Full Judgment Text
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 6
PETITIONER:
M/S PROGRESSIVE FINANCERS, MADRAS
Vs.
RESPONDENT:
THE ADDITIONAL COMMISSIONER OF INCOME TAX,MADRAS-1, MADRAS,
DATE OF JUDGMENT: 20/02/1997
BENCH:
S.C. AGRAWAL, G.T. NANAVATI
ACT:
HEADNOTE:
JUDGMENT:
WITH
CIVIL APPEAL NOS. 2439-39A OF 1981
J U D G M E N T
NANAVATI, J.
The appellant in these three appeals is M/s.
Progressive Financers, a partnership firm. It came into
existence with execution of a partnership deed on 1.7.67. It
consisted of five partners. Out of them Sunitha Pratap was
minor and, therefore, she was admitted to benefits of
partnership. The capital of the partnership was fixed at
Rs.5 lacs and each partner had to contribute as follows
1. M.R. Rajakrishna ... Rs. 1,25,000/-
2. Minor Sunitha Pratap ... Rs. 1,87,500/-
3. W.S. Parthasarathy ... Rs. 62,500/-
4. W.S. Sethunarayan Babu ... Rs. 62,500/-
5. M.S. Rajeswari ... Rs. 62,500/-
For the assessment year 1967-68 it applied for
registration to the Income Tax Officer (for short the ’ITO’)
under Section 184 of the Income Tax Act, 1961 (for short the
’Act’) on 31.3.68. For the assessment years 1969-70 and
1970-71 it applied for renewal of registration. The ITO
rejected the application for registration on 30.6.71. On the
same day, he passed an assessment order for the assessment
year 1968-69 treating the status of the appellant as
Association of Persons. Applications for renewal of
registration for the assessment years 1969-70 and 1970-71
were rejected on 13.3.72 and the assessment orders for those
years were again passed treating the appellant as
Association of Persons.
The appellant’s application for registration was
rejected by the ITO on the ground that through in the
opening paragraph of the partnership deed it was mentioned
that Sunitha Partap, a minor, was admitted to the benefits
of partnership, the relevant clauses in the partnership deed
indicated that she was taken as a full partner and,
therefore, the contract of partnership was void ab-initio.
The ITO arrived at this conclusion as he noticed that the
partnership deed was signed by Mrs. Sridevi Pratap, the
guardian of minor Sunitha Pratap; that Sunitha had
contributed the maximum capital; that it was not stated in
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 6
the partnership deed how i.e. the manner in which, the loss,
if any, was to be apportioned; that all partners were
entitled to operate bank accounts individually; that all
matters of importance were to be decided by majority of
partners holding more than 75% of capital; and, that on
dissolution, all the assets of the firm including goodwill
were to be converted into money and distributed amongst the
partners in proportion to their shares in the capital.
Against this order of the ITO the appellant preferred
an appeal to the Appellate Assistant Commissioner. Following
the decision of the Andhra Pradesh High Court in Addepally
Nageswara Rao & Brothers vs. Commissioner of Income Tax, 79
ITR 306, the Appellant Assistant Commissioner held that the
instrument of partnership was required to be construed
harmoniously and as the minor was admitted only to the
benefits of partnership there was admitted only of her being
made liable for the losses. He, therefore, allowed the
appeal holding that the firm was entitled to registration.
The Revenue went in appeal to the Income Tax Appellate
Tribunal.
Construing the partnership deed in the light of the
decisions of this court in Commissioner of Income-Tax,
Mysore vs. Shah Mohandas Sadhuram 57 ITR 415 and
Commissioner of Income-Tax, Mysore vs. Shah Jethaji
Phulchand 57 ITR 588 and the decision of the Andhra pradesh
high Court in Addepally Nageswara Rao (supra) the Tribunal
held that minor Sunitha was admitted merely to the benefits
to partnership and it was not correct to say that she was
made a full-fledged partner. The Tribunal also held that the
minor was not to be burdened with losses and they were to be
borne by the other partners. It further held that though the
instrument of partnership did not specifically provide how
the losses were to be borne by the partners the rule that in
such cases losses are to be shared in the same proportion as
profits became applicable and since the partnership deed was
capable of being construed in that manner, the firm was
entitled to registration. It, therefore, dismissed the
appeal.
The Revenue sought a reference to the High Court and
the Tribunal thought it fit to refer the following question
to the High Court for its decision:-
"Whether, on the facts and in the
circumstances of the case and a
true construction of the terms of
the partnership deed, the assessee
is entitled to the benefit of
registration under Section 185 of
the Income-tax Act, 1961, for the
assessment year 1968-69"
Against the orders passed by the ITO refusing renewal
or continuation of registration for the assessment years
1969-70 and 1970-71 the appellant had preferred two separate
appeals to the Appellate Assistant Commissioner. the were
allowed. The appeals filed by the Revenue against the said
appellate orders were dismissed by the Tribunal. At the
instance of the Revenue, for the said two assessment years
the following question was referred to the High Court:-
"Whether on the facts and in the
circumstances of the case and on a
true construction of the terms of
the partnership deed the assesses
is entitled to the continuation of
registration for the assessment
year 1969-70 and 1970-71."
The High Court referred to the decision of the Gujarat
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 6
High Court in Thacker & Co. vs. CIT 61 ITR 540 and two
decisions of the Kerala High Court in C.I.T. vs. Ithappiri &
George 88 ITR 332 and United Hardwares vs. C.I.T. 96 ITR 348
wherein it has been held that in view of the clear language
of Section 184 it is necessary that sharing of the losses
also has to be specifically provided in the partnership deed
and there is no scope for applying any principle or rule of
law for discerning the proportion in which the losses are to
be shared. It then held that the decision of this Court in
Mandyala Govindu & Co. vs. Commissioner of Income-Tax. A.P.
102 ITR 1 squarely applied to the facts of this case.
Following that case it held that it was not possible to
determine on any principle of inference, from the document
itself, how the remaining two partners were to share the
losses and, therefore, the firm was not entitled to
registration. The reference was answered accordingly, in
favour of the Revenue and against the assessee.
Following that decision in Tax Case No. 336 of 1974
(Reference No. 149 of 1974) the High Court answered the
other two references (Tax Case Nos. 707 of 1976) also in
favour of the Revenue and against the assessee. The assessee
has, therefore, filed these three appeals against the
judgment and orders passed by the High Court in those three
cases.
The learned counsel for the appellant submitted that
the view taken by the High Court is wrong. The two decisions
of the Kerala High Court which are relied upon by the High
Court have since been overruled by the Full Bench of the
Kerala High Court in Kerala Publicity Bureau vs.
Commissioner of Income Tax 200 ITR 366. he also submitted
that the instrument of partnership, if reasonable construed,
did indicate the method by which profits and losses were to
be shared by the partners. On the other hand, it was
contended by the learned counsel for the Revenue that as
Section 184 of the Act confers a benefit which would
otherwise laid down therein are strictly complied with.
Therefore, the said benefit can be claimed only if in the
instrument of partnership itself shares of the partners in
profits and losses are specifically stated.
This Court in Rao Bahadur Ravulu Subba Rao vs. CIT 30
ITR 163 and Patel (N.T.) and Co. vs. CIT 42 ITR 224,
interpreting Section 26-A of the earlier 1922 Act, held that
registration under that Section conferred a benefit on the
partners which the partners were not entitled to but for
that Section and, therefore, that right could have been
claimed any in accordance with the statute and those who
claimed it had to bring their case strictly within the terms
of that Section. This view was reiterated subsequently by a
5- Judge Bench of this court in the case of Kylasa
Sarabhaiah vs. CIT 56 ITR 219. At the same time, this Court
disapproved mechanical application of the provision and held
that "in ascertaining whether the application is in
conformity with the Rules, the deed of partnership must be
reasonably construed.". It was also held that the word
"specify" as used in that Section and the relevant rule
meant ’mentioning, describing or defining in detail’ and it
did not mean ’expressly setting out in factional or other
shares’. In view of this decision the correct legal position
is that the assessing officer cannot reject an application
for registration merely because in the deed of partnership
shares of the partners are not expressly specified. The
assessing officer will have to construe the instrument of
partnership as a whole and if reasonably the shares of the
partners in profits and losses can be ascertained, then to
accept it as genuine for the purpose of registration.
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 6
We will now refer to the decision of this Court in
Mandyala Govindu & Co. (102 ITR Page 1), which has been
relied upon by the High Court and on the basis of which it
decided the question referred to it against the appellant.
That case arose under Section 26-A of the 1922 Act.
Answering the question whether it was a condition for
registration under Section 26-A that the instrument of
partnership ought to have specified respective shares of
partners in losses it was held that "the Income-Tax Officer,
before allowing the application for registration, must be in
a position to ascertain the shares of the partners in the
losses even if Section 26A did not require the shares in the
losses to the specified in the instrument of partnership".
It referred to the conflict of opinion in the High Courts on
the point but did not think if necessary to decide which
view was correct as the assessee was bound to fail on any
view. What is significant to note is that this Court
referred to Rules 2 and 3 of the Rules framed under that Act
and also the form of application including the Schedule
annexed to Rule 3. The form and the Scheldule required the
partners to state particulars of the apportionment of income
and profits or gains (or loss) and also to state if any
partner, though entitled to share in profits, was not liable
to bear any loss. Thereafter it was observed that "it does
not appear to have been considered in this case whether the
application for registration made by the firm conforms to
the prescribed rules". Thus, this Court was of the view that
even if the shares of the partners were not expressly
specified in the instrument of partnership but if that could
be ascertained by the Income Tax Officer from the
application and the required information supplied therewith
then the requirements of Section 26-A could be said to have
been satisfied. It is also significant to not e that this
court tacitly approved application of the principle
contained in Section 13(b) of the Indian Partnership Act
that the partners are entitled to share equally to the
losses sustained by the firm and also the rule that ’where
the shares in the profits are unequal, the losses must be
shared in the same proportion as the profits if there is no
agreement as to how the losses are to be apportioned’. On
facts, it was held in that case that even after applying
those two principles, it was not possible to ascertain how
the losses pertaining to minor’s share were to be
apportioned amongst the adult partners.
In an earlier decision in the case of Parekh Wadilal
Jivanbhai vs. CIT 63 ITR 485 this Court construed the
partnership deed by reading it as a whole and "in the
context of the relevant circumstances of the case" and held
that there was specification of the individual shares of the
partners in the profits within the meaning of Section 26-A
of the Act and the assessee-fire was entitled to
registration. The relevant circumstances which were taken
into account were (1) under clause 3 of the partnership deed
the capital allotted to each partner was equal (2) under
clause 10 net profit or loss was to be divided amongst all
partners (3) in the application the three partners were
shown to share the profits equally and (4) in the books of
accounts the profits were apportioned equally among the
three partners. Thus, it was laid down by this Court in that
case that the instrument of partnership has to be construed
reasonably by reading it as a whole and taking into
consideration the relevant circumstances disclosed by the
instrument of partnership and the account books for the
relevant year and the statements made in that behalf in the
application.
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 6
In this case, it appears that the High Court, without
carefully examining the facts and circumstances of the case,
applied the decision of this Court in Mandyala Govindu & Co.
(supra). In the partnership deed the proportion in which the
five partners including the minor had to contribute the
capital was clearly stated. It was also clearly stated that
net profits were to be divided between the partners in
proportion to their shares in the capital. The application
made by the partners for registration of the firm contained
the statements required to be made therein according to the
prescribed form. The prescribed Schedule was also attached
with that application. The said Schedule read as under :-
"S C H E D U L E
Name of Date of Interest Salary Share
partner Address admittance on capital Commi- in
to partner- or loans if ssion bala
ship. any or nce
of other profit
remune loss;
ration percen
from tage
firm
-----------------------------------------------------------
(1) (2) (3) (4) (5) (6) (7)
------------------------------------------------------------
1.Mr. M.R. Rajakrishna
Vijaya Raga-
vachari Road,
Madras-17. 1.7.67 Nil Nil 25% of Profit
40% of loss
2.Miss Sunitha Pratap
(Minor) Villa
Enchantre, Ranjit
Road, Kottur Adyar
Madras - 25 1.7.67 Nil Nil 37.5% of Profit No
Share of loss
3.Mr.W.S. Parthasarathy
80, Harris Road,
Madras-2 1.7.67 Nil Nil 12.5% of profit
20% of loss
4.Mr.W.S.Sethunaryana
Babu, 80,Harris Road,
Madras-2 1.7.67 Nil Nil 12.5% of profit
20% of loss
5.W.S. Rajeswari
80, Harris Road,
Madras-2. 1.7.67 Nil Nil 12.5% of profit
20% of loss".
As minor Sunitha was admitted to the benefits of
partnership it is obvious that she had not to share any
loss. The losses were to be distributed among the major
partners only. Since they were to share the profits in the
proportion in which they had contributed the capital it was
implied that they were to share the losses in the same
ratio. This was the reasonable manner in which the
instrument of partnership was required to the construed,
applying the second principle referred to above while
dealing with the case of mandyala Govindu & Co. (supra).
Moreover, the application made by the appellant in the
prescribed form clearly disclosed as to how the losses of
the firm were to be distributed among the major partners.
The way they had worked out their share in the loss, if any,
in the Schedule attached to the application was quite
consistent with the provisions made in the instrument of
partnership and the legal principles applicable in that
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 6
behalf. Accordingly Rajakrishna who was required to
contribute 25% as share capital had to bear 40% of the loss
and the other three major partners who had individually
contributed 12.5% of the capital had to bear the loss in the
ratio of 20% each. The ITO had not considered these relevant
circumstances as he was of the view that the contract of
partnership itself was void. The Appellate Assistant
Commissioner and the Tribunal did to refer to the
application and construing the partnership deed alone held
that it was possible to ascertain how the losses of the firm
were to be distributed among the major partners.
If the partnership deed is construed reasonably, as
indicated above, then it has to be held that it did, by
necessary implication, provide for the proportion in which
the losses of the firm were to be shared by the major
partners. The application for registration made by the
appellant fulfilled the conditions laid down by Section 184
of the Act and, therefore, the ITO ought to have granted
registration and made assessment of the appellant for the
relevant years on that basis. The High Court was wrong in
taking the contrary view. Therefore, we allow these appeals,
set aside the judgment and orders passed by the High Court
and answer the question referred to the High Court by
holding that for the assessment year 1968-69 the appellant
was entitled to registration and for the assessment years
1969-70 and 1970-71 it was entitled to renewal/continuation
of registration. In view of the facts and circumstances of
the case, the parties shall bear their own costs.