# 1 · S.C.R. SUPREME COURT REPORTS 25i N. T. PATEL AND COMPANY v. COMMISSIONER OF INCOME-TAX, MADRAS

- **Citation:** [1962] 1 S.C.R. 251
- **Court:** Supreme Court of India
- **Decided:** 1962
- **Case number:** Civil Appeal No. 424of1960
- **Bench:** J. L. Kapur, M. Hidayatullah, J. c. SHAH
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1-s-c-r-supreme-court-reports-25i-n-t-patel-and-company-v-commissioner-of-2008
- **Pages:** 6

## Headnote

Income Tax-Partnership-Registration of-Shares of partners in profit and loss not specified-Refusal of registration, if
proper-Indian Income-tax Act, r922 (II of r922), s. 26A.
A partnership consisting of four persons was formed on
March 3r, r949, which was to come to an end on March 3r,
r954. On July 27, r95r, a fifth partner was taken into the
partnership. On March 29, r954, a r.ew partnership was entered into taking in a sixth partner who contributed Rs. 40,000 as
his share to the capital. In the partnership deed no express
provision was made as to the manner in which profits and losses
were to be divided. A deed of rectification was executed on
September r7, r955, after the close of the account year r954-55,
adding a clause to the partnership deed that the partners shall
share in the profits and losses in proportion to their contributions
to the capital. Upto the end of the assessment year r954-55,
the old firms were registered under s. 26A of the Income-tax
Act. The new firm applied for registration for the assessment
year 1955-56, but registration was refused on the ground that
there was no specification of shares of the partners.
Held, that registration was rightly refused. Section 26A
requires that for registration in a particular year there must be
an instrument of partnership specifying the shares of the partners in the profits and losses. Though in the present case. there
was an instrument of partnership in the year of assessment
1955-56, it did not specify the shares. The right of registration
can be claimed only in accordance with s. 26A and the assessee
must bring himself strictly under the terms of that section.
Ravula Subba Rao v. The Commissioner of Income-tax,
Madras, [r956] S.C.R. 577 and R. C. Mitter & Sons v. Commissioner of Income-tax, [r959] 36 I.T.R. r94, referred to.

## Text

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1 · S.C.R. SUPREME COURT REPORTS
25i
N. T. PATEL AND COMPANY
v.
COMMISSIONER OF INCOME-TAX,
MADRAS.
(J. L. KAPUR, M. HIDAYATULLAH and
J. c. SHAH, JJ.)
Income Tax-Partnership-Registration of-Shares of partners in profit and loss not specified-Refusal of registration, if
proper-Indian Income-tax Act, r922 (II of r922), s. 26A.
A partnership consisting of four persons was formed on
March 3r, r949, which was to come to an end on March 3r,
r954. On July 27, r95r, a fifth partner was taken into the
partnership. On March 29, r954, a r.ew partnership was entered into taking in a sixth partner who contributed Rs. 40,000 as
his share to the capital. In the partnership deed no express
provision was made as to the manner in which profits and losses
were to be divided. A deed of rectification was executed on
September r7, r955, after the close of the account year r954-55,
adding a clause to the partnership deed that the partners shall
share in the profits and losses in proportion to their contributions
to the capital. Upto the end of the assessment year r954-55,
the old firms were registered under s. 26A of the Income-tax
Act. The new firm applied for registration for the assessment
year 1955-56, but registration was refused on the ground that
there was no specification of shares of the partners.
Held, that registration was rightly refused. Section 26A
requires that for registration in a particular year there must be
an instrument of partnership specifying the shares of the partners in the profits and losses. Though in the present case. there
was an instrument of partnership in the year of assessment
1955-56, it did not specify the shares. The right of registration
can be claimed only in accordance with s. 26A and the assessee
must bring himself strictly under the terms of that section.
Ravula Subba Rao v. The Commissioner of Income-tax,
Madras, [r956] S.C.R. 577 and R. C. Mitter & Sons v. Commissioner of Income-tax, [r959] 36 I.T.R. r94, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal No.
424of1960.
Appeal from the judgment and order dated March
25, 1958, of the Madras High Court in case Referred
No.62ofl957.
·
A. V. Viswanatha Sastri, J.B. Dadachanji, Rameshwar Nath andP. L. Vohra, for the appellant.
z96r
March r3.
N. T. Patel
& Company
v.
Commissioner
. of Income-tax,
Madras
Kapuy ].
252
SUPREME COURT REPORTS
[1962]
H. N. Sanyal, Additional Solicitor-General of India,
K. N. Rajagopala Sastri and D. Gupta, for the respondent.
1961. March 13. The Judgment of the Court was
delivered by
KAPUR, J.-This is an appeal against the judgment
and order of the High Court of Judicature at Madras.
The assessee is the appellant and the Commissioner
of Income-tax is the respondent.
A partnership consisting of four persons was formed by a deed of partnership dated March 31, 1949. On
July 27, 1951 another partner was taken into partnership and a new deed was drawn up. The previous
partnership deed was considered as the principal deed.
The new partnership like the old one was to end on
March 31, 1954. On March 29, 1954, a new partnership was entered into and a sixth partner was taken
and a new deed was executed. The new partner contributed Rs. 40,000 as his share to the capital but in the
partnership deed no express provision was made as to
the manner in which profits and losses were to be
divided between the partners. In order to rectify
this, a deed of rectification was executed on September 17, 1955, which was after the close of the account
year 1954-55. This deed recited that an error had
crept in in typing the partnership deed dated March
29, 1954 by omitting to type cl. 21 of the old partnership deed in the new deed.
The parties had therefore agreed to rectify the error by adding cl. 20-A as
follows:-
"We hereby agree that for purpose of clarification
the following clause shall be added as clause 20-A
in the Partnership Instrument, dated 29th March,
1954:-
"The parties shall be entitled to shares in the
profits and losses of the firm in proportion to the
contribution of the capital of each of the partners
·and whenever fresh capital is required for the business, each partner shall be liable to contribute the
additional capital in the same proportion as the
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1 S.C.R. SUPREME COURT REPORTS
253
paid up capital referred to in clause 4 of the deed,
dated 29th March 1954"."
This is signed by all the partners.
Up to the end of assessment year 1954-55 the old
firms i.e., the one constituted of four partners and the
other constituted of five partners were registered
under s. 26A of the Income Tax Act (hereinafter
termed the 'Act'). The appellant firm then applied
for registration for the assessment year 1955-56. The
Income Tax Officer pointed out to the appellant firm
that there was no specification of shares of the partners in the deed of partnership. Thereupon the
appellant submitted the deed of rectification dated
September 17, 1955, above mentioned and submitted that the original deed did specify the shares of
the partners and the deed of rectification only clarified the position. But the registration was refused
by the Income-tax Officer and an appeal taken against
that order to the Assistant Commissioner was dismissed. Further appeal was taken to the Income-tax
Appellate Tribunal which also failed.
At the request
of the appellant the following question was referred
to the High Court for its opinion:-
"Whether the assessee firm is entitled to registration u/s. 26-A of the Income-tax Act for the assessment year 1955-56."
The High Court held that under s. 26-A of the Act
the factual existence in the year of account of an
instrument of partnership was necessary, a requisite
which, in the present case, was lacking and therefore
the provisions of s. 26-A were not satisfied and that
the specification of shares only took place on September 17, 1955 when the deed of rectification was executed. The question was therefore answered in the
negative. Against this judgment and order the appellant has come in appeal to this Court by certificate of
the High Court.
It was contended that els. 9, 11, 34 and 4l(a) sufficiently specified the shares of the partners and satisfied the requirements of the law. These clauses were
as follows:-
I96I
N. T. Patel
& Cotnpany
v.
Commissioner
of Income-tax,
Madras
f(apur ].
N. T. Patel
©-Company
v.
Com»tissioner
of Income·tax,
Madras
Kapur ].
254
SUPREME COURT REPORTS
[1962]
Cl. 9 "Such extra contribution made by the part.
ners shall be credited to the respective partners
under an account called "Extra Ca pita! Subscription Account" and for the period of the utilisation
of the whole or part thereof during the course of
the year or years, it shall be treated as capital contribution only for the purpose of dividing profit
but it shall otherwise in no circumstances be added
to the paid-up capital."
Cl. 11. "In addition to the share of profits in
proportion to the contribution to the extra capital
subscription account, the amount, so advanced shall
carry an interest equal to the highest rate at which
the company may have to pay in the event of
borrowing the same from Multani money market
and shall carry twice the said rate of interest in the
year or years ofloss."
Cl. 34. "The senior partner may at any time
during the subsistence of the partnership bring in
one or more of his other sons other than partners of ,
the 5th and the 6th part herein to the partnership
and in the event of their so becoming partners they
will be liable for the same duties as the other partners herein and shall be entitled to remuneration
and profits in proportion to their capital contribution."
Cl. 4l(a). "In the event of the dissolution of
partnership the capital available for distribution as
per the balance sheet, except for debts outstanding
for collection and reserve fund, shall be paid off to
the outgoing partner in proportion of the capital
contribution of the outgoing partner to the total
contribution of all the partners, including extra
capital subscription paid, if any, under clau~e 9."
None of these clauses specify the shares of the partners. Clause 9 has reference to extra contribution
made by the partners which was to be treated as
capital contribution for the purpose of dividing profits
but was not otherwise taken to be paid up capital.
Clause 11 provides for interest on the extra capital
subscribed. Clause 34 authorises the senior partner
during the subsistence of the partnership to bring in
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1 S.O.R. SUPREME COURT REPORTS
255
one or more of his sons as partners who on being so
brought in were entitled to remuneration and profits
in proportion to their capital contribution. Clause
4l(a) provides that in the event of dissolution of partnership the capital available except for debts etc. was
to be paid to the outgoing partners in proportion to
the capital contribution of the outgoing partner. But
in none of these clauses is it stated what the shares
of the partners in the profits and losses of the firm
were to be and that in our opinion was requisite for
registration of the partnership under s. 26-A of the
Act and as that was wanting, registration was rightly
refused. Registration under s. 26-A of the Act confers a benefit on the partners which the partners
would not be entitled to but for s. 26-A.
The right
can be claimed only in accordance with the statute
which confers it and a person seeking relief under
that section must bring himself strictly within the
term of that section. The right is strictly regulated
by the terms of that statute: Ravula Subba Rao v.
The Commissioner of Income-tax, Madras(').
Section 26-A provides:-
S. 26A(l) "Application may be made to the
Income-tax Officer on behalf of any firm, constituted under an instrument of partnership specifying
the individual shares of the partners for registration for the purpose of this Act and of any other
enactment for the time being in force relating to
income-tax or super-tax."
For the purpose of this case the relevant words of
that section are "constituted under an instrument of
partnership specifying the individual shares of the
partners". Therefore unless the instrument of partnership specified the individual shares of the partners
the instrument of partnership does not conform to the
requirements of the section. In R. C. Mitter & Sons
v. Commissioner of Income-tax(') it was held that the
instrument of partnership to be registered should
have been in existence in the accounting year in respect of which an assessment is being made.
At
page 202, Sinha J., (as he then was) said:-
(•) [1956] S.C.R. 577, 588.
(2) [1959] 36 I.T.R. 194,
N. T. Patel
&- Cotnpany
v.
Commissioner
of Income·tax,
Madras
Kapur ].
I96I
N. T. Patel
&- Company
v.
Commissioner
of Tncome-ta:r,
Madras
Kapur ).
256
SUPREME COURT REPORTS
[1962]
"It is, therefore, essential, in the interest of proper administration and enforcement of the relevant
provisions relating to the registration of firms, that
the firms shonld strictly comply with the requirements of the law, and it is incumbent upon the
Income-tax authorities to insist upon full compliance with the requirements of the law."
In the present case an instrument of partnership
was in existence but it did not specify the shares which
was one of the requirements for registration and that
condition was fulfilled by the deed of rectification
dated September 17, 1955.
Therefore it cannot be
said that there was the requisite instrument of partnership specifying the individual shares of the partners during the year of account. The High Court, in
our opinion, was right in answering the question in
the negative.
We therefore dismiss this appeal with costs.
Appeal dismissed.
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