Bhatnagar, J. -
(1.)THE Income-tax Appellate Tribunal, Jaipur Bench, at the instance of the assessee, M/s. Raj Construction Co., Mount Abu, has made this reference to this court under Section 256(1) of the Income-tax tax Act, 1961, for the opinion of this court on the following question of law :
"Whether, on the facts and in the circumstances of the case and on a proper construction of the partnership deed dated January 27, 1966, and application in Form No. 11, the Tribunal was correct in law in refusing grant of registration under Section 185 of the Income-tax Act, 1961, to the assessee-firm ?"
(2.)THE assessee is a firm styled as "M/s. Raj Construction Co.", Mount Abu. THE assessment year in question is 1967-68. THE assessee-firm was constituted of three partners, viz., Munshilal, Laxmi Chand and Babu Bhai, under a partnership deed to this effect executed on January 27, 1966. THE firm filed an application in Form No. 11 for the aforesaid assessment year for registration under Section 184 of the Income-tax Act (hereinafter to be referred as "the Act"). THE Income-tax Officer (for short "the ITO") was of the view that the shares of the losses of the partners were not specified in the deed and, as such, the firm could not be granted registration. He, therefore, rejected the application under Section 185 of the Act, vide order dated January 18, 1972, annexure B. THE assessee-firm filed an appeal before the Appellate Assistant Commissioner (for short "the AAC"), who justified the order of refusal of registration of the firm under Section 185 of the Act passed by the Income-tax Officer and dismissed the appeal. THE assessee-firm then preferred an appeal before the Income-tax Appellate Tribunal, Jaipur Bench (for short "the Tribunal"). THE Tribunal affirmed the findings of the Appellate Assistant Commissioner and dismissed the appeal. THE assessee-firm filed an application under Section 256(1) of the Act for stating the case and making a reference on the questions of law as to whether the Tribunal was justified in holding that the shares were not properly specified as required under Section 184 of the 1961 Act and for that reason no registration could be granted to the assessee-firm. THE application was allowed and the Tribunal submitted the statement of the case and referred the aforesaid question of law to this court for its opinion.
Annexure A is the deed of partnership. In Clause 6, the shares in the profits of the partners have been specified. One of the partners, viz., Babubhai Popatlal Shah, was a minor. In Clause 7, it has been provided that in case of any loss to the firm, the partners named Shri Munshilal Ganpatram and Shri Lakshminchand Johrilal, will share the total loss. In the Schedule of Form No. 11, the application for registration, the ratio of 50 : 50 to be borne by Laxmi Chand and Munshilal was, however, mentioned.
The first point of law involved in the matter is whether it is the requirement of law that the shares of the partners in profits as well as losses should be specified in the instrument of partnership. The relevant provision of Section 184 of the 1961 Act read as under :
"184. Application for registration.--(1) An application for registration of a firm for the purposes of this Act may be made to the Income-tax Officer on behalf of any firm, if-
(i) the partnership is evidenced by an instrument; and
(ii) the individual shares of the partners are specified in that instrument."
This second requirement, i.e., the individual shares of the partners to be specified in the partnership instrument has been a matter of controversy for a long period. There were divergent opinions of the various High Courts on the point as to whether the term "individual shares of partners" was confined to the shares in profits of the partners or included the shares in losses also.
In the case of Mitter & Sons v. CIT  36 ITR 194, their Lordships of the Supreme Court enumerated the essential conditions to be specified for entitling a firm for registration under Section 26A of the 1922 Act as under (at p. 198):
"(1) That the firm should be constituted under an instrument of partnership, specifying the individual shares of the partners.
(2) That an application on behalf of, and signed by, all the partners, containing all the particulars as set out in the Rules, has been made.
(3) That the application has been made before the assessment of the income of the firm, made under Section 23 of the Act... ...for that particular year.
(4) That the profits (or loss, if any) of the business relating to the previous year, that is to say, the relevant accounting year, should have been divided or credited, as the case may be, in accordance with the terms of the instrument, and lastly,
(5) That the partnership must have been genuine, and must actually have existed in conformity with the terms and conditions of the instrument."
(3.)IN the case of Sannappa and Sons v. CIT  66 ITR 27 (Mys), the deed of partnership provided only for sharing of profits after setting aside a portion for reserves but was silent as to the manner of distribution of losses among the partners. Registration was refused. On a reference to the High Court, it was held that Section 26A contemplates only specification of individual shares of partners and in the absence of a contract to the contrary, losses should be shared by the partners in the same proportion in which they share the profits. The firm was held to be entitled to registration.
The principle was followed in the case of R.B. Angadi and Sons v. CIT  73 ITR 93 (Mys) and it was held that it cannot be said to be proper for the Income-tax Officer to refuse registration under Section 26A of the 1922 Act 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.
Similar was the view expressed in the case of Hiralal Jagannath Prasad v. CIT  66 ITR 293 (All) and it was held that the omission to specify in a partnership deed the shares of the partners in the losses will not make the deed invalid so as to prevent the firm from being registered under Section 26A of the Act.