PAREKH WADILAL JIWANBHAI Vs. IN RE

JUDGEMENT

(1.) THIS is a reference under Sub -S. (1) of S. 66 of the IT Act, hereinafter called the "Act". We are concerned with the asst. year 1953 -54. The assessee is a partnership firm, doing business in jewellery. The partners are three brothers, Nandlal, Tarachand and Rajnikant, sons of one Bhimjibhai. These three partners along with eight other persons were doing business in Bombay, in the name and style "Rajnikant Vithaldas and Company." This firm had two branches of Nagpur also. In this firm, these three brothers had 2 annas share each, and the remaining eight persons had a 10 annas share. That partnership business was dissolved on 31st Oct., 1949, and on its dissolution, the business of Nagpur was allotted to these three brothers. These three brothers then constituted a new firm w.e.f. 1st Nov., 1949, and a deed of partnership was duly executed on 19th March, 1950. The partnership constituted under this deed is the assessee before us. This deed recites that these three brothers have agreed to continue the business of the two branches of Nagpur in Partnership on the terms mentioned in the said deed. For the purpose of this case, it is not necessary to reproduce all the terms. It would suffice to reproduce only four terms, to which a reference was made during the course of argument before us : "3. The capital of the partnership shall be Rs. 2,40,000 (Rupees two lakhs forty thousand) divided into 15 shares of Rs. 16,000 each. The partners hereby agree that the shares allotted to different partners will be equal, i.e., each partner will get five shares.

(2.) WE are here concerned with Sub -S. (1) of S. 26A, and in particular ascertaining the true import of the clause "specifying the individual shares of the partners" occurring in Sub -S. (1) Mr. Kolah learned counsel for the assessee, contends that what Sub -S. (1) requires is that the individual shares of the partners should be specified. It does not say that individual shares of the partners in the profits should be specified. Term No. 3 of the partnership deed specifies the individual share of the partners to be equal and further provides that each partner will get his share accordingly. It in terms says that each partner will get five shares. Term No. 3, therefore, fully satisfies the requirements of Sub -S. (1). At any rate, this term read together with term No. 10 specifies that each partner gets equal shares in the profits, and, therefore, the requirements of S. 26A are satisfied. Mr. Kolah also contended that on the basis of this very deed, the ITO had granted registration for the asst. year 1951 -52 and renewed the registration for the year 1952 -53. This also indicates that the deed satisfied the requirements of S. 26A. Nothing new had occurred. No new material has been brought on record and the ITO, therefore, was not justified in refusing the renewal.

(3.) IN our opinion, the contentions raised by Mr. Joshi are well founded. The dictionary meaning of the word "specify" given is : "to mention, speak of or name something definitely or explicitly; the other shade of meaning is -to set down or state categorically or particularly; and the third shade of meaning given is to relate in detail." It is indeed true that Sub -S. (1) of S. 26A does not in express terms say that the instrument of partnership should specify the individual shares of the partners in profits. It only says that the instrument of partnership should specify the individual shares of the partners. The meaning of the expression "shares of the partners", therefore, has to be ascertained from the relevant provisions of the Act. In the assessment of the firm if the firm is registered the income of the firm is not taxed in the hands of the firm, but the income is allocated among its partners according to their shares and is taxed in their hands in accordance with their shares in the income of the firm. On the other hand if the firm is not registered, the entire income of the firm is taxed in the hands of the firm as contra distinguished from its partners. It is not in dispute that when the income of the firm is taxed in its hands, the rate at which it taxed is high; while on the other hands if the income of the firm is taxed in the hands of the partners according to the shares of the partners in its income the rate of tax is lower. The registration of the firm therefore, is normally connected with the assessment of the income of the firm. The expression "shares of the partners" occurring in this section, therefore, can only relate to the share of the partner in the profits of the firm and not in anything else. The section in term says that individual shares of the partners are to be specified in the instrument of partnership, i.e., the section requires and express and definite mention of the shares of the partners in the profits of the firm. Sec. 2 of the IT Act gives definitions of various terms. Sub -s. (6B) of S. 2 provides that "firm", "partner" and "partnership" have the same meanings respectively as in the Indian Partnership Act, 1932, provided that the expression "partner" includes any person who being a minor has been admitted to the benefits of partnership. Sec. 4 of the Partnership Act defines "partnership." It states "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. Persons who have entered into partnership with one another are called individually 'partners' and collectively 'a firm' and the name under which their business is carried on is called the 'firm name'." This definition of "partnership" and "partner" has to be kept in view in construing S. 26A, Sub -S. (1). On reading S. 4 of the Partnership Act, it is abundantly clear that one of the essential elements to constitute a partnership is an agreement amongst the partner to share the profits of the business. The share of the partner in the partnership thus mean the share in the profits of the business of the partnership.