1. At the instance of the assesses, the Appellate Tribunal. Bombay has, under Section 66 (1) of the Indian Income-tax Act,1922, referred to this Court for its opinion the following question of few :
Whether, on the facts and in the circumstances of the case, the firm of M/s. Chimanlal Umaji and Sons constituted under an instrument of partnership dated 29-9-1964 could be denied registration on the ground that the instrument of partnership did not specify the individual shares of the partners as required by Section 26-A of the Act ?
2. The material facts, as appearing from the statement of the case, are these. The assessment year is 1958-59, the corresponding previous year being the one which ended on 23rd October 1957. The assessee is a firm consisting of three partners, namely. Chiman lal, Mangalchand and Hukumchand and one minor, Gulabchand, has been admitted to the benefits of the partnership. The firm was constituted by a deed of partnership dated 29th September 1954, the material terms of which, as translated from Hindi, read as follows :
' Clause 5. Shares in profit and loss of this partnership have been decided as under (Repetition of this very sentence is there). Clause 6. Seth Chimanlal Umaji,--age 50--4 as.
Seth Mangalchand S/o. Chimanlal--age 21--4 as. Hukumchand S/o. Chimanlal--age 18--4 as. Thus the share of profits of twelve annas in a rupee has been allocated amongst us, the three partners, Gulabchand son of Chimanlal who is a minor has been admitted to the bene fits of partnership and his share has been decided at remaining 4 as. '
This firm commenced its business as soon as it was formed. It applied for and secured, registration under Section 26-A of the Act for the assessment year 1956-57 and its renewal for the assessment year 1957-58. The application for renewal of registration for the assessment year 1958 59 was signed by the three, partners including Chimanlal who signed it on behalf of the minor also. The apportionment of income, profits and gains (or loss) as shown in paragraph 3 of the application was
Name of PartnerAddress
Date of admittance to partnership
Interest on capital or loans (if any)
Salary or commission from firm
Share in the balance profits or loss (annas and pies inthe rupee)
M.T. Cloth Market, Indore Tel Gali Malbarganj
Mangalchand s/o Chimanlaldo
Hukumchand s/o Chimanlaldo
Gulabchand s/o Chimanlaldo
The Income-tax Officer refused to grant renewal of registration on the ground that, according to clause 6 of the deed of partnership the minor was made to share the profits as well as losses and that, even if he could be regarded as not sharing the losses, it was not clear from the deed in what proportion the losses were to be shared. The Appellate Assistant Commissioner, while agreeing that the minor was merely admitted to the benefits of the partnership, held that there was no indication in the partnership deed how the remaining one fourth share of the loss was to be divided among the three adult partners though it was incorrectly stated in the application for renewal that, the minor too was to share equally with the adults the loss, if any The Tribunal concurred in the view taken by the Income tax authorities about the vagueness in the partnership deed relating to the one-fourth share of loss and held that, having regard to that uncertainty which could not be resolved without any complicated inference or resort to the provisions of the Partnership Act, 1932. the instrument of partnership did not specify the shares of individual partners within the meaning of Section 26-A of the Act and the refusal to renew the registration was, therefore, justified.
3. Having heard the counsel, we have formed the opinion that the instrument of partnership did specify the individual shares of the partners as required by Section 26-A of the Act and that the renewal of registration could not be refused on the ground that it did not do so. In order to qualify for registration under Section 26-A of the Act there must be in existence a valid and genuine firm constituted by an instrument of partnership, which specifies the individual share of the partners Then an application for registration on behalf of the firm should be made in accordance with the requirements of Rules 2 to 6-B of the Indian Income-tax Rules. 1922 If a firm desires to have this privilege, it must conform strictly; to those requirements Rayulu Subba Rao v. Commissioner of Income-tax, Madras : 30ITR163(SC) and N.T. Patel and Co. v. Commissioner of Income-tax, Madras : 42ITR224(SC) . It must be mentioned at the outset that, in this case, there was as required, a full disclosure of the particulars of apportionment in paragraph 3 of the application for renewal which also fulfilled all other prescribed requirements and all that is said about it is that the statement therein made to the effect that the minor shared theprofits (or losses) to the extent of one-fourth share was not in accord with the vague term of the deed of partnership relating to the sharing of loss appertaining that share to the benefits of which he had been admitted
4. This takes us to the instrument of partnership dated 29th September, 1954 A large number of cases were cited before us to show that the instrument did not specify the individual shares of partners or was otherwise invalid As the terms of that instrument show, the minor was admitted to the benefits of the partnership to the extent of one-fourth share. He was not as in the case of Commissioner of Income-tax v. Dwarkadas Khetan and Co. : 41ITR528(SC) , admitted as a full partner. The facts of Steel Brothers and Co. Ltd. v. Commissioner of Income tax : 33ITR1(SC) , In re, Parekh Wadilal Jiwanbhai : 42ITR266(Bom) , Karnidan Rawatmull v. Commissioner of Income-tax : 48ITR922(Cal) , Dastur Dadi and Co. v. Commissioner of Income tax 1963-49 ITR 554, Commissioner of Income-tax v Rupchand Rauthmal : 50ITR295(Cal) . and V.M. Periasami Chettiar and Co. v. Commissioner of Income-tax, 1964 62 ITR 134 are easily distinguishable because in these cases the individual shares of the partners or at least some of them were not specified. The law requires that the individual share of each partner must be specified in the instrument of partnership : Kannappa Naicker and Co. v Commissioner of Income-tax, Madras : 5ITR49(Mad) and : 1958CriLJ271 It is not that, in the case before us. the individual shares of partners, including the share to the benefits of which the minor has been admitted, are. in that sense, not specified in the instrument. All that is urged in support of the view that shares are not so specified is that it is not stated in the instrument how the loss appertaining to the one-fourth share to the benefits of which the minor has been admitted would be shared
5. Shri Chitale, who appeared for the assessee. urged that all that Section 26-A of the Act required was that, the individual shares of the partners in the firm should be specified in the instrument of partnership and it was not necessary to state in what proportion they would contribute to the capital of the firm or share the losses. Elaborating the argument, Shri Chitale stated that, under Section 4 of the Indian Partnership Act, 1932. 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. that, though it is usual to find it stated in partnership instruments that there is a communion of profits and losses, an agreement to share the losses is not essential for making one a partner and that, therefore it is sufficient if the instrument specifies in what proportion the profits would be shared by the parties While this is the true position under the general law, here we have to consider the requirements of Section 26-A of the Act and the relevant Rules. According to Rule 3, an application for registration has to be made in the prescribed form to show the share in the balance of profits (or loss) of the firm as constituted on the date of the application and the apportionment of the income, profits or gains (or loss) of the business in the previous year. It appears to us that these particulars imply that the instrument of partnership should disclose how the losses would be shared. But even if it be otherwise, that can have no practical bearing on the facts of the case before us because, as we would show immediately, the shares in losses have not been left unspecified
6. It appears to us that there was a mistake in appreciating the true meaning of the Hindi word ' Panti' as occurring, in clause 6 of the instrument of partnership. As is well known, that word means ' share' and not ' profits ' That being so, the correct translation of clauses 5 and 6 would read as follows :
' Clause 5. Shares in profits and loss of this partnership have been decided as under (Repetition of this very sentence is there).
Clause 6. Seth Chimanlal Umaji --age 50--4 as.Seth Mangalchand S/o. Chimanlal--age 21--4 as. Hukumchand S/o. Chimanlal--age 18--4 as.
Thus the share of twelve annas in a rupee has been settled for we three partners. Gulabchand son of Chimanlal who is a minor has been admitted to the benefits of the partnership and the remaining four annas has been settled to be his share. '
It will be readily seen that Clause 5. dealing with the sharing of profits and losses, governs the whole of Clause 6, including the minor's share of four annas, to the extent of which he had been admitted to the benefits of the partnership. This was, in our opinion, a legitimate course because, as provided by Section 30(3) of the Partnership Act, a minor admitted to the benefits of a partnership is liable for all the acts and obligations of the firm though his liability is not unrestricted. He is not personally liable nor will his separate property be liable for the debts and obligations of the firm but his liability does extend to his share in the property and profits of the firm. As pointed out by the Privy Council in Sanyasi Charan Mandal v Krishnadhan Banerji ILR 49 Cal 560 : AIR 1922 PC 237 the right of a minor admitted to the benefits of a partnership is merely to participate in the properly of the firm after its obligations have been discharged. So, in Commissioner of Income-tax v. Shah Mohandas : 57ITR415(SC) a firm was found entitled to be registered under Section 26-A of the Act although the instrument creating it provided that even the minors, who had been admitted to the benefits of partnership would share the losses to the extent of the capital invested on their behalf In view of these authorities and the recitals of the instrument of partnership dated 29th September, 1954, it should be held that it did not fail to provide for the losses relating to the minor's four annas share. In any event, as laid down by the Supreme Court in Kylasa Sarabhaiah v. Commissoner of Income-tax : 56ITR219(SC) and : 57ITR415(SC) , such instruments of partnership should be construed reasonably. If the instrument in this case is so construed in the light of the fact that the minor was admitted to the benefits of the partnership, the position in regard to the losses relating to the minor's share does not remain undefined or unspecified.
7. In view of the foregoing considerations, our answer to the question referred to us is that, in the circumstances of this case, registration of the assessee firm could not be refused. Since the assessee has succeeded, all costs of this reference shall be paid by the Department. Hearing fee Rs. 100.