TMI Blog1972 (7) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... ng a minor, was admitted to the benefits of partnership. For the assessment year 1959-60, the firm filed an application under section 26A of the Income-tax Act before the Income-tax Officer. Without making any order on the said application, the Income-tax Officer made an assessment order treating the firm as an unregistered one. The assessment order was made on October 29, 1959. Subsequently, on an application made by the assessee under section 27 of the Act, the Income-tax Officer re-opened the assessment and made a fresh assessment on March 31, 1960, treating the firm as a registered one. The firm was thus assessed to a tax of Rs. 5,946.46. The Income-tax Officer then allocated the profits among the 15 partners. The Income-tax Officer disallowed the alleged loss of Rs. 26,369 and made certain adjustments. The assessee carried the matter in appeal. The Appellate Assistant Commissioner set aside the assessment order and remitted the case to the Income-tax Officer directing him to dispose of the application filed under section 26A of the Act before making any allocations under section 23B of the Act. The Appellate Assistant Commissioner also felt that the relevant factors nece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der only the first question. In order to appreciate the implications of the first question it becomes necessary to read a few paragraphs of the partnership deed. "Para. 5: That the initial capital of the firm hereby constituted shall be Rs. 1,00,000 (rupees one lakh only) and the partners hereto have contributed the following amounts towards capital. _________________________________________________________________________ No. Name of the partner Amount _________________________________________________________________________ 19. Subash Keswarkar Rs. 7,000 _________________________________________________________________________ Para. 16: The profit or loss will be determined on 31st October and will be divided between the partners as follows: Name of the partner Share of profit or loss 1. Haji Mohd. Vazeer 2.3 nP. in the rupee. 2. Khaja Abdul Khader 2.3 do. 3. Abdul Gani 2.3 do. 4. Gopalarao Hanchate 5.6 do. 5. Shankar Hanchate 5.6 do. 6. M. Balwant Rao 4.168 do. 7. Ratna Bai 8.335 do. 8. Abdul Rahman 4.165 do. 9. Abdul Karim 4.165 do. 10. Abdul Gafoor 6.9 do. 11. Chandrasekhar 8.0 do. 12. Gouramma 8.0 do. 13. Gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect can be given to it, it is obvious that the registration of the firm under section 26A can be refused on the ground that no provision for sharing the losses is clearly made in the partnership deed. If, on the other hand, after appreciation of a document as a whole and applying the well-recognised principles of construction a conclusion is reached that the deed provides for the sharing of losses and the intent of the partners can be gathered in that behalf, it is plain that it cannot be said in such cases that the partnership deed does not contain any provision for sharing losses. The firm consequently cannot be refused to be registered. The question thus is of construction of a document and each case naturally has to be decided upon the terms of the deed and the facts and circumstances of that case. No hard and fast rule in that behalf can be laid down except perhaps broadly stating that the document should be read as a whole and attempt should be made to gather the real intention of the parties to the document by applying the rules of construction appropriately. Now, it cannot be in doubt that although section 26A does not specifically mention that the individual shares bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refused on the ground that the deed omits to specify the share in profit or loss. Our conclusion is supported by a decision of this court in Addepally Nageswara Rao v. Commissioner of Income-tax [1971] 79 ITR 306 (AP). In that case, like the present one, the partnership deed provided that the minor was admitted to the benefits of the partnership. Having provided that, the deed went on to specify that the shares in profits and losses would be borne in proportion to the shares mentioned in the document. While mentioning the shares in profit and loss of the partners, the minor was shown to have one anna share in a rupee. Construing the deed the learned judges held that the partnership deed cannot be said to have not specified the sharing in the losses by major partners. It was observed: "While the three major partners would in proportion to their shares bear the loss as if the unit of loss was 15 annas, the same thing can be arithmetically worked out treating 16 annas as a unit. In other words, they would, in proportion to their respective shares, bear the entire loss taking 16 annas as a unit, that is to say, the loss will be borne by them in the proportion of 1: 2: 2. That bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ratio of 50: 25: 25. It did not state in what proportion the loss was to be shared by the partners. Since no provision was made for the sharing of loss the Kerala High Court thought it sufficient to disentitle the firm for registration. In spite of this, the following observation appears in the judgment: "The liability of the major partners is, therefore, only to bear the loss in the proportion in which they are entitled to share the profit. This means that they are liable to bear 50% and 25% each of the loss; and the deed of partnership is blank regarding the sharing of the balance of 25% of the loss." If the provision was really there in the partnership deed, we fail to see, how it can be construed that there was no provision made for sharing the losses. In such a case since the minor is exempted from the losses, 75 could have been taken as a unit and it could be held that the two major partners had agreed to share losses in that unit in the ratio of 50 : 25. It cannot, in any case, be held that the deed would be deemed to have made no provision for sharing the losses by the major partners. If this is not the view which the Kerala High Court has taken, then, with due respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question does not arise in this case. Commissioner of Income-tax v. Mandyala Govindu Co. [1971] 82 ITR 926 (AP) is a case where provision was made for sharing the profits and no provision was made for sharing of losses whatsoever. That case, therefore, cannot be said to be an authority for the proposition with which we are concerned in this case. It is no doubt true that the learned judges considered in spite of holding that the deed does not provide for sharing the losses, the two possible interpretations of the partnership. The first was that the major partners should bear the entire losses in proportion to their shares in profit. If the losses were to be worked out on that basis, the learned judges thought that provision would have been deemed for sharing the losses in 77 paise and there will be no provision for showing as to how 23 paise of the losses should be borne. The learned judges rejected both the interpretations on the ground that since for profit 100 is treated as one unit and "if now the unit for the purpose of bearing the losses is taken as 77 paise instead of 100 paise the burden of each of the partners with respect to the losses incurred by the firm would be i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ult partners in the losses are specified in the partnership deed. We need not, therefore, consider the hypothetical question as to what would happen if no loss during the accounting year or at any time during the existence of the partnership occurs. The question is answered accordingly. The case will go before the Bench for the disposal of the other matters. ----------- [The following judgment of the Division Bench was delivered by SRIRAMULU J. on 1-8-1972 after the reference was answered by the Full Bench.] SRIRAMULU J.--At the instance of the Commissioner of Income-tax, Andhra Pradesh, three questions have been referred to this court by the Income-tax Appellate Tribunal under section 66(1) of the Income-tax Act, 1922. On account of the conflict between the decisions of this court in Addepally Nageswara Rao Brothers v. Commissioner of Income-tax [1971] 79 ITR 306 (AP) and R.C. No. 50 of 1966 (Commissioner of Income-tax v. Mandyala Govindu Co. [1971] 82 ITR 926 (AP)) dated February 19, 1970, and R.C. Nos. 65 and 82 of 1968 (Khummaji Milapchand Co. v. Commissioner of Income-tax [1973] 91 ITR 333 (AP)) dated February 10, 1971, a Division Bench of this court consisting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show in column 6 the shares in profits of each of the partners. The Accountant Member in his separate order observed that at that belated stage the revenue cannot claim that registration should be refused on the ground that the application was defective and that the assessee should not be made to suffer because of the default or a defective procedure on the part of the Income-tax Officer. The judicial Member in his separate order observed that to raise that ground at that stage would be to deny an opportunity to the assessee which he might have had earlier to rectify this technical error and, therefore, the application for registration should be treated as in order and, in view of the unsustainability of the refusal of registration on that ground, on which the income-tax authorities refused registration, the Tribunal directed the grant of registration to the assessee-firm. Sri Rama Rao, the standing counsel for the department, contended that the question as raised by the Commissioner of Income-tax in his application under section 66(1) of the Act should have been referred to this court by the Tribunal instead of the present question. It was open to the Income-tax Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defects in the application for registration and to give him an opportunity to remove those defects. Only if the assessee fails to remove the defects, then the Income-tax Officer could refuse registration to a firm. If such an immaterial or minor defect in the application had been pointed out at the proper time, the assessee would have, certainly, removed the defect. To sustain the order of refusal of registration on such aground raised for the first time, at the belated stage of second appeal, would be against all canons of justice. The Tribunal had exercised its discretion properly and in accordance with sound judicial principles when it refused to permit the Income-tax Officer to raise such an objection and in not sustaining the order of refusal of registration on that ground of defect in the application for registration. That apart, the particulars which are required to be shown in the Schedule to the application for registration are found in the instrument of partnership which is appended to the application. A reading of the application, along with the instrument of partnership, would make it abundantly clear that the shares of the partners have been specified. It is, in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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