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1995 DIGILAW 139 (MAD)

Navarathina Maligai v. Commissioner of Income Tax

1995-02-01

JAYARAMA CHOUTA, THANIKKACHALAM

body1995
Judgment :- THANIKKACHALAM, J. At the instance of the assessee, the Tribunal referred the following question for our opinion under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). "Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the refusal of registration to the assessee-firm?" The partnership firm, Navarathina Maligai, was originally constituted under a partnership deed dated April 1, 1974, consisting of four partners. With effect from April 1, 1979, under a deed bearing the same date, they agreed to admit into the partnership two more partners. The assessee-firm also filed an application in Form No. 11A on the basis of the deed dated April 1, 1979, together with a copy of the deed on March 27, 1980. Hence, the application for registration was filed four days before the close of the year. On April 30, 1980, a letter was filed by the assessee-firm before the Income-tax Officer, whereby the assessee claimed that since the excise authorities have objected to the admission of the two partners as prior intimation was not sent to them the deed dated April 1, 1979, and the application filed in Form No. 11 may be treated as cancelled and that they are closing the accounts of the relevant year in the same manner as in the earlier previous year. According to the Income-tax Officer, the assessee has not divided the profit on the basis of the deed dated April 1, 1979, and there was no evidence which would show that the two newly admitted partners have severed their connection with the firm. Hence, the Income-tax Officer rejected the claim of the assessee for registration. On appeal, the Appellate Assistant Commissioner allowed the assessee's claim. He took note of the deed dated March 27, 1980, whereby the assessee sought to cancel the partnership agreement dated April 1, 1979. According to the Appellate Assistant Commissioner, the assessee had given a go-by to the deed dated April 1, 1979, and there was a valid existing partnership from April 1, 1974, consisting of four partners, and, therefore, the Income-tax Officer was not justified in stating that the two new persons admitted in the firm should also be given share in the profit of the firm. Accordingly, he directed grant of registration. Aggrieved, the Department filed an appeal before the Tribunal. Accordingly, he directed grant of registration. Aggrieved, the Department filed an appeal before the Tribunal. The Tribunal reversed the order passed by the Appellate Assistant Commissioner and restored the order passed by the Income-tax OfficerThe point for consideration is whether the assessee is entitled to registration under section 185 of the Act. The partnership-firm was originally created under a partnership deed dated April 1, 1974, consisting of four partners. Another deed was drawn on April 1, 1979, wherein they agreed to admit to the partnership two more partners. The assessee-firm also filed the application in Form No. 11A on the basis of the deed dated April 1, 1979. The assessee also wrote a letter dated April 30, 1980, to the Income-tax Officer stating that the change effected on April 1, 1979, was not given effect to. Therefore, the new deed was withdrawn and application in Form No. 11A was also requested to be treated as cancelled. The assessee also filed Form No. 12 along with the return for the assessment year 1980-81. The capital contribution by the newly admitted two partners was transferred to their current account and interest was also credited to their account. Therefore, according to learned counsel appearing for the assessee, the change contemplated according to the agreement dated April 1, 1979, was not given effect to. This was also made clear by the deed dated March 27, 1980. This was not brought to the notice of the Income-tax Officer at the time of assessment. The new agreement dated April 1, 1979, was cancelled since that was not accepted by the Excise Department and agreement dated April 1, 1974, was revived. This could be seen not only from the letter dated April 30, 1980, but also from the new agreement dated March 27, 1980. It was, therefore, stated that there is no ground for the authorities below to suspect the genuineness of the firm. According to learned standing counsel for the Department, by letter dated April 30, 1980, the assessee cannot withdraw the agreement dated April 1, 1979, and give retrospective effect to the agreement dated April 1, 1974. According to learned standing counsel, the contention of the assessee that the agreement of partnership deed dated April 1, 1979, is void ab initio for the absence of recognition by the excise authorities is untenable. According to learned standing counsel, the contention of the assessee that the agreement of partnership deed dated April 1, 1979, is void ab initio for the absence of recognition by the excise authorities is untenable. He also submitted that it is not correct on the part of the assessee to state that the partnership deed dated April 1, 1979, was not acted upon. For all these reasons, it was submitted that the Tribunal was correct in refusing to grant registration to the assessee-firmWe have heard the rival submissions. The fact remains that the assessee-firm was originally constituted under a partnership deed dated April 1, 1974, with four partners. Thereafter, by another partnership deed dated April 1, 1979, two more partners were inducted into the firm. The new partners also contributed their capital. From April 1, 1979, to March 27, 1980, the business was carried on by the partnership consisting of six partners. The Tribunal pointed out that these facts cannot be altered by the assessee either by not crediting the profits of the year in the manner contemplated by the deed or by seeking to withdraw the application for registration in Form No. 11A on the basis of such deed on the ground of objection by the excise authorities. It was also seen that the profits of the year were not credited in the manner provided in the deed dated April 1, 1979. The profit was divided between four partners as per the partnership deed dated April 1, 1974, and no profit was allotted to the newly admitted partners. The assessee requested the Income-tax Officer to grant registration not on the basis of the deed dated April 1, 1979, but on the basis of the deed dated April 1, 1974, since according to the assessee by deed dated March 27, 1980, the assessee nullified the effect of the deed dated April 1, 1979, and revived the partnership as per the deed dated April 1, 1974. After a new partnership was constituted by a deed dated April 1, 1979, the partnership created under the deed dated April 1, 1974, cannot exist and what is not in existence cannot be revived by the deed dated March 27, 1980. After a new partnership was constituted by a deed dated April 1, 1979, the partnership created under the deed dated April 1, 1974, cannot exist and what is not in existence cannot be revived by the deed dated March 27, 1980. The Tribunal has rightly pointed out that the partnership constituted under the deed dated April 1, 1979, which was in existence from April 1, 1979, up to March 27, 1980, cannot be cancelled with retrospective effect by drawing up another deed subsequently, seeking to revive the earlier partnership deed dated April 1, 1974In the case of Ratanchand Darbarilal v. CIT 1985 AIR(SC) 1572, 1985 (22) ELT 635 , 1985 (155) ITR 720, 1985 (4) SCC 183 , 1986 (1) UJ 242 , 1985 (48) CTR 349, 1985 (23) Taxman 45, 1985 (48) CTR(SC) 349, the Supreme Court, while considering section 26A of the Indian Income-tax Act, laid down the conditions for considering a firm as genuine in the following manner: "The following conditions are to be satisfied in order that a firm may be entitled to registration : (i) the firm should be constituted under an instrument of partnership specifying the individual shares of the partners ; (ii) an application on behalf of and signed by all the partners and containing all the particulars as set out in the rules must be made ; (iii) the application should be made before the assessment of the firm for that particular year ; (iv) the profit or loss, if any, of the business relating to the accounting year should have been divided or credited, as the case may be, in accordance with the terms of the instrument ; and (v) the partnership must be genuine and must actually have existed in conformity with the terms and conditions of the instrument of partnership in the accounting year. Once such conditions are satisfied, it is the obligation of the Income-tax Officer under the Act to extend the benefit of registration and allow the firm to enjoy the benefits provided by the Act. Once such conditions are satisfied, it is the obligation of the Income-tax Officer under the Act to extend the benefit of registration and allow the firm to enjoy the benefits provided by the Act. While considering the genuineness of the firm under sections 185 and 186 of the Income-tax Act, the Allahabad High Court in Setha Ram Dhanvir Singh v. CIT 1980 (123) ITR 150 held: that, since in the accounts of the firm and in the profit and loss account and the balance-sheet filed with the return, the apportionment of the profit was one-sixth to each partner, but in the instrument of partnership the shares were unequal, the firm was, in law, not entitled to registration. The Commissioner having come to the conclusion that the firm had been wrongly granted registration, had to cancel the registration. The effect of cancellation was expressly provided for in sub-section (3) of section 186 and the Commissioner was only inviting the Income-tax Officer's attention to his duty when he passed his order under section 263. " In the present case, the original partnership deed was executed on April 1, 1974, with four partners and thereafter another deed was executed on April 1, 1979, admitting two more partners into the firm. By a letter dated April 30, 1980, the assessee tried to cancel the deed dated April 1, 1979, and to revive the deed dated April 1, 1974. Form No. 11A filed along with the deed was also required to be cancelled. The fact remains that between April 1, 1979, and March 27, 1980, the partnership-firm was in existence with six partners. Two new partners had contributed their capital and accounts were maintained on that basis. But, later on, the assessee wanted to say that since the original partnership deed dated April 1, 1974, was restored, the profit was allotted to the four partners and not to the other two partners. As already pointed out after the deed dated April 1, 1979, the partnership created under the deed dated April 1, 1974, cannot have any existence so as to restore the same. In view of all these facts, the Tribunal was justified in doubting the genuineness of the firm. Thus, considering the facts arising in this case in the light of the judicial pro nouncement cited supra, we see that there is no infirmity in the order passed by the Tribunal. In view of all these facts, the Tribunal was justified in doubting the genuineness of the firm. Thus, considering the facts arising in this case in the light of the judicial pro nouncement cited supra, we see that there is no infirmity in the order passed by the Tribunal. Accordingly, we answer the question referred to us in the affirmative and against the assessee. No costs. Counsel's fee fixed at Rs. 1,000.