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PETITIONER: N.   T. PATEL AND COMPANY

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, MADRAS.

DATE OF JUDGMENT: 13/03/1961

BENCH: KAPUR, J.L. BENCH: KAPUR, J.L. HIDAYATULLAH, M. SHAH, J.C.

CITATION:  1961 AIR 1356            1962 SCR  (1) 251  CITATOR INFO :  F          1973 SC1445  (15)

ACT: Income Tax-Partnership--Registration of--Shares of  Partners in  profit and loss not specified--Refusal of  registration, if proper--Indian Income-tax Act, 1922 (11 of 1922), s. 26A.

HEADNOTE: A partnership consisting of four persons was formed on March 31, 1949, which was to come to an end on March 31, 1954.  On July   27,  1951,  a  fifth  partner  was  taken  into   the partnership.   On  March  29, 1954, a  new  partnership  was entered into taking in a sixth partner will) contributed Rs. 40,000 as his share to the capital.  In the partnership deed no  express  provision was made as to the  manner  in  which profits   and  losses  were  to  be  divided.   A  deed   of rectification was executed on September 17, 1955, after  the close  of the account year 1054-5-5, adding a clause to  the partnership  deed  that  the partners  shall  share  in  the profits  and losses in proportion to their contributions  to the  capital.  Upto the end of the assessment year  1954-55, the old firms were registered under s. 26A of the Income-tax Act.   The  new  firm  applied  for  registration  for   the assessment year 1955-56, but registration was refused on the ground  that  there was no specification of  shares  of  the partners. Held,  that registration was rightly refused.   Section  26A requires  that for registration in a particular  year  there must  be an instrument of partnership specifying the  shares of  the partners in the profits and losses.  Though  in  the present  case there was an instrument of partnership in  the year  of assessment 1955-56, it did not specify the  shares. The right of registration can be claimed only in  accordance with  S.  26A and the assessee must bring  himself  strictly under the terms of that section. Ravula Subba Rao v. The Commissioner of Income-tax,  Madras, [1956] S.C.R. 577 and R. C. Mitter & Sons v. Commissioner of Income-tax, E1959] 36 I.T.R. 194, referred to.

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JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 424 of 1960. Appeal from the judgment and order dated March 25, 1958,  of the Madras High Court in case Referred No. 62 of 1957. A.V. Viswanatha Sastri, J. B. Dadachanji, Rameshwar  Nath and P. L. Vohra, for the appellant. 252 H.   N. Sanyal, Additional Solicitor-General of India, K.   N. Rajagopala Sastri and D. Gupta, for the respondent. 1961.  March 13.  The Judgment of the Court was delivered by  KAPUR, J.-This is an appeal against the judgment and  order of the High Court of Judicature at Madras.  The assessee  is the  appellant  and the Commissioner of  Income-tax  is  the respondent. A  partnership  consisting of four persons was formed  by  a deed of partnership dated March 31, 1949.  On July 27,  1951 another  partner was taken into partnership and a  new  deed was drawn up.  The previous partnership deed was  considered as the principal deed.  The new partnership like the old one was  to  end on March 31, 1954.  On March 29,  1954,  a  new partnership  was entered into and a sixth partner was  taken and  a new deed was executed.  The new  partner  contributed Rs.  40,000  as  his  share  to  the  capital  but  in   the partnership  deed  no express provision was made as  to  the manner  in  which  profits and losses  were  to  be  divided between  the partners.  In order to rectify this, a deed  of rectification was executed on September 17, 1955, which  was after  the  close of the account year  1954-55.   This  deed recited that an error had crept in in typing the partnership deed dated March 29, 1954 by omitting to type el. 21 of  the old  partnership  deed  in the new deed.   The  parties  had therefore agreed to rectify the error by adding cl. 20- A as follows:-               "We   hereby   agree  that  for   purpose   of               clarification  the following clause  shall  be               added  as  clause  20-A  in  the   Partnership               Instrument, dated 29th March, 1954:-               "The  parties shall be entitled to  shares  in               the   profits  and  losses  of  the  firm   in               proportion to the contribution of the  capital               of  each  of the partners and  whenever  fresh               capital  is  required for the  business,  each               partner  shall  be liable  to  contribute  the               additional  capital in the same proportion  as               the               253               paid up capital referred to in clause 4 of the               deed, dated 29th March 1954".  " This is signed by all the partners. Up to the end of assessment year 1954-55 the old firms i.e., the   one  constituted  of  four  partners  and  the   other constituted of five partners were registered under s. 26A of the  Income  Tax Act (hereinafter termed  the  ’Act’).   The appellant  firm  then  applied  for  registration  for   the assessment year 1955-56.  The Income Tax Officer pointed out to  the  appellant firm that there was no  specification  of shares   of  the  partners  in  the  deed  of   partnership. Thereupon the appellant submitted the deed of  rectification dated September 17, 1955, above mentioned and submitted that the original deed did specify the shares of the partners and the deed of rectification only clarified the position.   But the  registration was refused by the Income-tax Officer  and an  appeal  taken  against  that  order  to  the   Assistant Commissioner was dismissed.  Further appeal was taken to the Income-tax  Appellate  Tribunal which also failed.   At  the

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request of the appellant the following question was referred to the High Court for its opinion:-               "Whether  the  assessee firm  is  entitled  to               registration  u/s. 26-A of the Income-tax  Act               for the assessment year 1955-56." The  High  Court  held that under s. 26-A  of  the  Act  the factual existence in the year of account of an instrument of partnership was necessary, a requisite which, in the present case,  was lacking and therefore the provisions of  s.  26-A were not satisfied and that the specification of shares only took   place  on  September  17,  1955  when  the  deed   of rectification  was  executed.  The  question  was  therefore answered  in the negative.  Against this judgment and  order the   appellant  has  come  in  appeal  to  this  Court   by certificate of the High Court. It was contended that cls. 9, 11, 34 and 41(a)  sufficiently specified  the  shares  of the partners  and  satisfied  the requirements of the law.  These clauses were as follows:- 254               Cl.  9  "Such extra contribution made  by  the               partners  shall be credited to the  respective               partners   under  an  account  called   "Extra               Capital  Subscription  Account"  and  for  the               period of the utilisation of the whole or part               thereof  during  the  course of  the  year  or               years,  it  shall be treated as  capital  con.               tribution  only  for the purpose  of  dividing               profit   but   it  shall   otherwise   in   no               circumstances   be   added  to   the   paid-up               capital."               Cl. 11.  "In addition to the shake of  profits               in  proportion  to  the  contribution  to  the               extra,   capital  subscription  account,   the               amount,  so advanced shall carry  an  interest               equal to the highest rate at which the company               may have to pay in the event of borrowing  the               same from Multani money market and shall carry               twice the said rate of interest in the year or               years of loss."               Cl.  34.  "The senior partner may at any  time               during  the  subsistence  of  the  partnership               bring  in one or more of his other sons  other               than  partners  of the 5th and  the  6th  part               herein to the partnership and in the event  of               their so becoming partners they will be liable               for  the  same duties as  the  other  partners               herein  and shall be entitled to  remuneration               and  profits  in proportion to  their  capital               contribution."               Cl.  41(a).  "In the event of the  dissolution               of  partnership  the  capital  available   for               distribution as per the balance sheet,  except               for  debts  outstanding  for  collection   and               reserve  fund,  shall  be  paid  off  to   the               outgoing partner in proportion of the  capital               contribution  of the outgoing partner  to  the               total   contribution  of  all  the   partners,               including extra capital subscription paid,  if               any, under clause 9." None  of these clauses specify the shares of the   partners. Clause  9  has reference to extra contribution made  by  the partners which was to be treated as capital contribution for the purpose of dividing profits but was not otherwise  taken to  be paid up capital.  Clause 11 provides for interest  on the  extra  capital subscribed-.  Clause 34  authorises  the

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senior partner during the subsistence of the partnership  to bring in 255 one or more of his sons as partners who on being so  brought in  were entitled to remuneration and profits in  proportion to  their capital contribution.  Clause 41(a) provides  that in  the  event  of dissolution of  partnership  the  capital available  except  for  debts etc. was to  be  paid  to  the outgoing partners in proportion to the capital  contribution of the outgoing partner.  But in none of these clauses is it stated  what the shares of the partners in the  profits  and losses  of the firm were to be and that in our  opinion  was requisite for registration of the partnership under s.  26-A of the Act and as that was wanting, registration was rightly refused.   Registration under s. 26-A of the Act  confers  a benefit  on  the partners which the partners  would  not  be entitled to but for s. 26-A.  The right can be claimed  only in accordance with the statute which confers it and a person seeking  relief  under  that  section  must  bring   himself strictly  within  the term of that section.   The  right  is strictly  regulated  by the terms of  that  statute:  Ravula Subba Rao v. The Commissioner of Income-tax, Madras  Section 26-A provides:-               S.26A(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 purpose  of               this  Act and of any other enactment  for  the               time being in force relating to income-tax  or               super-tax." For  the  purpose of this case the relevant  words  of  that section are "constituted under an instrument of  partnership specifying   the   individual  shares  of   the   partners". Therefore unless the instrument of partnership specified the individual   shares  of  the  partners  the  instrument   of partnership  does  not conform to the  requirements  of  the section.  In B. C. Mitter & Sons V. Commissioner of  Income- tax (2) it was held that the instrument of partnership to be registered  should have been in existence in the  accounting year  in respect of which an assessment is being  made.   At page 202, Sinha J., (as he then was) said:- (1) [1956] S.C.R. 577,588. (2) [1959] 36 I.T.R. 194. 256               "It is, therefore, essential, in the  interest               of  proper administration and  enforcement  of               the   relevant  provisions  relating  to               the  registration  of firms,  that  the  firms               should  strictly comply with the  requirements               of  the  law,  and it is  incumbent  upon  the               Income-tax  authorities  to insist  upon  full               compliance with the requirements of the law." In  the  present case an instrument of  partnership  was  in existence but it did not specify the shares which was one of the  requirements  for registration and that  condition  was fulfilled  by the deed of rectification dated September  17, 1955.   Therefore  it  cannot be said  that  there  was  the requisite   instrument   of   partnership   specifying   the individual  shares  of  the  partners  during  the  year  of account.   The  High  Court, in our opinion,  was  right  in answering the question in the negative. We therefore dismiss this appeal with costs.                                        Appeal dismissed. 257

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