# Rao Bahadur Revulu Subba Rao and others v. Commissioner of Income-Tax

- **Citation:** [1976] 2 S.C.R. 131
- **Court:** Supreme Court of India
- **Decided:** 1975-10-06
- **Case number:** Civil Appeal No. 63 of 1971
- **Bench:** V. R. Krishna Iyer, A. C. Gupta Ands. Murtaza.Fazal Ali
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/rao-bahadur-revulu-subba-rao-and-others-v-commissioner-of-income-tax-6700
- **Pages:** 7

## Headnote

B
Registration of firms-Income Tax Act, 1922-Sec. 26A-Whether share of
parlllers in loss to be mentioned in the Partners/zip Deed-Sec. 13 (b) of Partners/zip Act-In the aibsence of contract regarding share in loss-Whether to
be borne equally or proportionate to profit.
·
The appellant assessee is a firm, having three partners and one minor admitted
to the benefits of the partnership.
One of the partners has 31 % share and
the remaining two partners and the minor have 23 % share each in the profit
of the firm but the partnership deed is silent about their shares in the losses.
Clauses 9 of the partnership deed provides that the partners are bound to
act a·ccording to the provisions of the Indian Partnership Act.
The firm applied
for registration under s. 26A of the Income Tax A:t, 1922 which was refused
by the Income Tax Officer.
The High Court in a reference under s. 66(1) held that unless the instrument
of partnership specified the shares of the partners not only in the profits but
also in the losses, the firm would not be entitled to registration under s. 26A.
The High Court negatived the contention of the assessee that clause 9 of the
instrument indicated how losses were to be apportioned between the partners.
On appeal by special leave it was contended by the appellant :
( 1) S. 26A does not require that the instrument of partnership must specify
the respective shares of the partners in the losses and it is sufficient if the
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proportion in whi.:h the losses are to be shared is otherwise ascertainable.
E
(2) Assuming that s. 2iiA does require mentioning the proportion of losses
in the instrument of partnership, clause 9 of the instrument read with s. 13 (b')
of the Partnership Act satisfies that requirement.
Dismissing the appeal,
HELD : (1) A firm whether registered or unregistered is &n assessee under
the Act and can do business as such.
However, registration under s. 6A
confers on the partners a benefit to which they would not have been entitled
F
but for s. 26A and such a right being a creature of a statute can be claimed
only in accordan:e with the statute which confers it and the per.son who seeks
relief under s. 26A must bring himself strictly within its terms before he rnn
claim the benefit of it.
[l33D-E]
Rao Bahadur Revulu Subba Rao and others v. Commissioner of Income-Tax,
Madras, (1956) 30 LT.R. 163, relied on.
·
(2) In the case of a registered firm the share of each partner in the profit
or loss is added to or set off against, as the case may be, to the other income
of the partner. Thus, the loss, if any, affects the assessment proceedings and,
therefore, Income Tax Offi.cer has to know what are the respective shares of
the partners in the loss before allowing the firm to be registered.
[134-C-D]'
( 3) There is a conflict of opinion amongst the High Courts whether it is
essential for registration under s. 26A that the shares of the partners must be
specified in the partnership deed. It is not necessary to decide for the purpose
of this appeal which of the conflicting views is correct because in the present
case the appeal is bound to fail on any view. It is not dispu.ted and ,cannot
be disputed that the Income Tax Officer before allowing the applicatfon for
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132
SUPRE1-IE COURT REPORTS
(1976] 2 S.C.R.
registrati<Jn must be in a position to ascertain the shares of the partners in
the losses even if s. 26A did not require this to be specified in the instr:un1ent
of partnership.
[135E-F]
( 4) The contention that clause 9 brings in by implication s.
13 (b)
of
the Partnership Act and thus specifies the shares of the partners in the losses
is Untenable. S. 13(b) makes the partners liable to contribute equally to the
losses only when they are entitled to share equally -in the profits. In this case
the shares of the partners are not equal. The case of K. Pitchiah Chettiar v.
G. Suhrc1mania1n Chettiar I.L.R. 58 Mad. 25 and In re Albion Life Assurance
Society, 16 Ch. Div. 83, 87, applied.
(135 G-H]
The l

## Text

. .
i
131
MANDYALA GOVINDU & CO.
v •
COMMISSIONER OF INCOME TAX, ANDHRA PRADESH
October 6, 1975
A
[V. R. KRISHNA IYER, A. C. GUPTA ANDS. MURTAZA.FAZAL ALI, JJ.]
B
Registration of firms-Income Tax Act, 1922-Sec. 26A-Whether share of
parlllers in loss to be mentioned in the Partners/zip Deed-Sec. 13 (b) of Partners/zip Act-In the aibsence of contract regarding share in loss-Whether to
be borne equally or proportionate to profit.
·
The appellant assessee is a firm, having three partners and one minor admitted
to the benefits of the partnership.
One of the partners has 31 % share and
the remaining two partners and the minor have 23 % share each in the profit
of the firm but the partnership deed is silent about their shares in the losses.
Clauses 9 of the partnership deed provides that the partners are bound to
act a·ccording to the provisions of the Indian Partnership Act.
The firm applied
for registration under s. 26A of the Income Tax A:t, 1922 which was refused
by the Income Tax Officer.
The High Court in a reference under s. 66(1) held that unless the instrument
of partnership specified the shares of the partners not only in the profits but
also in the losses, the firm would not be entitled to registration under s. 26A.
The High Court negatived the contention of the assessee that clause 9 of the
instrument indicated how losses were to be apportioned between the partners.
On appeal by special leave it was contended by the appellant :
( 1) S. 26A does not require that the instrument of partnership must specify
the respective shares of the partners in the losses and it is sufficient if the
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proportion in whi.:h the losses are to be shared is otherwise ascertainable.
E
(2) Assuming that s. 2iiA does require mentioning the proportion of losses
in the instrument of partnership, clause 9 of the instrument read with s. 13 (b')
of the Partnership Act satisfies that requirement.
Dismissing the appeal,
HELD : (1) A firm whether registered or unregistered is &n assessee under
the Act and can do business as such.
However, registration under s. 6A
confers on the partners a benefit to which they would not have been entitled
F
but for s. 26A and such a right being a creature of a statute can be claimed
only in accordan:e with the statute which confers it and the per.son who seeks
relief under s. 26A must bring himself strictly within its terms before he rnn
claim the benefit of it.
[l33D-E]
Rao Bahadur Revulu Subba Rao and others v. Commissioner of Income-Tax,
Madras, (1956) 30 LT.R. 163, relied on.
·
(2) In the case of a registered firm the share of each partner in the profit
or loss is added to or set off against, as the case may be, to the other income
of the partner. Thus, the loss, if any, affects the assessment proceedings and,
therefore, Income Tax Offi.cer has to know what are the respective shares of
the partners in the loss before allowing the firm to be registered.
[134-C-D]'
( 3) There is a conflict of opinion amongst the High Courts whether it is
essential for registration under s. 26A that the shares of the partners must be
specified in the partnership deed. It is not necessary to decide for the purpose
of this appeal which of the conflicting views is correct because in the present
case the appeal is bound to fail on any view. It is not dispu.ted and ,cannot
be disputed that the Income Tax Officer before allowing the applicatfon for
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132
SUPRE1-IE COURT REPORTS
(1976] 2 S.C.R.
registrati<Jn must be in a position to ascertain the shares of the partners in
the losses even if s. 26A did not require this to be specified in the instr:un1ent
of partnership.
[135E-F]
( 4) The contention that clause 9 brings in by implication s.
13 (b)
of
the Partnership Act and thus specifies the shares of the partners in the losses
is Untenable. S. 13(b) makes the partners liable to contribute equally to the
losses only when they are entitled to share equally -in the profits. In this case
the shares of the partners are not equal. The case of K. Pitchiah Chettiar v.
G. Suhrc1mania1n Chettiar I.L.R. 58 Mad. 25 and In re Albion Life Assurance
Society, 16 Ch. Div. 83, 87, applied.
(135 G-H]
The law stated in these' cases in the context of section 253 (2) of the
contract Act applies equally to s. 13(b) of the Partnership Act which is in
identical terms. In the absence of any indica:tion to the ~ontrary, where the
partners have agreed to share- the profits in certain proportions, the pre5umption
is that the losses are· also to be shared in like proportions. -The other rule
that where the shares in the profits are unequal the losses must be shared in
the same proportions as profits in the a:bsence of an agreement as to how the
losses are to he apportioned, also does not apply to this case since there is a
minor admitted to the benefits of the partnership. Even if the adult partners
bear the losses in proportion to their respective shares in the profits, the amount
of loss in the minor's share would still remain . undistributed. Whether the
partners between themselves will bear this Joss equ&Ily or to the extent of their
own individual shares, is not even suggested in the instrument of partnership.
There is, therefore, no meanS Of ascertaining in this case how the Jmses are
to be apportioned.
[136JH, 137A-Cl
·
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 63 of 1971.
Appeal by Special Leave from. the Judgment and Order. dated the
19th February 1970 of the Andhra Pradesh High Court in R.C; No.
50 of 1966.
S. T. Desai and K. Rajendra Choudhury, for the Appellant.
G. C. Sharma and S. P. Nayar, for the Respondent. ·
The Judgment of the Courf was delivered by
GUPTA, J. This appeal by special leave is directed against an
order of the High Court of Andhra· Pradesh at Hyderabad answering
in the negative and in favour of the revenue the following question ·
referred to it under sec. 66(1) of the Indian Income-Tax Act, 1922
(hereinafter referred to as the Act).
·
"Whether the Assessee is entitled to registration under Section
26A of the Income-Tax -Act, 1922 for the assessment year
1961-62."
The assessee is a firm.
The instrument of partnership was executed on January 5; 1959 but the application for registration under
sec. 26A remained undisposed of until the assessment for the year
1961-62 was taken up. The instrument shows that ·three persons,
Mandyala Narayana, Mandyala Venkatramaiah, Mandyala Srinivasulu
and a minor, Mandyala Jaganmohan who was admitted to the benefits of
the partnership, held the following shares: Narayana 31 per cent, Venkatramaiah 23 per cent, Srinivasulu 23 per cent, and minor J aganmohan 23, per cent. Clause 2 .of the instrument which sets out the
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M. GOVINDU & co. v. C.I.T. (Gupta, J.)
133
:shares of the partners add that the "profits of the . above partnership
business shall be divided and enjoyed according to the shares specified
:above." There is no clause in the instrument specifying the proportion
A-
• in which the three adult partners were to share the losses, if any. Having set out all the terms of agreement, the instrument cJoses with
clause 9 which states :

.,...,
"We (the partners) are bound to act according to the
above mentioned stipulations and aim according
to
the
provisions of the Indian Partnership Act .... "
The High Court was of the view· that unless the instrument
of
partnership specified the shares of the partners not only in the profits
but also in the losses, the firm would not be entitled to registration
under sec. 26A, ·and negatived the contention raised on behalf of the
assessee that clause 9 of the instrument indicated how losses were io
be apportioned between the partners. The correctnesi; of this decision
is clrnllenged by the appellant firm.
It is not that a firm to be able to trade must be registered under
sec. 26A. A firm, registered or unregistered, is an assess~ under the
Act and can do business as such. However, registration under sec. 26A
"'confers on the partners a benefit", as would appear from the provisions
<Of sec. 23 (5) of the Act, "to which they would not have been entitled but
for section 26A, and such a right being a creature of the statute, can be
claimed only in accordance with the statute which confers it, and a person who seeks relief under section 26A must bring himself strictly within
its terms before he can claim the benefit of it": Rao Bahadur Ravulu
.Subba Rao and others v. Commissioner of Income-tax, Madras.('') The
question in this case is whether in the absence of a specific statement in
the instrument as to the proportion in which the partners were to shar~
the losses, the requirement of sec. 26A can be said t-0 have been satisfied.
:Sec. 26A reads :
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"26A. (1) Application may be made to the Income-tax
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Officer on behalf of any firm, constituted under an instrument·
of partnership specifying the individual shares of the partners,
for registration for the purposes of this Act and of any other
enactment for the. time being in force relating to income-tax
or super-tax.
(2) The application shall be made by such person or
C
persons, and at such times and shall contain such particulars
shall be in such form, and be verified in such manner, as may
be prescribed; and it shall be dealt with by · the Income-taic
Officer in such manner as may be prescribed."
The required particulars are specified in rules 2 and 3 of the Rules framed
under the Act and the form of application including the Schedule annexed to rule 3. Paragraph 3 of the Form requires the partners to "cer-
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tify that the profits (or loss if any)" of the relevant period were or will
(1) (1956) 30 I. T. R. 163.
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134
SUPREME COURT REPORTS
(1976] 2 S.C.R,
be, as the case is, "divided or credited, as shown in Section 8 of the
Schedule". In Section 8 of the Schedule are to be recorded the "particulars of the apportionment of the income, profits or gains (or loss) of
the business, profession or vocation in the previous year between the •
partners who in that previous year were entitled to share in such income,
·profits or gains (or loss)". Note (2) appended to this Schedule states -.
that if any partner is entitled to share in profits but is not liable to bear a "
similar proportion of any losses, this fact should be indicated. lt is
clear therefore that the application for registration which has to be made
in the prescribed form must include particulars of the apportionment of
\
the loss, if any. It does not appear to have been considered in this case
whether the application for registration made by the firm conforms to li
the prescribed rules; the dispute is confined to the question whether sec. f
26A requires the instrument of partnership to specify the individual
shares of the partners in the profits as well as the losses of the business.
Section 23 (5) of the Act provides different procedures in the assessment of a registered firm and a firm that is unregistered. Without going
into details, in the case of a registered firm the share of each partner in
the firm's profits is added to his other income and he is assessed on his ·
total income which includes his share of the profits and the tax payable
by him is determined accordingly. · There is a proviso which lays down •
that "if such share of any partner is a loss it shall be set off against his
other income or carried forward and set off in accordance with the pro-
. 1
visions of section 24''. Thus, the loss, if any, affects the assessment •
proceeding and therefore the Income-tax Officer has to know what are
the respective shares of the partners in the losses before allowing the
firm to be registered. It is not dispu~ed that the Income-tax Officer must
he in a position to ascertain how losses are to be apportioned; the que.stion is whether it is a condition for registration under sec. 26A that the
instrument of partnership must specify the respective shares of the partners in the losses. According to the appellant sec. 26A has no such
requirement. The appellant contends that sec. 26A does not require
specification of the shares in losses in the instrument of partnership and
it is sufficient if the proportion in which the losses are to be shared is
otherwise ascertainable, and that, assuming the sectton did so require, ~
clause 9 of the instrument satisfies that requirement.
The contention that clause 9 specifies the respective shares of the \
partners in the lo_sses is obviously untenable. This clause says that the
partners are "bound to act according to the provisions of the Indian
Partnership Act"; that they are in any case, and it is not clear which •
provision of the Partnership Act indicated the proportion in which the
partners were to bear the losses in this case. Counsel for the appellant
refers to sec. 13 (b) of the Partnership Act in this connection.
Sec. 12(b) reads:
"Subject to contract between the partners-
(~ x
x
x
x
(b) the partners are entitled to share equally in the
profits earned, and shall contribute equally to the
losses sustained by the firm : "
l
•
M. GOVINDU & co. v. C.I.T. (Gupta, J.)
135
We shall refer to sec. 13(b) in more detail when we- consider the other
contention of the appellant, but assuming that this provision has any
relevance to the facts of this case, which it has not, bringing in by
implication sec. 13 (b) from a general statement that the partners are
to act in accordance with the Partnership Act does
not amount to
specification of the partners' shares in the losses, and the instrumen~ of
partnership, it must therefore be held, fails to comply with sec. 26A of
the Act, were this a requirement of that section.
The other contention of the appellant is that it is not essential for
registration under sec. 26A of the Act that the shares of the partners
in the losses must be specified in the partnership deed. In support of
this contention reliance is placed mainly on two decisions, one of the
Mysore High Court : R. Sannappa and Sons
v.
Commissioner
of
Income-tax, Mysore(') and the other of the Allahabad High Court:
Hiralal Jagannath Prasad v. ·Commissioner of Income-tax,
U.P.( 2 )
On behalf of the revenue it is claimed on the authority of a decision
of the Gujarat High Court, Thacker & Co. v. Commissioner of Incometax, Gujarat( 3), that the shares in the profits and losses have both to
be specifically stated in the instrument of partnership in order to comply with the conditions laid down in sec. 26A to obtain registration.
The view taken by the Gujarat High Court appears to have been
followed by the Kerala High Court in the following cases among
others : C. T. Palu & Sons v. Commissioner of Income-tax, Kerala(4)
am! Commissioner of Income-tax, Kerala v. lthappiri &
George("),
There is thus a conflict of opinion in the High Courts on the point. It
will not be necessary, however, for the purpose of this appeal to consider at any length the conflicting views of the different High Courts
and decide which view is correct according to us because on the facts
of the case the appeal is bound to fail on any view. It is not, and it
cannot be, disputed that the Income-tax Officer before allowing the
application for registration must be in a position to ascertain the
shares of the partners in the losses even if sec. 26A did not require the
shares in the losses to be specified in the instrument of partnership.
Counsel for the appellant argues that clause 9 of the instrument refers
to sec. 13 (b) of the. Partnership Act by implication and, accordingly,
in the absence of any contrary indication, it must be held that the
partners are liable to share the lbsses equally. The argument is not
based on a correct appreciation of the scope of sec. 13 (b) and the facts
of the case. Sec. 13 (b), it seems plain to us, makes the partners
liable to contribute equally to the losses only when they are entitled to
share equally in the profits. In this case the shares of the partners are
not equal. In the absence of any indication to the contrary, where the
partners have agreed to share the profits in certain proportions, the
presumption is that the losses are also to be shared in like proportions.
Jessel M. R. states the principle in In re Albion Life Assurance
Society( 6) as follows :
---------
(!) [1967] 66 I. T. R. 27.
(3) [1966] 61 I. T. R. 540.
(5) [1973] 88 I. T. R. 332.
lO-L127fSCI/7S
(2) [1967] 66 I. T. R. 293.
(4) [1969] 72 I. T. R. 641
(6) 16 Ch. Div. 83 (87),
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136
SUPREME COURT REPORTS
[1976] 2 S.C.R.
A
"It is said, as a general proposition of law, that in ordiB
nary mercantile partnerships where there is a community of
profits in a definite proportion, the fair inference . is that
losses are to be shared in the same proportion."
In the case before us the partners having unequal shares in the profits,
there can be no presumption that the losses are to be equally shared
between chem.
Sec. 13(b) of the Indian Partnership Act, 1932 reproduces the
provisions of the repealed sec. 253 (2) of the Indian Contract Act,
1872. In K. Pitchiah Chettiar v.
G.
Subramaniam
Chettiar(1),
C
Ramesam J. explained the scope of sec. 253(2) of the Indian Contract
Act, 1872:
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"Section 253(2) of the Indian Contract Act lays down
that all partners are entitled to share equally in the profits of
the partnership business, and must contribute equally towards
the losses sustained by the partnership. As I read the section, it lays down two presumptions with which the Court
should start. The two presumption are clubbed in one subsection. The first is, if no specific contract is prove<l, the
shares of the partners must be presumed to be equal. In
the present case the plaintiff alleged unequal shares whioh
were not denied by the defendants. So the parties being
agreed on their pleadings as to the shares possessed by them
in the profits, there is no scope for the application of this
first presumption. The second presumption is that where the
partners are to participate in the profits in certain shares
they should also participate in the losses in similar shares.
Now the section says that both should be in equal shares but
implies that if unequal shares are admitted by the partners
as to profits that applies equally to losses.
In the absence of
a special agreement, that this should be the presumption with
which one should start is merely a matter of common sense
and in India one has only to rely on section 114 of the Evoidence Act for such a principle."
The law stated here in the context of sec. 253 (2) of the Contract Act,
1872 applies equally to sec. 13(b) of the Partnership Act, 1932: the
two provisions are in identical terms. On the facts of the present case,
and having regard to the scope of sec. 13 (b), the section has plainly
no application.
(1) I. L. R. 58 Mad. 25 (28).
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M. GOVINDU & co. v. C.I.T. (Gupta, !.)
13 7
The other rule that where the shares in the profits are unequal, the
losses must be shared in the same proportions as the profits if there is
no agreement as to how the losses are to be apportioned, does not
also apply to this case. In this case even if the adult partners bear the
losses in proportion to their respective shares in the profits, the amount
of loss in the minor's s_hare would still remain undistributed.
Will the
p;irtners between them bear this loss equally, or to the extent of their
own individual shares ? To this the instrument of partnership does not
even suggest an answer. There is therefore no means of ascertaining
in this case how the losses are to be apportioned.
For the reasons stated above, the appeal fails and is dismissed with
costs.
P.H.P.
Appeal dismissed.
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