COMMISSIONER OF INCOME TAX Vs. ALISON SINGH

JUDGEMENT

(1.) At the instance of the Commissioner of Income-tax, Agra, the Income-tax Appellate Tribunal, "B" Bench, New Delhi (hereinafter referred to as "the Tribunal"), has referred the following question, for opinion to this court, under section 256 of the Income-tax Act, 1961 (hereinafter referred to as "the Act"): Whether, on the facts and in the circumstances of the case, the Tribunal was right in reading the partnership deed of May 24, 1974, and the memorandum of February 6, 1980, together and, on what basis, in maintaining the order of the Commissioner (Appeals) directing registration to the firm for the assessment year 1980-81? The facts giving rise to this reference are that M/s. Alison Singh and Co., 174, Baluganj, Agra (the respondent) was a partnership firm, engaged in the business of manufacture of shoe lasts, nails and other articles used in the footwear. The respondent firm came into existence through the partnership deed dated May 24, 1974, duly executed and signed by its all the four partners, namely, Mrs. Zohra Jabeen, Mahendra Pratap Singh, H.N. Sinha and Smt. Nirmala Singh. The firm was registered under the Act for the purposes of payment of income-tax and was being regularly assessed. All the aforesaid four partners executed another deed dated February 6, 1980, by which clause 5 of the original partnership deed, which was regarding the distribution of profits/loss of the firm was rectified, reiterating their intention for sharing the profit/loss of the firm to be in the ratio of their capital investments, i.e., (1) Mrs. Zohra Jabeen -- forty per cent. (2) Mahendra Pratap Singh -- twenty per cent. (3) H.N. Sinha -- twenty per cent. and (4) Smt. Nirmala Singh -- twenty per cent. They filed Form Mo. 11A along with the original partnership deed dated May 24, 1974, and the subsequent deed dated February 6, 1980, for registration under section 185 of the Act for the assessment year 1980-81. The Inspecting Assistant Commissioner of Income-tax (Asstt.), Agra (IAC), issued a show-cause notice to the firm as to why its registration may not be refused as the profit/loss was not shared between the partners, according to the ratio stipulated in the deed dated May 24, 1974. The partners submitted their reply on February 10, 1983, stating that in the partnership deed, due to typing error sharing of profit/loss was not incorporated according to the will/agreement of the partners. Throughout, their intention was to share the profit/loss of the business of the firm in the ratio of their capital investments and they actually used to share profit/loss accordingly. In order to rectify the mistake, deed dated February 6, 1980, was duly executed and signed by all the partners and profit was shown in proportion of their capital investments.

(2.) The Inspecting Assistant Commissioner by order dated October 22, 1983, held that there was no ambiguity in the partnership deed dated May 24, 1974, regarding sharing of profit/loss of the partners. In the accounting year, profit should have been shared according to the term of the deed dated May 24, 1974, i.e., in the ratio of 25 per cent. each. The memorandum dated February 6, 1980, revising the ratio of share could not have retrospective effect. Since the shares of the partners were not according to the terms of the deed dated May 24, 1974, as such registration of the firm was liable to be refused. On these findings registration was refused by order dated October 22, 1983. The respondent filed appeals (registered as the Commissioner of Income-tax (Appeals) 137, 138/IAC(A)/Agra/1983-84) from the aforesaid order. The appeal was heard by the Commissioner of Income-tax (Appeals), Jaipur House, Agra, who by order dated December 31, 1984, held that on examining the conduct of the partners right from June, 1976, and application Form No. 11 for the assessment year 1977-78, affidavit of H.N. Sinha, filed along with it, income-tax clearance certificate issued in June, 1978, it was proved that all the partners were throughout sharing the profits/loss as (1) Mrs. Zohra Jabeen -- 40 per cent. (2) Mahendra Pratap Singh -- 20 per cent. (3) H.N. Sinha -- 20 per cent. and (4) Smt. Nirmala Singh -- 20 per cent. The memorandum dated February 6, 1980, is in the nature of a revised deed, changing the ratio of the shares of the partners and is admissible under section 187(2)(b) of the Act, for that purpose the partners had filed Form No. 11A. Accordingly, it was held that share of the partners were shown in the ratio as given in the revised deed, which was throughout followed by the partners from the date of creation of the firm and the registration was wrongly refused. The Revenue filed an appeal (registered as ITA No. 1358/D/1985) from the aforesaid order. The appeal was heard by the Tribunal, who by order dated November 27, 1986, dismissed the appeal. Later on at the instance of the Commissioner of Income-tax, Agra, this reference was made.

(3.) Heard Sri Shambhu Chopra, senior standing counsel for the Revenue. Sri Chopra submitted that the partnership firm was created through a deed dated May 24, 1974, giving all the terms and conditions between the partners. There was no ambiguity in respect of share in profits/loss of the partners in it. The deed could not be rectified by a memorandum dated February 6, 1980. Since share of profits/loss of the partners in the assessment year 1980-81 has not been shown according to the terms stipulated in the deed dated May 24, 1974, as such registration was rightly refused by the Inspecting Assistant Commissioner. In any case, the memorandum dated February 6, 1980, could not have any effect for the assessment year 1980-81. The order of the Commissioner of Income-tax (Appeals) allowing the appeal of the respondent and the order of the Tribunal dismissing the appeal of the Revenue are illegal.