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PETITIONER: PAREKH WADILAL JIVANBHAI

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, M. P. NAGPURAND BHANDARA, NAGPUR

DATE OF JUDGMENT: 28/10/1966

BENCH: RAMASWAMI, V. BENCH: RAMASWAMI, V. SHAH, J.C. BHARGAVA, VISHISHTHA

CITATION:  1967 AIR  448            1967 SCR  (1) 998

ACT: Income-tax  Act (11 of 1922), s. 26A-Registration  of  firm- Whether individual shares of partners  specified-Partnership deed, construction of.

HEADNOTE: Three brothers entered into a partnership in 1949 for  doing business.   Clause 3 of the partnership deed  provided  that the  capital allotted to each partner was equal, and cl.  10 provided  that after meeting all the expenses, interest  and other  charges, the resulting net profit or loss  should  be ascertained  and divided amongst all the partners.   In  the assessment  year 1951-52, the three partners applied to  the Income-tax Officer for registration of the firm under s. 26A of  the Income-tax Act, 1922 and registration  was  granted. For  the assessment year 1952-53, the registration  was  re- newed  on application.  But for the assessment year  1953-54 the   Incometax  Officer  refused  renewal.   In   all   the applications for registration, the three partners were shown to  have  shared the profits equally, and in  their  account books  also, since 1949, the profits have  been  apportioned equally.   The ground of refusal by the  Income-tax  Officer was,  that  there was no clause in the deed  specifying  the individual  share of profits of each partner as required  by s. 26A.  The order was confirmed by the Appellate  Assistant Commissioner,  the Appellate Tribunal and the High Court  on reference. In appeal to this Court, HELD : The assessee firm was entitled to be registered under s.  26A  of the Act for the assessment  year  1953-54  also. [1003 D] Although the application for registration had to be strictly in  conformity with the section and Rules,  in  ascertaining whether   the  application  was  in  such   conformity   the partnership  deed has to be reasonably  construed.   Reading the partnership deed as a whole in the light of s. 13 of the Partnership  Act, 1932, and in the context of  the  relevant circumstances  of the case, there was specification  of  the individual  shares of the three partners in the profits  and losses namely, that each partner was allotted an equal  one- third share and there was hence specification of the indivi-

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dual  shares  of  the partners within  the  meaning  of  the section, [1002 D-F] Kylasa  Sarabhalah v. Commissioner of Income-tax,  [1965]  2 S.C.R. 310, followed.

JUDGMENT: CIVIL  APPELLATE  JURISDICTION : Civil Appeal  No.  1058  of 1965. Appeal  by special leave from the judgment  and order  dated March  14/15,  1961 of the Bombay High Court  in  Income-tax Reference No. 56 of 1960. Arvind P. Patwe, O. C. Mathur, for the appellant. S.   T. Desai, A. N. Kirpal and R. N. Sachthey, for the res- pondent. 999 The Judgment of the Court was delivered by Ramaswami,  J. This appeal is brought, by special leave,  on behalf of the assessee from the judgment of the Bombay  High Court dated March 15, 1961 in Income-Tax Reference No. 56 of 1960. The assessee is a partnership firm constituted under a  Deed of Partnership dated March 19, 1950.  The partners are three brothers-     Nandlal    Bhimjibhai,Tarachand     Bhimjibhai andRajnikant  Bhimjibhai, each one having an  equal  1/3rd sharein  he partnership firm. Prior to November,  1949, the threepartners of the assessee-firm in partnership  with eight others carried on business in Bombay and other  places in the name and style of "Rajnikant Vitheldas & Co." In that larger firm, each one of the three brothers had an equal two annas  share  each,  the other  eight  partners  having  the remaining  ten  anna  share.   The  larger  partnership   of ’Rajnikant  Vitheldas  & Co.’ was dissolved on  October  31, 1949 and on its dissolution the business of the two branches thereof  at Nagpur was allotted to the three  brothers,  who thereupon  as from November 1, 1949  constituted  themselves into  a new firm, viz., the assessee-firm under the deed  of partnership  executed  on  March 19,  1950.   This  document recites that the three brothers have agreed to continue  the business of the two branches at Nagpur in partnership on the terms  mentioned in that document.  For the purpose of  this case, it is not necessary to reproduce all the terms of  the partnership  deed.  It is sufficient to reproduce only  four terms as follows :               "3.  The capital of the partnership  shall  be               Rs.   2,40,000./-  (Rupees  two   lacs   forty               thousand)  divided  into  15  shares  of   Rs.               16,000/- each.  The partners hereby agree that               the shares allotted to different partners will               be  equal  i.e., each partner  will  get  five               shares.               10.After meeting all expenses, interest and               other charges,the  resulting net  profit  or               loss shall be ascertained and shall be divided               amongst all partners.               13.   In  case of death, or insolvency of  any               partner the surviving partners or such of them               as  are  willing  shall  have  the  rights  to               purchase  the shares of such partners  at  the               valuation  of  the  shares  in  the  preceding               balance sheet.               14.In  case  of  any  partner  desiring  to               retire from the partnership will have to  give               a written notice of at least two months to the

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             other partners of his intention to do so.   On               receipt of such notice, the remaining  partner               or partners will purchase the share or  shares               in pro-               1000               portion  to  their  holding at  the  time  the               valuation in paragraph 13." In  the assessment year 1951-52, the three partners  applied to the Income-tax Officer for registration of the firm under the  Indian  Income-tax Act, 1922  (hereinafter  called  the ’Act’).    Along   with  this  application,  the   deed   of partnership dated March 19, 1950 was produced.  By his order dated   March  20,  1956  the  Income-tax  Officer   granted registration under s. 26A of the Act for the assessment year 1951-52.  On the same day, he determined the total income of the  firm  at Rs. 87,172/-, and under s. 23(6) of  the  Act, allocated  it between the three partners for  tax  purposes, each  partner  getting one-third share of the  total  income i.e.,  Rs.  29,0571/.   On the basis of the  same  deed,  an application was made for the renewal of registration of  the firm  for  the  assessment year 1952-53.   The  renewal  was granted-  on  March 28, 1957. For the assessment year  1953- 54,the partners again applied for renewal of  registration on thebasis of  the   same  deed,  but  the   Income-tax Officer was of theopinion   that  there was no  clause  in the deed specifying theindividual  shares of each  partner as required by s. 26A of the Act.  After issuing notices  to the  three  partners and after giving them  a  hearing,  the Income-tax  Officer,  by  his order dated  March  28,  1958, rejected the application of the partners for renewal of  re- gistration  of  the firm.  The assessee took the  matter  in appeal  to  the  Appellate Assistant  Commissioner  but  the appeal  was  dismissed.   The assessee  preferred  a  second appeal  to the appellate Tribunal but that appeal  also  was dismissed.   At the instance of the assessee  the  appellate Tribunal  referred  the following question of  law  for  the determination of the High Court under s.     66(1)  of   the Act :               "Whether  on  a  proper  construction  of  the               partnership  deed  dated 19-3-1950,  the  firm               sought  to  be registered for  the  assessment               year  1953-54,  can  be  said  to  have  -been               constituted under an instrument of partnership               specifying   the  individual  shares  of   the               partners as required by section 26A of the Act               ?"               By  its  judgment -dated March 15,  1961,  the               High  Court  answered  the  question  in   the               negative, holding that renewal of registration               under s. 26A of the Act was rightly refused by               the Income-tax -authorities.               Section 26A of the Act provides as follows               "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,               1001               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  such               person or persons, and at such times and shall               contain such particulars and shall be in  such               form,  and be verified in such manner, as  may

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             be  prescribed; and it shall be dealt with  by               the  Income-tax Officer in such manner as  may               be prescribed." By securing registration under the Act, the partners of  the firm  obtain a benefit of lower rates of assessment  and  no tax is directly charged on the income of the firm.  This  is an  important benefit to which the partners of a  registered firm become entitled as a consequence of registration and if it  is intended to secure that benefit, the requirements  of s. 26A of the Act and the Rules framed under the Act must be strictly  complied  with   Rule 2 of  the  Income-tax  Rules framed under s. 59 of the Act requires that the  application shall   be  signed  by  the  partners  (not   being   minors personally,  and  prescribes  the period  within  which  the application shall be made for the year in question.  Rule  3 provides   that  the  application  shall  be  made  in   the prescribed  form  and shall be accompanied by  the  original instrument   of   partnership  under  which  the   firm   is constituted, together with a copy there of.  It is  provided by Rule 4 that if on receipt of the application, the Income- tax  Officer  is satisfied that there is or was  a  firm  in existence  constituted  as  shown,  in  the  instrument   of partnership,  and  that the application  has  been  properly made,  he  shall  enter  in  writing  at  the  foot  of  the instrument  or  certified  copy,  as  the  case  may  be,  a certificate in the prescribed form By rule 6 the certificate of  registration  granted under Rule 4 may  be  renewed  for subsequent years.  Section 4 of the Partnership Act  defines "Partnership"  as  the ’relation between  persons  who  have agreed to share the profits of a business carried on by  all or any of them acting for all  Persons who have entered into partnership with one another are called individually  ’part- ners’ and collectively ’a firm’, and the name ’ under  which their  business  is carried on is called  the  ’firm  name’. Section 13 of the Partnership Act provides as follows :               "13.    Subject   to  contract   between   the               partners-               (a)   a  partner  is not entitled  to  receive               remuneration for taking part in the conduct of               the business;               (b)   the  partners  are  entitled  to   share               equally  in  the  profits  earned,  and  shall               contribute equally to the losses sustained  by               the firm M17Sup.CI/66-19 1002 On behalf of the assessee the argument was put forward  that the High Court was in error in holding that the assessee was not  entitled to registration under s. 26A of the  Act.   It was  submitted that on a proper construction of the  various clauses  of  the partnership deed dated March  19,  1950  it should  have  been  held  that  the  shares  of  the   three individual  persons in the profits and losses  were  clearly specified,  namely, that each partner was allotted an  equal one-third  share  and there was hence specification  of  the individual  shares of the partners within the meaning of  s. 26A of the Act.  In our opinion, the argument of the  appel- lant is well-founded and must be accepted as correct.  It is evident  that  under cl. (3) of the  partnership  deed,  the capital allotted to each partner is equal, viz., 5 shares of Rs.  16,000/each  in  a total  capital  of  Rs.  2,40,000/-. Clause  (10)  states  that  "after  meeting  all   expenses, interest and other charges, the resulting net profit or loss shall  be  ascertained  and shall  be  divided  amongst  all partners".   It  should  also be noticed  that  in  all  the

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applications  for  registration made  by  the  assessee-firm under  s. 26A of the Act the three partners have been  shown to share the profits of the partnership firm equally.  There is also the other circumstance that in the books of accounts for  all the years since its commencement from  November  1, 1949  right  upto  date the profits  have  been  apportioned equally  mong  the three partners of the  partnership  firm. Reading  the partnership deed as a whole and in the  context of  the  relevant circumstances of the case, we are  of  the opinion  that  there  was specification  of  the  individual shares of the partners in the profits within the meaning  of s.  26A  of the Act and the assessee-firm  was  entitled  to registration  for the assessment year in question.   It  was pointed   out  by  this  Court  in  Kylasa   Sarabhaiah   v. Commissioner of Income: tax, Hyderabad(1) that although  the application  for registration of a firm under s. 26A of  the Act  had strictly to be in conformity with the Act  and  the Rules,  in  ascertaining  whether  the  application  was  in conformity with the Rules, the deed of partnership had to be reasonably construed.  In that case, there were three  major partners.  in firm A in which four minors were  admitted  to the benefits of partnership.  Its profits were to be  shared equally between the seven persons whereas the losses were to be  shared  by the three major partners equally.   A  larger firm,  firm B, was constituted, with five partners, under  a deed  of  partnership in which firm A was described  as  the first  partner  and its members were collectively  shown  as having  a  share  of 6 annas 9 pies in the  profits  of  the larger firm.  The fact that four minors were admitted to the benefits  of partnership in firm A with equal shares in  the profits but losses were to be shared only by its three major partners, was, however, recited in the preamble (1)  [1965] 2 S.C.R. 310: 56 I.T.R. 219. 1003 to  the  deed  of  partnership  of  firm  B.  The  deed   of partnership  of firm B was signed by all the major  partners of  firm  A. The question at issue was whether  firm  B  was entitled  to be registered under s. 26A of the Act.  It  was held  that the firm was entitled to be registered  and  that registration could not be refused merely because the deed of partnership  set out in paragraph 8 therein  the  collective share  of  the  yarn  shop as 6 annas 9  pies,  for  in  the preamble  the division of the shares of profits  and  losses among the three members of the yarn shop and those  admitted to  the benefits of the partnership was  clearly  indicated. It was, however, pointed out that the yarn shop as such  was not  introduced as a partner and the agreement was in  truth between the three major members out of those who constituted the  yarn shop and four outsiders.  Each of them had  signed the  application  and  the  covenants  of  the   partnership agreement bind the partners individually.  The indication in the deed of partnership that three of them held qua the yarn shop  a  certain  relation did not affect  their  status  as partners of the appellant-firm individually.  The  principle laid down in this case applies also to the present case and, for  the  reasons  already  expressed,  we  hold  that   the assessee-firm was entitled to. be registered under s. 26A of the  Act  for the assessment year 1953-54 and  the  question referred  to  the  High  Court  must  be  answered  in   the affirmative and in favour of the assessee-firm. We  accordingly allow this appeal with costs in  this  Court and the High Court. V. P. S. Appeal allowed. 1004

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