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SUPREME COURT OF INDIA
J.C. SHAH, V. RAMASWAMI AND V. BHARGAVA JJ.
M/s. Parekh Wadilal Jivanbhai, Appellant
Versus
Commissioner of Income-tax, Madhya Pradesh, Nagpur and Bhandara, Nagpur, Respondent.
Civil Appeal No. 1058 of 1965, dated 28-10-1966.
Advocates appeared
Mr. Arvind B. Patwa, Advocate and Mr. O. C. Mathur, Advocate of M/s. J. B. Dadachanji and Co., for Appellant; Mr. S. T. Desai, Senior Advocate, (M/s. A. N. Kirpal and R. N. Sachthey, Advocates, with him), for Respondent.
INCOME TAX - Registration of firm - Partnership deed specifying individual shares of partners - Interpretation - S. 26A of the Indian Income-tax Act, 1922.
Fact of the Case:
The assessee, a partnership firm, applied for registration under S. 26A of the Indian Income-tax Act, 1922 (the Act) for the assessment year 1953-54. The Income-tax Officer rejected the application on the ground that the partnership deed did not specify the individual shares of the partners as required by S. 26A of the Act. The assessee appealed to the appellate Assistant Commissioner and the appellate Tribunal, but both appeals were dismissed. The assessee then referred the following question of law to 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 S. 26A of the Act?
Finding of the Court:
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.
Issues: Whether the partnership deed specified the individual shares of the partners as required by S. 26A of the Act.
Ratio Decidendi: The Supreme Court held that the partnership deed did specify 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. The Court observed that Cl. (3) of the partnership deed allotted equal capital to each partner, Cl. (10) provided for equal sharing of profits and losses, and the books of accounts showed that profits had been apportioned equally among the partners since the commencement of the firm. The Court also relied on its decision in Kylasa Sarabhaiah v. Commissioner of Income-tax, Hyderabad, where it had held that a deed of partnership should be reasonably construed to ascertain whether it was in conformity with the Act and the Rules.
Final Decision: The Supreme Court allowed the appeal and held that the assessee-firm was entitled to be registered under S. 26A of the Act for the assessment year 1953-54.
Judgment
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.
2. The assessee is a partnership firm constituted under a Deed of Partnership, dated March 19, 1950. The partners are three brothers-Nandlal Bhimjibhai, Tarachand Bhimlibhai and Rajnikant Bhimjibhai, each one having an equal 1/3rd share in the partnership firm. Prior to November, 1949, the three partners 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 and 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 annas share. The larger partnership of Rajnikant Vitheldas and 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 Rupees 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 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 proportion 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. 29,057. 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 the basis of the same deed, but the Income-tax Officer was of the opinion that there was no clause in the deed specifying the individual 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 registration of the firm. The assessee took the matter in appeal to the appellate Assistant Commissioner but the appeal was dismissed. The assessed preferred a second appeal to the appellate Tribunal but tha
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