1970 (2) TMI 44 - HC - Income Tax

Whether the asessee is entitled to registration under section 26A of the Income-tax Act, 1922

Summary

Issues Involved:
1. Whether the partnership formed under the partnership deed is void ab initio.
2. Whether the partnership deed specifies the shares of the partners both in the profits and losses of the firm.
3. Whether specifying the share of each partner in the losses of the firm in the deed of partnership is necessary for registration under section 26A of the Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Whether the partnership formed under the partnership deed is void ab initio:
The primary question is whether the partnership deed makes the minor liable for losses, which would render the partnership void ab initio. The court examined the partnership deed and found that the minor, Jaganmohan, was admitted only to the benefits of the partnership and not made liable for losses. The relevant clauses of the partnership deed do not indicate that the minor was burdened with losses. Therefore, the partnership is not void. Under Section 30 of the Indian Partnership Act, a minor can be admitted to the benefits of a partnership but cannot be made liable for losses. Consequently, the partnership is valid, and registration under Section 26A of the Income-tax Act cannot be refused on this ground.

2. Whether the partnership deed specifies the shares of the partners both in the profits and losses of the firm:
The court noted that Section 26A requires the instrument of partnership to specify the individual shares of the partners. The partnership deed in question specifies the shares of the partners in the profits but is silent on how losses should be borne. The court considered two possible interpretations: either the losses should be borne in the same proportion as the profits, or the partners should contribute equally to the losses as per Section 13(b) of the Indian Partnership Act. However, the court emphasized that Section 13(b) applies only when there is no stipulation as to profits and losses. Since the partnership deed specifies the shares in profits but not in losses, it does not meet the requirements of Section 26A.

3. Whether specifying the share of each partner in the losses of the firm in the deed of partnership is necessary for registration under section 26A of the Income-tax Act, 1922:
The court held that for a firm to be eligible for registration under Section 26A, the partnership deed must specify the shares of the partners in both profits and losses. This is necessary to determine the tax liability of the firm and the partners accurately. The court referred to the Gujarat High Court's decision in Thacker & Co. v. Commissioner of Income-tax, which held that the words "individual shares of the partners" in Section 26A(1) must mean shares in both profits and losses. The court disagreed with the Allahabad High Court's decision in Hiralal Jagatnath Prasad v. Commissioner of Income-tax, which held that the omission to specify the shares in losses does not prevent registration. The court concluded that the instrument of partnership must clearly stipulate the shares of each partner in both profits and losses to qualify for registration under Section 26A.

Conclusion:
The court answered the question in favor of the department, holding that the partnership deed must specify the shares of the partners in both profits and losses for the firm to be entitled to registration under Section 26A of the Income-tax Act, 1922. The department was awarded costs, with an advocate's fee of Rs. 250.