2000 (2) TMI 52 - HC - Income Tax

Summary

Issues Involved:
1. Whether the appellant firm was entitled to registration and continuance of registration for the assessment years 1978-79 to 1980-81.

Issue-wise Detailed Analysis:

1. Entitlement to Registration and Continuance of Registration:
The primary issue was whether the appellant firm was entitled to registration and continuance of registration for the assessment years 1978-79 to 1980-81. The firm was constituted by a partnership deed dated July 26, 1977, specifying equal profit-sharing among the partners. However, the Income-tax Officer found discrepancies in the actual profit-sharing ratios in the firm's accounts, which deviated from the partnership deed. Consequently, the Income-tax Officer invoked section 186(1) of the Income-tax Act, 1961, and canceled the firm's registration, deeming it not genuine.

The Commissioner of Income-tax (Appeals) and the Appellate Tribunal upheld this decision, stating that the firm was not genuine as it did not adhere to the partnership deed. The Tribunal emphasized that the firm did not rectify the error and that section 186 of the Act clearly indicated the firm was not constituted in accordance with the partnership deed.

Arguments Presented:
The assessee's counsel argued that under section 184 of the Act, the Income-tax Officer should only consider the firm's genuineness and its constitution per the partnership deed. The counsel contended that the Income-tax Officer had initially granted registration after verifying these aspects. It was argued that the term "genuineness of the firm" in section 186 should align with section 184 and that the Income-tax Officer should not cancel registration based on profit distribution discrepancies. The counsel also referenced section 271(4) of the Act, suggesting that the appropriate action for profit distribution issues would be to levy a penalty, not cancel registration. Additionally, it was argued that the Income-tax Officer should have allowed the assessee to rectify the defects.

Conversely, the Revenue's counsel argued that the term "genuineness of the firm" encompasses all aspects related to profit distribution. If profits were not distributed per the partnership deed, the firm could not be considered genuine or entitled to registration.

Legal Provisions and Precedents:
Section 184 and section 185 of the Act outline the requirements and procedures for registering a firm, including the need for a genuine firm constituted as per the partnership deed. Section 186 allows the Income-tax Officer to cancel registration if the firm is found not genuine.

The Supreme Court in R. C. Mitter and Sons v. CIT and Ratanchand Darbarilal v. CIT established that for a firm to be registered, profits must be divided according to the partnership deed, and the firm must genuinely exist as per the deed. The Supreme Court in Sri Ramamohan Motor Service v. CIT emphasized strict compliance with these requirements.

The Allahabad High Court in Setha Ram Dhanvir Singh v. CIT held that if profit distribution deviates from the partnership deed, the firm cannot be considered genuine. This view was supported by the Punjab and Haryana High Court in CIT v. Ram Saran Inder Singh, which emphasized adherence to the partnership deed for registration.

Court's Conclusion:
The court agreed with the view that the term "genuineness of the firm" includes adherence to profit-sharing ratios specified in the partnership deed. The firm in question did not distribute profits as per the deed, breaching the statutory undertaking. The court held that granting an opportunity to rectify the defect would be futile since the profit division was deliberate and not accidental.

The court also rejected the argument that the Income-tax Officer should have proceeded under section 271(4) instead of canceling registration. It was held that the Income-tax Officer has the discretion to invoke either or both provisions.

Final Judgment:
The court affirmed the Tribunal's decision, concluding that the firm was not genuine due to non-compliance with the partnership deed. The common question of law was answered in favor of the Revenue, and the assessee was not entitled to registration and continuance of registration for the specified assessment years. The Revenue was awarded costs of Rs. 2,000.

Summary:
The judgment addressed the appellant firm's entitlement to registration and continuance of registration for the assessment years 1978-79 to 1980-81. The court upheld the cancellation of registration due to discrepancies in profit-sharing ratios, emphasizing strict compliance with the partnership deed. The term "genuineness of the firm" was interpreted to include adherence to the partnership deed, and the court rejected the argument that the Income-tax Officer should have only levied a penalty. The decision was in favor of the Revenue, with costs awarded.