M.A.A. Khan, J. - (1.) THIS joint reference under Section 256(1) of the Income-tax Act, 1961 (for short, "the Act of 1961"), has been made by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as "the Tribunal"), for the assessment years 1960-61 and 1961-62. The Tribunal has referred to this court for its opinion the following questions : Assessment, year 1960-61 : "(i) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the Income-tax Officer's order passed under Section 184(4) was in fact an order under Section 185(5) and was appealable ? (ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the application for registration filed on December 31, 1959, for the assessment year 1960-61 was filed within the time allowed ? (iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the partnership was valid ?" Assessment year 1961-62; "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the payment made to Shri Abdul Razaq was a charge on the profits of the firm ?"
(2.) THE facts relevant to the questions referred for the aforesaid two years and sufficient to dispose of this joint reference are these : During the accounting period relevant to the two assessment years, the assessee-firm was engaged in the business of exhibition of films in Ram Prakash THEatre, Jaipur. Originally, the firm was constituted of three partners, namely, Sarva Shri Noor Mohammed, Adbul Razaq and Hamid Hussain. THE accounting year of the firm was 31st December ending of each year. In March, 1953, Shri Mohd., one of the three partners, died. THE remaining two partners continued to carry on the same business under, the same business name, but they did not enter into any new partnership nor did they file a registration application with the Income-tax Department. This position continued up to the assessment year 1959-60 and for all these years the assessee-firm was assessed in the status of an unregistered firm. Shri Noor Mohammed, the deceased partner, is stated to have left a will whereby he had, inter alia, bequeathed that : "(i) After my death out of the share of the movable and immovable properties belonging to me 1/3rd will be owned by Abdul Razaq, who will have full ownership right. (ii) After Abdul Razaq inherits 1/3rd share in my movable and immovable properties, the rest of 2/3rds share will be managed by Abdul Razaq. He will have the right to manage the properties according to the income. In case the income from the properties dwindles down and the sale or mortgage is needed then Abdul Razaq will have the right to sell the properties. (iii) Out of the remaining income of the 2/3rds share of the property Rs. 50 per month will be paid to my wife, Musmat Gulab, Rs. 100 to my elder son, Wali Mohd., for the maintenance of himself and his family, which will be managed by Abdul Razaq. My younger son, Abdul Haq., will also be entitled to get Rs. 100 per month but since he i.s a vagabond he will get Rs. 30 per month and Rs. 70 will be paid to his wife and children." On January 1, 1959, Shri Abdul Razaq and Shri Hamid Hussain, the remaining two partners of the assessee-firm, executed a new partnership deed. The salient features of this partnership are as follows : "This deed of partnership is made on the first day of January, 1959, between Abdul Razaq, son of Hassan, aged 55 years, resident of Jaipur of the first part and Hamid Hussain, son of Chand, aged 56 years, resident of Jaipur, of the second part. Whereas Shri Abdul Razaq, Hamid Hussain and Noor Mohammed have for some time past been carrying on the business of film exhibition in partnership together at Jaipur under the name and style of Messrs. Hasan Chand and Sons, Jaipur, duly registered with the Registrar of Firms. And whereas on the death of the partner Noor Mohammed, Abdul Razaq was appointed as guardian of his share under a will to hold the same on behalf of and for the heirs of the said Noor Mohammed. And whereas now it has been decided and agreed upon between the two continuing living partners to continue the business in the same name and style on terms hereinafter contained. And whereas the property of the old partnership has been decided to be transferred as the assets of the partnership hereby constituted. And whereas the share capital of the deceased partner has been decided to be kept in the business, it has been decided to pay to the guardian of his property equal share in the profits of the new firm in accordance with Section 37 of the Indian Partnership Act, 1932, to which the guardian has agreed by appending his signatures to this deed." By Clauses 4 and 5 of the partnership deed, the division of profits and losses of the business was agreed to be made in the following manner ; "The capital coming to the share of Shri Abdul Razaq as the guardian and representative of Noor Mohd. (deceased partner) shall continue to be in this firm and the guardian shall be entitled to 1/3rd share in profits in this account and shall not bear any losses. The profits and losses of the new partnership shall be divided and borne as under : (a) Out of total profits 1/3rd shall be paid to the guardian of Shri Noor Mohd. (deceased). (b) The remainder thereafter shall be divided between Shri Abdul Razaq and Hamid Hussain equally." On December 31, 1959, the assessee-firm applied for registration for the assessment year 1960-61 as per Section 26A of the Indian Income-tax Act, 1922 (for short, "the Act of 1922"), read with Rule 2 of the Rules made /thereunder. This application was duly accompanied by the instrument of partnership and copy thereof as well as the copy of the account showing the division of profit and loss of the firm between the partners. The return of income for this year was filed in September, 1962. The Income-tax Officer, however, refused to grant registration to the firm on the ground of limitation and non-genuine character of the firm. According to the Income-tax Officer, as per the provisions of Section 26A of the Act of 1922, the application for registration of the firm should have been made within a period of six months of the constitution of the firm whereas the same was made on the last day of the accounting period.
(3.) REGARDING the genuine character of the assessee-firm, the Income-tax Officer held that the firm was in fact constituted of three partners, the third partner being the legal heirs of Shri Noor Mohd. Since Shri Noor Mohd, was having a debit balance of Rs. 46,332 as on December 31, 1958, no profits were attributable to the use of his share in the properties of the firm so as to attract the provisions of Section 57 of the Indian Partnership Act, 1932, to the facts of the present case. The Income-tax Officer, therefore, held that neither the application was signed by all the partners nor were the profits and losses distributed amongst the partners according to the shares specified in the instrument of partnership. The Income-tax Officer described the order passed by him as an order under the proviso to Section 184(4) of the Income-tax Act, 1961, read with the proviso to Rule 2(c) of the Indian Income-tax Rules, 1922. It appears that the Income-tax Officer had made assessment for this year ex parte under Section 144 of the Act of 1961. On appeal, the said ex parte assessment was set aside by the learned Appellate Assistant Commissioner. The order purported to have been made by the Income-tax Officer under Section 184(4), as aforesaid, was also set aside by the learned Appellate Assistant Commissioner with a direction to redo the same after allowing an opportunity to the assessee-firm to rectify the mistake, if any in the application submitted under the old Act of 1922 and allowing him to submit such an application under the provisions of the new Act also. The Income-tax Officer, however, held that in his opinion, the question of giving an opportunity to the assessee-firm as per the direction of the learned Appellate Assistant Commissioner would arise only if the order was to be made under Section 185 of the Act of 1961, but since he was making an order under Section 184(4) no question of giving such opportunity arose and the Income-tax (Removal of Difficulties) Order, 1962, docs not cover the issue. In the order made by the Income-tax Officer in the second round, the same ground for refusal of registration, which had found favour with him in his earlier order, were reiterated. The assessee-firm again approached the first appellate authority who dismissed its appeal as being not maintainable, vide his order dated September 1, 1970, in Appeal No. 16 of 1970-71. The application for grant of registration/renewal of registration for the assessment year 1961-62 was also rejected by the Income-tax Officer for almost the same reasons. An appeal against the refusal of grant of registration/renewal of registration was also filed and the learned Appellate Assistant Commissioner agreed with the Income-tax Officer that the firm was in fact constituted of three partners as against two shown in the registration application and the application for renewal of registration. In the opinion of the learned Appellate Assistant Commissioner, the applications did neither depict the real constitution of the firm nor the same had been signed by all the three partners. He held the view that the guardian of the heirs of the deceased partner constituted the third partner in the firm and, therefore, the provisions of Section 37 of the Indian Partnership Act, 1932, did not apply to the case. ;