1. This is an appeal filed by Radhakrishna Fruits Co. of Tenali objecting to the order of AAC confirming refusal of registration for the assessment year 1979-80.
2. The assessee is a partnership firm with 4 partners which had started its business on 31-3-1978. The partnership deed was executed on 7-4-1978. Clause 9 of the partnership deed reads as under: On 31st of March of every year or such other date as the parties may find it convenient, an account shall be taken of all the assets and liabilities of the firm and the net profit or loss be determined which shall be divided or borne by the parties as mentioned in clause No. 4 supra. The accounts for the first time will be closed to profit and loss on 31-3-1979.
Though the accounting year for the other years could end on a date at the convenience of the partners, it was pointed out that the firm's books had to be closed for the first time on 31-3-1979. The assessee had closed its accounts only on 1-4-1979. It was stated by the assessee that the closing day was deferred by one day as 31st March was not an auspicious day. The ITO considered this to be a violation of the terms of the partnership deed with the result that he declined to grant registration. He had not stated any other reason. In fact, we are told that the same firm has been registered for the next succeeding year. In other words, there appears to be no objection from the authorities as regards genuineness of the firm. The first appellate authority confirmed the order of the ITO on the ground that the closing of the accounts on 1st April was a clear cut violation. The assessee claimed that closing up of the accounts by a day by common consent by partners cannot be treated as a violation of the covenants of the partnership deed. Even if it were so, he contended that there could be no refusal of registration especially since there was no finding against the genuineness. It was claimed that registration required three conditions: (i) existence of instrument of partnership in writing during the year, (ii) the specification of shares, and (iii) genuineness of partnership. These are the only three conditions according to him as per statute and the exhaustive case law thereon.
The learned departmental representative, on the other hand, pointed out that the accounting year cannot be more than one year especially since the assessee did not close the accounts at the end of March and if it were so, he claimed the accounting year of the assessee ended on 31-3-1979. Since the accounts were not closed on that day, there has been no division of profits while according to the registration application, he has to certify that there had been such a division as for specifications in the deed. He claimed that the orders of the authorities below could be supported even on this ground apart from the reasons stated by them.
3. We have carefully considered the records as well as the arguments.
The accounting year, as stated by the ITO, is the same as given by the assessee. It is, therefore, not possible to entertain any objection as regards accounting year at this stage as sought to be canvassed by the learned departmental representative. No doubt, the assessee ought to have closed the accounts as on 31-3-1979 as per partnership deed. If the partners had agreed to extend the last date by one day by common consent among them, we fail to see how it could be said that there has been violation of the terms of agreement. Even if there be such a violation, we cannot consider it to be so material as to justify the inference that the assessee would forfeit its right to registration.
The Kerala High Court in St. Joseph's Provisions Stores v. CIT [1962] 45 ITR 380 held that appropriation of part of the profits as the revenue cannot be treated as violation either of terms of agreement or requirement of registration as to division of profits so as to disentitle the assessee to registration. The same High Court in the case of V.K. Kurien & K.P. George v. CIT [1967] 63 ITR 675 found that non-maintenance of accounts and non-payment of interest to a partner notwithstanding a provision in the partnership deed stipulating interest payment at 9 per cent were not sufficient to justify rejection of registration claimed. A Full Bench of the Andhra Pradesh High Court in CIT v. Hyderabad Stone Depot [1977] 109 ITR 686 overlooked some shortcomings in specification of share of profits and losses of partners in the view that only absolute non-specification would justify rejection of registration and that the ground of vagueness was not a material defect since the same could have been remedied by the assessee. The Allahabad High Court in CIT v. Hari Ram Khanna [1979] 116 ITR 886 found that some deviation in division of profits did not justify refusal of registration. In the assessee's case the deviation, if any, by inclusion of an additional day's profit is so marginal that we consider that rejection on account of such deviation would amount to a pedantic and hyper-technical view of law if we were to support the orders of the authorities below. It must be pointed out that there has been a division of profits arising in the accounting year if the assessee's accounting year is taken to be the correct accounting year.
Division of profits including a day's profit of the next accounting year on the basis of argument of the learned departmental representative would only mean that there is an advance division of part of the profits for a day falling in the next accounting year.
Since the profit-sharing ratio of both years was the same, it cannot mean that there is no division of profits of the year. Actually, it cannot be said that next year's profit has been included by adding a day to the accounting year because the ITO himself accepted the profit divided as profit of the year. There is also another angle to the issue inasmuch as the ITO had failed to issue notice to the assessee before refusal of registration under Section 185(3) of the Income-tax Act, 1961. This sub-section clearly contemplates an opportunity to the taxpayer to remedy any defect in the declaration or the claim. Even if we had agreed with the contention of the authorities, we would have still felt that the ITO should have given an opportunity to the taxpayer so that the assessee could make appropriate entries closing accounts a day earlier so as to satisfy the requirement of the ITO.Since we do not find violation to be material, we are not remitting the matter back to the ITO. Since the genuineness of the firm is not doubted and the firm has been registered for a subsequent assessment year, there is no justification on the part of the authorities below in refusing to grant registration for the year under consideration.
4. In the result, the appeal is allowed and the ITO is directed to register the firm for the assessment year 1979-80.