# SECUNDERABAD v. COMMISSIONER OF INCOME-TAX, ANDBRA PRADF.gl

- **Citation:** [1965] 2 S.C.R. 310
- **Court:** Supreme Court of India
- **Decided:** 1964-12-01
- **Case number:** Civil Appeal No. 83 of 1964
- **Bench:** P. B. Gajendragadkar, M. Hidayatullah, J. c. SHAH, S. M. Sikri, R. S. Bachawat
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/secunderabad-v-commissioner-of-income-tax-andbra-pradf-gl-3409
- **Pages:** 6

## Headnote

Income Tax Act, 1922 (11 of 1922), s. 26-A, r. 1r-Regjstration of firm
-Partnership consisting of firm and other persons-Income Tax Officer,
powers--"Specify", meaning of.
The appellant firm applied for registration under s. 26-A of the Indian
C
Income-tax Act.
In the application the persons recited as partners were
a Yam shop-another firm and four other persons and the collective share
of the Yam shop and the shares of the other partners were set out. The
IncomlHax Officer rejected the application and his order was confirmed in
appeal by the Appellate Assistant Commissioner and by the Income-tax
Appellate Tribunal. The Tribunal held that because in the deed of partnership benefits to which certain minors were admitted and particulars "about
D
the distribution of profits or losses in the manner in which the firm wanted
the same to be distributed" were not specified, and because by the deed
of partnership the yam shop was introduced as a partner in the firm, the
privilege of registration under s. 26A must be denied to the firm.
The
question was referred to the High Court. which too answered similarly. In
appeal by special lea\-e,
HELD : The appeal must be allowed.
(i) If the statutory conditions which qualify the firm for registration
E
are fulftlled, an arrangement between some of the partners, which binds
them to distribute the profits under a stipulation which is not a part ·
of the partnership agreement does not effect the right to claim registration
of the partnership agreement. (314 H]
Dullchand Laxminarayan v. Commissioner of Income-tax,
Nagpur,
[1956] S.CR. 154, distinguished.
·
F
·(ii) The word "specify" is used ins. 26A and Rule 2 as meaning mentioning, describing or defining in detail; it does not mean expressly setting
out in fractional or other shares. (314 D-E]
(iii) If the conditiom for registration of a firm are fulftlled, the
Income-tax Officer has no power to reject the application. Undoubtedly,
the application must strictly be in conformity with the Act and the Rules,
but in so ascertaining, the deed of partnership must be reasonably consG
trued.
(311 GI

## Text

KYLASA SARABmAH, BOMBAY CLOTH SHOP,
A
SECUNDERABAD
v.
COMMISSIONER OF INCOME-TAX, ANDBRA PRADF.gl
December 1, 1964
B
[P. B. GAJENDRAGADKAR, C.J., M. HIDAYATULLAH, J. c. SHAH,
S. M. SIKRI AND R. S. BACHAWAT, JJ.)
Income Tax Act, 1922 (11 of 1922), s. 26-A, r. 1r-Regjstration of firm
-Partnership consisting of firm and other persons-Income Tax Officer,
powers--"Specify", meaning of.
The appellant firm applied for registration under s. 26-A of the Indian
C
Income-tax Act.
In the application the persons recited as partners were
a Yam shop-another firm and four other persons and the collective share
of the Yam shop and the shares of the other partners were set out. The
IncomlHax Officer rejected the application and his order was confirmed in
appeal by the Appellate Assistant Commissioner and by the Income-tax
Appellate Tribunal. The Tribunal held that because in the deed of partnership benefits to which certain minors were admitted and particulars "about
D
the distribution of profits or losses in the manner in which the firm wanted
the same to be distributed" were not specified, and because by the deed
of partnership the yam shop was introduced as a partner in the firm, the
privilege of registration under s. 26A must be denied to the firm.
The
question was referred to the High Court. which too answered similarly. In
appeal by special lea\-e,
HELD : The appeal must be allowed.
(i) If the statutory conditions which qualify the firm for registration
E
are fulftlled, an arrangement between some of the partners, which binds
them to distribute the profits under a stipulation which is not a part ·
of the partnership agreement does not effect the right to claim registration
of the partnership agreement. (314 H]
Dullchand Laxminarayan v. Commissioner of Income-tax,
Nagpur,
[1956] S.CR. 154, distinguished.
·
F
·(ii) The word "specify" is used ins. 26A and Rule 2 as meaning mentioning, describing or defining in detail; it does not mean expressly setting
out in fractional or other shares. (314 D-E]
(iii) If the conditiom for registration of a firm are fulftlled, the
Income-tax Officer has no power to reject the application. Undoubtedly,
the application must strictly be in conformity with the Act and the Rules,
but in so ascertaining, the deed of partnership must be reasonably consG
trued.
(311 GI
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 83 of
1964.
Appeal by special leave from the judgment and order dated
August 18, 1960 of the Andhra Pradesh High Court in R. C.
Appeal No. 34 of 1957.
H
A. Ranganadham Chetty, K. Venkaramaiah, A. Vedavalli and
A. V. Rangam, for the appellants.
SARABHIAH v. C.I;T. (Shah, /.)
1111
A
R. Ganapathy Iyer and R. N. Sachthey, for the respondent.
The Judgment of the Court was delivered by
Shah, J. The appellants who are a firm carrying on business in
cloth at Secunderabad applied on June 30, 1955, for registration
8
under s. 26-A of the Indian Income-tax Act, 1922, for the assessment year 1956-57. The following persons were, it was recited in
the application, partners, having share in the profits and losses5 in
proportions specified against their names :-
c
D
1. M/ s Kylasa Sarabhiah a firm consisting of
the following partners :
(a) Kylasa Veeresalingam.
(b) Kylasa Nagendrarao
( c) Kylasa Madhusudhanarao
2. Mahendrakar Narayanarao
3. Nune Vittayya
4. Pottupalli Chandrayya
5. Gande Ramayya
Rs.As. Ps.
0 6 9
0 3 3
0 2
6
0 2 6
0
1 0
For facility of reference we will call No. 1 'the Yam Shop'.
E
The Income-tax Officer rejected the application, and his order
was confirmed in appeal by the Appellate Assistant Commissioner
and by the Income-tax Appellate Tribunal.
The Tribunal held
that because in the deed of partnership benefits to which certain
minors were admitted, and particulars "about the distribution of
profits or losses in the manner in which the firm wanted the same
F
to be distributed" were not specified, and because by the deed of
partnership the Yarn Shop was introduced.as a partner in the firm,
the privilege of registration under s. 26-A must be denied to the
firm. The High Court of Andhra Pradesh recorded on the following question referred under s. 66 ( 1) of the Income-tax Act :
G
H
"Whether on the facts and circumstances of the case,
the assessee is entitled to registration under s. 26-A of
the Income-tax Act ?",
a negative answer.
Section 26-A of the Indian Income-tax Act, 1922, provides :
"(1) 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
USup./65-4
.
312
SUPREME COURT RBPOR.TS
[ 1965] 2 S.C.R..
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 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."
A
B
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 c
to which the partners of a registered firm 'become entitled as a
consequence of registration, and if it is intended to secure that
benefit, requirements of s, 26-A and the rules framed under the
Act must be strictly complied with.
Rule 2 framed· under s. 59
requires that the application shall be signed by the partners (not
being minors) personally, and prescribes the period within which
D
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 partnership
under which the firm is constituted. By Rule 4 it is provided 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 E
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 of the certificate of registration may be
renewed for subsequent years.
Registration of the firm may be obtained on an application
to the Income-tax Officer on behalf of any firm, if the firm be
lawfully constituted under an instrument of partnership which
specifies the individual shares of partners and the Income-tax
Officer is satisfied that there is or was a genuine firm in existence
r
u shown in the instrument. If the conditions are fulfilled, the G
Income-tax Officer has no power to reject the application. Undoubtedly, the application must strictly be in conformity with the
Act and the Rules, but in ascertaining whether the application is
in conformity with the Rules, the deed of partnership must be
reasonably construed.
·
Under the Indian Partnership Act, 1932 partnership is the relaH
tion between persons who have agreed to share the profits of a
business carried on by all or any of them acting for all.
A firm
I
SAIWIHIAH V. C.I.T. (Shah, /.)
313
A is strictly not a person : it is an aswciation of persons, and an
agreement by which a firm purports to enter into a partnership
with an individual or another finn merely makes the partners of
that firm individually partners of the larger partnership.
The
problem posed by such a partnership agreement is under the general law academic, but the right to registration under s. 26A being
B conditional upon specification of the individual shares of the
partners, a deed of partnership between a finn and an individual,
which specifies the collective share of the finn, without more,
cannot be registered. It has been held by this Court in Dulichand
Laxminarayan v. Commissioner of Income-tax, Nagpur(') that a
partnership constitute4 between an individual, a joint Hindu family
C and three finns could not be registered under s. 26-A of the Act.
In Dulichand's case(') the partnership deed was signed by five
individuals, viz.. the kart a of the joint Hindu family, one partner
each of the three firms and the individual. It was held that the
partnership could not be admitted to registration, because a firm
D as such cannot enter into an agreement as partner with another
firm or individual, and also because all the members of the three
firms had not personally signed the application as required by
Rule 2 of the Income-tax Rules.
The application in the present case was rejected by the
Tn'bunal, because in its view the benefits to which the minors were
E admitted and the shares of the major partners who were members
of the Yam Shop were not specified, and that the Yam Shop was
introduced as a partner in the finn. But the Tribunal, in our
judgment, erred in holding that the benefits to which the minors
were admitted and the shares of the major· members of the Yarn
Shop were not specified in the deed of partnership. It is clearly
r recited in the preamble that K. Rajeshwanao, K. Haranath Babu,
K. Ramesh Babu and K. Shivakumar-the four minors-were
admitted to the benefit ~f the partnership with equal shares in the
profits falling to the share of the Yam Shop, and losses were to be
shared in equal shares only by the major partners K. V eeresaG liDgam, K. Nagendrarao and K. Madhusudhanarao. The scheme
of the deed therefore was that the Yam Shop collectively had a
share ol 0-6-9 in the profits and was liable in the same proportion in the losses in the appellant firm.
Out of this 0-6-9 share,
seven persons who constituted the Yam Shop were entitled to
share the profits. equally, whereas losses were to be shared by the
H three major members of the Yarn Shop equally. It is true that in
the deed of partnersh,ip, the first partner is described as "K ylasa
(1) [19S6] S.C.R. 154.
314
IVPUJO Cl01JllT JlBPOllTS
·
(196S) 2 S.C.1l.
Sarabhiah Yam firm"-the Yam Shop-constituted under an A
instrument of partnership dated May 12, 1955, and in paragraphs
3 and 8 this Yam Shop is also described as the first partner. But
the substance of the agreement cannot be permitted to be overshadowed merely by the use of the collective description of some
of the persons who agreed to be partners. The agreement was
between K. Veeresalingam, K. Nagendrarao, K. MadhusudhanaB
rao, Mahendrakar Narayana Rao, Noone Vittayya, Pottipalli
Chandrayya and Gande Ramayya to enter into partnership with the
covenant that the profits and losses shall be divided in the. shares
specified in the instrument. The partnership agreement was signed by the major partners; the application for registration was m C
conformity wilh the rules framed under the Act, the certificate
regarding the distribution of the profits in the previous year was
given, the original instrument of partnership was produced and
the instrument specified the individual shares of the partners.
Merely because the deed of partnership set out in paragraph 8 the
collective share of the Yarn Shop, registration could not be refused,
0
for in the preamble the division of the shares of profits and losses
among the three members of the Yam Shop and those admitted to
the benefit of the partnership is clearly indicated. The word
"specify" is used in s. 26-A and Rule 2 as meaning, mentioning,
describing or defining in detail : it does not mean expressly setting
out in fractional or other shares. In the deed of partnership, the. E
shares are clearly defined, though they are not worked out in
· precise fractions. Nor is it true to say that the Yam Shop is introduced as a partner.
The agreement is in truth between three
major members out of those who cqnstitute the Yam Shop and
four outsiders. Each of them has signed the application and the
covenants of the partnership agreement bind the partners .indiviF
dually. Indication in the deed of partnership that three of them
held qua the Yam Shop a certain relation did not affect their status
as partners of the appellant firm individually.
It was urged that in the deed dated February 20, 1952, constituting the Yam Shop, as amended by the deed dated May 12, 1955, G
no profit sharing ratio was mentioned. But we are not coneemed
with the registration of the Yam Shop. We are unable to appreciate how a defect (even if there be one in the agreement constituting the Yam firm) affects the right of the appellant firm to be
registered. If the statutory conditions which qualify the appellants H
for registration are fu1filled, an arrangement between some of the
partners of the appellants which binds them to distribute the profits under a stipulation which is not a part of the partnership agree-
SARABHIAH v. C.I.T. (Shah, /.)
31S
A ment does not affect the right to claim registration of the partnership agreement.
The answer recorded by the High Court must, therefore, be
discharged, and an affirmative answer must be recorded.
The appeal is allowed. The appellants will be entitled to
B their COits in this Court and the High Court.
Appeal allowed.