Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs Radhika Rice Mills on 24 June, 1997
Equivalent citations: [1998]229ITR304(AP)
Author: Syed Shah Mohammed Quadri
Bench: S.S. Mohammed Quadri, V. Rajagopala Reddy
JUDGMENT Syed Shah Mohammed Quadri, J.
1. This is a reference under section 256 of the Income-tax Act, 1961, at the instance of the Revenue. The following questions are referred for the opinion of this court :
"(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that Sri Ashok Kumar was not admitted to the benefits of partnership though he was not entitled to a share in losses ?
(2) Whether, on the facts and law, the Income-tax Appellate Tribunal was right in holding that Sri Ashok Kumar will not be entitled to the minimum guaranteed profits of Rs. 3,000 per annum in case of loss, and that the Andhra Pradesh High Court's decision in CIT v. B. Pandaiah and Co. , was not applicable to the facts of the case ?"
2. The controversy which led to the reference of the above questions relates to the assessment year 1980-81 for which the previous year ended on March 31, 1980. On April 6, 1979, a partnership was entered into, in which Sri Ashok Kumar was one of the partners. He was to receive a 5 per cent. share in the profits of the firm subject to a minimum of Rs. 3,000 per annum, but there was no liability to share the losses. The firm was granted registration under section 185 of the Income-tax Act. But later in exercise of the powers under section 263 of the Act, the Commissioner cancelled the registration purporting to apply the judgment of this court in CIT v. B. Pandaiah and Co. . On appeal, the Income-tax Appellate Tribunal took the view that though Ashok Kumar was not sharing the losses of the firm, the mere circumstance that a partner was to share profits only but not losses would not by itself militate against the presumption of partnership. So holding, the Tribunal allowed the appeal of the respondent-assessee by setting aside the order of the Commissioner. From that order, the questions aforementioned have, arisen.
3. Learned standing counsel for the income-tax contends that only a minor can be admitted to the benefits of the partnership and that the said Ashok Kumar, a major, could not have been admitted and, therefore, the partnership was an illegal partnership and as such the registration of the firm was rightly cancelled by the Commissioner.
4. Though the respondent-assessee entered appearance, learned counsel did not appear when the matter was called. We adjourned the case more than once to enable him to make his submissions, but in vain.
5. From a perusal of the first question itself, it is clear that the Tribunal, as a fact, found that the said Ashok Kumar was not admitted to the benefits of the partnership. That being a question of fact, the judgment of this court in CIT v. B. Pandaiah and Co. has no application. There, the issue was whether a major congenitally deaf and dumb person could have been admitted to the benefits of the partnership. A Division Bench of this court held that that could not have been done. Answering the reference, Justice Jeevan Reddy (as he then was), speaking for the Bench, observed, "admittedly, a partnership deed admitting an adult member to the benefits of the partnership is invalid". Thus, it is clear that the above judgment has no application to the facts of the present case. It is also brought to our notice that the above judgment of this court was followed by a Division Bench of the Madras High Court in CIT v. Shankar Cottons . There, the firm consisted of two partners each having a 12 1/2 per cent. share in the profits and a 50 per cent. share in the loss. Three persons were admitted to the benefits of the partnership with a 25 per cent. share each in the profits. One of them had been treated as a minor because she was a deaf and dumb person. On the ground that only a minor can be admitted to the benefits of the partnership, the Income-tax Officer held that the partnership was invalid and declined to grant registration. The Tribunal took a different view. Following the judgment of our High Court in B. Pandaiah's case , the Madras High Court held that the firm was not entitled for registration. In our view the ratio in that case is also not applicable to the facts of the present case.
6. Learned standing counsel, however, relied on the judgment of the Calcutta High Court in CIT v. Janata Medical Stores . There the subject-matter of reference was, whether registration of the firm under section 185 of the Act could not be refused on the ground that the terms of the partnership detracted from there being a genuine partnership between the executants of the document. Relying on the judgment of the Supreme Court in K. D. Kamath and Co. v. CIT , the Bench held that the firm was not entitled to be registered. Though the Calcutta High Court observed that the partnership was validly constituted and that it contained all the essential ingredients of a partnership except that the loss was not shared by all the partners; however, in view of the observations of the Supreme Court in K. D. Kamath's case , it answered the reference in the negative. In K. D. Kamath's case , the question that fell for consideration of the court was, whether on the basis of the terms of partnership in that case, the appellant-firm was eligible to be granted registration under section 26A of the Indian Income-tax Act, 1922. It was contended before the Supreme Court that the terms and conditions of the partnership provided that the control and management of the company was in the hands of one of the partners who alone was to operate the bank account and that others could do so only when authorised by him, therefore, there was no valid partnership. As a fact, it was found that the relationship of partners inter se had been created under the partnership deed and that such relationship had actually existed in accordance with the terms of the document. It was also found that the partners were sharing the profits and also bearing the losses in the proportion of their shares in accordance with clause (5) of the partnership deed. In that view of the matter, the Supreme Court held that all the essential ingredients of a partnership were satisfied under the deed and that the opinion of the High Court that registration could not be granted was unsustainable. We shall presently refer to the observations of the Supreme Court on which the Calcutta High Court has relied to reach the conclusion that the partnership in the case before it was not valid. But, before we do so, we consider it appropriate to note the relevant provisions of the Indian Partnership Act (Act No. IX of 1932), and the relevant provisions of the Income-tax Act.
7. Section 4 of the Partnership Act defines the expression "partnership" thus :
"4. '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."
8. From a perusal of the definition of "partnership" extracted above, it is clear that the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all, is termed a "partnership". In other words, it is a joint venture for earning profits. Section 13(b) of the Partnership Act says, subject to contract between the partners, the partners are entitled to share equally in the profits earned and shall contribute equally to the losses sustained by the firm. A combined reading of these two provisions makes it clear that where the persons agree that some of them should bear the losses and that all of them will share the profits, it is a valid agreement not hit by section 4 or section 13(b) of the Act. Section 30 of the Partnership Act which deals with admission of minors to the benefits of partnership is an enabling provision. It enables a person who is a minor to be admitted to the benefits of the partnership with the consent of all the partners for the time being. Sub-section (2) provides that such a minor has a right to such share of property and of the profits of the firm as may be agreed upon. It also enables the minor to have access to and inspect and copy any of the accounts of the firm. Sub-section (3) immunes the minor from personal liability from the acts of the firm though his share is made liable for such acts. Sub-section (4) puts an embargo on the minor suing the partners for an account or payment of share of the property or profits in the firm except when his connections with the firm are severed, in which case, his share will have to be determined in accordance with the provisions contained in section 48 of the Partnership Act. Sub-section (5) gives him an option of giving public notice of his election to become a partner or not to become a partner in the firm at any time within six months of his attaining majority or of his obtaining knowledge that he had been admitted to the benefits of partnership, whichever is later. Failure to give such a notice would result in his becoming a partner in the firm on the expiry of that period. Sub-section (6) deals with presumption of law with regard to burden of proof. Sub-sections (7) and (8) deal with rights and liabilities of such minor, with which we are not concerned here. Sub-section (9) is an exception to sub-sections (7) and (8) with regard to the application of the provisions of section 28 of the Act.
9. We may now refer to sections 184 and 185 of the Income-tax Act which were applicable at the relevant period. Section 184 deals with application for registration of firms and section 185 deals with procedure to be followed on receipt of applications for registration. Section 185, inter alia, provides that on receipt of an application for the registration of the firm, the Assessing Officer should inquire into the genuineness of the firm and its constitution as specified in the instrument of partnership and directs that if he is satisfied that there was or there had been during the previous year in existence a genuine firm with the constitution so specified, he should order registration and if he was not so satisfied he should refuse registering the firm.
10. Now, here we may advert to the relevant observations of the Supreme Court in K. D. Kamath's case . At page 693, their Lord ships of the Supreme Court observed thus :
"In certain decisions of the High Courts the two essential conditions necessary to form the relation of partnership have been stated to be : (1) that there should be an agreement to share the profits and losses of the business, and (2) that each of the partners should be acting as agent for all. Though those two conditions, by and large, have to be satisfied when the relationship of partners is created between the parties, we would emphasise that the legal requirements under section 4 of the Partnership Act to constitute a partnership in law are :
(1) there must be an agreement to share the profits or losses of the business; and (2) the business must be carried on by all the partners or any of them acting for all.
There is implicit in the second requirement the principle of agency."
11. From the above discussion, it follows that in order to have registration of a firm, there must exist a genuine firm with the constitution as specified in the instrument of partnership. If the partnership so exists, as per the constitution, which provides that the partners shall share the profits without the liability of all the partners sharing the losses, then, the partnership cannot be said to be an invalid partnership, disentitling the firm to have registration.
12. However, the Calcutta High Court took note of the observation of the Supreme Court in K. D. Kamath's case which reads thus :
"The above clauses also establish the right of each of the partners to share the profits and also to bear the losses in the proportion of their shares mentioned in clause (5)."
13. Placing reliance on the above observations of the Supreme Court, the Calcutta High Court held that a partnership in which there is no provision to share the losses, is an invalid partnership. With respect we record our disagreement in understanding the above observations of the Supreme Court, the way the Calcutta High Court did.
14. For the above reasons, we answer the first question in the affirmative, i.e., in favour of the assessee and against the Revenue. The reference is accordingly answered. No costs.