1994 (11) TMI 18 - HC - Income Tax

Summary

Issues Involved:
1. Legality of the Commissioner's order u/s 263 of the Income-tax Act, 1961.
2. Proper distribution of profits as per the partnership deed.
3. Validity of the firm's registration under sections 184 and 185 of the Act.
4. Examination of the genuineness of the charity fund.

Summary:

1. Legality of the Commissioner's order u/s 263 of the Income-tax Act, 1961:
The Commissioner exercised his powers u/s 263 of the Act to cancel the registration granted to the firm for the assessment years 1974-75 and 1975-76 and directed the Income-tax Officer to treat the firm as unregistered. The Tribunal found the Commissioner's order improper. The Revenue sought a reference on whether the Tribunal was correct in holding that the Commissioner's order u/s 263 was not justified and valid in law.

2. Proper distribution of profits as per the partnership deed:
The Revenue contended that the profits were not divided according to the partnership deed dated December 29, 1972. For the assessment year 1974-75, the firm transferred Rs. 39,143.14 to Vembathu Ayyanar Swamy Fund and kept a reserve fund, which was not contemplated in the partnership deed. Similarly, for the year 1975-76, Rs. 30,981.64 was transferred to the same fund and Rs. 11,532 was separated as a reserve fund.

3. Validity of the firm's registration under sections 184 and 185 of the Act:
The registration of firms is governed by sections 184 and 185, and can be canceled u/s 186 if there was no genuine firm in existence during the previous year. The Commissioner can exercise revisional powers u/s 263 if the Income-tax Officer's order is erroneous and prejudicial to the Revenue. The Tribunal emphasized that the Commissioner's revisional power should be exercised within the bounds of law and fairness, ensuring compliance with natural justice principles.

4. Examination of the genuineness of the charity fund:
The Supreme Court's decision in Khanjan Lal Sewak Ram v. CIT [1972] 83 ITR 175 was cited, emphasizing that profits must be divided among partners as per the partnership deed. The Tribunal noted that if the reserve fund and charity were not genuine, they should have been distributed as profits among the partners. The Tribunal directed the Income-tax Officer to examine the genuineness of the charity to Vembathu Ayyanar Swamy Fund and provide the assessee an opportunity to present evidence. If the charity was accepted in subsequent years, further proceedings might not be necessary.

The case was remitted to the Income-tax Officer to determine the genuineness of the charity fund, considering whether further proceedings would benefit the Revenue.