TaxTMI 
TaxTMI 
1961 (3) TMI 125
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....th effect from November 1, 1949, and a deed of partnership was duly executed on March 19, 1950. The partnership constituted under this deed is the assessee before us. This deed recites that these three brothers have agreed to continue the business of the two branches at Nagpur in partnership on the terms mentioned in the said deed. For the purpose of this case, it is not necessary to reproduce all the terms. It would suffice to reproduce only four terms, to which a reference was made during the course of argument before us : "3. The capital of the partnership shall be ₹ 2,40,000 (Rupees two lakhs forty thousand) divided into 15 shares of ₹ 16,000 each. The partners hereby agree that the shares allotted to different partners will be equal, i.e., each partner will get five shares. 10. After meeting all expenses, interest and other charges, the resulting net profit or loss shall be ascertained and shall be divided amongst all partners. 13. In case of death, or insolvency of any partner, the surviving partners or such of them as are willing shall have the right to purchase the shares of such partners at the valuation of the shares in the preceding balance-sheet. ....
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....e firm. Term No. 10, which related to the distribution of profits, did not specify the individual shares of the partner as required by section 26A of the Act, and, therefore, the requirements of section 26A were not fulfilled. He therefore rejected the application. The assessee feeling aggrieved by the order of the Income-tax Officer took an appeal to the Appellate Assistant Commissioner. But that was dismissed by him, by his order dated March 17, 1959. The assessee took further appeal to the Income-tax Appellate Tribunal, but that was also dismissed. The assessee then made an application under section 66(1) of the Act, and the Tribunal has referred to us the following question of law as one arising out of its order : "Whether on a proper construction of the partnership deed dated March 19, 1950, the firm sought to be registered for the assessment year 1953-54 can be said to have been constituted under an instrument of partnership specifying the individual shares of the partners as required by section 26A of the Act?" Before we proceed to deal with the arguments advanced by both the parties before us, it would be convenient to set out section 26A. "26A. Procedur....
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....artnership express and definite mention of the individual shares of the partners in the profits is made. The expression "shares of the partners" in the context of the provisions of the Act means the shares of the partners in the profits. These requirements are not satisfied in the instant case. Term No. 3 of the deed of partnership relates solely to the share in the capital. Term No. 10, which relates to the distribution of profits, does not specify the individual shares of the partners in the profits of the firm. The action of the income-tax authorities, therefore, is not open to challenge. He has referred us to the decisions in Kannappa Naicker & Co. v. Commissioner of Income-tax [1937] 5 ITR 49 , Khimji Walji & Co. v. Commissioner of Income-tax [1954] 25 ITR 462 and Sulaiman Hassan & Sons v. Commissioner of Income-tax [1959] 36 ITR 169 . In our opinion, the contentions raised by Mr. Joshi are well founded. The dictionary meaning of the word "specify" given is : "to mention, speak of, or name something definitely or explicitly; the other shade of meaning is-to set down or state categorically or particularly; and the third shade of meaning given is to rel....
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....lled individually 'partners' and collectively 'a firm' and the name under which their business is carried on is called the 'firm name'." This definition of "partnership" and "partner" has to be kept in view in construing section 26 A, sub-section (1). On reading section 4 of the Partnership Act, it is abundantly clear that one of the essential elements to constitute a partnership is an agreement amongst the partners to share the profits of the business. The share of the partner in the partnership thus means the share in the profits of the business of the partnership. Section 28 of the Income-tax Act provides the powers of the income-tax authorities regarding imposition of penalty for concealment of income or improper distribution of profits. Sub-section (2) provides that "if the Income-tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal, in the course of any proceedings under this Act, is satisfied that the profits of a registered firm have been distributed otherwise than in accordance with the shares of the partners as shown in the instrument of partnership registered under this Act governing such distr....
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....shares of ₹ 16,000 each, each partner having 5 shares out of the 15 shares. The assets of the old partnership brought into the business of the new firm thus formed the capital of the new firm. It is indeed true that on the language of term No. 3 each of the partners has got an equal share in the capital of the firm. But from it, it does not necessarily follow that they have also an equal share in the profits of the firm. In this connection, we may refer to a passage from Law of Partnership by Mr. Justice S.T. Desai at page 66, second edition : "There is no necessary connection between the proportion in which partners are entitled to share in the profits earned and the proportion in which they have contributed towards the capital of the firm ; nor does the fact that the work done by the partners is unequal affect the question of their shares. Equality in sharing profit and loss, independent of the shares of original capital contributed by the partners, is the only rule applicable in the absence of special agreement. The value of a particular member to the firm, derived from his skill, experience or business connection, may be wholly out of proportion to the amount of ca....
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....iven by them after due consideration of the facts unless some fresh facts are placed before them. Reliance was placed by Mr. Kolah on two decisions-one of this court in H.A. Shah & Co. v. Commissioner of Income-tax [1956] 30 ITR 618, and the other of the then Nagpur High Court in Tejmal Bhojraj v. Commissioner of Income-tax [1952] 22 ITR 208. In these decisions it has been observed that: "As a general rule the principle of res judicata is not applicable to decisions of income-tax authorities. An assessment for a particular year is final and conclusive between the parties only in relation to the assessment for that year and the decisions given in an assessment for an earlier year are not binding either on the assessee or the Department in a subsequent year. But this rule is subject to limitations, for there should be finality and certainty in all litigations including litigation arising out of the Income-tax Act and an earlier decision on the same question cannot be reopened if that decision is not arbitrary or perverse, if it had been arrived at after due inquiry, if no fresh facts are placed before the Tribunal giving the later decision, and if the Tribunal giving the earli....