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1984 (7) TMI 20
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....d Babu Bhai, under a partnership deed to this effect executed on January 27, 1966. The firm filed an application in Form No. 11 for the aforesaid assessment year for registration under section 184 of the Income-tax Act (hereinafter to be referred as " the Act "). The Income-tax Officer ( for short " the ITO ") was of the view that the shares of the losses of the partners were not specified in the deed and, as such, the firm could not be granted registration. He, therefore, rejected the application under section 185 of the Act, vide order dated January 18, 1972, annexure B. The assessee firm filed an appeal before the Appellate Assistant Commissioner (for short " the AAC "), who justified the order of refusal of registration of the firm under section 185 of the Act passed by the Income-tax Officer and dismissed the appeal. The assessee-firm then preferred an appeal before the Income-tax Appellate Tribunal, Jaipur Bench (for short " the Tribunal "). The Tribunal affirmed the findings of the Appellate Assistant Commissioner and dismissed the appeal. The assessee-firm filed an application under section 256(1) of the Act for stating the case and making a reference on the questions of la....
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....pplication has been made before the assessment of the income of the firm, made under section 23 of the Act ...... for that particular year. (4) That the profits (or loss, if any) of the business relating to the previous year, that is to say, the relevant accounting year, should have been divided or credited, as the case may be, in accordance with the terms of the instrument, and lastly, (5) That the partnership must have been genuine, and must actually have existed in conformity with the terms and conditions of the instrument." In the case of Sannappa and Sons v. CIT [1967] 66 ITR 27 (Mys), the deed of partnership provided only for sharing of profits after setting aside a portion for reserves but was silent as to the manner of distribution of losses among the partners. Registration was refused. On a reference to the High Court, it was held that section 26A contemplates only specification of individual shares of partners and in the absence of a contract to the contrary, losses should be shared by the partners in the same proportion in which they share the profits. The firm was held to be entitled to registration. The principle was followed in the case of R. B. Angadi and....
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....ordships were pleased to observe as under (at p. 228): But in none of these clauses is it stated what the shares of the partners in the profits and losses of the firm were to be and that in our opinion was a requisite for registration of the partnership under section 26A of the Act and as that was wanting, registration was rightly refused. Their Lordships were further pleased to observe that (p. 228): " Registration under section 26A of the Act confers a benefit on the partners which the partners would not be entitled to but for section 26A. The right can be claimed only in accordance with the statute which confers it and a person seeking relief under that section must bring himself strictly within the terms of that section. " Reference was made to the following principle enunciated in R. C. Mitter's case [1959] 36 ITR 194, 202 that: " It is, therefore, essential, in the interest of proper administration and enforcement of the relevant provisions relating to the registration of firms, that the firms should strictly comply with the requirements of the law, and it is incumbent upon the income-tax authorities to insist upon full compliance with the requirements of the l....
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....artnership, the three minor sons of the deceased partner who were admitted to the benefits of the partnership have been shown as one unit with a cumulative share in the profits and that the mandatory requirement of law that the individual shares of the partners should be specified in the deed of partnership was not fulfilled and that, therefore, the assessee-firms were not entitled to the grant of registration. In Mandyala Govindu's case [1976] 102 ITR 1 (SC), three adult partners in the appellant firm had their respective shares in the profits of 31 per cent., 23 per cent. and 23 per cent. One minor was admitted to the benefits of partnership with a share of 23 per cent. in the profits. There was no clause in the deed of partnership specifying the proportion in which the three adult Partners were to share the losses. There was, of course, clause providing that the partnership was according to the stipulations in the deed and according to the provisions of the Indian Partnership Act, 1932. The question for consideration before their Lordships of the Supreme Court was whether the firm was entitled to registration under section 26A of the 1922 Act. The principle enunciated in the ....
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....each group would, in that proportion, bear the loss also. In view of these facts, the Department itself had assessed each of the eight partners on his one-third share. Therefore, the direction by the Tribunal to the Income-tax Officer to grant registration to the firm under section 26A of the Act was held to be correct. The question as to whether the instrument of partnership should necessarily specify the actual shares in losses in fraction came up for consideration before the Full Bench of the Andhra Pradesh High Court in the case of CIT v. Hyderabad Stone Depot [1977] 109 ITR 686. A firm had been reconstituted after inducting some more partners, out of whom, one was a minor having seven paise share out of a total of 100 paise and admitted only to the benefits of the partnership. One of the terms of the partnership deed was that all the profits and losses will be divided in the ratios as stated in the deed. The Income-tax Officer refused to grant registration and his order was confirmed by the Appellate Assistant Commissioner. On further appeal, the Tribunal held that as the minor was only admitted to the benefits of partnership, registration cannot be refused on that ground. ....
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....t the firm was genuine and the grounds on which the Income-tax Officer refused registration were only technical and the partnership deed itself provided for the sharing of losses also. In the opinion of the Appellate Assistant Commissioner, the plain meaning of clause 10 of the deed was that the losses would be borne by the major partners only and that the partners would share losses also in the same ratio as the profit-sharing ratio indicated therein. The Income-tax Officer felt dissatisfied by his order being set aside and preferred an appeal before the Income-tax Appellate Tribunal. The Tribunal was of the opinion that it was clear from the clauses of the partnership deed read as whole that the parties intended to share the losses and the proportion can be culled out from other recitals in the partnership deed. The Tribunal distinguished the decision in Mandyala Govindu's case [1976] 102 ITR 1 (SC) and relied on Hyderabad Stone Depot's case [1977] 109 ITR 686 (AP) [FB] and held that there was no infirmity in the partnership nor was there any violation of any of the provisions of section 26A of the Indian Incometax Act, 1922. Consequently, registration was granted. At the instanc....
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....1922, does not indicate that the specification of shares of the partners is for distribution of profits and losses. But that is normally implied. Having regard to this, the word 'specify' under section 26A of the Indian Income-tax Act and rule 2 means 'mentioning or describing or defining in detail' but does not mean 'expressly set out in fractional or other shares'. Therefore, if the partnership deed specifies either expressly or by implication the shares of the individual partners in the firm, the firm is entitled to registration under the Income-tax Act. The intention and object of the partners of the firm in regard to specification of the shares can be culled out either from the recitals in the partnership deed as a whole or from the Proved facts and circumstances indicated in the application for registration, books of account and the conduct of the Partners. However, if the partnership deed does not provide for sharing of profits or losses at all or of losses while providing for sharing of profits, the firm is not entitled to registration. " (Emphasis is ours) It was further observed as under: " Whether or not there is a specification of the individual shares of the part....
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....se of specifying the shares of the partners in profits and losses is to enable the income-tax authorities to make a proper assessment of the income of the firm or individual partners of the firm and for that purpose to make out whether the firm is genuine or not. Genuineness of the partnership is an important factor in matters of registration. The word " specify " used in section 26A of the 1922 Act (now section 184 of the 1961 Act) was the subject-matter of discussion in the case of Kylasa Sarabhaiah v. CIT [1965] 56 ITR 219, 223 (SC) and it was held that " the word 'specify' is used in section 26A and rule 2 as meaning mentioning, describing or defining in detail and does not mean expressly setting out in fractional or other shares ". This principle was kept in view by the Full Bench of the Andhra Pradesh High Court in Krishna Mining Co.'s case [1980] 122 ITR 362 while holding that the registration of a partnership cannot be refused on technical grounds or for lack of setting out the shares in fraction. The argument of Mr. Joshi is that the shares of the three partners, two major and one minor, being unequal, provision of clause 7 that the two major partners will share the ....
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.... Act is that the registration should not be refused to genuine firms on technical grounds. Reference has been made to the various sections of Chapter 16 of the 1961 Act. Subsection (2) of section 185 requires the Income-tax Officer to intimate the defect, if any, in the application or if the application was not in order, give the firm an opportunity to rectify within a period of one month from the date of such information. The Income-tax Officer has to provide the opportunity to rectify the declaration furnished by the firm in pursuance of sub-section (7) of section 184 of the 1961 Act, if it is not in order. The very purpose of incorporating these provisions in the new Act was to give proper opportunity to the firm to place relevant material before the assessing authority so that the registration may not be refused to the firm, which is genuine and entitled to benefit of registration, on technical ground. In view of the above discussion, the conclusion to be drawn would be that the term " individual shares of the partners required to be specified in the partnership instrument " according to section 184(1)(ii) refers to shares in profits as well as in losses. So far as the conno....