1979 (3) TMI 25 - HC - Income Tax

Summary

Issues Involved:
1. Compliance with Clause 16 of the 1954 Partnership Deed.
2. Legality of Executors as Partners.
3. Specification of Individual Shares.
4. Appealability of the ITO's Order.

Issue-Wise Detailed Analysis:

1. Compliance with Clause 16 of the 1954 Partnership Deed:
The ITO refused registration of the reconstituted firm on the ground that the new partnership of 1962 did not comply with Clause 16 of the 1954 partnership deed. Clause 16 stipulated that an heir of a deceased partner could succeed to the deceased's share if mentioned by the deceased. The ITO noted that no nomination was made, and the two executors stepped into the deceased partner's shoes, which he deemed improper.

2. Legality of Executors as Partners:
The ITO contended that the two executors of the deceased partner Bulakhidas constituted an "association of persons" and such an association could not be a partner in a firm. The AAC and the Tribunal upheld this view, with the Tribunal emphasizing that the two executors were given a consolidated share of 25 paise, which did not meet the requirement of specifying individual shares under Section 184(1)(ii) of the I.T. Act, 1961.

3. Specification of Individual Shares:
The ITO and the Tribunal found that the individual shares of the partners were not specified in the partnership deed dated 5th February 1962. The Tribunal opined that the two executors were separately considered partners, but their joint share of 25 paise was not in compliance with Section 184(1)(ii). The court noted that the deed of partnership described the two executors collectively as the "Fourth Part" and specified their joint share, which was not permissible under the law.

4. Appealability of the ITO's Order:
The Tribunal rejected the department's argument that the ITO's order was under Section 184 and not Section 185, making it non-appealable. The court held that if the refusal of registration was based on substantial grounds rather than procedural defects, the order must be regarded as one made under Section 185, which is appealable under Section 246(j).

Conclusion:
The court concluded that the partnership deed of 5th February 1962 did not create a legal partnership because it attempted to make two executors collectively a single partner, which is not permissible under the law. Thus, the refusal of registration was proper. The court also held that the ITO's order was appealable under Section 185.

Questions Answered:
1. Refusal of Registration: The refusal of registration to the appellant firm was proper.
2. Order under Section 185 or 184: The order of the ITO must be deemed to be one made under Section 185 and hence appealable.

Costs:
The court directed the parties to bear their own costs of the reference, noting partial failure and partial success for both parties.