1965 (9) TMI 51 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the partnership agreement dated March 28, 1960.
2. Registration of the firm under section 26A of the Indian Income-tax Act, 1922.
3. Minor's liability in the partnership.
4. Specification of shares in profits and losses in the partnership deed.

Detailed Analysis:

1. Validity of the Partnership Agreement Dated March 28, 1960:
The partnership agreement dated March 28, 1960, was questioned on the grounds that the stamp paper on which it was executed was purchased on March 31, 1960. The Appellate Assistant Commissioner did not attach much importance to this discrepancy, indicating that the date of the stamp paper was not a critical factor in determining the validity of the partnership agreement.

2. Registration of the Firm Under Section 26A of the Indian Income-tax Act, 1922:
The primary issue was whether the firm constituted under the partnership deed dated March 28, 1960, was entitled to registration under section 26A. The Income-tax Officer refused registration on several grounds, including the discrepancy in the date of the stamp paper, the minor's liability for losses, and the nature of the agreement dated August 1, 1960. The Tribunal upheld the refusal on the grounds that the partnership deed did not specify the shares of the partners in the event of losses, which is a requirement for registration under section 26A. The Tribunal emphasized that the 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."

3. Minor's Liability in the Partnership:
The partnership deed included a minor, Dilipkumar, who was admitted to the benefits of the partnership. The Income-tax Officer and the Appellate Assistant Commissioner both held that Dilipkumar was made a full-fledged partner liable for losses, which would render the partnership agreement void. However, the Tribunal and the High Court found that Dilipkumar was only admitted to the benefits of the partnership and thus was not personally liable for losses. This admission did not invalidate the partnership agreement.

4. Specification of Shares in Profits and Losses in the Partnership Deed:
The Tribunal and the High Court both emphasized that for a firm to qualify for registration under section 26A, the partnership deed must specify the individual shares of the partners in both profits and losses. The Tribunal noted that "there is no specification of the shares of the partners in the event of the firm suffering a loss," and this vagueness was "fatal to its claim for registration." The High Court concurred, stating that "the words 'the individual shares of the partners' in section 26A(1) must necessarily mean shares in profits and losses and therefore both have to be specifically stated in the instrument."

Conclusion:
The High Court concluded that the firm constituted under the partnership deed dated March 28, 1960, was not entitled to registration under section 26A for the assessment year 1961-62 because the partnership deed did not specify the shares of the partners in the event of losses. The question referred to the High Court was answered in the negative, and the petitioner was ordered to pay the costs of the reference.