High Court Of Rajasthan (Full Bench)
Metharam Lekhumal vs. CIT
Section 184
Asst. Year 1972-73, 1973-74
J.S. Verma, C.J.; G.M. Lodha & V.S. Dave, JJ.
IT Ref. N. 11 of 1978
11th November, 1986
Counsel Appeared
N.M. Ranka, for the Assessee : R.N. Surolia, for the Revenue
VERMA, C.J.:
This is a reference under s. 256(1) of the IT Act, 1961 (” the Act “), at the instance of the assessee for the decision by this Court of the following questions of law, namely:
” 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee-firm was not entitled to registration for the asst. yr. 1972-73 and continuation of registration for the asst. yr. 1973-74 due to non-specification of shares in losses in the partnership deed dated October 30, 1971 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that shares in losses were not specified in the partnership deed dated October 30, 1971 ? “
2. This reference initially came up for hearing before a Division Bench when it was indicated at the hearing that a Division Bench decision of this Court in Raj Construction Co. vs. Addl. CIT (1985) 49 CTR (Raj) 348:(1986) 157 ITR 734(Raj), does not appear to be in consonance with the Supreme Court decision in Mandyala Govindu & Co. vs. CIT 1976 CTR (SC) 20:(1976) 102 ITR 1(SC). For this reason, the Division Bench referred the matter for decision by a larger Bench. This is how the reference has come up before us for decision of the above questions of law.
3. The material facts are these: The relevant assessment years are 1972-73 and 1973-74. For the asst. yr. 1972-73, the assessee applied for registration as a firm on the basis of a partnership deed dated October 30, 1971. It also applied for continuation of registration of the firm for the next asst. yr. 1973-74 on the same basis. The ITO passed an order under s. 185(1)(a) of the Act on December 12, 1973, granting the assessee-firm registration for the asst. yr. 1972- 73. For the asst. yr. 1973-74, the ITO continued the registration by order dated March 18, 1975, treating the firm as genuine.
4. The CIT, on a perusal of the record on the basis of which the ITO had granted and continued registration to the assessee-firm for these years, came to the conclusion that the orders of the ITO were erroneous and prejudical to the interests of the Revenue. Accordingly, the CIT issued a notice under s. 263 of the Act to show cause why the registration granted by the ITO should not be cancelled, inasmuch as the partnership deed dated October 30, 1971, on the basis of which registration was claimed did not specify the shares of the partners in the losses of the firm, it may be mentioned here that the partnership evidenced by the deed dated October 30, 1971, comprised of four adult partners, namely, Nevandram, Dhanomal, Kishanchand and Choithram, and Sunderdas, a minor son of Dhanomal, was admitted to the benefits of the partnership on the death of Smt. Isari Bai, a deceased partner. The CIT took the view that specification of the shares in the profits as well as the losses was an essential requirement for grant of registration to a firm and since the partnership deed did not specify the ratio in which the losses were to be shared by the adult partners only, the order of the ITO granting registration to the firm was erroneous and, therefore, prejudicial to the interests of the Revenue. Accordingly, the CIT by his order dated December 10, 1975, cancelled these orders of the ITO and directed him to make the assessment in the status of an unregistered firm. The assessee preferred an appeal to the Tribunal which failed. The Tribunal affirmed the view taken by the CIT and upheld the cancellation of registration of the assessee as a firm for the asst. yr. 1972-73 and continuation of registration for the asst. yr. 1973-74. The Tribunal took this view following the Supreme Court decision in Mandyala Govindu & Co.’s case (supra). Aggrieved by the decision of the Tribunal, the assessee applied under s. 256(1) for a reference of the above questions of law to this Court for its decision. The Tribunal has accordingly referred these questions which arise out of the Tribunal’s order.
The real question for our decision is whether the Supreme Court decision in Mandyala Govindu & Co.’s case (supra) concludes the point for decision before us. The point is whether the non-specification of shares in the losses of the firm in the instrument of partnership justifies refusal of registration of the firm under s. 185. Admittedly, the partnership of the assessee-firm is evidenced in the present case by the partnership deed dated October 30, 1971, on the basis of which the assessee-firm claimed registration under s. 185. The partnership deed shows that it is comprised of four adult partners, namely, Nevandram, Dhanomal, Kishanchand and Choithram and a minor, Sunderdas, has been admitted only to the benefits of the partnership. Choithram and a minor, Sunderdas, are the sons of Dhanomal, while Nevandram is the brother of Dhanomal. The shares are indicated in the deed as 25 paise each of Nevandram, Dhanomal and Kishanchand; 15 paise for Choithram and remaining 10 paise for minor, Sunderdas. These are shares obviously in the profits of the firm, even though the word ” profit ” is not expressly mentioned. This is obvious from the fact that the minor has been expressly admitted only to the benefits of the partnership and even otherwise the minor could not be made liable for the losses. There is nothing else in the partnership deed relating to the shares of the partners and there is no mention of the losses and the manner in which they were to be shared by the adult partners. In other words, the partnership deed is totally silent about the sharing of losses and there is nothing to indicate that it was even considered, much less decided while entering into partnership and drawing up the partnership deed to evidence thecontract of partnership. The question arising for decision has, therefore, to be decided on these facts.
Having heard both sides at considerable length, we have reached the inescapable conclusion that the real point for our decision is concluded by the decision of the Supreme Court in Mandyala Govindu & Co’s case (supra). In that case, there were three adult partners and a minor was admitted to the benefits of the partnership. The shares of the three adult partners were 31 per cent., 23 per cent. and 23 per cent., respectively, while that of the minor was the remaining 23 per cent. The partnership deed in that case after mentioning these shares added that the profits of the partnership business were to be shared as specified. There was no mention in the instrument of partnership of the proportion in which the three adult partners were to share, the losses, if any. The question for decision before the Supreme Court was whether, on these facts, the firm was entitled to registration under s. 26A of the Indian IT Act, 1922 (“the 1922 Act “) (corresponding to s. 185 of the 1961 Act). The Supreme Court noticed the conflicting views on the point of the several High Courts and without going into that controversy came to the conclusion that, on these facts, the firm was not entitled to be granted registration. In our opinion, the ratio of the Supreme Court decision is contained in the following extract of the decision, namely (pp. 5 and 7): ” It is not, and it cannot be, disputed that the ITO before allowing the application for registration must be in a position to ascertain the shares of the partners in the losses even if s. 26A did not require the shares in the losses to be specified in the instrument of partnership… The other 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, does not also apply to this case. In this case, even if the adult partners bear the losses in proportion to their respective shares in the profits, the amount of loss in the minor’s share would still remain undistributed. Will the partners between them bear this loss equally, or to the extent of their own individual shares ? To this, the instrument of Partnership does not even suggest an answer. There is, therefore, no means of ascertaining in this case how the losses are to be apportioned.” [Emphasis , italicised in print, supplied]
The Supreme Court clearly held that where a minor has been admitted to the benefits of the partnership, it must be clearly indicated in the instrument of partnership evidencing the contract as to the manner in which the losses, if any, have to be shared by the adult partners or, in other words, the proportion in which the amount of loss falling to the minor’s share has to be distributed. Unless the instrument of partnership indicates this fact either expressly or by necessary implication, there is nothing to show the proportion in which the losses are to be shared, since the shares in the profits are no indication for the obvious reason that the minor’s share is only in the profits. The significance is for the obvious reason that for determining the genuineness of the firm, it is necessary to know the proportion in which losses, if any, are to be shared by the adult partners, who alone are liable for the losses. This is a strong circumstance for deciding the genuineness of the firm and in the absence of any term in the contract of partnership providing for the sharing of losses by the adult partners, it is reasonable to infer that the partnership is not genuine. This decision is also significant to indicate that in the absence of any specific mention in the instrument of partnership of the proportion in which losses, if any, were to be shared by the adult partners, the Supreme Court held that it was not permissible to draw any inference to that effect from the term providing for sharing of profits by the adult partners and the minor admitted to the benefits of the partnership. Our reading of the Supreme Court decision leads us to this irresistible conclusion.
It follows that where a minor is admitted to the benefits of a partnership, the document evidencing the contract must specify expressly or at least by necessary implication the proportion in which the adult partners are to share the losses, if any, of the firm. The mere mention of the shares of the adult partners and the minor in the profits of the firm cannot provide any basis for drawing any inference about the proportion in which the adult partners have to share the losses of the firm. For this reason, in the absence of any provision in the instrument of partnership evidencing the contract of partnership for sharing of losses by the adult partners where a minor has been admitted to the benefits of the partnership and the shares indicated are merely for sharing the profits, the firm cannot be granted registration treating it as genuine. The obvious reason is that there is no indication of the manner in which the amount of loss in the minor’s share is to be distributed between the adult partners.
We may now briefly refer to the decisions cited at the Bar including the decision of a Division Bench of this Court, which has led to the formation of this larger Bench. A Full Bench of the Andhra Pradesh High Court in CIT vs. Krishna Mining Co.(1980 15 CTR (AP) 203 (FB) (1980) 122 ITR 362(AP) (FB) , distinguished the Supreme Court decision in Mandyala Govindu & Co.’s case (supra), on the facts of that case. The mere fact that the Andhra Pradesh High Court considered theSupreme Court decision to be distinguishable is sufficient for us to say that the Andhra Pradesh High Court decision is distinguishable in the present case. This is for the reason already indicated by us that the aforesaid Supreme Court decision fully covers the point for our decision. That apart, it is significant that in Krishna Mining Co.’s case (supra), the summary of the principles emerging from the decisions summarised at pp 375 and 376 of the report is the same as indicated by us. It is sufficient for our purpose to quote only the principles at Serial Nos. 3, 8, 9 and 11 which support the conclusion reached by us. These are as under : ” 3. Such deed of partnership must specify, either expressly or by implication, the individual shares of the partners. Where no provision at all for sharing of the profits or losses is made in the deed of partnership, such a partnership firm is not entitled for registration. Where there is provision for sharing the profits only but not losses, such firm also is not entitled for registration.
11. Where a minor or minors are admitted to the benefits of partnership only, the sharing of the losses must be provided amongst the major partners.” The next case relied on by learned counsel for the assessee is Conpro Corporation vs. CIT (1985) 47 CTR (Kar) 152 (1985) 151 ITR I (Kar). The aforesaid Supreme Court decision was distinguished by the Karnataka High Court also on the facts of the case before it. However, the intention of the parties to share the losses of the firm was inferred from the term in the instrument of partnership providing for sharing of profits and losses as 20 per cent. and 40 per cent. by the two adults and the remaining 40 per cent. by the minor. From this term, it was inferred that the intention of the parties was to take 100 as unit for dividing the profits and 60 as unit for dividing the losses excluding the minor partner in the sharing of losses. With respect, we are unable to concur with this view which introduces in the instrument of partnership something which is not there, apart from the same being in direct conflict with the Supreme Court decision as we read it.
The Division Bench decision of this Court on which reliance has been placed by learned counsel for the assessee is Raj Construction Co.’s case (supra). In this case also, the above Supreme Court decision has been distinguished while reiterating that specification of the shares of the partners in the profits as well as the losses is essential to entitle a firm to the grant of registration. That too was a case of a minor admitted to the benefits of the partnership. Even then the aforesaid Supreme Court decision was distinguished and a view similar to that in the above Karnataka decision was taken. A formula, for distribution of the loss, was worked out on that basis by drawing an inference from the share in the profits of the adult partners. As already indicated, while dealing with the Karnataka High Court decision, this view is in direct conflict with the ratio of the Supreme Court decision in Mandyala Govindu & Co.’s case (supra). With respect, we are unable to concur with this view for the obvious reason that it is in conflict with the decision of the Supreme Court.
Learned counsel for the assessee also tried to contend that the aforesaid Supreme Court decision is distinguishable on the ground that it was rendered under the corresponding provision in the 1922 Act, while we are concerned with the provision in the 1961 Act. We are unable to accept this contention. The substance of requirement of the two provisions is the same and at any rate in the present case, the contract of partnership is contained in an instrument which is the basis of the assessee’s claim for registration. This being so, the terms of the contract of partnership have to be derived therefrom. In this respect, there is no distinction between the provisions in the two Acts.
Learned counsel for the assessee also referred to the contents of the application for registration filed by the assessee in accordance with the Rules. According to learned counsel, the contents thereof are also material for ascertaining the provision for sharing of losses by the adult partners. It is not necessary for us in the present case to decide whether any document other than the instrument of partnership can be seen for this purpose where the contract of partnership is evidenced by an instrument, since a reading of this application of the assessee also does not improve the situation. There is no specification made even in this application of the proportion in which losses of the firm were to be shared only by the adult partners.
15. Consequently, this reference is answered against the assessee and in favour of the Revenue as under : The Tribunal was justified in holding that the assessee-firm was not entitled to registration for the asst. yr. 1972-73 and continuation of registration for the asst. yr. 1973-74 due to non-specification of shares in losses in the partnership deed dated October 30, 1971. The Tribunal was justified in holding that shares in losses were not specified in the partnership deed dated October 30, 1971.
16. There will be no order as to costs.
[Citation : 169 ITR 194]
