M.C.DESAI, C.J. - (1.) THIS statement of case has been submitted to this court at the assessees instance by the Income-tax Appellate Tribunal, Allahabad Bench, under section 66(1) of the Indian Income-tax Act inviting it to answer the following question, said to be a question of law arising out of it : "quot"Whether the assessee firm which had distributed its book profits amongst the partners according to the instruments of partnership but which had not distributed the profits earned by it in the black market amongst the six partners in accordance with the instrument of partnership was entitled for renewal of registration for the assessment year 1948-49 ?"quot"
(2.) THE assessee is a firm consisting of two groups of partners, one consisting of Khanjan Lal having four annas share and his three sons having two annas share each and the other, consisting of Sewak Ram having four annas share and his mother having two annas share. THE firm was registered under section 26A for the assessment years 1942-43 to 1947-48. For the assessment year 1948-49 the partners applied for renewal of registration which was refused. A firm if it is registered under the Act has certain advantages in the matter of assessment to income-tax and section 26A lays down the procedure to be followed by a firm in order to get registered. It is as follows : "quot"(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 registration... (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."quot" Rules 2 to 6B of the Income-tax Rules deal with registration of firms. Rule 2 lays down that firm is entitled to registration if it is constituted under an instrument of partnership specifying the individual shares and makes an application signed by all the partners personally hand before the end of the previous year in the case of the first application for registration or before the 30th day of June of the assessment year if it is for renewal of registration. Rule 3 prescribes the form in which an application should be made. It has three clauses, clause 2 being a statement to the effect that the instrument of partnership specifying the individual shares of the partners is enclosed and that "quot"the prescribed particulars are given in the Schedule attached to the instrument"quot" and clause 3 being a certificate to the effect that "quot"the profits of the previous year were/will be divided or credited as shown in section B of the Schedule and that the information given in the application and the Schedule is correct."quot" THE Schedule is in two section, section A relating to the firm as constituted at the date of the application and section B relating to the apportionment of the income in the previous year (applicable where the application is made after the end of the relevant previous year) and having several columns including column 1 of names of partners and column 6 of shares in the balance of profits "quot"(annas "amp" pies in the rupee)"quot". Rule 4 lays down that if the Income-tax Officer is satisfied on receipt of the application referred to in rule 3 that "quot"there is or was a firm in existence constituted as shown in the instrument of partnership and that the application has been properly made"quot" he "shall"quot" endorse a certificate on the instrument or its certified copy to the effect that it has been registered with him under section 26A and that the certificate will have effect for the assessment for the year ending on such and such date. THE rule further requires that "quot"if the Income-tax Officer is not of satisfied, he shall pass an order.... refusing to recognize the instrument of partnership."quot" Rule 5 is to the effect that a certificate of registration granted under rule 4 "quot"shall have effect only for the assessment to be made for the year mentioned therein."quot" Rule 6 refers to renewal of registration and provides that a firm may apply to the Income-tax Officer to have the certificate renewed for the subsequent year, that the application "quot"shall be signed personally by all the partners...and accompained by a certificate in the form set out below"quot" and shall be made before the 30th day of June of the assessment year. THEre is a form of application given in the rule which has three clauses, clause 2 being the statement that the instrument of partnership was registered on such and such date and the certificate that the constitution of the firm and the individual shares of the partners as specified in it remain unaltered and clause 3 being a certificate that "quot"the profits of the previous year were divided or credited as shown below"quot", followed by a statement showing particulars of the apportionment of the income, profits or gains. THE statement has several columns including column 1 and column 6 as in the Schedule of the prescribed form for an application under section 4. On receipt of an application under rule 6 "quot"the Income-tax Officer may, if he is satisfied that the application is in order and that there is or was a firm in existence constituted as shown in the instrument of partnership, grant to the assessee a certificate"quot" in a certain from and "quot"if the Income-tax Officer is not so satisfied, he shall pass an order in writing refusing to renew the registration"quot", this is rule 6A. Rule 6B empowers an Income-tax Officer on being satisfied that a certificate granted under rule 4 or rule 6A had been obtained "quot"without there being a genuine firm in existence"quot", to cancel it. The application made by the assessee was in time and in order to this extent that in column 6 of it the share held by each partner was given and not the amount of the income pertaining to his share and that there was a certificate about the profit of the previous year having been divided or credited "quot"as shown below"quot". Neither the income of the previous year was shown in the statement nor the amount apportioned to each partner. The partnership was dissolved on November 5, 1949, and the deed of dissolution provided that if an amount not entered in the books at the time of the settlement of accounts was found only the partner through whom it was received or paid would be accountable for it. On October 5, 1950, the partners of the first group disclosed to the Income-tax Officer that the firm had received Rs. 15,000 by way of profits which were not shown in the accounts of the firm and that they had been distributed among the partners. Sewak Ram, partner of the other group, made a statement to the effect that he and his mother were not given full shares in the profits of a certain business carried on by the firm, that the entire profits earned by it in the previous years were not recorded in the account books and that they themselves had received their shares only in those profits which were entered in them. On March 15, 1952, Sewak Ram and his mother made an application to the Income-tax Officer saying that they had withdrawn their signatures from the application for renewal because the profits were not distributed according to the deed of partnership. The Income-tax Officer made enquiries about the business activities of the firm and discovered that it had reaped extra profits in its business which were not recorded in its books during the accounting year. He observed that "quot"it is... nothing surprising if the profits had not been properly distributed as stated on oath by Sri Sewak Ram, partner"quot" and that "quot"one of the partners seeks to withdraw the application for registration filed on July 12, 1949"quot", and rejected the renewal application on these grounds. The assessee filed an appeal which was dismissed by the Appellate Assistant Commissioner and a further appeal which was dismissed by the Tribunal on the ground that the entire profits had not been distributed among the partners. Then at the assessees instance the Tribunal stated the case. The question formulated by the Tribunal is not proper; it suggests that a firm which has distributed all its profits including undisclosed profits is entitled to registration regardless of other facts, which is not correct. In order to be entitled to registration it must make an application in the prescribed form and within the prescribed time; until it does so it cannot be said to be entitled to registration. In this case registration was refused on the ground that the Income-tax Officer had discretion to refuse it even if the application was in time and in order and not on the ground that the application for registration was withdrawn by partners of the second group withdrawing their signatures on the application for renewal and the Income-tax Officer had taken it into consideration for refusing a renewal of registration, but the Tribunal maintained its order only on the ground that the undisclosed profits had not been distributed among the partners and not on the ground that the application for registration had been withdrawn by some of them. While rule 4 regarding application for registration uses the word "quot"shall" rule 6 regarding renewal 6 of registration uses the word "quot"may" making it clear that an Income-tax Officer is not compelled to renew the registration merely because he is satisfied that the application was in order and that there was firm in existence constituted as shown in the instrument of partnership. Further the provision in rule 6A that if he is not so satisfied he "quot"shall" refuse to renew the registration also indicates that while he must refuse renewal if the satisfaction does not exist he is not bound to renew if the satisfaction exists. Even if an application for renewal is in order and there is or was a firm in existence constituted as sown in the deed of partnership there may be circumstances justifying refusal of renewal. For instance, if the application is withdrawn by some of the partners or it is proved that signatures of some of the partners were obtained under duress or by fraud it would be wrong to renew registration and the Income-tax Officer should not be bound to renew registration. The Government could not have contemplated that even in such a case he must renew registration. Further one satisfaction required under the rule is only about the application being "quot"in order"quot" and there is authority for the view that "quot"in order"quot" means "quot"correct in form"quot" and not "quot"true" and an application may be in order even though the particulars contained in it are untrue. One can make all statements that one is required to make in a prescribed form of an application without their being correct; so long as one has made all the required statements the application on the face of it must be said to be in order. The distinction that is made out is like the distinction between an order being within jurisdiction and an order being correct; an order within jurisdiction need not be correct. Similarly an application to be "quot"in order"quot" need not be correct. On this view that the satisfaction is about the form of the application, surely an applicant cannot claim that he is entitled to registration if the form of the application is correct but not its substance. The benefits arising out of registration have connection with the substance of the application and not with its form and the Government could not have intended that all that an applicant had do was to adopt the form and that he would be granted renewal regardless of the lies told by him in the application. That the statements made or the certificate given in the application is incorrect would be a ground for refusing renewal. There is thus sufficient justification for the Governments deliberately using he word "quot"may" in the rule and the rule must mean that if the satisfaction is not there the registration cannot be renewed at all and that if it there, it may be renewed provided there do not exist circumstances justifying refusal. In other words, non-existence of the satisfaction is a sufficient ground for refusal to renew while existence of the satisfaction permits, but does not confer a right to, renewal and "quot"in order"quot" means correct in form. The interpretation that "quot"in order"quot" means correct in form is consistent with the interpretation that the first paragraph of rule 6A confers discretion upon the Income-tax Officer. If the application is in order as so interpreted but is incorrect in substance the Income-tax Officer may exercise his discretion against renewal. As he has discretion and is not bound to renew the registration, "quot"in order"quot" need not be interpreted to mean "quot"correct in form and substance"quot". The registration will not be renewed merely because the form of the application is correct; the application will have to be correct in substance also so that there is no question of exercising the discretion against the applicant. This interpretation is confirmed by the fact that the satisfaction has to be also on the point that there is or was a firm in existence constituted as shown in the deed of partnership. The application itself has to contain the statement that the constitution of the firm as specified in the partnership instrument remains unaltered but the partners are not entitled to registration merely because they say so. In addition to saying so what they say must be true. The express requirement about its being true suggests that it must be made. Under rule 6B registration or renewal of registration can be canceled (only) on the ground that it had been obtained without there being a genuine firm in existence. If the words "quot"in order"quot" meant "quot"correct in form and substance"quot" the Government would have provided for cancellation of the registration or its renewal also on the ground that the application was substantially incorrect. There might be no justification for canceling it only on the ground that the application was not quite in order but if the statements made in the application were substantially untrue, it would be a good reason for cancellation of the registration or the renewal. The absence of a provision for cancellation on this ground shows that the application was only required to be correct in form. If an application is correct in form and the other satisfaction exists the Income-tax Officer has discretion and may renew the registration in exercise of it; if later he finds that the application was incorrect in substance it would be a case of wrong exercise of discretion and the Government might have well thought that he should not have the power of cancellation in such a case.
(3.) COLUMN 6 of the form of an application for registration as well as of an application for renewal is of "quot"Share in the balance of profits or loss (annas and pies in rupee)"quot" and if against the name of each partner entered in column 1 his share in a rupee of profit or loss is entered in column 6 entries in these two columns are in order. There is nothing to suggest that in column 6 not the fractional share but the amount of the share in the profits or loss of the particular year should be mentioned. What is meant by "quot"share" in the heading of the column is made clear by the words "quot"annas and pies in the rupee"quot"; only the share in a rupee of profits or loss is to be stated and not the actual amount of the share in the profits or loss is to be stated and not the actual amount of the share in the profits of loss of the year. Nothing is to be gained by the actual amount being mentioned instead of the fractional share in a rupee. Undoubtedly, there is a difference between stating the amount of the share in the actual amount of the profits or loss and stating the share in a rupee of profits or loss; if the amount is stated it means that nothing more has been distributed to the partner and that if the correct amount of the profits during the year is more no share in the excess of the profits has been paid to the partner. On the other hand, if only the fractional share in a rupee of profits or loss is entered in the column it means that whatever is the correct amount of profits the partner has received his share in it. But the statement in clause 3 of the application that each partner has received either by payment or through credit his share in the profits of the year amounts to the statement that each partner has received his share out of the amount of the correct profits of the year. It may be an untrue statement when a part of the correct profits is not distributed among the partners but the statement is there. Even if the partners were required to state the amount of each partners share in the actual profits there is nothing to prevent their stating wrong amounts in column 6. Section B of an application for registration requires "quot"particulars of the apportionment of the income, profits or gains"quot" but the columns are same for section B as for section A and if the actual amount of the share received by each partner is not required to be stated in section A it is also not required to be stated in section B. Stating the fractional share in a rupee of profits or loss is giving "quot"particulars of the apportionment of the income, profits or gain"quot" (or loss). An application for certificate is in two sections because the particulars of the partnership on the date of the application may be different from the particulars of the partnership in the previous year. The amount paid to each partner as salary or commission has to be stated in column 5 of the form of an application for registration or renewal but it does not follow that the actual amount of the share must be stated in column 6. Salary cannot be described in terms of a fractional share. Commission also even when it is fixed at a certain percentage of the profits cannot be described in terms of a fractional share of the profits because though it may be earned at a certain percentage of, and be paid out of, the profits the commission agent cannot be said to have a share in the profits. Moreover, while the application contains the certificate about the distribution of the profits according to the shares shown in column 6 it does not contain a certificate that a salary at a certain rate per month or a commission at a certain percentage was paid and, therefore, the actual amount received by way of salary or commission is required to be stated in column 5. The amount received by each partner as his share in the profits cannot be stated in the application unless the correct amount of the profits was known. Profits of a partnership business as worked out by the partners may not be identical with the profits worked out by an Income-tax Officer for assessment purposes. Interest and commission paid to partners can be deducted when they calculate the profits for distribution among themselves, but an Income-tax Officer will not deduct them for assessment purposes. The forms of the applications of not show which profits, profits for purposes of distribution or profits for purposes of assessment, are to be distributed among the partners. Fractional shares of the partners in a rupee of profits can be stated in the applications even though the correct amount of the profits is not known but the actual amount received by each partner cannot be stated. The there may be bona fide doubts whether certain receipts are income or capital receipts and whether the partnership is entitled to deduct certain expenses or not; the correct amount of the profits for assessment purpose cannot be determined unless these doubts are resolved. Finally the accounts maintained by a partnership may be rejected by an Income-tax Officer under section 13 and he may estimate the amount of its profits upon such basis and in such manner as he may determine. The Government could not have expected the partners to certify that they had distributed or credited the correct profits of the partnership and to state correctly the amount received by each partner as his share in them. Section 28(2) permits an Income-tax Officer, on being satisfied that the profits of a registered firm were distributed otherwise than in accordance with the shares of the partners as shown in the partnership deed and that a partners had thereby returned his income below its real amounts, to impose a penalty upon him. So the department was not left without any remedy in case the amount received by a partner by way of his share in the profits was less than what it should have been and it cannot be said that refusal to register was necessary if the amount received by a partner as his share in the profits was not stated, and stated correctly, in the application for registration or renewal.;