C.I.O. Full Mould Tyre Retreaders vs Commissioner of Income Tax

S.P. Sinha, J.—The Patna Bench of the Income Tax Appellate Tribunal has made these references, which this court by order dated 20th July, 1973, has taken as references made u/s 66(1) of the Indian I. T. Act, 1922, in place of references u/s 256(1) of the I. T. Act, 1961, as stated by the Tribunal.

Both these matters relate to orders passed u/s 26A of the Indian I. T. Act, 1922 (hereinafter referred to as the "Act"). The question which has been referred to this court for opinion is :

"Whether the entity styled Messrs. C.I.O. Full Mould Tyre Re-treaders (India), Jamshedpur, which filed its return of income as a firm and also applied for registration is entitled to registration u/s 26A of the Indian I. T. Act, 1922, for the assessment years 1959-60 and 1960-61 ?"

The facts relevant may be briefly stated.

The assessment years for which the claim for registration u/s 26A was made by the assessee are 1959-60 and 1960-61, for which the respective relevant accounting periods are January 1, 1959, to January 31, 1959, and April 1, 1959, to March 31, I960. Admittedly, up to 31st December, 1958, the business was a proprietary concern of one C.I. Chakko. On and from the 1st January, 1959, the said business is said to have been converted into a partnership firm, the original proprietor and two other persons, namely, C.I. George and Baby Peters, having joined in as partners. A partnership deed was executed on the 1st January, 1959, and the same was registered under the Indian Registration Act on the 17th January, 1959. The shares of the respective partners in the partnership were as follows :

C.I. Chakko 45%

C.I. George 45%

Baby Peters 10%

For the assessment year 1959-60, application u/s 26A of the Act claiming registration of the firm was filed late on the 18th April, 1959, but has been entertained by the ITO.

Similarly, the application u/s 26A of the Act for the assessment year 1960-61 was entertained, though filed late, along with the return of income, on the 27th July, 1960.

The ITO refused to register the partnership for the said two assessment years on two grounds :

(1) that no genuine firm had come into existence ; and

(2) the profits of the relevant years had not been divided between the partners.

On appeal, the AAC reversed both the findings of the ITO and found that the firm was genuine and the reason for non-division of the profits of the previous year relevant to the assessment year 1959-60 had been duly explained. Relying upon the reasons for allowing the claim for registration of the partnership for the assessment year 19519-60, the AAC allowed the claim of registration for the assessment year 1960-61 also.

The department appealed to the Tribunal against the AAC''s order for both the assessment years. The Tribunal, by separate orders passed in respect of the two assessment years, reversed the decision of the AAC. So far as the question relating to the genuineness or otherwise of the firm was concerned, the Tribunal did not give any specific finding. The Tribunal, however, agreed with the ITO''s view that the profits accruing to the firm for the relevant previous years had not been divided between the partners even after the end of the relevant previous years, and this was contrary to the requirements of law. At the instance of the assessee, the Tribunal has made the reference on the question of law aforesaid.

This court felt difficulty in answering the question referred in the absence of relevant facts concerning the manner in which the profits had been dealt with in the books of account for the relevant previous years. A supplementary statement of case was accordingly called for from the Tribunal by order dated 28th July, 1973. The Tribunal has since made the supplementary statement of case giving the details regarding the manner in which the profits of the firm for the relevant previous years had been dealt with in the firm''s account books. The Tribunal has summarised the position, stating that whereas at the time of filing of the revised returns for the said two years the profits were shown as divided among the three partners, these profits were not credited in any separate account or capital account of the partners. The profits for the three months relevant for the assessment year 1959-60 were shown as credited in the current account of the partners in the account for the next succeeding year. The profits for the previous year relevant to the assessment year 1960-61 were also not divided in the books before claiming registration for the year. To put it in brief, the Tribunal''s finding is that the profits for the relevant previous years were divided after the filing of the applications for registration for the said two assessment years.

Learned counsel for the petitioner has submitted that the refusal to register the firm on the ground of non-division of profit was illegal because none of the provisions of the Act or the Rules required that division of profit between the partners must be made before filing the application for registration. Learned counsel for the opposite party on the other hand has submitted that the registration had been rightly refused because the assessee had failed to fulfil the requirements of the Act and the Rules.

The provisions of the Act and the Rules, in so far as they are relevant for the purpose of these references are Section 26A of the Act, Rules 2 and 3 of the Rules, as also the prescribed forms of application for claiming registration and renewal of registration of the firms. Section 26A of the Act reads as under :

"26A. Procedure in registration of firms.--(1) Application may be made to the Income Tax Officer on behalf of any firm, constituted under an instrument of partnership specifying the individual shares of the partners, for registration for the purposes of this Act and of any other enactment for the time being in force relating to Income Tax or super-tax.

(2) The application shall be made by such person or persons, and at such times and shall contain such particulars and shall be in such form, and be verified in such manner, as may be prescribed ; and it shall be dealt with by the Income Tax Officer in such manner as may be prescribed."

The relevant rules are Rules 2 and 3. They are as under :

"2. Any firm constituted under an instrument of partnership specifying the individual shares of the partners may, under the provisions of Section 26A of the Indian Income Tax Act, 1922 (hereinafter in these rules referred to as the Act), register with the Income Tax Officer, the particulars contained in the said instrument on application made in this behalf.

Such application shall be signed by all the partners (not being minors) personally, or in the case of a dissolved firm by all persons (not being minors) who were partners in the firm immediately before dissolution and by the legal representative of any such partner who is deceased, and shall, for any year of assessment up to and including the assessment for the year ending on the 31st day of March, 1953, be made before the 28th February, 1953, and for any year of assessment subsequent thereto, be made-

(a) where the firm is not registered under the Indian Partnership Act, 1932 (IX of 1932), or where the deed of partnership is not registered under the Indian Registration Act, 1908 (XVI of 1908), and the application for registration is being made for the first time under the Act,

(i) within a period of six months of the constitution of the firm or before the end of the ''previous'' year of the firm, whichever is earlier, if the firm was constituted in that previous year,

(ii) before the end of the previous year in any other case;

(b) where the firm is registered under the Indian Partnership Act, 1932 (IX of 1932), or where the deed of partnership is registered under the Indian Registration Act, 1908 (XVI of 1908), before the end of the previous year of the firm, and

(c) where the application is for renewal of registration under Rule 6 for any year, before the 30th day of June of that year :

Provided that the Income Tax Officer may entertain an application made after the expiry of the time-limit specified in this rule, if he is satisfied that the firm was prevented by sufficient cause from making the application within the specified time.

The application referred to in Rule 2 shall be made in the form annexed to this rule and shall be accompanied by the original instrument of partnership under which the firm is constituted, together with a copy thereof; provided that if the Income Tax Officer is satisfied that for some sufficient reason the original instrument cannot conveniently be produced, he may accept a copy of it certified in writing by all the partners (not being minors) or where the application is made after dissolution of the firm, by all the persons referred to in the said rule, to be a correct copy, and in such a case the application shall be accompanied by a duplicate copy."

The form of application for registration is Form I which is as under :

"FORM I

Form of application for registration of a firm u/s 26A of the Indian Income Tax Act, 1922

To The Income Tax Officer,

Dated 19

income tax year 19 19

We beg to apply for the registration of our firm u/s 26A of the Indian Income Tax Act, 1922, for the assessment for the income tax year 19 /19.

The original A certified copy of the instrument of partnership under which the firm is constituted specifying the individual shares of the partners together with a copy/duplicate copy is enclosed. The prescribed particulars are given in the schedule below.

We do hereby certify that the profits (or loss, if any) of the previous year were/will be Period up to the date of dissolution were/will be divided or credited as shown in Section B of the Schedule and that the information given above and in the attached Schedule is correct.

(Signatures) (Address)

NOTE:--This application must be signed personally by all the partners (not being minors) in the firm as constituted at the date on which the application is made, or where the application is made after dissolution of the firm, by all persons (not being minors) who were partners in the firm immediately before dissolution and by the legal representative of any such person who is deceased.

SCHEDULE

Name of partner Address Date of admittance to partnership (1) Interest on capital or loans (if any) (1) Salary or commission from firm (2) Share in the balance of profits (or loss) (annas & pies in the rupee) Remarks

1 2 3 4 5 6 7

(A) Particulars of the firm as constituted at the date of this application.

(B) Particulars of the apportionment of the income, profits or gains (or loss) of the business, profession or vocation in the previous year between the partners who in that previous year were entitled to share in such income, profits or gains (or loss). (Applicable where the application is made after the end of the relevant previous years.)

NOTE:--(1) If the interest, salary and/or commission is payable (or allowable) only if there are sufficient profits available, this fact should be noted by marking the items in the appropriate columns with the letter ''R''. (In other cases the interest, salary and/or commission may exceed the total profits so as to leave a balance of net loss divisible in column 6).

(2) If any partner is entitled to share in profits but is not liable to bear a similar proportion of any losses, this fact should be indicated by putting against his share in column 6, the letter ''P''."

Looking to the requirements under para. 3 of Form I for registration of a firm u/s 26A, the application is required to certify that the profits or loss, if any, of the previous year were divided or credited or will be divided or credited. Evidently, therefore, if the claim is for initial registration of a firm u/s 26A, the certificate required to be appended with the application seeking such registration is that the profit or loss, if any, of the previous year were either divided or credited or will be divided or credited. The option is with the assessee to divide or credit the profit or loss of the previous year after the close of the said year or even later. Where, however, the claim is for renewal of registration of a firm the profit or loss, if any, must be divided or credited by the time such application is made [See Shere-e-punjab Silk Stores Vs. Commissioner of Income Tax, New Delhi, ]. In para 3 of the form of application for renewal of registration of a firm u/s 26A of the Act, the certificate which is required from the applicant is :

" ......that the profits (or loss, if any) of the previous year were/will be period up to the date of dissolution were/will be divided or credited......"

The Madras High Court in the case of Surajmalls Vs. Commissioner of Income Tax, Madras, has correctly indicated the distinction between the requirements for initial registration and renewal of registration. Their Lordships have observed that having regard to the form for initial registration of a firm, two alternatives were available to the firm, namely, to divide the profits before the filing of the application for initial registration or to do it at a later point of time. Such alternative was, however, not available while seeking renewal of registration of a firm.

It has been urged by the learned counsel for the department that such a privilege for claiming initial registration had been allowed because, as per Rule 2, application for initial registration was required to be filed within six months of the constitution of the firm before the end of the previous year, but that did not mean that the assessee had the option to divide the profits at any time or in any year that it chose to do.

It is difficult to prescribe any limit to the privilege which the Act and the Rules afford to the assessee while applying for initial registration of the firm. The question, however, is one of intention as to whether or not the profit or loss of the relevant previous year was meant to be divided between the partners of the firm. A belated division of profit or loss might give rise to an adverse factual presumption against the claim of registration of the firm, but surely it cannot be said to be an infringement of the requirements of law. A very old decision of the Nagpur Judicial Commis-missioner''s Court in the case of AIR 1930 6 (Nagpur) in which a similar question, relating to the extent of time which a firm should take to divide its profits between its partner, arose. It was decided in favour of the assessee and it was observed :

"The certificate to be given is not that the profits will be divided or credited within some fixed period ; and it seems to us that when a certificate in the prescribed form is given in good faith, if the applicants do constitute a firm, that firm is entitled to be registered."

In the instant case from the supplementary statement of the case it appears that the profits of the previous years relevant for assessment years 1959-60 and 1960-61 were actually divided in proportion to the share of the respective partners and such share of profit of each partner was credited to the respective partner''s current account. Though such entries were made later than the dates on which the respective applications u/s 26A of the Act were filed, it cannot be said that the profits of the relevant years were not divided between the partners.

Learned counsel for the department submitted that where the application was being made after the end of the previous year, Schedule B of Form I required that the particulars of apportionment of the profit or loss between the partners should be mentioned, that is to say, the exact amount of share in the profit or loss of each partner in the said previous year should be given.

This argument is based on a misreading of the particulars required to be filled in. The apportionment required is not of the amount of profit or loss in the year, but of the extent of share of each partner in term of annas and pies in a rupee. (See the caption at page 509 of Schedule).

It, therefore, follows that non-division of the profits of the relevant previous years, before the filing of the application u/s 26A of the Act, was no ground for rejecting the claim for initial registration of the firm for the said assessment years.

Such being the position the question must be answered in favour of the assessee and against the department.

Learned counsel for the department then urged that since initial registration was being granted for the assessment year 1959-60, for the assessment year 1960-61 it would be a renewal of registration and when such could be the position for want of division of profits during the previous year itself renewal of registration could not be granted because of the non-compliance of the requirements.

This argument does not fall to be answered in terms of the question referred to this court. In the instant case the department cannot now take alternative stands.

The question referred is, therefore, answered in favour of the assessee and against the department. The assessee shall be entitled to costs and hearing fee of Rs. 250.

S. Sarwar ali, J.

I agree.