RASTOGI, J. - (1.) THIS is a reference under Section 256(1) of the I.T. Act, 1961. It relates to the assessment year 1971 -72. The assessee is a partnership firm which was formed on September 1, 1969, for running a re -rolling mill and for manufacture, purchase and sale of certain kinds of iron and steel. A partnership instrument was drawn up on September 15, 1970. The partners are Smt. Sabaz Mala Jain and Sarvasri Sushil Chand Jain, Satish Chand Jain, Ramesh Chand Jain and Anil Agarwal. The accounts were to be closed on the 31st of March each year and for the year under consideration the accounts were closed on March 31, 1971. The assessee filed an application for registration along with a certified copy of the partnership deed on March 16, 1971. The ITO refused to register the firm on the grounds that the assessee had not applied for registration in the proper and the prescribed form, that the original partnership deed had not been filed within the prescribed time, that there was no mutual agency and privity amongst the partners, that the firm had not distributed the loss as required in the partnership deed and, lastly, that the relationship between Rarnesh Chand Jain and Sri Agarwal was that of servant and master.
(2.) THE assessee appealed. The AAC did not agree with the reasons given by the ITO except one and that was that the loss of the year under consideration had not been divided amongst the partners in accordance with the terms of the partnership deed. The AAC found that for the first year the accounts were closed on March 31, 1970, and there was a loss of Rs. 14,653. For the assessment year 1971 -72, again, there was a loss and it was Rs. 1,39,096. Thus, the total loss of these two years amounting to Rs. 1,54,749 was shown in the balance -sheet filed by theassessee along with the return of income. Subsequently, a revised balance -sheet was filed showing the allocation of the loss and that too on the assetsside in the following manner : ' Profit and Loss Account ' As perlast balance -sheet Add:Loss during the year Rs. Rs. - - - - Suit. Subaz MalaJaia 3,713.33 34,973.98 = 38,687.31 SriSushil Chand Jain 3,713.33 34,973.97 = 38,687.30 SriSatish Chand Jain 3,713.33 34,973.97 = 38,687.30 SriRamesh Chand Jain 3,713.32 34,973.98 = 38,687.30 1,54,749.21 ' In the opinion of the AAC, the above treatment of the loss could not be regarded as distribution of loss amongst the partners. That should have been done by debiting the proportionate loss to the partners' accounts in the books. On this view of the matter, he confirmed the order of the ITO refusing to register the firm. Heing aggrieved, the assessce filed a further appeal before the Appellate Tribunal. The Appellate Tribunal referred to the certificate contained in the application for registration in Form No. 11 which was to the effect that the loss of the previous year 'will be divided' and in its opinion the allocation of loss before the completion of assessment was suffcient for the purpose. As for the mode of allocation of loss, in its opinion, no particular mode is prescribed in the Act and that such an allocation had been effected in the revised balance -sheet and the fact that loss had not been debited to the partners' individual accounts did not make any difference. On this view, the Appellate Tribunal accepted the assessee's claim and granted registration to it.
(3.) NOW , at the instance of the Commissioner, the following two questions have been referred to this court for its opinion : '(1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the loss of the assessee -firm for the assessment year 1971 -72 was divided amongst the partners in accordance with the partnership deed? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in directing the grant of registration to the assessee -firm for the assessment year 1971 -72?' ;