ORDER
Moksh Mahajan, Accountant Member
1. The order of the learned Commissioner of Income tax (Appeals) for assessment year 1982-83 whereby the order of the Assessing Officer passed under Section 185(1)(b) whereby refusal of registration was confirmed, has been challenged by the assessee.
2. Shri C.S. Aggarwal who appeared on behalf of the assessee submitted that the assessee’s claim for registration was refused on the ground that there was no genuine firm in existence for the various reasons as discussed in the assessment order passed under Section 143(3) in the case of the assessee for the aforesaid assessment year. According to the Assessing Officer, it was the assessee who carried on wholesale business in sarees, the income of which was diverted to the trust M/s. K.C. Dilip Kumar Pvt. Family Specific Trust. The learned CIT (Appeals) on the other hand was of the view that the profits earned were not distributed in accordance with the constitution so specified in the deed of partnership. This was for the reason that the income shown in the hands of the trust was held to belong to the assessee-firm. Another reason stated for disallowing the claim of registration was that the part of the profits was not divided or credited in the manner shown in the Application Form No. 11. This was supported by the decision of the Supreme Court in the case of Khanjan Lal Sewak Ram v. CIT [1972] 83 ITR 175. In fact, argued the learned A.R.. the profits shown in the hands of the trust belonged to it and as such were not assessable in the hands of the assessee-firm. The decision of the Supreme Court in the case of Khanjan Lal Sewak Ram (supra) was delivered under the old Act of 1922 where the provisions were different from that of Act, 1961. Apart the aforesaid case pertained to renewal of registration and not the fresh registration as is the case of the assessee. As per the provisions of Sections 184 and 185, there is no requirement for the profits to be distributed as per the ratio laid down in the partnership deed. What is required is that the firm is validly constituted and is genuine. As there is no conclusive evidence to show that the firm was not genuine, the registration was wrongly refused. In support the reliance was placed on various case laws.
3. The learned Departmental Representative on the other hand, heavily supported the order of the CIT (Appeals). It was argued that it was proved beyond doubt that the income shown in the hands of the trust actually belonged to the assessee-firm and as such the entire profits were not distributed as per the share ratio specified in the partnership deed. Considering that this was the year of initial registration, the Assessing Officer was well within his right to enquire into the genuineness of the firm and then refused the registration. The ratio in the case of Khanjan Lal Sewak Ram (supra) squarely applies to the case of the assessee whereas the other cases cited are distinguishable. In the circumstances there is no merit in the arguments of the learned AR that the assessee’s claim for registration was wrongly rejected. Various decisions were relied upon.
4. We have considered the rival submissions. Examining the assessee’s claim under the 1961 Act, we find that a firm may be assessed as registered or to be treated as unregistered one. An application for registration is to be made under Section 184 and the procedure to be followed on receipt of application, is contained in Section 185 of the Act. As per the provisions prevailing at the relevant point of time, the essential conditions are- (a) an application to be made on behalf of the firm. This has to be as per rules 22 to 24 of the Income-tax Rules, 1962. As per these rules, the application has to be filed either in Form No. 11, Form No. 11A or Form No. 12A as the case may be, for registration or for continuation of registration; (b) the firm is to be evidenced by instrument of partnership deed; and (c) partnership is to be valid and genuine and should be constituted as specified in the instrument.
5. In the case of the assessee it is not disputed that the firm is validly constituted. The dispute is only with regard to the distribution of the profits which according to the department, have not been made as per the shares specified in the partnership deed. In this context, we find that while Section 184 speaks of the individual shares of the partners being specified in the instrument, Section 185 talks of the power of the Assessing Officer to enquire into the genuineness of the firm. Form No. 11 which is relevant in the case of the assessee requires the following declaration to be made by the partners :-
3. We hereby declare that none of the partners of the firm was, at any time during the previous year* upto the date of this application, in relation to the whole or any part of his share in the income or property of the firm, a benamidar of any other partner to whom he is not related as spouse or minor child.
4. We do hereby certify that the profits (or loss, if any) of the previous year were/will be_________________divided or credited as period upto the date of dissolution were /will be shown in the Schedule and that the information given above and in the Schedule is correct.
*Note : Where the application is made after the end of the previous year, the words ‘upto the date of this application’ must be deleted.
Similar certificate was prescribed in paragraph 3 of the form of application for registration prescribed under rule 3 of the Income-tax Rules, 1922, From the above it is clear that the certificate ‘to be given by the firm is that the profit or loss if any, is divided or credited as shown in the Schedule. The Schedule in turn contains 7 columns out of which the 6th column which is relevant reads as under :-
Share in the balance of profits or loss
Percentage.
This apparently refers to the profits/loss which the partners agreed to share amongst themselves as specified in the deed. As the reliance has been mainly placed on the decision of the Supreme Court in the case of Kharyan Lal Sewak Ram (supra), we would refer to the same. The aforesaid case related to renewal of registration for assessment year 1948-49 under Section 26A of Indian Income-tax Act, 1922. The firm which constituted of 6 partners was registered for assessment year 1947-48. It applied for renewal of registration for assessment year 1948-49. On 5-11-1949, the firm was dissolved under the Deed of distribution dated 9-11-1949. One of the clauses in the deed provided as under:-
But if an amount which was not entered in the books at the time of settlement is found then only that person will be accountable for it through whom the money was received or paid. None of the parties will have any objection to it.
The first four partners made disclosure statement to the Income-tax Officer that the firm had earned Rs. 15,000 by way of profits outside the books. It was also stated that the entire profits were not recorded in the books. On these facts, the ITO rejected the assessee’s claim for registration which order was upheld by the Appellate Asstt. Commissioner. There being a difference amongst the Members of the ITAT. It was referred to the Third Member who agreed with the Judicial Member that the firm was not entitled to renewal of registration. When it came to the Supreme Court, their Lordships of Supreme Court held that as the firm gave wrong certificate that the profits earned by the firm had been divided or credited in the manner shown in the application, the assessee was not entitled to renewal of registration. This was for the reason that it did not comply with the conditions prescribed in paragraph 3 of rule 6. While holding so, it was also held that the reason behind rule 6 was that at the relevant time the registered firm was not taxable, and only the partners of the firm could be taxed. If a portion of the profits earned by the firm was not divided amongst the partners or credited to their accounts to that extent, the profits earned by the firm escaped assessment and as such the claim for renewal of registration could not be accepted. While holding so they allayed the apprehension of the learned AR regarding the decision being taken advantage of by observing that in the cited decision it was only the scope of paragraph 3 of rule 6 which was examined. “So long as the divisible profits had been divided or had been credited to the accounts of the partners, the requirement of that provision was complied with”. Thus while in the aforesaid case it was admitted by the partners that there were secret profits which were not shared amongst all the partners as per terms of dissolution deed, in the case of the assessee there is no such thing. All along the line, the assessee has not admitted that the income pertaining to trust belonged to it which was agreed to be shared amongst the partners of the firm in the ratios laid down in the deed. In this context we would like to state that the order passed under Section 185 is a separate and independent from the order passed under Section 143(3) of the Act. While one affects the tax to be recovered from the firm, the other relates to the computation of the taxable income. Both are independent to each other determining different subject-matters.
6. As regards the other cited cases, in the case of Shri Setha Ram Dhanvir Singh, the shares were divided at variance with the ones specified in the instrument of partnership. So facts are distinguishable. In the case of Kanhaiya Lal Radha Krishna v. CIT [1965] 55 ITR 568 (AIL), it was found by the Assessing Officer that the assessee carried on two undisclosed businesses at two more places, the profit of which was not shown by it. On the facts it was held by their Lordships of Allahabad High Court that the certificate given in clause 3 of the application was incorrect which was deliberate and dishonest on the part of the assessee. Accordingly the claim of the registration was refused. As against this, we find that in the case of Addl. CIT v. Chanderbhan Harichand & Co. [1980] 126 ITR 709 (Delhi), their Lordships of Delhi High Court have held that even if some partners had made secret profits without the knowledge of the others, the firm was entitled to the certificate of continuance of registration under Section 184(7). It must also be found that the other partners have assented to such a distribution. Though the decision pertains to the provisions of Section 184(7), the ratio is relevant. Their Lordships of Delhi High Court also discussed the decision of the Supreme Court in the case of Khanjan Lal Sewak Ram (supra). While arriving at the conclusion they also referred to the observations of their Lordships of Supreme Court made at page 182 of the aforesaid 83 ITR wherein the apprehension expressed by the counsel for the assessee were allayed. In any case as stated above, in absence of any material to show that the profits belonging to the trust were actually agreed to be shared by the partners, it could not be said that the firm was not genuine. It is also not a case where any of the partners is benamidar of the other partner for which the declaration in Form No. 11 was made. In the circumstances, we hold that the firm is entitled to registration and as such we reverse the order of the learned CIT (Appeals) in this respect.
7. In the result, the appeal is allowed.