COMMISSIONER OF INCOME TAX vs K. A. MEENAKSHISUNDARAM and CO.

THANIKKACHALAM, J. :

In pursuance of the direction given by this Court dt. 27th June, 1983 in TCP No. 309 of 1982 the Tribunal referred the following question for the

opinion of this Court under S. 256(2) of the IT Act, 1961 :

Whether, on the facts and in the circumstances of the case the Tribunal was correct in law in holding that even though no books of account are

maintained and no clear evidence was produced regarding the division of profits made by the firm among the partners, the assessee is entitled to

registration on the basis of Form 11 filed by it ?

The assessee is a partnership firm. The assessee in the asst. yr. 1975-76 has applied for registration of the firm. The firm has been constituted

with three partners. The application for registration in Form No. 11 has been filed on 31st March, 1975. The partnership deed in original with a

copy thereof has been filed. The assessee was requested to produce evidence to show whether the profit of the business has been fully

apportioned among the partners and credited to the respective accounts. In reply the assessee stated that the firm is not maintaining any regular

accounts and that the partners of the firm have divided the business profits equally as per the deed of partnership as customary. The partners were

requested to appear. Two of the three partners appeared and deposed that they divided the profit and adjusted at the end of the year and this was

only an oral adjustment and there was no accounts. In the absence of any records to show that the profits were divided between the partners, the

ITO came to the conclusion that the application for registration of the firm cannot be entertained and the firm was treated as an unregistered firm.

On appeal the AAC accepted the view taken by the ITO. On further appeal the Tribunal held that the assessee is entitled to registration of the firm.

We have heard learned counsel for the Department and perused the records carefully. The fact remains that the assessee-firm filed Form No.

11 and requested registration of the firm. The partnership deed and a copy of the same were filed. The statement showing the division of profits

among the partners according to the profit sharing ratio in the partnership deed was not produced according to the ITO. According to the

assessee, the firm is not maintaining any regular books of accounts. But, they are dividing the profits orally as per profit sharing ratio stated in the

partnership deed.

Learned counsel for the Department submitted that in the absence of the account, the Tribunal was not correct in granting registration. It was

further submitted that the assessee is expected to file a statement of account when an application for registration under Form No. 11 was filed. In

the present case, the assessee neither produced any account book nor produced any evidence to show that the profits were divided among the

partners as per the profit sharing ratio in the partnership deed. Learned standing counsel further submitted that the fact that the statement of

account was filed along with the return of the income would not entitle the assessee to ask for registration of the firm when the statement of account

was not corroborated with account books. Learned standing counsel relied on a decision of the Andhra Pradesh High Court in the case of Shri

Vijayalakshmi Rice Mill Contractors Co. Vs. Commissioner of Income Tax, , wherein the Andhra Pradesh High Court pointed out that the counsel

for the assessee submitted that along with the return the assessee has filed copies of accounts showing distribution of profits and loss between the

members and, therefore, the assessee-firm is entitled to registration"". While dealing with that aspect the Andhra Pradesh High Court held ""that

inasmuch as the assessee failed to satisfy the ITO with regard to the share of the profits in the manner specified in the partnership deed, it is not

possible to grant registration in favour of the firm"". Relying on this decision, learned standing counsel submitted that in the present case also the

assessee has not filed any account books to corroborate the statement made by the partners that the profits were divided between them according

to the profit sharing ratio. Therefore, learned standing counsel submitted that the Tribunal was not correct in coming to the conclusion that the

assessee-firm is entitled to registration.

It is no doubt true that while Form 11 was filed for registration of the firm, no statement of account was filed and no account books were

produced. According to the assessee, they are dividing the profits orally in accordance with the partnership deed. Further, according to the

assessee, their evidence of sharing of profits as can be seen from the memo of income filed with the return of income. Therefore, the assessee

could be said to have satisfied the conditions required for registration of the firm. The Tribunal pointed out that Form 11, which is the application

for registration, does not require immediate division but even a future division will be sufficient because the expression used in para 4 of this

application is ""profits (or loss if any) of the previous year"" will be divided. According to the Tribunal, a mere declaration that the profits will be

divided in future would be sufficient to comply with the conditions prescribed in Form 11. In support of this line of reasoning, the Tribunal relied on

a decision of the Orissa High Court in the case of RAO and SONS Vs. COMMISSIONER OF Income Tax, BIHAR AND ORISSA., wherein it

has been held ""that even when an assessee has preferred a statement in a thick sheet of paper showing how the total loss was distributed among

the partners in proportion to the shares and the specific amounts were duly debited to the accounts of each partner, it cannot be said that there was

no evidence of division of loss and registration of the firm should have been allowed"".

According to the facts arising in the present case, when the return of the firm was filed the assessee has enclosed a statement of account showing

the profits and loss divided between the partners as per the profit sharing ratio. In the quantum appeal, the Tribunal accepted the statements filed

by the assessee and held that the profits as divided between the partners should be accepted for the purpose of the assessment on the firm. The

application for registration under Form 11 was filed by the assessee along with the return of the firm and with the statement of account and if that is

taken into account that would show that the assessee has shown how the profits were divided between the partners as per the profit sharing ratio.

The Tribunal never doubted the statement of account filed by the assessee. The Tribunal also never asked the assessee to produce the accounts to

verify the statement, though the assessing authorities requested the assessee to produce the account books. When according to the assessee-firm,

it is not maintaining the regular account books, it would not have been possible for it to produce the same. But, the Tribunal, which is the highest

fact-finding authority, accepted that the profits were divided among the partners as per the profit sharing ratio in the partnership deed on the basis

of the oral evidence tendered by the partners and the statement of account filed along with the return of the firm. When the Tribunal on analysis of

the facts came to the above said conclusion, it is not possible to take a different view by this Court while exercising its jurisdiction of rendering its

opinion. According to the facts arising in Shri Vijayalakshmi Rice Mill Contractors Co. Vs. Commissioner of Income Tax, , the ITO asked the

assessee to produce the accounts. When the accounts were not produced, the ITO had drawn an adverse inference which adverse inference was

confirmed by the High Court. But, in the present case, when both the quantum appeal as well as the appeal filed on rejection of the application in

Form 11 came up for consideration, the Tribunal accepted the statement of account filed by the assessee and acted upon that basis. Therefore, in

the present case, the decision rendered by the Andhra Pradesh High Court, cited supra, would render no assistance. In view of the foregoing

reasons we consider that there is no infirmity in the order passed by the Tribunal in directing the assessing authority to grant registration to the firm

for the asst. yr. 1975-76. In that view of the matter, we answer the question referred to us in the affirmative and against the Department. No costs.