1. This is a reference under sub-section (1) of section 66 of the Indian Income-tax Act, 1922, at the instance of the department. We are here concerned with the two assessment years 1958-59 and 1959-60, the relevant accounting periods being from November 3, 1956, to October 23, 1957, and from October 24, 1957, to November 11, 1958. The assessee is a partnership firm and the question that falls for consideration arises out of the assessee-firm's claim of its registration under the Indian Registration Act. Facts relevant for both the assessment years are for all material purposes identical.
2. Facts in brief are : Some time in July, 1951, the Premier Automobile Limited, Bombay, entered into an agreement with Messrs. Raoji Deochalnd, Valchand Deochands, Ratanchand Sakharam and Mrs. Shantabai Gulabchand, trading in the name and style of 'National Garage, Nagpur'. Under the said agreement the said four persons were given exclusive rights to sell within certain territories certain cars and trucks manufactured by the said Premier Automobile Limited. It was this agreement that was said to have been exploited by the present assessee-firm constituted under the instrument of partnership made on November 15, 1955. The terms on which the partners agreed to do business are incorporated in the instrument of partnership of date November 15, 1955. On the basis of this partnership deed the assessee-firm was granted registration for the assessment year 1957-58 and the assessee claimed its renewal for the two assessment years 1958-59 and 1959-60 with which we are concerned.
3. It is necessary to refer to and reproduce certain material terms in the deed to appreciate the question arising in the case. The deed of partnerships is annexure 'A' to the statement of the case and forms part of it. There are ten partners in this firm, including Shri P. R. Modi, Shri Sakharam Deochand (Shri S. D. Shah), Shri Raoji Deochand (Shri R. D. Shah), Shri Valchand Deochand (Shri V. D. Shah). Sub-clause (e) of clause 3 recites that Shri P. R. Modi shall be the managing partner, who shall look to the working of the partnership and shall be entitled to such monthly remuneration as will be fixed by the partners from time to time, in addition to the 5 per cent. share in the net profits of the firm and his share of profits as mentioned in clause (j) below. Clause (h) empowers the partners by mutual agreement to fix remuneration from time to time to be paid to any one or more partners for such extra time and skill devoted by them respectively to the business of the partnership. Cause (i) provides that it is mutually agreed that, before arriving at the net profits of the firm, 25 per cent. of the profits shall be charged as commission to the profit and loss account of the firm to be distributed as under :
5 per cent. shall be paid as commission to the managing partnerNo.6, Shri Pamulal Raoji Modi, for managing theday-to-day affairs of the firm.20 per cent. shall be paid as agency commission to partners Nos. 1to 3, Messrs. Sakharam Deochand, Raoji Deochand andValchand Deochand.
4. Thus, after meeting the surcharge, the net profit shall be distributed among the partners as noted in clause (j) below in which the share of each partner in the net profits in certain proportions is given. It is sufficient to state that the exact share which each of the ten partners has in the profit and loss of the partnership business has been expressly stated in clause (j). It will, however, be seen that the proportion in which the 20 per cent. of the gross profits, which had been agreed to be paid to the three partners Shri Sakharam Deochand, Shri Raoji Deochand and Shri Valchand Deochand, is to be divided, has not been stated.
5. The Income-tax Officer took the view that inasmuch as the partnership did not specify the individual shares of the three partners in the aforesaid 20 per cent. of the gross profits, the requirements of section 26A were not satisfied, and in this view of the matter he rejected the application of the assessee-firm for renewal of its registration. The Appellate Assistant Commissioner confirmed the view of the Income-tax Officer and dismissed the appeal of the assessee. The assessee took second appeal to the Tribunal. The Tribunal, disagreeing with the view taken by the income-tax authorities, held that the assessee-firm was entitled to the renewal of registration under section 26A. On an application made by the department, the Tribunal has stated the case referring to us the following question of law :
'Whether, on the facts and in the circumstances of the case, the individual shares of the partners were specified in the deed of partnerships dated November 15, 1955, in terms of section 26A of the Indian Income-tax Act, 1922 ?'
6. The stands take by the Income-tax Officer has been reiterated by Mr. Joshi, earned counsel for the department, before us. We find it difficult to sustain the contention raised on behalf of the revenue. The question as to when an assessee-firm is entitled to claim registration of its firm has been elaborately considered by a Division Bench of this court in Commissioner of Income-tax v. D'Costa Brothers. It has been held therein :
'Rule 4 of the Indian Income-tax Rules, 1922, is mandatory in terms. It casts an obligation on the Income-tax Officer, save and except when he is satisfied that there was no genuine firm constituted or in existence as shown in the instrument of partnership, or when the application for registration has not been properly made to grant registration.
The determination of profits by a firm in manner different from the provisions of the Indian Income-tax Act or even not strictly in accordance with the express terms of the deed of partnership would not entitled the Income-tax Officer to reject the application for registration of the deed of partnership under section 26A of the Indian Income-tax Act, 1922, on the ground that the application for registration has not been properly made within the meaning of rule 4. In what manner the profits are to be determined and what deductions are to be allowed in the determination of the profits of the firm is a matter entirely for the partners inter se to decide. The requirements of the law are that here must be an instrument of partnership under which the partnership is constituted; that it must specify the individual share of the partners; that the application has to be in the prescribed form and must be signed by all major partners; and that if the application is made after the expiry of the relevant previous year, it must show the manner in which the profits of the business as determined by the partners have been distributed or would be distributed and that must be in accordance with the shares specified in the deed o partnership. Any error in the computation of profits by the partners does not give a right to the Income-tax Officer to reject an application for registration on the ground that the application for registration has not been properly made.'
7. We have already reproduced the terms in the deed of partnership which are relevant for the decision of the question. It is indeed true that the shares of the three partners in the 20 per cent. of the gross profits paid to them by way of agency commission have not be specified, but it would be seen that the payment of the said 20 per cent. has been agreed to by the partners as an expense of the partnership before the figure of net profits has been arrived at. The distribution of the net profits arrived at according to the agreement between the partners has been shown in the deed in the specified share of each partner. The Division Bench of this court has already held in the earlier case that in what manner the profits are to be determined and what deductions are to be allowed in the determination of the net profits of the firm is a matter entirely for the partners inter se to decide. In our opinion, therefore, the Tribunal was justified in holding that the requirements of section 26A of the Income-tax Act have been fulfilled and the assessee-firm was entitled to the renewal of registration of this partnership. In our opinion, therefore, the answer to the questions referred to us will have to be in favour of the assessee. We answer the question in the affirmative. The department shall pay the costs of the assessee.
8. Question answered in the affirmative.