Law:

Section:

Section 185 of the Income-tax Act 1961 - Firm - Position prior to 1-4-1993 - Assessment year 1975-76 - Under clause 4 of partnership deed of assessee firm, net profits would have to be distributed among partners in certain proportions - However, under clause 5 if net profit of firm exceeded Rs. 20,000, excess profit would have to be distributed among partners in equal shares - For relevant assessment year, profit were allocated among partners in accordance with clause 4 even though relevant clause was clause 5 - Subsequently, on discovery, mistake was rectified by assessee by reversing entries - Tribunal held that mistake committed by assessee in allocation of profit was an honest and innocent mistake which did not militate against grant of registration and, therefore, assessee-firm was entitled to registration - Whether order of Tribunal was justified - Held, yes FACTS The assessee was a firm. Clause 4 of the partnership deed provided that the net profits and losses of the partnership would be shared in certain proportions, viz., 40 per cent, 30 per cent, 15 per cent and 15 per cent. Clause 5 of the partnership deed, however, provided that in case the net profit of the firm exceeded Rs. 20,000, the excess profit would be distributed among the partners in equal shares. For the relevant assessment year the profits were allocated among the partners in accordance with clause 4, even though the relevant clause was clause 5. The ITO also did not notice clause 5 and, having been satisfied that the firm was genuine, granted registration. Subsequently, in revision proceeding before the Commissioner, the assessee explained that the distribution made according to clause 4 of the partnership deed was not correct and the necessary rectification was made by reversing the entries. The explanation was not accepted and the registration was cancelled. The Tribunal held that the mistake committed by the assessee in the allocation of profits was an honest and innocent mistake which did not militate against the grant of registration and which was rectifiable on discovery and in fact was rectified on discovery by reversing the entries. The Tribunal, therefore, granted registration…

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