TaxTMI 
TaxTMI 
1965 (9) TMI 51
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....from 14th November, 1957, to 27th March, 1960, and on 28th March, 1960, Jayantilal entered into an agreement with his brother, Kantilal, to carry on the business of mill-gin stores on certain terms and conditions. Both of them agreed to admit their minor brother, Dilipkumar, to the benefits of the partnership. This agreement is dated 28th March, 1960, but the stamp-paper on which it is executed was actually issued on 31st March, 1960. Clause 5 of the partnership deed provided as under: "5. Share of profits.--The partners shall be entitled to the net profits of the business in the following shares: (1) Shri Jayantilal Lalji Thacker 25% (2) Shri Kantilal Lalji Thacker 25% (3) Shri Dilipkumar LaIji Thacker 50% Thereafter on 1st August, 1960, Jayantilal, Kantilal and Dilipkumar through his guardian, Lalji Thacker, entered into an agreement acknowledging that a partition of the business had taken place on 26th March, 1960, and the amount in the account of Jayantilal in the books of the business had been distributed in three accounts, namely, Jayantilal Rs. 11,919, Kantilal Rs. 11,91....
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....or, Dilipkumar, was only admitted to the benefits of the partnership and, therefore, was not liable to share the losses and that the two major partners were liable to pay the losses and their Shares were equal. It was emphasized that there was no ambiguity in the partnership deed and that without any reference to the Partnership Act it was possible to know from the partnership deed itself that the shares of the losses of the major partners were equal. It was also stressed that the firm was genuine and that whatever motive might have actuated Jayantilal in transferring a part of his capital to his brothers, there were no mala fides and he was entitled to dispose of his assets in the manner he liked. A reference was made to the Bombay High Court's decision in the case of Dastur Dadi and Co. v. Commissioner of Income-tax [1963] 49 I.T.R. 554, and it was contended that the decision was not binding in the Gujarat State and that the decision called for reconsideration. On behalf of the department reliance was placed on the order of the Appellate Assistant Commissioner and it was contended that there was no genuine firm in existence, that the firm was not entitled to registration and ....
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.... share in the property and profits of the firm, he would clearly be liable, in the absence of contract to the contrary, in the event of loss suffered by the firm. When there is no specific provision about liability of partners, whether major or minor, there is vagueness in the partnership deed which is fatal to its claim for registration. In order to qualify for registration the shares in the losses as well as in the profits must be specified in the partnership deed itself. They must be ascertainable without any discussion or debate. They must leap to the eye so that he who runs may read them. Any uncertainty or fogginess as is in evidence in this case must clearly disqualify the firm for registration. We would, therefore, uphold the order of the income-tax authorities although or. the limited grounds given by us." The order of the Tribunal is made annexure "B" and forms part of the case. 7. The following question o law arises from the order of the Tribunal: "Whether, on the facts and in the circumstances of the case, the firm constituted under the partnership deed dated 28th March, ....
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....erms and conditions therein contained. Clause 1 of the deed provided that the first and the second party, i.e., Jayantilal and Kantilal, agreed to admit their minor brother, Dilipkumar, to the benefits of partnership. Clause 3 provided that the partnership was to be at will, and clause 5 set out the shares of profits as follows: "The partners shall be entitled to the net profits of the business in the following shares: 1. Shri Jayantilal Lalji Thacker...25% 2. Shri Kantilal Lalji Thacker...25% 3. Shri Dilipkumar Lalji Thacker...50%." For the assessment year 1961-62, of which the relevant previous year was Samvat year 2016 (November 2, 1959, to 20th October, 1960), the assessee-firm applied for registration under section 26A of the Income-tax Act, 1922. The Income-tax Officer rejected the application on three grounds, (1) that though the agreement purported to have been executed on March 28, 1960, the stamp-paper on which it was executed was actually purchased on March 31, 1960; (2) that the minor, Dilipkumar, was a fullfledged partner as he was made liable for losses also; and (3) that the said ....
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....unal rejected the contention urged on behalf of the assessee-firm that the shares in the losses of the partners were specifically provided for in the instrument of partnership, the Tribunal observing that such shares must be specified in the instrument itself and must be capable of ascertainment without the aid of the provisions of the Partnership Act or any inference which one would have to draw from some of the other terms of the partnership. The Tribunal further held that if the contention on behalf of the assessee were to be accepted, it would have to resort, in order to ascertain the shares of the partners in losses, to the provisions of the Partnership Act or to a complicated process of inference from the terms of clause 5 of the partnership deed, and that it would have first to hold that because the minor was only admitted to the benefits of partnership, he could not be personally held liable for any part of the losses of the firm but that even if the Tribunal were to do that, there would still be a further difficulty in the sense that clause 5 of the instrument merely provided for the sharing of losses by the major partners to the extent of fifty percent only and that, ther....
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.... persons, and at such times and shall contain such particulars and shall be in such form, and be verified in such manner, as may be prescribed, and it shall be dealt with by the Income-tax Officer in such manner as may be prescribed." Rule 2 of the Income-tax Rules, 1922, made under the Act provides that any firm constituted under an instrument of partnership specifying the individual shares of the partners may, under the provisions of section 26A of the Indian Income-tax Act, 1922, register with the Income-tax Officer, the particulars contained in the said instrument on application made in this behalf. Such application shall be signed by all the partners (not being minors) personally and shall, for any year of assessment up to and including the assessment for the year ending on the 31st day of March, 1953, be made before the 28th February, 1963, and for any year of assessment subsequent thereto, be made "(b) where the firm is registered under the Indian Partnership Act, 1932, or where the deed of partnership is registered under the Indian Registration Act, 1908, before the end of the previous year of the firm." Rule 3 provides that the application referred to in rule 2 shall be....
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....sons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually "partners" and collectively "a firm" and the name under which their business is carried on is called the "Firm name." Under section 4 of the Partnership Act, therefore, an agreement to share the profits of a business is an essential element in bringing about a partnership and forming a firm. Section 13 of that Act, inter alia, provides that, subject to a contract between the partners, the partners are entitled to share equally in the profits earned and shall contribute equally to the losses sustained by the firm. Therefore, if there is no agreement between the parties as to the respective shares in the profits and losses of the firm, the rule laid down in section 13 is that the profits as also the losses are to be shared equally. Where the profits are not shared equally and there is no agreement as to how the losses are to be shared, the rule is that the losses should be shared in the same proportion as the profits of the firm. Section 30 of the Partnership Act deals with minors admitted to the be....
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....t held that in order that a firm may be entitled to registration under section 26A of the Income-tax Act, the following essential conditions must be satisfied, viz., (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 the 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 under section 23 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. At page 198 of the report, the Supreme Court observed that for a true and proper construction of the relevant provisions of the Act relating to registration of firms, sections 26, 26A and 28, and the rules set out in the decision had to be read together and, when so read, it was reasonably clear that th....
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....ll expenses, interest and other charges, the resulting net profit or loss shall be ascertained and shall be divided amongst all partners." The Income-tax Officer granted registration on the basis of this deed of partnership for the assessment years 1951-52 and 1952-53, but he refused to renew the registration for the assessment year 1953-54 on the ground that there was no clause in the deed specifying the individual shares of the partners as required by section 26A. One of the contentions raised before the High Court on behalf of the assessee-firm was that what sub-section (1) of section 26A required was that the individual shares of the partners should be specified but that the sub-section did not require that the individual shares of the partners in profits should be specified. That contention, however, was repelled and the learned judges observed that it was true that section 26A(1) did not in express terms provide that the instrument of partnership should specify the individual shares of the partners in profits, but used the expression "the individual shares of the partners" and, therefore, the meaning of those words had to be ascertained. The learned judges stated that if t....
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....ed question only that the words "individual shares" in section 26A do not mean the respective shares of the partners in the assets and properties of the partnership, but mean the individual shares in the profits from the business of that firm and such shares must be specifically stated in the instrument of partnership. This decision in any event cannot be used to mean that individual shares of partners in losses have not to be specifically stated in the deed of partnership. Mr. Kaji then relied upon two decisions of the Supreme Court in Kylasa Sarabhaiah v. Commissioner of Income-tax [1965] 56 I.T.R. 219 (S.C.) and Commissioner of Income-tax v. Shah Mohandas Sadhuram [1965] 57 I.T.R. 415 (S.C.). But in these two decisions also, the real principle laid down was that an instrument of partnership must be reasonably construed while considering the question whether an applicant-firm was entitled to registration under section 26A. The principle, however, postulates that there is something in the instrument itself which must be read along with the rest of the provisions of the instrument. The two decisions, however, had not to deal with the question as to the correct interpretation which ....
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.... was enacted for giving to the firms a certain benefit in assessment and that benefit is the lower rate of assessment than that which would apply to the whole of the income of the firm if the firm were to be charged as a unit of assessment. The object of section 26A was that if such a firm wishes to have this benefit, it must get itself registered under this section. If it gets registered, no tax, apart from the income-tax at special low rates after 1956, would be levied on the firm as a unit of assessment, but instead, each of the partners would be taxed under section 23(5) in respect of his share in the firm's profits. If the firm, therefore, wants to derive this benefit, it has to comply with the conditions; there are two conditions, namely, (1) that though a firm can be constituted under the Partnership Act by an oral agreement, section 26A requires that it should be under a written instrument, and (2) that that instrument must specify the individual shares of the partners. From this, it is fairly clear that the contention urged at one stage by Mr. Kaji that we should not read section 26A as laying down any further condition over and above those required by section 4 of the....
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....provisions of section 24. Such a right given to a partner of a registered firm by the first proviso to clause (a) is denied to the partners of an unregistered firm. This is a benefit conferred on registered firms, and if this benefit is desired by a firm, it has to comply with the conditions laid down in section 26A. Since under section 23(5) profits of a firm are to be apportioned and allocated according to the respective shares of the partners in profits and added to the total income of each of the partners and assessed, the share in profits of each of the partners has to be specified in the instrument of partnership, so that the Income-tax Officer before granting the certificate of registration would at once know what their respective shares are. This is also necessary in order to give give effect to the provisions of section 23(5) as also the first proviso to clause (a) thereof. Therefore, the Income-tax Officer must also know from the instrument of partnership itself before he issued such certificate what the shares of the partners in losses are, for under the first proviso to clause (a) of section 23(5), a partner of a registered firm, as already stated, is entitled to set of....