Judgment:
Jeevan Reddy, J.
1. Two questions are referred in this case under section 256(1) of the Income-tax Act, 1961. They are :
'(1) Whether, on the facts and in the circumstances of the case, the allocation of profits made on the basis of the partnership deed dated July 17, 1973, could not be a ground for refusing grant of registration to the assessee-firm
(2) Whether, on the facts and in the circumstances of the case, the assessee-firm was entitled to grant of registration under section 185 of the Income-tax Act, 1961 ?'
2. The assessee-firm was originally constituted under a deed of partnership dated July 21, 1968. There have been changes in the composition of the firm from time to time. For the accounting year relevant to the assessment year 1973-74, there were 8 partners, including on Sri Kanakam Babu. The genuineness of the firm was never doubted by the Income-tax Officer and registration was being granted to it year after year up to and including the assessment year 1973-74. In this case, we are concerned with the assessment year 1974-75. The accounting year relevant to the said assessment year is September 1, 1972, to August 31, 1973. During this accounting year, two deeds were executed by the partners. One was on June 5, 1973, resolving to admit the three minor sons and a minor daughter (in all four) of Sri Kanakam Babu to the benefits of partnership with effect from September 1, 1973. These minors were sought to be accommodated and adjusted within the 17% share held by Sri Kanakam Babu which means that there was no change in the shares of other partners; only Kanakam Babu's share was affected. A deed was executed to that effect. It, however, appears that on the same day the partners met again and resolved to permit Sri Kanakam Babu to share his profits in the firm with his minor children with retrospective effect from September 1, 1972. In pursuance of this resolution, a fresh partnership deed was executed on July 17, 1973, whereunder the said minor children of Sri Kanakam Babu were admitted to the benefits of partnership with effect from September 1, 1972. Before the end of the said accounting year, the partners applied for registration/continuation of registration, by filing applications in Forms Nos. 11, 11A and 12. The Income-tax Officer refused to grant registration. The reasons for such refusal are : (a) the minors were actually admitted to the benefits of partnership only on June 5, 1973, and not from an anterior date, and hence they could not have been allotted any benefits or share with retrospective effect from September 1, 1972, (b) the instrument of partnership dated July 17, 1973, did not specifically stipulate the date of commencement of the new partnership; and (c) the profits for the period September 1, 1972. to June 5, 1973, have to be divided only in accordance with the partnership deed dated July 21, 1968. But inasmuch as the profits were divided with reference to the deed dated July 17, 1973, the firm is not entitled to registration.
3. On appeal, the Appellate Assistant Commissioner disagreed with the Income-tax Officer and held that once the firm is found to be genuine and has complied with the provisions of section 185 of the Act, there was no justification for refusing registration. On further appeal by the Revenue, the Tribunal agreed with the Appellate Assistant Commissioner. The Tribunal observed that since the Income-tax Officer has not doubted the genuineness of the firm as constituted by the deed dated July 17, 1973, and also because there was an application made in accordance with the provisions of law, registration ought to have been granted. The Tribunal observed further that the mere assumption that the purported retrospective operation given to the partnership deed was bad was not fatal to the claim for registration. Similarly, the fact that at the end of the accounting year, profits were apportioned among all the 12 partners (including minors), cannot be a ground for refusing registration. The Tribunal posed the question arising in the case in the following words :
'The real question that has to be considered is whether the apportionment of the profits amongst the partners according to the partnership deed dated July 17, 1973, could be a ground for refusing to grant registration......'
4. Following the decision of the Allahabad High Court in Addl. CIT v. Mardan Khan Rafiq Ahmad : [1978]115ITR559(All) , it held that allocation of profits in a manner other than the one provided in the deed cannot constitute a ground for refusing registration.
5. Mr. M. Suryanarayana Murthy, learned standing counsel for the Revenue, urged the following contentions : Once the Tribunal has found that the deed dated July 17, 1973, was ineffective in so far as it purported to admit the minors to the benefits of partnership with retrospective effect from September 1, 1972, it ought to have held that the allocation of profits for the entire accounting year among the 12 partners, including the four minors, is a valid ground for refusing registration. According to the finding of the Tribunal, there were two firms in existence - one from September 1, 1972, to July 16, 1973, and the other from July 17, 1973, to August 31, 1973. The application for registration was made only by the firm constituted on July 17, 1973. There was no application for continuance of registration of the first firm. The decision of the Allahabad High Court relied upon by the Tribunal does not represent the correct position in law. Learned counsel relied upon certain decisions to which we shall refer at a later stage.
6. Registration of fims is covered by the provisions contained in section 184 - 189. Section 184 says that an application for registration of a firm for the purposes of the Income-tax Act may be made if the partnership is evidence by an instrument which specifies the individual shares of partners. The application has to be made by all the partners (not being minors) personally. Such application has to be made before the end of the previous year relevant to the assessment year for which registration is sought, enclosing the original instrument of partnership. The application has to be made in the prescribed form. Sub-section (7) of section 184 provides that where registration is granted to any firm for any assessment year, it shall have effect for every subsequent assessment year, provided that (i) there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the registration was granted; and (ii) the firm furnishes, within the time specified, a declaration in the prescribed form. Sub-section (8) says, where any change in the constitution of the firm has taken place in the previous year, the firm shall apply for fresh registration for the assessment year concerned.
7. Section 185 prescribes the procedure to be followed by the Income-tax Officer on receipt of an application the registration. After enquiring into the genuineness of the firm and its constitution as specified in the instrument of partnership, if the Income-tax Officer is satisfied that during the previous year a genuine firm did exist with the constitution as specified in the deed, he shall grant registration; otherwise, he shall refuse the same. If there are any defects in the application made, he shall intimate the same to the firm and give it an opportunity to rectify the same.
8. Section 186 provides for cancellation of registration with which we are not concerned.
9. Sections 187 and 188 are, however, relevant for our purposes. Section 187 says that, if at the time of making an assessment under section 143 or section 144, it is found that a change has occurred in the constitution of the firm the assessment shall be made on the firm as constituted at the time of making the assessment. However, the income of the previous year shall, for the purpose of inclusion in the total income of the partners, be apportioned between the partners who, in such previous year, were entitled to receive the same, and where the tax assessed upon one partner cannot be recovered from him, it shall be recovered from the firm as constituted at the time of making the assessment. Sub-section (2) defines what a change in the constitution of the firm means. It takes in a case where one or more of the partners cease to be partners, or one or more new partners are admitted in such circumstances that one or more of the persons who were partners of the firm before the change continue as partner or partners after the change, as also a case where all the partners continue with a change in their respective shares or in the shares of some of them.
10. Section 188 says, where during the previous year, a firm carrying on business or profession is succeeded by another firm and the case is not one covered by section 187, separate assessments shall be made on the predecessor firm and the successor firm in accordance with section 170. It is unnecessary for us to refer to section 189, which deals with assessment of a dissolved firm.
11. These provisions in the Act are supplemented by rules 22 to 25 of the Income-tax Rules, 1962, along with the prescribed Forms Nos. 11, 11A, and 12. A combined reading of the above provisions along with the Rules yields the following position :
(i) Where a partnership firm has been granted registration for an assessment year and there is no change in the constitution of the partnership firm for the next assessment year for which registration is sought, no application as such is necessary by such firm. All that it needs to do is to file the declaration in Form No. 12. This declaration has to be signed by all the partners as provided by rule 24, read with section 184(7) of the Act;
(ii) Where there has been a change in the constitution of the firm (change in the constitution as contemplated by sub-section (2) of section 187), the application for registration has to be filed, signed by all the partners on the date of making of the application, as provided by rule 22(2)(ii). It need not be signed by the partners who may have ceased to be partners during the course of the accounting year and who are not partners on the date of filing of the application for registration. But, the said application has to specify the shares of all the partners, including those who may have ceased to be partners during the course of the said accounting year. We are, of course, dealing with a situation where the change in the constitution of the firm has taken place prior to the date of making of the application, and the application itself is made on or before the end of the accounting year;
(iii) an application for initial registration, where no change in the constitution of the firm has taken place during the relevant previous year has to be made in Form No. 11, as contemplated by rule 22(2)(i).
12. We may now examine the conditions which a partnership firm must satisfy before it is granted registration under the Act. According to section 184(7), an application for registration has to be made, signed by all the partners, provided (i) the partnership is evidenced by an instrument, and (ii) the individual shares of the partners are specified in that instrument. On receipt of such application, the Income-tax Officer shall enquire into the genuineness of the firm and its constitution as specified in the instrument of partnership, and if he is satisfied that 'there is or was during the previous year in existence a genuine firm with the constitution so specified', he shall register the firm; otherwise, he shall refuse registration. In R. C. Mitter & Sons v. CIT : [1959]36ITR194(SC) , a case arising under the Indian Income-tax Act, 1922, the Supreme Court held that the following essential conditions must be satisfied before registration can be granted under section 26A of the Act. They are : (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 under section 23 for that particular year; (iv) the profits or losses, 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 have actually existed in conformity with the terms and conditions of the instrument of partnership in the accounting year. (So far as condition No. (iii) is concerned, the 1961 Act says that such application should be made before the end of the relevant accounting year). To the same effect is the decision of a Bench of this court in Chintalapati Ranga Naikulu v. CIT : [1963]48ITR968(AP) . It was held that one of the essential conditions of registration is that the profits or losses, if any, of the business relating to the relevant previous year should have been divided, or credited, as the case may be, in accordance with the terms of the instrument. It was observed that where it is not so done, refusal to register cannot be found fault with.
13. Applying the above principles, let us examine the facts of the case before us. We accept the finding of the Tribunal that the four minors were admitted to the benefits of partnership only on, and with effect from July 17, 1973, and that, therefore, they cannot be deemed to have been admitted to such benefits with effect from an anterior date. This is, therefore, a clear case where a reconstitution of the firm has taken place as contemplated by sub-section (2) of section 187 during the previous year. (According to the definition of 'partner' in section 2(23), it includes a minor admitted to the benefits of partnership). In this case, an application was indeed made for registration in Form No. 11A signed by all the partners excluding, of course, the minors. It was also accompanied by the partnership deed dated July 17, 1973. However, both the Form 11A and the partnership deed enclosed thereto incorrectly stated that the minors were admitted to the benefit to the benefits of partnership with effect from the commencement of the relevant accounting year, i.e., with effect from September 1, 1972, which is now found to be untrue as a fact. The second infraction pointed out by the Income-tax Officer - and which circumstance weighed heavily with him in refusing registration - is that the profits of the firm for the entire year were divided between 12 partners, including the four minors, which is inconsistent with the actual factual situation. The Tribunal has also agreed that the correct thing to do was to apportion the profits of the firm between two periods. viz., September 1, 1972, to July 16, 1973, and July 17, 1973 to August 31, 1973. (It has described the allocation of profits in this case, based as it is upon the partnership deed dated July 17, 1973, as a 'mistake'). The Tribunal, however, was of the opinion that the said mistake, or the fact that the assessee-firm did not allocate the profit correctly, cannot be considered as 'a sole ground for refusing grant of registration'. In so holding, the Tribunal followed the decision of the Allahabad High Court in Addl. CIT v. Mardan Khan Rafiq Ahmed Khan : [1978]115ITR559(All) . The question is whether the Tribunal was right in its opinion
14. Learned standing counsel for the Revenue relied strongly upon the following decisions in support of his contention that the wrong statement in the partnership deed (to the effect that the minors were admitted to the benefits of partnership with effect from September 1, 1972, whereas, in fact, they were admitted as such only from on July 17, 1973) and the allocation of profits on a basis different from the true position, disentitles the assessee firm to registration. The first decision is in Khanjanlal Sewakram v. CIT : [1972]83ITR175(SC) . In this case, it was held by the Supreme Court that where only a part of the profits of the firm was entered by the assessee in its account books and was distributed, the certificate given in the application for renewal of registration cannot be said to be a true certificate. In that case, it was found that the profits earned in black market have not been distributed among the partners according to the deed of partnership, and that was made a ground for refusing registration by the Income-tax Officer. The Supreme Court upheld the same, holding that only where the divisible profits of a firm are divided, or credited to the accounts of the partners, and a certificate to that effect is filed along with the application for renewal, is the requirement of the provisions of rule 6(3) of the Income-tax Rules satisfied. It was, no doubt, a case decided under the 1922 Act and the rules made thereunder. It is also true that at the relevant time there was no tax on a partnership firm. But, in our opinion, the principle is unexceptionable.
15. The second decision is of the Allahabad High Court in Setha Ram Dhanvir Singh v. CIT : [1980]123ITR150(All) , where it was held, following an earlier decision of the same court in Krishna Gopal & Bros. v. CIT : [1977]110ITR378(All) , that division of profits otherwise than in accordance with the shares specified in the deed, disentitles the firm to the benefit of registration under the Act. Yet another decision cited by learned counsel is in Dawjee Dadabhoy & Company v. CIT : [1963]49ITR698(Cal) . In this case, the partnership deed dated November 14, 1949, gave liberty to any partner of the firm to retire on June 30, or December 31, in any calendar year, if he so desire, on giving two month's previous notice. On July 2, 1953, two out of the eight partners of the firm retired and a supplemental deed of partnership was executed on that day by the remaining six partners and a new partner was inducted on that day. The said supplemental deed recited that the two retiring partners should be considered to have retired with effect from December 31, 1952, and that the new partner must be deemed to have been inducted with effect from January 1, 1953. The question arose, in the above circumstances, whether the firm was entitled to registration under section 26A of the 1922 Act for the period January 1, 1953, to July 1, 1953 It was held that the firm was not entitled to such registration. It was held that the partnership which applied for registration was constituted only on July 2, 1953, and was not in existence prior to that date. It was observed that it is not open to the partners to extend the life of a partnership by saying that they shall be considered to have been carrying on business from a date anterior to the date on which they actually commenced the partnership. In other wards, it was held that where a partnership actually comes into existence on a particular date, it is not open to the partners to say that it must be deemed to have come into existence with effect from an anterior date. At the same time, it was clarified that a deed is not necessary for bringing a partnership into existence and that a mere oral agreement is sufficient, though a deed must in fact be executed as a condition for registration.
16. In our opinion, the principles enunciated in the above decisions are perfectly consistent with section 185 of the Act. Section 185 says that on receipt of an application for registration, the Income-tax Officer shall inquire into the genuineness of the firm and 'its constitution as specified in the instrument of partnership', and only where he is satisfied that 'a genuine firm with the constitution so specified' did exist 'during the previous year' that he shall grant registration. The expression 'previous year' undoubtedly means the whole of the previous year and not a part thereof. If, during the previous year, there has been a reconstitution of the firm the application must specify the particulars of the partners and their shares, both before and after the reconstitution. Now, in the case before us, while the formality of an application in Form No. 11A signed by all the partners was complied with and it has also been found that the firm as it existed before July 17, 1973, and thereafter, is a genuine firm, there was an incorrect statement of fact to the effect that the firm as reconstituted on July 17, 1973, was constituted in fact on and with effect from September 1, 1972. In other words, there was no reference to the reconstitution during the previous year. The second violation is that the profits of the firm for the entire previous year were distributed among 12 partners, whereas the correct method was either to make up the accounts as on July 16, 1973, and again on August 31, 1973, and distribute the same among the respective partners, or to allocate the profits of the firm at the end of the year on time basis, among the relevant partners. In this sense, the firm as reconstituted on July 17, 1973, was not entitled to registration for the period September 1, 1972, to July 16, 1973.
17. In our opinion, however, in the particular facts and circumstances of this case, the grant of registration is justified and proper; the violations aforesaid lose their sanctity in the particular facts of this case. The reasons are the following :
(a) by virtue of reconstitution of the firm on July 17, 1973, there was no change in the shares of other partners; the minors were admitted only in the share of Sri Kanakam Babu who held a 17% share in the firm. The four minors were accommodated within that 17% share;
(b) the allocation of profits between the 12 partners at the end of the relevant accounting year was with the consent of all the partners and it only meant the allocation of the share of profits of Sri Kanakam-Babu between himself and his minor children; others were not affected; and
(c) the finding of the Income-tax Officer is that the firm, both before the reconstitution and thereafter, was a genuine firm. Unlike the Calcutta case, no adult partner was inducted in this case. The new partners were only minors admitted to the benefits of partnership and they were accommodated within the existing share of their parent/partner.
18. We are, therefore, of the opinion that in the particular facts and circumstances of this case, the Tribunal was justified in holding that the partnership firm was entitled to registration, though it was not right in enunciating a principle that allocation of profits otherwise than in accordance with the partnership deed cannot be a ground for refusing grant of registration.
19. For the above reasons, we answer the second question referred to us in the affirmative, i.e., in favour of the assessee and against the Revenue, while we decline to answer question No. 1, in the particular facts and circumstances of this case and for the reasons given above. There shall be no order as to costs.