Income-tax---

----Firm---Registration---Minor---Minors admitted to benefits of partner ship---Specification of shares in profits and losses of major partners and shares in profits allotted to minors admitted to benefits of partnership--No clear provision regarding share in losses of minors admitted to benefits of partnership---Inference that major partners would share such losses in same ratio in which they agreed to share losses---Firm entitled to registration-- Indian Income Tax Act, 1961, S.185.

Held, that a perusal of the partnership deed showed that the share ratio of profits and losses of the major partners was well-specified. The share ratio in profits of minors was also clearly stated. The share ratio in losses up to 40 percent. was well-defined amongst the major partners. The' question was in which ratio they would share 60 percent. losses falling to the share of minors. In the absence of any agreement to the contrary it would be inferred that the partners would share losses falling to the share of minors in the same ratio in which they agreed to share losses up to 40 percent. The firm was

Progressive Financers v. CIT (1997) 224 ITR 595 (SC) applied

Mandyala Govindu & Co. v. CIT (1976) 102 ITR 1 (SC) ref.

JUDGMENT

OM PRAKASH, J.---The Income-tax Appellate Tribunal (Allahabad Bench, Allahabad), referred the following question relating to the assessment year 1974-75 for the opinion of this Court under section 256(1.) of the Income Tax Act, 1961 (briefly, "the Act"):

"Whether, on the facts and in the circumstances of the case, the assessee was rightly allowed registration under section, 185 of the Income Tax Act, 1961?"

The Assessing Officer in his order passed under section 185(1)(b) of the Act held that the partnership-deed is defective and the firm is not entitled to registration.

The constitution of the assessee-firm is as under:

(1) Sri Sechan Ram son of Late Hari DasAll major partners 20 %

(2) Sri Ghasi Ram son of Sri Ganga Ram7 %

(3) Sri Puhawashi Prasad son of Ghasi Ram13 %

Besides the major partners following minors were also admitted to the benefits of the partnership:

Clause (5) of the partnership deed is as under:

"That at the close of each year the account of the firm will be prepared after adjusting all the business expenses and in the case of profit the amount of profit shall be credited to the respective accounts of the partners according to their shares as specified in para. 3 and in the case of loss the amount of loss shall be borne by the partners according to their shares."

Interpreting clause (5) of the partnership deed, the Assessing Officer observed as under:

"From the above it is clear that the ratio in which the loss' falling to the shares of the minors are to be shared by the major partners has not been clearly specified in the deed."

On appeal, the appellate authority held as follows:

"In the instant case, it is found that shares, in the profits of the firm have specifically been given and the shares in the losses of the firm have also been given. Shares in the losses are in the same proportion on which the profits are being shared with a stipulation that m the case of the minors he will be responsible only to the extent of his share and would not be personally liable. This stipulation is of immense significance as it is in accordance with section 30(3) of the Indian Partnership Act, 1932

This is how the appellate authority accepted the contention of counsel for the assessee-firm and directed the Assessing Officer to treat the firm as a registered one. The dispute was further carried in appeal before the Appellate Tribunal which affirming the order of the first appellate authority found as follows:

"In our view there is no scope for interference in the order of the assessee. The case of the Supreme Court reported in Mandyala Govindu & Co. v. CIT (1976) 102 ITR is clearly distinguishable as in that case there was no reference to sharing of losses of the firm by the partners in the partnership deed while in the case before us so far as the minor's liability for losses is concerned, a specific clause has been inserted indicating therein that he shall be minor liable to the loss to the extent of his share (sic) according to section 30 of the Indian Partnership Act .

---The only interpretation that was possible is that the minor will be liable for losses as per the provisions of section 30(3) of the Indian Partnership Act and he will not be personally liable for the same. Whatever surplus remains after sharing of loss by the minor to the extent of his capital investment, the rest is to be taken as loss to the firm and it is to be shared by the remaining major partners in their profit-sharing ratio. Hence, we uphold the findings given by the appellate authority wherein he has allowed registration to the firm."

It is in this backdrop, the Appellate Tribunal referred the aforementioned question for the opinion of this Court.

The question for consideration is whether the ratio in which the major partners are to bear the losses falling to the share of the minors, i3 well-ascertainable. From the constitution of the firm as reproduced above, it is clear that the share ratio of profits and losses of the major partners is well specified. The share ratio in profits of minors is also clearly stated. Up to 40 percent. the major partners are to share the profits and losses in the ratio of 20 percent. 7 percent. and 13 percent., respectively. So the share ratio in losses up to 40 percent. is well-defined amongst the major partners. The question is in which ratio they will share 60 percent. losses falling to the share of the minors. In the absence of any agreement to the contrary it will be inferred that the partners will share losses falling to the share of minors in the same ratio in which they agreed to share losses up to 40 percent. Accordingly, the share ratio of the three partners, namely, Bechan Ram, Ghasi Ram, and Puhwashi Prasad in losses will be 50 percent. 17.5 percent. and 32.5 .per cent. respectively.

Almost a similar question arose in Progressive Financers v. CIT (1997) 224 ITR 595 (SC), and then the Court held as under.

"As minor Sunitha was admitted to the benefits of partnership it is obvious that she had n6t to share any loss. The losses were to be distributed among the major partners only, since they were to share the profits in the proportion in which they had contributed the capital it was implied that they were to share the losses in the same ratio."

This being so, the registration could not have been refused on the ground that there was no clear stipulation in the partnership deed as to how the losses falling to the share of the minors would be borne by the major partners.

In the result, the aforementioned question is decided. in the affirmative, that is, in favour of the assessee and against the Revenue.

M.B.A./3193/FC Reference answered.