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PETITIONER: KYLASA SARABHIAH, BOMBAY CLOTH SHOP,SECUNDERABAD

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, ANDHRA PRADESH

DATE OF JUDGMENT: 01/12/1964

BENCH: SHAH, J.C. BENCH: SHAH, J.C. GAJENDRAGADKAR, P.B. (CJ) HIDAYATULLAH, M. SIKRI, S.M. BACHAWAT, R.S.

CITATION:  1965 AIR 1411            1965 SCR  (2) 310  CITATOR INFO :  F          1967 SC 448  (5)

ACT: Income  Tax  Act,  1922  (11  of  1922),  s.  26-A,  r.   2- Registration  of  firm -Partnership consisting of  firm  and other persons-Income Tax Officer, powers-"Specify",  meaning of.

HEADNOTE: The appellant firm applied for registration under s. 26-A of the  Indian Income-tax Act.  In the application the  persons recited  as partners were a Yam shop-another firm  and  four other persons and the collective share of the Yarn shop  and the shares of the other partners were set out.  The  Income- tax  Officer  rejected  the application and  his  order  was confirmed in appeal by the Appellate Assistant  Commissioner and by the Income-tax Appellate Tribunal.  The Tribunal held that  because in the deed of partnership benefits  to  which certain  minors  were admitted and  particulars  "about  the distribution of profits or losses in the manner in which the firm wanted the same to be distributed" were not  specified, and  because  by the deed of partnership the yarn  shop  was introduced  as  a  partner in the  firm,  the  privilege  of registration  under s. 26A must be denied to the firm.   The question was referred to the High Court, which too  answered similarly.  In appeal by special leave, HELD:     The appeal must be allowed. (i)  If the statutory conditions which qualify the firm  for registration  are fulfilled, an arrangement between some  of the  partners,  which binds them to distribute  the  profits under  a stipulation which is not a part of the  partnership agreement does not effect the right to claim registration of the partnership agreement. [314 H] Dulichand   Laxminarayan  v.  Commissioner  of   Income-tax, Nagpur, [1956] S.C.R. 154, distinguished. (ii) The  word  "specify" is used in s. 26A and  Rule  2  as meaning  mentioning,  describing or defining in  detail;  it does  not mean expressly setting out in fractional or  other shares. [314 D-E]

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(iii)     If  the conditions for registration of a firm  are fulfilled, the Income-tax Officer has no power to reject the application.  Undoubtedly, the application must strictly  be in  conformity  with  the  Act and  the  Rules,  but  in  so ascertaining,  the  dead of partnership must  be  reasonably construed. [311 G]

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 83 of 1964. Appeal  by special leave from the judgment and  order  dated August  18, 1960 of the Andhra Pradesh High Court in  R.  C. Appeal No. 34 of 1957. A.   Ranganadham Chetty, K. Venkaramaiah, A. Vedavalli and A. V. Rangam, for the appellants. 311 R. Ganapathy Iyer and R. N. Sachthey, for the respondent. The Judgment of the Court was delivered by Shah, J. The appellants who are a firm carrying on  business in  cloth  at  Secunderabad applied on June  30,  1955,  for registration  under  s. 26-A of the Indian  Income-tax  Act, 1922,  for  the  assessment  year  1956-57.   The  following persons  were, it was recited in the application,  partners, having  share  in  the profits and  lossess  in  proportions specified against their names :-               1 .   M/s  Kylasa Sarabhiah a firm  consisting               of the following partners :               (a)   Kylasa Veeresalingam.               (b)   Kylasa Nagendrarao               Rs.  As.  Ps.      (c) Kylasa Madhusudhanarao 069      2. Mahendrakar Narayanarao 033      3. Nune Vittayya  026      4. Pottupalli Chandrayya 026      5. Gande Ramayya 010 For  facility  of  reference we will call No.  1  ’the  Yarn Shop’. The  Income-tax  Officer rejected the application,  and  his order  was  confirmed in appeal by the  Appellate  Assistant Commissioner and by the Income-tax Appellate Tribunal.   The Tribunal  held  that  because in  the  deed  of  partnership benefits   to  which  certain  minors  were  admitted,   and particulars "about the distribution of profits or losses  in the  manner  in  which  the  firm  wanted  the  same  to  be distributed" were not specified, and because by the deed  of partnership the Yarn Shop was introduced as a partner in the farm,  the privilege of registration under s. 26-A  must  be denied  to  the  firm.  The High  Court  of  Andhra  Pradesh recorded  on the following question referred under s.  66(1) of the Income-tax Act "Whether  on  the facts and circumstances of the  case,  the assessee  is entitled to registration under s. 26-A  of  the Incometax Act ?", a negative answer. Section 26-A of the Indian Income-tax Act, 1922, provides               "(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 Sup.165--4 312 and  of  any  other enactment for the time  being  in  force relating to income-tax or super-tax.

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             (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               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, requirements of s. 26-A  and  the rules framed under the Act must  be  strictly complied with.  Rule 2 framed under s. 59 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.  By Rule 4 it is provided 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  of  the certificate  of registration may be renewed  for  subsequent years. Registration  of the firm may be obtained on an  application to the Income-tax Officer on behalf of any firm, if the firm be  lawfully constituted under an instrument of  partnership which  specifies the individual shares of partners  and  the Income-tax  Officer  is  satisfied that there is  or  was  a genuine  firm in existence as shown in the  instrument.   If the conditions are fulfilled, the income-tax Officer has  no power   to   reject  the  application.    Undoubtedly,   the application must strictly be in conformity with the Act  and the Rules, but in ascertaining whether the application is in conformity  with the Rules, the deed of partnership must  be reasonably construed. Under  the Indian Partnership Act, 1932 partnership  is  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.  A firm                             313 is strictly not a person : it is an association of  persons, and  an agreement by which a firm purports to enter  into  a partnership with an individual or another firm merely  makes the  partners  of  that firm individually  partners  of  the larger partnership. The problem posed by such a  partnership agreement  is under the general law academic, but the  right to   registration  under  s.  26A  being  conditional   upon specification  of the individual shares of the  partners,  a deed of partnership between a firm and an individual,  which specifies  the collective share of the firm,  without  more, cannot  be  registered.  It has been held by this  Court  in Dulichand   Laxminarayan  v.  Commissioner  of   Income-tax, Nagpur(1)   that  a  partnership  constituted   between   an individual,  a joint Hindu family and three firms could  not be  registered  under  s. 26-A of the  Act.  In  Dulichand’s case(1) the partnership deed was signed by five individuals, viz., the karta of the joint Hindu family, one partner  each of the three firms and the individual.  It was held that the

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partnership could not be admitted to registration, because a firm as such cannot enter into an agreement as partner  with another firm or individual, and also because all the members of the three firms had not personally signed the application as required by Rule 2 of the Income-tax Rules. The  application  in the present case was  rejected  by  the Tribunal,  because  in its view the benefits  to  which  the minors  were admitted and the shares of the  major  partners who  were members of the Yarn Shop were not  specified,  and that  the Yam Shop was introduced as a partner in the  firm. But the Tribunal, in our judgment, erred in holding that the benefits to which the minors were admitted and the shares of the major members of the Yarn Shop were not specified in the deed of partnership.  It is clearly recited in the  preamble that  K. Rajeshwarrao, K. Haranath Babu, K. Ramesh Babu  and K.  Shivakumar-the four minors-were admitted to the  benefit of the partnership with equal shares in the profits  falling to  the share of the Yam Shop, and losses were to be  shared in equal shares only by the major partners K. Veeresalingam, K.  Nagendrarao and K. Madhusudhanarao.  The scheme  of  the deed  therefore  was that the Yam Shop  collectively  had  a share  of  0-6-9 in the profits and was liable in  the  same proportion in the losses in the appellant firm.  Out of this 0-6-9 share, seven persons who constituted the Yam Shop were entitled  to share the profits_equally, whereas losses  were to  be  shared by the three major members of  the  Yam  Shop equally.   It is true that in the deed of  partnership,  the first partner is described as "Kylasa (1)[1956] S.C.R. 154. 314 Sarabhiah  Yam  firm"-the  Yam  Shop-constituted  under   an instrument  of  partnership  dated  May  12,  1955,  and  in paragraphs  3 and 8 this Yam Shop is also described  as  the first partner.  But the substance of the agreement cannot be permitted  to  be  overshadowed merely by  the  use  of  the collective description of some of the persons who agreed  to be partners.  The agreement was between K. Veeresalingam, K. Nagendrarao,  K. Madhusudhanarao, Mahendrakar Narayana  Rao, Noone  Vittayya, Pottipalli Chandrayya and Gande Ramayya  to enter  into partnership with the covenant that  the  profits and  losses shall be divided in the shares specified in  the instrument.   The  partnership agreement was signed  by  the major  partners;  the application for  registration  was  in conformity  with  the  rules  framed  under  the  Act,   the certificate regarding the distribution of the profits in the previous   year  was  given,  the  original  instrument   of partnership  was produced and the instrument  specified  the individual shares of the partners.  Merely because the  deed of  partnership set out in paragraph 8 the collective  share of the Yarn Shop, registration could not be refused, for  in the  preamble  the  division of the shares  of  profits  and losses  among  the three members of the Yam Shop  and  those admitted  to  the  benefit of  the  partnership  is  clearly indicated.  The word "specify" is used in s. 26-A and Rule 2 as  meaning, mentioning, describing or defining in detail  : it  does  not mean expressly setting out  in  fractional  or other  shares.  In the deed of partnership, the  shares  are clearly  defined, though they are not worked out in  precise fractions.   Nor  is  it true to say that the  Yam  Shop  is introduced as a partner.  The agreement is in truth  between three  major  members out of those who constitute  the  Yarn Shop  and  four  outsiders.  Each of  them  has  signed  the application  and the covenants of the partnership  agreement bind  the partners individually.  Indication in the deed  of partnership  that  three  of them held qua the  Yam  Shop  a

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certain relation did not affect their status as partners  of the appellant firm individually. It  was  urged  that in the deed dated  February  20,  1952, constituting the Yarn Shop, as amended by the deed dated May 12, 1955, no profit sharing ratio was mentioned.  But we are not  concerned with the registration of the Yarn  Shop.   We are unable to appreciate how a defect (even if there be  one in  the  agreement constituting the Yarn firm)  affects  the right  of  the  appellant firm to  be  registered.   If  the statutory  conditions  which  qualify  the  appellants   for registration  are fulfilled, an arrangement between some  of the   partners  of  the  appellants  which  binds  them   to distribute  the pro-fits under a stipulation which is not  a part of the partnership agree- ment does not affect the right to claim registration of  the partner-ship agreement. The answer recorded by the High Court must therefore, be discharged, and an affirmative answer must be recorded. The  appeal is allowed.  The appellants will be entitled  to their costs in this Court and the High Court. Appeal allowed. 316