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Income‑tax Referred Case No. 28 of 1967, decided 17th October 1968.

Firm‑Registration of‑Partnership deed specifying only share of partners in profit but not in loss ‑ Refusal of registration ‑ Whether proper ‑ Indian Income‑tax Act, 1922, S. 26‑A.

It is not proper for the Income‑tax Officer to refuse registra tion under section 26‑A of the Indian Income‑tax Act, 1922, of an instrument of partnership on the ground that, though the instrument of partnership specifies the individual shares of the partners in the profits, it does not specify the shares in the losses.

R. Sannappa & Sons v. Commissioner of Income‑tax (1967) 66 I T R 27 fol.

K. Srinivasan for the Assessee.

S. R. Rajasekhara Murthy for G. R. Ethirajulu Naidu for the Commissioner.

This is a reference under section 66(1) of the Indian Income‑tax Act, 1922, sought by the assessee which is a firm in Hubli. There were four partners in the firm and in the opinion of the Tribunal, the instrument of partnership, on its interpretation, specified only the shares of the partners in the profit and not their shares in the losses. So, it reversed the order made by the Appellate Assistant Commissioner and restored that made by the Income‑tax Officer who refused registration under section 26‑A of the Act. The two questions of law referred to us read:

"(1) Whether for obtaining registration under the provisions of the Income‑tax Act, 1922, it is necessary for a firm to specify the shares of the partners in losses also in the instrument of partnership, besides specifying the shares of profits

(2) Whether, on a reasonable interpretation of clauses 3 and 7 of the instrument of partnership under which the assessee firm was constituted, could it be said that the shares of the partners in losses have not been specified in the deed disentitling it from getting registration under the Income‑tax Act "

If the first question is answered in favour of the assessee, as in our opinion it should be, the answer to the second question becomes unnecessary. Our answer to the question should be in favour of the assessee since the enunciation made by this Court in Sannappa v. Commissioner of Income‑tax ((1967) 66 I T R 27) makes it clear that refusal of registration under section 26‑A is not possible in a case where the instrument of partnership specifies the individual shares of the partners although it does not specify the shares in the losses. The elucidation made in that decision was that if an instrument of partnership specifies the individual shares of the partners in the partnership profits, without more, it should follow that the losses, if any, in the partnership should also be shared in the same proportion in which the profits are to be shared by them in the absence of a contract to the contrary.

That being so, it was not possible for the Income‑tax Officer to refuse registration in the present case and the Appellate Tribunal was in error in restoring the order made by him. Our answer, therefore, to the first question referred to us is in favour of the assessee and that answer is that it is not necessary that an instrument of partnership should specify the shares of the partners in losses also in order to enable the firm to secure registration under the provisions of the Income‑tax Act, 1922. It is not necessary to answer the second question and we, therefore, do not answer it.

The assessee will get his costs. Advocate's fee Rs. 250.

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