R.C. No. 37/59
CHANDRASEKHARA SASTRY J. - This is a reference under section 66, clause (1), of the Indian Income-tax Act (XI of 1922). The question referred to for decision is : Whether, on the facts and circumstances of the case, the assessee is entitled to registration under section 26A of the Income-tax Act ?' The facts leading up to this reference are as follows : The assessee filed an application on June 30, 1955, before the Income-tax Officer, C-Ward, Hyderabad, for renewal of the registration under section 26A of the Indian Income-tax Act (hereinafter referred to as the Act). As per the application, the following were shown as the partners :
Share
Rs. A. P.
1.
M/s. Kylasa Sarabharah (a firm consisting of the following partners).
(a) Kylasa Veereslingam ....
(b) Nagendra Rao
}
090
2.
K. Sathaiah ....
036
3.
V. Narayana ....
036
Total
100
The application was signed by K. Veeresalingam, K. Nagendra Rao, K. Sathaiah and V. Narayana. The assessment year was 1955-56 and the accounting year for the relevant assessment year was from November 7, 1953, to October 26, 1954. The deed of partnership on which reliance was placed for the purpose of registration under the Indian Income-tax Act was dated December 12, 1953. The Income-tax Officer rejected the application. On appeal, the order of the Income-tax Officer was confirmed by the Appellate Assistant Commissioner which in its turn was confirmed by the Income-tax Appellate Tribunal, Hyderabad Bench. On an application filed by the assessee to the High Court, the Tribunal referred the above question for decision. The material portions of the deed of partnership dated December 12, 1953, on the basis of which the renewal of the registration is prayed for are as follows :
'This instrument of partnership executed on the 12th day of December, 1953, by and between :
1. Kylasa Sarabhaiah, a firm constituted under an instrument of partnership dated 20th February, 1952, consisting of the following members :
(a) Kylasa Veeresalingam, aged 41 years.
(b) Kylasa Nagendra Rao, aged 23 years, with minor brothers.
1. Kylasa Madhusudhan Rao
2. Kylasa Rajeswara Rao
3. Kylasa Harinath Babu
4. Kylasa Siva Kumar
5. Kylasa Ramesh Babu admitted to the benefits of the partnership all holding equal shares in profits and in case of losses the major parties only sharing the losses in equal shares.
2. Kelluri Sathaiah, son of Venkayya, aged 33 years, Hindu, residing in Kavadiguda, Secunderabad, of the second part.
3. Veeravalli Narayana, son of Rangayya, aged 33 years, Hindu, residing in Pan Bazar, Secunderabad, of the third part.
Whereas the parties named above were carrying on business in cloth along with Kandukoori Somayya, son of Bhoomayya, in the name and style of Kylasa Sarabhaiah and Sons since 31st January, 1952, under an instrument of partnership dated 18th February, 1953, and whereas the said Kandukoori Somayya, son of Bhoomayya, died on September 13, 1953, and whereas the remaining partners named above have decided to continue the business in the name and style of Kylasa Sarabhaiah & Sons on and from September 15, 1953, and whereas they have agreed to engross the scope of the business and the conduct of it and the other terms of which they have agreed in future in a deed as an indenture since such a deed is likely to facilitate the conduct of the business and fix the rights and liabilities of the partners named above definitely and clearly lest there might be any room for misunderstandings among them . . . . .
The profits or losses of the partnership firm shall be divided between and borne by the parties in the following shares as and from September 5, 1953.
S. No
Name of the partner
Share held..
Rs. A. P.
1.
Kylasa Sarabhaiah firm consisting of the partners:
(i) K. Veeresalingam 1/2 share
(ii) K. Nagendra Rao 1/2 share constituted under an instrument of partnership dated February 20, 1952
}
090
2.
Kolluri Sathaiah
036
3.
Veeravalli Narayana
036
Total
100
1/32 (0-0-6 in a rupee) of the total profits shall be set apart for charity in the name of deity Bonthapalli Veerabhadra Swamy and the balance alone shall be divisible the partners in accordance with their representative shares as said above.'
The instrument of partnership referred to in this deed is executed by Kylasa Veereslingam and Kylasa Nagendra Rao. Under this deed, five minors are admitted to the benefits of the partnership evidenced by the deed of partnership dated February 20, 1952. It was also recorded in that deed of partnership dated February 20, 1952. It was also recorded in that deed that each of them was entitled to an equal share in the profits which comes to 1/7th share in the profits. But in the deed of partnership dated December 12, 1953, which is the partnership in question in this case, the shares of Kyalsa Veeresalingam and Kylasa Nagendra Rao are shown to be equal and to amount to a nine annas share in all.
The question for decision in this case is whether the assessee is entitled to a renewal of the registration of the firm under section 26A of the Act for the assessment year 1955-56. Section 26A is as follows :
'26A. Procedure in registration of firms. - (i) 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 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 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.'
Two condition have to be satisfied before a partnership can be registered under section 26A of the Act : (1) it must be a partnership as permitted by the law, viz., the Indian Partnership Act and (2) the instrument of partnership must specify the individual shares of the partners. Unless these two conditions are satisfied, the alleged partnership cannot be registered under this section. From a perusal of the instrument dated December 12, 1953, it appears that it purports to be a partnership between Kylasa Sarabhaiah, a firm constituted under an instrument of partnership dated February 20, 1952, and Kolluri Sathaiah and Veeravalli Narayana. It is well settled that a firm as such cannot become a partner of another firm. Section 4 of the Indian Partnership Act, 1932, 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. This section further specifies that 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'. In Dulichand Laxminarayan v. Commissioner of Income-tax, the Supreme Court held that a firm is not an entity or 'person' in law, but is merely an association of individuals and that a firm is only a collective name of those individuals, who constitute the firm and that a firm as such is not entitled to enter into a partnership with another firm or individuals. The Supreme Court, therefore, held that there can arise no question of registration of a partnership purporting to be one between three firms, a Hindu undivided family business and an individual as a firm under section 26A of the Act.
It can, therefore, be no longer contended that a partnership which purports to be one between two or more firms, or between one firm and another individual, or a Hindu undivided family can be registered under section 26A of the Indian Income-tax Act. In the present case, the deed of partnership, on its face, purports to be one between (I) Kylasa Sarabhaiah, a firm constituted under an instrument of partnership dated February 20, 1952, consisting of (a) Kylasa Veeresalingam; (b) Kylasa Nagendra Rao, with five minor brothers admitted to the benefits of the partnership, (2) Kolluri Sathaiah and (3) Veeravalli Narayana. In view of the decision of the Supreme Court above referred to, this partnership evidenced by the instrument dated December 12, 1953, is illegal and is not a partnership at all which can be recognised either under the Indian Partnership Act or under the Indian Income-tax Act.
But then, it is contended by the learned counsel for the assessee that though in the concerned deed of partnership one of the partners is shown as Kylasa Sarabhaiah firm, it is really the partners constituting that firm under the partnership dated February 20, 1952, that they are the partners individually under the partnership dated December 12, 1953, which is sought to be registered under the Act. It is pointed out that in the partnership dated December 12, 1953, all the major partners have signed and that, therefore, it must be taken that all the partners of Kylasa Sarabhaiah firm are also partners in the partnership in question individually having equal shares and that, therefore, it cannot said that the firm of Kylasa Sarabhaiah as such is a partner. In support of this argument, the learned counsel for the assessee relied upon the decision of the High Court of Bombay in Chhotalal Devchand v. Commissioner of Income-tax. If is a case of partnership between two firms and an individual, the registration of which was refused by the department and the Tribunal under section 26A of the Act. There, it was held that :
'Where a partnership is constituted of a firm and an individual the partnership deed instead of setting down the names of the individual and the members of hat firm may compendiously use the name of the firm by making it clear that what was intended was a partnership constituted between the individual and the constituent members of the firm; and that such is the intention can be made clear if the partnership deed itself is signed not only in the name of the firm but by all the constituent members of that firm.'
It was further held that :
'An instrument of partnership may be constituted by one or several documents and what section 26A requires is that the documents which constitute the instrument of partnership must specify the shares of the partners; it is not necessary that the shares must be specified in one document along with the other terms of the partnership.'
Chagla C.J., who delivered the judgment of the bench in that case, referred to the decision of the Supreme Court in Dulichand Laxminarayan v. Commissioner of Income-tax and distinguished it. The learned Chief Justice pointed out that, in that case, on a true reading of the partnership deed, it is the constituent members of the two firms and not the two firms as entities that had entered into the partnership with the individual and that fact was amply borne out both by the recitals and the fact that the partnership deed had been signed by the constituent members of the two firms. The other provisions in the deed of partnership were also referred to as making the intention of the parties clear that the partnership deed in question was one between individual partners only who were the constituent members of the two firms and not the two firms as entities. With regard to the objection on behalf of the department based upon the fact that the partnership deed in question did not specify the individual shares of the several partners, the learned Chief Justice held that these individual shares could be ascertained by referring to their shares as specified in the respective deeds of partnership of the two firms and that such a course was permissible under section 26A of the Act.
But, on a reading of the instrument of partnership in the present case, we are unable to hold that this is a partnership between the constituent members of Kylasa Sarabhaiah firm and the other two individuals mentioned in this deed. It is specifically stated that the first partner is Kylasa Sarabhaiah, a firm constituted under the instrument of partnership dated February 20, 1952, and the two others are Kolluri Sathaiah and Veeravalli Narayana. This deed does not purport to be one as between the individual constituent members of Kylasa Sarabhaiah firm and two others. When signing this deed of partnership also, the signature of the firs partner purports to be on behalf of Kylasa Sarabhaiah firm and not by its constituent members as individuals. Therefore, we hold that the partnership, which is sought to be created by the deed dated December 12, 1953, cannot be recognised in law and cannot be registered under section 26A of the Act.
Under section 26A of the Act, there is one other condition which has to be satisfied before a firm can be registered and that is that the instrument of partnership shall specify the individual shares of the partners. In the deed of partnership in question, the total share of the first partner, i.e., Kylasa Sarabhaiah, a firm constituted under the instrument of partnership dated February 20, 1952, is shown as 0-9-0 share thought the shares of two adult partners, Kylasa Veeresalingam and Kylasa Nagendra Rao, are shown as '1/2 share' for each. But, in this context, it has to be noted that in the partnership deed under which Kylasa Sarabhaiah firm was constituted, there were five other minors, who were admitted to the benefits of the partnership and who were entitled to equal shares in the profits of that firm. This is not specified in the partnership deed in question, where, as already mentioned, only two adult partners, Veeresalingam and Nagendra Rao, were each shown as having been given half share in this entire 0-9-0 share allotted to the first partner, Kylasa Sarabhaiah firm. It has been held in Kannappa Naicker & Co. v. Commissioner of Income-tax, that :
'A partnership cannot be registered as a firm under section 26A of the Indian Income-tax Act where the instrument of partnership does not specify on the face of it the individual shares of the partners. Therefore, where a partnership does not specify on the face of it the individual shares of the partners. Therefore, where a partnership consists of a firm and some individuals and the the deed of partnership, while mentioning the proportion in which the profits and losses are to be shared between the firm and the other partners respectively, does not specify the shares of the partners of the firm which is a member of the partnership, the partnership cannot be registered as a firm under section 26A. The fact that the smaller partnership the shares of its partners are specified is immaterial.'
This decision is binding on us. It, therefore, follows that, unless the deed of partnership dated December 12, 1953, specified the individual shares of its partners, it cannot be registered under section 26A of the Act. In our opinion, it is not permissible to look into the instrument of partnership dated February 20, 1952, by which Kylasa Sarabhaiah firm was constituting that firm in order to ascertain the individual shares of the members of this firm which is now sought to be registered. What all was decided by the High Court of Bombay in Chhotalal Devchand v. Commissioner of Income-tax was only that an instrument of partnership should be constituted by one or several documents and that what section 26A requires is only that the documents which constitute the instrument of partnership must specify the shares of the partners and that is is not necessary that the shares must be specified in one document along with the other terms of the partnership. If this decision intended to hold that, in order to ascertain the individual shares of several partners, it is permissible to refer to the earlier deed of partnership, we must express our respectful dissent from it. Such a view is opposed to the decision of the High Court of Madras in Kannappa Naicker & Co. v. Commissioner of Income-tax above referred to and, in our opinion, will not also be in accordance with the decision of the Supreme Court in Dulichand Laxminarayan v. Commissioner of Income-tax. Therefore, we hold that the firm in question in this case cannot be registered under section 26A of the Act for the reason that the instrument of partnership does not specify the individual shares of the partners even assuming that it can be taken that it is the constituent members of Kylasa Sarabhaiah firm that entered into the partnership with two others, Kolluri Sathaiah and Veeravalli Narayana, and even assuming that such a course is permissible under the Indian Income-tax Act.
The question referred to us has to be decided against the assessee on one other ground also. Kylasa Sarabhaiah firm consists of not only two adult members but also five minors admitted to the benefits of the partnership all holding equal shares in profits and in case of loses the manor partners only sharing the losses in equal shares. But in paragraph 8 of the instrument of partnership in question, it is stipulated that the profits or losses of the partnership firm shall be divided between and borne by the parties in the shares mentioned therein as and form September 5, 1953. It means that the minors, who were admitted to the benefits of the partnership under the instrument of partnership dated December 12, 1953, also could be equally liable for the losses. Such a course is not permissible in law. In Commissioner of Income-tax v. Dwarkadas Khetan & Co., it is pointed out by the Supreme Court that :
'Section 30 of the Indian Partnership Act clearly lays down that a minor cannot become a partner, though with the consent of the adult partners he may be admitted to the benefits of partnership. Any document which goes beyond this section cannot be regarded as valid for the puposes of registration under section 26A of the Indian Income-tax Act. Registration can only be granted of a document between persons who are parties to it and on the covenants set out in it.'
It was also further held that :
'If the income-tax authorities register the partnership as between the adults only contrary to the terms of the document, in substance, a new contract is made out. It is not open to the income-tax authorities to register a document which is different from the one actually executed and asked to be registered.'
In the deed of partnership in question in that case, as it is in the present case, it was not stated that the minors were only admitted to the benefits of the partnership and are not liable for the losses. It was for this reason that the Supreme Court held that the firm in that case could not be registered under the under the Indian Income-tax Act. Following this decision of the Supreme Court, we hold that the assessee firm in the present case before us also cannot be registered under section 26A of the Indian Income-tax Act. Following this decision of the Supreme Court, we hold that the assessee firm in the present case before us also cannot be registered under section 26A of the Indian Income-tax Act. In R. C. No. 37/59, we hold that, on the facts and circumstances of this case, the assessee is not entitled to registration under section 26A of the Indian Income-tax Act.
The facts in R. C. No. 34/59 are similar to the facts in R. C. No. 37/59 though the deed of partnership relating to the assessee firm in this case is dated the 15th of May, 1955. In this deed of partnership also the first partner is described as 'Kylasa Sarabhaiah, a firm constituted under an instrument of partnership dated 12th May, 1955, consisting of Kylasa Veeresalingam and with minor brothers and four others. The share of the first partner, Kylasa Sarabhaiah firm is specified as 0-6-9. In this case also, on a proper construction of the instrument of partnership, we hold that it purports to be the partnership between Kylasa Sarabhaiah firm and four other partners. Hence, it cannot be registered under section 26A of the Act. We also hold that, in this case also, the individual shares of the several partners are not specified and that, in any event, the instrument of partnership does not specified that the minors, who were admitted to the benefits of the partnership of Kylasa Sarabhaiah firm, are not liable for the losses.
Our answer to the question referred to us in this case also is that, on the facts an circumstances of this case, the assessee is not entitled to registration under section 26A of the Indian Income-tax Act. We make no order as to costs in this case. But in R. C. No. 37/59, the assessee shall pay the costs of the reference. Advocates fee Rs. 100.
Question answered accordingly.