Srinivasa Medical Agencies v. Income Tax Officer

K.S Viswanathan, A.M:— This is an appeal by the assessee, a firm, against the order holding that the assessee is not entitled to registration.

2. The firm was constituted by an instrument dt. 1-4-1977. There were 5 partners. Two of the partners were Apparao and his son Mallikharjuna Rao. Both of them had 15% share in the profits of the firm.

3. On 12-12-1981, a dissolution deed was executed by which these two partners that is Apparao and Mallikharjuna Rao retired from the firm. According to this deed, the assets and liabilities would be taken over by the continuing partners. The retiring partners would be given their share of profit for the accounting year concerned till the date of dissolution by calculating the net profit at 1-1/2% of the turnover of that period. This is to be paid within 15 days after the finalisation of the accounts.

4. On 24-12-1981, another partner was inducted. A new partnership deed was executed. This partnership deed stated in the preamble that Apparao and Mallikharjunarao who are partners had retired from the partnership deed with retrospective effect as from 1-4-1981 and the new partner was being taken in. Clause of this deed stated that the partnership shall be deemed to have come into operation with effect from 1-4-1981.

5. The books of accounts were closed on 31-3-1982. The profits were ascertained and the share of profit allocable to the retiring partners on the basis of the turnover for the period was credited to their accounts. Thus, Apparao was credited with Rs. 825 and Mallikharjunarao with Rs. 6,177.

6. The assessee applied for registration both in Form 11 and Form 11A. The ITO was of opinion that the assessee is not entitled to the registration. The ITO pointed out to an inconsistency between the dates on which the two partners had retired; as per the dissolution deed dt. 12-12-1981, they were partners till 30-11-1981 and as per the new partnership deed, they had retired on 1-4-1981 itself. Factually, he noticed that all the 5 partners had carried on business till 30-11-1981. Therefore, these two partners could not have relinquished their rights in the partnership from 1-4-1981. Therefore, the new partnership deed which is deemed to have come into operation from 1-4-1981 cannot be valid. So, there could not be a genuine firm existing by the partnership deed dt. 24-12-1981.

7. The AAC agreed with the ITO. He gave a finding that no firm came into existence from 1-4-1981 as envisaged by the partnership deed dt. 24-12-1981. Therefore, registration was, according to him, correctly refused.

8. The assessee is on further appeal before us. After having heard the parties, we are of opinion that the assessee is entitled to registration. Both the ITO and the AAC have accepted that a genuine firm was in existence till 30-11-1981. The question is whether the new partnership deed has to be accepted as a valid partnership deed so that the firm is entitled to registration throughout the year. In substance the only reason given for treating the latter firm as. invalid is inconsistency as to the date of retirement of the two partners. The dissolution deed clearly mentions the date as 30-11-1981. The partnership upto this period is accepted as genuine and valid. The department has not doubted the correctness of the narration in the dissolution deed. Therefore, factually, the two partners retired only on 30-11-1981. It is true that the partnership deed dt. 24-12-1981 gives the date of retirement as 1-4-1981. The assessee's case is that this is an erroneous statement. Now, the question is whether the mention of the date in the new partnership deed is a mistake or not. It is quite possible that it is a mistake. At the same time, it is quite possible that the three continuing partners might have decided to allocate the share of profit only among the four partners as per the change in the constitution and to effectuate this, they might have mentioned that the partnership is effective from 1-4-1981. The question is whether assuming it is not amistake, the partnership is invalid because of this.

9. In order to show that the narration in the partner ship deed dt. 24-12-1981 is a mistake, the assessee has to show that all the surrounding facts and circumstances would only support such inference. We are concerned. with the original partnership deed of 1977, the dissolution deed, the new partnership deed dt. 24-12-1981 and the books of account. As per the dissolution deed, the partners have retired on 30-11-1981. This is noted in the new partnership deed also. The narration which gives rise to the controversy in the new partnership deed reads as follows:

“Whereas the aforesaid Illindra Apparao and Illendra Sreenivasa Mallikharjunarao retired from the partnership business relinquishing their interest whatsoever in the above firm with re trospective effect as and from 1-4-1981; subject to cl. No. 10 of this “Deed.”

10. The above extract from the preamble narrated what had happened earlier. That narration is clearly wrong. It is wrong because the dissolution deed does not say. that they have relinquished their interest retrospectively from 1-4-1981. The preamble of the dissolution deed stated as follows:

“Whereas the parties” on mutual consent have. agreed that the partnership should be dissolved, the partnership with effect from 1-12-1981 as per the terms and conditions set forth hereunder, it is hereby agreed, laid down, and witnesseth as under:

1. The firm of M/s Sri Srinivasa Medical Agencies Ongole stood dissolved with effect from 1-12-1981;

2. It has been agreed between the partners that all the assets and liabilities of the firm should be taken over by the party of the first part with all its furniture, goodwill, if any and existing agencies.

3. The party of the first part agreed to pay the party of the second part the amount standing to his credit as on 30-11-1981 alongwith 30% of an estimated net profit at 1.5% on turnover effected from 1-4-1981 to 30-11-1981 with 15 days after finalisation of the accounts. In case the party of the second part stands indebited to the firm, he should pay the same within 15 days of the finalisation of the accounts.”

11. It is quite clear from the above that the narration in the partnership deed is a mistake.

12. Having committed the mistake in the preamble, it is continued subsequently also. That is how cl. 3 of the partnership deed stated that the new partner ship is deemed to Have come into effect from 1-4-1981. It being a wrong narration, it cannot invalidate a partnership deed which is otherwise valid. If any authority is required, we may refer to the case of CIT v. K. Venkateshwararao (1982) 134 ITR 328 (AP) wherein the Tribunal and the High Court had held if there was mistake committed by the assessee in the distribution of the profits and it was an honest mistake it cannot effect the validity of the firm.

13. The conduct of the assessee is also not inconsis tent with the theory that it was a mistake. The assessee firm did not close their books of accounts on 30-11-1981. But, the assessee firm had accepted that the outgoing partners are entitled to the profit upto the date of their retirement. Since books were not closed, there must be a method acceptable to all the partners for ascer taining the profit upto 30-11-1981. This method was to estimate the net profit on the turnoever upto 30-11-1981”. This has been done. However, Sri Jayakar pointed out that even in the allocation made appears to be erroneous. Though, both the partners are entitled to equal share or profit, yet one partner was credited with Rs. 820 and the other partner Rs. 6,177. This has to be a mistake, Again on the basis of the ratio in Venkateshwararao's case: this is an honest mistake and should not stand in the way of registration.

14. In view of the above, we are of opinion that the assessee is entitled to registration. The appeal is allowed.