# [1967] 1 S.C.R. 998

- **Citation:** [1967] 1 S.C.R. 998
- **Court:** Supreme Court of India
- **Decided:** 1966-10-28
- **Case number:** Civil Appeal No. 1058 of 1965
- **Bench:** J.C. Shah, V. Ramaswami, V. Bhargava
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1967-1-s-c-r-998-3959
- **Pages:** 6

## Headnote

Income-tax Act (11 of 1922), s. 26A-Registration of fimt-Whttlier
individual shares oj partners specified-Partners/zip deed, construction of.
Three brothers entered into a partnership in 1949 for doing bu&ne.ss.
A
B
Dause 3 of the partnership deed provided that the capital allotted to each
putner was equal, and cl. 10 provided that after meeting all the expensCIS, c
mterest and other charges, the resulting net profit or loss should be ascertained and divided
amongst all
the partners.
Io the assessment year
1951-52, the three partners applied to the Income-tax Officer for registration of the firm under s. 26A of the Income-tax Act, 1922 and registration
was granted.
For the assessment year 1952-53, the registration was renewed on application:
But for the assessment year 1953-54, the Iocometax Officer refused renewal.
In all the applications for rcgisrratioo, the
three partners were sho11w·n to have shared the profirs equally, anJ in their
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account books also, since 1949, the profits have been apportioned equally.
The ground of refusal by the Jncon1e--tax Officer \Vas, that there was no
clause in the deed specifying the individual
share of
profits of
each
partner as required by s. 26A.
The order was confirmed by tht• Appellate
;
Assistant Commissioner, the Appellate Tribunol ond the High Court on
'
reference.
In appeal to this Court,
HELD : The assessee firm was entitled to b-~ registered under s. 26A
of the Act for the a=sment year 1953-54 also.
[1003 DJ
Although the application for
registration
had to be strictly in conformity with the section and Rules, in ascertaining whether the application
was in such conformity the partnership deed has to be reasonably construed. Reading the partnership deed as a whole in the light of s. 13 of the
Partnership Act, 1932, and in the contcx.1 of the relevant circumstances
of the case, there was specificaiion of the individu.11 shares of the three
partners in the profits and lO";ses namely, that each partner was allotted
an equal one-third share and there was hence specification of the individual shares of the partners within the meaning of the section. [1002 D-F]
Kylasa Sarabl1ala/J v. Co111n1issioncr of lncooie-tax, [1965] 2
S.C.R.
310, followed.
OvlL APPELLATE JURISDICTION : Civil Appeal No. 1058 of
1965.
Appeal by special leave from the judgment and order dated
March 14/15,
1961 of the Bombay High Court in Income-tax
Reference No. 56 of 1960.
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Arvind P. Patwe, 0. C. Mathur, for the appellant.
H
S. T. Desai, A. N. Kirpa/ and R. N. Sachthey, for tht' res-
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pondent.
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WADILAL JIVANBHAI v. c.I.T. (Ramaswami, I.)
999,

## Text

PAREKH WADILAL JIVANBHAI
I'.
COMMISSIONER OF L"\"COME-Tl\X, M. P. NAGPUR
Ai"ID BHANDARA, NAGPUR
October 28, 1966
[J.C. SHAH, V. RAMASWAMI AND V. BHARGAVA, JJ.j
Income-tax Act (11 of 1922), s. 26A-Registration of fimt-Whttlier
individual shares oj partners specified-Partners/zip deed, construction of.
Three brothers entered into a partnership in 1949 for doing bu&ne.ss.
A
B
Dause 3 of the partnership deed provided that the capital allotted to each
putner was equal, and cl. 10 provided that after meeting all the expensCIS, c
mterest and other charges, the resulting net profit or loss should be ascertained and divided
amongst all
the partners.
Io the assessment year
1951-52, the three partners applied to the Income-tax Officer for registration of the firm under s. 26A of the Income-tax Act, 1922 and registration
was granted.
For the assessment year 1952-53, the registration was renewed on application:
But for the assessment year 1953-54, the Iocometax Officer refused renewal.
In all the applications for rcgisrratioo, the
three partners were sho11w·n to have shared the profirs equally, anJ in their
D
account books also, since 1949, the profits have been apportioned equally.
The ground of refusal by the Jncon1e--tax Officer \Vas, that there was no
clause in the deed specifying the individual
share of
profits of
each
partner as required by s. 26A.
The order was confirmed by tht• Appellate
;
Assistant Commissioner, the Appellate Tribunol ond the High Court on
'
reference.
In appeal to this Court,
HELD : The assessee firm was entitled to b-~ registered under s. 26A
of the Act for the a=sment year 1953-54 also.
[1003 DJ
Although the application for
registration
had to be strictly in conformity with the section and Rules, in ascertaining whether the application
was in such conformity the partnership deed has to be reasonably construed. Reading the partnership deed as a whole in the light of s. 13 of the
Partnership Act, 1932, and in the contcx.1 of the relevant circumstances
of the case, there was specificaiion of the individu.11 shares of the three
partners in the profits and lO";ses namely, that each partner was allotted
an equal one-third share and there was hence specification of the individual shares of the partners within the meaning of the section. [1002 D-F]
Kylasa Sarabl1ala/J v. Co111n1issioncr of lncooie-tax, [1965] 2
S.C.R.
310, followed.
OvlL APPELLATE JURISDICTION : Civil Appeal No. 1058 of
1965.
Appeal by special leave from the judgment and order dated
March 14/15,
1961 of the Bombay High Court in Income-tax
Reference No. 56 of 1960.
E
F
G
Arvind P. Patwe, 0. C. Mathur, for the appellant.
H
S. T. Desai, A. N. Kirpa/ and R. N. Sachthey, for tht' res-
•
pondent.
•
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WADILAL JIVANBHAI v. c.I.T. (Ramaswami, I.)
999,
The Judgment of the Court was delivered by
Ramaswami, J. This appeal is brought,
by special leave,
on behalf of the assessee from the judgment of
the Bombay
High Court dated March 15, 1961 in Income-Tax Reference No.
56of1960.
The assessee is a partnership firm constituted under a Deed of
Partnership dated March 19, 1950. The partners are three brothersNandlal Bhimjibhai,
Tarachand Bhimjibhai
and Rajnikant
Bhimjibhai, each one having an equal I/3rd share
in the partnership
firm. Prior to November, 1949, the three
partners
of the assessee-firm in partnership with eight
others carried on
business in Bombay and other places in the
name and style of
"Rajnikant Vitheldas & Co." In that larger firm, each one of
the three brothers had an equal two annas share each,
the other
eight partners having the remaining ten anna share. The larger
partnership of 'Rajnikant Vitheldas · & Co.' was dissolved
on
October 31, 1949 and on its dissolution the business of the two
branches thereof at Nagpur was allotted to the three brothers,
who thereupon as from November 1, 1949 constituted themselves
into a new firm, viz.,
the assessee-firm under the deed of partnership executed on March 19, 1950. This document recites
that
the tl1ree brothers have agreed to continue the business of the
two branches at Nagpur in partnership on
the tem1S mentioned
in that document.
For the purpose of this case, it is not necessary to reproduce all the terms of the partnership deed.
rt is
sufficient to reproduce only four terms as follows :
"3. The capital of the partnership
shall be Rs.
2,40,000./- (Rupees two lacs forty
thousand) divided
into 15 shares of Rs. 16,000/-
each. The partners hereby agree that the shares allotted to different partners will
be equal i.e., each partner will get five shares.
10. After meeting all expenses,
interest and other
charges,
the resulting net profit or loss shall be ascertained
and shall be divided amongst all partners.
13. In case of death, or insolvency of any partner
the surviving partners or such of them
as are willing
shall have the rights to purchase ilie shares of such partners
at the valuation of the shares in the
preceding balance
sheet.
14. In case of any partner desiring to retire
from the
partnership will have to give a written notice of at
least two months to the other partners of his intention to
do so. On receipt of such notice, the remaining partner or partners will purchase ilie share or shares in pro-
1000
SUPREME COURT REPORTS
[1967] I S.C.R.
portion to their holding at the time the valuation in para·
A '
graph 13."
In the assessment year 1951-52,
the three partners applied to
the Income-tax Officer for registration of the
firm under the
Indian Income-tax
Act,
1922 (hereinafter called the 'Act').
Along with this application, the deed of partnership dated March 19,
1950 was produced.
By his order dated M:ll'ch 20, 1956 the
Income-tax Officer granted registration under
s. 26A of the Act
for the assessment year 1951-52.
On the same day, he determined the total income of the firm at Rs. 87,172/·,
and under
s. 23(6) of the Act,
allocated it between the three partners for
tax purposes, each partner getting one-third share
of the total
i11eome i.e.,
Rs. 29,0571/. On the basis of the same deed, an
application was made for the renewal of registration
of the firm
for the assessment year 1952·53.
The renewal was granted
on March 28, 1957. For the assessment year 1953-54,
the partners again applied for renewal of registration on the
basis of
the same deed, but the Income-tax Officer was of the opinion
that there was no clause in the deed specifying the
individual
shares of each partner as required by s. 26A of
the Act. After
!issuing notices to the three partners and after giving
them a
hearing, the Income-tax Officer, by his order dated
March 28,
1958, rejected the application of the partners for renewal
of registration of the firm. The assessee took the matter in
appeal
to the Appellate Assistant Commissioner but the appeal was
dismissed. The assessee preferred a second appeal to the ap·
pellate Tribunal but that appeal also was dismissed. At the instance of the assessee the appellate Tribunal referred the following
.question of law for the determination of the High Court under
s. 66(1) of the Act :
"Whether on a proper construction of
the partnership deed dated 19-3-1950, the firm sought to be re·
gistercd for the assessment year 1953-54,
can be said to
have been constituted under an
instrument of partner·
ship specifying the individual shares of the partners as
required by section 26A of the Act ?"
By its judgment dated March 15, 1961, the High Court answered
the question in the negative,
holding that renewal of registration
under s. 26A of the Act was rightly refused by the Income-tax
.authorities.
Section 26A of the Act provides as follows :
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"26A. Procedure in
registration of firms.
(I)
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Application may be made to the Income-tax Officer on behalfof any finn, constituted under an instrument of part·
1
ncrship specifying the individual shares of the partners,
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WADILAL JIVANBHAI v. C.I.T. (Ramaswami, J.)
I 00 I
rnr registration for the purposes of this Act and of any
other enactment for the time being in force relating to
income-tax or s~per-tax.
(2) The application sh.all be made by such person
or persons, and at such times and shall contain such
particulars and shall be in such form, and be verified in such manner, as may be prescribed; and it shall be
dealt with by the Income-tax Officer in such manner as
may be prescribed."
By securing registration under the Act, the partners of the
firm obtain a benefit of lower rates of assessment and no tax is
directly charged on the income of the firm. This is an important
benefit to which the partners of a registered firm become entitled
as a consequence of registration and if it is intended to secure
that benefit, the requirements of s. 26A of the Act and the Rules
framed under the Act must be strictly complied with. Rule 2
of the Income-tax Rules framed under s. 59 of the Act requires
that the application shall be signed by the partners (not being
minors) personally, and prescribes the period within which the
application shall. be made for the year in question. Rule 3
provides that the application shall be made in the prescribed
form and shall be accompanied by the original instrument of partn.ership under which the firm is constituted,
together with a
copy thereof, It is provided by Rule 4 that if on
receipt of
the application, the Income-tax Officer is satisfied that there is
or was a firm in existence constituted as shown in the instrument
of partnership, and that the application has been properly made,
he shall enter in writing at the foot of the instrument or certified
copy, as the case may be, a certificate in the prescribed form.
By rule 6 the certificate of registration granted under Rule 4
may be renewed for subsequent years. Section 4 of the Partnership Act defines "Partnership" as 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'.. Persons who · have entered
into partnership with one another are called individually 'partners' and collectively 'a firm', and the name under which their
business is carried on is called the 'firm name'. Section 13 of
the Partnership Act provides as follows :
"13. Subject to contract between the partners-
( a) a partner is not entitled to receive remuneration
for taking part in the conduct of the business;
(b) the partners are entitled to share equally in the
profits earned, and shall contribute equally to the
losses sustained by the firm ;
"
•
MJ;Sup.Cl/66-19
1002
!UPREME COURT REPORTS
[1967) l S.C.R.
On behalf of the asscssee the argument
was put forward
that the High Court was in error in holding that the asscssee
was not entitled to registration under s. 26A of the Act.
It was
submitted that on a proper construction of the various clauses
of the partnership deed dated March I 9, I 950 it should have
been held that the shares of the three individual persons in the
profits and losses were clearly specified, namely, that each partner
was allotted an equal one-third share and. there was hence specification of the individual shares of the partners within the meaning
of s. 26A of the Act. In our opinion, the argument of the appellant is well-founded and must be accepted as correct. It is
evident that under cl. (3) of the partnership deed,
the capital
allotted to each partner is equal, viz., 5 shares of Rs. 16,000/-
each in a total rnpital of Rs. 2,40,000/-.
Clause (JO) states
that "after meeting all expenses, interest and other charges, the
resulting net profit or loss shall be ascertained and shall be divided
amongst all partners". It should also be noticed that in all the
applications for registration made by the assessee-firm under
s. 26A of the Act the three partners have been shown to share the
profits of the partnership firm equally. There is also the other
circumstance that in the books of accounts for all the years
since its commencement from November I, 1949 right upto date
the profits have been apportioned equally mong the three partners
of the partnership ·firm.
Reading
the partnership deed as a
whole and in the context of the relev;.mt circumstances of the
case, we arc of the opinion that there was specification of the
individual shares of the partners in the profits within the meaning
of s. 26A of the Act and the assessee-firm was entitled to registration for the as.~essmcnt year in question. It was pointed out
by this Court in Ky/asa Sarabhaiah v. Commissioner of Income:
tax, Hyderahad( 1) that although the appli~tion for registration
of a firm under s. 26A of the Act had stnctly to be
in
conformity with the Act and the Rules, in ascertaining whether
the application was in conformity with the Rules, the deed of
partnership had to be reasonably
construed. In that case,
there were three major partners in firm A in which four minors
were admitted to the benefits of partnership. Its profits were
to be shared equally between the seven persons whereas the losses
were to be shared by the three major partners equally. A larger
firm, firm B, was constituted, with five l?artners, under a deed of
partnership in which firm A was descnbed as the
first partner
and its members were collectively shown as having a share of
6 annas 9 pies in the profits of the larger firm.
The .fac'. thal four
minors were admitted to the benefits of partnership m firm A
with equal shares in the profits but losses we~c to . be shared only
by its three major partners, was, however, reClled m the preamble
(I) [1965] 2 S.C.R. 310 : 56 I.T.R. 219.
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WADILAL JIVANBHAI v. C.I.T. (Ramaswami, J.)
1003
to the deed of partnership of firm B.
The deed of partnership
of firm B was signed by all the major partners of firm A. The
question at issue was whether firm B was entitled to be registered
under s. 26A of the Act. It was held that the firm was entitled
to be registered and that registration could not be refused merely
because the deed of partnership set out in paragraph 8 therein
the collective share of the yarn shop as 6 annas 9 pies, for in the
preamble the division of the shares of profits and losses among
the three .members of the yarn shop and those admitted to the
benefits of the partnership was clearly indicated. It was, however, pointed out that the yarn shop as such was not intr<>duced
as a partner and the agreement was in truth between the three
major members out of those who constituted the yarn shop and
four outsiders. Each of. them had signed the application and
the covenants of the partnership agreement bind the partners
individually. The indication in the
deed of partnership that
three of them held qua the yarn shop a certain relation did not
affect their status as partners of the appellant-firm individually.
The principle laid down in this case applies also to the present
case and, for the reasons already expressed, we hold that the
assessee-firm was entitled to be registered under s. 26A of the Act
for the assessment year 1953-54 and the question referred to the
High Court must be answered in the affirmative and in favour
of the assessee-firm.
We accordingly allow this appeal with costs in this Court
and the High Court.
V.P.S.
Appeal allowed.