COMMISSIONER OF INCOME-TAX VS NAND LAL JAGDISH PRASAD
1999 P T D 1379
[226 I T R 312]
[Allahabad High Court (India)]
Before P. K. Mukherjee and M. C. Agarwal, JJ
COMMISSIONER OF INCOME-TAX
Versus
NAND LAL JAGDISH PRASAD
Income-tax Reference No. 116 of 1980, decided on 09/08/1996.
Income-tax---
----Firm---Registration---Cancellation of registration---Firm consisting of three adult partners and one minor---Partnership deed providing for profits and losses to be shared among adult partners in proportion of 20:25:30-- Minor to share profits at 25 paise in a rupee and not to share in losses except as defined in Partnership Act, 1932---Balance loss of 25 paise in a rupee also to be fully distributed among adult partners---Cancellation of registration of firm---Not valid---Indian Income Tax Act, 1961, S.186(1).
The assessee-firm was constituted by a partnership deed, dated March 15, 1967, and consisted of three adult partners and a minor was admitted to the benefits of the partnership. The partnership deed provided that the profits of the firm were to be shared in the proportion of 20 paise, 25 paise and 30 paise in a rupee among the adult partners and 25 paise was to be the share of the minor. The losses were to be shared in the same proportion in which the partners were entitled to share the profits, except that the minor was not liable for the losses of the firm except as defined in the Partnership Act, 1932. The assessee-firm was granted registration for the assessment years 1968-69 and continuation of registration for the following years. The Assessing Officer, on audit objections, cancelled the registration under section 186(1) of the Income Tax Act, 1961, on the ground that no specific provision was made in the partnership deed to share the losses and that even the minor was held responsible for losses to the extent permitted by the provisions of the Partnership Act. The Appellate Assistant Commissioner affirmed the order of the Income-tax Officer. The Tribunal held that the plain meaning of clause (2) of the deed was that the shares of the adult partners in the losses would be the same as in the case of profits, i.e., in the ratio of 20:25:30 and that it was incorrect to state that the shares of the partners in the losses had not been specifically mentioned. The Tribunal, therefore, quashed the order cancelling the registration under section 186(1) of the Act. On a reference, the Revenue contended that though clause (2) of the deed mentioned how the profits were to be shared, the provision in respect of sharing of losses was incomplete inasmuch as if the losses were distributed among the three adult partners in the proportion of 20:25:30 in a rupee, there remained undistributed balance to the extent of 25 paise which meant that the losses could not be distributed amongst the partners in the manner prescribed in the deed:
Held, that under the partnership deed there was a specific reference to the losses and the deed provided for the manner in which the losses were to be distributed among the adult partners. The contention of the Revenue that if the losses were distributed in the ratio 20 paise, 25 paise and 30 paise as stated in the deed, there would remain an undistributed balance of 25 paise, was not correct. The loss had to be fully distributed amongst the partner who had agreed to share the losses and, therefore, this portion of the loss too had to be distributed amongst them though the result might be that the profit-sharing ratio would be different from the ratio in which the losses were to be shared. This, however, was the clear intention of the parties when they provided that the minor would not share the losses and the whole loss would be shared by the partners. Therefore, the Tribunal was right in holding that the partnership deed made provision for the manner in which the losses were to be shared amongst the adult partners and in cancelling the orders passed by the Income-tax Officer under section 186(1) of the Act.
Mandyala Govindu & Co. v. CIT (1976) 102 ITR 1 (SC) distinguished.
CIT v. Krishna Mining Co. (1980) 122 ITR 362 (AP) and Conpro Corporation v. CIT (1985) 151 ITR 1 (Kar.) ref.
Shekhar Srivastava for the Commissioner.
S.P.L. Srivastava for the Assessee.
JUDGMENT
M.C. AGRAWAL, J.---In pursuance of the directions of this Court under section 256(2) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), the Income-tax Appellate Tribunal, New Delhi, has referred the following question for the opinion of this Court:
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in cancelling the orders under section 186(1) of the Income Tax Act, 1961, passed by the Income-tax Officer for the assessment years 1968-69 to 1976-77?" We have heard Sri Shekhar Srivastava, learned standing counsel for the Commissioner of Income-tax, and Sri S.P.L. Srivastava, learned counsel for the assessee-respondent.
The matter relates to the assessment years 1968-69, 1969-70, 1970-71, 1971-72, 1972-73, 1973-74, 1974-75, 1975-76 and 1976-77. The assessee is a partnership-firm that was constituted through a partnership deed, dated March 15, 1967. There were three adult partners and one Laxmi Kant, a minor, was admitted to the benefits of the partnership. Clause (2) of the partnership deed that prescribed the manner in which the profits and losses of the partnership-firm were to be shared amongst the partners was as under:
"That the new profits and losses of the partnership business shall be distributed between all the partners in the proportion given below:
(1) Nand Lal (1st party) Rs.0.20 n.p. in a rupee.
(2) Ram Avtar (2nd party) Rs.0.25 n.p. in a rupee.
(3) Smt. Raj Kumari (3rd party) Rs.0.30 n.p. in a rupee.
(4) Laxmi Kant (minor) Rs.0.25 n.p. in a rupee.
and they shall bear and be liable to all the losses suffered by the partnership business in the same proportion in which they are entitled to profits as aforesaid except the minor who has only been admitted to the benefits of partnership, i.e., the minor shall be entitled to share the profits of the firm but shall not be liable for the losses except as defined in the Indian Partnership Act. "
The assessee was granted registration under the Income-tax Act for the assessment year 1968-69 and continuation of registration for the following years. Subsequently on objections raised by the audit party that the aforesaid clause did not specifically provide how the losses will be distributed amongst the partners, the Assessing Officer cancelled the registration in exercise of powers under section 186(1) of the Act. He held that no specific provision was made in the partnership deed to share the losses and that even the minor was held responsible for the liability of losses to the extent permitted by the provisions of the Indian Partnership Act. The Assessing Officer placed reliance on a judgment of the Supreme Court in Mandyala Govindu & Co. v. CIT (1976) 102 ITR 1. The assessee preferred appeals to the Appellate Assistant Commissioner without any success. On further appeal, the Tribunal, however, held that the plain meaning of clause (2) was that the shares of the adult partners in the losses would be the same as in the case of profits, i.e., in the ratio of 20:25:30. The same was the ratio for distribution of losses amongst them. The Tribunal observed that it was incorrect to state that the shares of the partners in the losses had not been specifically mentioned. The Tribunal, therefore, allowed the assessee's 'appeal and quashed the order cancelling the registration under section 186(1) of the Act and that is how the present reference is before this Court.
The provisions of the Income-tax Act require that the partnership deed must specify the manner in which the profits and losses of the firm are to be distributed amongst the partners. The contention of the Revenue was that clause (2) of the partnership deed as reproduced above does mention how the profits will be distributed, but the provision in respect of the share of the losses is incomplete inasmuch as if the losses are distributed amongst the three adult partners in the proportion 0:25:30 in a rupee there remains undistributed profit to the extent of 25 paise in a rupee, meaning thereby that the losses cannot be distributed amongst the partners in the manner prescribed in the partnership deed. Reliance is placed by learned counsel, Sri Shekhar Srivastava, on Mandyala Govindu & Co. v. CIT (1976) 102 ITR 1 (SC). That was a case in which the partnership deed stated the ratio in which the profits of the firm were to be distributed amongst the partners and the minor admitted to the benefits of the partnership while there was no mention whatsoever about the manner in which the losses were to be distributed. It was in these circumstances that it was held that there was no means of ascertaining how the amount of loss in the minor's share was to be apportioned. Learned counsel for the assessee, on the other hand, placed reliance on CIT v. Krishna Mining Co. (1980) 122 ITR 362 (AP) (FB) in which the partnership deed elaborately mentioned how the profits were to be distributed between the major partners and the minor admitted to the benefits of the partnership and there was also a mention that the losses shall be borne by the "parties hereto" meaning the major partners. The Full Bench of the Andhra Pradesh High Court held that the specification of the individual shares of the partners may be express or implied or worked out and that the intention and object of the partners of the firm in regard to specification of the individual shares of the partners can be gathered either from the very recitals of the deed of partnership as a whole or from the true facts and circumstances indicated in the application for registration, books of account and the conduct of the parties. The judgment of the Supreme Court in Mandyala's (1976) 102 TTR 1 was held to be distinguishable as there was no provision in that case in the instrument of partnership indicating the proportion in which the partners were to bear the losses. Reliance was also placed on Conpro Corporation v. CIT (1985) 151 ITR 1 (Kar.), in which it was observed that a partnership deed has to be reasonably construed and that there should be an attempt to effectuate the intention of the parties to the deed and not to highlight the bad drafting, if any.
As is evident from a perusal of clause (2) of the partnership deed reproduced above, it would be apparent that there is a specific reference to the losses and the deed provides for the manner in which the losses will be distributed amongst the adult partners. The ratio of Mandyala's case: (1976) 102 ITR 1 (SC), therefore, cannot be mechanically applied to the present case. What has to be seen is whether the losses of the firm can be fully distributed amongst the three partners without doing any injustice to the terms of the agreement as contained in clause (2) above. The learned Tribunal has held that the aforesaid clause means that the losses are to be shared amongst the three partners in the ratio of 20:25:30. The contention that if the losses are distributed as 20 paise in a rupee, 25 paise in a rupee and 30 paise in a rupee as stated in the partnership deed there would remain an undistributed balance of 25 paise per rupee, is not correct. The loss has to be fully distributed amongst the three partners and suppose there is loss of one rupee, i.e., 100 paise, in the first distribution 75 paise will be distributed and then the remaining 25 paise is again distributed in the same ratio, i.e. 20/100, 25/100 and 30/100 another sum of 18-3/4 paise will get distributed leaving a balance of 6-1/4 paise. If we go on distributing this remainder till the full rupee is exhausted, the result will be that out of one rupee of loss, the three partners would get 26-2/3, 33-1/3, and 40 paise in a rupee of loss. Thus, giving clause (2) a realistic and effective meaning the losses have to be distributed in the ratio of 20:25:30 or 26-2/3/100, 33-1/3/100 and 40/100. It would be adopting a very literal and unrealistic approach if the Revenue's contention that a portion of the loss, i.e., 25 paise in a rupee remains undistributed. The loss has to be fully distributed amongst the partners who have agreed to share the losses and, therefore, this portion of the loss too has to be distributed amongst them though the result may be that the profit sharing ratio is different from the ratio in which the losses are to be shared. This, however, was the clear intention of the parties when they provided that the minor would not share the losses and the whole loss would be shared by the partners. A minor is not a partner and is only a person admitted to the benefits of the partnership.
For the above reasons, we are of the opinion that the Tribunal was right in holding that the partnership deed made a provision about the manner in which the 1$sses were to be shared amongst the adult partners and that the Tribunal was justified in cancelling the orders passed by the Income-tax Officer under section 1860) of the Act. The question reproduced above as answered accordingly in favour of the assessee and against the Revenue. The respondent will get its costs of this reference from the Commissioner of Income-tax, which we assess at Rs.1,500.
M.B.A./1905/FCOrder accordingly.