P L D 1952 Lahore 67 (PLP)

M. R. KAYANI J.‑Messrs. Kirpa Ram Sethi & Sons of Mohan Lal Road, Lahore, a firm constituted by two partners, Sita Ram and Shiv Ram, each having a half share, applied to the Income‑tax Officer under section 26‑A of the Income‑tax Act for the registration of the firm in respect of the year of assessment 1944‑

45. The assessee had not closed the accounts for the year of assessment and had calculated profit by apply ing a flat rate of 15 per cent, to the turnover. This rate had not been accepted by the department for‑ the purposes of assessment and a rate of 30 per cent: had been applied. The Income‑tax Officer, while deciding the application for regis tration, took notice of this fact, and holding that ‑the rate of 15 percent. had not been fixed in good faith, rejected the application, observing that "the essential condition to be fulfilled before the registration is to be granted is that the profits or losses, if any, of the year should be divided or credited in the personal accounts of the partners," and since the profits shown by the assessee were arbitrary and not actual, the statement in the application was apparently untrue. The Income‑tax Officer was apparently referring to the form of application for registration prescribed by rule 3 of the rules framed under section 59 read with section 26‑A of the Act. Paragraph 3 of the form is in the following terms : We do hereby certify that the profits (or loss if any) of the previous year were divided or credited as shown in Section (B) of the Schedule and that the information given above and in the attached Schedule is correct." In the sixth column of the Schedule is to be shown the share of each partner in the balance of profits or loss. On appeal by the assessee the Appellate Assistant Com missioner was of the opinion that since the department itself had been applying a flat rate to the turnover of the assessee since 1935‑36, starting with 8 percent. and rising to 30 percent. in the year of assessment under‑consideration, a flat rate of 15 percent. applied by the assessee itself was a fair average and did not disclose any bad faith. The appeal having been accepted, the department took a second appeal to the Appellate Tribunal, which upheld ‑the order of the Assistant Commissioner. On application by the department the Tribunal has referred to the High Court under section 66 (1) of the Act the following question for opinion: "Whether, for the purposes of registration under section 26‑A of the Act, the distribution of profits determined in good faith by the assessee by applying a flat rate to the turnover satisfies the requirements of law as envisaged in paragraph 3 of the prescribed application appended to rule 3 of the Income‑tax Rules? " I think it can reasonably be said that the information which is required to be given in the form of application for registration, is intended to enable the Income‑tax Officer to carry out the purpose of section 26‑A, which may be con veniently reproduced below : "26‑A. Procedure in registration of firms‑(1) Application may be made to the Income‑tax Officer on behalf of any firm, constituted under an instrument of partnership specifying the individual shares of the partners, for regis tration for the purposes of this Act and of . any other enactment for. the time being in force relating to income‑tax or super‑tax. (2) The application shall be made by such person or persons, and at such times and shall contain such particulars and shall be in such form and be verified in such manner as may be prescribed ; and it shall be dealt with by the Income tax Officer in such manner as may be prescribed." What is necessary, therefore, is that the application should be by a firm, that the firm should be constituted under, an instrument of partnership and that the instrument afore said should specify the individual shares of the partners Needless to say, the object of registration is, not that the sum payable by the firm itself shall be determined, but that each partner should be assessed separately, with the result that a lower rate of taxation will be applied to him. The information which the assessee gives in the form of application for registration is thus not intended to help assessment but to assist the Income‑tax Officer at finding out whether a genuine and valid partnership is in existence, and, if so, what is the share of each partner. For the purpose of assessment the assessee is required to furnish a return of income under section 22 of the Act, and it is on this return that the Income‑tax Officer takes a decision whether he should accept the profits indicated by the assessee or apply a flat rate. In the present case we have already noticed that the assessee himself had applied a flat rate of 15 per cent, because he had not closed the account. yet, while the Income‑tax Officer, apparently acting under section 13 and finding that either the assessee had no regular method of accounting or that he had employed a method by which the income, profits and gains of the business could not be properly deduced, had raised the flat rate to 30 percent. The return of income made under section 22 was thus quite distinct from the statement submitted by the assessee in his application under section 26‑A. Next, subsection (2) of section 26‑A requires the applica tion, among other things, to be in a prescribed form and to) contain prescribed particulars. In respect of these prescribed particulars, the Central Board of Revenue was enabled to make rules under section 59, and subsection (2) (e) was expressly intended for rules which may "provide for any matter which by this Act is to be prescribed". These rules are not to prejudice the generality of the power contained in subsection (1) to make rules "for carrying out the purposes of this Act."' Now, so far as the subject under discussion goes, all that sub, S. (2) of section 26‑A requires is that the application shall contain such particulars as may be prescribed and that it shall be dealt with by the Income‑tax Officer in such manner as may be prescribed. Going back to rule 3 and to paragraph 3 of the application form, we find it prescribed that the assessee should certify that the profits of the previous year were divided or credited as shown in section (B) of the Schedule and that the information given in the Schedule was correct. What the consequences of an incorrect statement would be is not stated here, but we can rely on other branches of .law (Ss. 191 and 193 P. P. C., for instance) for providing a punishment. What is stated in the rules (and here I refer to R 4) is that if, on receipt of the application, the Income‑tax Officer is satisfied that there is or was a firm in existence constituted as shown in the instru ment of partnership and that the application has been properly made he shall enter a certificate, that the instrument of partner ship has been registered with him for the year of assessment. but if he is not so satisfied, he shall pass an order refusing to recognize the instrument and thus refuse registration. What he has to see, therefore, is : (1) that there is a firm in existence constituted as is shown in the instrument of partnership, and (2) that the application has been properly made I do not think it can be argued that an application is not properly made because it contains a false particular. In the Schedule there is a column which should contain the address of the partners and, as my brother Shabir Ahmad, Judge, pointed out, if by some honest mistake the number of the house in which the partner is residing is given 22 instead of 23, then on this reason ing the application has not been properly made and ought to be rejected. An application, I think, would be properly made if it is in order, that is to say, a proper form is used and all information which is required is given: In fact, the words used in rule 6‑A, in respect of an application for the renewal of registration show that the Income‑tax Officer will register the firm if he finds that a firm is in existence and that the applica tion is "in order". It could not be reasonably argued that although it was enough for, an application for renewal of registration to be merely in order, an application for registra tion itself required something more to be done. This interpretation accords with the requirements of sub section (2) of section 26‑A, which requires that the application shall contain such particulars as may be prescribed and shall be ‑dealt with by the Income‑tax Officer in such manner as may be prescribed. Rule 4 shows how the application is to be dealt with by the Income‑tax Officer, and if it was intended to prescribe something which went beyond the purposes of the Act, it would not be a rule but a legislative measure itself. The purpose of the Act is that the application should contain such particulars as the Income‑tax Officer needs for the purpose of ascertaining that a genuine firm is in existence and the assessee's share in the partnership not that he should decide whether the rate of profit stated in the application is true, or has, in fact, been applied. If the profits mentioned in paragraph 3 of the application were, necessarily profits as actually found, it would mean that the assessee should wait until he had closed his year of account, ascertain the actual profits and then make an application, for registration. By that time, since assessment will already have been made of his income, he would lose the advantages of registration. This would compel him to close his year of account invariably on the 31st of March each year. In other words, an appreciable number of firms which do not close their year of account on the 31st of March will have been intended to be excluded from the benefit of registration. The assessee was not represented before us, and learned counsel for the department argued the case ex‑parte. He relied on three rulings which have no bearing on the point involved in the present reference. In 1949 I. T. R. 51, registra tion was refused because the partnership was not valid, although it existed. In 1937 I. T: R. 44 and 1950 I. T. R. 106, one of the partners had died but the application for renewal of. registration stated that the constitution of the firm was the same, and as this was clearly a false statement, registration was refused. It will have been noticed that rule 4 requires the satisfaction of the Income‑tax Officer as to the existence of a firm "constituted as shown in the instrument of partner ship", so that if there is a false statement in respect of the con stitution of the firm; ‑it should be fatal to the application. The learned counsel also argued that the assessee should have determined its profits by employing the method of accounting regularly employed by him in his business, as required by section 13, and should not have applied a flat rate of profit. It is overlooked, however, that section 13 provides for the contingency where no method of accounting has been regularly employed, in which case the Income‑tax Officer computes the income in his discretion If the argument of the learned counsel is to be accepted, registration should be refused to any firm which does not regularly employ a method of accounting and that would not seem to be the intention of rule 4 ante. We, therefore answer the reference in the affirmative. K. M. A. Reference answered.