- (1.) THIS is a case stated under section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act). The question referred is: "Whether, on the facts and in the circumstances of the case, the firm was entitled to renewal of registration under section 26A for the assessment year 1959-60?"
(2.) THE material facts are these: The assessee, Messrs. Hiralal Jagannath Prasad of Banaras, a Hindu undivided family concern, was carrying on business at Banaras, inter alias, in kirana and money-lending. A partial partition quo the aforesaid business was effected on the 17th of July, 1948, and, on the following day, namely, 18th July, 1948, the members of the erstwhile Hindu undivided family formed themselves into a partnership for the purpose of carrying on the aforesaid business. An instrument of partnership was duly drawn up on 31st July, 1948, which was made operative from 18th July, 1948. According to the deed of partnership, which was in Hindi, and an English translation whereof was annexed as annexure "A" to the statement of the case, the firm consisted of six major partners. The opening paragraphs of the deed mentions that the partnership deed is between the aforesaid six parties. The first party is Hiralal. It is his son, Ram Prasad, who was admitted to the benefit of the partnership. The minor is not mentioned as one of the parties to the partnership deed. It is only in clause 3 of the deed that Ram Prasad in mentioned. That clause reads: "3. That in the partnership business the share of the first party shall be 1/7th and in the same way the share of each the other partners shall be 1/7th and each party shall be entitled to get the profits and be liable to bear the losses according to his share and the parties have admitted Ram Prasad, minor son of Hiralal Sahu, the first party, to the benefit of partnership according to section 30 of the Indian Partnership Act and he also will get 1/7th share in the profits of the firm." Clauses 7 and 9 of the deed run: "7. That on the date when the parties commenced partnership business the capital of the parties in it was as given below and twelve thousand two hundred and thirty eight, six annas, one and held pies, belonging to the minor was also invested. It will be the duty of the partners to increase the capital so far as possible so that the partnership business may go on progressing and at all events no party will be entitled to withdraw any sum from the capital of the firm without the consent of the other partners. Rs. As. Ps. 1. Hiralal Sahu, first party 12,238-6-3 2. Jagannath Prasad, second party 12,238-6-1 1/2 3. Ram Dass, third party 12,238-6-1 1/2 4. Bhagwan Das, fourth party 12,238-6-1 1/2 5. Gopal Dass, fifth party 12,238-6-1 1/2 6. Shiva Prasad, sixth party 12,238-6-1 1/2 9. That if any partner dies this partnership firm will not be dissolved but instead of the deceased partner his heirs will join the firm as partnership under section 30 of the Indian Partnership Act and the share of those heirs will be fixed out of the share of the deceased partner according to their shares."
(3.) THE firm constituted under the said instrument of partnership was being registered from the assessment year 1950-51 up to the assessment year 1958-59. In other words, the firm was considered to be genuine in all respects and the provisions of section 26A were complied with. For the relevant assessment year 1959-60, for which the previous year was Asarh Sudi 12, Sambat 2015, the assessee field an application for renewal of registration under rule 6 of the Indian Income-tax Rules, 1922. This application was signed by seven persons including the aforesaid Ram Prasad, who had attained majority on the 6th May, 1958, which fell during the relevant accounting period. A fresh instrument of partnership dated 5th June, 1958, was also drafted but that concerns the next assessment year and will not govern the proceedings for the registration or renewal of registration for the relevant assessment year. The Income-tax Officer rejected the application for the reason that the partnership deed does not specify the allocation of the remaining 1/7th share of the loss since there was specific agreement that six major partners shall each be liable to the extent of 1/7th share of the losses. "Thus the liability of the major six partners of the firm was to extent of 6/7the of the losses only. If the partners had not made specific agreement regarding the sharing of losses, the alternative plea of the assessee could have been that the total losses of the firm will be shared by the major partners of the firm in the same proportion in which they were sharing the profits. But since there is a positive agreement that each major partner is liable to 1/7th of the loss only, the share of loss to the extent of remaining 1/7th remains unspecified. At any stage and, in the eventuality of there being loss in the firm in any year, any partner can disown the loss over and above the extent which is covered by 1/7th falling to his share according to the specific agreement in clause 3 of the said instrument of partnership". The registration was accordingly refused. The Appellate Assistant Commissioner confirmed the order of refusal. The Tribunal did likewise, holding that the registration was intended to confer benefits upon the partners and the conditions for obtaining such benefits required to be strictly complied with, and as there was no provision specifying as to who would bear the 1/7th share of the loss, the partnership deed cannot be said to comply with the conditions under section 26A which requires the instrument of partnership to specify the shares of each partner. Hence, this reference at the instance of the assessee.;