1971 PLP 298 (PTD)

ISAAC, J.‑This is a reference made by the Income‑tax Appellate Tribunal, Madras Bench, under section 66(2) of the Indian Income‑tax Act, 1922, as directed by this Court on the application of the assessee. The question referred is: "Whether, on the facts and in the circumstances of the case, the assessee‑firm is entitled to renewal of registration under section 26‑A of the Indian Income‑tax Act, 1922?" This reference relates to the assessment year 1959‑60 ; and the previous year is the one which ended on 31‑12‑1133, M.E. The assessee is a partnership firm consisting of two partners, P. P. Kuriakose and P. P. Varghese, constituted under a deed dated March 7, 1953. It carries on business in provisions, rice and handloom goods. It was also conducting a wholesale ration shop for which the licence was in the name of Kuriakose, and a retail ration shop for which the licence was in the name of Varghese. During the accounting year 1133 M.E., the profits from its business excluding the ration shop amounted to Rs. 9,

548. This amount was credited equally in the names of the two partners in the books of accounts of the firm. There was a profit of Rs. 2,182 in the wholesale ration shop ; and this was credited in the name of Kuriakose. The profit in the retail ration shop was Rs. 803 ; and this was credited in the name of Varghese. In accordance with the terms of the deed of partner ship, the total profits from these ration shop should also have been equally divided and the share of each partner should have been credited in his name. On August 6, 1959, the assessee applied for renewal of its registration. Under rule 6 of the Indian Income‑tax Rules, 1922, this application should have been made before 30th June 1959 ; but the Income‑tax Officer may entertain a belated application, if he is satisfied that the assessee was prevented by sufficient cause from making the application within the prescribed period. The Income‑tax Officer did not accept the assessee's explanation, and rejected the application for renewal of the registration of the firm. The assessee filed an appeal ; and the Appellate Assistant Commissioner dismissed the appeal, not only on the ground of delay in making the application for renewal of registration, but also on the ground that the profits of the ration shops were not distributed among the partners according to the deed of partnership. The assessee filed a further appeal before the Appellate Tribunal. It held that there was sufficient cause to condone the delay in making the application for renewal of its registration, but the assessee was not entitled to the renewal as the profits of the ration shops had not been divided between the partners in accordance with the partnership deed. The assessee's learned counsel contended before us that the application for renewal of registration was made in the prescribed form ; that it has satisfied all the requirements of the Act and the Rules ; that the profits of the entire partnership have been brought into the accounts ; that the fact that two items of profits, though entered in the books, have not been divided and credited in the names of the partners in accordance with the deed of partnership, was only an omission or error in making the necessary postings in the books of accounts ; and that this did not constitute a valid ground for refusing renewal of registration. In support of his contention, the learned counsel first cited the decision of the Bombay High Court in Commissioner of Income tax v. Shantilal Vrajlal ((1957) 31 I T R 903). In that case, a firm which was constituted with two individuals and partners of two firms, C and S, applied for registration under the Act. The two individuals and the two firms C and S had equal shares in the firm. The share of each of the partners, of the firms, C and S, was also shown in the deed of partnership. The profits of the firm were divided equally among the two individuals and the firms, C and S, and were credited accordingly in the books of accounts of the firm. It was contended that the firm was not entitled to registration on the ground that the shares in the profits due to the firms C and, S, had not been divided and credited in the names of the partners of these two firms in accordance with the deed of partnership. In rejecting the above contention, Chagla, C. J. stated: "Now, technically Mr. Joshi is right that in the books of account no separate accounts have been opened of the constituent partners of these two firms. But in our opinion it is a pure technicality. On the facts contained in the second partnership deed it is clear that, although in the books of account the profits are allocated to the two firms, the profits belong to the constituent partners of those two firms, and it is also clear how those profits are to be divided between the constituent partners of Messrs Chandulal Dahyalal and Messrs Shantilal Vrajlal & Co. Therefore, if the books of account show what share of profits was allocated to the firm of Messrs Chandulal Dahyalal and to the firm of Messrs Shantilal Vrajlal & Co., it is merely a matter of arithmetical computation to find out what profits were credited to the constituent partners of the two firms." The same view was taken by the Bombay High Court in Chhotalal Devchand v. Commissioner of Income‑tax ((1958) 34 I T R 351). Reference was also made by the assessee's learned counsel to a decision of this Court in St. Joseph's Provisions Stores v. Commissioner of Income‑tax ((1962) 45 I T R 380). In that case, renewal of registration was refused by the Appellate Tribunal on the ground that the firm did not divide and credit its profits to the partners in accordance with the deed of partnership ; but the profits were kept as a reserve. The assessee contended that this was not a valid ground for refusing the renewal of the firm's registration. The contention was upheld by this Court ; and, in doing so, this Court quoted with approval the following passage from the judgment of Chagla, C. J. in Chhotalal Devchand's case: "Now in the application for registration the shares of the partners are set out ; but what is urged against the assessee is that in its books of account it has credited the profits to the firm name and not to the name of each constituent of the firm. Now if the shares of the partners are known and for the purpose of this argument we will assume that the shares are known‑then it is merely a matter of arithmetical computa tion."

6. The learned counsel for the revenue relied on the decision of the Andhra Pradesh High Court in Chintalapati Ranga Naikulu v. Commissioner of Income‑tax ((1963) 48 I T R 968) in support of the view taken by the Appellate Tribunal. The firm concerned in this case consisted of two partners ; and in the relevant previous year, it made a profit of Rs. 20,668‑10‑

11. Out of this, Rs. 20,000 was divided between the partners and credited to their accounts, while Rs. 312‑8‑0 was credited to charity account of two temples, and Rs. 356‑2‑11 was carried forward to next year's account. On the above facts, the High Court upheld the decision of the Appellate Tribunal that the firm was not entitled to registration on the ground that its profits were not wholly divided between the two partners as provided in the deed of partnership. The decisions of the High Courts of Bombay and Kerala referred to above were cited in the above case ; but the Andhra Pradesh High Court said that those decisions were distinguishable on the facts. It is true that the facts are different; but we do not think that it would make any difference on the application of the principle laid down by Chagla, C. J. Sir J. B. Kanga in his Law and Practice of Income‑tax, 5th Edition, Volume I, refers to the above decision of the Andhra Pradesh High Court in the foot‑notes at page 800, and submits that this decision is incorrect. In our opinion, the principle laid down by Chagla, C. J. in the two Bombay decisions would apply to this case. There is no dispute that the two ration shops formed part of the partnership business. The profits from these two shops as well as the profits of the remaining business of the firm had been equally divided and credited in the names of the two partners in all the prior years. In the accounting year with which we are concerned in this case, all the profits of the partnership business including the two ration shops were brought into the accounts of the firm. All that happened was that the profits from the two ration shops were not divided and the share of each partner therein was not posted in the folio in his name. This is not a defect dealt with or noticed by the Income‑tax Officer. It seems to have been discovered by the Appellate Assistant Commissioner. It is not necessary under law that the books of accounts should be produced along with the application for renewal of the registration of the firm, or that the postings in the books of accounts should be made before a specified date, or that, if there is any apparent omission or error in the postings made in the books, it cannot be rectified. At the most, this was only a case of error, which the assessee would have rectified, if it ever came to his notice. We do not think that this would in any manner render the assessee's application for renewal of registration invalid. Accordingly, we answer the question referred to this Court in the affirmative and in favour of the assessee. In the circum stances of the case, the parties will bear their own costs. A copy of this judgment will be forwarded to the Appellate Tribunal as required by section 66(5) of the Indian Income‑tax Act, 1922.