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TMI Blog1971 (2) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... ases. The material facts giving rise to these references are: Consequent upon the death of Lasraj Khummaji, one of the four partners of M/s. Khummaji Milapchand & Co. (in R.C. No. 65 of 1968) and M/s. Sokalchand Indermal & Co., (in R.C. 82 of 68), on September 17, 1961, the assessee-firms were reconstituted by instruments of partnership dated April 17, 1962, by the admission of the three minor sons of Lasraj Khummaji, viz., Jeevaraj, Indermal and Chandramal, to the benefits of partnership. Some other changes in the constitution of the firms were also effected, but those changes have no bearing on the question referred to us. The amount standing to the credit of the deceased partner, Lasraj Khummaji, in the account books of the previous firm on the last Diwali, i.e., November 8, 1961, was treated as the capital of the three minor sons, who were admitted to the benefits of the partnership of the assessee-firms. Clause 7 of the instruments of partnership of the re-constituted firms specifying the shares of the partners read thus; In R. C. No. 65/68 Clause 7: "The accounts of the firm will be closed by the end of every Deepavali year and partner No. 3, Jeevaraj, Indermal and Chand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar setting out of fraction or proportion of the share in the instrument does not now hold the field. The Supreme Court has given an enlarged and a liberal meaning to the word "specified". The word "specifying" was used in section 26A of the Indian Income-tax Act, 1922 and in rule 2 of the Indian Income-tax Rules, 1922, as meaning: "Mentioning, describing or defining in detail; it did not mean expressly setting out any fractional or other shares." For determining whether or not the shares are specified, the instrument of partnership must be read as a whole and in the context of relevant circumstances of the case. The instruments so read in the context of the circumstances disclose that the individual shares of the minors, who were admitted to the benefits of the partnership, are specified in those instrumemts. The Appellate Tribunal was, therefore, not justified in upholding the orders of the Commissioner of Income-tax. Sri Rama Rao, the learned standing counsel for the income-tax department, contended that one of the essential conditions for the grant of registration was the specification of individual shares of the partners in the instrument of partnership. The shares of the mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n existence during the relevant previous year and was genuine, he shall grant registration under section 185 of the 1961 Act in writing. Registration shall not be refused merely for any defects in the application, unless those defects are brought to the notice of the assessee and the assessee fails to remove them within the time fixed therefor. When once registration is granted it shall, under section 184(7), have the effect for every subsequent year, if the assessee-firm files a declaration in Form No. 12, along with the return, that there was no change in the constitution of the firm or the shares of the partners as evidenced by the instrument on the basis of which registration was granted. Rule 22 of the Income-tax Rules prescribes the form in which the application has to be made and the time within which such application has to be made. Under rule 23, changes effected in the constitution have to be intimated to the Income-tax Officer. The declaration for renewal has to be made in Form No. 12. Although some changes have been effected by the 1961 Act in the procedure relating to the registration of firms, which existed under the 1922 Act, both under the 1922 Act and under the 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be said to have been specified in the instrument of partnership " and in that view justified refusal of registration. In Khimji Walji & Co. v. Commissioner of Income-tax, where the shares of the minors, who are admitted to the benefits of the partnership in the place of their deceased father, were shown collectively as " ten annas ", the Patna High Court justified the " refusal of registration on the ground that the shares of individual partners were not specified in the instrument of partnership ". The same view has been expressed by the Calcutta High Court in Karnidan Rawatlal v. Commissioner of Income-tax and also by the Gujarat High Court in Commissioner Income-tax v. Shivlal Dayaram Panchal. Thus we find that the Madras, Patna, Calcutta and Gujarat High Courts, in the aforesaid cases, have taken the view that in the instrument of partnership, showing the collective share of the minors admitted to the benefits of the partnership, does not amount to the specification of individual shares of the minors, and that on the basis of such an instrument of partnership the firm would not be entitled to registration. It is only the Punjab High Court that has taken a different vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccepted by the Tribunal in Commissioner of Income-tax v. Shivlal Dayaram Panchal but the view expressed by the Tribunal was disapproved and reversed by the Gujarat High Court. The following observations of the learned judges will bear out what is stated above : " The Tribunal took the view that, prior to his death, Balubhai held his share in the assessee firm as a karta of his Hindu undivided family and that when, on the death of Balubhai, Heniendra and Niranjan were admitted to the benefits of the partnership by reason of clause (6) of the old deed of partnership, they also held their share as representing the Hindu undivided family and since it was the Hindu undivided family constituting a single unit which was a partner in the assessee-firm through the two minors, it was not necessary to specify the individual shares of the two minors in the assessee-firm and, consequently, there was no defect in the new partnership deed which precluded grant of registration on the basis of that partnership deed. " With reference to that view, the Gujarat High Court observed that: " The specification of a collective share belonging to the two minors would not meet the requirements of the sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 961 Act. It is no doubt true that the three minors were admitted to the benefits of the partnership, because they were the male heirs of the deceased, Lasraj Khummaj, and the 23 nP. share, which was given to them in R. C. No. 65/68 and the 1/3rd share in R. C. No. 82/68, were given to them collectively. The fact that they were the male heirs of the deceased was material only for the view that it entitled them to the benefits of the partnership. But that did not mean that the collective share which was allotted to the minors was taken by them in equal shares. How they would divide their share would be a matter of internal arrangement between them. There is nothing in the instruments of partnership which establishes that there was an internal arrangement between the minors to share in equal proportions the profits allotted to them for their collective share. From the mere fact that the minors were entitled in equal proportions to the capital of their father does not in our opinion give rise to an inference that they would also share the profits in equal proportions. We, therefore, reject this argument. In Kylasa Sarabhaiah v. Commissioner of Income-tax the facts are as follows : T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e instrument as a whole, it could not be said that the shares of the individual partners were not specified in the instrument. Therefore, their Lordships allowed registration of the firm in that case. However, in the instant case, we have read the partnership agreement carefully. Neither in the recitals there is anything to show that the minors would share in equal proportions the profits that have been collectively shown against their names, nor is there any term in the instruments of partnership, which leads to the conclusion that the minors would share equally the profits that have been collectively allotted to them in the instruments of partnership. It is, therefore, clear that the decision in Kylasa Sarabhaiah v. Commissioner of Income-tax strongly relied upon by the assessees' counsel would not help the assessees. It is thus clear that almost all the courts, except the Punjab High Court, have uniformly held that the non-specification of the individual shares of the minors in the instruments of partnership is a sufficient ground for refusal of registration. We, therefore, agree with the view expressed by the Tribunal that the assessee-firms are not entitled for registration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7% 3. 17/77x100 ... 22% 4. 14/77x100 ... 18.18% approx. If this latter interpretation is accepted to be correct, then the shares of the major partners in loss would be different from their shares in the profits as shown in the instrument. So, that interpretation cannot be said to be correct. If on the other hand the former interpretation is accepted to be correct, then 23 nP. of the loss would be left undivided and to that extent the partners' shares in loss would not be considered as specified in the instrument. Therefore, both the interpretations cannot be accepted as correct. The only interpretation that is possible is that the shares of the major partners in loss in the firm have not been specified in the instrument of partnership. We cannot for this purpose take recourse to section 13(b) of the Indian Partnership Act. Section 13(b) of the Indian Partnership Act says that, subject to an agreement to the contrary, the shares of the partners, if not specified, will be taken as equal. That clause would not apply to this case, because the shares of the partners are specified in the instrument. Thus, our finding is that the shares of the major partners in losses have not been sp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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