1975 (10) TMI 2 - SC - Income Tax

Minor was admitted to the benefits of partnership - Rule that where the shares in the profits are unequal, the losses must be shared in the same proportion as the profits if there is no agreement as to how the losses are to be apportioned, does not also apply to this case. In this case even if the adult partners bear the losses in proportion to their respective shares in the profits, the amount of loss in the minor s share would still remain undistributed

Summary

Issues:
Whether the firm is entitled to registration under section 26A of the Indian Income-tax Act, 1922 for the assessment year 1961-62.

Analysis:
The High Court held that without specifying the partners' shares in both profits and losses, the firm cannot be registered under section 26A. The appellant challenged this decision, arguing that the instrument of partnership did not need to specify shares in losses. The court highlighted that registration under section 26A provides benefits to partners not available otherwise. The application for registration must include details of profit and loss apportionment, as per prescribed rules. The court emphasized that partners' shares in losses must be ascertainable for registration. The appellant contended that clause 9 of the instrument impliedly specified the partners' shares in losses, but the court rejected this argument.

The court discussed conflicting High Court opinions on whether partners' shares in losses must be explicitly stated in the partnership deed for registration under section 26A. The court clarified that even if not explicitly required, the Income-tax Officer must ascertain partners' shares in losses. The appellant argued that partners were impliedly liable to share losses equally based on section 13(b) of the Partnership Act. However, the court rejected this argument, stating that unequal profit shares do not presume equal loss shares. The court cited legal principles to support this conclusion.

The court further explained that in the absence of an agreement on loss apportionment, losses should be shared in the same proportion as profits. However, in this case, the instrument did not provide clarity on how losses, especially the minor partner's share, should be apportioned. As a result, the court dismissed the appeal, emphasizing the necessity of clear specification of partners' shares in both profits and losses for registration under section 26A.