TMI Blog1978 (9) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... th share and that the profits had been divided accordingly. The Commissioner, during his inspection, found that the ITO's order was erroneous. According to the partnership deed, two of the partners had a three-anna share each, while the other four had a two-anna six pie share each, while the profits of the firm had been divided by crediting one-sixth share to each of the six partners. He issued notice under s. 263 of the Act, and after hearing the assessee held that according to the profit and loss account and the balance-sheet, filed along with the return, the profits had been divided equally amongst the six partners, though the partnership deed indicated that four of the partners had only a two-anna six pie share each. The division of profits was not in accordance with the shares specified in the deed. He set aside the order granting registration and directed the ITO to reframe the assessment of the firm treating it as an unregistered firm, and to make consequential amendments in the assessment of the partners. The assessee appealed to the Tribunal, but failed. At the instance of the assessee, the Tribunal has referred for our opinion three questions, the substance of which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ession genuine firm denotes that the firm is really in existence and that the partners are collectively carrying on the business. Genuineness is also interrelated to the specified constitution of the firm. The constitution of the firm refers to the identity of the partners and their shares in the profit or loss of the firm business. The ITO has to be satisfied that there was in existence a genuine firm with the constitution so specified. Genuineness by itself is not enough. Genuineness has to be considered in the light of the specified constitution if it is found that the partners have in the instrument of partnership indicated their shares, but in fact they have, while dividing the profits or losses adopted some other shares, voluntarily and knowingly, it will be a case where the firm, though in existence, is not a genuine firm with the specified constitution. Section 186(1) authorises the ITO to cancel the registration if he is of opinion that " no genuine firm is in existence as registered " (emphasis supplied). Here again the genuineness of the firm has to be determined in the background of the firm as it was registered. The firm should really be in existence and carrying on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal to show that the error occurred because of misgivings on the part of the accountant was held to be an after-thought and disbelieved by the Tribunal. Under the circumstances, the firm was, in law, not entitled to registration. Learned counsel for the assessee relied on several decisions. In CIT v. Madanlal Chhaganlal [1963] 50 ITR 477, the Madhya Pradesh High Court observed that though there was a term in the instrument of partnership that interest will be paid to the capital furnished by the partners, but in the accounts the interest was not credited. It was held that this irregularity was no ground to refuse registration. There was in that case no error in the distribution of profits amongst the partners in accordance with the specified shares. In N. S. S. Sokkalingam Chettiar and Co. v. CIT [1966] 60 ITR 671 the Madras High Court upheld the claim for registration. In that case, salary was paid to a partner. It was held to be an allowable deduction ih the computation of profits of the firm. Profits were divided properly. The case is clearly distinguishable. In CIT v. Sat Ram Gian Chand [1961] 42 ITR 543, a case from Punjab and Variety Hall and Ramakrishna Textiles v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Girdhari Lal Laxman Prasad v. CIT [1968] 70 ITR 853 (All), Hari Om Company v. CIT [1969] 71 ITR 584 (AM), CIT v. P. P. Johny [1969] 73 ITR 459 (Ker) and CIT v. Pure Nichitpur Colliery Co. [1975] 101 ITR 79 (Pat)]. But the question is whether this principle is applicable to the facts of the present case. Here no one exercised any option. The ITO granted registration and assessed the firm as such. The Commissioner, in exercise of his revisional powers, held that registration was wrongly granted. He set aside that order. The automatic consequence of that order was that the firm was entitled to be assessed only as an unregistered firm. This legal consequence cannot be equated with a voluntary election. An election has to be between assessment of a firm as an unregistered firm on the one hand, and assessment of the same income in the hands of the individual partners on the other. The principle that after the partners have been assessed, the status of the firm cannot be changed arises only when the assessing authority has an option to elect one or the other entity for assess ment. Here neither the, ITO nor the Commissioner had any option, much less did they exercise it. Sub-sections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the ITO had committed an error in granting registration when in view of the statutory provisions he should not have. In other words, on the finding that the case was a fit one for cancellation of registration and the ITO erred in granting the renewal, the Commissioner was entitled to interfere. The ITO is authorised to cancel the registration or to renew it only under s. 186 of the Act, on the ground that no genuine firm, as registered, was in existence. The Commissioner could not act on any other ground to hold that the ITO has committed an error. The Commissioner's jurisdiction depends upon the existence of an error in the ITO's order. It is thus evident that the Commissioner has no higher or wider powers. His powers were co-extensive with that of the ITO in the sense that he, if on examining the record of any proceedings, finds that the ITO has committed an error, then alone he can act. The jurisdiction to cancel registration of a firm even at the instance of the Commissioner was hence confined to the provisions of s. 186(1) under which alone the ITO could have acted. The Tribunal expressed the opinion that the Commissioner, while acting under s. 263 could not direct the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
