Commissioner of Income-tax Vs. Agrawal Refrigeration - Court Judgment

Excerpt:
- - as shown earlier, failure to divide the profits amongst the partners in accordance with the terms of the partnership deed did not itself disentitle the firm to be registered so long the partnership was evidenced by an instrument of partnership and there was no reason to doubt the genuineness of the partnership deed and the other conditions had been complied with.r.k. gulati, j.1. these are two connected applications under section 256(2) of the income-tax act, 1961 (hereinafter referred to as 'the act'), in respect of the assessment years 1985-84 and 1984-85. the common question proposed in these applications is as under :'whether in law and on the facts of the case in granting registration to the firm which was wrong and prejudicial to the interests of the revenue, the income-tax appellate tribunal was correct in cancelling the order of the commissioner of income-tax passed under section 263 of the income-tax act, 1961 ?'2. we have heard learned standing counsel for the revenue. in our opinion, the applications are devoid of any merit and are liable to be rejected.3. briefly, the facts leading to the filing of these applications are that messrs. agrawal refrigeration, jhansi, respondent-assessee, is a partnership firm. initially, the assessments for the two years in question were made in the status of a registered firm. the commissioner of income-tax initiated proceedings under section 263 of the act and cancelled the assessments directing the income-tax officer to make fresh assessments in the status of an unregistered firm. on appeal, the order of the commissioner of income-tax was set aside. registration of the firm had been cancelled by the commissioner of income-tax on the sole ground that the profits were not allocated amongst the partners in the share ratio as provided in the instrument of partnership. up to the assessment year 1982-83, the assessee was throughout assessed in the status of a registered firm. in the previous year relevant to the assessment year 1983-84, there was a change in the constitution of the firm when a fresh deed of partnership was drawn up which provided for apportioning of profit or loss in the ratio of 40 : 20 : 40 but the profits were actually allocated equally (one-third each) among the partners. the tribunal accepted the explanation of the assessee that the omission to divide the profits in accordance with the terms of the partnership deed, was because of the inadvertent fault of the accountant. it was pointed out that prior to the change in the constitution of the firm each of the three partners had a one-third share in the profit or loss of the business carried on by the firm. it was under that erroneous impression that the accountant divided the profits incorrectly omitting to take into account that there was a change in the share ratio in which the profits were to be allocated. the tribunal found that after the error in allocation of profit was noticed, the same was corrected by reallocating the profits and dividing the same in terms of the instrument of partnership. the firm was held to be a genuine firm. in accepting the case that for a clerical mistake, the assessee cannot be denied the benefit of registration, the income-tax appellate tribunal relied upon a division bench decision of this court in gurudeo prasad jagannath prasad v. ito : [1981]131itr486(all) , where the view expressed is that registration cannot be refused or cancelled on the ground of improper allocation of shares if it had been made due to an omission, inadvertence or mistake. the said decision of this court, in turn, is based on an earlier decision of this court in cit v. hari ram khanna : [1979]116itr886(all) . to the same effect is another decision of this court in addl. cit v. mardan khan rafiq ahmad khan : [1978]115itr559(all) .4. on a consideration of sections 184 to 186 of the income-tax act and the scheme provided thereunder, it is manifest that where a firm is genuine and complies with the requirements of those sections and the rules framed thereunder, it is incumbent upon the income-tax officer to grant registration to the firm. the mistake committed by the munim in allocating the profits was capable of being corrected and reconciled in terms of the partnership agreement. indeed, this was done in the instant case before the assessment was made. as shown earlier, failure to divide the profits amongst the partners in accordance with the terms of the partnership deed did not itself disentitle the firm to be registered so long the partnership was evidenced by an instrument of partnership and there was no reason to doubt the genuineness of the partnership deed and the other conditions had been complied with. on somewhat similar facts, an application under section 256(2) of the act was rejected by a division bench of the andhra pradesh high court in cit v. k. venkateswara rao : [1982]134itr328(ap) , where it was held that no question of law was involved. in our opinion, the income-tax appellate tribunal, in the instant case, was justified in holding that the mistake committed by the assessee in the distribution of profits initially otherwise than in accordance with the provisions of the partnership deed was an honest mistake. even the question proposed in the applications does not challenge the finding of the income-tax appellate tribunal in this respect. the mistake being a bona fide one, the order of the income-tax appellate tribunal was correct and the firm was entitled to registration.5. for what has been stated above, these applications are rejected by saying that the order of the income-tax appellate tribunal does not give rise to any statable question of law. there shall be no order as to costs.