Commissioner of Income Tax, Andhra Pradesh vs K. Venkateswara Rao

Alladi Kuppuswami, J.—The assessee is a firm. Under clause 4 of the partnership deed it was provided that the net profits and losses of the partnership shall be shared in certain proportions, viz., 40%, 30%, 15% and 15%. Clause 5 of the partnership deed, however, provides that in case the net profit of the firm exceeded Rs. 20,000, the excess profit shall be distributed among the in equal share. For the assessment year 1975-76 the profits were allocated among the partners in accordance with clause 4, even though the relevant clause was clause 5. Registration was claimed before the ITO on the basis of the partnership deed and the distribution of the profits was made in accordance with clause 4 of the partnership deed. In the application for registration the profit- sharing ratio was mentioned as provided for in clause 4. The stipulation in clause 5 to share the profits equally in case the net profits of the firm exceeds Rs. 20,000 was not even mentioned in the said application. The ITO also did not notice clause 5 and, having been satisfied that the firm was genuine, granted registration and apportioned the profits in the ratio of 40: 30: 15: :15 as mentioned in clause 4. Subsequently, the Commissioner of Income Tax discovered the existence of clause 5 and noticed that it was not implemented. Therefore, he called upon the assessee to show cause why the registration granted to it should not be cancelled. The assessee replied that the distribution made according to clause 4 of the partnership deed was not correct and the necessary rectification was made by reversing the entries. The explanation was not accepted and the registration was cancelled. The assessee, therefore, preferred an appeal to the Tribunal. The Tribunal, on a consideration of the facts and circumstances, held that the mistake committed by the assessee in the allocation of profits was an honest and innocent mistake which did not militate against the grant of registration and which was rectifiable on discovery and in fact was rectified on discovery by reversing the entries. The Tribunal also went through the entries in the books and found that they were genuine. Accordingly, it held that the Commissioner was not justified in cancelling the registration. On the finding of the Tribunal that the allocation of profits under clause 4 and not under clause 5 was the result of a genuine mistake, we are of the view that the Tribunal came to the correct conclusion.

No question of law is involved. The application is dismissed.