1. At the instance of the Commissioner of the Income-tax, the Income-tax Appellate Tribunal, Hyderabad Bench, has referred for our opinion under Section 256(1) of the Income-tax Act, 1961 (hereinafter called ' the Act '), the following question :
' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the registration granted to the assessee-firm would have effect for the assessment year 1963-64 under Section 184(7) of the Act notwithstanding that there had been no ascertainment or division of the profits of the business among the partners of the firm '
2. In order to appreciate the scope of the reference, it is necessary to refer to the material facts. The respondent-assessee was a firm constituted under an instrument of partnership dated April 1, I960, and consisting of five partners. For the assessment years 1961-62 and 1962-63 the assessee-firm was registered under the Act. For the assessment year 1963-64 corresponding to the accounting year ending with March 31, 1963, the firm returned a net income of Rs. 43,021 accompanied by a declaration in Form No. 12. The declaration states that there was no change in the constitution of the firm or the shares of the partners for the assessment year in question. The Income-tax Officer, on scrutiny of the accounts maintained by the firm, found no profit and loss account and the ascertainment and distribution of the profits amongst the parties. Hence, he refused to grant the certificate under Section 185(4) of the Act for that year. The appeal by the assessee to the Appellate Assistant Commissioner was without success. However, on further appeal, the Tribunal upheld the contention of the assessee that it was entitled for the grant of renewal of registration notwithstanding the fact that there was no ascertainment or division of the profits of the business amongst the partners. Hence, this reference.
3. The learned standing counsel for the revenue, Sri P. Rama Rao, contend-ed that the Tribunal erred in law in directing the continuation of the registration for the assessment year 1963-64 and relied upon the provisions of Sections 184, 185 and 186 of the Act in support of his plea. Mr. Srinivasa Rao, the learned counsel appearing for the assessee, contended contra.
4. The answer to the question largely depends upon the scope and application of the provisions of Sections 184, 185 and 186 of the Act and Rule 24 of the Rules framed thereunder and Forms 11, 11A and 12 which we shall presently refer to. Section 184, provides for granting registration to firms. Section 184, requires the assessee-firm to file an application for the grant of registration. It must produce an instrument of partnership wherein the individual shares of the partners are specified. The firm should be genuine and it must be in existence in the year of account. As far as the original grant of registration is concerned, the application must be in Form No. 11. The ascertainment and distribution of the profits amongst the partners as per the shares specified in the deed of partnership must be one of the requisite conditions for entitling the assessee to the registration. Where the firm seeks renewal of registration for sub- sequent years, the provisions of Section 184, and Form No. 11 have no application. There is a departure in this respect in the present Act from the provisions of the repealed Indian Income-tax Act, 1922. The assessee would be entitled for continuation of registration for subsequent years if the firm is a genuine one and the constitution of it and the shares of the partners specified in the deed of partnership are the same without any change. To that effect the firm has to make a declaration in Form No. 12 which has to be signed by all the partners. They must also declare that the information furnished in Form No. 12 when read with Rule 24 of the Rules is correct and complete. The Income-tax Officer has to apply his mind to the particulars stated in the declaration and enquire into the correctness or otherwise of the same after affording reasonable opportunity to the assessee. Where in the course of enquiry the Income-tax Officer is satisfied that there was KO change in the constitution of the firm or the shares of the partners specified in the deed of partnership on the basis of which registration was granted and the declaration was found to be true and according to the provisions of Section 184, , he shall record a certificate under Sub-section (4) of Section 185 on the instrument of partnership or on the certified copy thereof, as the case may be, to the effect that the firm has been registered for the relevant subsequent year. The Income-tax Officer is not only empowered but has a statutory duty to enquire into the correctness of the statement made by the assessee in the declaration under Form No. 11 and to refuse registration of the firm if he is not satisfied about the truth and correctness of the declaration. Where the Income-tax Officer, after due enquiry, arrives at the conclusion that there was a change in the constitution of the firm or the shares of its partners as evidenced by the deed of partnership, he has to refuse continuation of registration for the subsequent year of assessment. The provisions of Section 184(7), do not specifically mention the failure or absence of ascertainment or distribution of profits amongst the partners of the firm as one oi the requisite conditions for the continuation of registration of the firm for the subsequent years. Nor is it possible on a plain reading of the provisions of Section 184, and Form No. 12 or any other provisions of the Act or the Rules made thereunder to think that the sovereign Parliament intended such a pre-requisite condition for the continuation of registration of the firm for the subsequent years if the firm were found to be genuine and there was no change in its constitution and the shares of its partners. It must be borne in mind that to this extent there is a clear departure in the law relating to the grant of registration in the new Act. The sovereign Parliament must have thought that the granting of registration under the Act must be made liberal, and, if the firm is found to be genuine and there is no change in its constitution or the shares of its partners, it should be granted. This view is amply borne out by the provisions of Section 186(1) which empowers the Income-tax Officer to cancel the registration granted either under Section 185(1) or Sub-section (7) of Section 184, for the subsequent years if no genuine firm in his opinion was in existence during the previous year. The Income-tax Officer has to exercise the power to cancel the registration already granted, after affording the firm a reasonable opportunity of being heard and with the previous approval of the Inspecting Assistant Commissioner. Even if there is any change in the constitution of a firm at the time of making an assessment, the assessment has to be made on the firm as constituted by that time: See Section 187.
5. The registration of a firm under the Act confers on the partners a benefit of lower rates of assessment in addition to the tax payable by the firm directly on its total income. The income of the firm would be apportioned to the partners and their share income shall be included in their total income and assessed to tax accordingly. But, in the case of an unregistered firm, the Income-tax Officer may charge the income of the firm to tax directly on that basis or if, in his opinion, the aggregate amount of tax payable by the partners if the firm is treated as a registered firm would be greater than the amount of tax that would be payable by the firm under Clause (a) and the amount payable by the partners individually, may assess the firm as if it were a registered firm.
6. The legal position may, therefore, be summed up thus: A combined reading of Sections 184, 185 of the Act and the rules made thereunder manifest that it is incumbent on the Income-tax Officer to register a firm if the application made by it furnishes the requisite particulars prescribed therefor, provided the existence of a genuine firm with the constitution so specified in the instrument of partnership is established. The discretion vested in the income-tax authorities under Sections 184, 185 of the Act is a judicial one and, therefore, the applications for the original registration or continuation of registration for subsequent years under the Act cannot be refused on suspicion or speculation. The Income-tax Officer has jurisdiction to reject the application of the firm for registration only if it is not in conformity with the rules and the provisions of Sections 184, 185 and when the firm is proved to be a bogus one, not genuine or has no legal existence, but not otherwise. He is empowered to enquire into the truth or otherwise of the requisite facts stated by the partners of the firm in the declarations and the applications made to him after due notice and opportunity to the assessee, and refuse registration or continuation of registration for subsequent years if the firm was not genuine or the declarations made are not true. Where the original registration has been granted under Section 185(1) or the certificate for continuation of registration under Sub-section (7) of Section 184, read with Sub-section (4) of Section 185 is granted for the subsequent years of assessment, the Income-tax Officer may cancel the same if, in his opinion, in the previous year no genuine firm was in existence. He has to exercise the power of cancellation of registration under Section 186(1) only after due notice and opportunity to the assessee-firm and after obtaining requisite sanction of the Inspecting Assistant Commissioner. The registration of a firm under the Act is not a matter of course but the assessee-firm is entitled for registration if the requisite conditions for the same are satisfied.
7. In the light of the aforesaid discussion, we shall consider the facts of the present case. Admittedly, the Income-tax Officer has found the declaration made by the assessee-firm to the effect that there was no change in the constitution of the firm or in the shares of the partners, as true. The only ground on which the continuation of registration has been refused is that there was no ascertainment or distribution of profits amongst the partners for the assessment year in question. The contention of Mr. Rama Rao that the failure or absence to ascertain and distribute profits amongst the partners would amount to change in the constitution of the firm as well as the shares of the partners, cannot be given effect to. Change in the constitution of a firm would come in only when there is change in its partners. The original partnership may contain four partners. Subsequently, if the number of partners is increased or decreased, it must be stated that there was a change in the constitution of the firm. As long as the four partners who originally constituted the firm continued to exist, in the subsequent years, it cannot be said that there was any change in the constitution of the firm. Where the shares of the partners are changed in the subsequent years, however small the change may be, it must be stated that there was a change. In both the aforesaid contingencies, the provisions of Section 184(8), would come into play. The firm has to make a fresh application for the grant of registration as required by Sub-section (8) of Section 184, . There is a clear distinction between a change in the shares of the partners and the failure or absence of ascertainment and distribution of the profits of the firm amongst its partners. The ascertainment and distribution of profits, no doubt, will have to be made according to the shares of the partners as evidenced in the deed of partnership. Whether there was ascertainment and distribution of profits or not, is a question of fact depending upon the facts and circumstances of each case. The distinction between the failure or absence of ascertainment and distribution of profits amongst the partners of a firm and the distribution of profits being not according to the shares specified in the deed of partnership may be noticed. Whether the allocation or distribution of profits was made in a manner different from the shares evidenced by the instrument of partnership, it may amount to change in the shares of the partners, but in. the normal course, it cannot be said that there was a change in the shares of the partners. It may at the most be stated in such a case that there was a postponement of distribution of the profits earned by the firm amongst its partners. Hence, that itself cannot be held to amount to a change in the shares of the partners when compared with the shares specified in the instrument of partnership which was sought to be registered. Where the share income has been received by the partners, the further question of its application has no relevancy to the grant or refusal of the registration under the Act. It is now well-settled that the firm is entitled to grant of registration under the Act even though one of the partners is a benami: see Commissioner of Income-tax v. Abdul Rahim & Co., : 55ITR651(SC) . The Income-tax Officer has no right to refuse registration for the subsequent years where the assessee-firm has satisfied the statutory requirements of Sub-section (7) of Section 184, .
8. We are also unable to agree with Mr, Rama Rao that if the contention of the assessee is acceded to, the Income-tax Officer would be compelled to grant registration in each case and subsequently resort to the provisions of Section 186(1) to cancel the registration if the firm is not genuine. Where a declaration has been made in Form No. 12 for continuation of the registration for any subsequent year of assessment, the Income-tax Officer, in the course of the enquiry, if he comes to the conclusion that the firm itself was not genuine, may not grant the certificate under Section 185(4) immediately until he completes the enquiry. He may refuse continuation of registration if the provisions of Section 184(7), are not satisfied. In case he was satisfied at that time with that and granted registration, the Income-tax Officer is entitled to cancel the registration under Section 186(1) where the firm is found to be not genuine. For these reasons, we must hold that the assessee is entitled for the continuation of registration under the Act for the assessment year 1963-64 and the Income-tax Officer is not entitled to refuse the same.
9. That apart, in the instant case, it is disclosed from the order of the Tribunal that the assessee had filed a statement showing a net profit of Rs. 40,818.52 and its distribution as referred to in paragraphs of its order. When once there was such a distribution as stated therein, the Income-tax Officer could assess the income of the partners according to law without any difficulty. The view expressed by the Accountant Member that the Income-tax Officer can always cancel the registration on the ground that the partnership was not genuine if the profits are distributed otherwise than in the agreed ratio is not correct. We are unable to endorse such opinion as the same runs counter to the provisions of Sub-section (7) of Section 184, of the Act. The Tribunal or the court is not justified to import, a new reason or ground into the section which does not find a place therein. The sovereign Parliament has, as a matter of policy, thought fit to grant the continuation of registration to all the firms which are found to be genuine and without much procedure and difficulty if there was no change in its constitution or the shares of its partners.
10. The question is, therefore, answered in the affirmative and in favour of the assessee. The assessee shall have its costs. Advocate's fee is fixed at Rs. 250.