1. This appeal is by the revenue. The appeal relates to the assessment year 1979-80 and is against the decision of the Commissioner (Appeals) granting registration to the assessee-firm. The assessee-firm was constituted by an instrument of partnership executed on 3-11-1978. The partners were Shri G.R. Govinda-rajulu, G.R. Devarajan and G.Rangaswamy. The deed stated that the first partner had taken over the assets and liabilities of Sri Rangavilas Ginning & Oil Mills, Coimbatore in the course of the distribution of assets and liabilities of the said firm as per the terms and conditions stipulated in the deed of dissolution of that partnership with effect from 1-7-1978.
The first partner requested the remaining two persons to join with him to carry on the business with the assets received on dissolution of the earlier firm. The new partnership came into effect from 1-7-1978. Each of the partners contributed in terms of Clause 9 capital of Rs. 2 lakhs. It was also provided that the parties may withdraw amounts which they thought necessary and such withdrawals would be debited to the personal accounts of the partners. According to Clause 17 the profits or losses were to be shared by the partners as under : In due course the assessee-firm closed its accounts on 31-12-1978 and the calendar year was the relevant accounting period for the assessment year 1979-80. On 17-11-1978, that is before the close of the accounting period, an application in Form No. 11 was filed before the ITO, which application was dated 3-11-1978 and the certificate which becomes relevant for the decision of the present appeal given was as under : We do hereby certify that the profits (or loss, if any) of the previous year/period up to the date of dissolution will be/were divided or credited as shown in the Schedule and that the information given above and in the Schedule is correct.
2. In the order refusing registration the ITO mentioned that the accounts of the erstwhile firm were closed and the assets and liabilities were brought into the books of the new firm and a dissolution adjustment account was created, with the debit balance. The deficit in the dissolution adjustment account was brought into the balance sheet of the assessee-firm. The ITO stated that this was the personal loss of all the three partners who were partners in the erstwhile firm. The net profit according to the profit and loss account of the assessee-firm was Rs. 2,11,590. This was transferred to a profit and loss appropriation account and therefrom Rs. 1,95,000 was transferred to dissolution adjustment account and the balance of Rs. 16,590 only was apportioned between the three partners, Govindarajulu, Devarajan, Rangaswamy in the ratio of 30 : 35 : 35. According to the ITO by doing so the amount of Rs. 1,95,000 in effect was apportioned at one-third each between the three partners because it was their personal loss which they took equally. Hence, he took the view that out of Rs. 2,11,590 only Rs. 16,590 had been apportioned according to the terms of the instrument of partnership dated 3-11-1978 and the balance was apportioned in a different ratio. By a letter dated 24-3-1982 the ITO had brought to the notice of the assessee the inferences which he sought to draw and he had stated that the adjustment of a portion of profits against deficit in dissolution adjustment account was in contravention of the terms of the partnership deed and, therefore, it could not be said that the profit had been divided as per the terms of the deed and the firm, consequently, would not be eligible to the grant of registration. The ITO called upon the assessee to put forth objections and the assessee's reply dated 29-3-1982 has been considered by the ITO who has brought on record the salient points as under : (a) The first objection related to the authority of the ITO under law to call for clarification on any point with regard to the registration of the firm; (b) It was contended that the ITO had no right to scrutinise the deed of dissolution of the earlier firm nor the conclusion derived therefrom had any bearing on the genuineness of the firm and its constitution; (c) It was contended that profits were allocated as per the partnership deed, but even assuming that they had not been allocated so, the ITO had no power to refuse registration. The ITO considered these objections and negatived them holding that he had the right to seek every clarification that was necessary to determine whether the firm was genuine or not and eventually he concluded that since the profits were not distributed according to the terms of the instrument of partnership, the assessee-firm could not be granted registration.
3. Against the order of the ITO the assessee appealed to the Commissioner (Appeals), who briefly set out the background of the case.
According to him the expression 'constitution' would only mean the personnel composing the firm. He sought to derive support for this interpretation by referring to proviso (i) to Section 184(7) of the Income-tax Act, 1961 ('the Act'), which spoke of a change in the constitution of the firm or the shares of the partners. According to the Commissioner (Appeals) the ITO was not justified in refusing registration to the firm.
4. Before us the learned departmental representative referred to the judgment of the Allahabad High Court in Setha Ram Dhanvir Singh v. CIT  123 ITR 150 and submitted that registration could be granted only to a 'genuine firm' and the expression 'genuine firm' denoted that a firm was in existence, that the partners were collectively carrying on the business and genuineness also was inter-related to the specific constitution of the firm, which included not only the personnel constituting the firm but also their shares in the profits or losses.
According to the learned departmental representative the Allahabad High Court decision was the authority for the proposition that if it was discovered that the partners had while dividing the profits not adhered to the snares indicated in the instrument of partnership, registration could be refused. He stated that the present was a case which fell fully within the ratio of the Allahabad High Court decision and the refusal of registration was in order.
5. The learned counsel for the assessee, on the other hand, submitted that in the present case the firm was a genuine firm and the constitution was as specified in the deed of partnership and further that the certificate given in Form No. 11 filed was also a correct certificate. According to him there was no warrant for refusing registration merely because the assessee had transferred a portion of the net profits to a dissolution account and had thought it fit only to distribute the balance. Be, therefore, prayed for registration being granted.
6. We have considered the rival submissions. We also looked into the records. While submitting the return of income the assessee started with the net profit as per the profit and loss account and after making certain adjustments for prima facie inadmissibles, etc., arrived at the net profit, which was allocated in the ratio as specified in the instrument of partnership itself, such was the summary of total income, which came to Rs. 2,31,100 and which was shown, in the return filed on 31-10-1979. We have given anxious consideration to several judicial pronouncements which have bearing on the issue before us. In the case relied on by the departmental representative in Setha Ram's case (supra) had observed : ...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 inter-related 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.
(pp. 153-54) The above observation of the Court shows that registration can be refused in cases where the partners have voluntarily and knowingly, while dividing the profits or losses, adopted some other shares other than the shares as specified in the instrument of partnership. In Khanjan Lal Sewak Ram v. CIT 83 ITR 175 the Supreme Court had occasion to review various pronouncements on the aspect relating to the grant of registration where a part of the profits were not distributed or the full profits were not disclosed and only the disclosed profits were distributed. The Supreme Court observed with reference to the decision of the Bombay High Court in CIT v. D'Costa Bros.  49 ITR 1, which was relied on before them, as under : ...Therein, the Court held that the Income-tax Officer was not entitled to reject the application for registration of the deed of partnership of the assessee-firm on the ground that the household expenses of the partners were debited to the profit and loss account of the firm. Therein there was no contention that all the profits earned were not distributed. The only question was whether the household expenses could have been deducted before dividing the profits. In other words, the question was whether the household expenses was a proper deduction to be made in the circumstances of that case before dividing the profits. Hence, that decision has no bearing on the question under consideration. (p. J80) It would follow, in our view, from the pronouncements of the Supreme Court and the Allahabad High Court, referred to aforesaid, that where out of the disclosed profits an assessee transfers to a reserve or other account a portion of profits and distributes only the balance and such balance is distributed in accordance with the shares as specified in the instrument of partnership, there would be compliance with the requirements of Section 185 of the Act. The deduction made by the assessee of a portion of the profits by transfer to another account may not be an admissible deduction to arrive at from the total income. But as long as the balance is correctly distributed it will not be a case where an assessee voluntarily and knowingly adopts some other profit-sharing ratio. Merely because in accounts the assessee had set apart by deduction to a different account certain amount, registration could not be refused on the ground that the profits which were distributed by the assessee were not in conformity with the shares as specified in the instrument of partnership. In the case of Khanjan Lal (supra), no doubt, refusal of registration was upheld. This was a case where a part of the profits was suppressed and only the balance was distributed. Hence with reference to the contents of the application for registration under Section 26A of the Indian Income-tax Act, 1922 the Supreme Court held that refusal of registration was in order because where a portion of the profits earned was not actually divided, the certificate that the profits earned had been correctly divided in the manner shown in the application would be false. A case came up before the Allahabad High Court where the profits were not divided in terms of the shares as specified in the instrument of partnership. A deviation was found occurred due to inadvertence of the accountant with reference to the provisions of Section 185 and the relevant rules relating to the application made for the grant of registration. The Allahabad High Court in the case of CIT v. Hari Ram Khanna  116 ITR 886 observed as under : At the instance of the Commissioner, the Tribunal has referred the following question of law for our opinion : Whether, on the facts and in the circumstances of the case, registration under Section 185 of the Income-tax Act, 1961, for the assessment years 1962-63 and 1963-64 could be granted to the assessee-firm The facts are not in dispute. The application for registration was made in time and in the proper form. It complied with all the requisite formalities including the declaration which is required to be made that the profits of the firm will be divided or credited as shown below, namely, in accordance with the shares specified in the partnership deed. The factual findings of the Tribunal show that at the time when the application was made a proper declaration that the shares of profits will be distributed in accordance with the shares indicated in the partnership deed was duly made. The deviation occurred subsequently and it was because of the inadvertent fault of the accountant. On an overall consideration of all the facts, the Tribunal came to the conclusion that it cannot be said that the firm was not genuine. In our opinion, the deviation was negligible inasmuch as the father was credited with 5-1/3 annas share instead of six annas and the same mistake occurred in the case of the two sons, namely, instead of live annas they were credited with 5-1/3 annas. We are not satisfied that the Tribunal committed an error in coming to the factual conclusion that in spite of this minor deviation in the crediting of the share of the profits the genuineness of the firm was doubtful (sic). On this view, the decision of the Supreme Court in Khanjan Lal Sewak Ram v. CIT  83 ITR 175 becomes clearly distinguishable. In that case, a portion of the profits were not divided amongst the partners at all. The division of shares took place before the application for registration was made and the declaration given that the shares had been divided in accordance with the partnership deed was found to be false. In this view, it was held that para 3 of Rule 6 was clearly violated and hence the ITO was justified in refusing registration.
The distinguishing features are that in the present case the distribution of profits had not taken place at all when the application for registration was made and the explanation for the irregularity, if any, was, on facts, found believable by the Tribunal. (pp. 888-89) In the present case also the distribution of profits had not taken place when the application for registration was made. What all happened was that the assessee, subsequently, when the accounts were closed, transferred to a dissolution account a portion of the profits and distributed only the balance. While filing the return of income the assessee started with the profit as per the profit and loss account, that is, prior to the transfer to the dissolution account, which was made only to the profit and loss appropriation account and in the statement accompanying the return the profit-sharing allocation of the entire profit, of the year was shown strictly in conformity with the shares as specified in the instrument of partnership. We consider that the present case clearly falls within the ratio of the Allahabad High Court decision referred to above and, therefore, the denial of registration would be erroneous.
7. We also look at the case from another angle. Section 271(4) of the Act reads as under : If the Income-tax Officer or the Appellate Assistant Commissioner or the Commissioner (Appeals) in the course of any proceedings under this Act, is satisfied that the profits of a registered firm have been distributed otherwise than in accordance with the shares of the partners as shown in the instrument of partnership on the basis of which the firm has been registered under this Act and that any partner has thereby returned his income below its real amount, he may direct that such partner shall, in addition to the tax, if any, payable by him, pay by way of penalty a sum not exceeding one and a half times the amount of tax which has been avoided, or would have been avoided if the income returned by such partner had been accepted as his correct income ; and no refund or other adjustment shall be claimable by any other partner by reason of such direction.
According to the learned departmental representative the provisions of Section 271(4) only show that where registration has already been granted to a firm and it is subsequently found that profits were not distributed according to the shares specified in the instrument of partnership then penalty could be imposed in the case of the partners, but it would not justify an inference that the Legislature contemplated the grant of registration, if other circumstances permitted, to a firm where distribution of profits may not have been strictly in accordance with the terms of the deed. The judicial pronouncements set out by us earlier show that an arithmetical distribution of profits may, on occasions, vary from the shares as stipulated in the instrument of partnership either because of omission, inadvertence or because of even deduction of certain amounts which are not strictly deductible in arriving at the total income for income-tax purposes. In all such cases registration is admissible and the provisions of Section 271(4) would take care of any loss of revenue by providing levy in the shape of penalty on the partners in whose cases there has been short allocation of sharing. We. therefore, come to the conclusion having regard to the statutory provisions and review of the decisions which have a bearing on the point, that on the facts of the present case registration cannot be refused. We, accordingly, direct to grant registration.