The judgment of the court was delivered by
MADHAVA REDDY J. - The following two questions have been referred to us at the instance of the assessee-firm arising out of two separate orders of the Income-tax Appellate Tribunal, Hyderabad, in I. T. A. No. 12098/62-63 and I. T. A. No. 12095/62-63 dated June 2, 1964 :
'1. Whether the Appellate Tribunal was justified in reversing the order of the Appellate Assistant Commissioner by purporting to follow the decision of the Andhra Pradesh High Court in Commissioner of Income-tax v. Chennabasappa.
2. Whether, on the facts and in the circumstances of the case, the applicant-firm was entitled to registration under section 26A of the Income-tax Act ?'
The facts and circumstances in which these questions came to be referred may be briefly stated :
The applicant-firm styled Variety Hall and Ramakrishna Textiles carrying on business in retail cloth constituted under an instrument of partnership dated December 27, 1958, applied for registration for the assessment year 1960-61 under section 26A of the Act. They also filed a return showing an income of Rs. 13,084. A sum of Rs. 1,600 was added as profits while making the said return with an explanation that certain credits and debits in the names of six different persons were not brought to account and that they were not borrowals but were purchasers and sales not brought to account. The total of these credits was Rs. 19,550. The Income-tax Officer refused to accept the explanation and also found that there were several unledgered cash credits and the total of such amounts was put at Rs. 31,287. He therefore, took the peak credits appearing in each of the several accounts and arrived at a figure of Rs. 15,000, as the assessees concealed income from undisclosed sources by including the said sum and on that basis assessed the tax payable by the assessee-firm. He also refused registration of the firm in view of the fact that even according to the assessees own showing the undisclosed profit was not divided among the partners. On appeal by the assessee the Appellate Assistant Commissioner while agreeing with the Income-tax Officer that the cash credits were not taken into account held that the peak credits should have been estimated at Rs. 10,000 and accordingly reduced the concealed income by Rs. 5,000. He also held that the Income-tax Officer was not justified in refusing registration merely because there was no proper division of the profits among the partners. Accordingly he allowed both the appeals preferred by the assessee. The department carried the matter in appeal to the Tribunal and the Tribunal restored the order of the Income-tax Officer in both the matters in issue.
In so far as the first question is concerned Mr. Dasaratharama Reddy learned counsel for the assessee-firm sought to contend that when the Income-tax Officer and the Tribunal had held that the accounts were not properly maintained then the very same accounts should not have been relied upon by him for the purpose of arriving at a figure of Rs. 15,000, as income from undisclosed sources. This point however, was not raised before any of the income-tax authorities nor was it raised before the Tribunal. What all that was argued was that the Income-tax Officer ought to have taken Rs. 8,500 as the peak credits and not Rs. 15,000. It was never contended that the accounts discarded for one purpose could not be made the basis for the purpose of arriving at the figure of peak credits. We cannot, therefore, allow this question to be raised. This question does not arise from the statement of facts or from the order of the Tribunal. The question that has been referred on those facts is merely whether the Tribunal was justified in reversing the order of the Appellate Assistant Commissioner by purporting to follow the decision of the Andhra Pradesh High Court in Commissioner of Income-tax v. G. M. Chennabasappa. The learned counsel for the assessee-firm has not been able to point out how the Tribunal erred in following that decision when on his own showing there were amounts totalling to Rs. 29,550 credited in the account. The burden is upon the assessee to prove that amounts of cash received in an accounting year are not of an income nature. Once the explanation furnished by the assessee is found to be unsatisfactory and is rejected the department is at liberty to treat such items of credits not only as income but also as receipts derived in the year in which the cash credits are made as observed in Commissioner of Income-tax v. G. M. Chennabasappa, by this court. We, therefore, while refusing leave to the assessee to raise a new plea for the first time before us and rejecting his contention that on the statement of case, he is entitled to raise that plea answer the first question referred to us against the assessee.
So far as the second question is concerned all the authorities have found that the assessee-firm was constituted under an instrument of partnership dated December 27, 1958. The orders of the various authorities disclose that this was a genuine firm. All that the Income-tax Officer and the Tribunal held was that a sum of Rs. 15,000, was not disclosed by the firm as its income and added the said firm as the assessees concealed income from undisclosed sources. But on that basis the existence of the firm or its genuineness was not doubted. The mere fact that certain amount of income was concealed by a firm duly constituted under an instrument of partnership does not justify the rejection of its claim for registration under section 26A of the Act. Mr. Ananta Babu learned counsel for the department relied upon a decision of this court in Chintalapati Ranganaikulu v. Commissioner of Income-tax, in support of his contention that where an instrument of partnership contemplated the division of all the profits but a portion of the profits was carried to the next years account the registration should be refused. In the said judgment it was laid down that one of the essential conditions to be fulfilled in order that a firm is entitled to registration is that the profits (or loss, if any) of the business relating to the previous year should have been divided or credited as the case may be in accordance with the terms of the instrument. If the profits are not so divided the firm cannot claim to be registered under section 26A of the Act. In the instant case he points out that a sum of Rs. 15,000, which is now estimated to be the income suppressed by the assessee was not admittedly divided among the partners as contemplated by clauses IV, V and VI of the partnership deed. The failure to divide a portion of the profits among the partners in accordance with the terms of the partnership deed does not by itself disentitle the firm to be registered so long as the partnership is evidenced by an instrument of partnership and there is no reason to doubt the genuineness of the partnership and the Income-tax Officer is satisfied that there is a firm in existence constituted as shown in the instrument of partnership. In Commissioner of Income-tax v. Sivakasi Match Exporting Co., the Supreme Court has held that the combined effect of section 26A and the rules made thereunder was that the Income-tax Officer could not reject an application made by a firm, if it gave the necessary particulars prescribed by the rules and if there was a firm in existence as shown in R. C. No. 30/66 dated 3-2-1970. In view of the facts found by all the authorities including the Tribunal the genuineness of the assessee-firm cannot be doubted. The mere fact that firm did not disclose certain sum as the profits earned by it does not disentitle it to be registered under section 26A of the Act. We, therefore, answer the second question in favour of the assessee.
In the result, the first question is answered in favour of the department and the second question in favour of the assessee. In the circumstances there will be no order as to costs. Advocates fee Rs. 250.