1. Registration of a firm under Section 26A of the Income-tax Act requires an instrument of partnership creating the firm and governing the distribution of profits at or prior to the commencement of the relevant accounting year. 2. Unexplained cash credits can be assessed as income from undisclosed sources if the assessee fails to satisfactorily explain the source of the credits.

CHAKRAVARTTI, C. J.

( 1 ) THIS is a Reference under Section 66 (1), Income-tax Act by the Calcutta Bench of the Appellate Tribunal of two questions of Law. One of them is concluded by the judgment we have just delivered in the case Re.-- "r. C. Miter and Song v. Commissioner of Income-tax, West Bengal, Calcutta'.

( 2 ) THE facts are as follows: The assessee is Messrs. D. C. Auddy and Brothers, Calcutta, described as an unregistered firm. It is said that the firm commenced on 30-6-1944, and that a deed of partnership was executed on 2-6-1948. An application for registration of the firm was made on 24-8-1949, with, respect to the assessment years 1945-45 and 1946-47. The accounting year relative to the first of the assessment years was the period between 30-6-1944 and 13-4-1945 and that relative to the second assessment year was the period between 14-4-1945 and 13-4-1946. The deed of partnership was thus executed long after the expiry of even the second of the assessment years.

( 3 ) THE firm's application for registration having been refused by all the authorities, the following question has been referred to this Court with reference to both the assessment years. "whether the Assessee Firm constituted orally in June, 1944, can validly be registered in the assessment years 1945-46 and 1946-47 under Section 26a, Indian Income-tax Act on the basis of a Memorandum of Partnership executed in June, 1948?"

( 4 ) WE have already held, in and for the reasons given by us in our judgment in that case, that no registration can be claimed under Section 26a of the Act with respect to any assessment year, unless at or prior to the commencement of the relative accounting year there was an instrument of partnership creating the firm and unless such an instrument governed the distribution of profits in the said accounting year.

( 5 ) THE answer to the first question set out above must, therefore, be in the negative.

( 6 ) A second question has been referred in connection with the assessment for the assessment year 1946-47. It appears that the books of the assessee firm for the relevant accounting year disclosed a gross profits of only 4 per cent. The Income-tax Officer considered the percentage of profit to be too low and thought that a considerable volume of sales had been suppressed. He therefore added a sum of Rs. 50,000/- as concealed profits of the business which raised the gross profit to 121/2 per cent. It is said that, in the year immediately preceding, the percentage of gross profit was 15 per cent.

( 7 ) HAVING disposed of the business profits, the Income-tax Officer took up certain cash credit entries which he found in the suspense account of the firm. The credits amounted to a total sum of Rs. 32,563/- and they were shown as put in by the partners. The explanation offered by the assessee with respect to the source of these deposits was not accepted by the income-tax Officer and he added the whole amount of Rs. 32,563/- as the firm's profits from undisclosed sources. On appeal, the Appellate Assistant Commissioner took the view that of the amount of Rs. 32,563/-, the origin of Rs. 9,000/- had been satisfactorily explained. There remained a balance of Rs. 23,563/ -. The Appellate Assistant Commissioner observed that there was no evidence to show that the assessee firm "had any other source of business", by which he probably meant any other source of income. Founding on that fact, the Appellate Assistant Commissioner observed that since the only known source of the assessee's income was business and the undisclosed profits of the business had already been estimated, there could be no justification for adding the unexplained cash credits as well as undisclosed profits from other sources. The Appellate Assistant Commissioner seems to have thought that if the assessee firm made any profits at all, it could have made profits only out of the business carried on by it and since the profits of that business had already been estimated by

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