Bombay High Court
Commissioner Of Income-Tax vs J.K. Doshi And Co. on 1 December, 1988
Equivalent citations: [1989]176ITR371(BOM)
Author: S.P. Bharucha
Bench: S.P. Bharucha
JUDGMENT S.P. Bharucha, J.
1. The reference, made at the instance of the Revenue, raises the following question :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the assessee-firm was entitled to registration ?"
2. The question arises with reference to the assessment year 1969-70. The assessee is a firm of chartered accountants. Originally, the partners were one J. K. Doshi and his daughter. Anjani (now referred as "the senior partners"). By a deed of partnership dated October 12, 1967, on K. H. Doshi and Charulata, till then employees, joined the senior partners (and are now referred to as "the junior partners"). Clause 14 of the deed of partnership dealt with the division of net profits appearing in the yearly accounts and, subject to annual increments and such bonus as was agreed upon, stated that K. H. Doshi would receive Rs. 12,000 per year and Charulata would receive Rs. 5,100 per year.
3. By reason of the provisions of the said clause 14, the Income-tax Officer refused registration to the firm on the ground that the conditions specified by section 184(1)(ii) of the Income-tax Act, 1961, were not satisfied. In appeal, the Appellate Assistant Commissioner, following the order of the Income-tax Appellate Tribunal for an earlier year, upset the Income-tax Officer's order. The Revenue carried the matter to the Tribunal which held that the firm was entitled to registration.
4. Section 184(1)(ii) lays down the conditions for the application for registration of a firm for the purpose of the Act. The conditions are that (i) the partnership is evidenced by an instrument, and (ii) the individual shares of the partners are specified in the instrument. There is no dispute that there is an instrument evidencing the partnership. The argument on behalf of the Revenue is that the instrument does not specify the individual shares of the partners. It is submitted that the junior partners are, by virtue of the said clause 14, to receive specified sums regardless of the profit or loss of the firm, and, therefore, are not to receive shares in its profit or loss. In other words, the argument is that the word "shares" must be read to mean stated proportions.
5. Mrs. Singh, learned counsel for the Revenue, invited our attention to he judgment of the Andhra Pradesh High Court in CIT v. Ravi Constructions . The learned judges there noted the provisions of the Partnership Act and laid down that the three essential elements of a partnership were (i) an agreement between the parties, (ii) which specified their share in the profits of the firm, and (iii) that the firm's business was to be carried on by any or all of the partners acting for all. They noted the provisions of section 6 which stated that in determining whether a firm existed or not, or whether a person was a partner or not, regard had to be had to the real relation between the parties, as shown by all relevant facts taken together. The learned judges found that the Tribunal, in the case before them, had not kept in mind the test provided by section 6. They found, on examination of the facts, that the conclusion reached by the Tribunal entitling the firm to registration was erroneous.
6. It is difficult to see how this authority assists the Revenue in he present case.
7. The assessing authorities refused registration to the assessee only because the deed of partnership provided that the junior partners were on receive a fixed sum and not some proportion of the profits. In the case of Raghunandan Nanu Kothare v. Hormasji Bezonji Bamji [1927] ILR 51 Bom 342, the very question arose in the context of a partnership between two attorneys of this court. The observation of Amberson Marten C.J., with whom Kemp J. agreed, are illuminating (at page 189 of AIR 1927 Bom 187) :
"Next, we come to the main point, viz., he question about sharing he profits. My personal view is that partners can agree to share those profits in any way they like. They may agree to share them equally. They may also agree, in my opinion, that one partner is to receive a fixed annual or monthly sum in lieu of a sum varying in accordance with the profits actually earned. Take this case for instance. Would not the difficulties pointed out by the plaintiff, disappear here, if the agreement had been drafted in this form, that out of the profits of the partnership, the defendant should be paid a preferential Rs. 500 a month, but that if and in so far as the profits of the business should be insufficient to pay that sum, then the plaintiff would pay the deficiency to the defendant out of his own pocket ? I do not think any objection could have been taken to such an agreement, if it had been entered into, as not coming within the express words in section 239. But, in my opinion, that is what the parties have substantially agreed on her when they said that 'in lieu of his share of profits' the defendant was to get a particular fixed sum. In other words, he defendant thus became a salaried partner which is an expression we are quite familiar with not only in England but also in Bombay."
8. Section 239 of the Contract Act which governed the relationship of partners at the relevant time required them "to share the profits". Amberson Marten C.J. laid, in his regard, emphasis on he words "in lieu of share of profits" in the partnership deed. In the present case, the said clause 14 speaks of the division of net profits. The shares of the junior partners in the profits are the fixed sums set out in the said clause 14. Their shares do not have to be some stated proportion of the profits.
9. The only argument advanced on behalf of the Revenue must, on the strength of this court's judgment in Raghunandan Nanu Kothare's case, AIR 1927 Bom 187, be repelled. The question, accordingly, is answered in the affirmative and in favour of the assessee.
10. No order as to costs.