TMI Blog1979 (8) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... sequent upon the partition in each of the two families of the partners in respect of their interest in the firm on September 30, 1958, when there was a partition of movable and immovable properties. A fresh partnership deed was drawn up on October 1, 1958, whereunder, some minors, who had been admitted to the benefits of partnership, became partners. The assessee filed an application for the registration of the firm under s. 26A of the Indian I.T. Act, 1922, on January 20, 1959. The application contains the names of the partners and the minors who have been admitted to the benefits of the partnership. The profit sharing ratio as per the partnership deed was also indicated. The registration was refused by the ITO. On appeal, the AAC passed an order on 8th March, 1965, holding that the assessee should be granted registration and directed the ITO to suitably amend the status of the appellant as that of a registered firm. The Income-tax Appellate Tribunal confirmed the view of the AAC. Hence, this reference. Sri P. Rama Rao, the learned counsel for the revenue, contends that the view taken by a Full Bench of this court in CIT v. Hyderabad Stone Depot [1977] 109 ITR 686 holding that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtners, there was a change in the constitution of the firm under a partnership deed drawn up on October 1, 1958. The members of the divided families became partners including some minors who had been admitted to the benefits of the partnership. The profit-sharing ratio in accordance with the new deed is as follows : Name Share in profits 1. G. Venkatasubbaiah 12 1/2% 2. Smt. G. Audilakshmamma 4-1/6% (Widowed eldest daughter- in-law of No. 1) 3. G. Seshagiri Rao 4-1/6% 4. Shri G. Venkateswara Rao 12 1/2% (Following minors have been admitted to the benefits of the partnership) 1. G. Pitcheswara Rao 4-1/6% } } Sons of 2. G. Sekhar Babu 4-1/6% } partner No.2 3 . G. Sekhar Babu 4-1/6% } } Sons of 4. G. Ravi Kumar 4-1/6% } partner No. 3 5. G. Mohan Rao 12 1/2% Son of partner No. 1 6. G. Giri Babu 12 1/2% } Sons of 7. G. Ramesh 12 1/2% } partner 8. G. Kumara Raja 12 1/2% } No. 4 For the assessment year 1959-60, the assessee-firm had filed an application under s. 26A of the Indian I.T. Act, 1922, on January 20, 1959, for the registration of the firm furnishing the names of the partners and the minors who have been admitted to the benefits of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the conduct of the parties in so far as the distribution of the profits is concerned does not leave any room for doubt as to the intention of the parties regarding the sharing of losses. " The decision of this court in CIT v. Mandyala Govindu and Co. [1971] 82 ITR 926 was distinguished and relying on CIT v. Hyderabad Stone Depot [1977] 109 ITR 686 (AP) [FB], the Tribunal held that there was no infirmity in the partnership nor was there any violation of any of the provisions of s. 26A of the Indian I.T. Act, 1922. It consequently granted registration. The Tribunal was in full agreement with what the AAC had stated with regard to the closing of the accounts on 31st March, 1959, as the business was continued and carried on without any interruption in spite of the change in the constitution of the firm and the accounts. As there was an agreement among the partners to share the profits right from the beginning of the year till the accounts are closed as usual, the distribution of the profits for the entire year among all the partners was held to be in order. The Tribunal found that the parties, after the partition of all the family members, were entitled to profits and, therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 686 (AP) [FB] is no longer good law in view of the decision of the Supreme Court in Mandyala Govindu Co. v. CIT [1976] 102 ITR 1 and that the division of profits among all the partners for the entire year is violative of the terms of the deed of partnership since a new firm had come into existence with effect from October 1, 1958. This claim of the revenue is resisted by Sri S. Parvatha Rao, learned counsel appearing as amicus curiae, contending, inter alia, that on a reading of all the material clauses in the deed of partnership the intention of the partners was to share the losses, if any, in the proportion in which they agreed to share the profits and that in any event there is sufficient material in this case on the basis of which it can safely be gathered that the intendment of the major partners was to share the losses, if any, in the same proportion in which they agreed to share the profits. He further contends that the law laid down by the Full Bench of this court in CIT v. Hyderabad Stone Depot [1977] 109 ITR 686 holds good as the decision of the Supreme Court in Mandyala Govindu Co. v. CIT [1976] 102 ITR 1 is distinguishable on facts, that there is no illegality in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence constituted as indicated in the partnership deed and that the application has been properly made, he shall enter in writing at the foot of the instrument a certificate in the prescribed form. Therefore, in order to get a firm registered for the purposes of the Act, there must exist a valid and genuine partnership constituted under an instrument specifying the individual shares of the partners and an application with the deed signed by all the partners personally and in conformity with the rules must be filed before the ITO, within the time prescribed therefor. Section 26A read with rr. 2, 3 and 4 made under s. 59 of the 1922 Act enjoins a duty on the ITO to register a firm if the application made by the assessee-firm furnishes the requisite particulars. The ITO can refuse to register a firm if the application is not in conformity with the rules or if the firm is not genuine or has no legal existence. However, the discretion vested in the I.T. authorities under s. 26A is a judicial one and, therefore, the application for registration cannot be refused on suspicion or speculation ; nor is it open to the ITO to look into the instrument of partnership and the application for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a whole. The specification of the individual shares of the partners may be either express or implied or worked out. It is one of intention or object of the partners who constituted the firm. This intention and object of the partners of the firm with regard to the specification of the individual shares of the partners can be gathered either from the very recitals of the deed of partnership as a whole or from the proved facts and circumstances indicated in the application for registration, books of account and the conduct of the parties. The specification of the shares of the partners is required for the purpose of distributing the profits or losses, as the case may be, among the partners and for enabling the I.T. authorities to make proper assessments on the true income of each one of the partners of the firm. Section 26A does not indicate that the specification of the shares is for distributing the profits or losses. But that is normally implied. The very object of this requirement is to grant benefits of registration to valid and genuine firms only. The genuineness of the partnership is the most important condition precedent to claim registration under the Act. The trend of the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orked out in precise fractions, and that any defect in the deed of the smaller firm could not affect the right of the larger firm to be registered and, therefore, the larger firm was entitled to be registered under s. 26A. Parekh Wadilal Jivanbhai v. CIT [1967] 63 ITR 485 (SC) is an authority for the proposition that the deed of partnership providing only that " profits or losses shall be divided amongst partners " without specifying the individual shares was considered to be sufficient to satisfy the requirement of specification of individual shares of the parties or persons within the meaning of s. 26A as the profits shown in the accounts and the application for registration had to be divided equally. In Mandyala Govindu Co. v. CIT [1976] 102 ITR 1 the Supreme Court held : The Income-tax Officer, before allowing the application for registration under section 26A of the Indian Income-tax Act, 1922, must be in a position to ascertain the shares of the partners in the losses even if section 26A did not require the shares in the losses to be specified in the instrument of partnership. Where the shares in the profits were unequal, the losses must be shared in the same propor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... J. (as he then was) in S. R. G. Ginning Oil Mills v. CIT [1970] 2 APLJ 194 observed thus at : " It is settled law that the deed of partnership, for the purpose of registration under section 26A of the Act, must be construed fairly and reasonably. The intention of the parties at the time of the execution of the deed of partnership as revealed from the clauses of the very instrument, is a relevant and material factor to find whether the minors have been made full partners or they have been admitted only to the benefits of partnership. Mere mention of the minors as partners in the preamble and their being represented by their guardians in the execution of the document will, in our considered opinion, none the less affect the validity of a genuine partnership." In CIT v. R. S. Nikhera Construction Co. [1978] 114 ITR 294 (MP), the deed of partnership of the assessee-firm indicated that the eight partners of the firm formed themselves into three groups to share the profits at 1/3rd each. The claim of the assessee-firm for registration was refused by the I.T. authorities on the ground that the share of each partner of the various groups was not specifically mentioned in the deed of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nuine firms on technical grounds. Where the deed of partnership did not specify the individual shares of partners either in respect of profits or in respect of losses, it can be rectified by the partners if the defect was pointed out immediately to the firm. The ITO has to assess the income of the partners and there is no difficulty in completing the assessments of the partners in the years during which no loss has been incurred or suffered by the firm. In the absence of a contract to the contrary, the loss must be shared by the major partners in the same proportion in which they are entitled to share the profits. It is not necessary that the instrument of partnership should give the detailed working out of the shares or the legal inferences to be drawn. From the aforesaid discussion, the following principles emerge : 1. Section 26A confers a beneficial right or interest on a firm entitling it for registration for the purposes of the Act, if the application made by it furnishes the requisite particulars prescribed by rr. 2, 3 and 4. 2. In order to entitle a firm for registration there must exist a valid and genuine partnership constituted under an instrument. 3. Such deed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive HUFs, which owned the firm's business originally. Each of the original partners had three sons : The sons of Venkatasubbaiah are 1. the husband of Smt. G. Audilakshmamma, the second partner, 2. G. Seshagiri Rao, the third partner, and 3. G. Mohan Rao, minor, who was given 12 1/2% share in the profits. As the husband of G. Audilakshmamma, the 2nd partner, died, she was given 4-1/6% share whereas her two minor sons, Pitcheswara Rao and Sekhar Babu, were each given 4-1/6% share in the profits. G. Seshagiri Rao, the second son of Venkatasubbaiah, was given 4-1/6% share whereas his two minor sons, Sekhar Babu and Ravi Kumar, were each given 4-1/6% share in the profits. The third son of Venkatasubbaiah who was a minor, viz., Mohana Rao, was having 12 1/2% share in the profits. Audilakshmamma, the 2nd partner, represents the branch of her husband along with her two minor sons and the entire branch will have 12 1/2% share in the profits. Similarly, in the case of G. Seshagiri Rao, the third partner. G. Venkataswara Rao, the half-sharer in the original firm, has three minor sons and they were each given 12 1/2% share in the profits along with him. The share of profits of G. Venkateswar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits for the entire year amongst all the partners was held to be valid as there was an agreement between the partners to share the profits right from the beginning of the year till the accounts are closed as usual. The Tribunal also took note of the fact that there were no losses so far as the year under consideration was concerned and the question regarding losses was only academic. The genuineness of the firm was never doubted nor the partitions which were effected in the respective families were in doubt. The Appellate Tribunal agreed with the AAC that the firm is genuine and is entitled to registration. On a careful and proper reading of all the clauses of the partnership deed as a whole, we have no hesitation to hold that the major partners alone intended to share the losses, if any. The respective guardians, who represent the bigger family, would be liable to bear his loss incurred by the minors. G. Venkatasubbaiah would bear the loss at 12 1/2% as well as 12 1/2% of his minor son, G. Mohana Rao, i.e., he will bear a total loss of 25%. G. Audilakshmamma would be liable for loss of her share of 4-1/6% and the two shares of her minor sons, each at 4-1/6%, which would make a ..... 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