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Petitioner: KHANJAN LAL SEWAK RAM VS Respondent: COMMISSIONER OF INCOME-TAX, U. P.Honorable Justice M. C. DESAIR. K. Gulati,S. C. Das
1964 P T D 824
1964 P T D 824
[Allahabad (India)]
Before M. C. Desai, C. J. and R. S. Pathak, J
KHANJAN LAL SEWAK RAM
Versus
COMMISSIONER OF INCOME‑TAX, U. P.
Miscellaneous I. T. R. No. 389 of 1958, decided on 21st January 1964.
Firm‑Registration‑Renewal‑Failure to distribute profits not brought into the account books‑Officer whether entitled to refuse renewal of registration‑Appeal to Appellate Assistant Commissioner from refusal to renew registration‑Reference‑Question of law arising out of order of' Appellate Tribunal‑Order made under S. 33(4)‑Meaning‑Indian Income‑tax Act, 1922, Ss. 26‑A, 30, 31, 33 & 66‑Indian Income‑tax Rules, 1922, rr. 6 & 6A.
If a firm makes profits which are not shown in the books of accounts and the undisclosed profits are not distributed among the partners, then the Income‑tax Officer has discretion to refuse to renew the registration of the firm under section 26‑A of the Indian Income‑tax Act, 1922.
Although under rule 6‑A of the Income‑tax Rules, 1922, the Income‑tax Officer is bound to refuse renewal of registration to a firm if he is not satisfied that the application was in order or that there was a firm in existence constituted as shown in the instrument of partnership, he is not bound to renew registration if he is so satisfied. Even if the application for renewal of regis tration is in order and there is or was a firm in existence constituted as shown in the deed of partnership, there may be circumstances justifying the refusal of renewal. For instance, if the application is withdrawn by some of the partners or if it is proved that the signatures of some of the partners were obtained under duress or by fraud it would be wrong to renew registration and the Income‑tax, Officer should not be bound to renew registration. Further, the satisfaction required under rule 6‑A is only about the application being "in order". "In order" means "correct in form" and not necessarily "true", and an application may be in order even though the particulars contained in it are untrue. The benefits arising out of registration have connection with the substance of the application and not with its form and therefore that the statements made are or the certificate given in the application is incorrect would be a ground for refusing renewal of registration. The word "may" in rule 6 has been deliberately used. If the application is in order, in the sense that it is correct in form, but is incorrect in substance, the Income‑tax Officer may exercise his discretion against renewal. It may be an untrue statement when a part of the correct profits is not distributed among the partners and yet there is a statement in the applica tion for renewal that the profits have been so distributed.
Barring the case in which there is a bona fide doubt as to what the actual profits are, if the partners distributed or credited amongst themselves their shares in what they bona fide believed to be the actual or real profits they can be said to have certified the fact as required by the form of application, But if they dishonestly concealed certain profits and did not distribute or credit them among themselves they cannot truthfully certify that they had distributed or credited the profits.
Concealment of a portion of the profits will not render a certificate that the profits have been distributed or credited incorrect if it in fact had been distributed or credited among the partners in accordance with their shares in the partnership deed. Registration or renewal may not be refused only because a portion of the profits was concealed from the accounts though it was distributed or credited among the partners in accordance with their shares.
Renewal of registration is nothing but registration for a subsequent year, and therefore an appeal lies to the Appellate Assistant Commissioner' under section 30 against an order refusing to renew registration of a firm. The Appellate Tribunal will therefore have jurisdiction under section 33 from an order passed by an Appellate Assistant Commissioner under section 31 in an appeal against an order refusing to renew the registration of a firm.
Commissioner of Income‑tax v. Arokiaswami Chetty and Co. (1948) 16 I T R 404; R. C. Mitter and Sons v. Commissioner of Income‑tax (1959) 36 I T R 194; Hajie ‑Saeed and Sons v. Commissioner of Income‑tax (1947) 15 I T R 51 and Firm Raghunandan Prasad v. Commissioner of Income‑tax (1957) A I R 1957 All. 75 fol.
If the Appellate Tribunal purports to pass an order under section 33, that is enough to give it jurisdiction to refer to the High Court a question of law arising from its order. Whether an order is made under section 33 (4) or not depends upon what, the Appellate Tribunal professes to do ; if it professed to make an order under section 33 (4), it is such an order even if it could not legally be made under that provision. Correctness of the order, which includes correctness of the exercise of the jurisdiction to make it, is irrelevant.
[Cases referred to.]
STATEMENT OF CASE
By this application the assessee requires the Appellate Tribunal to refer to the High Court certain questions of law said to arise out of the order of the Tribunal in I. T. A. No. 3223 of 1953. As in our opinion a question of law does arise out of the said order, we hereby draw up a statement of the case and refer it to the High Court of Judicature at Allahabad under section 66 (1) of the Income‑tax Act, 1922.
2. The assessee is a firm constituted under an instrument of partnership dated the 30th April 1947, showing the following constitution :
Rs. As. Ps.
1. L. Khanjan Lal
0‑4‑0
2. L. Lalloo Ram
0‑2‑0
3. L. Dwarka Prasad
0‑2‑0
4. L. Ram Lal
0‑2‑0
5. L. Sewak Ram s/o Jagannath Prasad
0‑4‑0
6. Smt. Jagrani Devi, wife of L. Jagannath Prasad and mother of partner No. 5
0‑2‑0
The firm was registered for the assessment year 1947‑48. An application for renewal of registration for the assessment year 1948‑49 signed by all the partners was preferred on the 12th of July 1949. The application was on the prescribed form and in paragraph 3 of the application, the certificate given was as under:
"We do hereby further certify that the profits of the previous year were divided or credited as shown below:"
On November 5, 1949, the partnership was dissolved and a document of dissolution of the partnership was drawn up on November 9, 1949. One of the clauses in the document of dissolution was 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."
On October 5, 1950, the first four partners made a disclosure 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 these profits had been divided between the partners. A copy of the disclosure application is part of the case and is annexure "A". On December 9, 1950, partner, L. Sewak Ram, appeared before the Income‑tax Officer and made a statement on oath stating that he and the other partner, Smt. Jagrani Devi, were not given full share of profits in gur business earned by the firm in Samvat year 2005. It was also stated that the entire profits earned in the gur business carried on in the previous year were not recorded in the books and that the first four partners had given them their shares of only those profits which were recorded in the books. He also stated:
"For this reason I want to withdraw the application for registration because the profits have not been divided according to the shares."
A copy of the statement of L. Sewak Ram is part of the case and is annexure "B". On September 10, 1951, Sewak Ram gave a list of the black market transactions of the firm carried on by the first four partners and the profits earned by the firm in those transactions. According to L. Sewak Ram, the profits earned by the firm outside the books amounted to Rs. 1,13,571. On March 31, 1951, L. Sewak Ram filed a civil suit for rendition of accounts and claimed as his share of profits a sum of Rs. 50,000 The suit was ultimately compromised and a compromise petition was presented to the Court stating as under:
"Seva me savinay nivedan hai ki ukt mukadama ki halat dekhkar vadigan is natije par pahunche hain ki unko prativadigan se kuch milna nahin hai. Athaiva vadigan prarthi hain ki unka vad kharij parmaya jave;"
meaning thereby that "looking to the progress of the suit the plaintiffs had reached the conclusion that they could realise nothing from the defendants and therefore the plaintiffs pray that their suit be dismissed and the parties would bear their costs." The Civil Judge accepted the compromise and dismissed the suit.
4. On March 15, 1952, the two partners, L. Sewak Ram and Smt. Jagrani Devi, gave an application to the Income‑tax Officer stating that they had withdrawn their signatures on the application for renewal of registration as the profits were not distributed according to the deed of partnership and the certificate of registration required under rule 4 (1) of the Income‑tax Rules, 1922, had never been granted as required by law on the back of the partnership deed. It was also stated that as the certificate under rule 4 had not been granted under law, the firm was not entitled for registration under rule 6 of the Income tax Rules. A copy of that application is part of the case and is annexure "C".
5. On these facts, the Income‑tax Officer making the assess ment held that the assessee‑firm had earned black market profits which were not distributed amongst all the partners according to the partnership deed and the firm was not, therefore, entitled for registration. He also held that the application for registra tion of firm was duly withdrawn. On these facts, the Income‑tax Officer refused to grant registration of the firm and made an assessment on the firm in the status of an unregistered firm and included in the total computation of the assessee's income, the profits earned by the firm in the black market in addition to the profits entered in the books. Copies of the assessment order made by the Income‑tax Officer as also the order refusing renewal of registration are parts of the case and are annexures "D" and "E" respectively.
6. The assessee's appeal before the Appellate Assistant Commissioner against the refusal to renew the registration was unsuccessful and a second appeal was preferred before the Appellate Tribunal. Before the Tribunal, it was contended that, on facts, there was evidence to hold that L. Sewak Ram and Smt. Jagrani Devi had been given their due share in the entire profits earned by the firm, namely, those entered in the books and those not entered in the books. It was also stated that the two partners, L. Sewak Ram and Smt. Jagrani Devi, had no power to withdraw the application for registration of the firm already given under the signatures of all the partners. It was further stated that all the conditions prescribed by rule 6‑A of the Income tax Rules were duly fulfilled and the refusal to renew the registra tion was not proper and legal. The Tribunal heard the appeal and felt it necessary to record the statement of L. Sewak Ram in respect of the quantum and distribution of the black market profits in gur business earned by the firm. A copy of the state ment of L. Sewak Ram along with a copy of the accounts referred to in the statement is part of the case and is annexure "F". At this stage, it is necessary to mention that the appeal preferred by the firm against the quantum of assessment was heard and dis posed of by the Tribunal and the Tribunal held in that appeal that the firm had earned black market profits to the tune of Rs. 1 lakh which were not entered in the books. A copy of the order of the Tribunal in quantum appeal is part of the case and is annexure "G".
7. The two members who heard the appeal held that the assessee‑firm had in fact earned black market profits which were not entered in the books. They also held that these profits were not distributed amongst the partners according to the instrument of partnership. They however differed on the other issues that arose for consideration. The Accountant Member held : (1) that it was not open to the partners, L. Sewak Ram and Smt. Jagrani Devi, to withdraw the application for renewal of registra tion which they had already given. (2) He also held that inasmuch as all the profits recorded in the books had been distributed according to the instrument of partnership, the firm was entitled for registration although the black market profits were not so dis tributed. The Judicial Member, on the other hand, held that as the partners, L. Sewak Ram and Smt. Jagrani Devi, had stated that they had given their signatures on the application for renewal of registra tion on a misrepresentation of facts, they had every right to withdraw the application for renewal of registration and as the application had been withdrawn by two of the six partners, the firm was not entitled for registration. He further held that as all the profits namely, those entered in the books and those earned in the black market, had not been distributed according to the instru ment of partnership, the firm was not entitled for registration. Relying upon the decision of the Madras High Court in Commis sioner of Income‑tax v. Arokiaswami Chetti & Co. ((1948) 16 I T R 404), the Judicial Member further held that every renewal of registration was in fact registration for that year and the conditions to be fulfilled in both the proceedings were practically the same.
The Judicial Member held that as all the profits had not been distributed according to the instrument of partnership and in accordance with the certificate given in the application for renewal of registration, the claim for renewal of registration was not tenable.
8. As there was difference of opinion amongst the two members, the case was referred to the President of the Tribunal under section 5‑A (7) of the Income‑tax Act and the following question was referred for his opinion
"Whether the assessee‑firm is entitled for renewal of the registration in the circumstances of the case?
The President who heard the appeal concurred with the opinion expressed by the Judicial Member and held that as the entire profits had not been distributed the Income‑tax Officer had properly exercised his discretion in refusing to register the firm. The President did not express any opinion as to whether L. Sewak Ram and Smt. Jagrani Devi could or could not in law withdraw the application for renewal of registra tion of the firm. As the majority of opinion was that the firm was not entitled to registration, the Tribunal passed an order dismissing the appeal on the 11th of March 1957. A copy of the order of the Tribunal (including orders passed by the Accountant Member, Judicial Member and the President) is part of the case and is annexure "H".
9. On these facts we refer the following question of law for the opinion of their Lordships:
"Whether the assessee‑firm which had distributed the book profits amongst the partner s according to the instrument of partnership but which had not distributed the profit earned by it in the black market amongst the six partners in accordance with the instrument of partnership was entitled for renewal of registration for the assessment year 1948‑49?"
10. The draft statement of the case was placed before the parties. Some minor suggestions made by the asssesee have been accepted and duly incorporated in the statement of the case. The assessee desired that a copy of the compromise .petition filed by L. Sewak Ram before the civil Court be made part of the case. That suggestion is accepted and a copy of the com promise petition is accordingly made part of the case and is annexure "I". At the request of the assessee a copy of the deed of dissolution of the firm is also made part of the case and is annexure "J". The assessee referred to other documents and requested the Tribunal to make those documents part of the case. 'These documents referred to in paragraph 6 of the written sug gestions of the assessee relate to the question as to whether the black market profits were divided amongst the partners in propor tion to their shares. The Tribunal has held that the black market profits were not divided according to the instrument of partner ship. The finding is one of fact, and it is not necessary to annex the documents as part of the case The assessee also raised some More questions besides the one set out by the Tribunal, In our opinion the only question that arises out of the order of the Tribunal is the one set out in this statement of the case.
11. The Commissioner of Income‑tax has no suggestion to make. The statement is finalised.
R. K. Gulati, N. N. Gulati and R. L. Gulati for the Assessee.
S. C. Das for the Commissioner.
JUDGMENT
M. C. DESAI, C. J.‑This statement of case has been sub mitted to this Court at the assessee's instance by the Income tax Appellate Tribunal, Allahabad Bench, under section 66 (1) of the Indian Income‑tax Act inviting it to answer the following question, said to be a question of law arising out of it:
"Whether the assessee‑firm which had distributed its book profits amongst the partners according to the instrument of partnership but which had not distributed the profits earned by it in the black market amongst the six partners in accordance with the instrument of partnership was entitled for renewal of registration for the assessment year 1948‑49?"
The assessee is a firm consisting of two groups of partners, one consisting of Khanjan Lal having four annas share and his three sons having two annas share each and the other, consisting of Sewak Ram having four annas share and his mother having two annas share. The firm was registered under section 26‑A for the assessment years 1942‑43 to 1947‑48. For the assessment year 1948‑49 the partners applied for renewal of registration which was refused. A firm if it is registered under the Act has certain advantages in the matter of assessment to income‑tax and section 26‑A lays down the procedure to be followed by a firm in order to bet registered. It is as follows:
"(1) Application may be made to the Income‑tax Officer on behalf of any firm, constituted under an instrument of partnership specifying the individual shares of the partners, for registration . . .
(2) The application shall be made by such person or persons, and at such times and shall contain such particulars and shall be in such form, and be verified in such manner, as may be prescribed ; and it shall be dealt with by the Income‑tax Officer in such manner as may be prescribed."
Rules 2 to 6‑11 of the Income‑tax Rules deal with registration of firms, Rule 2 lays down that a firm is entitled to registration if it is constituted under an instrument of partnership specifying the individual shares and makes an application signed by all the partners personally and before the end of the previous year in the case of the first application for registration or before the 30th day of June of the assessment year if it is for renewal of registration. Rule 3 prescribes the form in which an application should be made. It has three clauses, clause 2 being a statement to the effect that the instrument of partnership specifying the individual shares of the partners is enclosed and that "the prescribed particulars are given in the Schedule attached to the instrument" and clause 3 being a certificate to the effect that "the profits of the previous year were/will be divided or credited as shown in section B of the Schedule and that the information given in the application and the Schedule is correct." The Schedule is in two sections, section A relating to the firm as constituted at the date of the application and section B relating to the apportionment of the income in the previous year (applic able where the application is made after the end of the relevant previous year) and having several columns including column 1 of names of partners and column 6 of shares in the balance of profits "(annas & pies in the rupee)". Rule 4 lays down that if the Income‑tax Officer is satisfied on receipt of the application referred to in rule 3 that "there is or was a firm in existence constituted as shown in the instrument of partnership and that the applica tion has been properly made " he "shall" endorse a certificate on the instrument or its certified copy to the effect that it has been registered with him under section 26‑A and that the certificate will have effect for the assessment for the year ending on such and such date. The rule further requires that "if the Income‑tax Officer is not so satisfied, he shall‑ pass an order . . . refusing to recognize the instrument of partnership." Rule 5 is to the effect that a certificate of registration granted under rule 4 "shall have effect only for the assessment to be made for the year mentioned therein." Rule 6 refers to renewal of registration and provides that a firm may apply to the Income‑tax Officer to have the certificate renewed for a subsequent year, that the application "shall be signed personally by all the partners . . . and accom panied by a certificate in the form set out below" and shall be made before the 30th day of June of the assessment year. There is a form of application given in the rule which has three clauses, clause 2 being the statement that the instrument of partnership was registered on such and such date and the certi ficate that the constitution of the firm and the individual shares of the partners as specified in it remain unaltered and clause 3 being a certificate that "the profits of the previous year were divided or credited as shown below", followed by a statement showing particulars of the appointment of the income, profits or gains. The statement has several columns including column 1 and column 6 as in the Schedule of the prescribed form for an application under section 4. On receipt of an application under rule 6 "the Income‑tax Officer may, if he is satisfied that the application is in order and that there is or was a firm in existence constituted as shown in the instrument of partnership, grant to the assesssee a certificate" in a certain firm and "if the Income‑tax Officer is not so satisfied, he shall pass an order in writing refusing to renew the registration"; this is rule 6‑A. Rule 6‑B empowers an Income‑tax Officer on being satisfied that a certificate granted under rule 4 or rule 6‑A had been obtained "without there being a genuine firm in existence", to cancel it.
The application made by the assessee was in time and in order to this extent that in column 6 of it the share held by each partner was given and not the amount of the income pertain ing to his share and that there was a certificate about the profits of the previous year having been divided or credited "as shown below". Neither the income of the previous year was shown in the statement nor the amount apportioned to each partner. The partnership was dissolved on November 5, 1949, and the deed of dissolution provided that if an amount not entered in the books at the time of the settlement of accounts was found only the partner through whom it was received or paid would be accountable for it. On October 5, 1950, the partners of the first group disclosed to the Income‑tax Officer that the firm had received Rs. 15,000 by way of profits which were not shown in the accounts of the firm and that they had been distributed among the partners. Sewak Ram, partner of the other group, made a statement to the effect that he and his mother were not given full shares in the profits of a certain business carried on by the firm, that the entire profits earned by it in the previous years were not recorded in the account books and that they themselves had received their shares only in those profits which were entered in them. On March 15, 1952, Sewak Ram and his mother made an application to the Income‑tax Officer saying that they had withdrawn their signatures from the application for renewal because the profits were not distri buted according to the deed of partnership. The Income‑tax Officer made enquiries about the business activities of the firm and discovered that it had reaped extra profits in its business which were not recorded in its books during the accounting year. He observed that "it is . . . nothing surprising if the profits had not been properly distributed as stated on oath by Sri Sewak Ram, partner" and that "one of the partners seeks to withdraw the application for registration filed on July 12, 1949", and rejected the renewal application on these grounds. The assessee filed an appeal which was dismissed by the Appellate Assistant Commissioner and a further appeal which was dismissed by the…
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