The judgment of the court was delivered by
M. C. DESAI C.J. - This is a statement of a case submitted at the assessees instance to this court by the Income-tax Appellate Tribunal, Allahabad Bench, inviting this courts answer to the following question :
'Whether, on the facts and in the circumstances of the case, the income-tax authorities were justified in refusing to register the firm under section 26A of the Act ?'
The assessee is a firm owned by two brothers, Lakhan Lal and Radha Krishna, and carrying on business in grains at Kanpur. It was registered under section 26A of the Income-tax Act for and up to the assessment year 1945-46 and it applied for renewal for the assessment year 1946-47. The Income-tax Officer found in the course of assessment for 1946-47 that it carried on two undisclosed businesses in grains at two more places, Debiapur and Jhijhak. The business at Debiapur was alleged to be carried by a partnership consisting of the wives of the partners of the assessee and of the third brother, Thakur Din, while the business at Jhijhak was alleged to be carried on by a partnership consisting of the third brothers son-in-law and uncle. The Income-tax Officer found that these two partnerships were not genuine and that the two businesses were carried on by the assessee itself and included their profits in its total income. The assessee in its account books had credited the profits of the two business in the accounts of their alleged owners. As according to the account books the profits were paid to other persons and not to the partners of the assessee-firm and as according to the finding the profits belonged to the assessee, the Income-tax Officer held that a portion of the profits derived by the assessee had not been distributed among its partners in accordance with the shares specified in the instrument of partnership and refused registration. His order was confirmed by the Appellate Assistant Commissioner. The assessee preferred an appeal to the Tribunal contending that the law did not oblige it to divide among its partners the profits assessed by the income-tax authorise and that, so long as a genuine partnership existed, the shares of the partners in the profits were specified in the instrument of partnership and the profits of the partnership according to its account books were distributed or credited to the partners in accordance with their shares, the Income-tax Officer had no jurisdiction to refuse registration on the ground that the partnership carried on an undisclosed business and did not distribute or credit its profits among its partners in accordance with their shares. This contention was rejected by the Tribunal, which held that the certificate given by the assessee about the distribution or crediting of the profits among its partners was false. The assessee applied to the Tribunal to state the case under section 66(1) and on the Tribunals refusal applied to this court under section 66(2). The question of law that was sought to be referred by the assessee was whether the registration could have been refused on the ground that the 'firm had failed to disclose the fact that it owned the two business at Debiapur and Jhijhak also' and this court observing that it was a question of law arising out of the Tribunals order called upon it to state the case 'on the point mentioned above'. Thereupon, the Tribunal stated the case.
The question formulated by the Tribunal is on the face of it wrong. It is not the question in respect of which this court called upon it to state the case. It had no jurisdiction to formulate a question different from that in respect of which a statement was called for by this court. We, therefore, reframed the question as follows :
'Can an application for registration be rejected on the ground that the assessee-firm had failed to disclose the fact that it owned two business at two different places ?'
Even the question as reframed by us is not the correct question that should have been called for from the Tribunal. Neither the Income-tax Officer nor the Appellate Assistant Commissioner nor the Tribunal refused registration on the ground that the assessee had failed to disclose the fact of its owning the business at Debiapur and Jhijhak. The first two refused it on the ground that the profits of the businesses had not been distributed in accordance with the shares specified in the instrument of partnership of the assessee and the Tribunal, on the ground that the certificate given by the partners in their application for renewal was incorrect, because the profits of the business were distributed or credited to persons other than its partners. Even if the profits of the two business had been concealed by the assessee from its account books, they could have been distributed among its partners in accordance with their shares and the certificate could not be said to be incorrect and renewal might not have been refused. The question as reframed by us now would have arisen before the Income-tax Officer but it did not arise because the profits were found not to have been distributed or credited among its partners, and, therefore, cannot be said to be a question arising out of the Tribunals order. When the Tribunal refused registration on one ground, whether it could be refused on another ground or not is not a question arising out of its order and it is not within the province of this court to answer it. Answering it will not serve any purpose at all; the Tribunal will not be able to revise its order under section 66(5) whatever be the answer that we give to it because it would be an irrelevant answer. The application made by the assessee to this court under section 66(2) is not placed before us, it not being included in the paper-book. Even the application made by it to the Tribunal under section 66(1) is not made a part of the paper-book. This court could not under section 66(2) require the Tribunal to refer to it a question not sought to be referred to it by the assessee in its application under sub-section (1), or sub-section (2), of section 66. If the assessee had sought reference of the question as reframed by us in its applications under sub-sections (1) and (2) of section 66, this court could not have called for a reference of another question and we cannot answer that another question. The result would be that neither is the question reframed by us a question arising out of the Tribunals order nor can we answer a question other than it.
We see no justification whatsoever to go into the question whether registration could be referred on the ground that the assessee-firm had failed to disclose certain profits as that is not the ground for the refusal in the instant case. The real controversy between the assessee and the department is whether registration could be refused on the ground that it falsely in accordance with their shares when a portion of the profits were distributed or credited to persons other than its partners. For the reasons given by us in Khanjan Lal Sewak Ram v. Commissioner of Income-tax (I. T. R. No. 389 of 1958) decided today, we hold that, even if the application for renewal could be said to be in order because it was correct in form and even though the existence of the assessee as a genuine partnership was not in dispute, the matter was at the discretion of the Income-tax Officer and he could refuse renewal on relevant grounds. Rule 6A did not impose any obligation upon him to renew simply on his being satisfied that the application was in order and that there was a firm in existence constituted as shown in the instrument of partnership. That the certificate given in the clause (3) of the application was incorrect and that the incorrectness arose from a deliberate and dishonest act of the assessee in concealing a portion of its profits, falsely alleging that they were earned by persons other that its partners and stating, whether truthfully or falsely, that they were distributed or credited to the other persons were relevant facts to be taken into consideration by the Income-tax Officer when exercising his discretion in the matter. He could hold that a false certificate amounted to the absence of a true certificate and that the application though appearing to be correct in form was incorrect in substance. That the assessee had not complied with the spirit of rule 6 could justify refusal to renew, especially when the non-compliance was the direct result of dishonesty on its part.
The contention that for renewal a simple application praying for renewal and not an application containing certain particulars was required is devoid of force. Under rule 6 an application for renewal is necessary and it must be signed personally by the personally by the partners and accompanied by a certificate in the form set out in the rule. If it is made after dissolution of the partnership, it must be signed by all persons who were partners immediately before the dissolution or by their legal representatives and accompanied by a certificate in the prescribed form. Every application for renewal must be signed by persons mentioned in the rule and accompanied by a certificate in the prescribed form. The words 'accompanied by a certificate' are to be read with the words 'such application shall be' in rule 6. Without the verb 'be' the clause 'and accompanied by a certificate' would become meaningless and the verb 'be' cannot be read with it without the preceding words 'such application shall'. As the sentence stands 'such application shall be' is to be read with the clause beginning with the word 'signed' as well as with the clause beginning with the word 'accompanied'.
We are not impressed with the argument that registration does not prevent assessing undisclosed income of the registered partnership to income-tax. It is true that the registration does not prevent this bit the Income-tax Officer has to discover undisclosed income and if it is not discovered it will escape assessment. Section 26A may be only a procedural provision having nothing to do with the liability of a partner to pay the tax charged on him by section 23 on his total income as held in Shapurji Pallonji v. Commissioner of Income-tax and 'income-tax authorities are not estopped by the fact of registration from going behind the certificate and deciding who the real partners of the firm are' as held by the Supreme Court in Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax, but it does follow that a question regarding the liability to pay tax cannot be a matter to be considered when exercising the discretion conferred by the provision. Then it was argued that, if a partnership does not distribute its profits among its partners according to the shares, it has nothing to do with the liability to pay tax and that information regarding distribution or crediting of the profits in accordance with the share is required in an application for registration only for the purpose of showing that partnership is genuine and carried on its business in accordance with the instrument of partnership. Section 23(5)(a) deals with assessment of a registered firm; instead of the firm being assessed on its assessed income each partner of it is to be assessed individually on his share in the profits and other income. As the registration follows the certificate by the partners that each of them has received his share in the profits, his being assessed on that share together with his other income becomes connected with his receiving his share in the profits. It is, therefore, not correct to say that distribution or non-distribution of the profits of the partnership has nothing to do with the liability to tax or that the information about it is required only for satisfying the Income-tax Officer about the genuineness of the partnership.
The assessee referred us to Kanodia Brothers v. Commissioner of Income-tax, in which Malik C.J. and Bhargava J. held that registration can be renewed even though the partnership ceases to carry on branch business. This decision is of no assistance at all in the instance case. Another decision relied upon is Chhotalal Devchand v. Commissioner of Income-tax, but there the profits were credited to the accounts of the partners though in the names of the two constituent firms of which they were the owners. The instant case, in which a portion of the profits was credited to the accounts of other persons, could not be said to be tantamount to saying that they were credited to the partners. The Supreme Court observed in R. C. Mitter and Sons v. Commissioner of Income-tax, at page 204, that 'unless the partnership business was carried on in accordance with the terms of an instrument of partnership which was operative during the accounting year, it cannot be registered in respect of the following assessment year'. This is quite different from saying that if the partnership business is carried on in accordance with the terms of the partnership deed registration must be ordered. The Supreme Court dealt with a case in which the partnership business was not carried on in the accordance with the terms of the partnership deed and not with a case in which it was carried on. Therefore, it is useless for the assessee to rely upon the decision when it claims to have carried on the business in accordance with the terms of its deed of partnership. The last case, Commissioner of Income-tax v. DCosta Brothers death with a bona fide, and not a mala fide, mistake in calculation and distribution of profits.
We, therefore, hold that the renewal of registration could be refused by the Tribunal on the ground on which it did. The question as formulated by it must be answered in the affirmative but that is not the question that should have been referred by it to this court and has been substituted by another question by us.
In the result, we refuse to answer the question as reframed by us and return the reference unanswered. Since the assessee has lost in all its contentions, we order it to pay to the Commissioner of Income-tax his costs of this reference, which we assess at Rs. 200. Counsels fee is assessed at Rs. 200.
We direct that copies of this judgment shall be sent to the Income-tax Appellate Tribunal and the Commissioner of Income-tax under the seal of the court and the signature of Registrar as required by section 66(6) of the Income-tax Act.