(a) Income‑tax‑‑

‑‑‑‑Firm‑‑‑Registration‑‑Condition precedent‑‑‑Specification of shares of losses‑‑‑Firm consisting of adult partners and a minor admitted to benefits of partnership‑‑‑Statement in partnership deed that term "partner" would mean adult partners‑‑‑Partnership deed providing that profits and losses would be shared equally‑‑‑Provision did not mean that minor would be liable to bear losses‑‑‑Firm was entitled to registration‑‑‑Indian Income Tax Act, 1961, S.184.

Under the provisions of section 185(2) of the Income Tax Act, 1961, which was substituted by 'section 34 of the Taxation Laws (Amendment) Act, 1970, with effect from April 1, 1971, there is a duty cast upon the Income‑tax Officer when he considers that the application for registration is not in order, to intimate the defect to the firm and give it an opportunity to rectify the defect in the application within a period of one month from the date of such intimation.

s

The assessee‑firm consisted of three partners and a minor admitted to the benefits of partnership. In sub‑paragraph (3) of the partnership deed, it was clearly stated that the adult members would be the partners. The capital of the partnership firm was stated to be Rs. 5,004 contributed equally by all the four. Clause 12 of the deed laid down that the profits and losses would be divided among the partners equally. According to the Income‑tax Officer, the share of the loss cannot be apportioned to a minor and since clause 12 provided that the loss of the firm shall be divided between the partners equally, there was no specification in the deed with regard to the division of the loss of the firm. He refused to register the firm. The Appellate Assistant Commissioner upheld the decision. He also noticed another defect and held that in the application for registration in Form No. IIA, the letter "P" was not mentioned against the share of the partner, who was entitled to the share in profits, but was not liable to bear a similar proportion of any loss. According to the Appellate Assistant Commissioner, since the letter "P" was not mentioned against the share of the minor who was admitted to the benefits of the partnership, the firm did not comply with the requirements of the rules. On further appeal, the Tribunal considered the document and found that the term "partner" according to the partnership deed meant only major partners. According to the Tribunal, when clause 12 provided that the loss should be shared by the partners, the loss of the assessee‑firm should be borne by the adult partners and the minor who was admitted to the benefits of the partnership was not liable to share the loss. In so far as the defect pointed by the Appellate Assistant Commissioner and found in Form No. 11A was concerned, the Tribunal held that the defect was curable and directed the Income‑tax Officer to give an opportunity to the assessee‑firm to rectify the defect in Form NO. I IA filed by the firm and then register it. On a reference:

Held, that a fair reading of the partnership deed clearly indicated that the losses should be shared only by the adult partners and the minor who was admitted to the benefits of the partnership was not made to bear the loss. The instrument of partnership also clearly specified the manner of division of losses among the three major and adult partners. The absence of the expression "P" in Form No. 11A could be considered only as a defect in the application and would not render the application void and non est in law. The Tribunal was justified in holding that the deed of partnership specified the shares of losses and was also justified in directing the Income‑tax Officer to give an opportunity to the assessee firm to rectify the defect found in Form NO. I IA filed by it.

Mandyala Govindu & Co. v. CIT (1976) 102 ITR 1 (SC); Progressive Financers v. CIT (1997) 224 ITR 595 (SC) and Sri Ramamohan Motor Service v. CIT (1973) 89 ITR 274 (SC) ref.

‑‑‑‑Firm‑‑‑Registration‑‑‑Application for--registration‑‑‑Defect in application opportunity must be given for rectification of defect‑‑‑Indian Income Tax Act, 1961, S.185.

C. V. Rajan for the Commissioner.

Nemo for the Assessee.

JUDGMENT

N.V. BALASUBRAMANIAN, J.‑‑‑At the instance of the Revenue, the Income‑tax Appellate Tribunal, Madras, has stated a case and referred the following question of law under section 256(1) of the Income Tax Act, 1961:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the firm was entitled to registration under section 185(1) of the Income Tax Act, 1961?"

The assessee is a firm engaged in the business of publication of books. The assessment year with which we are concerned is 1977‑78. The assessee‑firm was originally constituted with two partners viz., Chockalingam and Muthiah. On April 1, 1976, there was a change in the constitution of the firm and one Kumari M. Meenakshi was taken into the business as a partner. One minor by name, Selvi M. Visalakshi, daughter of Muthiah, was admitted to the benefits of the partnership. In sub?paragraph (3) of the partnership deed, it is clearly stated that the adult members would be the partners. The capital of the partnership firm was stated to be Rs. 5,004 contributed equally by all the four. Clause 12 of the said partnership deed was the subject‑matter of consideration in the matter of grant of registration under the provisions of the Income Tax Act, 1961 (hereinafter referred to as "the Act").

The said clause 12 reads as under:

"The net profits or losses shall be arrived at after charging all the expenditure connected with the business including interest payable to the partners on advance made by them and the remuneration payable to them against the income of the business. The profit and losses so ascertained shall be divided between the partners equally. "

The Income‑tax Officer, construing clause 12 of the deed, held that the said Visalakshi was a minor and was admitted only to the benefits of the partnership and there is no provision in the said clause 12 as to how the losses of the firm should be divided between the partners. According to him, the share of the loss cannot be apportioned to a minor and since clause 12 provides that the loss of the firm shall be divided between the partners equally, there is no specification in the deed with regard to the division of loss of the firm. He held that the share of the loss cannot be apportioned to the minor. In view of the defects pointed out by him in the deed of the partnership, the Income‑tax Officer held that the assessee‑firm is not entitled for registration and in this view of the matter he refused to register the firm.

The assessee filed an appeal against the order of the Income‑tax Officer passed under section 185(1)(b) of the Act refusing to register the firm on the ground that there is no ambiguity about the sharing of the losses in the deed of partnership. According to the assessee, the intention of the parties is very clear that the loss of the firm has to be borne equally by the partners and it cannot be stated that the deed did not specify the share of loss to be borne by the partners. The Appellate Assistant Commissioner, however, did not agree with the contentions of the assessee and placing reliance on a decision of the Supreme Court in the case of Sri Ramamohan Motor Service v. CIT (1973) 89 ITR 274, held that the partnership deed provided that the share of loss should also be borne by the minor partner who was admitted to the benefits of the partnership and, therefore, the deed is void in the light of section 30 of the Partnership Act. He also, noticed another defect and held that in the application for registration in Form No. IIA, the letter "P" was not mentioned against the share of the partner, who is entitled to the share in profits, but is not liable to bear a similar proportion of any loss. According to the Appellate Assistant Commissioner, since the letter "P" was not mentioned against the share of the minor who was admitted to the benefits of the partnership, the applicants did not comply with the requirements of the rules, and that there are no reasons its interfere with the order of the Income-?tax Officer refusing to grant registration.

The assessees carried the matter by way of filing a further appeal before the Income‑tax Appellate Tribunal. The Tribunal considered the document and found that the term, "partner" according to the partnership deed meant only major partners. According to the Tribunal when clause 12 provides that the loss should be shared by the partners, the loss of the assessee‑firm should be borne by the adult partners and the minor who was admitted to the benefits of the partnership was not liable to share the loss. The Appellate Tribunal also held that the manner of division of losses among the major shares was specific in the instrument of partnership, and, therefore, the objection raised by the Income‑tax Officer against the validity of the deed has no force and it is devoid of reasons and substance. In so far as the defect pointed by the Appellate Assistant Commissioner and found in Form No. 11A is concerned, the Tribunal held that the defect is only a curable defect which would not be fatal to the grant of registration t6 the assessee‑firm. The Appellate Tribunal, in this view of the matter, directed the income‑tax Officer to give an opportunity to the assessee‑firm to rectify the defect in Form No. 11A filed by the firm. In this view of the matter, the appeal preferred by the assessee was allowed and the Tribunal directed the Income‑tax Officer to grant registration to the assessee‑firm.

The Revenue is challenging the order of the Appellate Tribunal in the present tax case reference. As already seen, the Appellate Tribunal has stated a case and referred the question set out above.

Mr. C.V. Rajan, learned counsel for the Revenue, submitted that clause 12 of the deed .of partnership provides that the profits and losses ascertained by the firm in the prescribed manner should be divided between the partners equally, and clause 12, therefore, provides that the losses of the firm should be borne by the minor who was admitted to the benefits of the partnership. According to him as per the provisions of the Income‑tax Act, the minor admitted to the benefits of the partnership is also a partner and, therefore, when clause 12 provides that the loss should be shared between the partners, the minor is also made liable to bear the loss. In so far as the second aspect of the matter, viz., the defect in Form No.11A is concerned, Mr. C.V. Rajan, learned counsel, submitted that the defect found in Form No.1lA is fatal and once the application filed under Form No.11A for the grant of registration of the reconstituted firm is invalid, it is impermissible for the Appellate Tribunal to direct the Income‑tax Officer to offer an opportunity to the assessee‑firm‑ to rectify the defects. He strongly placed reliance on a decision of the Supreme Court in Sri Ramamohan Motor Service v. CIT (1973) 89 ITR 274 and submitted that the application for registration itself was invalid and the assessee‑firm is not entitled to the registration under section 184 of the Act.

There is no representation on behalf of the assessee.

We have carefully considered the submissions made by Mr. C.V. Rajan, learned counsel for the Revenue, and perused the records. We have already 'extracted clause 12 of the partnership deed and clause 12 provides that the profits and, losses of the firm as ascertained in the prescribed manner shall be divided between the partners equally. The instrument of partnership also provides that the term "partner" means only a major partner. It is made explicit that one M. Meenakshi was taken as a partner. In so far as minor, M. Visalakshi, is concerned, the deed clearly provides that she was admitted only to the benefits of the partnership. A fair reading of the document above mentioned clearly indicates that the losses should be shared only by the adult partners and the minor who was admitted to the benefits of the partnership was not made to‑ bear the loss. The instrument of partnership also clearly specifies the manner of division of losses among the three major and adult partners. Therefore, we are of the view that the sharing of the losses by the adult partners is made explicit and clear in the instrument of partnership.

The decision of the Supreme Court in Progressive Financers v. CIT (1997) 224 ITR 595, would support the case of the assessee in the instant case. The Supreme Court in the above case distinguished its earlier decision in Mandyala Govindu & Co. v. CIT (1976) 102 ITR 1, and held, that the Assessing Officer should not reject the application for registration of a firm merely because in the deed of partnership the shares of the partners are not expressly specified. The Supreme Court further held than the Assessing Officer should construe the instrument of partnership as a whole and ascertain the shares of the partners in the profits and losses. The Supreme Court also held that if the shares of the partners are not expressly specified in the partnership deed but if that could be ascertained by the Income‑tax Officer from the application and the required information was supplied therein then the requirements of section 261 of the 1922 Act could be said to have been satisfied. The Supreme Court, therefore, held that if the shares of the partners can be reasonably ascertained, the requirements of provisions relating to the grant of registration are said to have been satisfied. The Supreme Court held that when the shares of the partners are unequal, then the losses must be shared in the same proportion as the profits, if there is no agreement as to how the losses are to be apportioned. Applying the principles of law laid down by the appeal Court, it is clear that the deed has to be construed reasonably, and it must be considered as a whole. As already seen, the instrument of partnership specified that the term "partner" would mean only a major partner. It is also made clear that Meenakshi was made as a partner. The deed also provides that the minor partner was‑admitted to the benefits of the partnership. In the light of the above provisions of the deed, clause 12 has to be construed and if clause 12 is so construed in the light of the provisions of the deed, the losses as ascertained would be shared only between the three adult members and there is a clear specification of the shares of the losses by the three partners. Therefore, we are of the view that the Tribunal is correct in holding that the clause regarding the specification of the shares of the losses is clearly made in the instrument of partnership and the minor who was admitted to the benefits of the partnership is not made to bear the loss of the firm.

Mr. C. V. Rajan, learned counsel

then contended that the direction given by the Tribunal directing the Income‑tax Officer to give an opportunity to the assessee‑firm to rectify the defect in Form NO. I IA is not correct. As already seen he placed reliance on the decision of the Supreme Court in Sri Ramamohan Motor Service v. CIT (1973) 89 ITR 274. He brought to our notice Form No.11A of the Income‑tax Rules and the relevant portion of Form No. 11A reads as under:

"Form No. 11A

(Application for registration of a firm for

the purpose of the Income Tax Act, 1961)

To

The Income‑tax Officer?????????

??????????? Regarding: Assessment year 20?????.20?????

1. We, on behalf of ???????..(name of the firm) hereby apply for the registration of our firm for the purposes of the Income Tax Act, 1961 for the assessment year 20??..20??..

Date???????????????????????????????????????? Signature????????????????????????????????????????????? Address

1.

2.

3.

4.

(A) .....................

(B) .....................

Notes.‑‑‑

If any partner is entitled to share in profits but is not liable to bear a similar proportion of any losses, this fact should be indicated by putting against his share in column 6 the letter ' P'."?

It is no doubt true that the firm should indicate by including an appropriate entry into the form when a partner is not liable to bear the loss, but is sharing only the profit. The question that arises is whether such as commission can render the application filed, which is otherwise complete in other respects, invalid and fatal. It is significant to notice that the decision of the Supreme Court cited supra arose under the corresponding provision of the Indian Income‑tax Act, 1922, and the relevant provision which the Supreme Court considered was section 26A of the 1922 Act. On the other and, the assessment year which we are concerned is 1977‑78 and under the provision of section 185(2) of the Income Tax Act, 1961, which has been substituted by section 34, the Taxation Laws (Amendment) Act, 1970, with effect from April 1, 1971, there is a duty cast upon the Income‑tax Officer when he considers that the application for registration is not in order to intimate the defect to the firm and give it an opportunity to rectify the defect in the application within a period of one month from the date of such intimation. It is admitted that there is no similar provision in the old Act. In the light of section 185(2) of the Act, while considering the application for registration, when the Income‑tax Officer finds that the application is not in order, he must give an opportunity to the firm to rectify the defect found in the application. The absence of the expression "P" in Form No.11A can be considered as only a defect in the application and would not render the application void and non est in law to be ignored by the Income‑tax Officer. Therefore, when the application is not in order and is not in accordance with the relevant terms of the instrument of partnership, it is incumbent on the Income‑tai Officer to give an opportunity to the firm to rectify the defect found in the application. Since the Income‑tax Officer has not granted the opportunity to the firm to rectify the defect found in the application, the Tribunal has naturally directed the Income‑tax Officer to give an opportunity to the firm to rectify the defect. We do not find any infirmity in the order of he Tribunal in directing the Income‑tax Officer to give an opportunity to the assessee‑firm to rectify the defect in Form No. 11A. The Appellate Tribunal has acted in accordance with the provisions of section 185(2) of the Act. It is also significant to notice that the Supreme Court in Sri Ramamohan Motor Service v. CIT (1973) 89 ITR 274, has noticed the provisions of section 185(2) of the Act and held that section 185, is not retrospective in operation. In so far as the present case is concerned, the assessment year is 1977‑78 and the provisions of section 185(2) would be applicable to the facts of the case. Therefore, when the Income‑tax Officer concerned found that the application for registration was not in order, he should have given an opportunity to the firm to rectify the defect found in the application and the Tribunal, by directing the officer to act in accordance with the law, cannot be said to have acted beyond the parameter of the law. In this view of the are of the view that the Appellate Tribunal was justified in the deed of partnership specified the shares of losses and was I in directing the Income‑tax Officer to give an opportunity to the assessee‑firm to rectify the defect found in Form No.11A filed by it. Therefore, we are of the view that the question of law referred to us is liable to be answered against the Revenue.

In the result, we answer the question referred to us in the affirma?tive and against the Revenue. However, there will be no order as to costs.

M.B.A./352/FC?????????????????????????????????????????????????????????????????????? Reference answered.