Commissioner of Income Tax vs Khanna Theatre

G.G. Sohani, Actg. C.J.

By this reference u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), the Income Tax Appellate Tribunal, Jabalpur Bench, Jabalpur, has referred the following question of law to this court for its opinion :

"Whether, on the facts and in the circumstances of the case, the assessee-firm is entitled to registration despite the assessee''s failure to distribute the loss suffered by the firm among the partners for the assessment years 1978-79 and 1979-80 ?"

The material facts giving rise to this reference, briefly, are as follows ; For the assessment years 1978-79 and 1979-80, the assessee-firm had filed returns declaring loss. For the assessment year 1978-79, the assessee had also filed an application for registration while, for the assessment year 1979-80, the assessee had filed an application for continuation of registration. While framing the assessment, the Income Tax Officer held that as the assessee had not distributed the loss among the partners, the assessee was not entitled to registration. The Income Tax Officer, therefore, rejected the application for registration and assessed the assessee as an unregistered firm. On appeal, the order passed by the Income Tax Officer was upheld. The assessee, thereupon, preferred second appeal before the Tribunal. The Tribunal held that the assessee-firm was entitled to registration. The Tribunal, therefore, allowed the appeal. Aggrieved by the order passed by the Tribunal, the Revenue sought reference and it is at the instance of the Revenue that the aforesaid question of law has been referred to this court for its opinion.

Having heard learned counsel for the Revenue, we have come to the conclusion that this reference must be answered in favour of the assessee and against the Revenue. It is well-settled that, in deciding an application for registration, the jurisdiction of the Income Tax Officer is confined to the ascertainment of the facts : (i) whether the application for registration is in conformity with the Act and the Rules, and (ii) whether the firm shown in the document presented for registration is a bogus one or has no legal existence. In the instant case, the Income Tax Officer had not found that the application for registration was not in conformity with the Act and the Rules or that the firm was not genuine. In the absence of these findings, the Income Tax Officer was not justified in refusing registration. It is true that in P.R. Chowdhary and S. Gangoli Vs. The State of U.P., it has been laid down by the Supreme Court that one of the essential conditions that should be fulfilled before a firm is entitled to registration is that the profits (or loss, if any) of the business relating to the previous year, should have been divided or credited, as the case may be, in accordance with the terms of the instrument, but the decision in P.R. Chowdhary and S. Gangoli Vs. The State of U.P., was based on the Indian Income Tax Rules, 1922. Under the 1922 Rules, the recital in the application for registration was as follows :

"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."

Under the Income Tax Rules, 1962, the relevant recital in the application for registration is as follows :

"We do hereby certify that the profits (or loss, if any) of the previous year were/will be-----divided ro crdited as period up to the date of dissolution were/will be shown in the Schedule and that the information given above and in the Schedule is correct."

In view of the aforesaid provision, the Tribunal was right in holding that failure to distribute the loss suffered by the assessee among the parties would not disentitle the assessee-firm to registration.

Our answer to the question referred to this court by the Tribunal is, therefore, against the Revenue and in favour of the assessee. In the circumstances of the case, parties shall bear their own costs of this reference.