2017 (8) TMI 1010 - HC - Wealth-tax

Whether Section 13(b) of the Indian Partnership Act, 1932, could be invoked by the Revenue in the context of clause-7 of the Partnership Deed of the firm, M/s Saraf Trading Corporation - Held that - In the absence of any specification in clause-7 of the Partnership Deed regarding the percentage of profit or loss per partner, the Revenue was entitled to take recourse to Section 13(b) of the Indian Partnership Act. Having considered this submission, we confess our inability to accept the contention. This is for the reason that there is no provision in the Partnership Act requiring that the Partnership Deed should contain the ratio of profit and loss per partner. If that be so, the partners are free to have a provision similar to clause-7, leaving the manner of apportionment to be decided by the partners. So long as this clause reflects an agreement between the partners, irrespective of its vagueness, Section 13(b) cannot be invoked. The upshot of the above discussion that the question of law raised as to whether the Revenue could rely on Section 13(b) of the Indian Partnership Act has to be answered against the Revenue and in favour of the assessee.

Summary

Issues Involved:
Interpretation of Section 13(b) of the Indian Partnership Act in relation to a Partnership Deed clause regarding profit distribution.

Analysis:

Issue 1: Interpretation of Section 13(b) of the Indian Partnership Act
The judgment deals with the application of Section 13(b) of the Indian Partnership Act, 1932, in the context of a Partnership Deed clause governing profit distribution. Section 13(b) provides for equal sharing of profits and losses among partners unless there is a specific agreement to the contrary. The court referred to previous judgments to establish that Section 13(b) mirrors the repealed Section 253(2) of the Indian Contract Act, 1872, and emphasized the importance of partner agreements in profit allocation.

Issue 2: Analysis of the Partnership Deed Clause
The court examined clause-7 of the Partnership Deed, which outlined the profit distribution mechanism among partners. The clause specified that 10% of profits would be distributed annually among partners, with the remaining profits accumulated for future contingencies. The court noted that the clause constituted a clear agreement among partners regarding profit appropriation, thereby rendering Section 13(b) inapplicable due to the presence of a specific contract contrary to equal profit sharing.

Issue 3: Precedent and Legal Interpretation
The judgment referenced a previous case where the applicability of Section 13(b) was discussed, emphasizing that the provision only applies in the absence of a specific agreement on profit sharing. The court highlighted that the absence of a specified profit-sharing ratio in the Partnership Deed did not automatically trigger Section 13(b) invocation, as partners have the freedom to agree on profit distribution terms.

Conclusion:
The court concluded that the Revenue could not rely on Section 13(b) of the Indian Partnership Act in this case, as the Partnership Deed contained a clear agreement on profit distribution among partners. The judgment dismissed the appeals filed by the Revenue and disposed of the Income Tax References in favor of the assessee. The decision reaffirmed the significance of partner agreements in determining profit allocation within a partnership, emphasizing the autonomy of partners in structuring their financial arrangements.