1. A very short question arises on this reference, namely, whether the assessee-firm is entitled to registration under section 26A of the Income-tax Act, 1922. The reference relates to the assessment years 1956-57 and 1957-58, the relevant account years being Samvat year 2011 (27th October, 1954, to 14th November, 1955), and Samvat year 2012 (15th November, 1955, to 2nd November, 1956). The assessee-firm was originally constituted under a deed of partnership dated 17th January, 1952, and so constituted it consisted of three sons and a mother as partners and the fourth son, namely, Nandubhai, who was then a minor aged about 17 years, was admitted to the benefits of the partnership. Nandubhai attained majority on 27th September, 1954, but he did not give within six months of attaining majority public notice whether he had elected to become or not to become a partner of the assessee-firm with the result that he became a partner in the assessee-firm on the expire of the period of six months. Thereafter, on 3rd May, 1955, Balubhai, one of the partners of the assessee-firm, died leaving him surviving his widow, Bai Jadi, and his two sons, Hemendra and Niranjan. Now clause (6) of the partnership deed provided that on the death of a partner, his male heir or heirs should be taken as partners and the business should be continued to be carried on as before the death of the partner. Hemendra and Niranjan being the male heirs of Balubhai were, therefore, entitled to be admitted in the assessee-firm in the place of Balubhai as representing his share, but they were both minors and they were, therefore, admitted to the benefits of the partnership, their mother, Bai Jadi, acting as guardian in the matter of their admission to the benefits of the partnership. A new partnership deed was drawn up between the partners on 14th May, 1955, recording the aforesaid changes in the constitution of the partnership and the new partnership deed recited that on the death of Balubhai, his male heirs, Hemendra and Niranjan, had been admitted to the benefits of the partnership in conformity with clause (6) of the earlier partnership deed and hence the new partnership deed was being entered into between the partners. The new partnership deed was signed by the major partners but not by the minors, Hemendra and Niranjan, or by Bai Jadi. Clause (2) of the new partnership deed set out the respective shares of the partners and of the minors admitted to the benefits of the partnership and the share of the minors was specified in the following terms :
'On behalf of minor, Hemendra Balubhai, and minor, Niranjan Balubhai, their guardian their mother, Bai Jadi, w/o Balubhai Shivlal, 1/5 share out of rupee one, admitted only for the benefits of partnership.'
2. The assessee-firm was registered for the assessment years 1954-55 and 1955-56 on the basis of the partnership deed dated 17th January, 1952, and the assessee-firm, therefore, made an application for renewal of registration for the assessment year 1956-57 on the basis of the same partnership deed since that partnership deed was operative during at least a part of the year of account, namely, 27th October, 1954, to 3rd May, 1955. This application was rejected by the Income-tax Officer, but was subsequently granted in appeal by the Appellate Assistant Commissioner and, since no appeal against the order of the Appellate Assistant Commissioner granting this application was filed by the revenue, we are not concerned with this application and we need say no more about it. In addition to this application, the assessee-firm also made another application to the Income-tax Officer under section 26A and that was an application for registration on the basis of the new partnership deed dated 14th May, 1955, since during a part of the year of account, namely, 3rd May, 1955, to 14th November, 1955, it was this new partnership deed which was in operation. A similar application for renewal of registration on the basis of the new partnership deed was also made by the assessee-firm for the subsequent assessment year 1957-58. Both the applications were rejected by the Income-tax Officer on the ground that the new partnership deed on the basis of which the applications were made did not specify the individual shares of the two minors in the profits and losses of the assessee-firm. The assessees-firm thereupon preferred appeals to the Appellate Assistant Commissioner, but the Appellate Assistant Commissioner also took the same view and dismissed the appeals. Then followed appeals to the Tribunal and before the Tribunal the assessee-firm succeeded. The Tribunal took the view that prior to his death Balubhai held his share in the assessee-firm as a karta of his Hindu undivided family and that when, on the death of Balubhai, Hemendra and Niranjan were admitted to the benefits of the partnership by reason of clause (6) of the old deed of partnership, they also held their share as representing the Hindu undivided family and since it was the Hindu undivided family constituting a single unit which was a partner in the assessee-firm through the two minors, it was not necessary to specify the individual shares of the two minors in the assessee-firm and, consequently, there was no defect in the new partnership deed which precluded grant of registration on the basis of that partnership deed. The Tribunal, in this view of the matter, allowed the appeals of the assessee-firm and directed grant of registration for the assessment year 1956-57 and renewal of registration for the assessment year 1957-58 on the basis of the new partnership deed. The Commissioner was obviously dissatisfied with this order and he accordingly applied for a reference and on the application the Tribunal referred for the opinion of the court the question whether, on the facts and circumstances of the case, and having regard to the terms of the two partnership deeds, the claim of the assessee-firm for registration could be refused on the ground that the individual shares of the minors were not specified in the new partnership deed.
3. Now it is well-settled that registration of a firm is not a general right but is a mere privilege given to a firm in order to enable the partners of the firm to get the benefit of lower rates of assessment than those which would be applicable to the whole income of the firm when charged as a unit of assessment. If a firm desires to have this privilege, it must conform strictly to the requirements of law on the fulfillment of which alone the privilege is granted. Now what are the requirements of law which must be satisfied in order to entitle a firm to registration is no longer a matter of doubt or debate. The Supreme Court in R. C. Mitter & Sons v. Commissioner of Income-tax, after considering the relevant provisions of the Act relating to registration of firms and particularly section 26A and the Rules made by the Central Board or Revenue under section 59, held that the following five essential conditions must be fulfilled in order that a firm may be held entitled to registration :
(1) that the firm should be constituted under an instrument of partnership, specifying the individual shares of the partners;
(2) that an application on behalf of, and signed by, all the partners and containing all the particulars as set out in the Rules has been made;
(3) that the application has been made before the assessment of the income of the firm made under section 23 of the Act (omitting the words not necessary for our present purpose) for that particular year;
(4) that the profits (or losses, if any) of the business relating to the previous year, that is to say, the relevant accounting year, should have been divided or credited, as the case may be, in accordance with the terms of the instrument; and lastly
(5) that the partnership must have been genuine and must have actually existed in conformity with the terms and conditions of the instrument.
Out of these five conditions, the revenue disputed the fulfillment of only the first condition which requires that the assessee-firm should be constituted under an instrument of partnership specifying the individual shares of the partners and, even in regard to this condition, the only contention was that the instrument of partnership under which the assessee-firm was constituted did not specify the individual shares of the partners. Now, though under the ordinary law, a minor, who is admitted to the benefits of a partnership is not a partner, he would be a partner within the meaning of the Indian Income-tax Act by reason of the definition contained in section 2(6B). The instrument of partnership must, therefore, specify not only the individual shares of the major partners but also the individual shares of the minors who are admitted to the benefits of the partnership and, as held by us in a judgment delivered today in Thacker & Co. v. Commissioner of Income-tax (Income-tax reference No. 15 of 1964), the individual shares would mean individual shares not only in profits but also in losses. The question which, therefore, arises for consideration is whether, in the present case, the new partnership deed constituting the assessee-firm specified the individual shares of the partners including the minors who were admitted to the benefits of the partnership.
4. Turning to the new partnership deed, we find that, so far as the minors are concerned, clause (2) did not specify the individual share of each minor, but merely specified the collective share of the two minors as 1/5 of the total profits. Is this specification sufficient for the purpose of section 26 The answer is obviously no. What the section requires is that the partnership deed must specify the individual shares of the minors and, therefore, the individual share of each minor must be specified in the partnership deed. The specification of a collective share belonging to the two minors would not meet the requirements of the section. The Tribunal sought to get over this difficulty by holding that the minors represented the Hindu undivided family in the assessee-firm and that it was the Hindu undivided family which was a partner in the assessee-firm through the two minors and that it was, therefore, sufficient if the collective share of 1/5 was specified as the share of the minors, for that was really the share of the Hindu undivided family which was a single unit. But this view is patently wrong. It is based upon an erroneous assumption that a Hindu undivided family can be a partner in a firm. It is undoubtedly true that a manager or other member of a Hindu undivided family may be a partner in a firm and the share which he has in the firm may as between him and the Hindu undivided family belong to the Hindu undivided family, but so far as the firm is concerned, it is he and he alone who would be a partner and the other members of the Hindu undivided family would have no rights or liabilities qua the other partners and equally the other partners would have no concern with the members of the Hindu undivided family as such and they would look only to the manager or member who is their partner for enforcing their rights or discharging their obligations under the partnership deed. The Tribunal was, therefore, in error in taking the view that the Hindu undivided family was a partner in the assessee-firm through the two minors. The two minors were admitted to the benefits of the partnership and they were entitled to the rights and were subject to the liabilities arising as a result of their admission to the benefits of the partnership and the specification of their individual shares was necessary under the provisions of section 26A. The new partnership deed was clearly deficient in this respect and the assessee-firm was, therefore, not entitled to registration on the basis of the new partnership deed.
5. Mr. Kaji, learned advocate appearing on behalf of the assessee-firm, however, contended that on a true construction of the partnership deed, it was possible to say that though clause (2) specified only the collective share of the two minors, each minor was entitled to that collective share in equal proportion and, if that be so, the partnership deed could be regarded as specifying the individual share of each minor. He relied on the decision of the Punjab High Court in Commissioner of Income-tax v. Kishore Chand Ramji Dass in support of this contention. We shall presently consider this decision but, before we do so, we would prefer to examine the validity of the contention on principle. The proposition is now well-established and cannot be disputed that when the court is looking at a partnership deed for the purpose of considering whether the firm constituted under it is entitled to registration, the partnership deed must be construed reasonably and each and every part of the partnership deed must be referred to for the purpose of ascertaining whether reading the partnership deed as a whole and from a commonsense point of view it can be said that the individual share of each partner is mentioned, described or set out in the partnership deed. If reading the partnership deed in this manner the individual share of each partner can be gathered from the terms of the partnership deed itself, the court would regard the partnership deed as sufficient to meet the requirements of section 26A and would not insist that the clause setting out the shares must itself contain specification of the individual shares of the partners. If, for example, the share of two or more partners is set out as a collective share in the clause dealing with the shares of the partners, but the preamble or the recital of the partnership deed shows that those partners are to take their collective share in certain specified proportions, the court would look at the partnership deed as a whole and regard the individual shares of those partners as specified in the partnership deed. But here, in the present case, we do not find anything in the partnership deed to show that the two minors were to take the collective share shown against their names in clause (2) in equal shares as contended for on behalf of the assessee. The only portion of the partnership deed on which reliance was placed on behalf of the assessee was that the two minors were admitted to the benefits of the partnership as male heirs of Balubhai by virtue of clause (6) of the earlier deed of partnership and that, since, as male heirs, their shares in the estate of Balubhai would be equal, they must be deemed to take their collective share in equal proportion. This contention is in our opinion not well-founded and must be rejected. It is no doubt true that the two minors were admitted to the benefits of the partnership because they were the male heirs of Balubhai, but the 1/5 share which was given to them was given to them collectively and the firm was not concerned as to how they chose to apportion that 1/5 share between themselves. The fact that they were the male heirs of Balubhai was material only in that it entitled them to be admitted to the benefits of the partnership but that did not mean that the 1/5 share which was allotted to them collectively was taken by them necessarily in equal shares; how they would divide the 1/5 share would be a matter of internal arrangement between them. The portion of the partnership deed relied on behalf of the assessee cannot, therefore, avail to show that each minor was entitled to an equal share in the 1/5 share allotted collectively to the minors. There was in the result no specification of the individual share of each minor in the new partnership deed. The Punjab High Court in the decision referred to above certainly held that, in the case before it, the mere fact that the shares of some minors in the firm were shown collectively and the share of each one of them was not separately stated in express words was not a sufficient ground for refusing registration of the firm, but the reason for taking this view was that, on the facts of the case before it, the court held that it was clear from the context beyond doubt that the minors took the shares allotted to them collectively in equal shares. But, as we have already pointed out above, on the facts of the present case, we are unable to say that it is clear from the new partnership deed that the two minors took the 1/5 share allotted to them collectively in equal shares. The decision of the Punjab High Court cannot, therefore, assist the assessee.
6. In this view of the matter we are of the opinion that the Tribunal was in error in holding that the assessee-firm was entitled to registration on the basis of the new deed of partnership dated 15th May, 1955. Our answer to the question referred to us will, therefore, be in the affirmative. The assessee will pay the costs of the reference to the Commissioner.
7. Question answered in the affirmative.