TMI Blog1970 (2) TMI 44X X X X Extracts X X X X X X X X Extracts X X X X ..... n January 5, 1959. The terms of the said partnership, in so far as they are relevant for our present purpose, are as follows: " This deed of partnership executed on the 5th day of January, 1959, by and between (1) Narayana, son of Mandyala Pedda Munaiah, occupation business, residing at Proddatur, Proddatur taluk, (2) Venkataramaiah, (3) Srinivasulu (4) Jaganmohan. The fourth party being minor is represented by the father and guardian, Govindu, son of Mandyala Pedda Munaiah. The parties of the first part, second part and third part have started and have been carrying on business in yarn, art silk and colours, etc., in partnership from 3rd January, 1959, under the name and style of "Mandyla Govindu Co.", at Proddatur. We have admitted Jaganmohan, minor, the party of the fourth part to the benefits of that partnership. 2. We have the following shares in the above mentioned partnership: Rs. P. (a) Mandyala Narayana, the party of the first part. 0.31 (b) Mandyala Venkataramaiah, the party of the second part. 0.23 (c) Mandyala Srinivasulu, the party of the third part 0.23 (d) Mandyala Jaganmohan the party of the fourth part 0.23 ------- Total: 1.00 -------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artnership did not specify the proportion in which the adult partners were to bear the losses. The Tribunal held that, on a proper construction of the partnership deed, it was clear that the minor was only admitted to the benefits of the partnership and was not made liable for losses of the firm. The partnership was, therefore, not void. On the question whether the partnership deed specified the proportion of the liability of the adult partners in respect of the losses incurred by the firm, it rejected the contention of the assessee that the shares in the losses of the adult members had also been specified in the instrument. Nevertheless, the Tribunal was of the opinion that, inasmuch as, during the relevant accounting year, the business of the firm had not resulted in loss, the assessee could not be denied registration merely because the shares of the partners in the losses incurred by the firm were not specified. It held that the application for registration or renewal of registration of a firm should be judged by the facts of the relevant previous year and as it was common ground that the assessee had only made profits during the relevant accounting year, registration ought not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be a partner for the purpose of the Act. We, therefore, agree with the Tribunal that the constitution of the assessee-firm is not void for he was only admitted to the benefits of the partnership, having admitted the minor. Registration under section 26A of the Act could not be therefore refused to the assessee-firm on this ground. The more important question, however, that falls for consideration is: " Whether the partnership deed specifies the shares of the partners both in the profits and losses of the firm and whether the specification of the share of each partner in the losses of the firm in the deed of partnership is necessary in order to entitle the firm to registration under section 26A of the Act ? " It is, therefore, necessary to read in this context section 26A of the Act : "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, 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3% each, i.e., in the same proportion as they are sharing the profits. But, this would result in none of the three major partners bearing the burden of the remaining 23% of losses which is the share of the minor partner in the profits of the partnership to which he is admitted. This will lead to the conclusion that there is no specification as to how 23% of the losses should be borne. Another interpretation that may be placed on the document and which is sought to be put by the learned counsel for the assessee-firm is that the entire losses incurred by the firm should be borne in the proportion of 31 : 23 : 23. But such an interpretation is not warranted by the terms of the document, for nowhere in the document is it mentioned that they would be made liable for the losses in that proportion. Clause 2 merely mentions the shares of each of the four partners, treating the ettire partnership business as 100 nP. If now the unit for the purpose of bearing the losses is taken as 77 instead of 100 nP. the burden of each of the partners with respect to the losses incurred by the firm would be increased. That apart, there is no warrant for such an interpretation in view of the terms of the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f partnership does not answer the description of an instrument specifying the shares of the partners which alone entitles the firm to registration under section 26A of the Act. It was, therefore, contended by the learned counsel for the assessee-firm that "specifying the individual shares of the partners" does not mean "specifying the shares of partners both in the profits and losses". It was argued that the requirements of section 26A are satisfied even if the instrument merely specifies the share in the profits. It is true that section 26A does not speak of specifying the individual shares of the partners either in the profits or in the losses. In order to ascertain whether the expression "specifying the individual shares" of an instrument of partnership refers to the shares in the profits only or the liability to share the losses also must be determined having regard to the object of registration under the Act. Though partnership is a relationship between the persons who have agreed to share the profits of the business carried on by all or any of them acting for all, still the business carried on by the partnership may result in losses. In view of section 23 of the Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 13(b) in the absence of such a specification the partners would be entitled to share the profits and losses equally. The Income-tax Officer must clearly know what the shares of the partners are and should not be left to deduce, on an interpretation of the terms of the document, as to what the shares of the respective partners in the profits and losses are. The instrument itself must clearly stipulate the share of each one of the partners both in the profits and losses and not merely in the profits. A similar view has been taken by the Gujarat High Court in Thacker Co. v. Commissioner of Income-tax in which J.M. Shelat C.J. speaking for the Bench, held: "The words 'the individual shares of the partners' in section 26A(1) of the Indian Income-tax Act, 1922, must necessarily mean shares in profits and losses and, therefore, both have to be specifically stated in the instrument in order to comply with the conditions laid down in that section to obtain registration." On the facts in that case, the court held that the assessee-company was not entitled to registration as the shares of the partners in the losses were not stated in the instrument of partnership. We find ourselves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Hiralal Jagannath Prasad v. Commissioner of Income-tax and for the reasons already mentioned we are unable to agree with the said view. Strong reliance was also placed upon a decision of our High Court in R.C. No.2/66. But that was a case in which while admitting the minor to the benefits of a partnership business, the partnership deed specified the manner in which the profits as well as the losses should be apportioned among the partners who were majors. Our learned brother, Gopal Rao Ekbote J., speaking for the Bench, on a construction of the entire document, came to the conclusion that: "...... the loss can be shared by the three major partners in the same proportion as is indicated in clause 3(a) (partnership deed); and that there can be no difficulty in that behalf ". The learned judge further held that : "It cannot, therefore, be validly contended that the document is silent in that behalf and does not mention the share in such losses." Having reached that conclusion, he specifically observed: "In the view which we have taken, it is not necessary to consider whether it is essential to indicate such a thing in the document of partnership (share in the loss) in order ..... X X X X Extracts X X X X X X X X Extracts X X X X
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