MADHAVA REDDY J. - The following question has been referred to us under section 66(1) of the Indian Income-tax Act, 1922 :
'Whether the assessee is entitled to registration under section 26A of the Income-tax Act, 1922, for the assessment year 1961-62 ?'
The question came to be referred in the following circumstances.
M/s. Mandyala Govindu & Co., Proddatur, was assessed by the Income-tax Officer, Cuddapah, on February 17, 1962, as a registered firm and the determination of total income and the apportionment thereof between the parties was made accordingly. This assessment order was revised by the Commissioner of Income-tax under section 33B of the Income-tax Act, 1922. Four persons, M. Narayana, M. V. Ramaiah, M. Srinivasulu and M Jaganmohan, a minor, represented by his father and guardian executed a partnership deed on January 5, 1959. The terms of the said partnership, in so far as they are relevant for our present purpose, are as follows :
'This deed of partnership executed on the 5th day of January, 1959, by and between (1) Narayana, son of Mandyala Pedda Munaiah, occupation business, residing at Proddatur, Proddatur taluk, (2) Venkataramaiah, (3) Srinivasulu, (4) Jaganmohan. The fourth party being minor is represented by the father and guardian, Govindu, son of Mandyala Pedda Munaiah.
The parties of the first part, second part and third part have started and have been carrying on business in yarn, art silk and colours, etc., in partnership from 3rd January, 1959, under the name and style of 'Mandyla Govindu & Co.', at Proddatur. We have admitted Jaganmohan, minor, the party of the fourth part to the benefits of that partnership.
2. We have the following shares in the above mentioned partnership :
(a) Mandyala Narayana, the party of the first part.
(b) Mandyala Venkararamaiah, the party of the second part.
(c) Mandyala Srinivasulu, the party of the third part.
(d) Mandyala Jaganmohan the party of the fourth part.
The profits of the above partnership business shall be divided and enjoyed according to the shares specified above.
3. The capital contributed by the partners to the partnership business shall carry interest at the rate of 0.50 (fifty paise) per hundred per month. Every year on the 31st day of March, interest shall be credited to the capital accounts of the partners and balance struck.
4. Every year on the 31st day of March the accounts of the partnership shall be closed and the profits and losses ascertained.
5. After deducting the expenses and interest due to the partners from the profits of the partnership, and after setting apart an amount as reserve fund from the net profits as the parties may deem fit, the remaining amount shall be divided according to the shares specified in clause 2 above and the profits shall be credited to the respective accounts of the partners.'
The Commissioner, on a scrutiny of the terms of the partnership deed, was of the view that the minor was also made liable for losses and therefore, the partnership was void ab initio and that, consequently, the assessee was not entitled to registration as a firm under the Income-tax Act. He, accordingly, gave a notice to the assessee to revise the order of assessment under section 33B of the Act. The assessee filed a writ petition the details of which are not necessary to be recorded for answering the question now referred to us. The Commissioner after hearing the assessee firm held that the constitution of the firm was void, cancelled the order of the Income-tax Officer and directed him to pass an order refusing renewal of the registration to the assessee-firm for the assessment year 1961-62. He also noticed that the Income-tax Officer had not disposed of the original application filed under section 26A of the Act. The assessee-firm preferred an appeal to the Appellate Tribunal. Among others it was contended before the Tribunal that the Commissioner erred in holding that the partnership deed purported to make the minor a full-fledged partner and that the real position was that the minor had only been admitted to the benefits of the partnership. The department while supporting the Commissioners construction of the instrument of partnership also contended that the assessee-firm was in any event no entitled to registration under section 26A of the Act as the instrument of partnership did not specify the proportion in which the adult partners were to bear the losses. The Tribunal held that, on a proper construction of the partnership deed, it was clear that the minor was only admitted to the benefits of the partnership and was not made liable for losses of the firm. The partnership was, therefore, not void. On the question whether the partnership deed specified the proportion of the liability of the adult partners in respect of the losses incurred by the firm, it rejected the contention of the assessee that the shares in the losses of the adult members had also been specified in the instrument. Nevertheless, the Tribunal was of the opinion that, inasmuch as, during the relevant accounting year, the business of the firm had not resulted in loss, the assessee could not be denied registration merely because the shares of the partners in the losses incurred by the firm were not specified. It held that the application for registration or renewal of registration of a firm should be judged by the facts of the relevant previous year and as it was common ground that the assessee had only made profits during the relevant accounting year, registration ought not to have been refused and accordingly allowed the appeal of the assessee.
The first point that requires to be considered for answering the question referred to us is :
'Whether, on a proper construction of the partnership deed, the partnership formed thereunder is void ab initio ?'
This turns upon the determination of the fact whether the minor was admitted merely to the benefits of the partnership or was also made liable for the losses. So far as this point is concerned, there cannot be much dispute. The first clause of the partnership clearly mentions that only the three major partners had started and are carrying on the business in yarn, art silks, and colours, etc., from September 3, 1959, under the name and style of Mandyala Govindu & Co. at Proddatur. The minor, jaganmohan, was specifically admitted to the benefits of the partnership firm by the three other persons mentioned in the deed. The other terms of the partnership deed extracted above do not in any way lead to the inference that the minor was burdened with the losses that may be incurred by the firm. Clause 4 merely stipulates that on 31st March of every year the accounts of the partnership shall be closed and the profits and losses ascertained. It does not render either the major partners, or the minor who is admitted to the benefits of the partnership under clause 1, liable to, bear the losses either in the proportion mentioned in clause 2 or in equal proportion. Clause 3 provides that, after setting apart an amount as reserve fund, the net profits shall be divided according to the shares specified. Clause 2 does not mention as to what is to happen in case of loss. Hence, on a true construction of the document, it cannot be held that the minor, who was admitted to the benefits of the partnership under clause 1, is made liable for the losses also in the proportion mentioned in clause 2 or equally with the other partners. That being so, the partnership cannot be said to be void. Under section 30 of the Indian Partnership Act, though a person who is a minor according to law to which he is subject may not be a partner in a firm, he may with the consent of the major partners for the time being be admitted to the benefits of the partnership and in view of the definition of partner and partnership contained in section 2 (6B) of the Indian Income-tax Act, 1922, such minor would also be deemed to be a partner for the purpose of the Act. We, therefore, agree with the Tribunal that the constitution of the assessee-firm is not void for the was only admitted to the benefits of the partnership, having admitted the minor. Registration under section 26A of the Act could not be therefore refused to the assessee-firm on this ground.
The more important question, however, that falls for consideration is :
'Whether the partnership deed specifies the shares of the partners both in the profits and losses of the firm and whether the specification of the share of each partner in the losses of the firm in the deed of partnership is necessary in order to entitle the firm to registration under section 26A of the Act ?'
It is, therefore, necessary to read in this context section 26A of the Act :
'26A. Procedure in registration of firms. - (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 may be prescribed.'
Section 26A of the Act which is extracted above lays down that among others the two essential requirements to be satisfied for entitling the firm to registration are;
(i) that it should have been constituted under an instrument of partnership; and
(ii) that such an instrument of partnership must specify the individual shares of the partners.
In the instant case the first requirement is satisfied, for the partnership is constituted under an instrument of partnership. So far as the other requirement is concerned, clause 2 of the partnership deed specifies the shares of the partners including that of the minor partner in the profits and it also specifies that the profits of the partnership business shall be divided and enjoyed according to the shares specified in clause 2 of the partnership deed. There is, however, no specific clause stipulating as to the manner in which the losses, if any, sustained by the firms, shall be borne by the partners. As one of the partners whose share is mentioned to be 23% is a minor, and as, in view of section 30 of the Act, he could only be admitted to the benefits of partnership business but could not be made responsible for the losses, if the specification of shares in clause 2 could be deemed to be specified the share of the minor partner in the losses of the firm as well in the same proportion as he is entitled to the profits, then the partnership itself would be void. We have, however, on a construction of the terms of the partnership deed, already held that it was not the intention of the parties to burden the minor with any losses. He was admitted only to the benefits of the partnership. That being so, it is only the other partners that will have to bear the losses. The partnership deed, however, is silent as to in what proportion the remaining partners should bear their losses. In this behalf there could be two possible interpretations of the partnership in question. One is that the partners (other than the minor) should bear the entire losses in the same manner as they are sharing the profits, that is, the 1st partner 31% of the losses and remaining two partners at 23% each, i.e., in the same proportion as they are sharing the profits. But, this would result in none of the three major partners bearing the burden of the remaining 23% of losses which is the share of the minor partner in the profits of the partnership to which he is admitted. This will lead to the conclusion that there is no specification as to how 23% of the losses should be borne. Another interpretation that may be placed on the document and which is sought to be put by the learned counsel for the assessee-firm is that the entire losses incurred by the firm should be borne in the proportion of 31 : 23 : 23. But such an interpretation is not warranted by the terms of the document, for nowhere in the document is it mentioned that they would be made liable for the losses in that proportion. Clause 2 merely mentions the shares of each of the four partners, treating the entire partnership business as 100 nP. If now the unit for the purpose of bearing the losses is taken as 77 instead of 100 nP. The burden of each of the partners with respect to the losses incurred by the firm would be increased. That apart, there is no warrant for such an interpretation in view of the terms of the document. Faced with this difficulty, the learned counsel for the assessee-firm contended, that as the minor has been specifically admitted only to the benefits of the partnership and as there is no stipulation in regard to the losses, the partners must be held to be liable to contribute equally to the losses sustained by the firm as provided under section 13(b) of the Indian Partnership Act. No doubt, section 13(b) of the Indian Partnership Act lays down that, subject to contract between the partners, the partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm. It is not necessary for us to consider the question whether by invoking clause (b) of section 13, even the major partners in the instant case would be held liable to contribute equally to the losses sustained by the firm when they have specifically provided that they shall be entitled to the profits in the proportion mentioned in clause 2 of the partnership deed and not equally, for clause (b) of section 13 is subject to the contract between the partners and seems to apply only to a case where there is no stipulation as to profits and losses and not where there is stipulation as to profits but no stipulation as to losses. The more equitable rule in a case where there is a stipulation in the partnership deed as to the proportion in which profits should be shared is that the losses also should be shared in the same proportion. But where a minor is admitted to the partnership and is given a share in the profits of the partnership, the difficulty arises as to in what proportion the major partners should contribute to the losses. Be that as it may, inasmuch as section 26A requires specification of shares in the instrument of partnership, any determination of the share of the partners in the profits or in the losses not with reference to the particular instrument but by resort to section 13 of the Indian Partnership Act would be to supply the omission in the instrument of partnership. Specification of shares of the partners in the instrument of partnership is a condition precedent for entitling the firm to registration. Resorting to the application of section 13(b) of the Partnership Act would itself imply that there is no specification of the shares in the partnership deed at least as regards the losses. In other words, the instrument of partnership does not answer the description of an instrument specifying the shares of the partners which along entitles the firm to registration under section 26A of the Act. It was, therefore, contended by the learned counsel for the assessee-firm that 'specifying the individual shares of the partners' does not mean 'specifying the shares of partners both in the profits and losses'. It was argued that the requirements of section 26A are satisfied even if the instrument merely specifies the share in the profits. It is true that section 26A does not speak of specifying the individual shares of the partners either in the profits or in the losses. In order to ascertain whether the expression 'specifying the individual shares' of an instrument of partnership refers to the shares in the profits only or the liability to share the losses also must be determined having regard to the object of registration under the Act. Though partnership is a relationship between the persons who have agreed to share the profits of the business carried on by all or any of them acting for all, still the business carried on by the partnership may result in losses.
In view of section 23 of the Income-tax Act if a firm is registered under the Act certain benefits are conferred upon it. In the case of registered firms the income tax payable by the firm itself is determined and the total income of each of the partners of the firm including therein his share of income, profits and gains of the previous year, is required to be assessed and the sum payable by him on the basis of such assessment is required to be determined. If such share of any partner is a loss, it is required to be set off against his other income or carried forward and set off in accordance with the provisions of section 24 of the Act. Any loss suffered by a registered firm which cannot be set off against other income, profits and gains of the firm is required to be apportioned between the partners of the firm and they alone are entitled to have the amount of loss set off under section 24 of the Act. Unregistered firms are not entitled to such benefits in view of section 23 and 24 of the Income-tax Act. Though both the registered and unregistered firms are liable to assessment of tax, the registered firms have certain advantages both when they gain profit and incur losses to which the unregistered firms are not entitled. The rate of assessment is lower in the case of registered firms as compared to the rate of assessment applicable to an unregistered firm. If the registration of a firm under section 26A is intended to work out the assessment and compute the profits or set off the losses of the firm and the total income of each of the partners or the losses of each of the partners is entitled to set-off or carry-forward, then the Income-tax Officer must know what the share of the respective partners is in the profits and losses of the business carried on by the firm without which he cannot complete the assessment proceedings and determine the tax liability of the firm and the partners. In order that there may be no ambiguity as to the respective shares of the individual partners in the profits and losses, section 26A requires that the firm seeking registration must have been constituted under an instrument of partnership, although under the general law partnership may be entered into even orally, and such instrument is also required to specify the shares of the individual partners, although once again under the general law the specification of the shares is not obligatory, for by virtue of section 13(b) in the absence of such a specification the partners would be entitled to share the profits and losses equally. The Income-tax Officer must clearly know what the shares of the partners are and should not be left to deduce, on an interpretation of the terms of the document, as to what the shares of the respective partners in the profits and losses are. The instrument itself must clearly stipulate the share of each one of the partners both in the profits and losses and not merely in the profits. A similar view has been taken by the Gujarat High Court in Thacker & Co. v. Commissioner of Income-tax in which J. M. Shelat., speaking for the Bench, held :
'The words the individual shares of the partners in section 26A (1) of the Indian Income-tax Act, 1922, must necessarily mean shares in profits and losses and, therefore, both have to be specifically stated in the instrument in order to comply with the conditions laid down in that section to obtain registration.'
On the facts in that case, the court held that the assessee-company was not entitled to registration as the shares of the partners in the losses were not stated in the instrument of partnership. We find ourselves in entire agreement with the reasoning of the said judgment.
The learned counsel for the assessee-firm placed reliance upon a decision of the Allahabad High Court in Hiralal Jagannath Prasad v. Commissioner of Income-tax in which it was held :
'The omission to specify in a partnership deed the shares of the partners in the losses will not make the deed invalid so as to prevent the firm from being registered under section 26A of the Act.'
It further held that section 26A is essentially a provision for protection of the revenues of the State. That was a case in which one of the partners was a minor and the instrument of partnership specified the shares of all the seven partners including that of the minor both in the profits and in the losses at 1/7th. That was not a case in which there was an omission to specify the shares of the partners in the losses which is the situation in the case now before us. The point that fell for consideration in that decision was 'as a minor cannot be held liable for the losses of the firm, who should bear the shares of losses apportioned to him under the partnership deed In those circumstances what would have been the effect of an omission to specify the share of the partners in the losses did not really fall for consideration. For the reasons given above with due respect, we are unable to agree with the view taken by the learned judges of the Allahabad High Court in the above case. In view of the decision of the Supreme Court in N T Patel & Co. v. Commissioner of Income-tax we must hold that registration under section 26A of the Act confers a benefit on the partners which the partners would not be entitled to but for section 26A. The right can be claimed only in accordance with the statute which confers it and a person seeking relief under that section must bring himself strictly within the terms of that section. The right is strictly regulated by the terms of that statute. Unless the instrument of partnership specified the individual shares of the partners, the instrument of partnership would not conform to the requirements of section 26A. The decision of the Allahabad High Court in Laxmi Trading Co. v. Commissioner of Income-tax relied upon by the learned counsel for the assessee does not clearly state as to what were the terms of the partnership deed. But there are observations in the same judgment to the effect as in Hiralal Jagannath Prasad v. Commissioner of Income-tax and for the reasons already mentioned we are unable to agree with the said view. Strong reliance was also placed upon a decision of our High Court in R. C. No. 2/66. Addepally Nageswara Rao & Bros. v. Commissioner of Income-tax  79 I.T.R. 306, 325 (A.P.). But that was a case in which while admitting the minor to the benefits of a partnership business, the partnership deed specified to the manner in which the profits as well as the losses should be apportioned among the partners who were majors. Our learned brother, Gopal Rao Ekbote speaking for the Bench, on a construction of the entire document, came to the conclusion that :
'...... the loss can be shared by the three major partners in the same proportion as is indicated in clause 3(a) (partnership deed); and that there can be no difficulty in that behalf'. The learned judge further held that :
'It cannot, therefore, be validly contended that the document is silent in that behalf and does not mention the share in such losses.'
Having reached that conclusion, he specifically observed :
'In the view which we have taken, it is not necessary to consider whether it is essential to indicate such a thing in the document of partnership (share in the loss) in order to get it accepted by the income-tax authorities for the purpose of section 26A of the Act.'
and then proceeded to consider the legal position :
'In deference to the arguments, however, which were advanced before us, we will briefly state the position in that behalf.'
That being so, any observation made therein on the question now before us would only be obiter, for that was a case in which even, as found by the Bench, the instrument of partnership specified the shares not only in the profits but also in the losses.
In view of the foregoing discussion, we are of the view that unless the instrument of partnership specifies the shares of the individual partners both in the profits and losses of the firm, the firm would not be entitled to registration under section 26A of the Act. We answer the question accordingly in favour of the department. The department will be entitled to its costs. Advocates fee Rs. 250.