JUDGMENT Rajes Kumar, J.
1. The Tribunal has referred the following question under Section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), for the opinion of this Court relating to the assessment year 1997-98 :
"Whether, on the facts and circumstances of the case, M/s. Narain Automobiles was entitled to registration under Section 185 of the Income-tax Act, 1961 for the assessment year 1997-98 ?"
2. The brief facts of the case are as follows :
3. The applicant/assessee (hereinafter referred to as "the assessee"), was assessed in the status of a registered firm for the last several years but the first change in the constitution of the firm took place in the assessment year 1971-72 when one of the partners, namely, Vinod Narain, retired and in his place his two minor daughters, namely, Kum. Vineeta Narain and Kum. Smita Narain, were admitted to the partnership with equal shares of 12% per cent. The newly constituted firm continued till the accounting year relevant to the year 1977-78. In the assessment year 1976-77, the shares of the major partners was reduced from 25 per cent, to 15 per cent, and one new partner, Rajeev Narain, was admitted and the shares of the aforesaid two minors was increased from 121/2 per cent, to 171/2 per cent. In the same year, another change was took place with effect from April 1, 1976, and the result was that the two minor daughters having 171/2. per cent, retired from the firm and in their place their mother, namely, Rita Narain was admitted. Five partners were allowed in the new partnership deed.
4. The accounts of firm were closed on April 30 and the allocation of the profit and loss on the basis of two deeds executed in this year was as under :
5. The aforesaid basis was only in respect of profits and losses in regard to four major partners and they had to bear losses equally at 25 per cent. each. On the basis of the partnership dated April 1, 1976, the profits of the firm were equally distributed amongst the five partners, as a result of it Smt. Reeta Narain got the profit for 12 months though she was admitted in the firm after the expiry of 11 months in that accounting year. The first three partners got the shares in the profit at 20 per cent, each, whereas their share in the firm for 11 months in the profit and loss was only equal to 15 per cent, as per the terms and conditions of the earlier partnership deed and thus the minors did not get any share though they remained partners in the firm for about 11 months.
6. The Inspecting Assistant Commissioner (Assessment) issued a show-cause notice requiring the assessee to explain as to why the shares had not been divided in accordance with terms and conditions incorporated in the partnership deed and on examining the entire material on record, the Inspecting Assistant Commissioner (Assessment) came to the conclusion that no genuine firm existed and as such he refused continuation of registration and treated the status of the firm as that of a body of individuals. The assessee filed an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) allowed the appeal and held that the application in Form No. 11A should have been considered on the merits. He was of the view that nothing was wanting regarding the genuineness of the firm and as such he directed the Assessing Officer (Assessment) to grant registration to the firm and to reframe the assessment accordingly.
7. The Revenue filed appeal before the Tribunal. The Tribunal allowed the appeal of the Revenue. The Tribunal held as follows :
"We have considered the submission of the parties and have gone through the decisions cited by the rival parties. The hon'ble Supreme Court in the latest case of Ratanchand Darbarilal held that the following conditions are to be satisfied in order that a firm may be entitled to Registration : (i) the firm should be constituted under an instrument of partnership specifying the individual shares of the partners; (ii) an application on behalf of and signed by all partners and containing all the particulars as set out in the rules must be made; (iii) the application should be made before the assessment of the firm for that particular year; (iv) the profit or loss, if any, of the business relating to the accounting year should have been divided or credited, as the case may be, in accordance with the terms of the instrument; and (v) the partnership must be genuine and must actually have existed in conformity with the terms and conditions of the instrument of partnership in the accounting year. Once such conditions are satisfied, it is the obligation of the Income-tax Officer under the Act to extend the benefit of registration and to allow the firm to enjoy the benefits provided by the Act. The hon'ble Supreme Court in the aforesaid case has followed its earlier decision in the case of R. C. Mitter and Sons [1959] 36 ITR 194. In this case their Lordships of the hon'ble Supreme Court had held that in case the terms and conditions mentioned in the deed of partnership had not been fulfilled, then in that case the Income-tax Officer can refuse registration of the firm on the ground that it was not a genuine firm. We have considered the decision of the hon'ble Supreme Court in the case of Ashokbhai Chimanbhai and we are of the opinion that this case is distinguishable on the facts because it deals with the assessment matter and furthermore it may be clarified that even after knowing that the terms and conditions of the partnership deed had not been complied with, even then necessary rectificatory entry had not been passed. So we hold that the decision in the case of Ashokbhai Chimanbhai is not applicable on the facts of the present case. The hon'ble Supreme Court in the latest decision of Ratanchand Darbarilal had specifically held that in case the profits and losses are not divided in accordance with the terms and conditions mentioned in the partnership deed, then in that case the firm is not genuine and the Income-tax Officer is justified to refuse registration to the partnership firm. After going through the order of the Commissioner of Income-tax (Appeals) we are of the opinion that the Commissioner of Income-tax (Appeals) overlooked the necessary ingredients which are required for grant of registration and he has also not considered the implication of the fact that the minor partners though they remained partners for 11 months, but still they did not get any share in the profits. This ingredient mentioned in the partnership deed had been clearly violated and in view of these facts, the Commissioner of Income-tax (Appeals) was not justified in directing the Inspecting Assistant Commissioner (Assessment) to grant continuation of registration. We, following the decisions of the hon'ble Supreme Court in the cases of Ratanchand Darbarilal and R. C. Mitter and Sons [1959] 36 ITR 194, hold that the necessary conditions for grant of registration had not been complied with by the assessee. Therefore, the Inspecting Assistant Commissioner (Assessment) was perfectly justified in refusing to grant continuation of registration to the assessee-firm for the simple reason that the profits of the firm were not distributed as per the terms and conditions of the partnership deed. Having considered the facts and circumstances of the case, we accordingly reverse the order of the Commissioner of Income-tax (Appeals) and restore that of the Inspecting Assistant Commissioner (Assessment)."
8. Heard Sri S. P. Gupta, the senior advocate assisted by Sri S. D. Singh, learned Counsel for the assessee, and Sri Shambu Chopra, learned standing counsel for the Revenue.
9. Learned Counsel for the assessee submitted that the firm was in existence for long and merely because their shares have not been allocated in the books of account in accordance with the shares mentioned in the partnership deed, the genuineness of the firm could not be doubted. In support of his contention he relied upon the decisions of the apex court in the cases of CIT v. Sivakasi Match Exporting Co. , and in the case of CIT v. Ashokbhai Chimanbhai . Learned standing counsel submitted that the apex court in the case of Ratanchand Darbarilal has held that in case, profit and loss are not divided in accordance with the terms and conditions mentioned in the partnership deed, then in that case the firm is not genuine and the Income-tax Officer is justified to refuse the registration to the partnership firm. He also relied upon the decision of the Allahabad High Court in the case of Setha Ram Dhanvir Singh v. CIT .
10. Having heard learned Counsel for the parties, we have given our anxious consideration to the submissions. In the present case there is no dispute that the profit has not been allocated as per the shares mentioned in the partnership deed. In this view of the matter, there was no genuine firm in existence in terms of the partnership deed. In the case of R. C. Mitter and Sons v. CIT [1959] 36 ITR 194 (SC), the apex court held that in case the terms and conditions mentioned in the partnership deed had not been fulfilled then in that case the Income-tax Officer can refuse the registration of the firm on the ground that it was not a genuine firm. In the case of Ratanchand Darbarilal v. CIT , the apex court had specifically held that in case profit and loss are not divided in accordance with the terms and conditions mentioned in the partnership deed then that firm is not genuine and the Income-tax Officer is justified to refuse the registration to the partnership firm.
11. In the case of Setha Ram Dhanvir Singh v. CIT a Division Bench of this Court held that the Income-tax Officer can refuse to register a firm if it was not a genuine firm with the constitution specified in the partnership deed. The firm must actually exist. It should not be a sham transaction or a mere pretence. The expression "genuine firm" denotes that the firm is really in existence and that the partners are collectively carrying on the business. Genuineness is also inter-related to the specified constitution of the firm. The constitution of the firm refers to the identity of the partners and their shares in the profit or loss of the firm's business. If it is found that the partners have in the instrument of partnership indicated their shares, but, in fact, they have, while dividing the profits or losses, adopted some other shares voluntarily and knowingly, it will be a case where the firm, though in existence, is not a genuine firm with the specified constitution. The Income-tax Officer can refuse to register it. If the Income-tax Officer finds that factually the division of profit or loss is at variance with the shares specified in the instrument of partnership he can cancel the registration.
12. The two decisions cited by learned Counsel for the assessee CIT v. Siva-kasi Match Exporting Co. and in the case of CIT v. Ashokbhai Chimanbhai are not applicable to the present case and are distinguishable. Before the apex court there was no issue whether the firm would be considered as genuine in case, if the shares are not distributed in terms of the partnership deed.
13. On the facts and circumstances of the present case and in view of the law laid down by the apex court we do not find any error in the order of the Tribunal. In view of the above discussions, we answer the question referred to us in the negative, i.e., in favour of the Revenue and against the asses-see. However, there shall be no order as to costs.