Commissioner of Income Tax vs Kanhaya Lal Ram Chand (No. 2)

M.R. Sharma, J.—Kanhaya Lal was a partner in the firm styled as Karnal Tractors and Motor Workshop (hereinafter referred to as "the firm"). He had 25 per cent, share in the profits of the firm. He entered into a sub-partnership with his father-in-law, giving him 40 per cent, share of the profit which fell to his lot on the ground that his father-in-law had advanced Rs. 12,000 for investment in the main firm. The main firm had been functioning prior to April 1, 1969, but the sub-partnership deed was executed on October 26, 1969, and was to have effect with effect from April 1, 1969.

For the assessment year 1970-71, the sub-partnership was declined registration on the ground that the whole arrangement was in the nature of a collusive transaction devised to reduce the tax liability of Kanhaya Lal. The assessee in that case, however, went in appeal, which was allowed by the Income Tax Appellate Tribunal. Against the judgment, the Commissioner of Income Tax sought a reference and the following question of law was referred to this court for its decision :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that refusal of registration u/s 185 was not justified in this case ?"

This question was answered in the negative, i.e., against the assessee and in favour of the Revenue in Commissioner of Income Tax Vs. Kanhayalal Ram Chand, , (income tax Reference No. 45 of 1975 decided on December 10, 1976).

When the Commissioner of Income Tax applied to the Tribunal for a reference in the instant case, the Tribunal came to the conclusion that u/s 184(7) of the Income Tax Act, 1961, once registration had been granted for the earlier year, it would enure for the subsequent years also. In fairness to the Tribunal, it must be said that by that time the Division Bench had not decided the earlier reference. Because of the decision in Income Tax Reference No. 45 of 1975 Commissioner of Income Tax Vs. Kanhayalal Ram Chand, registration has now been declined to the sub-partnership firm and the very basis of the judgment rendered by the Tribunal has gone. We are, accordingly, of the view that a question of law does arise and we direct the Tribunal to make the reference prayed for.

No order as to costs.