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TMI Blog1980 (4) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... and legal representatives of the deceased partner as partners in his place. Harkisondas Gokaldas, a partner of the firm, died on or about February 8, 1961, leaving behind him his wife, Smt. Taramati, a major daughter, named, Kanchan, two minor sons, Kishorechandra and Rameshchandra and two minor daughters, Tarulata and Karuna. A fresh partnership deed was executed by and between Gokaldas Mulchand, Anilkant Gokaldas, Taramati and Kanchan on March 17, 1961. In the preamble to the partnership deed the party of the third part was described as Taramati, widow of Harkisondas Gokaldas, and Kanchan, Kishorechandra, Tarulata, Rameshchandra and Karuna, all children of Harkisondas Gokaldas, since deceased, " the last four minors by their mother and natural guardian, Taramati and all six persons as the heirs and legal representatives of the said Harkisondas Gokaldas, since deceased ". The relevant clause dealing with the shares of the partners was cl. 4, which read as follows : " After defraying rents, wages, taxes, interest and all other incidental expenses and outgoings pertaining to the partnership business the net profits in the partnership shall be divided between the partners as f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving regard to the fact that the profits coming to the share of the party of the third part were credited into one account, the order refusing registration was proper. In the assessee's appeal to the Tribunal, it was contended that the shares of the heirs would be determined according to the provisions of the Hindu Succession Act, 1956. The Tribunal took the view that the firm was not entitled to registration as it found that the fact that the shares of the six persons inter se should be determined as provided in the Hindu Succession Act, as contended on behalf of the assessee, was not even stated in the partnership deed. The Tribunal also observed that there was no other material on which it could be ascertained as to what were the shares of the legal, heirs of Harkisondas. The Tribunal thus having upheld the action of the ITO in refusing registration, the question reproduced, earlier which arose out of the order of the Tribunal has been referred to this court at the instance of the assessee. Mr. Dwarkadas appearing on behalf of the assessee could not dispute the fact that the partnership deed does not expressly specify the shares of each of the six heirs of Harkisondas and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n has to be made in Form No. II. One of the points in respect of which information is required to be furnished in the application is " share in the balance of profits (or loss) percentage". The procedure which is to be followed on receipt of an application for registration made under s. 184 is provided for in s. 185. Under that section if the ITO is satisfied about the existence of a genuine firm during the previous year he shall make an order in writing registering the firm for the assessment year, and if he is not so satisfied he can refuse registration. It may be pointed out at this stage that under cl. (23) of s. 2 of the Act partner includes a minor, who is admitted to the benefits of partnership. Clause (23) of s. 2 of the Act reads: "' Firm', 'partner' and 'Partnership' have the meanings respectively assigned to them in the Indian Partnership Act, 1932 (IX of 1932), bat the expression I partner shall also include any person who, being minor, has been admitted to the benefits of partnership. " Reading s. 184(1)(ii) with the definition of " partner ", it is obvious that s. 184 requires that the instrument of partnership should not only specify the shares of the individua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 partner ship, in the accounting year. In N. T. Patel Co. v. CIT [1961] 42 ITR 224, the Supreme Court observed as follows (p. 228): " Registration under section 26A of the Act confers a benefit on the partners which the partners would not be entitled to but for section 26A. The right can be claimed only in accordance with the statute which, confers it and a person seeking relief under that section must bring himself strictly within the terms of that section." It is, therefore, clear from these decisions of the Supreme Court as well as the provisions of ss. 184 and 185 that, unless the requirements of those sections are complied with, and one of the requirements of s. 184 being that the shares of the individual partners must be specified in the instrument of partnership, a partnership firm will not be entitled to registration, if that requirement is not satisfied. It is in this context that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of whom two are partners and four others are admitted to the benefits of the partnership, it is impossible to ascertain, on the terms of the document of partnership, the shares of each of these six legal heirs of Harkisondas. As already pointed out, s. 184(1)(ii) requires the individual shares to be specified in the instrument of partnership. In other words, such share must be ascertainable on the terms of the document itself, and if on the terms of the document the share is not ascertainable the deed o partnership will not meet the requirements of s. 184(1)(ii). There can be no difficulty in accepting the submission that under the provisions of the Hindu Succession Act, 1956, each one of the heirs of the deceased, Harkisondas, was entitled to one-sixth share in the entire estate of Harkisondas. But when we say that each heir will be entitled to one-sixth share in the estate of Harkisondas, that is not the same thing as saying that the partners inter se have agreed between themselves to share the profits in the same proportion, and no such presumption can be drawn for the purposes of the statutory provisions of s. 184(1)(ii) which requires that the individual shares of the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was answered against the assessee. Before the Supreme Court in appeal by the assessee it was argued that on a proper construction of the various clauses of the partnership deed dated 19-3-1950, the shares of the individual persons in the profits and losses should have been held to have been clearly specified, namely, each partner was allowed an equal one third share. This argument was accepted by the Supreme Court, and while accepting the argument two circumstances were taken into account namely, (1) in all the applications for registration made by the assessee-firm under s. 26A of the Indian I.T. Act, 1922, the three partners have been shown to share, the profits of the partnership firm equally, and (2) that in the books of account for all the years since its commencement from 1-11-1949 right up to date, the profits have been apportioned equally among the three partners of the partnership-firm. It was in this context that the Supreme Court observed as follows (p. 489): "Reading the partnership deed as a whole and in the context of the relevant circumstances of the case, we are of the opinion that there was specification of the individual shares of the partners in the profits wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f s. 13(b), it is apparent that it deals with the manner in which the profits of the firm are to be shared as a whole. They are to be shared equally by all the partners subject to contract between them, or, in other words, if there is nothing to show that there is an agreement between the partners in respect of their respective shares in the profits or losses, such profits and losses, shall be shared by all the partners equally. Section 13(b) will not be attracted to a case where the share of two or three partners is cumulatively shown in the deed of partnership. Since s. 13(b) can apply only where a question arises in respect of the entire profits or losses of the firm as a whole, those provisions will not be of any assistance to the assessee in support of his contention that the different members of the third part will also be entitled to share the profits equally. The decisions of the Madras, Patna, Calcutta and Gujarat High Courts also seem to have taken the view that in a case where the shares are shown cumulatively, there is no compliance with the provisions relating to the registration of the partnership deed, and the ITO will be justified in refusing registration. It is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their shares would be a matter of internal arrangement between them. It was, found that there was nothing in the instrument of partnership which established that there was an internal arrangement between the minors to share in equal proportion the profits allotted to them for their collective share. It was then observed (pp. 341-42): " From the mere fact that the minors were entitled in equal proportion 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 proportion. " The learned judges of the Andhra Pradesh High Court referred to the decisions of the Madras, Patna, Calcutta and Gujarat High Courts in support of the view taken by them. In CIT v. N. V. Abdulla Sahib [1942] 10 ITR 7, a Full Bench of the Madras High Court took the view that where on the death of one of the partners a firm was reconstituted by taking in his place the widow of the deceased as a partner and six minor children were admitted to the benefits of the partnership, and in the instrument of partnership all the six minor children were shown as " a body " jointly entitled to a four annas share, and further nothing was said about th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Calcutta High Court that the minors had equal shares in their collective share, for, the principle of Hindu law is that where a gift or bequest is made to two persons they will take the property in equal shares as held by the Calcutta High Court in the case of CIT v. Pulin Behari Dey [1951] 20 ITR 314, the Calcutta High Court rejected this contention on the ground that in the case of the joint property of an undivided Hindu family governed by the Mitakshara law the principle of joint tenancy was unknown to Hindu law except in the case of coparcenary between the members of an undivided family, as observed by the Privy Council in, Jogeswar Narain Deo v. Ram Chandra Dutt [1896] ILR 23 Cal 670, 679. The High Court also referred to the observations of the Supreme Court in Rao Bahadur Ravulu Subba Rao v. CIT [1956] 30 ITR 163 in which, dealing with the provisions of s. 26A of the Indian I.T. Act, 1922, the Supreme Court had held that " the statute must be construed as exhaustive in regard to the conditions under which it (registration) can be claimed ". The Calcutta High Court pointed out that these observations set at rest the argument founded upon the Mitakshara school of Hindu law, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oportion Taramati and Kanchan will between themselves bear the loss to the extent of six annas. But what is contended by him is that even then we must proceed on the assumption that they will bear the loss in equal proportion because according to learned counsel their share in the income of the partnership profits is also equal, that is, one anna each. It is difficult for us to see how we can allocate the losses in the manner contended on behalf of the assessee. In what proportion Taramati and Kanchan would, between themselves, bear the losses is again a matter on which there had to be an agreement, and it was necessary to mention and specify the share of the losses which Taramati and Kanchan would bear. This is not a case where all the partners are having equal shares in the profits, and where by virtue of the provisions of s. 13(b), if there is no express mention, it may have been possible to argue that the share in the losses would also be equal. The shares of the partners are unequal, Gokaldas having 6 annas share, Anilkant having 4 annas share and Taramati and Kanchan having one anna share each. It will not be permissible for the court, therefore, to invoke the principle of eq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT [1961] 42 ITR 224, at p. 228, the Supreme Court had observed that the specification of the shares of the partners in the profits and losses of the firm was requisite for registration of the partnership under s. 26A of the Indian I.T. Act, 1922, and if that is wanting, registration can be refused. The matter seems to have fallen for express consideration by the Supreme Court in Mandyala Govindu Co. v. CIT [1976] 102 ITR 1. In that case, the partnership firm consisted of three partners whose shares in the profits were 31%, 23% and 22%, respectively, and a minor was admitted to the benefits of partnership with share of 23% in the profits. There was no clause in the deed specifying the proportion in which the three adult partners were to share the losses. One of the clauses provided that the partners are bound to act according to the stipulation in the deed and according to the provisions of the Partnership Act. It was argued before the Supreme Court that it was sufficient if the proportion in which the losses were to be shared was otherwise ascertainable and that cl. 9, which required that the partners were bound to act according to the stipulation in the deed and according to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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