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TMI Blog1995 (4) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... g on business as a firm constituted under a deed dated December 4, 1970, with Pandurangan and B. A. Majeeth as partners. Majeeth expired on November 13, 1973, and the firm stood dis solved, Since Majeeth had expressed his desire that his wife should be taken in as a partner in the event of his death, Smt. Shammi Majeeth, his wife, was taken in as a partner under the deed dated January 28, 1974. This partnership, according to the assessee, was to be for a period of 11 years commencing from April 1, 1974, the capital was to be Rs. 80,000 for which Pandurangan was to contribute Rs. 30,000 and Mrs. Shammi Majeeth was to place at the disposal of the firm the site taken on lease by her husband, over which a construction was put up, the total value of which was Rs. 50,000. The relevant clauses of the deed are extracted in the order of the Tribunal as follows : " The partnership was for a period of 11 years commencing from April 1, 1974. The capital was to be Rs. 80,000 out of which Shri Pandurangan was to contribute Rs. 30,000, Mrs. Majeeth placed at the disposal of the firm the site taken on lease by her husband. Clause 5 of the deed provided as under : The party of the first part he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal and the Tribunal has affirmed the view of the Appellate Assistant Commissioner. There is a departure from the Partnership Act and Rules in Chapter XVI of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), wherein special provisions have been made applicable to the partnership firms. A firm or partnership, under the Partnership Act, 1932, is not a legal entity separate and distinct from partners and is only compendious description of individuals, who compose the firm. A partnership firm is not a legal person even though it has some attributes of a legal personality. A partnership firm is not created by status, but arises from contract. A collective noun, a compendious expression to discriminate an entity and not a person, however, is given statutory recognition, under section 182 of the Act, notwithstanding anything contained in sections 143 and 144 and subject to the provisions of sub-section (3), that "When any of the partners of a registered firm is a non-resident, the tax on his share in the income of the firm shall be assessed on the firm at the rate or rates which would be applicable if it were assessed on him personally, and the tax so assessed shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the profits of a business and that business must be carried on by all or any of them acting for all, but while the Income-tax Officer applying the above test, found against the assessee, the Appellate Assistant Commissioner has noted the presence of the above ingredients in the relationship of Pandurangan and Majeeth and accordingly ordered in favour of the assessee. The Tribunal has approved the view of the Appellate Assistant Commissioner. We feel, however, on the facts of the instant case, that it is not possible to blame either the Income-tax Officer or the Appellate Assistant Commissioner or the Tribunal, for the views they have taken, for, it will be altogether wrong for any person to say that in deciding whether there is a genuine partnership before registration, as contemplated under section 185(1) of the Act, it is not necessary to consider the cumulative effect of all the facts and the circumstances taken together and that there should be no attempt to find out what was the real nature of the relationship between the alleged partners. It is indeed necessary in all cases to consider the cumulative effect of all the facts and circumstances taken together and always to ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not go further than noticing the above, to state that the legislation governing the registration of firms for the purposes of the Act, has indicated that the shares of partners in profits and losses should be found specified in the instrument of partnership to enable the income-tax authorities to make proper assessment of the income of the firm or the individual partners of the firm and for that purpose to make out whether the firm is genuine or not. The requirement, as envisaged under section 184(1)(ii), that is, "the individual shares of the partners are specified in that instrument", refers in our view, to shares in the profits as well as losses. An instrument, thus, which shall specify the share of the partners for the purposes of the registration, must carry particulars for sharing the profits as well as the sharing of the losses. We may advert at this stage to section 13 of the Partnership Act, which provides, "Subject to contract between the partners--(a) a partner is not entitled to receive remuneration for taking part in the conduct of the business, (b) the partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h a decision. The Calcutta High Court has also considered the judgment cited before it in Raghunandan Nanu Kothare v. Hormasji Bezonji Bamji, AIR 1927 Bom 187 which held : " It is not essential to constitute a partnership that the partners should agree to share the losses. " and the judgment of the Allahabad High Court in Mirza Mal Bhagwan Das v. Rameshar, AIR 1929 All 536, 540, which held (at page 381 of 155 ITR) : " An agreement to share the loss is not a necessary ingredient of a partnership under the Indian Contract Act. " It has referred to a Full Bench judgment of the Lahore High Court in B. C. G. A. (Punjab) Ltd. v. CIT [1937] 5 ITR 279 which held in a reference under section 66(2) of the Indian Income-tax Act, 1922, that while construing section 4 of the Indian Partnership Act, 1932, one would find that the mere circumstance that a person is to share profits only and not losses did not, by itself, militate against the presumption of partnership. Besides the judgment in Kamath and Co.s case [1971] 82 ITR 680 (SC), the Calcutta High Court considered the judgment of the Supreme Court in (M. P.) Davis v. Commr. of Agrl. I.T [1959] 35 ITR 803, 807, which was a case with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions of the learned advocate for the assessee which in our view are of substance. But the categoric observations of the Supreme Court in K D. Kamath and Co.'s case [1971] 82 ITR 680 which are binding on us, whether obiter or not, appear to have laid down the law further in India which departs from the English law and impliedly overrules the earlier decisions of the High Courts on the point. After anxious consideration, we answer the question in the negative and in favour of the Revenue." In Mandyala Govindu and Co. v. CIT [1976] 102 ITR 1, the Supreme Court has considered the question of registration under section 26A of the Indian Income-tax Act, 1922. The instrument of partnership disclosed that three persons and a minor who was admitted to the benefits of the partnership held shares : N--31 per cent., V--23 per cent., S--23 per cent. and minor J--23 per cent. One of the clauses of the instrument which had set out the shares of the partners provided, inter alia, that the profits of the partnership business would be divided and enjoyed according to the shares specified therein. There was no clause in the instrument specifying the proportion in which the three adult pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appreciation of the scope of section 13(b) and the facts of the case. Section 13(b), it seems plain to us, makes the partners liable to contribute equally to the losses only when they are entitled to share equally in the profits. In this case, the shares of the partners are not equal. In the absence of any indication to the contrary, where the partners have agreed to share the profits in certain proportions, the presumption is that the losses are also to be shared in like proportions. Jessel M. R. states the principle in Albion Life Assurance Society, In re [1880] 16 Ch D 83, 87 as follows : ' It is said, as a general proposition of law, that in ordinary mercantile partnership where there is a community of profits in a definite proportion, the fair inference is that the losses are to be shared in the same proportion.' In the case before us the partners having unequal shares in the profits, there can be no presumption that the losses are to be equally shared between them. Section 13(b) of the Indian Partnership Act, 1932, reproduces the provisions of the repealed section 253(2) of the Indian Contract Act, 1872. In Pitchiah Chettiar v. Subramanian Chettiar [1935] ILR 58 Mad 25, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h of the Andhra Pradesh High Court in CIT v. Krishna Mining Co. [1980] 122 ITR 362 and a Division Bench which has followed the said judgment in CIT v. Ravi Constructions [1988] 169 ITR 662 (AP) and the Rajasthan High Court in Raj Construction Co. v. Addl. CIT [1986] 157 ITR 734 have taken the view that in order to entitle a firm to registration under the Income-tax Act, the specification of shares of the partners in profits as well as losses is necessary and if there is no such specification in the deed, it should at least be inferable from other materials on record. The final consensus in this behalf is that where the partnership deed suffers immunity from losses of one of the partners, it detracts from there being a genuine partnership between the executants of the deed and such a firm cannot be granted registration under the Act. Our attention has been drawn to a Full Bench judgment of this court in R. M. Chidambaram Pillai v. CIT [1970] 77 ITR 494, which has been affirmed by the Supreme Court in CIT v. R. M. Chidambaram Pillai [1977] 106 ITR 292. The said case, however, has dealt with the question whether the salaries paid to the partners of a partnership firm constitute prof ..... X X X X Extracts X X X X X X X X Extracts X X X X
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