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TMI Blog1980 (8) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act whereby he rejected the application for registration. He held that none of the conditions mentioned in s. 184(7) of the Act were fulfilled, and, therefore, the assessee was not entitled to registration or continuation of registration. The firm was treated as an unregistered firm. On appeal to the AAC, it was held that the ITO had not acted properly. It was held that the ITO had to inform the party concerned of the defect in the application under the provisions of s. 185(2) of the Act and period of one month was available to rectify the defect. As the assessee had rectified the defect within a fortnight, the application could not be rejected on the ground that the form was wrong. The other ground, namely, the non-existence of the conditions under s. 184(7) was also differed from. It was held by the AAC that the finding of the ITO that some profits had been secretly distributed among some of the partners could not justify the conclusion that there was change in the constitution of the firm or in the profit sharing ratio of the partners. On appeal to the Tribunal, it was held that the application for registration under s. 185(1) and the declaration under s. 184(7) of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the question of assessment of the firm, certain statements were recorded by the ITO. Shri Prem Chand, the ex-partner made a statement on 24th January, 1969, that there were certain extra profits being cash credits amounting to Rs. 35,000, benami trading in potatoes yielding Rs. 20,000 to Rs. 30,000 and profits in the account of Lala Ram group amounting to Rs. 35,000. According to the ITO, this was a concealed income which was shared between Chander Bhan, Hari Chand and Prem Chand in equal shares, but in actual fact only Chander Bhan and Hari Chand made the division. Hakimuddin made a similar statement on 21st February, 1969, in which he claimed that the business of the firm was arhat. He did not know of the sale and purchase of potatoes. He claimed that there were secret profits shared between Prem Chand, Hari Chand and Chander Bhan. From these facts, the ITO concluded that there were secret profits of Rs. 98,399 which were shared between Chander Bhan and Hari Chand to the exclusion of Prem Chand and Hakimuddin. He also found that as profits were shared among two partners but not by four partners equally, there had been a change in the share ratio of the partners. Accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " After analysing the question in some detail, the Supreme Court noted that the apprehension of the learned counsel for the assessee that the decision of the court might be used for refusing registration was not justified. The following observations were made by the court : "The apprehension of Mr. Ramachandran that our decision might be taken advantage of by the department for refusing registration of firms whose return of income or claim for some allowance has not been accepted by the Income-tax Officer for one reason or the other, appears to us to have no basis. Herein, we are merely considering the scope of paragraph 3 of rule 6. So long as the divisible profits had been divided or had been credited to the accounts of the partners, the requirement of that provision was complied with. " It will thus be seen that the legal position under the Act of 1922 was contained in the Rules and not in the Act. The application had to be in a particular form and the ITO had the power to reject the application for renewal. Under the Act of 1961, there has been a considerable change in the legal position which is as follows. Under the Act of 1961, the provisions applicable to firms are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer shall inquire into the genuineness of the firm and its constitution as specified in the instrument of partnership, and (a) if he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified, he shall pass an order in writing registering the firm for the assessment year ; (b) if he is not so satisfied, he shall pass an order in writing refusing to register the firm. (2) The Income-tax Officer shall not reject an application for registration merely on the ground that the application is not in order, but shall intimate the defect to the firm and give it an opportunity to rectify the defect in the application within a period of one mouth from the date of such intimation. (3) If the defect is not rectified within such time, the Income-tax Officer may reject the application. (4) Where a firm is registered for any assessment year, the Income-tax Officer shall record a certificate on the instrument of partnership or on the certified copy submitted in lieu of the original instrument, as the case may be, to the effect that the firm has been registered under this Act, for that assessment year; and where a declaratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aulty or even false. In such a case, it would stand to reason that the ITO would refuse to record the certificate. The existence of a proviso to s. 184(7) indicates that the ITO is not wholly powerless to refuse a certificate if facts so justify. The conclusion of the Tribunal in the present case was that the declaration furnished was a true one. There is a specific finding that there was no change in the constitution and the certificate given by the partners in the declaration form was a correct certification. This finding of fact would itself be sufficient to dispose of this objection. This brings us to the important question in this case. On the facts, the ITO found that there were secret profits which had been distributed by some of the partners in a manner different from that set out in the partnership deed. Was the effect of such a conclusion sufficient to give the I.T. authority to say that the continuation of the registration had come to an end as the proviso to s. 184(7) was not satisfied? According to learned counsel for the Commissioner, this conclusion is inevitable because it has been found as a fact that the secret profits were not shared in accordance with the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the deed and without change of the shares of the partners as recorded in the instrument of partnership, the ITO would continue the registration and record a certificate to that effect under s. 185(4). If he finds on inquiry or facts come to light showing that in fact the declaration is not correct factually, then the ITO may refuse to record the necessary certificate under s. 185(4). However, in this case, the Tribunal found as a fact that the declaration made by the partners was correct and not wrong. This conclusion was based on examining the nature of the secret profits which were allegedly made by some of the partners. It was held that the mere fact that some of the partners made a secret profit was not sufficient for refusing the continuation of the registration. It appears that the Tribunal was not wrong in coming to the conclusion it did come to in the circumstances of this case. The reason for this is not difficult to find. The rights of the parties under a partnership deed are governed by the instrument of partnership. No partner is permitted in law to make a secret profit. If he makes secret profit, he is bound to account for the same to his other partners. Every partner ..... X X X X Extracts X X X X X X X X Extracts X X X X
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