Satish Chandra, C.J.
1. Setha Ram Dhanvir Singh, the assessee-firm, was constituted under an instrument of partnership on 14th December, 1964. It consisted of six partners. The first accounting period of the firm was from August 1, 1964, to March 31, 1965, relevant to the assessment year 1966-67, for which the firm applied for registration in form No. 11, accompanied by the instrument of partnership on March 24, 1965. Under this instrument four partners had a two-anna six pie share each, while the other two had a three anna share each. On July 23, 1966, the firm filed its return showing division of shares equally among the six partners.
2. On 19th January, 1967, the ITO passed an order of assessment as well as an order granting registration to the assessee-firm. The officer stated that the six partners each had one-sixth share and that the profits had been divided accordingly.
3. The Commissioner, during his inspection, found that the ITO's order was erroneous. According to the partnership deed, two of the partners had a three-anna share each, while the other four had a two-anna six pie share each, while the profits of the firm had been divided by crediting one-sixth share to each of the six partners. He issued notice under Section 263 of the Act, and after hearing the assessee held that according to the profit and loss account and the balance-sheet, filed along with the return, the profits had been divided equally amongst the six partners, though the partnership deed indicated that four of the partners had only a two-anna six pie share each. The division of profits was not in accordance with the shares specified in the deed. He set aside the order granting registration and directed the ITO to reframe the assessment of the firm treating it as an unregistered firm, and to make consequential amendments in the assessment of the partners.
4. The assessee appealed to the Tribunal, but failed. At the instance of the assessee, the Tribunal has referred for our opinion three questions, the substance of which is:
' (1) Whether the cancellation of registration was, in law, justified ?
(2) Whether after the partners' assessment the firm's assessment could be changed and assessed as an unregistered firm ?
(3) Whether the Commissioner could cancel the registration only under Section 186 of the Income-tax Act?'
5. Section 184 of the I.T. Act, 1961, deals with registration of firms. It provides that an application for registration may be made on behalf of a firm, if-
(a) the partnership is evidenced by an instrument, and
(b) the individual shares of the partners are specified in that instrument.
6. Section 184(6) says that the application shall be made in the prescribed form. Part V of the I.T. Rules, 1962, lays down the procedure for registration of a firm. Rule 22(1) provides that an application shall be made in Form No. 11. Clause (3) of Form No. 11 requires a certificate from the partners to the effect that the profit or loss of the previous year were/will be divided or credited as shown in the Schedule and that the information given in the Schedule is correct. The Schedule specifies the shares of the individual partners.
7. Under Section 15(1), the ITO is to 'enquire into the genuineness of the firm and its constitution as specified in the instrument of partnership'. On being so satisfied or otherwise, he passes an order of registration of firm or refusing to register the firm.
8. Section 186 authorises the ITO to cancel the registration if he is of the opinion that there was no genuine firm in existence as registered.
9. To enable a firm to obtain registration under Section 185 it is necessary that-
(a) an application in the required form and complying with the statutory requirements be made to the' ITO ;
(b) the firm should be evidenced by an instrument of partnership ;
(c) the instrument should specify the individual shares of the partners ;
(d) the partnership should be actually constituted as specified in the instrument.
10. If these conditions are fulfilled, the ITO is bound to register the firm, and if an application in Form No. 12 is made for renewal, the ITO is bound to grant renewal for subsequent assessment years. He can refuse to register the firm if it was not a genuine firm with the constitution so specified. In other words, the firm must actually exist. It should not be a sham transaction or a mere pretence to escape liability to tax. The expression genuine firm denotes that the firm is really in existence and that the partners are collectively carrying on the business. Genuineness is also interrelated to the specified constitution of the firm. The constitution of the firm refers to the identity of the partners and their shares in the profit or loss of the firm business. The ITO has to be satisfied that there was in existence a genuine firm with the constitution so specified. Genuineness by itself is not enough. Genuineness has to be considered in the light of the specified constitution if it is found that the partners have in the instrument of partnership indicated their shares, but in fact they have, while dividing the profits or losses adopted some other shares, voluntarily and knowingly, it will be a case where the firm, though in existence, is not a genuine firm with the specified constitution.
11. Section 186(1) authorises the ITO to cancel the registration if he is of opinion that ' no genuine firm is in existence as registered '. Here again the genuineness of the firm has to be determined in the background of the firm as it was registered. The firm should really be in existence and carrying on business. In addition, the identity of the partners as well as their shares ought to be as specified in the instrument of partnership, otherwise the firm will not be in existence as registered. The fact that the firm was actually carrying on business with the same partners, as were specified to be partners in the instrument of partnership, is not enough. The shares in the profits and losses must continue to be as specified in the instrument. Then alone it can be said that there is a genuine firm in existence as registered.
12. If the ITO finds that factually the division of shares in profit or loss is at variance with the shares specified in the instrument of partnership, he can cancel the registration.
13. This is the view taken by the Supreme Court in Khanjan Lal Sewak Ram v. CIT : 83ITR175(SC) . In that case, the firm had earned profits in the black-market and the same had not been distributed amongst the partners, though the book profits were distributed. The Supreme Court held that the certificate given by the partners was false, and there was really no compliance with the conditions prescribed by the rules. The firm was not entitled to renewal of registration. This could only be on the basis that there was no genuine firm as registered,
14. The same position obtained in a decision of this court in Krishna Gopal and, Brothers v. CIT : 110ITR378(All) . It was found that a sum of Rs. 3,100 was really the income of the firm but had not been distributed amongst the partners. A Bench of this court held that the certificate given by the partners was a false certificate. As a result, the firm became a non-genuine firm, and its registration was rightly cancelled under Section 186 of the Act. The phrase ' non-genuine ' was used as a short form of 'non-genuine as registered '.
15. On facts it has been found that in the accounts of the firm the apportionment of the profits was one-sixth to each partner. Same was the position in the profit and loss account and the balance-sheet filed along with the return. Admittedly, the shares specified in the instrument of partnership were unequal, four of the six partners having a two-anna six-pie share each, while the other two a three-anna share each. There was no suggestion that any attempt was made to rectify the account books or the profit and loss account, etc., or the return. The belated attempt made for the first time before the Tribunal to show that the error occurred because of misgivings on the part of the accountant was held to be an after-thought and disbelieved by the Tribunal. Under the circumstances, the firm was, in law, not entitled to registration.
16. Learned counsel for the assessee relied on several decisions.
17. In CIT v. Madanlal Chhaganlal : 50ITR477(MP) , the Madhya Pradesh High Court observed that though there was a term in the instrument of partnership that interest will be paid to the capital furnished by the partners, but in the accounts the interest was not credited. It was held that this irregularity was no ground to refuse registration. There was in that case no error in the distribution of profits amongst the partners in accordance with the specified shares.
18. In N.S.S. Sokkalingam Chettiar and Co. v. CIT : 60ITR671(Mad) the Madras High Court upheld the claim for registration. In that case, salary was paid to a partner. It was held to be an allowable deduction in the computation of profits of the firm. Profits were divided properly. The case is clearly distinguishable.
19. In CIT v. Sat Ram Gian Chand , a case from Punjab and Variety Hall and Ramakrishna Textiles v. CIT : 84ITR202(AP) , a case decided by the Andhra Pradesh High Court, the position was similar. In both these cases certain amounts were added by the ITO to the profits. The profits as declared by the firm hence became different from the assessed income. The firm had divided the profits properly. It was held in both these cases that simply because certain additions were made by the officer to the profits returned by the firm it would not make the firm a non-genuine one. It was not possible for the firm to foresee the additions made by the officer. The firm was entitled to registration. These cases do not afford material guidance for the present case.
20. Learned counsel for the assessee relied heavily on the decision of the Kerala High Court in P.P. Kuriakose and P.P. Varghese v. CIT : 71ITR109(Ker) . In this case, the profits from some of the business were credited to the accounts of the partners properly, but the profits from two wholesale ration shops were not so credited. The Kerala High Court held that the error was inadvertent, and could be rectified, and so the application for registration was not invalid. In this case, the crucial finding was that the error was such as could be overlooked after rectification. The case is one of special facts. In any event, the principle flowing from it is contrary to the Supreme Court decision in Khanjan Lal Sewak Ram : 83ITR175(SC) as well as to this court's decision in Krishna Gopal and Brothers : 110ITR378(All) . We are, with respect, unable to go all the way with this decision of the Kerala High Court.
21. On the facts and the circumstances of the present case the finding clearly amounted to holding that the firm was not genuine as registered and so the cancellation of its registration was proper and valid.
22. The second question referred to us is whether the status in which a firm is to be assessed can be changed after the partners have been assessed.
23. The law is well settled, that the ITO cannot assess the same income twice--once in the hands of the partners, and then also in the hands of a firm, treating it to be an unregistered firm. The ITO has an option to tax either the firm or the partners. But having elected to adopt one course, he cannot subsequently change it. He can exercise the option only once [See CIT v. Murlidhar Jhawar and Purna Ginning and Pressing Factory : 60ITR95(SC) , Girdhari Lal Laxman Prasad v. CIT : 70ITR853(All) , Hari Om Company v. CIT : 71ITR584(All) , CIT v. P.P. Johny : 73ITR459(Ker) and CIT v. Pure Nichitpur Colliery Co. : 101ITR79(Patna) ].
24. But the question is whether this principle is applicable to the facts of the present case. Here no one exercised any option. The ITO granted registration and assessed the firm as such. The Commissioner, in exercise of his revisional powers, held that registration was wrongly granted. He set aside that order. The automatic consequence of that order was that the firm was entitled to be assessed only as an unregistered firm. This legal consequence cannot be equated with a voluntary election. An election has to be between assessment of a firm as an unregistered firm on the one hand, and assessment of the same income in the hands of the individual partners on the other. The principle that after the partners have been assessed, the status of the firm cannot be changed arises only when the assessing authority has an option to elect one or the other entity for assessment. Here neither the ITO nor the Commissioner had any option, much less did they exercise it.
25. Sub-sections (3) and (4) of Section 186 make express provision for such a situation. They provide :
'(3) Where the registration of a firm is cancelled for any assessment year, the Income-tax Officer shall amend the assessments of the firm and its partners for that assessment year on the footing that the firm is an unregistered firm.
(4) The provisions of Section 154 shall, so far as may be, apply to the amendments of the assessments of the firm and its partners under subsection (3) of this section, the period of four years specified in Sub-section (7) of that section being reckoned from the date of the order cancelling the registration.'
26. On cancellation the firm is liable to be assessed as an unregistered firm. The assessment of the firm as well as its partners is bound to be amended. The ITO is under a duty to do both the things within four years of the date of the order cancelling the registration.
27. As we read these provisions, it is apparent that the ITO is bound to do both the things virtually simultaneously, namely, amend the assessment of the firm as well as that of its partners. When the Commissioner cancelled the assessment of the firm, he did not exceed his authority if he indicated that the ITO would amend the assessment orders of the firm and its partners suitably. When the firm is assessed as an unregistered firm after cancellation of its registration, it is inevitable that the share income of the firm which had been assessed in the hands of the partners on the basis that the firm was registered has also to be changed. The share income has to be excluded from the assessment of the partners in accordance with law.
28. On the third question, the position is that Section 263(1) entitles the Commissioner to pass a suitable order 'if he considers that any order passed therein by the ITO is erroneous in so far as it is prejudicial to the interests of the revenue ' . The ITO must have committed some error, i. e., he must have acted in contravention or violation of some provision of the I. T. Act while making the assessment. The Commissioner has no power to interfere with an order of the ITO, unless he finds it erroneous. In the next place, the error must be such which prejudicially affects the interests of the revenue. If these two conditions co-exist, the Commissioner can interfere in a case like the present. The Commissioner could have interfered only if he found that the ITO had committed an error in granting registration when in view of the statutory provisions he should not have. In other words, on the finding that the case was a fit one for cancellation of registration and the ITO erred in granting the renewal, the Commissioner was entitled to interfere. The ITO is authorised to cancel the registration or to renew it only under Section 186 of the Act, on the ground that no genuine firm, as registered, was in existence.
29. The Commissioner could not act on any other ground to hold that the ITO has committed an error. The Commissioner's jurisdiction depends upon the existence of an error in the ITO's order. It is thus evident that the Commissioner has no higher or wider powers. His powers were coextensive with that of the ITO in the sense that he, if on examining the record of any proceedings, finds that the ITO has committed an error, then alone he can act. The jurisdiction to cancel registration of a firm even at the instance of the Commissioner was hence confined to the provisions of Section 186(1) under which alone the ITO could have acted.
30. The Tribunal expressed the opinion that the Commissioner, while acting under Section 263 could not direct the amendment of the assessment of the partners of the firm. It took the view that this power has expressly been conferred by Section 267 on appellate authorities like the AAC or the Tribunal, but such power is lacking under Section 263, which provides for revision.
31. Under Section 263, the Commissioner is entitled to ' pass such order thereon as the circumstances of the case justify'. The Commissioner, having come to the conclusion that the firm was wrongly granted registration, had to cancel the firm's registration. The effect of cancellation is expressly provided for in Sub-section (3) of Section 186, namely, that the assessments of the firm as well as its partners have to be amended and made on the footing that the firm is an unregistered firm. This was the statutory duty of the ITO. The Commissioner in inviting his attention to this duty did not, in our opinion, pass an order which the circumstances of the case did not justify. In our opinion, he was competent to do so.
32. Section 267 entitles an appellate authority to direct the amendment of the assessment of a partner of the firm in a case where any change is made in the assessment of the firm. Section 267 does not specifically deal with the change in the registration of the firm but in its assessment. That situation does not arise in the present case.
33. We may now set out the questions referred to us in full. They are;
'(1) Whether, on the facts and in the circumstances of the case, was the Commissioner justified in law in cancelling the registration of the firm on the ground that it had not distributed the profits among the partners in the ratio specified in the partnership deed ?
(2) Whether, after the individual partners had been assessed, the partnership firm could be assessed in the status of an unregistered firm, after its registration had been cancelled.
(3) Whether the power of cancellation of registration of a firm was confined to the provisions of Section 186 of the Income-tax Act, even when the Commissioner of Income-tax was to exercise the power of cancellation '
34. Our answers to the three questions are in the affirmative, in favour of the department and against the assessee. The Commissioner will be entitled to costs, which are assessed at Rs. 200.