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TMI Blog1979 (11) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... e, whether, on the facts and in the circumstances of this case, the Tribunal were right in law in holding that the distribution of the profit was to be made among the partners who constituted the firm on the last date of the accounting year and in the profit sharing ratio obtaining on that date, even though there was a change in the constitution of the firm both in regard to persons and profit sharing ratio in the middle of the accounting year ? 3. If the answer to the second question is in the affirmative could registration under section 185 of the Income-tax Act, 1961, be granted to the firm, even though the terms of the instrument of partnership operative for part of the year were completely ignored ?" The facts relevant for the qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the books of accounts were not closed on June 29, 1970, when in place of the erstwhile firm the new firm came into existence; and (2) that the sharing ratio of the profit between the partners was as per the new partnership deed. The ITO held that " since the profit was not distributed as per the partnership deed registration of the firm is not allowed ". On appeal, the AAC allowed registration to the firm, observing that the right to share the profit arising in the firm arose to the partners only at the end of the relevant previous year; and necessarily, therefore, the profit sharing ratio between the partners, must be the one as was prevailing at that relevant time. The Department, being aggrieved, then moved the Income-tax Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit or loss of the firm. Such division, it was submitted, had not been made. The Tribunal had, therefore, erred in accepting the claim of the firm, for its registration under s. 185 of the Act. Mr. Jain, appearing for the assessee, has contended that it all depends upon the agreement between the partners as to the point of time when profit or loss arising to a firm has to be divided between them. In the instant case, by reference to the terms of the partnership deed, a part of which is quoted in the order of the Income-tax Appellate Tribunal, he submitted that both under the previous deed dated September 8, 1969, and the present deed dated June 30, 1970, the profit was to be divided at the end of the accounting year, on the diwali day. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further, that the right of the partners to get their shares in the profits arose only on that date. If on that date, the partnership deed which was in vogue was the one dated June 30, 1970, it must be held that the Tribunal had correctly held that the partnership firm was entitled to grant of registration under s. 185 of the Act. The primary question which arises for consideration on the basis of the rival contentions is, whether it would be correct to say that the period of time when a profit is said to arise on a transaction, entered into by firm, would be determined not by the transaction in question but by the agreement between the parties. Say, as in this case, the partners had agreed that they will work out the profit and loss of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t plane. It does not deal with the question as to when and at what stage a profit arises on transactions entered into by a firm. In the case of CIT v. Bangalore transport Company Ltd. [1967] 66 ITR 373 (SC), a question arose as to whether the undertaking having been taken over by the Government, would be liable to be taxed on the profits which accrued during the period when the undertaking was with the assessee. In that context, their Lordships observed (p. 376): " The company carried on the business of a transport operator between April 1, 1956, and September 30, 1956, and the audited accounts of the company disclosed that embedded in the gross receipts was a net profit of Rs. 4,01,954 during that period. That profit reduced by outgoings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the accounting year. The question then is with regard to the distribution of the profits of the accounting year, as to who should receive the profits on distribution and in what proportion. According to learned counsel for the Department, since the profit of the business of the firm is to be computed and determined at the end of the relevant previous year for the whole year, the distribution must also be made according to the sharing ratio as evidenced by the two partnership deeds, the one dated September 8, 1969, and the other dated June 30, 1970, which cover the whole year. In other words, the sharing ratio of the profit or loss shall follow the sharing ratio of the two partnership deeds for the period for which they have been in vogue. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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