COMMISSIONER OF INCOME TAX Vs. VIJAYA TRADERS

JUDGEMENT

(1.) PURSUANT to the direction of this Court in TCP No. 347 of 1980 the instant reference has been made and we are asked accordingly to answer the question, "whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the assessee is a partnership validly constituted and accordingly directing to grant registration to the firm for the asst. year 1975 -76 in T.C. No. 768 of 1982 and for the asst. year 1976 -77 in TC No. 1005 of 1982 ?"

(2.) THE above has arisen in a proceeding for the assessment of the income -tax, which the assessee is called upon to pay by the ITO for the assessment years aforementioned. The assessee claimed registration on the basis of an instrument described as a deed of partnership dt. 20th Jan., 1974. The instrument revealed that the assessee, Vijay Traders, was carrying on business as a firm constituted under a deed dt. 4th Dec., 1970, with Pandurangan and B.A. Majeeth as a partners. Majeeth expired on 13th Nov., 1973, and the firm stood dissolved. Since Majeeth had expressed his desire that his wife should be taken in as a partner in the event of his death, Smt. Shammi Majeeth, his wife, was taken in as a partner under the deed dt. 28th Jan., 1974. This partnership, according to the assessee, was to be for a period of 11 years commencing from 1st April, 1974, the capital was to be Rs. 80,000 for which Pandurangan was to contribute Rs. 30,000 and Mrs. Shammi Majeeth was to place at the disposal of the firm the site taken on lease by here husband, over which a construction was put up, the total value of which was Rs. 50,000. The relevant clauses of the deed are extracted in the order of the Tribunal as follows :

(3.) WHAT is, however, important in the scheme of the provisions in Chapter XVI of the Act is to notice that while determining the income -tax payable by the firm, the ITO is also required to determine the share of each partner in the income of the firm and it such share of a partner is a loss, to set off the same against the individual partner's other income, or to carry forward and set off in accordance with the provisions of ss. 70 to 75. We thought, we need, however, in the instant case, not go further than noticing the above, to state that the legislation governing the registration of firms for the purposes of the Act, has indicated that the shares of partners in profits and losses should be found specified in the instrument of partnership to enable the IT authorities to make proper assessment of the income of the firm or the individual partners of the firm and for that purpose to make out whether the firm is genuine or not. The requirement, as envisaged under s. 184(1)(ii), that, "the individual shares of the partners are specified in that instrument", refers in our view, to shares in the profits as well as losses. An instrument, thus, which shall specify the share of the partners for the purposes of the registration, must carry particulars for sharing the profits as well as the sharing of the losses. We may advert at this stage to S. 13 of the Partnership Act, which provides, "Subject to contract between the partners -(a) a partner is not entitled to receive remuneration for taking part in the conduct of the business, (b) the partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm....". The entitlement envisaged is one, which undoubtedly shall cover agreements or contracts of partnership in general; but the provisions in S. 184(1)(i) and (ii) read together rule out any possibility of introducing the concept of mutual rights and liabilities, as envisaged under the Partnership Act, if the instrument has not specified the sharing of profits as well as losses.