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TMI Blog1965 (9) TMI 51X X X X Extracts X X X X X X X X Extracts X X X X ..... entered into an agreement with his brother, Kantilal, to carry on the business of mill-gin stores on certain terms and conditions. Both of them agreed to admit their minor brother, Dilipkumar, to the benefits of the partnership. This agreement is dated 28th March, 1960, but the stamp-paper on which it is executed was actually issued on 31st March, 1960. Clause 5 of the partnership deed provided as under: 5. Share of profits.--The partners shall be entitled to the net profits of the business in the following shares: (1) Shri Jayantilal Lalji Thacker 25% (2) Shri Kantilal Lalji Thacker 25% (3) Shri Dilipkumar LaIji Thacker 50% Thereafter on 1st August, 1960, Jayantilal, Kantilal and Dilipkumar through his guardian, Lalji Thacker, entered into an agreement acknowledging that a partition of the business had taken place on 26th March, 1960, and the amount in the account of Jayantilal in the books of the business had been distributed in three accounts, namely, Jayantilal ₹ 11,919, Kantilal ₹ 11,919 and Dilipkumar ₹ 23,839. The firm as constituted under the deed dated 28th March, 1960, was registered with the Registrar of Firms on 3rd Oct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtners were liable to pay the losses and their Shares were equal. It was emphasized that there was no ambiguity in the partnership deed and that without any reference to the Partnership Act it was possible to know from the partnership deed itself that the shares of the losses of the major partners were equal. It was also stressed that the firm was genuine and that whatever motive might have actuated Jayantilal in transferring a part of his capital to his brothers, there were no mala fides and he was entitled to dispose of his assets in the manner he liked. A reference was made to the Bombay High Court's decision in the case of Dastur Dadi and Co. v. Commissioner of Income-tax [1963] 49 I.T.R. 554, and it was contended that the decision was not binding in the Gujarat State and that the decision called for reconsideration. On behalf of the department reliance was placed on the order of the Appellate Assistant Commissioner and it was contended that there was no genuine firm in existence, that the firm was not entitled to registration and that both the agreements were essentially a family arrangement. The Tribunal, however, confirmed the orders of the authorities below, although on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether major or minor, there is vagueness in the partnership deed which is fatal to its claim for registration. In order to qualify for registration the shares in the losses as well as in the profits must be specified in the partnership deed itself. They must be ascertainable without any discussion or debate. They must leap to the eye so that he who runs may read them. Any uncertainty or fogginess as is in evidence in this case must clearly disqualify the firm for registration. We would, therefore, uphold the order of the income-tax authorities although or. the limited grounds given by us. The order of the Tribunal is made annexure B and forms part of the case. 7. The following question o law arises from the order of the Tribunal: Whether, on the facts and in the circumstances of the case, the firm constituted under the partnership deed dated 28th March, 1960, was entitled to registration under section 26A for the assessment year 1961-62? K. H. Kaji with Y. S. Mankad, for the assessee. J. M. Thakore(Adocate-General) with M. M. Thakore and M. G. Doshini, for the Commissioner. JUDGMENT SHELAT C.J.- Between November 14, 1957, and Mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 5 set out the shares of profits as follows: The partners shall be entitled to the net profits of the business in the following shares: 1. Shri Jayantilal Lalji Thacker...25% 2. Shri Kantilal Lalji Thacker...25% 3. Shri Dilipkumar Lalji Thacker...50%. For the assessment year 1961-62, of which the relevant previous year was Samvat year 2016 (November 2, 1959, to 20th October, 1960), the assessee-firm applied for registration under section 26A of the Income-tax Act, 1922. The Income-tax Officer rejected the application on three grounds, (1) that though the agreement purported to have been executed on March 28, 1960, the stamp-paper on which it was executed was actually purchased on March 31, 1960; (2) that the minor, Dilipkumar, was a fullfledged partner as he was made liable for losses also; and (3) that the said agreement dated August 1, 1960, was a family arrangement dividing the capital between the three brothers and that such division took place on August 6, 1960, and not on March 27, 1960, as recited therein. When the matter went before the Appellate Assistant Commissioner, he confirmed the order of the Income-tax Officer, though on different grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ship Act or any inference which one would have to draw from some of the other terms of the partnership. The Tribunal further held that if the contention on behalf of the assessee were to be accepted, it would have to resort, in order to ascertain the shares of the partners in losses, to the provisions of the Partnership Act or to a complicated process of inference from the terms of clause 5 of the partnership deed, and that it would have first to hold that because the minor was only admitted to the benefits of partnership, he could not be personally held liable for any part of the losses of the firm but that even if the Tribunal were to do that, there would still be a further difficulty in the sense that clause 5 of the instrument merely provided for the sharing of losses by the major partners to the extent of fifty percent only and that, therefore, there was in any event no provision in respect of the remaining fifty per cent. of such losses. The Tribunal concluded that: When there is no specific provision about liability of partners, whether major or minor, there is vagueness in the partnership deed which is fatal to its claim for registration. In order to qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Officer, the particulars contained in the said instrument on application made in this behalf. Such application shall be signed by all the partners (not being minors) personally and shall, for any year of assessment up to and including the assessment for the year ending on the 31st day of March, 1953, be made before the 28th February, 1963, and for any year of assessment subsequent thereto, be made (b) where the firm is registered under the Indian Partnership Act, 1932, or where the deed of partnership is registered under the Indian Registration Act, 1908, before the end of the previous year of the firm. Rule 3 provides that the application referred to in rule 2 shall be made in the form annexed to this rule and shall be accompanied by the original instrument of partnership under which the firm is constituted, together with a copy thereof; provided that if the Income-tax Officer is satisfied that for some sufficient reason the original instrument cannot be conveniently produced, he may accept a copy of it certified in writing by all the partners (not being minors), etc. Form I annexed to this rule is the prescribed form in which the application has to be made. Parag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inter alia, provides that, subject to a contract between the partners, the partners are entitled to share equally in the profits earned and shall contribute equally to the losses sustained by the firm. Therefore, if there is no agreement between the parties as to the respective shares in the profits and losses of the firm, the rule laid down in section 13 is that the profits as also the losses are to be shared equally. Where the profits are not shared equally and there is no agreement as to how the losses are to be shared, the rule is that the losses should be shared in the same proportion as the profits of the firm. Section 30 of the Partnership Act deals with minors admitted to the benefits of partnership. Under this section and by reason of section 11 of the Contract Act, a minor cannot become a partner, though with the consent of the partners he may be admitted to the benefits of partnership. If that is done, such a minor would be entitled to his agreed share, but he would not be personally liable for the debts and liabilities of the firm, though his share in the properties and the profits of the firm would be liable for the same. The contention of Mr. Kaji on behalf of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 23 for that particular year; (iv) the profit or loss, if any, of the business relating to the accounting year should have been divided or credited, as the case may be, in accordance with the terms of the instrument; and (v) the partnership must be genuine and must actually have existed in conformity with the terms and conditions of the instrument of partnership in the accounting year. At page 198 of the report, the Supreme Court observed that for a true and proper construction of the relevant provisions of the Act relating to registration of firms, sections 26, 26A and 28, and the rules set out in the decision had to be read together and, when so read, it was reasonably clear that those five essential conditions must be fulfilled in order that a firm could be said to be entitled to registration. Though a specific question did not arise before the Supreme Court in this decision as regards the interpretation of the words the individual shares of the partners as used in section 26A, the Supreme Court, while considering the provisions of that section, did state that one of the essential conditions was that the profit or loss, if any, of the business relating to the previous year, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat sub-section (1) of section 26A required was that the individual shares of the partners should be specified but that the sub-section did not require that the individual shares of the partners in profits should be specified. That contention, however, was repelled and the learned judges observed that it was true that section 26A(1) did not in express terms provide that the instrument of partnership should specify the individual shares of the partners in profits, but used the expression the individual shares of the partners and, therefore, the meaning of those words had to be ascertained. The learned judges stated that if the firm were to be registered, the income of the firm was not taxed in the hands of the firm, but was allocated among its partners according to their shares and was taxed in their hands in accordance with their shares in the income of the firm. If the firm, on the other hand, were not to be registered, the entire income of the firm was taxed in the hands of the firm and that when the income of the firm was taxed in its hands, the rate at which it was taxed was high while, on the other hand, if the income of the firm was taxed in the hands of the partners accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner of Income-tax [1965] 56 I.T.R. 219 (S.C.) and Commissioner of Income-tax v. Shah Mohandas Sadhuram [1965] 57 I.T.R. 415 (S.C.). But in these two decisions also, the real principle laid down was that an instrument of partnership must be reasonably construed while considering the question whether an applicant-firm was entitled to registration under section 26A. The principle, however, postulates that there is something in the instrument itself which must be read along with the rest of the provisions of the instrument. The two decisions, however, had not to deal with the question as to the correct interpretation which should be given to the words individual shares occurring in section 26A and, therefore, they would not assist us. The result, therefore, is that there is no direct authority on the question and, therefore, we must construe the words in question unaided by any authority and in the context in which those words are used and the object with which section 26A was enacted. As against the contentions of Mr. Kaji, the learned Advocate-General argued that sub-section (2) of section 26A requires that an application for registration has to contain such particulars an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 23(5) in respect of his share in the firm's profits. If the firm, therefore, wants to derive this benefit, it has to comply with the conditions; there are two conditions, namely, (1) that though a firm can be constituted under the Partnership Act by an oral agreement, section 26A requires that it should be under a written instrument, and (2) that that instrument must specify the individual shares of the partners. From this, it is fairly clear that the contention urged at one stage by Mr. Kaji that we should not read section 26A as laying down any further condition over and above those required by section 4 of the Partnership Act becomes at once untenable. Section 26A, as we have already seen, does lay down conditions over and above those required under the Partnership Act and that section, therefore, has to be read in that light. Sub-section (5) of section 23 provides that when the assessee is a firm and the total income of the firm has been assessed under sub-section (1) or sub-section (3) or sub-section (4), as the case may be, in the case of a registered firm the income-tax payable by the firm itself shall not be determined but the total income of each partner of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtners has to be specified in the instrument of partnership, so that the Income-tax Officer before granting the certificate of registration would at once know what their respective shares are. This is also necessary in order to give give effect to the provisions of section 23(5) as also the first proviso to clause (a) thereof. Therefore, the Income-tax Officer must also know from the instrument of partnership itself before he issued such certificate what the shares of the partners in losses are, for under the first proviso to clause (a) of section 23(5), a partner of a registered firm, as already stated, is entitled to set off his share of loss against his other income and is further entitled to carry forward that loss and set it off in accordance with the provisions of section 24. If section 26A were read in the context of the object with which it was enacted and in the context of section 23(5), section 24 and section 16(1)(b) of the Act, it is clear that the condition of specifying the individual shares of the partners was enacted with a view to enable the Income-tax Officer to give effect to the provisions of section 23(5) and in doing so to ascertain what are the individual sha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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