KHANJAN LAL SEWAK RAM vs. COMMISSIONER OF INCOME TAX, U.P.

CIVIL APPEAL No. 1947/1968Supreme Court[1972] 1 S.C.R. 50231 August 1971Bench: 2 JudgesAuthor: K.S. HEGDE, A.N. GROVER8 pages
AI SummaryDismissed

What were the facts?

The assessee, a registered firm, applied for renewal of registration for assessment year 1948-49. The application was accompanied by a certificate stating profits were divided or credited. During the pendency of the application, the partners fell out. It was disclosed that the firm had earned Rs. 15,000/- in profits outside the books, which were allegedly divided. Subsequently, one partner stated on oath that he and his mother were not given their full share of profits earned in Samvat year 2005, and that the entire profits were not recorded in the books. He sought to withdraw the application for renewal, claiming profits were not divided according to the partnership deed. The Income-tax Officer refused renewal, taxing the firm as an association of persons. The Appellate Assistant Commissioner upheld this. The Income-tax Appellate Tribunal, with a difference of opinion between its members, referred the matter to the President, who agreed with the Judicial Member that renewal should be refused.

What did the Supreme Court hold?

The Supreme Court held that for renewal of registration under Section 26A of the Income-tax Act, 1922, and Rule 6(3) of the Rules, it is a condition that the profits of the previous year must have been divided or credited to the partners' accounts as shown in the certificate. The certificate is not a mere formality because a registered firm is not taxed, but its partners are. If a portion of the profits earned by the firm was not actually divided amongst the partners or credited to their accounts, to that extent, the assessee firm had evaded tax. In such a situation, the Income-tax Officer's only recourse is to refuse registration and tax the partners as an association of persons. The Court found that in the present case, the application for renewal did not comply with the prescribed conditions under Rule 6A, justifying the Income-tax Officer's refusal. The Court also examined and distinguished the High Court decisions relied upon by the assessee, finding them inapplicable to the facts of the case where a portion of earned profits was not divided or credited. The appeal was dismissed.

What were the issues?

1. Whether the firm was entitled to renewal of registration for assessment year 1948-49, considering that a portion of its profits were not recorded in the books and allegedly not distributed according to the partnership deed, under Section 26A of the Indian Income-tax Act, 1922, and Rule 6(3) of the Income-tax Rules. Assessee's contentions: The assessee argued that so long as the profits that were actually divided or credited to the partners' accounts met the requirements of the provision, the condition was fulfilled. They relied on several High Court decisions, including Commissioner of Income-Tax, M.P. Nagpur and Bhandaru v. D'Costa Brothers, Commissioner of Income-tax, Simla v. Sat Ram Gian Chand, N. S. S. Chakkalingam Chettiar and Co. v. C.I.T. Madras, C.I.T., M.P. v. Mandanlal Chhaganlal, and St. Joseph's Provisions Store v. C.I.T. Kerala, to support their arguments that the division of profits is an internal matter and that the absence of specific entries or the treatment of profits in a reserve account does not necessarily invalidate the registration application. Revenue's contentions: The revenue contended that the firm had earned considerable black market profits which were not credited in the account books and had not been distributed among the partners in accordance with the instrument of partnership. This non-compliance with the prescribed conditions for renewal under Rule 6A justified the Income-tax Officer's refusal to grant renewal.

Which sections of the Income-tax Act were involved?

Section 26A,Section 5A(7)

AI-generated summary — verify with the full judgment below

502 KHA~iAN LAI. SEWAKRAM V. COM~issioNER O'F' INC0ME '.fAX'.; u.:P ..

August 3'L 1971 (K. s.· iitoa'E AND N.. :N. GRovER, 11.]' '

Income .Tax Ac! (IL of !92i)". ~- 26A iznd rl'. 6(3) and 6A of the Rules-Application for renewal of regi::;trarion-Book Profit/ distributed 'but black 1narket. profits not dislribu(ed-lf finn entitled to renevJal of re- gistration. · ...

The assessec was a registered firn1. The partners applied to the Income-tax Officer for renewal of regi~_tratiori.

To that application they C ap)?enL1ed a certificate· that the profits of the prcviotu1 year were divided' or ciedilcO as shbwn.· W.hile the application' \vas pending', the partners fell oUf and the Irlcome"-tax Officer founc. that the firm had ea"tned 'considerable_ -- Ql'ick n1a·rket profits which had nqt been credited in the account books and h'at1.• not been distributed among the partners· in accordati.ce with the instru- n\eht of partnership.

The Depaitmerit, Tri6unal and the Hig.h Court, on reference, held" that th-e firm Was not entitled to renewal.

Di$missing the appeal· to this Courf, HELD" : Under s. 26A of the Income-tax Act, 1922, one of the con- difions fof registrati

The order continues below.

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