P L D 1956 Supreme Court (Pak (PLP)

Commissioner of Income‑tax, West Punjab and N.‑W. F. P. v. Messrs. Kirpa Ram Sethi & Sons P L D 1952 Lah. 67 and Haji Saeed Muhammad v. Commissioner of Income‑tax 15 I T R51 ref. Abdul Haq Advocate Supreme Court instructed by Iftikharuddin Ahmad Attorney for Appellant. Fazal Din. Senior Advocate Supreme Court (Doss Muhammad Khan Advocate, Supreme Court with him) instructed by Naziruddin Attorney for Respondent. Date of hearing : 26th May 1956. MUHAMMAD MUNIR, C. J.--‑‑ This is a certified appeal from the judgment of a special bench of the High Court of Lahore, delivered on a reference under section 66 of the Income‑tax Act. The facts giving rise to the appeal are these : For the assessment year 1949‑50, the assessee, ‑‑- Messrs Maula Dad‑Muhammad Saeed of Sheikhupura, filed a return, based on books of account, showing a profit of Rs. 3,500‑3‑0 on business carried on during the previous year. The firm also submitted an application for registration under section 26‑A of the Income‑tax Act. In the course of assessment proceedings, the Income‑tax Officer recovered from the assessee's possession another set of books in which the profits shown were far in excess of those shown in the profit and loss account and declared in the return. These books did not show that any profits had been divided amount, or credited to the personal accounts of, the partners constituting the firm, and with their aid, the Income‑tax Officer assessed the income of the firm at Rs. 49,

388. The application for registration was in order except that the statement in it that the amount of profits had been divided among the partners was not correct. The Income tax Officer refused to register the firm on the ground that the statement in the application regarding the division of profits being false the application could not be said to have been properly made. The Appellate Assistant Commissioner on appeal and the Appellate Tribunal on further appeal agreed with this view, The assessee required the Tribunal to state the case for the opinion of the High Court and that Court has taken the view that the application could not be rejected on the ground on which it was rejected by the Income‑tax authorities. The Income‑tax Commissioner therefore appealed to this Court on the strength of a certificate granted by the High Court. The sole question that we have to determine is, whether the High Court was right in the opinion that the application could not be said not to have been properly made merely because the statement therein that the amount of profits had been divided among the partners was false. Under the Income‑tax Act when the profits of a firm have been determined by the Income‑tax Officer under sub section (1), subsection (3) or subsection (4) of section 23 of the Act, the sum payable by the firm, in the case of a registered firm, shall not be determined but the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined. Thus the partners of a firm are entitled to a lower rate of tax provided their firm has been registered by the Income‑tax Officer. Under section 26‑A of the Act an 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 the Act and of any other‑enact ment for the time being in force relating to income‑tax or super‑tax. 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. According to the Rules framed under this section an application for registration, (1) shall be made by the partners in the firm as constitu ted on the date of the application ; (2) shall be signed by all such partners ; (3) shall be made before a certain date ; and (4) shall be made in the form prescribed and be accom panied by certain documents including the instrument of partnership under which the firm is constituted. The form prescribed for the application provides that the application shall certify "that the profits (or loss) as per profit‑and‑loss account of the previous year were divided or credited as shown in the schedule hereunder, and that the particulars set forth in the said schedule are correct." The schedule requires the applicants to state their shares in the balance of profits (or loss) and the amount credited to their accounts. Under rule 4, on receipt of the application the Income‑tax Officer shall, if he is satisfied that there exists a firm as set out in the instrument of partnership operative at the date of the application and that the application is properly made, pass an order registering the firm and grant a certificate in the form prescribed arid thereupon the firm shall be duly registered and the instrument of partnership shall be deemed to have been registered for the purposes of the Act. It is clear from the statutory provisions and the Rules mentioned above that the Income‑tax Officer is bound to register a firm if he is satisfied that the firm as set out in the instrument of partnership exists and that the application has n been properly made. It is not the appellant's case that the income‑lax Officer was not satisfied as to the existence of the firm and the shares of the partners therein, but what is contended is that if the application states that the profits of the previous year as per profit and loss account were divided or credited and that statement is false, together with the statement in the schedule regarding the share in the balance of profits and the amount credited to the partners' accounts, the application cannot be said to have been properly made. We cannot accept this reasoning because the words properly made in rule 4 must be given their ordinary meaning in the context in which they have been used and that context shows that these words refer back to the particulars which are prescribed by rules 2 and .3, namely, that the application has been made by the persons who are required to make it is that it has been signed by the persons who are required to sign it; and that it has been made in the prescribed form ands is accompanied by the prescribed documents. If these requirements are fulfilled, then the only question that the Income‑tax Officer has to decide is whether a firm as set out in the instrument of partnership exists or not. If he is satisfied that the firm exists; he is bound to register the firm. If he is not so satisfied, he must reject the application. The only legal consequences of the registration of a firm is that the tax payable has to be determined on the income of each individual partner and not on the whole income of the firm. If, therefore, the Income‑tax Officer is satisfied that the partnership as evidenced by the instrument of partnership exists and that on determining the true profits of the firm the share of each partner in the profits can be ascertained, he cannot refuse the application on the ground that the profits certified by the partners are not the true profits of the business carried on by the firm. The question what are the true profits of the firm is not at this stage before him and he has yet to decide it under the general provisions of the Income‑tax. Act. He may accept the assessee's return under subsection (1) of section 23 ; he may issue such notices as he considers necessary and assess the total income of the firm after hearing the evidence under subsection (3) ; or he may make the assessment to the best of his judgment under subsection (4). When the income of the firm has been so determined, he is not, in the case of a registered firm ; to determine the sum payable by the firm itself but only the total income of each partner of the firm and the amount of the tax payable by him on such income. If the appellant's contention be accepted, no application for the registration of a firm would be granted, unless the return were accepted under subsection (1) because where a return is ‑not accepted and the Income‑tax Officer determines the total income of the firm under subsection (3) or subsection (4) and that income is higher than that disclosed by the firm in the return, there will ex‑hypothesis be a false or incorrect statement in the application for registration that the profits as per profit and loss account were the true profits of the business and that the amount of profits had, been divided among or credited to the accounts of the partners. It could certainly not be the intention that in such cases a firm should be disentitled to the benefit of registration. Further, if the law were as contended for on behalf of the appellant an application for registration will have to be refused where the method of accounting employed by the firm is such that in the opinion of the income‑tax Officer the income, profits and gains cannot be deduced thereform, and the computation has to be made under section 13 of the Act upon such basis and in such manner as the Income‑tax Officer may determine, and the computation so made differs from the amount of profits disclosed by the firm in its profits and loss statement and which the firm has certified as having been divided among the partners. The falsity of the return and of the certificate in the application for registration that the firm has earned a certain amount of profits and that that amount has been divided among the partners is irrelevant to the issue, which the Income‑tax Officer has to decide under rule 4, whether or not a firm exists as stated in the instrument of partnership. If after investigation the Income‑tax Officer finds that the amount of profits as verified by the firm in the application for registration is false and he can arrive at this result only after he has determined the income of the firm under section 23, he can cancel the registration of the firm under subsection (4) of that section if there has been some such default by the firm as is mentioned in that subsection. He can also cancel the registration under rule 6 (b), if subse quently he finds that no genuine firm was in existence when he registered the firm. And, of course, there are heavy penalties under the Act, e.g in clause (d) of subsection (1) of section 28, if it be found that the firm concealed particulars of its income or deliberately furnished inaccurate particulars of its income within the meaning of clause (c) of that sub section. We have, therefore, arrived at the conclusion that in the present case it could not be said that the application for registration had not been properly made. The view that we have taken accords with the observations of the Lahore High Court in The Commissioner of Income‑tax, West Punjab and N: W. F. P. v. Messrs Kirpa Ram Sethi & Sons (P L D 1952 Lah. 67), and the judgment of the Allahabad High Court in Haji Saeed Muhammad v. Commissioner of Income‑tax (15 I T R 51). , The judgment under appeal is itself a fully reasoned document, and except in one respect to be mentioned presently, a correct statement of the legal position. A question of some importance seems to have been mooted before the High Court. namely, whether an application can be said to have been properly made if it does not allege that the profits as per profit and loss account have been divided among or credited to the partners. Under the second subsection of section 26A the time when an application for registration may be made can be prescribed by the Rules, and therefore it seems to us that the competent authority may prescribe that an application for registration shall be made after the profits of the business have been so divided or credited, just as a rule already framed provides that it must be made before the income of the firm is assessed. If, therefore, the effect of the rule which prescribes that the firm shall certify that the profits of the business have been divided be that an application can only be made after the firm's profits have been divided among the partners the rule will not be, as the High Court seems to think ultra vires, under subsection (5) (a) of section 23 in the case of a registered firm the total income of each partner has to be assessed, and since such income must include each partner's share in the profits of the firm, a true return of the incomes of the partners cannot be filed until profits from the business of the firm have been divided or credited. Therefore an application for registration before the division or crediting of the profits is premature and cannot help the Income‑tax Officer in assessing the individual income of the partners. Consequently, the rule prescribing that an application for the registration of a firm should only be made after the profits have been divided or credited and that it should state that the profits have been divided or" credited is not ultra vires and non‑compliance of that rule makes the application legally incompetent on the ground that it is not properly made. The appeal fails on the first point and is accordingly dismissed with costs. A. H. Appeal dismissed.