Law:

Section:

Section 185 of the Income-tax Act, 1961 - Firm - Position prior to 1-4-1993 - Assessment year 1970-71 - Assessee firm constituted in 1968, had six partners-During relevant accounting year assessee earned profits and divided as per terms of partnership deep - In subsequent year, assessee incurred losses and under a compromise deed two of partners retired from firm on 30-7-1970 - ITO relying upon compromise deed held that assessee-firm was not genuine as retiring partners had not been given any profit earned by firm since date of its formation - He, accordingly, rejected registration application filed by firm under section 184 - Tribunal affirmed ITO's order - On instant reference, it was seen that ITO had granted registration to assessee-firm in earlier year holding that assessee-firm was a genuine firm as it divided profits among partners as per terms of partnership deed - Whether, in aforesaid circumstances, ITO was wrong in refusing registration to firm on basis of compromise deed - Held, yes FACTS The assessee firm constituted in 1968 had six partners. For the assessment year 1970-71, the assessee earned profit and divided it in accordance with the terms of partnership. In the second year it incurred heavy losses and one of the partners filed a suit for dissolution. The suit was compromised by which said partner and his son retired from the partnership as on that date, i.e., 30-7-1970. The registration application filed under section 184 was rejected by the ITO on 8-2-1973 and assessed the assessee as an unregistered firm. The ITO was of the view that the retiring partners had not been given any profit earned by the firm since the date of it formation, and, thus, according to him, the profits for the assessment year 1970-71, had not been distributed among the partners as per the terms of the partnership deed. On appeal, the AAC set aside the order of the ITO. He held that the firm was entitled to claim registration. He was of the view that the ITO only took into consideration the fact of dispute among the partners as existed on the date of compromise i.e., 30-7-1970, rather than the fact as existed, on 30-6-1969, when the profits of the firm were duly…

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