Kantibai v. Kamal Singh Thakur .

- This is an application under section 66(2) of the Indian income-tax Act, 1922, by the assessee, for requiring the Income-tax Appellate Tribunal, Nagpur Bench, Nagpur, to refer a certain question of law said to arise out of its order in Income-tax Appeal No. 16572 of 1966-67, dated May 30, 1970, to the High Court for its opinion, viz. :

"Whether, in the circumstances of the case, registration was rightly refused under rules 2 and 6B of the Income-tax Rules ?"

Here, by this application under section 66(2) of the Act, the assessee had tried to introduce various other questions; but it is not necessary for us to deal with such additional questions.

The Income-tax Appellate Tribunal, on the facts and in the circumstances of the case, found that the partnership styles as "M/s. Mukhi Mulchand Sitaldas, Chakarbhata", was not a genuine firm and, therefore, no registration could be granted under section 26A of the Indian Income-tax Act, 1922. Whether a partnership is genuine and actually exists or not with the constitution as specified in the deed of partnership, is essentially a question of fact. As Rankin C.J. observed in Bisseswarlal Brijlal V. Commissioner of Income-tax [1930] 4 I.T.R. 365 (Cal.) [FB] that an instrument of partnership is not a magical talisman protection its executants from the imposition of higher tax."

When a document purporting to be an instrument of partnership is tendered on behalf of a firm and an application is made for registration of the firm as evidenced by such instrument m the Income-tax Officer is entitled to inquire whether by such instrument is intended by the parties to have real effect as governing their rights and liabilities inter se in relation to the business or whether it has been executed by way of pretence in order to escape liability for tax and without intention that its provisions should in truth have effect as defining the rights of the parties as between themselves : Kanga and Palkhivalas Income Tax, seventh edition, volume I, page 1016. Here, on the facts found by the Tribunal, it is amply clear that when the partners of the firm applied for registration for the assessment year 1959-60, vide their application dated January 30, 1958, which was received in the office of the Income-tax Officer required the firm to produced before the Income-tax Officer, though required. During the course of the assessment proceedings, the aforesaid Chijumal appeared before the Income-tax Officer on October 17, 1964, in his capacity as a complainant, and stated that the firm was engaged in suppression of sales and evasion of sales and evasion of income-tax and sales tax.

The Income-tax Officer found that the firm had maintained three different sets of accounts. One of these sets was, admittedly, called a "fictitious set". In one set, the purchases were found to have been recorded at Rs. 2,64,770 and in another set, the purchases were found to have been recorded at Rs. 4,47,335. In one set of books, on the basis of which the return of income was filed, the sales were shown at Rs. 4,12,586, but in another set, the sales were found to have been recorded at Rs. 7,52,485. The admitted total purchases were of the order of Rs. 8,09,859. Against the income declared at Rs. 8,091 in the return of income filed on November 7, 1963, the income finally determined was Rs. 61,649. The firm had filed copies of the accounts of the partners along with the return of income, but no profit was shown to have been credited in the account of any partner. Subsequently, a revised balance-sheet was filed and revised copies of the partners accounts were also filed. In these accounts, profit of Rs. 7,298 was shown to have been distributed amongst the partners. The amount of Rs. 8,091 was arrived at by adding the sum of Rs. 739, being the interest paid to one of the partners to the profit figure of Rs. 7,198.

Considering the fact that the firm had not distributed concealed income amongst the partners in their profit-sharing ratio, the Income-tax Officer held that the terms of the deed of partnership were not acted upon. He further held that the accounts had not been closed that the total in the books were intentionally done wrongly. He even observed that this was a fir case for launching prosecution. Finally, he held that the firm was not genuinely constituted and was not entitled to registration.

In appeal, the Appellate Assistant Commissioner accepted the contention of the assessee that the reasons given by the Income-tax Officer did not warrant an inference that there was no genuine firm in existence. It was urged that the firm was dissolved some time in 1961 and enquiries were conducted in the year 1964. Because of the disputes among the partners, the whereabouts of all the partners could not be intimated to the Income-tax Officer. One of the partners, Chijumal, had himself however, appeared before the Income-tax Officer. It was, therefore, urged that the nonavailability of the partners after a long lapse of time should not have been made a ground for the refusal of registration. It was also urged that though the sales, as originally shown, may have not been correct, but that, by itself, could not establish that the terms of the partnership deed were not acted upon. Regarding the non-closure of the accounts on the stipulated date, it was submitted that the same was by mutual agreement between the partners. Reliance was placed on the decision of this court in Commissioner of Income-tax V. Madanlal Chhaganlal [1963] 50 ITR 477 (MP), wherein it was observed (page 480) :

"What we wish to emphasise is that the ground for refusing to register can be the non-existence of the firm as constituted by the instrument of partnership and not mere subsequent deviation from one of the terms relating to the making of accounts."

The Appellate Assistant Commissioner, relying upon the decision in Commissioner of Income-tax V. Madanlal [1963] 50 ITR 477 (MP), held that the Income-tax Officer had not made out a proper case which would justify the finding that the firm was not a genuine firm. He, therefore, set aside the order of the Income-tax Officer passed under section 26A with a direction to register it.

On further appeal, the Appellate Tribunal found that only a sum of Rs. 7,298 was shown as distributed amongst the partners, but there was no distribution whatsoever of the concealed income. After hearing both the parties, the Tribunal adverted to the provisions of section 26A and rules 2 to 6B of the Income-tax Rules. It then referred to the decision of the Allahabad High Court in Khanjan Lal Sewak Ram V. Commissioner of Income-tax [1964] 53 ITR 37 (All), wherein it was observed :

"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 had discretion to refuse to renew the registration of the firm under section 26A of the Indian Income-tax Act, 1922."

In that case, there was deliberate concealment of a portion of the profits which were not shown in the books of account. The Allahabad High Court rightly distinguished the decision in Commissioner of Income-tax V. Madanlal Chhaganlal [1963] 50 I.T.R. 477 (MP) that, whatever were the profits ascertained by the partnership had, in fact, been distributed and further that there the court did not go into the question whether an Income-tax Officer has discretion under rules 4 or not; it only decided that the mere fact that, in calculating the profits, the firm failed to credit interest on the capital investment was not a ground for refusing to register a firm.

The Appellate Tribunal accordingly found that, on the facts and in the circumstances of the case, the firm was not genuine; and that the non-distribution of profits earned was not due to any bona fide mistake, and thus the firm was not entitled to registration; more so, because the concealed part of the profits were not proved to have been distributed among the partners. As already stated, the view of the Tribunal was based on the decision of the Allahabad High Court in Khanjan Lal Sewak Ram v. Commissioner of Income-tax [1964] 53 ITR 37. That decision of the Allahabad High Court has since been affirmed by their Lordships of the Supreme Court in Khanjan Lal Sewak Ram v. Commissioner of Income-tax [1972] 83 ITR 175.

In view of the decision of their Lordships of the Supreme Court in Khanjan Lal Sewak Ram v. Commissioner of Income-tax [1972] 83 ITR 175, we have no hesitation in rejecting the application made by the assessee under section 66(2) of the Indian Income-tax Act, 1922. The Commissioner shall have the costs of this reference application. Hearing fee Rs. 200.