Case: Khanjan Lal Sewak Ram Vs. Commissioner Of Income Tax, U.P

renew the registration.19. In resisting the above conclusion, Mr. Ramachandran Counsel for the assessee relied on certain decisions of the High Courts. The first decision relied on by him is that of the Bombay High Court in Commissioner of Income-tax, M. P., Nagpur and Bhandra v. DCosta Brothers, (1963) 49 ITR 1 (Bom) . Therein the Court held that the Income-tax Officer was not entitled to reject the application for registration of the deed of partnership of the assessee firm on the ground that the house-hold expenses of the partners were debited to the profit and loss account of the firm. Therein there was no contention that all the profits earned were not distributed. The only question was whether the household expenses could have been deducted before dividing the profits. In other words the question was whether the household expenses was a proper deduction to be made in the circumstances of that case before dividing the profits. Hence that decision has no bearing on the question under consideration.20. He next placed reliance on the decision of the Punjab High Court in Commissioner of Income-tax, Simla v. Sat Ram Gian Chand, (1961) 42 ITR 543 (Punj). Therein the partners first estimated the divisible profit and divided the same. The Court held that the division of profit was a matter relating to the internal affairs of the partnership and had no bearing on the genuineness of the firm and that no question of law arose from the order of the Appellate Tribunal. The ratio of that decision has no relevance for our present purpose.21. Counsel for the assessee next relied on the decision of the Madras High Court in N. S. S. Sokkalingam Chettiar and Co. v. Commr. I T., Madras, (1966) 60 ITR 671 (Mad) . In that case though there was no provision in the deed of partnership for payment of salary to any of the partners, some of the partners were paid a salary in addition to the shares to which they were entitled under the terms of the partnership and the Income-tax Officer refused to register the firm on the ground that the profits were not divided in accordance with the partnership deed as some of the partners took an additional amount out of the profits in the shape of salary. The Court held that, as the partnership was found to be a genuine one and the application for registration was also in due form, the mere fact that some partners took some portion of the profits as salary was not a ground for refusing registration. The question whether a partner should be paid salary for the services rendered by him is a matter to be decided by the partners of the firm: so long as their payment is bona fide one, the same has to be deducted before the divisible profits are computed. Hence the ratio of that decision also does not bear on the facts of the present case.22. Reliance was next placed on the decision of the Madhya Pradesh High Court in C. I. T., M. P. v. Madan Lal Chhagan Lal, (1963) 50 ITR 477 (Madh Pra). In that case the partnership deed provided that each partner will be entitled to interest at 6 per cent. per annum on his capital investment and that the profit and loss will be divided equally among the partners after deducting the interest payable on the capital advances made by the partners. When the partners made an application for registration under Section 26-A of the act, the Income-tax Officer refused to register it but the Court held that the application was a valid one and the provision for payment of interest did not in any manner conflict with the relevant provision. Here again there is no question of not dividing any portion of profits earned. That being so, that decision is irrelevant for our present purpose.23. Lastly reliance was placed on the decision of the Kerala High Court in Josephs Provisions Store v. C. I. T., Kerala, (1962) 45 ITR 380 (Ker) . Therein the partners of the assessee firm resolved that the profits of the firm as disclosed in the profit and loss account need not be divided and credited in the profit and loss accounts of the partners, but should be credited to a reserve account but each of the partners to have an equal share in that amount. An application for registration of the firm was rejected on the ground that the firm had not complied with the requirements of Rule 6 of the Rules. The Court held that the absence of entries in the separate accounts of each partners was not fatal; the requirement of Rule 6 was met when the profit was taken into a reserve fund showing the partners shares therein and indicating what was the contribution of each partner to the reserve fund. Therefore the application for registration was not liable to be rejected on the ground that Rule 6 had not been complied with. Hence again the profits earned had been divided and they were credited to the accounts of the partners though the same were credited to a reserve fund. Hence the rule laid down in that case is inapplicable to the facts of the present case. As the above referred decisions do not bear on the point in issue we have not gone into the question whether all or any of them were correctly decided or not.24. The apprehension of Mr. Ramachandra that our decision might be taken advantage of by the Department for refusing registration of firms whose return of income or claim for some allowance has not been accepted by the Income-tax Officer for one reason or the other, appears to us to have no basis. Herein we are merely considering the scope of paragraph 3, of R. 6. 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.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]If it did not comply with the requirements of Rule 6, the Income-tax Officer was within his powers in rejecting it.As seen earlier, the finding of the Tribunal is that though the profits of the firm entered in its account books had been distributed, the profits earned but not entered into the amount books have not been divided or credited in the account books. From that it follows that the certificate given in the application for renewal of registration is not a true certificate and further that a sub-stantial portion of the profits earned had not been divided.18. The reason behind R. 6 was that at the relevant time, the registered firm as such was not taxable. Only the partners of a firm could be taxed. That being so, if a portion of the profits earned by the firm was not divided amongst the partners or credited to their accounts to the extent, the profits earned by the firm escaped assessment. Therefore the certificate contemplated by Rule 6 is not a mere formality. It has a definite purpose. If a portion of the profits earned by the firm was not actually divided amongst the partners or credited to their accounts, then the only course open to the Income-tax Officer was not to register that firm and to tax the partners of the firm as an association of persons. By giving a false certificate that the profits earned by the firm had been divided or credited in the manner shown in the application, the assessee firm was trying to evade tax. Hence we must hold that the application for renewal of registration made by the assessee did not comply with conditions prescribed in paragraph 3 of Rule 6. Hence the Income-tax Officer was justified to refuse to renew thethe application for registration was not liable to be rejected on the ground that Rule 6 had not been complied with. Hence again the profits earned had been divided and they were credited to the accounts of the partners though the same were credited to a reserve fund. Hence the rule laid down in that case is inapplicable to the facts of the present case. As the above referred decisions do not bear on the point in issue we have not gone into the question whether all or any of them were correctly decided or not.24. The apprehension of Mr. Ramachandra that our decision might be taken advantage of by the Department for refusing registration of firms whose return of income or claim for some allowance has not been accepted by the Income-tax Officer for one reason or the other, appears to us to have no basis. Herein we are merely considering the scope of paragraph 3, of R. 6. 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.Before examining the scope of the question submitted to the High Court under Section 66 (1) of the Act, we may mention that the question whether the application for renewal of registration stood withdrawn or not is not before us. On that question, the Judicial member of the Tribunal took the view that the said application stood withdrawn but the Accountant member did not agree with that view. The President of the Tribunal did not express any opinion on that point.12. Now turning to the question referred to the High Court, that question is based on two findings of fact which are no more open to question. Those findings are: (1) that the firm had distributed its book profits amongst the partners according to the Instrument of partnership (2), but it has not distributed the profits earned by it in the black market amongst the six partners in accordance with the Instrument ofit did not comply with the requirements of Rule 6, theOfficer was within his powers in rejecting it.As seen earlier, the finding of the Tribunal is that though the profits of the firm entered in its account books had been distributed, the profits earned but not entered into the amount books have not been divided or credited in the account books. From that it follows that the certificate given in the application for renewal of registration is not a true certificate and further that asubstantial portion of the profits earnedhad not been divided.