CHANDRA REDDY C.J. - The following question of law is referred under section 66(1) of the Indian Income-tax Act for the opinion of this court, namely :
'Whether the firm is entitled to registration under the Act even if the whole of its divisible profits are not divided among the partners ?'
This reference relates to the assessment year 1956-57. The assessee is a firm of two partners each having an equal share, constituted under an instrument of partnership dated November 15, 1955. It applied for registration of the firm under section 26A of the Income-tax Act for the said assessment year but the department refused to grant registration on the following two grounds :
'(1) The divisible profits of the firm were not wholly divided between the two partners and, therefore, the rules of registration were not fully complied with by the assessee in that respect; and
(2) A portion of the profits carried to the charity account amount to distribution of profits among others than those who are partners of the firm.'
This order of the assessing authority was confirmed on appeal by the appellate Assistant Commissioner and on further appeal by the Income-tax Appellate Tribunal though the Tribunal disagreed with the department as regards the second ground of rejection in view of certain decisions of the Allahabad High Court. The Tribunal accepted the view of the department that if all the divisible profits of the firm were not wholly divided between the partners, the rules of registration on the subject could not be said to have been fully complied with and, therefore, registration was properly refused. It may be mentioned here that the profits earned by the company for the assessment year in question amounted to Rs. 20,668-10-11 out of which Rs. 20,000 was divided between the partners, Rs. 312-8-0 was credited to the charity account of the two temples and Rs. 356-2-11 was carried forward to the next years account.
At the request of the assessee, the Tribunal referred the above mentioned question under section 66(1) for the opinion of this court.
It is argued in this reference by Sri Ranganathachari, learned counsel for the assessee, that failure to divide a small portion of the profits, namely, Rs. 356-2-11 out of Rs. 20,668-10-11 could not lead to the rejection of the application for registration, especially when the profits not divided constituted an insignificant portion of the profits made by the firm.
The point that falls for determination is whether carrying forward a part of profit without distributing them in the year of assessment would incur the consequence of rejection of registration. Section 26A, which deals with registration of firms, runs as follows :
'(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 purposes 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, as may be prescribed, and it shall be dealt with by the Income-tax Officer in such manner as may be prescribed.'
It is manifest that the section contemplates the framing of rules laying down the details of the form in which the application has to be made and the particulars which should be stated in the application, and other cognate matters.
Section 59 empowers the Central Board of Revenue, subject to the control of the Central Government, to frame rules for giving effect to the purposes of the Act. Sub-section (5) of section 59 provides that rules made under the section shall be published in the official gazette and they shall thereupon have effect as if enacted in the Income-tax Act.
Income-tax Rules 2 to 6B lay down the details of the procedure for making an application for registration of the firm as envisaged in section 26A extracted above. Rule 2 requires such an application to be signed by all the partners personally and to be made before the income of the firm is assessed under section 23. Under rule 3, the application should be accompanied by the original instrument of partnership under which the firm is constituted. The form appearing in rule 3 requires the assessment year to be specified.
It is clear from the form that the application for registration has to be made every year. That form also requires a certificate to be signed by the applicants for registration to the effect that the profits (or loss, if any) of the Schedule. In the Schedule annexed as shown in Section B of the Schedule. In the Schedule annexed to this form, there are Sections A and B. Section A has to contain particulars of the firm as constituted at the date of application and Section B has to contain the particulars of the apportionate of the income, profits or gains (or loss) of the business in the previous year between the partners who in that previous year were entitled to share therein. Rule 6 makes provision for the certificate of registration to be renewed for a subsequent year on an application made in that behalf in accordance with the preceding rules :
The Income-tax Officer,...
1. We...beg to apply for the renewal of the registration of our firm under section 26A of the Indian Income-tax Act, 1922, for the assessment for the income-tax year....
3. We do hereby further certify that the profits (or loss, if any) of the previous year/period up to date of dissoluton 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.
It is thus plain that one of the essential conditions to be fulfilled in order that a firm may be entitled to registration is that the profits (or loss, if any) of the business relating to the previous year, that is to say, the relevant accounting year, should have been divided or credited, as the case may be, in accordance with the terms of the instrument. Therefore, there can be no doubt that if the divisible profits are not allocated to the partners of the firm, one of the essential requisites of registration is not satisfied and the assessee will not be entitled to insist upon registration.
The question for consideration is whether the divisible profits should be wholly divided before section 26A could be invoked by the partnership. In our opinion, the sine qua non for registration is compliance with the terms of the concerned rules and excluding any part of the divisible profits from division in accordance with the instrument of partnership will entail the consequence of rejection of the registration. It is worthy of note that in the deed of partnership in question the term relating to division of profits says :
'The accounts of the firm shall be closed to profit and loss at least once in every year after the commencement of the business by our firm and the resulting net profit or loss shall be adjusted in equal shares to the accounts of the partners.'
Clearly, the instrument of partnership contemplates the division of all the profits and it leaves no scope for the carrying of any portion of the profits to the next years account. In that situation, the denial of registration of the firm by the department could not be regarded as erroneous.
In support of the proposition enunciated by Sri Ranganathachari that it was not necessary that all the divisible profits should be divided amongst the partners in the accounting year itself and it was enough if they could be divided at a later date, reliance is placed on the judgment of the Kerala High Court in St. Josephs Provisions Stores v. Commissioner of Income-tax. We do not think that the ruling helps the assessee in any way, since the facts of that case have no resemblance to those herein. There the share of each partner was carried to the reserve fund and each partner was shown as having contributed to the reserve fund and each partner was shown as having contributed his share to the reserve fund. Ansari C.J. and Govinda Menon J., who constituted the Bench, thought that his was tantamount to division of profits in the relevant assessment year. All that the learned judges said was that immediate user was not required and the position was not different where the profits of the year had been taken to the reserve account after the shares of the partners in the aforesaid amount were shown.
Commissioner of Income-tax v. Kikabhai is not also quite relevant in the context of the present enquiry. In that case, the application for registration of the firm was made under section 2(14) of the Income-tax Act. The learned judges on the language of the certificate to be given under that section came to the conclusion that the certificate to be given under that section came to the conclusion that the certificate to be given by the partners was not that the profits would be divided or credited within some fixed period and that, where the certificate was given in good faith in the prescribed form, if the applicants did constitute a firm, the firm was entitled to be registered. It should be remembered that in that case the certificate given was that the profits of the assessment year would be actually divided or credited and, since no time was fixed under the certificate for division of profits, failure to divide them was fixed under the certificate for division of profits, failure to divide them was fixed under the certificate for division of profits, failure to divide them within a particular time was not considered fatal to the registration of the firm. Thus, the situation there is dissimilar to that arising under the relevant rules and the statutory provision here.
Chhotalal Devchand v. Commissioner of Income-tax does not come to the rescue of the assessee either. The question that fell to be considered in that case was whether it was the two firms of the constituent members thereof that entered into partnership with an individual and whether the partnership so constituted was a valid partnership. In the decision of that question, one of the points that came up for consideration was whether the fact that profits were not credited to the individual accounts of the constituent members of the two firms but were credited to the accounts of the two firms was material and whether that indicated that the partnership consisted of two firms and not the constituent members thereof. It was in that context that Chagla C.J., who spoke for the court, extracted with approval the following observations made in Commissioner of Income-tax v. Shantilal Vrajlal.
'The mere fact that in the account books of the partnership the profits were not taken into the accounts of the constituent members but were only taken into the accounts of the two firms and the two individual partners was immaterial as the partnership deed clearly showed how the profits were to be divided between the constituent members of the two firms and ascertainment of the exact amount due to each of the constituents was merely a matter of arithmetical calculation.'
The learned judges were not concerned with the effect of the non-division of a portion of divisible profits in relation to the registration of the firm under section 26A of the Indian Income-tax Act. Thus, the decisions called in aid by Sri Ranganathachari are of no avail to him.
An identical question arose in the Nagpur High Court in K. B.Haji Niazali and Sons v. Commissioner of Income-tax (Misc. Civil Case No. 54 of 1950). There, for the account year ending Diwali 1944, the divisible profits of the firm amounted to Rs. 66,217. The partners distributed amongst themselves only Rs. 45,000 and carried forward the balance of Rs. 21,217 to the profit and loss account of the next year. This amount and the profits earned by the firm in the succeeding account year were distributed according to the shares of the partners. The Nagpur High Court decided that in order to entitle a firm for registration under section 26A, the divisible profits must be wholly divided and that since in that case a part of the profits was credited to the profit and loss account of the next year, the renewal was rightly refused. With respect, we express our respectful assent to the propositions enunciated in that case. If a firm desires to have the privilege conferred on it under section 26A of the Income-tax Act, it must conform to the form of the law strictly and rightly. Otherwise, the firm could not take advantage of section 26A.
We have, therefore, no option but to answer the question in favour of the department and against the assessee.
In the circumstances, we make no order as to costs. Advocates fee - Rs. 100 (one hundred only).