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

2. The assessee is a firm constituted under an Instrument of partnership dated April 30, 1947. The shares of the partners in the profit and loss of the firm as mentioned in that deed are asL. Khanjan Lal-/4/-2. L. Lalloo Ram-/2/-3. L. Dwarka Prasad-/2/-4. L. Ram Lal-/2/-5. L. Sewak Ram-/4/-6. Smt. JagraniLallu Ram, Dwarka Prasad and Ram Lal are the children of Khanjan Lal. Sewak Ram is the son of Jagrani Devi. The first group has -/10/- share in the profit and loss of the firm and the second group has -/6/- share.4. The assessee firm was registered for the assessment year 1947-48. On July 12, 1949, the partners of the firm applied to the Income-tax Officer for renewal of the registration for the assessment year 1948-49. That application was signed by all the partners. To that application they appended a certificate to the effect that "profits of the previous year were divided or credited as shown below... On November 5, 1949, the partnership was dissolved under a deed of distribution dated November 9, 1949. One of the clauses in that deedif 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 statement to the Income-tax Officer to the effect that the firm had earned Rupees 15,000/- by way of profits outside the books. In that disclosure statement, they further stated that those profits had been divided between the partners. On December 9, 1950, Sewak Ram, one of the partners stated on oath before the Income-tax Officer that he and his mother Jagrani Devi were not given full share of the profits of the business earned by the firm in Samv. Year 2005. He further stated that the entire profits earned in the business carried on in the previous year were not recorded in the books and the first four partners had given to him and his mother only their shares of those profits which were recorded in the books. Therein he sought to withdraw the application for registration because all the profits earned had not been divided according to the shares. According to Sewak Ram, the profits earned and not entered in the accounts amounted to Rs. 1,13,571/-. From the aforementioned statements, it is clear that the firm was trying to evade tax on a portion of the profits earned by it by not bringing the same into their books.6. On March 31,1951, Sewak Ram sued the first four partners for rendition of accounts. In that suit he estimated his share of profits in the amount that had not been entered in the account books at Rs. 50,000/-. Ultimately the suit was compromised and Sewak Ram withdrew his suit. In his application to withdraw the suit, he stated that he wanted to withdraw the suit "in view of the circumstances of the above case", an expression of utmost ambiguity. Therein he stated that he is not entitled to get any more amount from the defendants.7. On March 15, 1952, Sewak Ram and his mother Jagrani Devi gave an application to the Income-tax Officer stating that they are withdrawing their signatures on the application for renewal of registration as the profits of the previous year 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 (to be hereinafter referred to as "the Rules") framed under the Indian Income-tax Act, 1922 (in brief the Act) had never been granted as required by law on the back of the partnership deed. Therein they further stated that as the certificate under Rule 6 had not been granted by the assessee in accordance with law, the firm was not entitled for registration under rule 6 of the Rules.8. On the basis of the material before him, the Income tax Officer came to the conclusion that the firm had earned considerable black market profits, and the same had not been distributed amongst the partners according to the partnership deed and therefore the firm was not entitled for renewal of the registration. He further opined that the application for registration had stood withdrawn. On the basis of those conclusions, he refused to renew the registration of the firm and taxed the firm in the status of association of persons. In appeal the Appellate Assistant Commissioner, upheld the decision of the Income-tax Officer.9. The assessee took the matter in appeal to the Income-tax Appellate Tribunal. The two members who heard the appeal concurred with the Income-tax Officer and the Appellate Assistant Commissioner that a substantial portion of the profits earned by the firm had not been entered in the books. They also held that those profits were not distributed amongst the partners according to the Instrument of partnership. On the basis of those findings the judicial member held that the firm was not entitled to the renewal of registration asked for but the Accountant member opined that inasmuch as the profits that had been entered in the books had been distributed, there was compliance with the provisions of the "Act" as well as the "Rules". In view of this difference of opinion between the two members, the matter was referred to the President of the Tribunal under Section 5-A (7) of the Act. The President agreed with the Judicial Member that firm was not entitled to have the renewal of the registration asked for. Thereafter at the instance of the assessee, the Tribunal submitted the following question to the High Court under Section 66 (1) of thethe 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 yearThe High Court answered that question in favour of the Department. Hence this appeal by the assessee firm.

Court's reasoning:
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.