1. This reference under section 66(1) of the Indian Income-tax Act, 1922, to be hereinafter referred to as the 'Act' was made at the instance of the assessee. The question of law referred for the opinion of this court is :
'Whether, on the facts and in the circumstances of the case, the assessee is entitled to registration under section 26A of the Income-tax Act for the assessment year 1961-62 ?'
2. The assesses firm was constituted under a deed of partnership dated November 14, 1955. It consists of three partners, namely, R. S. Satyanarayanappa, R. S. Chandrasekharappa and R. S. Venugopal. It is provided in the partnership deed that the profits earned by the firm shall be distributed in the following manner :
(1) Reserve fund, one anna in a rupee.
(2) Satyanarayanappa, six annas in a rupee.
(3) Chandrasekharappa, six annas in a rupee.
(4) Venugopal, three annas in a rupee.
3. The deed is silent as to the manner of distribution of losses among the partners. The firm was granted registration under section 26A of the Act for the assessment year 1960-61. But, when it applied for renewal of its registration for the assessment year 1961-62, the same was refused by the Income-tax Officer on the ground that the partnership deed is silent as to the manner of distribution of losses among the partners. The order of the Income-tax Officer was reversed by the Appellate Assistant Commissioner. But the Income-tax Appellate Tribunal set aside the order or the Appellate Assistant Commissioner and restored that of the Income-tax Officer. We have now to see whether the Income-tax Officer was right in refusing to register the firm under section 26A on the sole ground that the instrument of partnership is silent as to the manner of distributing the losses among the partners.
4. The view taken by the Tribunal receives support from the decision of the Gujarat High Court in Thacker & Co. v. Commissioner of Income-tax. But, on the other hand, the conclusion reached by the Appellate Assistant Commissioner receives some support from the observations of the Bombay High Court in In re Parekh Wadilal Jiwanbhai. It is true that that decision does not directly bear on the question of law under consideration.
5. As there is no decision of the Supreme Court as well as that of this court covering the point under consideration, it is necessary for us to decide the question of law referred to us on the basis of the language of section 26A read with the relevant rules.
Section 26A of the Act reads :
'(1) Application may be made to the Income-tax Officer on behalf of any firm, constituted under an instrument of partnership specifying the individual shares of the partners, for registration for the purposes of this Act and of any other enactment for the time being in force relating to income-tax or super-tax.
(2) The application shall be made by such person or persons, and at such times and shall contain such particulars and shall be in such form, and be verified in such manner, as may be prescribed; and it shall be dealt with by the Income-tax Officer in such manner as many be prescribed.'
6. Rules 2 to 6 of the Rules framed under the Act relate to applications to be made under section 26A. It is not the case of the revenue that the assessee had not complied with those Rules. Admittedly the application made by him fulfills the conditions laid down in sector 26A as well as in rules 2 to 6. Therefore, all that we have to see is whether the instrument of partition referred to in section 26A specifies the individual shares of the partners.
7. What exactly the legislature meant by saying 'under an instrument of partnership specifying the individual shares of the partners' Section 26A does not say that the instrument of Partnership should specify the individual shares of the partners in the partnership profits and losses. On the other hand, it merely says that that instrument should specify 'the individual shares of the partners'. Does that expression mean that the instruments should specify both the individual shares of profits as well as that of losses of the partners in the partnership
8. It is now well-settled that an assessee wanting to claim the benefit of section 26A should strictly fulfil the requirements of that section. It is equally well-settled that in considering an instrument of partnership, one should not look into that instruments with a view to see how best the assessee could be denied the benefit of section 26A. The instrument should be read in a reasonable manner. Bearing in mind these principles, we shall now proceed to consider as to what are the requirements of section 26A.
9. It must be remembered that the registration contemplated under section 26A is 'for the purpose of the Act', the principal purpose of the Act being the assessment of the assessee under section 23. 'Firm' is defined in section 2(6B) of the Act and that definition runs thus :
''Firm', 'partner' and 'partnership' have the same meaning respectively as in the Indian Partnership Act, 1932 (IX of 1932),...'
10. In Commissioner of Income-tax v. Bagyalakshmi & Co. the Supreme Court laid down that except where there is a specific provision of the Income-tax Act which derogates from any other statutory law or personal law, the provision will have to be considered in the light of the relevant branches of law. Therefore, for the purpose of finding out what exactly the legislature meant by saying 'specifying the individual shares of the partners' in section 26A of the Act, we must go back to the Partnership Act. Section 4 of the Partnership Act provides :
''Partnership' is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.'
11. The main purpose of a partnership is to share the profit of the business carried on by the partnership. If any losses are incurred, they are merely incidental to the venture to make profits. Incurring loss is by no means the purpose of partnership. Hence, prima facie, when section 26A speaks of 'specifying the individual shares of the partners', it must be held to mean 'specifying the individual shares of the profits of the partners'. So far as the sharing of the losses is concerned, the same is regulated by section 13(b) of the Indian Partnership Act. That section to the extent it is relevant for our purpose, says :
'Subject to contract between the partners -........
(b) the partners are entitled to share equally in the profits earned and shall contribute equally to the losses sustained by the firm.'
12. In Pitchiah Chettiar v. Subramaniam Chettiar a Bench of the Madras High Court held that where in a partnership the profits are shared in a certain proportion, the fair inference is that losses are to be shared in the same proportion in the absence of a contract to the contrary; the onus of proving that they are not liable for loss lies on persons who so assert. If section 26A of the Act is read with sections 4 and 13(b) of the Indian Partnership Act, it would be seen that if an instrument of partnership specifies the individual shares of the partners in the partnership profits, without more, it follows that the losses, if any, incurred by the partnership should also be shared in the same proportion in which the profits are to be shared by them. In the absence of a contract to the contrary, whenever an instrument of partnership specifies the proportion in which the partnership profits are to be distributed among the partners, it should be held as a legal inference that the losses also should be distributed among them in the same proportion. Such a clause can be considered as an implied term of the document or as an invisible term. If so read, the instrument of partnership with which we are concerned in this case must be held to have specified not only the proportion in which the partnership profits should be distributed among the partners, but also the losses. If that be so, as we think it is, then the mandate of section 26A(1) must be held to have been complied with.
13. In In re Parekh Wadilal's case, Tambe J. (as he then was), who spoke for the Bench, repeatedly stated that the essence of section 26A is 'specifying the individual shares of profits of the partners'. On a reading of that judgment it is clear that the Bench was of the opinion that what section 26A requires is the specification, in the instrument of partnership, of the individual shares of the partners in the partnership profits. Though the observations relating to that aspect are obiter, in our opinion they are entitled to weight. In our judgment, those observations accord with the scope and purpose of section 26A.
14. The learned counsel for the revenue invited our attention to the form mentioned in rule 6 of the Rules framed under the Act which provides for a certificate from the partners to the effect that the profits or losses, if any, of the previous years were divided or credited as shown in the application. From that circumstance, he wanted us to spell out from section 26A, a similar condition. We do not think that there is any basis for that contention. The form in question has nothing to do with the conditions to be mentioned in the instrument of partnership. It relates to a subsequent stage, i.e., to the distribution of profits and losses of the previous year. In fact, a contention similar to the one advanced by the learned counsel for the revenue did not commend itself to the Gujarat High Court in Thacker & Co.'s case. But yet the learned judges therein proceeded to conclude that the instrument of partnership should specify the share of losses of individual partners on two grounds, namely, (1) that by implication that Supreme Court must be considered to have laid down such a position in R. C. Mitter & Sons v. Commissioner of Income-tax, and (2) if such is not the position, the object of section 26A would be defeated. In R. C. Mitter & Sons v. Commissioner of Income-tax the Supreme Court was called upon to consider the scope of the expression 'constituted under an instrument of partnership' in section 26A of the Act. While dealing with that question their Lordships proceeded to consider not only the requirements of section 26A but also that of the relevant rules. Dealing with those requirements, their Lordships observed that in order that a firm may be entitled to registration under section 26A of the Act, the following essential conditions must be satisfied, viz., (i) the firm should be constituted under an instrument of partnership, specifying the individual shares of the partners; (ii) an application on behalf of, and signed by, all the partners and containing all the particulars as set out in the Rules must be made; (iii) the application should be made before the assessment of the firm under section 23, for the particular year; (iv) the profit or losses if any of the business relating to the accounting year should have been divided or credited, as the case may be, in accordance with the terms of the instrument; and (v) the partnership must be genuine and must actually have existed in conformity with the terms and conditions of the instrument of partnership, in the accounting year. In that case, the Supreme Court was not called upon nor did it consider directly or indirectly the scope of the expression 'specifying the individual shares of the partners' found in section 26A. We are in agreement with the learned judges of the Gujarat High Court that even casual observations of the Supreme Court are entitled to weight. But then in R. C. Mitter's case, we do not find even any casual observation bearing on the point under consideration.
15. This takes us to the next question whether, if the individual shares of the partners in the losses of the firm are not mentioned in the instrument of partnership, the purpose of the Act is likely to be defeated or at least hindered. The purpose of the Act considered by the learned judges in Thacker & Co.'s case is the assessment of the assessee under section 23 of the Act. It is true, for that purpose it is necessary for the Income-tax Officer to known how the profits as well as the losses of the firm have been distributed among its partners. But if our earlier conclusion that, in the absence of a contract to the contrary, the losses should be shared by the partners in the same proportion in which they are entitled to share the partnership profits, is correct then, the difficulty envisaged by their Lordships does not survive. The purpose of the Act will be fully served by merely specifying in the instrument in question, the proportion in which the profits should be shared by the partners. It is not the law that legal inferences should be set out in the instrument of partnership. From the above discussion, it follows that as per the terms of the instrument of partnership, the partnership losses have to be distributed among the three partners mentioned above in the ratio of 6 : 6 : 3 respectively. The reserve fund built up by the firm when distributed, will have to be done on the same basis.
16. For the reasons mentioned above, our answer to the question referred to us is that, on the facts and in the circumstances of the case, the assessee is entitled to registration under section 26A of the Act for the assessment year 1961-62.
17. The assessee is entitled to his costs of this reference. Advocate's fee Rs. 250.