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High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE JAGADISAN & THE HONOURABLE MR. JUSTICE SRINIVASAN
Tyresoles Concessionaries Private Limited - Appellant
Versus
Commissioner of Income Tax, Coimbatore - Respondent
Case No : No
Decided On : 17 July 1962
PARTNERSHIP - DISSOLUTION AND RECONSTITUTION - INTERPRETATION OF DEED - REGISTRATION UNDER SECTION 26A OF THE INDIAN INCOME-TAX ACT - LOSSES - SET-OFF.
Fact of the Case:
Tyresoles (India), Calcutta, a partnership firm, sought registration under section 26A of the Indian Income-tax Act for the assessment years 1952-53 to 1956-57. The Income-tax Officer refused registration, and on appeal, the Appellate Assistant Commissioner refused registration for the first four years but granted it for the fifth year. Both the assessee and the department appealed to the Income-tax Appellate Tribunal, which restored the decision of the Income-tax Officer. The Tribunal referred three questions of law to the High Court at the instance of the assessee.
Finding of the Court:
The High Court held that there was no dissolution of the partnership in fact and that the document dated September 21, 1950, merely embodied the arrangement by which three of the partners retired from the firm. The court also held that the profit-sharing ratio of the two surviving partners was apparent ex facie on the two documents dated November 5, 1948, and September 21, 1950. The court further held that the assessee was entitled to registration for the assessment year 1956-57 but not for the other years 1952-53 to 1955-56. Finally, the court held that the assessee was entitled to set off the losses for assessment years 1950-51 and 1951-52 in the assessment of 1952-53 but not in the assessment of 1955-56.
Issues: 1. Whether the firm as constituted up to September 21, 1950, is the same as the one that carried on the business thereafter with only a change in its constitution? 2. Whether the firm is entitled to registration for the assessment years 1952-53 to 1956-57 under section 26A? 3. If the answer to question No. 2 is in the negative, whether the losses of assessment years 1950-51 and 1951-52 require to be set off in the assessments of 1952-53 and 1955-56?
Ratio Decidendi: 1. The court held that there was no dissolution of the partnership in fact and that the document dated September 21, 1950, merely embodied the arrangement by which three of the partners retired from the firm. The court relied on the fact that the business of the partnership continued without any change except that the partnership which originally consisted of five members became a partnership of two members, and that the profit-sharing ratio of the surviving partners was not changed after the retirement of the three partners. 2. The court held that the assessee was entitled to registration for the assessment year 1956-57 because there was no dissolution of the partnership and the articles of partnership dated November 5, 1948, read with the modification introduced under the document dated September 21, 1950, sufficiently satisfied the requirement of law regarding the necessity of a written instrument to obtain registration. 3. The court held that the assessee was entitled to set off the losses for assessment years 1950-51 and 1951-52 in the assessment of 1952-53 because there was a change in the constitution of the firm within the meaning of section 24(2), proviso (e). However, the court held that the assessee was not entitled to set off the losses of 1950-51 and 1951-52 in the assessment of 1955-56 because the assessee failed to claim the set-off at the relevant time.
Final Decision: Question No. 1 is answered in the affirmative and in favour of the assessee. Question No. 2 is answered in favour of the assessee in respect of the assessment year 1956-57 and against the assessee in respect of the other years 1952-53 to 1955-56. Question No. 3 is answered in favour of the assessee only in respect of the assessment year 1952-53 and against the assessee in respect of the other year 1955-56.
JAGADISAN J.
This is a reference under section 66 of the Indian Income-tax Act arising out of a controversy between the revenue and the assessee, whether the firm of partnership styled Tyresoles (India), Calcutta, is registrable under section 26A of the Act for the assessment years 1952-53, 1953-54, 1954-55, 1955-56, and 1956-57. The Income-tax Officer refused registration and on appeal by the assessee to the Appellate Assistant Commissioner registration was refused for the first four years, but was granted for the fifth year 1956-57. Both the assessee and the department preferred appeals to the Income-tax Appellate Tribunal which restored the decision of the Income-tax Officer. The Tribunal however has referred the following questions of law to this court under section 66(1) of the Act at the instance of the assessee
"1. Whether the firm as constituted up to September 21, 1950, is the same as the one that carried on the business thereafter with only a change in its constitution ? 2. Whether the firm is entitled to registration for the assessment years 1952-53 to 1956-57 under section 26A ? 3. If the answer to question No. 2 is in the negative, whether the losses of assessment years 1950-51 and 1951-52 require to be set off in the assessments of 1952-53 and 1955-56 ?" *
Tyresoles (India), Calcutta, referred to in this judgment as the assessee, was originally a partnership firm consisting of five partners. The articles of partnership were embodied in a written instrument dated November 5, 1948. The names of the partners, their respective share capital and their profit-sharing ratio are set out herein below
Partners Share capital Profit-sharing ratio
Rs
1. T. Stanes & Co. Ltd. 26, 000 26%
2. Stanes Motors (South
India) Ltd. 25, 000 25%
3. Mr. P. W. Davis 15, 000 15%
4. Mr M. P. Davis 25, 000 25%
5. A. J. Davis 9, 000 9%
Total 1, 00, 000
This partnership was for a fixed term of 10 years commencing from September 5, 1948. Clause 5 of the partnership instrument provides that the net profits of the partnership shall belong to and be divisible amongst the partners in the shares belonging to them in the ratio of the share capital contributed by the respective partners. The losses also were to be divided in like proportion. Clause 18 is important and it reads as follows :
"(i) If during the continuance of the partnership any partner shall die or go into liquidation or determine the partnership by notice pursuant to the provisions hereinbefore contained the surviving partners or partner shall in the proportions in which they are entitled to share in the net profits of the partnership have the option of purchasing as from the date of the dissolution and upon the terms hereinafter appearing the share of the outgoing partner so dying, going into liquidation or determining the partnership as aforesaid to be exercised by giving to the outgoing partner or his representatives notice in writing of his intention in that behalf within three calendar months from the date of the death, liquidation or determination as the case may be."(ii)" The purchase money shall be the fair value as determined by the auditors of the partnership at the date of the dissolution of the share of the outgoing partner in the partnership net assets and effects including therein the goodwill of the business to be ascertained in case of dispute under the arbitration clause hereinafter contained "...... (iv)" The purchase money shall be payable as to so much thereof as shall represent capital by six equal instalments at intervals of one calendar month (the first to be paid at the expiration of two calendar months from the date of the dissolution) with interest at the rate of six per cent. per annum on the amount thereof for the time being unpaid ". . . (vi)" The outgoing partner or his representatives shall do all such acts and execute all such assurances as may be necessary for vesting in the partners exercising the option the assets including the goodwill and property of
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