PETITIONER:
MANDYALA GOVINDU & CO.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, ANDHRA PRADESH
DATE OF JUDGMENT06/10/1975
BENCH:
GUPTA, A.C.
BENCH:
GUPTA, A.C.
KRISHNAIYER, V.R.
FAZALALI, SYED MURTAZA
CITATION:
1975 AIR 2284 1976 SCR (2) 131
1976 SCC (1) 248
ACT:
Registration of firms-Income Tax Act, 1922-Sec. 26A-
Whether share of partners in loss to be mentioned in the
Partnership Deed-Sec. 13(b) of Partnership Act-In the
absence of contract regarding share in loss-Whether to be
borne equally or proportionate to profit.
HEADNOTE:
The appellant assessee is a firm, having three Partners
and one minor admitted to the benefits of the partnership.
One of the partners has 31% share and the remaining two
partners and the minor have 23% share each in the profit of
the firm but the partnership deed is silent about their
shares in the losses. Clauses 9 of the partnership deed
provides that the partners are bound to act according to the
provisions of the Indian Partnership Act. The firm applied
for registration under s. 26A of the Income Tax Act, 1922
which was refused by the Income Tax officer.
The High Court in a reference under s. 66(1) held that
unless the instrument r of partnership specified the shares
of the partners not only in the profits but also in the
losses, the firm would not be entitled to registration under
s. 26A. The High Court negatived the contention of the
assessee that clause 9 of the instrument indicated how
losses were to be apportioned between the partners.
On appeal by special leave it was contended by the
appellant:
(1) S. 26A does not require that the instrument of
partnership must specify the respective shares of the
partners in the losses and it is sufficient if the
proportion in which the losses are to be shared is otherwise
ascertainable.
(2) Assuming that s. 26A does require mentioning the
proportion of losses in the instrument of partnership,
clause 9 of the instrument read with s 13(b) of the
Partnership Act satisfies that requirement.
Dismissing the appeal,
^
HELD: (1) A firm whether registered or unregistered is
an assessee under the Act and can do business as such.
However, registration under s. 6A confers on the partners a
benefit to which they would not have been entitled but for
s. 26A and such a right being a creature of a statute can be
claimed only in accordance with the statute which confers it
and the person who seeks relief under s. 26A must bring
himself strictly within its terms before he can claim the
benefit of it. [133D-E]
Rao Bahadur Revulu Subba Rao and others v. Commissioner
of Income-Tax, Madras, (1956) 30 I.T.R. 163, relied on.
(2) In the case of a registered firm the share of each
partner in the profit or loss is added to or set off
against, as the case may be, to the other income of the
partner. Thus, the loss, if any, affects the assessment
proceedings and. therefore, Income Tax officer has to know
what are the respective shares of the partners in the loss
before allowing the firm to be registered. [134-C-D]
(3) There is a conflict of opinion amongst the High
Courts whether it is essential for registration under s. 26A
that the shares of the partners must be specified in the
partnership deed. It is not necessary to decide for the
purpose of this appeal which of the conflicting views is
correct because in the present case the appeal is bound to
fail on any view. It is not disputed and cannot be disputed
that the Income Tax Officer before allowing the application
for
132
registration must be in a position to ascertain the shares
of the partners in the losses. even if s. 26A did not
require this to be specified in the instrument of
partnership. [135E-F]
(4) The contention that clause 9 brings in by
implication s. 13 (b) of the Partnership Act and thus
specifies the shares of the partners in the losses is
untenable. s. 13(b) makes the partners liable to contribute
equally to the losses only when they are entitled to share
equally in the profits. ID this case the shares of the
partners are not equal. The case of K. Pitchiah Chettiar. v.
G. Subramaniam Chettiar I.L.R. 58 Mad. 25 and In re Albion
Life Assurance Society, 16 Ch. Div. 83, 87, applied. [135 G-
H]
The law stated in these cases in the context of section
253(2) of the contract Act applies equally to s. 13(b) of
the Partnership Act which is in identical terms. 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. The other rule that where the
shares in the profits are unequal the losses must be shared
in the same proportions as profits in the absence of an
agreement as to how the losses are to be apportioned, also
does not apply to this case since there is a minor admitted
to the benefits of the partnership. Even if the adult
partner bear the losses in proportion to their respective
shares in the profits, the amount of loss in the minor's
share would still remain undistributed. Whether the partners
between themselves will bear this loss equally or to the
extent of their own individual shares, is not even suggested
in the instrument of Partnership. TD There is, therefore, no
means of ascertaining in this ease how the losses are to be
apportioned. [136-H, 137A-C]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 63 of
1971.
Appeal by Special Leave from the Judgment and order
dated the 19th February 1970 of the Andhra Pradesh High
Court in R.C. No. 50 of 1966.
S. T. Desai and K. Rajendre Choudhary, for the
Appellant
G. C. Sharma and S. P. Nayar, for the Respondent.
The Judgment of the Court was delivered by
GUPTA, J. This appeal by special leave is directed
against an order of the High Court of Andhra Pradesh at
Hyderabad answering in the negative and in favour of the
revenue the following question referred to it under sec.
66(1) of the Indian Income-Tax Act, 192 (hereinafter
referred to as the Act).
“Whether the Assessee is entitled to registration
under Section 26A of the Income-Tax Act, 1922 for the
assessment year 1961-62.”
The assessee is a firm. The instrument of partnership
was executed on January S, 1959 but the application for
registration under sec. 26A remained undisposed of until the
assessment for the year 1961-62 was taken up. The instrument
shows that three persons, Mandyala Narayana, Mandyala
Venkatramaiah, Mandyala Srinivasulu and a minor, Mandyala
Jaganmohan who was admitted to the benefits of the
partnership, held the following shares: Narayana 31 per
cent, Venkatramaiah 23 per cent, Srinivasulu 23 per cent,
and minor Jaganmohan 23 per cent: Clause 2 of the instrument
which sets out the
133
shares of the partners add that the profits of the above
partnership A business shall be divided and enjoyed
according to the shares specified above. ” There is no
clause in the instrument specifying the proportion in which
the three adult partners were to share the losses, if any.
Having set out all the terms of agreement, the instrument
closes with clause 9 which states:
“We (the partners) are bound to act according to
the above mentioned stipulations and also according to
the provisions of the Indian Partnership Act….”
The High Court was of the view that unless the
instrument of partnership specified the shares of the
partners not only in the profits hut also in the losses, the
firm would not be entitled to registration under sec. 26A,
and negatived the contention raised on behalf of the
assessee that clause 9 of the instrument indicated how
losses were to be apportioned between the partners. The
correctness of this decision is challenged by the appellant
firm.
It is not that a firm to be able to trade must be
registered under sec. 26A. A firm, registered or
unregistered, is an assessee under the Act and can do
business as such. However, registration under sec. 26A
“confers on the partners a benefit”, as would appear from
the provisions of sec. 23 (5) of the Act, “to which they
would not have been entitled but for section 26A, and such a
right being a creature of the statute, can be claimed only
in accordance with the statute which confers it, and a
person who seeks relief under section 26A must bring himself
strictly within its terms before he can claim the benefit of
it”: Rao Bahadur Ravulu Subba Rao and others v. Commissioner
of Income-tax, Madras.(1) The question in this case is
whether in the absence of a specific statement in the
instrument as to the proportion in which the partners were
to share the losses, the requirement of sec. 26A can be said
to have been satisfied. Sec 26A reads:
“26A. (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 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 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.”
The required particulars are specified in rules 2 and 3 of
the Rules framed under the Act and the form of application
including the Schedule annexed to rule 3. Paragraph 3 of the
Form requires the partners to `’certify that the profits (or
loss if any) ” of the relevant period were or will
(1) (1956) 30 I. T. R. 163.
134
be, as the case is, ‘`divided or credited, as shown in
Section 8 of the Schedule”. In Section 8 of the Schedule are
to be recorded the “particulars of the apportionment of the
income, profits or gains (or loss) of the business,
profession or vocation in the previous year between the
partners who in that previous year were entitled to share in
such income, profits or gains (or loss)”. Note (2) appended
to this Schedule states that if any partner is entitled to
share in profits but is not liable to bear a similar
proportion of any losses, this fact should be indicated. It
is clear therefore that the application for registration
which has to be made in the prescribed form must include
particulars of the apportionment of the loss, if any. It
does not appear to have been considered in this case whether
the application for registration made by the firm conforms
to the prescribed rules; the dispute is confined to the
question whether sec. 26A requires the instrument of
partnership to specify the individual shares of the partners
in the profits as well as the losses of the business.
Section 23(5) of the Act provides different procedures
in the assessment of a registered firm and a firm that is
unregistered. Without going into details, in the case of a
registered firm the share of each partner in the firm’s
profits is added to his other income and he is assessed on
his total income which includes his share of the profits and
the tax payable by him is determined accordingly. There is
a proviso which lays down that “if such share of any partner
is a loss it shall be set off against his other income or
carried forward and set off in accordance with the
provisions of section 24”. Thus, the loss, if any, affects
the assessment proceeding and therefore the Income-tax
officer has to know what are the respective shares of the
partners in the losses before allowing the firm to be
registered. It is not disputed that the Income-tax officer
must be in a position to ascertain how losses are to be
apportioned; the question is whether it is a condition for
registration under sec. 26A that the instrument of
partnership must specify the respective shares of the
partners in the losses. According to the appellant sec. 26A
has no such requirement. The appellant contends that sec.
26A does not require specification of the shares in losses
in the instrument of partnership and it is sufficient if the
proportion in which the losses are to be shared is otherwise
ascertainable, and that, assuming the section did so
require, clause 9 of the instrument satisfies that
requirement.
The contention that clause 9 specifies the respective
shares of the partners in the losses is obviously untenable.
This clause says that the partners are “bound to act
according to the provisions of the Indian Partnership Act”;
that they are in any case, and it is not clear which
provision of the Partnership Act indicated the proportion in
which the partners were to bear the losses in this case.
Counsel for the appellant refers to sec. 13(b) of the
Partnership Act in this connection.
Sec. 12(b) reads:
“Subject to contract between the partners-
(a) x x x x
(b) the partners are entitled to share equally in
the profits earned, and shall contribute
equally to the losses sustained by the firm
:”
135
We shall refer to sec. 13(b) in more detail when we consider
the other contention of the appellant, but assuming that
this provision has any relevance to the facts of this case,
which it has not, bringing in by implication sec. 13(b) from
a general statement that the partners are to act in
accordance with the Partnership Act does not amount to
specification of the partners’ shares in the losses, and the
instrument of partnership, it must therefore be held, fails
to comply with sec. 26A of the Act, were this a requirement
of that section.
The other contention of the appellant is that it is not
essential for registration under sec. 26A of the Act that
the shares of the partners in the losses must be specified
in the partnership deed. In support of this contention
reliance is placed mainly on two decisions, one of the
Mysore High Court: R. Sannappa and Sons v. Commissioner of
Income-tax, Mysore (1) and the other of the Allahabad High
Court: Hiralal Jagannath Prasad v. Commissioner of Income-
tax, U.P. (2) on behalf of the revenue it is claimed on the
authority of a decision of the Gujarat High Court, Thacker &
Co. v. Commissioner of Income-tax, Gujarat (3), that the
shares in the profits and losses have both to be
specifically stated in the instrument of. partnership in
order to comply with the conditions laid down in sec. 26A to
obtain registration. The view taken by the Gujarat High
Court appears to have been followed by the Kerala High Court
in the following cases among others: C. T. Palu & Sons v.
Commissioner of Income-tax, Kerala (4) and Commissioner of
Income-tax, Kerala v. Ithappiri & George (5), There is thus
a conflict of opinion in the High Courts on the point. It
will not be necessary, however, for the purpose of this
appeal to consider at any length the conflicting views of
the different High Courts and decide which view is correct
according to us because on the facts of the case the appeal
is bound to fail on any view. It is not, and it cannot be,
disputed that the Income-tax officer before allowing the
application for registration must be in a position to
ascertain the shares of the partners in the losses even if
sec. 26A did not require the shares in the losses to be
specified in the instrument of partnership. Counsel for the
appellant argues that clause 9 of the instrument refers to
sec. 13(b) of the Partnership Act by implication and,
accordingly, in the absence of any contrary indication, it
must be held that the partners are liable to share the
losses equally. The argument is not based on a correct
appreciation of the scope of sec. 13(b) and the facts of the
case. Sec. 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 In re
Albion Life Assurance Society (G) as follows:
(1) [1967] 66 I.T.R. 27. (2) [1967] 66 I.T.R. 293.
(3)[1966] 61 I.T.R. 540. (4) [1969] 72 I T. R. 641
(5) [1973] 88 L.T.R. 332. (6) 16 Ch. Div. 83 (87).
10-L1276SCI/75
136
“It is said, as a general proposition of law, that
in ordinary mercantile partnerships where there is a
community of profits in a definite proportion, the fair
inference is that 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
Sec. 13(b) of the Indian Partnership Act, 1932
reproduces the provisions of the repealed sec. 253(2) of the
Indian Contract Act, 1872. In K. Pitchiah Chettiar v.
G.Subramaniam Chettiar(1), Ramesam J. explained the scope of
sec. 253 (2) of the Indian Contract Act, 1872:
“Section 253(2) of the Indian Contract Act lays
down that all partners are entitled to share equally in
the profits of the partnership business, and must
contribute equally towards the losses sustained by the
partnership. As I read the section, it lays down two
presumptions with which the Court should start. The two
presumption are clubbed in one sub section. The first
is, if no specific contract is proved, the shares of
the partners must be presumed to be equal. In the
present case the plaintiff alleged unequal shares which
were not denied by the defendants. So the parties being
agreed on their pleadings as to the shares possessed by
them in the profits, there is no scope for the
application of this first presumption. The second
presumption is that where the partners are to
participate in the profits in certain shares they
should also participate in the losses in similar
shares. Now the section says that both should be in
equal shares but implies that if unequal shares are
admitted by the partners as to profits that applies
equally to losses. In the absence of a special
agreement, that this should be the presumption with
which one should start is merely a matter of common
sense and in India one has only to rely on section 114
of the Evidence Act for such a principle.”
The law stated here in the context of sec. 253(2) of the
Contract Act, 1872 applies equally to sec. 13(b) of the
Partnership Act, 1932: the two provisions are in identical
terms. On the facts of the present case, and having regard
to the scope of sec. 13(b), the section has plainly no
application.
(1) I. L. R. 58 Mad. 25 (28).
137
The other rule that where the shares in the profits are
unequal, the A losses must be shared in the same proportions
as the profits if there is no agreement as to how the losses
are to be apportioned, does not also apply to this case. In
this case even if the adult partners bear the losses in
proportion to their respective shares in the profits, the
amount of loss in the minor’s share would still remain
undistributed. Will the partners between them bear this
loss equally, or to the extent of their own individual
shares ? To this the instrument of partnership does not
even suggest an answer. There is therefore no means of
ascertaining in this case how the losses are to be
apportioned.
For the reasons stated above, the appeal fails and is
dismissed with costs.
P.H.P.Appeal dismissed.
138