1. The assessee-firm is aggrieved against the order of the AAC confirming the ITO's order, under Section 186 of the Income-tax Act, 1961 ("the Act"), cancelling registration.
2. The assessee-firm was carrying on business in oil, etc. It was constituted by 5 partners under a partnership deed dated 4-3-1970. Its account year, relevant for the assessment year 1974-75, closed on 26-10-1973, in which year it had filed a return declaring an income of Rs. 42,440. Thereafter, it filed a revised return, on 2-2-1976, offering Rs. 7,088 as additional income which was claimed to have arisen from business conducted by an accountant of the assessee-firm, without the knowledge of the assessee-firm, and though the firm reiterated that it did not derive any income from the said business, it still offered the estimated income of Rs. 7,088 for assessment. It may be mentioned that there was a raid by the Sales Tax Department on the assessee's premises, on 15-5-1973, and sale transactions in sweet oil and purchase of ground nuts outside the account books were found by them. The ITO, after recapitulating these facts, rejected the assessee's contention that the accountant could do business of this magnitude without instructions from the assessee-firm and, considering the additional capital of Rs. 10,000 employed in this business outside the account books, he estimated the income outside the account books at Rs. 21,000 in place of Rs. 7,088, estimated by the assessee-firm and the assessee agreed to the said addition. Income was assessed at Rs. 77,070. The ITO, further, noted that a declaration under Section 184(7) of the Act for the continuation of registration to the assessee-firm had been filed. He, accordingly, allowed continuation of registration to the assessee and allocated the said assessed income between the 5 partners as per assessment order dated 22-3-1976. Thereafter, the ITO cancelled the continuation of registration by an order dated 3-4-1979 in which, relying on Khanjan Lal Sewak Ram v. CIT  83 ITR 175 (SC), he held that there was no genuine firm in existence, as profits outside the account books had not been distributed among the partners.
3. The AAC upheld the ITO's order, under Section 186, holding that the assessee's case was fully covered by Khanjan Lal Sewak Ram (supra) and rejecting the assessee's contention that the assessee's case was distinguishable from Khanjan Lal Sewak Ram (supra) and that continuation of registration under the 1961 Act was different from renewal of registration under the 1922 Act. The AAC observed that the assessee-firm, having duly incorporated the profit from undisclosed business transactions in the revised return, had earned that profit. He observed that a declaration under Section 184(7) for continuation of registration in Form No. 12 required the firm to certify that there was no change in the constitution of the firm or the shares of the partners and as it was not known how the undisclosed profits outside the account books were apportioned between the partners, it cannot be verified whether there was any change in the shares of the partners. He, accordingly, upheld the order under Section 186.
4. At the hearing before us, learned counsel for the assessee urged that both the ITO and the AAC, while relying on Khanjan Lal Sewak Ram (supra), had not established how the assessee's case fell under Section 186 and that the assessee-firm was not genuine. A distinction was drawn between granting of registration to firms and the power of cancellation of registration. It was urged that non-distribution of a part of the profits or secret profits, not disclosed in the account books, would not lead to the conclusion that there was no genuine firm in existence.
While under the 1922 Act the procedure for grant of registration and renewal of registration was the same, namely, distribution of profits as per the terms of the partnership deed, there was no such requirement so far as continuation of registration under Section 184(7) in Form No.12 was concerned, where the only requirement was that there was no change in the constitution of the firm or in the shares of the partners, and that there was no need for declaration regarding the distribution of profits between the partners in contradistinction to the requirement under 1922 Act. It was emphasised that Section 184(1) was silent on the distribution of profits though under Form No. 11 (in the application for registration) a certificate regarding distribution of profits had to be given. But once registration had been granted, then, for continuation of registration under Section 184(7), no such certificate regarding distribution of profits had to be given in Form No. 12. Reliance was placed on CIT v. Voleti Veerabhadra Rao & Sons  84 ITR 764 (AP) where it was held that a firm was entitled to continuation of registration, under Section 184(7), even if there was no distribution of profits, so long as the firm was genuine and there was no change in the constitution of the firm or the shares of the partners. Similarly in Addl. CIT v. Chanderbhan Harichand & Co.  126 ITR 709 (Delhi), it was held that the firm was entitled to continuation of registration under Section 184(7) if there was no change in the constitution of the firm or the shares of the partners and an enquiry as to the genuineness of the firm was to be made only in the first year, at the time of registering the firm, and not in any subsequent years in contradistinction to the position under the 1922 Act. It was, therefore, urged that non-distribution of profits outside the account books by the assessee-firm would not make the assessee-firm a non-genuine firm and the fact that the ITO in his order under Section 185 of the Act, had divided the assessee's profits among the five partners would show that profits were divided in the profit-sharing ratio between the partners as per partnership deed and that the ITO had nowhere made the case that the profits from business outside the account books were divided in a ratio other than the one given in the partnership deed. It was further urged that there was no finding by the ITO that there was no genuine firm in existence. Reliance was also placed on Gurudeo Prasad Jagannath Prasad v. ITO  131 ITR 486 (All.) that registration cannot be cancelled on the ground of improper allocation of shares if it is due to omission, inadvertence or mistake.
5. The learned departmental representative urged that the fact that there was no distribution of profits earned outside the account books showed that the said non-distribution was not in accordance with the partnership deed. It. was urged that the test of genuineness of a firm is that the constitution of the firm is as specified in the partnership deed which was registered and that profits have been distributed in accordance with the profit-sharing ratio in the said partnership deed.
If the actual constitution or profit-sharing ratio is different, than that given in the partnership deed, then there is no genuine firm.
Reliance was placed on Setha Ram Dhanvir Singh v. CIT  123 ITR 150 (All.) where noting the variation between the apportionment of profit as per account books and as per the instrument of partnership, the Allahabad High Court upheld cancellation of registration.
6. We have carefully considered the submissions of both the parties. We find that the assessee has a good case. The lower authorities have no where given the definite finding that the firm was not genuine. The fact that the firm has been granted registration since the assessment year 1972-73 showed that the revenue had accepted the firm to be a genuine firm. The question for consideration is whether registration, though originally granted in the year under consideration (assessment year 1974-75), can be cancelled subsequently on the short ground that profits of business outside the account books have not been shown to be apportioned between the partners in the profit-sharing ratio as per instrument of partnership. It may, however, be noticed that there is no evidence with the revenue to show that such profits from business outside account books had been apportioned in any ratio other than that as per the instrument of partnership. If the revenue had such evidence, then it could certainly bring its case within the ratto of Setha Ram Dhanvir Singh (supra). However, as stated above, such evidence is conspicuous by its absence. Thus, the only argument available to the revenue is that it is not shown by the assessee that profits from business outside the account books had been apportioned in the profit-sharing ratio as per the instrument of partnership. On this point, the assessee has an effective reply in CIT v. Voleti Veerabhadra Rao & Sons (supra) and Addl. CIT v. Chanderbhan Hirachand & Co.
(supra). It is also clear that for claiming continuation of registration under Section 184(7), the assessee, while applying in Form No. 12, is only declaring that there is no change in the constitution or in the shares of the partners and is not declaring that profits have been apportioned in accordance with the profit-sharing ratio indicated in the instrument of partnership. This is in contradistinction with the position under the 1922 Act, where in the application for renewal of registration, the assessee had to certify that the profits have been divided, as detailed in the said application, which division of profits should be in accordance with the profit-sharing ratio as per the instrument of partnership. It is this vital difference between the provisions of the 1922 Act and that of the 1961 Act that distinguishes the assessee's case from that of Khanjan Lal Sewak Ram (supra). In the latter case, the said firm had applied for renewal of registration for the assessment year 1948-49 under Section 26A of the 1922 Act, and the said application was signed by all the partners and in paragraph 3 thereof they had appended a certificate to the effect that the profits of the previous year were divided or credited as shown below. The Tribunal had found that the firm had earned profits in the black market and though it had distributed its book profits among the partners according to instrument of partnership, it had not distributed profits earned by it in the black market amongst the partners according to the instrument of partnership. It was on these facts that the Supreme Court held that the application for renewal of registration made by the said firm did not comply with the conditions prescribed in paragraph 3 of Rule 6 of the Income-tax Rules, 1922, and the firm was, therefore, not entitled to renewal of registration. We have mentioned above the distinguishing feature in the case before us that the assessee-firm has not to make any declaration in Form No. 12 which could be similar to a declaration given in paragraph 3 of Rule 6 of the 1922 Rules (in which the partners had to certify that the profits of the previous year were divided or credited as shown below in the said application form for renewal of registration under Section 26A of the 1922 Act). Thus, the ratio of decision in Khanjan Lal Sewak Ram (supra) is not applicable to the facts of the case before us. We need not go to the further distinguishing features, for example, that registered firms are taxed in the year under consideration before us (assessment year 1974-75) as distinguished from the fact that registered firms were not taxed in the assessment year 1948-49 and, therefore, observations of the Supreme Court in the above mentioned case at page 180 regarding the non-taxability of registered firms would no longer be applicable to the year under consideration before us.
7. Considering the facts and circumstances of the case, we do not find any valid ground for the ITO to cancel registration under Section 186 after having initially granted continuation of registration to the assessee-firm. We would, accordingly, vacate the orders of the authorities below under Section 186 and direct that the firm be allowed continuation of registration.