PETITIONER: PAREKH WADILAL JIVANBHAI Vs. RESPONDENT: COMMISSIONER OF INCOME-TAX, M. P. NAGPURAND BHANDARA, NAGPUR DATE OF JUDGMENT: 28/10/1966 BENCH: RAMASWAMI, V. BENCH: RAMASWAMI, V. SHAH, J.C. BHARGAVA, VISHISHTHA CITATION: 1967 AIR 448 1967 SCR (1) 998 ACT: Income-tax Act (11 of 1922), s. 26A-Registration of firm- Whether individual shares of partners specified-Partnership deed, construction of. HEADNOTE: Three brothers entered into a partnership in 1949 for doing business. Clause 3 of the partnership deed provided that the capital allotted to each partner was equal, and cl. 10 provided that after meeting all the expenses, interest and other charges, the resulting net profit or loss should be ascertained and divided amongst all the partners. In the assessment year 1951-52, the three partners applied to the Income-tax Officer for registration of the firm under s. 26A of the Income-tax Act, 1922 and registration was granted. For the assessment year 1952-53, the registration was re- newed on application. But for the assessment year 1953-54 the Incometax Officer refused renewal. In all the applications for registration, the three partners were shown to have shared the profits equally, and in their account books also, since 1949, the profits have been apportioned equally. The ground of refusal by the Income-tax Officer was, that there was no clause in the deed specifying the individual share of profits of each partner as required by s. 26A. The order was confirmed by the Appellate Assistant Commissioner, the Appellate Tribunal and the High Court on reference. In appeal to this Court, HELD : The assessee firm was entitled to be registered under s. 26A of the Act for the assessment year 1953-54 also. [1003 D] Although the application for registration had to be strictly in conformity with the section and Rules, in ascertaining whether the application was in such conformity the partnership deed has to be reasonably construed. Reading the partnership deed as a whole in the light of s. 13 of the Partnership Act, 1932, and in the context of the relevant circumstances of the case, there was specification of the individual shares of the three partners in the profits and losses namely, that each partner was allotted an equal one- third share and there was hence specification of the indivi- dual shares of the partners within the meaning of the section, [1002 D-F] Kylasa Sarabhalah v. Commissioner of Income-tax, [1965] 2 S.C.R. 310, followed. JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1058 of
1965.
Appeal by special leave from the judgment and order dated
March 14/15, 1961 of the Bombay High Court in Income-tax
Reference No. 56 of 1960.
Arvind P. Patwe, O. C. Mathur, for the appellant.
S. T. Desai, A. N. Kirpal and R. N. Sachthey, for the res-
pondent.
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The Judgment of the Court was delivered by
Ramaswami, J. This appeal is brought, by special leave, on
behalf of the assessee from the judgment of the Bombay High
Court dated March 15, 1961 in Income-Tax Reference No. 56 of
1960.
The assessee is a partnership firm constituted under a Deed
of Partnership dated March 19, 1950. The partners are three
brothers- Nandlal Bhimjibhai,Tarachand Bhimjibhai
andRajnikant Bhimjibhai, each one having an equal 1/3rd
sharein he partnership firm. Prior to November, 1949,
the threepartners of the assessee-firm in partnership with
eight others carried on business in Bombay and other places
in the name and style of “Rajnikant Vitheldas & Co.” In that
larger firm, each one of the three brothers had an equal two
annas share each, the other eight partners having the
remaining ten anna share. The larger partnership of
‘Rajnikant Vitheldas & Co.’ was dissolved on October 31,
1949 and on its dissolution the business of the two branches
thereof at Nagpur was allotted to the three brothers, who
thereupon as from November 1, 1949 constituted themselves
into a new firm, viz., the assessee-firm under the deed of
partnership executed on March 19, 1950. This document
recites that the three brothers have agreed to continue the
business of the two branches at Nagpur in partnership on the
terms mentioned in that document. For the purpose of this
case, it is not necessary to reproduce all the terms of the
partnership deed. It is sufficient to reproduce only four
terms as follows :
“3. The capital of the partnership shall be
Rs. 2,40,000./- (Rupees two lacs forty
thousand) divided into 15 shares of Rs.
16,000/- each. The partners hereby agree that
the shares allotted to different partners will
be equal i.e., each partner will get five
shares.
10.After meeting all expenses, interest and
other charges,the resulting net profit or
loss shall be ascertained and shall be divided
amongst all partners.
13. In case of death, or insolvency of any
partner the surviving partners or such of them
as are willing shall have the rights to
purchase the shares of such partners at the
valuation of the shares in the preceding
balance sheet.
14.In case of any partner desiring to
retire from the partnership will have to give
a written notice of at least two months to the
other partners of his intention to do so. On
receipt of such notice, the remaining partner
or partners will purchase the share or shares
in pro-
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portion to their holding at the time the
valuation in paragraph 13.”
In the assessment year 1951-52, the three partners applied
to the Income-tax Officer for registration of the firm under
the Indian Income-tax Act, 1922 (hereinafter called the
‘Act’). Along with this application, the deed of
partnership dated March 19, 1950 was produced. By his order
dated March 20, 1956 the Income-tax Officer granted
registration under s. 26A of the Act for the assessment year
1951-52. On the same day, he determined the total income of
the firm at Rs. 87,172/-, and under s. 23(6) of the Act,
allocated it between the three partners for tax purposes,
each partner getting one-third share of the total income
i.e., Rs. 29,0571/. On the basis of the same deed, an
application was made for the renewal of registration of the
firm for the assessment year 1952-53. The renewal was
granted- on March 28, 1957. For the assessment year 1953-
54,the partners again applied for renewal of registration
on thebasis of the same deed, but the Income-tax
Officer was of theopinion that there was no clause in
the deed specifying theindividual shares of each partner
as required by s. 26A of the Act. After issuing notices to
the three partners and after giving them a hearing, the
Income-tax Officer, by his order dated March 28, 1958,
rejected the application of the partners for renewal of re-
gistration of the firm. The assessee took the matter in
appeal to the Appellate Assistant Commissioner but the
appeal was dismissed. The assessee preferred a second
appeal to the appellate Tribunal but that appeal also was
dismissed. At the instance of the assessee the appellate
Tribunal referred the following question of law for the
determination of the High Court under s. 66(1) of the
Act :
“Whether on a proper construction of the
partnership deed dated 19-3-1950, the firm
sought to be registered for the assessment
year 1953-54, can be said to have -been
constituted under an instrument of partnership
specifying the individual shares of the
partners as required by section 26A of the Act
?”
By its judgment -dated March 15, 1961, the
High Court answered the question in the
negative, holding that renewal of registration
under s. 26A of the Act was rightly refused by
the Income-tax -authorities.
Section 26A of the Act provides as follows
“26A. Procedure in registration of firms. (1)
Application may be made to the Income-tax
Officer on behalf of any firm, constituted
under an instrument of partnership specifying
the individual shares of the partners,
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for registration for the purposes of this Act
and of any other enactment for the time being
in force relating to income-tax or Super-tax.
(2)The application shall be made by such
person or persons, and at such times and shall
contain such particulars and shall be in such
form, and be verified in such manner, as may
be prescribed; and it shall be dealt with by
the Income-tax Officer in such manner as may
be prescribed.”
By securing registration under the Act, the partners of the
firm obtain a benefit of lower rates of assessment and no
tax is directly charged on the income of the firm. This is
an important benefit to which the partners of a registered
firm become entitled as a consequence of registration and if
it is intended to secure that benefit, the requirements of
s. 26A of the Act and the Rules framed under the Act must be
strictly complied with Rule 2 of the Income-tax Rules
framed under s. 59 of the Act requires that the application
shall be signed by the partners (not being minors
personally, and prescribes the period within which the
application shall be made for the year in question. Rule 3
provides that the application shall be made in the
prescribed form and shall be accompanied by the original
instrument of partnership under which the firm is
constituted, together with a copy there of. It is provided
by Rule 4 that if on receipt of the application, the Income-
tax Officer is satisfied that there is or was a firm in
existence constituted as shown, in the instrument of
partnership, and that the application has been properly
made, he shall enter in writing at the foot of the
instrument or certified copy, as the case may be, a
certificate in the prescribed form By rule 6 the certificate
of registration granted under Rule 4 may be renewed for
subsequent years. Section 4 of the Partnership Act defines
“Partnership” as the ‘relation between persons who have
agreed to share the profits of a business carried on by all
or any of them acting for all Persons who have entered into
partnership with one another are called individually ‘part-
ners’ and collectively ‘a firm’, and the name ‘ under which
their business is carried on is called the ‘firm name’.
Section 13 of the Partnership Act provides as follows :
“13. 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
the firm
M17Sup.CI/66-19
1002
On behalf of the assessee the argument was put forward that
the High Court was in error in holding that the assessee was
not entitled to registration under s. 26A of the Act. It
was submitted that on a proper construction of the various
clauses of the partnership deed dated March 19, 1950 it
should have been held that the shares of the three
individual persons in the profits and losses were clearly
specified, namely, that each partner was allotted an equal
one-third share and there was hence specification of the
individual shares of the partners within the meaning of s.
26A of the Act. In our opinion, the argument of the appel-
lant is well-founded and must be accepted as correct. It is
evident that under cl. (3) of the partnership deed, the
capital allotted to each partner is equal, viz., 5 shares of
Rs. 16,000/each in a total capital of Rs. 2,40,000/-.
Clause (10) states that “after meeting all expenses,
interest and other charges, the resulting net profit or loss
shall be ascertained and shall be divided amongst all
partners”. It should also be noticed that in all the
applications for registration made by the assessee-firm
under s. 26A of the Act the three partners have been shown
to share the profits of the partnership firm equally. There
is also the other circumstance that in the books of accounts
for all the years since its commencement from November 1,
1949 right upto date the profits have been apportioned
equally mong the three partners of the partnership firm.
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 within the meaning of
s. 26A of the Act and the assessee-firm was entitled to
registration for the assessment year in question. It was
pointed out by this Court in Kylasa Sarabhaiah v.
Commissioner of Income: tax, Hyderabad(1) that although the
application for registration of a firm under s. 26A of the
Act had strictly to be in conformity with the Act and the
Rules, in ascertaining whether the application was in
conformity with the Rules, the deed of partnership had to be
reasonably construed. In that case, there were three major
partners. in firm A in which four minors were admitted to
the benefits of partnership. Its profits were to be shared
equally between the seven persons whereas the losses were to
be shared by the three major partners equally. A larger
firm, firm B, was constituted, with five partners, under a
deed of partnership in which firm A was described as the
first partner and its members were collectively shown as
having a share of 6 annas 9 pies in the profits of the
larger firm. The fact that four minors were admitted to the
benefits of partnership in firm A with equal shares in the
profits but losses were to be shared only by its three major
partners, was, however, recited in the preamble
(1) [1965] 2 S.C.R. 310: 56 I.T.R. 219.
1003
to the deed of partnership of firm B. The deed of
partnership of firm B was signed by all the major partners
of firm A. The question at issue was whether firm B was
entitled to be registered under s. 26A of the Act. It was
held that the firm was entitled to be registered and that
registration could not be refused merely because the deed of
partnership set out in paragraph 8 therein the collective
share of the yarn shop as 6 annas 9 pies, for in the
preamble the division of the shares of profits and losses
among the three members of the yarn shop and those admitted
to the benefits of the partnership was clearly indicated.
It was, however, pointed out that the yarn shop as such was
not introduced as a partner and the agreement was in truth
between the three major members out of those who constituted
the yarn shop and four outsiders. Each of them had signed
the application and the covenants of the partnership
agreement bind the partners individually. The indication in
the deed of partnership that three of them held qua the yarn
shop a certain relation did not affect their status as
partners of the appellant-firm individually. The principle
laid down in this case applies also to the present case and,
for the reasons already expressed, we hold that the
assessee-firm was entitled to. be registered under s. 26A of
the Act for the assessment year 1953-54 and the question
referred to the High Court must be answered in the
affirmative and in favour of the assessee-firm.
We accordingly allow this appeal with costs in this Court
and the High Court.
V. P. S.
Appeal allowed.
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