1. IT Appeal Nos. 604 and 606 (Coch.) of 1982 are appeals by the revenue contesting the grant of relief in respect of certain additions made in determining the quantum of income to be assessed for the assessment years 1980-81 and 1981-82 respectively.
(a) IT Appeal Nos. 605 and 607 (Coch.) of 1982 are also appeals by the revenue but contest the decision of the Commissioner (Appeals) directing continuation of registration to the assessee-firm for the assessment years 1980-81 and 1981-82.
(b) CO. No. 73 (Coch.) of 1982 (relating to the assessment year 1980-81) is filed by the assessee submitting that the Commissioner (Appeals) was not justified in holding that the levy of interest under Sections 139 and 215 of the Income-tax Act, 1961 ('the Act'), could not be contested. Similar is the plea in CO. No. 75 (Coch.) of 1982 which relates to the assessment year 1981-82. In CO. No. 74 (Coch.) of 1982, the assessee seeks for upholding the order of the Commissioner (Appeals) directing continuation of registration.
Similar is the plea in CO. No. 76 (Coch.) of 1982. Of the latter two cross-objections, the first cross-objection relates to the assessment year 1980-81 and the second to the assessment year 1981-82.
2. We briefly set out certain facts which would enable a decision being rendered so far as the appeals relating to the registration aspect is concerned.
3. For the assessment year 1980-81, the ITO considered that the application in Form No. 12 was filed out of time. But the Commissioner (Appeals) held that the application was not belated and this issue is no longer in controversy.
4. As far as the merits are concerned, the ITO referred to the relevant portion of Clause 14 of the partnership deed executed on 1-11-1973 which read as under : The profits after charging all expenses including interest on borrowings, partners' salaries and expenses, shall be shared by the partners in proportion to the amount of capital contribution by them.
He then adverted to the clause relating to the contribution of capital which was Clause 5 in the deed and the particulars of capital contribution are as under : The ITO stated that there was no specification of the individual shares of losses either in the partnership deed or in any other supplemental record. He observed that the non-specification of the share of losses was fatal to the grant of registration vide decisions of the Kerala High Court in the following cases-C.T. Palu & Sons v. CIT [1969] 72 ITR 641, CIT v. Ithappiri & George [1973] 88 ITR 332, United Hardwares v.CIT [1974] 96 ITR 348 and CIT v. Best Automobiles [1979] 117 ITR 877.
5. The submission of the assessee before the ITO was that registration had been granted till the assessment year 1979-80 and, therefore, where there was a valid declaration in Form No. 12, registration should have been granted. It was also contended on merits that even if there was no specific reference to sharing of loss in the deed, then the rule of interpretation was that that losses would have to be shared in the same proportion as profits. In short, the submission of the assessee was that once a firm was granted registration as a genuine firm, continuation of registration had to be given to such firm provided a valid declaration in Form No. 12 was made.
6. The ITO held that failure to specify individual shares in losses was violation of a mandatory provision for the grant of registration and would render the partnership deed void. The submission that in Form No.11 A, it was declared that losses would be shared in proportion to the profits could not improve the position of the assessee. He referred to a decision of the Tribunal and the decision of the Andhra Pradesh High Court in the case of CIT v. Badjanapara Salt Co. 1974 Tax LR 19, which stated that where a firm was not constituted in accordance with the requirements of law, it would not be entitled to continuation of registration merely because registration was allowed in the first year.
Finally, the ITO declined to continue registration for the assessment year 1980-81 and for the same reasons he declined continuation of registration for the assessment year 1981-82 also.
7. In appeal, the Commissioner (Appeals) stated that the assessee was a firm of nine partners. He referred to the facts which we have set out already. He also referred to a decision of the Supreme Court in the case of Mandyala Govindu & Co. v. CIT [1976] 102 ITR 1, but eventually decided the issue in favour of the assessee by stating that once registration was granted, continuation of registration cannot be refused as long as the requirements of filing a valid declaration under Section 184(7) of the Act, are satisfied.
8. The revenue is aggrieved and with reference to its appeal, the learned departmental representative submitted that the Kerala High Court had repeatedly held that there must be an instrument of partnership specifying the shares in both profits and losses and as long as such an instrument was absent in the accounting period, continuation of registration could not be given. He placed reliance on the decision of the Kerala High Court in the case of Best Automobiles (supra) which referred to earlier decisions on the point, 9. The learned counsel for the assessee in reply relied on the provisions of Section 184(7) and stated that so long as the requirements were complied with by the filing of a valid declaration, registration had to be continued.
10. Adverting to the merits, the learned counsel submitted that the decision of the Supreme Court in the case of Parekh Wadilal Jivanbhai v. CIT [1961] 63 ITR 485 was an authority for the proposition that registration could be given even if the deed did not expressly specify the shares in profits or losses of the partners as long as a fair construction of the deed together with all attendant material could reasonably show what the sharing-ratio would be. He also referred to the decision of the Supreme Court in the case of Mandyala Govindu & Co.
(supra) and stated that the proposition in law was that where the shares in profit as specified in the deed of partnership was not equal and the manner of sharing losses was not specified in the deed itself, the losses would have to be shared in the same ratio as the profits.
Where the sharing of profits was equal, of course, he stated, the provisions of Section 13(6) of the Indian Partnership Act, 1932 would be applicable and it would be presumed that the losses are also to be shared equally. In the present case, the profits were to be shared in proportion to the capital contribution which was unequal and, therefore, following the ratio of the judgment of the Supreme Court referred to, it had to be inferred that the sharing-ratio in the losses would be the same. This being the position, he submitted that the principles laid down in the Board's Circular F. No. 26/12/67-IT(A-I), dated 15-11-1967, which is reproduced below, applied. (Extract from Chaturvedi and Pithisaria's Income-tax Law, 2nd edition, Vol. 3) : A question has been raised whether registration to a firm should be allowed in a case where minors have been admitted to the benefits of partnership but the shares of the major partners and the minor partners in the profits only have been specified in the partnership deed but the shares of the major partners in the event of the firm sustaining a loss, have not been so specified. The matter has been considered by the Board in the light of the decisions of various High Courts and the Supreme Court.
2. The position that emerges from the Supreme Court's judgments in the cases of Kylasa Sarahhaiah v. CIT [1965] 56 ITR 219 (SC) and Parekh Wadilal Jivanbhai v. CIT, Madhya Pradesh [1967] 63 ITR 485 (SC) is that although the application for registration should strictly be in accordance with the Act and the Rules, in ascertaining whether the application is in conformity with the Act and the Rules, the partnership deed has to be construed in a reasonable manner and the deed read as a whole and in the context of the relevant circumstances of the case. If reading the partnership deed in a reasonable manner indicates that the shares both in profits and in losses can be inferred from the deed, registration cannot be refused. The trend of judicial pronouncements is that the claim for registration should not be refused unless there is ambiguity or uncertainty about the shares of the partners either in the profits or the losses of the business.
3. These instructions should please be brought to the notice of all the officers. Departmental appeals which are pending before the Tribunal or High Courts may also be reviewed in the light of the legal position as explained above. (p. 2001) Therefore, he submitted that continuation of registration should not have been refused.
11. We have considered the rival submissions. We would first examine the aspect from the angle of grant of registration. In the case of Parekh Wadilal Jivanbhai (supra) the relevant clause in the partnership deed regarding apportionment of profits or losses read as under : 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. . . . (p. 486) No definite shares were specified in the deed and the observations of the Supreme Court in directing the grant of registration with reference to the aforesaid fact were as under : ... In our opinion, the argument of the appellant is well-founded and must be accepted as correct. It is evident that under Clause (3) of the partnership deed, the capital allotted to each partner is equal, viz., 5 shares of Rs. 16.000 each in a total capital of Rs. 2,40,000. Clause (10) 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 Section 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 1, 1949, right up to date, the profits have been apportioned equally among the three partners of the partnership firm. Reading the partnership deed as a whole and in the context of the relevant circumstances of the case, we are of the opinion that there was specification of the individual shares of the partners in the profits within the meaning of Section 26A of the Act and the assessee-firm was entitled to registration for the assessment year in question. It was pointed out by this Court in Kylasa Sarabhaiah v. CIT [1965] 56 ITR 219 (SC) that, although the application for registration of a firm under Section 26A of the Act had strictly 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. . . . (p. 489) 12. In the present case, we would state that a perusal of the records showed that in the declaration in Form No. 12 which was filed for each of the assessment years 1980-81 and 1981-82, it was stated that there was no change in the constitution of the firm. For the assessment year 1972-73 when an application in Form No. 11A had been made the shares in the profits were also shown to be the shares in losses in the Schedule to the said application. The Supreme Court in the case of Mandyala Govindu & Co. (supra) had observed as under : . . .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 as follows : It is said, as a general proposition of law, that in ordinary mercantile partnerships where there is a community of profits in a definite proportion, the fair inference is that the losses arc to be shared in the same proportion. (p. 6) Therefore, it would appear that on the basis of the construction of a partnership deed it could be construed that the shares in losses would be the same as the shares in profits. The Supreme Court, however, in the aforesaid case had referred to the cleavage of opinion between the Mysore and Allahabad High Courts, on one side and the Gujarat and Kerala High Courts, on the other, where the Kerala High Court had taken the view that the shares had to be specified in the deed itself. The Supreme Court had left the matter open without deciding as to which of the view was preferable. In the case of Best Automobiles (supra), the Kerala High Court had referred to the cleavage of opinion to which we have adverted and had observed as under : . . . This Court was of the view that the expression used in the section must normally count both as regards the profits as well as the losses and that there was no compelling reason to. read down the expression and to give it a limited meaning. The Division Bench rulings in CIT v. Ithappiri & George [1973] 88 ITR 332 and United Hardwares v. CIT [1974] 96 ITR 348, which followed the same, are binding on us. On the view accepted in these decisions, there must be a specification of the shares in the losses as well in the instrument of partnership. Even on the safe and liberal view pointed out by the Supreme Court that the officer must be satisfied at the time of granting registration that the shares of the partners as regards profits and losses were ascertainable, the conclusion is irresistible that the instrument of partnership did not satisfy the requirements of Section 184. (p. 884) It is clear that the view of the Kerala High Court in the earlier decisions stands reiterated, viz., that there must be a specification of the shares in the losses as well as in the profits in the deed of partnership. The earlier view was considered by the Division Bench in deciding the case of Best Automobiles (supra) to be binding on them.
The ratio of the judgments of the Kerala High Court are binding on us and, consequently, if it had been the matter of first registration, we would have come to the conclusion that since the shares in losses were not specified in the instrument of partnership itself, registration could not be granted to the assessee-firm.
13. In the present case registration has already been granted and what was sought was only continuation of registration. The non-specification of the shares in the losses in an instrument of partnership does not make the partnership void ab initio. Therefore, there is a valid instrument of partnership. The decision of the Andhra Pradesh High Court on which reliance was placed by the revenue in the case of Badjanapara Salt Co. (supra), was a case in which consequent to the admission of minors, as partners, the deed was void ab initio and it was not a firm at all in the eye of law. Where there is no firm at all in the eye of law it cannot be said that it is a firm constituted under an instrument of partnership. Section 184(7) reads as under: (7) Where registration is granted to any firm for any assessment year, it shall have effect for every subsequent assessment year : (i) there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the registration was granted ; and (ii) the firm furnishes, before the expiry of the time allowed under Sub-section (1) or Sub-section (2) of Section 139 (whether fixed originally or on extension) for furnishing the return of income for such subsequent assessment year, a declaration to that effect, in the prescribed form and verified in the prescribed manner, so, however, that where the Income-tax Officer is satisfied that the firm was prevented by sufficient cause from furnishing the declaration within the time so allowed, he may allow the firm to furnish the declaration at any time before the assessment is made.
What the ITO has to see before registration is continued, is whether there was a change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership. This presupposes the existence of an instrument of partnership and when a partnership is ab initio void there cannot be an instrument of partnership. Such, however, is not the case here. There is a valid instrument of partnership dated 1-4-1972. This instrument of partnership does not cease to be valid because shares in losses were not specified in the instrument itself. The firm was granted registration right from the assessment year 1972-73 onwards. There has been no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which registration was originally granted. That being the case, the declaration in Form No. 12 having been filed within the prescribed time, all the requirements of Section 184(7) in the present case were satisfied and it was not open to the ITO to decline to grant continuation of registration. Therefore, we hold that the ITO acted in excess of his powers under Section 184(7) in declining to grant continuation of the registration to the assessee-firm because registration stood allowed to it already from the assessment year 1972-73 onwards till 1979-80.
14. The result is that the appeals of the revenue in IT Appeal Nos. 605 and 607 (Coch.) of 1982 stand dismissed.
15 to 19. [These paras are not reproduced here as they involve minor issues.]