Karnataka High Court
Bhagwanchand S. Jain And Co. vs Addl. Commissioner Of Income-Tax, ... on 18 June, 1980
Equivalent citations: (1980)18CTR(KAR)156, [1981]127ITR770(KAR), [1981]127ITR770(KARN), [1980]4TAXMAN447(KAR)
JUDGMENT Srinivasa Iyengar, J.
1. The Income-tax Appellate Tribunal has referred the following common question in relation to the assessment years 1972-73 and 1973-74 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee-firm was not entitled to registration under the Income-tax Act, 1961 ?"
2. The assessee was a registered partnership firm carrying on business under the name "Bhagwanchand Seremul Jain and Company" and there was a deed of partnership entered in to on November 11, 1964. The assessee was granted registration in the assessment year 1966-67 and it came to be renewed year after year. For the assessment years 1972-73 and 1973-74 also, declaration under s. 184(7) were filed and the ITO continued the registration and made assessments accordingly.
3. The Commissioner being of the opinion that the grant of registration was erroneous and it was prejudicial to the revenue, issued notice under s. 263 of the I.T. Act. The relevant portion of the partnership deed is as follows :
"Each partner shall invest to his capacity and shall receive interest at 6% per annum on his investment.
The remaining profits of the business shall be reckoned at Re. 1 and the partner shall share the same as under :
Ps.
Bhagwanchand Hummatmul 0.25
Persmal Himmatmul 0.25
Seremul Ottaji 0.30
Mohanlal Seremul 0.15
Charity 0.05
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Total 1.00
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Losses, if any, will be shared in the same ratio.
At the end of the year (accounting year), the profit or loss of the year shall be credited or debited to the partners' accounts in their respective shares."
4. The view taken by the Commissioner was that the charity had been included as a partner and this was illegal and, therefore, registration ought not to have been granted. For the assessee, a statement was filed contending that the charity was not a partner and the intention of the partners was only to set apart a portion of the towards charity and the stand that the charity as such had been made a partner was not correct, and, therefore, the proceedings should be dropped. But, the Commissioner did not accept the contention and stated that it was clear from the contents of the document that the charity was a partner. He cited the decision of the Allahabad High Court in Manohar Das Kedar Nath v. CIT [1950] 18 ITR 914, in support of his conclusion. He, accordingly, set aside the assessment made in the status of a registered firm and directed the ITO, Hospet, to redo the assessment in the status of an unregistered firm.
5. Feeling aggrieved by this order, the assessee preferred appeals to the Tribunal. In the course of its order, the Tribunal was of the view that the charity as such was not a partner, but it came to a conclusion that, in the event of loss, it was not at all clear as to how it should be distributed and, accordingly, the deed was vague and, therefore, the assessee was not entitled to registration.
6. At the instance of the assessee, the Tribunal has referred the above question for the opinion of this court.
7. The partnership deed has to be read in a reasonable manner. Eo nomine only four persons are declared to be partners. While providing for distribution of profit a provision has been made to allocate 5% of the profits to the charity. That is all that is intended by the relevant provision in the deed. So far as losses are concerned, if there is a loss in any year, no question of crediting any sum to the charity would arise. The provision made that losses, if any, shall be shared in the same ratio would only mean that the loss would be shared in the same ratio as the profits would have been shared by the four partners. The allocation of 5 paise in a rupee to charity is not by way of allocation of a share to a partner, but only distribution of the profits providing for a reservation in favour of the charity to that extent. The Commissioner, in our opinion, was in error in interpreting the judgment of the Allahabad High Court in Manohar Das Kedar Nath v. CIT(1950) 18ITR 914. In that case also the partners had agreed to set apart 1/16 of the profits to a common charity fund. The learned judges observed (p. 918) :
"On a correct interpretation of the document it is impossible to hold that the charity still remained a partner. It is open to the partners of a business to agree not to take the whole of the profits of the partnership for their own personal use and to reserve a part of the profits for charitable purposes."
"The purport and intent of the document in the instant case is nothing more. The difficulty felt by the Tribunal in regard to the allocation of losses is more imaginary than real. Accordingly, the question referred is answered in the negative and in favour of the assessee.
8. The assessee will have its costs. Rs. 250 one set.