1. The appeal relates to the assessment year 1977-78. The assessee-appellant is a firm which was constituted under a deed of partnership dated 1-3-1976. It consisted of three partners.
Subsequently there was a change in the constitution in that one Shri P.K. Subramaniam was taken in as a partner and also the minor, A.Sundararajan, who had become major and had elected to be a full-fledged partner. This change in the constitution is evidenced by a deed dated 1-1-1977. The partnership deed dated 1-3-1976 and 1-1-1977 specifically stated that the accounts of the firm shall be closed on 31-3-1977. The assessee, however, made up his accounts and filed a return offering income up to 11-11-1976, i.e., Deepavali year.
2. The ITO by order dated 20-9-1979 refused registration on the following reasons : ... The accounts have been been closed up to 11-11-1976. As has been mentioned above, the accounts have been closed up to 11-11-1976 and not 31-3-1977 as reuired by the partnership. Thus, there has been no strict tcompliance with the provisions of the Income-tax Act and the rules framed hereunder. On the question of granting registration, Courts have emphasised time and again that there must be strict compliance with the rules framed in these regards A substantial compliance is not good enough. Registration normally grants an advantage, it must conform to the fullest extent. It is incumbent on the part of the firm to first divide the profits for the relevant years among its partners in their respective profit sharing ratio.
It is clear that this condition has not been satisfied in that the accounts have been made up to a date before the date on which the accounts have to be closed according to the partnership deed....
3. The AAC dismissed the appeal by stating that the only deed of partnership which was in existence during the relevant accounting year was the deed dated 1-3-1976 and that in the said deed the previous year has been mentioned as 31-3-1977 but that the accounts were closed on 11-11-1976 itself and that, therefore, under such circumstances he would fully agree with the ITO that there was no strict compliance with the provisions of the Income-tax Act, 1961 ('the Act').
4. It appears, there was an application on 18-11-1977 by the assessee before the ITO for change of year from 31-3-1976 to 18-11-1977. That application, it appears, was not allowed by the ITO. We are also told that for this assessment year 1977-78, the ITO has made the assessment with the accounting year ended 31-3-1977 and has estimated the income for the period 18-11-1976 to 31-3-1977.
5. We are inclined to agree with the assessee for registration. We take it that the assessee has without the permission of the ITO altered the accounting year 31-3-1976 as provided in the document to 11-11-1976 as shown in the return. But that cannot be a reason for refusal of registration. Section 185 of the Act, which provides about granting of registration, states that if the ITO is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified, he shall pass an order in writing registering the firm for the assessment year. In this case, there is a genuine firm in existence with the constitution so specified. The accounting year is not part of the constitution of the firm. The constitution of a firm is regarding the number of partners and the individual shares of the partners. The extent of the accounting year is not considered to be a part of the constitution of the firm. We are also not made aware of any of the other rules in the Income-tax Rules, 1962, or forms prescribed that are violated by the assessee. It is stated by the ITO that it is incumbent on the part of the firm to first divide the profits for the relevant years among its partners in their respective profit sharing ratio and that it is clear that this condition has not been satisfied in that the accounts have been made up to a date before the date on which the accounts have to be closed according to the partnership deed. We fail to see how by a change in the accounting year this condition of sharing profits in the respective profit sharing ratio has been violated. Even if the accounting year is 11-11-1976, the extent of profits available till then had been shared only according to the profit sharing ratio specified in the partnership deed. We found no ground to refuse registration.
6. Appeal allowed. The ITO is directed to grant registration to the assessee-firm.