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Sher-i-estate Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Amritsar
Decided On
Judge
Reported in(1983)5ITD188(Asr.)
AppellantSher-i-estate
Respondentincome-tax Officer
Excerpt:
.....the granting of registration as there was no indication about the profit-sharing ratio in the deed of partnership. the ito took action under section 186(1) for cancelling the registration granted under section 185 of the act for the first year and for cancelling the continuation of registration allowed under section 184(7) of the act for the second year. the assessee objected to the action of the ito and also submitted a deed of rectification allegedly written on 21-7-1975.the major controversy before the ito was about the genuineness of this rectification deed and both the ito and the aac were of the opinion that the deed of rectification was an after thought, which was not executed on 21-7-1975. it was also held by the ito and the aac that non-specification of share of.....
Judgment:
1. The assessee-firm is in appeal against the ITO's order under Section 186(1) of the Income-tax Act, 1961 ('the Act'), relating to the assessment years 1976-77 and 1977-78. The appeals are inter-connected and these are conveniently considered together and disposed of by a common order.

2. The assessee had been granted registration for the assessment year 1976-77 and this registration continued for the assessment year 1977-78. Subsequently, internal audit raised an objection about the granting of registration as there was no indication about the profit-sharing ratio in the deed of partnership. The ITO took action under Section 186(1) for cancelling the registration granted under Section 185 of the Act for the first year and for cancelling the continuation of registration allowed under Section 184(7) of the Act for the second year. The assessee objected to the action of the ITO and also submitted a deed of rectification allegedly written on 21-7-1975.

The major controversy before the ITO was about the genuineness of this rectification deed and both the ITO and the AAC were of the opinion that the deed of rectification was an after thought, which was not executed on 21-7-1975. It was also held by the ITO and the AAC that non-specification of share of profit/losses in the partnership deed would disentitle the assessee from obtaining registration and such a case would fall within the ambit of Section 186(1). The assessee is aggrieved and has come up in appeal to the Tribunal.

3. Shri D.P. Mahajan, the learned counsel for the assessee, did not deal with the controversy about the rectification deed and contended that the provisions of Section 186(1) in law were not applicable in a case where profit-sharing ratio of the partners of a firm is not specified in the partnership deed and in any event non-specification of profit-sharing ratio will not render the assessee-firm to be a non-genuine firm. It was pointed out that the genuineness of a partnership agreement did not depend on that consideration and in any event under Section 186(1) registraiion already granted could not be withdrawn for the two assessment years. He relied upon a decision of the Allahabad High Court in the case of Sheonath Prasad Motilal v. ITO [1963] 47 ITR 493. He next referred to Section 13(b) of the Partnership Act about the shares of partners to be held to be equal when no contract between the partners to the contrary is found to exist or in other words, when the contract between the partners is not spelt out in the partnership deed executed. He referred to the observations in the commentary of Shri Om Parkash Aggarwala on the Indian Partnership Act, 6th edition, page 167. Next he cited a Supreme Court ruling in the case of Parekh Wadilal Jivanbhai v. CIT [1967] 63 ITR 485 wherein it was held in a similar case that partnership deed should be read as a whole and the relevant circumstances be taken into account to determine the fact that shares were equal in the partnership profits or losses. Shri Mahajan submitted that profit was, in fact, divided equally amongst the partners and credited to their personal accounts in the books and in Form No. 11 filed for registration for the assessment year 1976-77 the shares were shown to be equal. It was also stated that Form No. 12 for continuation of registration was filed within time.

4. On behalf of the revenue, it was contended that the view taken by the lower authorities was correct and for obtaining registration specification of profit-sharing ratio of the partners in the partnership deed was essential. Certain case laws were also cited which in our opinion are not relevant authorities.

5. On a consideration of rival submissions, we are of the opinion that the assessee is entitled to registration for both the assessment years.

It is clear from reading of Section 13 of the Partnership Act that where there is no specific agreement for sharing of profit forthcoming in the case of a firm that section will come into operation and make the share of partners equal. From this it follows that non-existence of the agreement on the point of sharing of profits amongst the partners will not render a firm to be non-genuine in the eye of law. A genuine partnership firm thus can come into existence even when shares of the partners are not specifically agreed upon. This being the position, it cannot be said that non-specification of profit-sharing ratio in the partnership deed will render a firm to be a non-genuine one. Once it is found that a firm is not non-genuine due to this omission it becomes obvious that Section 186(1) will have no applicability. It is only this section which permits the ITO to withdraw the registration already granted. In our opinion, Section 186(1) itself will have no applicability and the ITO's action in cancelling the registration for both the assessment years is contrary to law. The Allababad High Court ruling cited by the assessee, namely Sheonath Prasad Motila case (supra), certainly brings out that registration can be cancelled only if the circumstance of non-genuineness of the firm exists and not for any other lapse found later on by the ITO.6. We are also inclined to the view that non-omission of profit-sharing ratio in the partnership deed in the facts and the circumstances of the assessee's case as pointed out by its counsel will not be fatal for the granting of registration. The Supreme Court authority in the case of Parekh Wadilal Jivanbhai (supra) certainly supports the assessee's case. The assessee has claimed that the shares of its partners are equal and has allocated the profits amongst the partners on that basis in the books of accounts and filed Form No. 11 for the first assessment year on that basis. All these relevant circumstances go to show that provision of Section 13 of the Partnership Act can be invoked when the partnership deed is found to be silent on the issue of profit-sharing ratio. On this footing also the ITO's action in granting the registration and continuation of registration on the first occasion for the two assessment years was in order. Consequently, we cancel the orders of the ITO passed under Section 186(1) for the two assessment years, restore the original orders of the ITO granting registration and continuation of registration for the assessment years 1976-77 and 1977-78 and allow the appeals of the assessee.


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