Chandra Reddy, C.J.
1. The question referred to this Court by the Income-Tax Appellate Tribunal, Bombay Bench, is :
'Whether on the facts and circumstances of the case, the Tribunal was right in refusing registration on the ground that the profits were not distributed between the partners'.
The reference relates to the assessment years 1951-52, 1952-53 and 1953-54, the chargeable accounting periods being 1950-51, 1951-52 and 1952-53. The facts leading up to the reference may be stated in a few words. The assessee is a firm running a hotel under the name and Style of 'Grand Hotel' in Abid Road, Hyderabad. It has been carrying on this business for the last several years. Originally, it was constituted under a deed of partnership which was registered before the Registrar of Assurances. It was assessed in the status of a 'Registered Firm' for 1949-50, 1950-51 for which the previous years were Fasli years 1357 and 1358.
It appears that there was a change in the constitution of the firm on 29-8-1949 when one of the partners retired and two new people took his place as evidenced by the partnership deed dated 1-4-1950. This deed was produced before the Income-tax Officer in connection with the 1950-51 assessment and it was accepted as evidence of a genuine partnership. On an application made under Section 26-A of the Indian Income-tax Act, the proper authorities granted the benefits of registration.
2. In the course of the assessment for the year 1951-52, which is the subject-matter of the present reference, the assesses applied for renewal of registration. We are not here concerned with the history of that application, as the question to be answered by us lies within a narrow compass. Suffice it to say that the Income-tax Officer rejected the application on the ground that there was no proof that correct profits were divided amongst the partners. On appeal the Appellate Assistant Commissioner directed the renewal of the registration of the firm remarking:
'According to the method of accounting employed by the petitioner, he had maintained a cash book on cash basis which records daily expenses and receipts in cash. The cash balance, for each month is shown separately in this book for the twelve months and the aggregate amount of cash balance at the end of the year is divided among the partners. This is the method of ascertaining the profits of the business by the petitioner. Whether this method of adducing the profits is reliable or not cannot be questioned under the provisions of Section 26-A. The only point to determine is that the profits arrived at by the petitioner according to his own manner of bookkeeping were distributed according to the profit ratio mentioned in the deed. And I find that the division of profits is in accordance with the term of the partnership deed'.
Dissatisfied with this order of the Appellate Assistant Commissioner, the Department carried the matter in appeal to the Income-tax Appellate Tribunal. The Tribunal reversed the order of the Appellate Assistant Commissioner in the view that the account book maintained by the assessee was not 'an acceptable record to show the net annual cash surplus and the division thereof in the manner claimed,' and observing that 'there being no evidence of distribution of profit, the firm cannot be registered under Section 26-A'. In the result, the order of the Appellate Assistant Commissioner was vacated. Thereupon, the assessee requested the Tribunal to state a case under Section 66 of the Indian Income-tax Act for the opinion of this Court. The request of the assessee was complied with by the Tribunal, since it was felt that there was a question of law, involved in it.
3. The point for determination is whether the application for registration was properly rejected. Since the controversy centres round Section 26-A of the Indian Income-tax Act, it is profitable to read that section here. It reads:
(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 for the purpose of this Act and of any other enactment For the time being in force relating to income-tax or super-tax.
(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, and may be prescribed; and it shall be dealt with by the Income-tax Officer in such manner as may be prescribed'.
4. It is clear that the sine qua non of the registration of a firm Is the existence of a genuine partnership. If the Income-tax Officer is not satisfied that there is really a partnership, he can deny the benefits of registration to the assessee. A partnership involves the concept of sharing the profits. Section 4 of the Indian Partnership Act (IX of 1933) declares a partnership to be 'the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all'. The rules framed under Section 59 of the Indian Income-tax Act bearing on this application are in consonance with the statutory requirement of the Indian Partnership Act as also of the Indian Income-tax Act.
5. It is enough in this case to extract rules 2 and 3, omitting the unnecessary portions.
Rule 2: Any firm constituted under an Instrument of Partnership specifying the individual shares of the partners may, under the provisions of Section 26-A of the Indian Income-tax Act, 1922 (hereinafter in these rules referred to as the Act), register with the Income-tax Officer, the particulars contained in the said Instrument on application made in this behalf. Such application shall be signed by all the partners (not being minors) personally, or in the case of a dissolved firm by all persons (not being minors) who were partners in the firm immediately before dissolution etc.,
Rule 3: The application referred to in Rule 2, shall be made in the form annexed to this rule and shall be accompanied by the original Instrument of Partnership under which the firm is constituted, together with a copy thereof; provided that if the Income-tax Officer is satisfied that for some sufficient reason the original Instrument cannot conveniently be produced, he may accept a copy of it certified in writing by all the partners (not being minors) or where the application is made after dissolution of the firm, by all the persons referred to in the said rule, to he a correct copy, and in such a case the application shall be accompanied by a duplicate copy. The Form prescribed by this rule to accompany the application for registration is in these words:
The Income Tax Officer
1) xx xxx xxxx
2) xx xxx xxxx 3) We do hereby certify that the profits (or loss, if any) of the previous year were/will be divided or credited as shown in Section B of the Schedule and that the information given above and in the attached Schedule is correct'.
6. It should be pointed out here that the Form which was in vogue at the time when the application was made did not contain the words 'will be'. This change was introduced in November 1932. The Form as it excised before the amendment reads:
'We do hereby certify that the profits (or loss, if any) of the previous year were divided or credited as shown in Section B of the Schedule'.
Consequently, at She time of the application, the assesses had to show that the profits were actually divided amongst the partners.
7. The pertinent question, therefore, is whether that requirement has been satisfied. It is relevant here to see the system of accounting employed by the assessce. (as disclosed in the statement of facts made by the Tribunal). The daily cash takings were recorded in lump sums. As against that, the daily expenditure towards purchases of provisions, wages etc., were entered seriatim and alt the end of the day cash balance was struck. At the end of the month, the net surplus remaining with the firm was defter-mined and noted and this was done for the full period of twelve months; and at the end of the year, the surplus was distributed according to the shares of the partners.
This practice seems to have been followed from the inception of the firm. It is clear from Section 13 of the Income-tax Act that an assessee is entitled to adopt his own method of accounting. If in the Opinion of the Income-tax Officer that is not conducive for deducing the income and the profits and losses easily, he could make the computation upon such basis and in such manner as he may determine. Whatever may he the other consequences merely because the system of accounting did not commend itself to the departmental authorities, the right of the assessee to employ a particular mode of accounting could not be questioned in an application under Section 26-A of the Indian Income Tax Act.
Undoubtedly, as pointed out by the Appellate Assistant Commissioner, the firm in question was following this system ever since its inception. It is not suggested that the account book was brought into existence for the purpose of registration. The only comment made by the Tribunal is that it was not an 'acceptable record to show the net annual cash surplus and the division thereof in the manner claimed' and that it does not establish that there was distribution of profits at all in proportion to the shares of the partners.
The observations of the Tribunal can have bearing only on the method of accounting which, in our opinion, cannot enter in the determination of a question under Section 26-A of the Income-tax Act. As already said that section does not contemplate an enquiry into the method of accounting employed by an assessee. The account book maintained by the assessee shows that the profits according to its own method of accounting were determined and were also divided according to the shares of the partners. That being so, it is futile to contend that there was no evidence of distribution of profits.
8. The learned Counsel for the department urged that this statement of the case refers only to the assessment year 1954-55 and it does not cover the previous assessment years, 1952-53 and 1953-54. On this assumption he has invited our attention to the order of the Income-tax Officer for the year 1953-54. We do not think we can accede to this theory. The statement of the case commences with this sentence:
'This reference relates to the assessment years 1951-52, 1952-53 and 1953-54 etc'. Again that order recites:
'A copy of the Tribunal's order is annexure 'D' and forms part of the case. The same facts apply for the 1952-53 and 1953-54 assessment years'. There can, therefore, be no doubt that the statement of the case is a consolidated one and has relation to all the three years.
9. Assuming that the order of the Income-tax Officer for that year (1953-54) should be taken into account we do not think that that makes much difference for the disposal of this reference. It is true the Income-tax Officer doubts the genuineness of the firm for the reason adduced by him in support of his conclusion. But, on appeal, the Appellate Assistant Commissioner came to grips with the reasoning of the Income-tax Officer and met every one of the points raised by him. The main ground upon which the Income-tax officer thought that the individuals 2 and 3 (Hussain Ali and Faredoon Felfile) might be dummies was that it was not shown that they contributed any capital.
The Appellate Assistant Commissioner had pointed out that if Hussain Ali and Faredoon Felfile acquired the interest of Muhammad Hussain, they could not be expected to bring in capital afresh. The Assistant Commissioner has further pointed out that from the records of Mohammad Hussain, who was an assessee on the list, it appears that he had beenpaid some consideration for the sale of his share in this business to Mr. Hussain Ali and Faredoon Felfile, although the exact amount of consideration is not discernible.
It is added that the fact that some consideration was received by Muhammad Hussain in regard to this transaction was noted by the Income-tax Officer making the assessment on him. The conclusion of the Appellate Assistant Commissioner seems to be sound. The position might have been different if the Income-tax Appellate Tribunal had expressed its agreement with the Income-tax Officer. It could perhaps be then said that it is a finding of fact. But the Appellate Tribunal had not assented to either of the views.
It contented itself by saying that the reasons, given by them in their order in I. T. A, No. 1298/54-53 would apply to the appeal (I. T. A. 1299 of 1954-55) preferred by the Department. It is not out of place to state here that the statement of the case proceeded on the footing of the existence of a genuine partnership. The Tribunal, in their order in I. T. A. No. 1298 of 1954-55, did not indicate that the partnership was a bogus one and that the alleged partners were mere dummies. We cannot, therefore, go into the question whether in fact there was a genuine partnership or not.
10. A very relevant consideration in this context is the grant of the request for the. registration of the firm under Section 26-A not only for the assessment year 1950-51 but also for the years 1955-56 and 1956-57. If in the year 1951-52 the Departmental authorities thought that the three persons mentioned therein constituted a genuine partnership, in the absence of any evidence to show that there was a change in the situation and when the same considerations applied for the next year also we fail to see how the Income-tax Officer could refuse the benefit of registration.
Similarly, in the following years, the genuineness of the partnership was not brought into question nor was any question of non-distribution of profits raised. It is not suggested that subsequently the two partners had made any contribution towards the capital or that there was a different method of the distribution of profits or losses. We are told that the same system was adopted even subsequently. It follows that there was no basis for the order of the Appellate Tribunal to reverse that of the Appellate Assistant Commissioner.
11. Sri Kondayya drew our attention to a judgment of a Bench of the Madras High Court in P. A. Raju Cettiar and Bros. v. Commr. of Income-tax, 1949-17 I. T. R. 51: (AIR 1949 Mad 516). But that decision docs not really afford us any guidance. There, it was found that there was no genuine partnership for the reason that the mother, who entered into partnership with her husband's brother was merely a dummy for her two minor sons and they had resorted to that device because the minors could not form members of a partnership. The learned Counsel argues on the basis of this judgment that it is entirely for the Income-tax Officer to consider whether the registration should be granted or not and his discretion could not be questioned.
We do not agree that he has an unfettered discretion in the matter and it is open to him to grant or reject an application for registration irrespective of considerations pointed out in Section 26-A of the Income-tax Act and the relevant rules. Sub-section (2) Section 26-A lays stress on the application being dealt with by the Income-tax Officer in such manner 'as may be prescribed'. It is indisputable that if the application does not conform to the procedure indicated in the rules the Income-tax Officer should surely reject the application. But he cannot capricilously and without proper basis decline to register the partnership.
12. On the foregoing discussion, we have to answer the question in the negative. The department will pay the costs of the assessee. Advocate's fee is fixed Rs. 250/-.
13. We cannot leave this without remarkingthat the order of the Income-tax Appellate Tribunalis very unsatisfactory. The Tribunal should make aspeaking order and should give reasons in supportof its conclusion. It should not be left to this Courtto search for the reasons in the records of the caseand to speculate upon what induced the Tribunal tocome to a particular conclusion.Question answered in negative.