TMI Blog1970 (1) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... eference may briefly be stated : The assessee-firm, which came into existence on April 1, 1959, was constituted by an instrument of partnership dated February 20, 1959. The partnership consisted of three partners, Mr. Narayana Rao and Venkateswararao, sons of Challa Appalaswamy and Kannamma, widow of Appalaswamy. Kumari Satyavathi, minor daughter of Narayana Rao was admitted to the benefits of the partnership. The partnership was formed to continue the aluminum vessels business run under the name and style of Challa Appalaswamy Sons, and the graphite crucible business run under the name of Narayan Graphite Crucible Works, which were originally run by the deceased Challa Appalaswamy. The shares of the partners in the profits were 9 : 4 : 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpretation of the relevant clauses of the instrument of partnership. They are clauses 2 and 6 of the instrument of partnership, which read as follows : " CLAUSE 2 : It is hereby agreed that the shares of the partners in the business of the firm carried on under the above-mentioned names shall be : (a) Challa Narayana Rao 0-9-0 in a rupee (b) Challa Venkateswararao 0-4-0 do. (c) Challa Kannamma 0-2-0 do. (d) Challa Satyavathi 0-1-0 do. The partners of this firm shall have the above-mentioned shares in the running business. CLAUSE 6 : ....If the firm incurs losses such losses are apportionable only between the first three partners and the fourth partner is entitled only to the profits regardless of such losses." For all th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further contended that in case the Income-tax Officer found that a registered firm had not divided its profits in accordance with the respective shares of the partners he could in the exercise of powers vested in him impose a penalty under section 28 of the Indian Income-tax Act, 1922, but could not in any case refuse or cancel registration. As against the above arguments, the learned counsel, Sri Ramarao, appearing for the department, relying upon the decisions in Commissioner of Income-tax v. S. M. Chitnavis and Calcutta Co. Ltd. v. Commissioner of Income-tax submitted that the profits of the previous year of a firm from whatever source that may be taken as a whole has to be charged to tax, and the manner in which the firm divided prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is a firm in existence as shown in the instrument of partnership. A firm may be said to be not in existence if it is a bogus or not a genuine one, or if in law the constitution of the partnership is void. The jurisdiction of the Income-tax Officer is, therefore, confined to the ascertaining of the two facts, namely, (i) whether the application for registration is in conformity with the rules made under the Act, and (ii) whether the firm shown in the document presented for registration is a bogus one or has no legal existence. Further, the discretion conferred on him under section 26A is a judicial one and he cannot refuse to register a firm on mere speculation, but he shall base his conclusion on relevant evidence." The assessee-firm h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een accepted by the department as correct. As a matter of fact, we are told that the manner in which the profits and losses have actually been divided by the assessee firm is more beneficial to the revenue than it would have otherwise been if they were divided in accordance with the manner the department requires the assessee to do. In interpreting the relevant clauses in the instrument of partnership, care has to be taken to find out whether such clauses contravene the provisions of section 30 of the Indian Partnership Act, the relevant portion of which reads as under : " 30. (1) A person who is a minor according to the law to which he is subject may not be a partner in a firm, but, with the consent of all the partners for the time being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferent sets are managed by an assessee and one results in a loss and the other in a profit, there is no doubt that the net result after adjusting the loss from one business against the profit of the other has to be brought to tax under section 4(1) of the Indian Income-tax Act, 1922. That may be so under the Income-tax Act for the purpose of computation of tax. But, here, what we are concerned with is not the determination of the profit for the purpose of computation of tax. It is the Income-tax Officer that does the computation. What we are concerned with is whether the loss or profit has been divided in accordance with the shares specified in the instrument of partnership. This is a case where the major partners have agreed that the minor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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