Verma, C.J. - (1.) THIS is a reference under Section 256(1) of the Income-tax Act, 1961 ("the Act"), at the instance of the assessee for the decision by this court of the following questions of law, namely : "1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee-firm was not entitled to registration for the assessment year 1972-73 and continuation of registration for the assessment year 1973-74 due to non-specification of shares in losses in the partnership deed dated October 30, 1971?
(2.) WHETHER, on the facts and in the circumstances of the case, the Tribunal was justified in holding that shares in losses were not specified in the partnership deed dated October 30, 1971 ?" This reference initially came up for hearing before a Division Bench when it was indicated at the hearing that a Division Bench decision of this court in Raj Construction Co. v. Addl. CIT [1986] 157 ITR 734, does not appear to be in consonance with the Supreme Court decision in Mandyala Govindu & Co. v. CIT [1976] 102 ITR 1. For this reason, the Division Bench referred the matter for decision by a larger Bench. This is how the reference has come up before us for decision of the above questions of law. The material facts are these : The relevant assessment years are 1972-73 and 1973-74. For the assessment year 1972-73, the assessee applied for registration as a firm on the basis of a partnership deed dated October 30, 1971. It also applied for continuation of registration of the firm for the next assessment year 1973-74 on the same basis. The Income-tax Officer passed an order under Section 185(1)(a) of the Act on December 12, 1973, granting the assessee-firm registration for the assessment year 1972-73. For the assessment year 1973-74, the Income-tax Officer continued the registration by order dated March 18, 1975, treating the firm as genuine. The Commissioner, on a perusal of the record on the basis of which the Income-tax Officer had granted and continued registration to the assessee-firm for these years, came to the conclusion that the orders of the Income-tax Officer were erroneous and prejudical to the interests of the Revenue. Accordingly, the Commissioner issued a notice under Section 263 of the Act to show cause why the registration granted by the Income-tax Officer should not be cancelled, inasmuch as the partnership deed dated October 30, 1971, on the basis of which registration was claimed did not specify the shares of the partners in the losses of the firm. It may be mentioned here that the partnership evidenced by the deed dated October 30, 1971, comprised of four adult partners, namely, Nevandram, Dhanomal, Kishanchand and Choithram, and Sunderdas, a minor son of Dhanomal, was admitted to the benefits of the partnership on the death of Smt. Isari Bai, a deceased partner. The Commissioner took the view that specification of the shares in the profits as well as the losses was an essential requirement for grant of registration to a firm and since the partnership deed did not specify the ratio in which the losses were to be shared by the adult partners only, the order of the Income-tax Officer granting registration to the firm was erroneous and, therefore, prejudicial to the interests of the Revenue. Accordingly, the Commissioner by his order dated December 10, 1975, cancelled these orders of the Income-tax Officer and directed him to make the assessment in the status of an unregistered firm. The assessee preferred an appeal to the Tribunal which failed. The Tribunal affirmed the view taken by the Commissioner and upheld the cancellation of registration of the assessee as a firm for the assessment year 1972-73 and continuation of registration for the assessment year 1973-74. The Tribunal took this view following the Supreme Court decision in Mandyala Govindu & Co.'s case [1976] 102 ITR 1. Aggrieved by the decision of the Tribunal, the assessee applied under Section 256(1) for a reference of the above questions of law to this court for its decision. The Tribunal has accordingly referred these questions which arise out of the Tribunal's order.
(3.) THE real question for our decision is whether the Supreme Court decision in Mandyala Govindu & Co.'s case [1976] 102 ITR 1 concludes the point for decision before us. THE point is whether the non-specification of shares in the losses of the firm in the instrument of partnership justifies refusal of registration of the firm under Section 185. Admittedly, the partnership of the assessee-firm is evidenced in the present case by the partnership deed dated October 30, 1971, on the basis of which the assessee-firm claimed registration under Section 185. THE partnership deed shows that it is comprised of four adult partners, namely, Nevandram, Dhanomal, Kishanchand and Choithram and a minor, Sunderdas, has been admitted only to the benefits of the partnership. Choithram and a minor, Sunderdas, are the sons of Dhanomal, while Nevandram is the brother of Dhanomal. THE shares are indicated in the deed as 25 paise each of Nevandram, Dhanomal and Kishanchand ; 15 paise for Choithram and remaining 10 paise for minor, Sunderdas. THEse are shares obviously in the profits of the firm, even though the word "profit" is not expressly mentioned. This is obvious from the fact that the minor has been expressly admitted only to the benefits of the partnership and even otherwise the minor could not be made liable for the losses. THEre is nothing else in the partnership deed relating to the shares of the partners and there is no mention of the losses and the manner in which they were to be shared by the adult partners. In other words, the partnership deed is totally silent about the sharing of losses and there is nothing to indicate that it was even considered, much less decided while entering into partnership and drawing up the partnership deed to evidence the contract of partnership. THE question arising for decision has, therefore, to be decided on these facts. Having heard both sides at considerable length, we have reached the inescapable conclusion that the real point for our decision is concluded by the decision of the Supreme Court in Mandyala Govindu & Co.'s case [1976] 102 ITR 1. In that case, there were three adult partners and a minor was admitted to the benefits of the partnership. The shares of the three adult partners were 31 per cent., 23 per cent. and 23 per cent., respectively, while that of the minor was the remaining 23 per cent. The partnership deed in that case after mentioning these shares added that the profits of the partnership business were to be shared as specified. There was no mention in the instrument of partnership of the proportion in which the three adult partners were to share the losses, if any. The question for decision before the Supreme Court was whether, on these facts, the firm was entitled to registration under Section 26A of the Indian Income-tax Act, 1922 ("the 1922 Act") (corresponding to Section 185 of the 1961 Act). The Supreme Court noticed the conflicting views on the point of the several High Courts and without going into that controversy came to the conclusion that, on these facts, the firm was not entitled to be granted registration. In our opinion, the ratio of the Supreme Court decision is contained in the following extract of the decision, namely (pp. 5 and 7): "It is not, and it cannot be, disputed that the Income-tax Officer before allowing the application for registration must be in a position to ascertain the shares of the partners in the losses even if Section 26A did not require the shares in the losses to be specified in the instrument of partnership... The other rule that where the shares in the profits are unequal, the losses must be shared in the same proportion as the profits if there is no agreement as to how the losses are to be apportioned, does not also apply to this case. In this case, even if the adult partners bear the losses in proportion to their respective shares in the profits, the amount of loss in the minor's share would still remain undistributed. Will the partners between them bear this loss equally, or to the extent of their own individual shares ? To this, the instrument of partnership does not even suggest an answer. There is, therefore, no means of ascertaining in this case how the losses are to be apportioned." The Supreme Court clearly held that where a minor has been admitted to the benefits of the partnership, it must be clearly indicated in the instrument of partnership evidencing the contract as to the manner in which the losses, if any, have to be shared by the adult partners or, in other words, the proportion in which the amount of loss falling to the minor's share has to be distributed. Unless the instrument of partnership indicates this fact either expressly or by necessary implication, there is nothing to show the proportion in which the losses are to be shared, since the shares in the profits are no indication for the obvious reason that the minor's share is only in the profits. The significance is for the obvious reason that for determining the genuineness of the firm, it is necessary to know the proportion in which losses, if any, are to be shared by the adult partners, who alone are liable for the losses. This is a strong circumstance for deciding the genuineness of the firm and in the absence of any term in the contract of partnership providing for the sharing of losses by the adult partners, it is reasonable to infer that the partnership is not genuine. This decision is also significant to indicate that in the absence of any specific mention in the instrument of partnership of the proportion in which losses, if any, were to be shared by the adult partners, the Supreme Court-held that it was not permissible to draw any inference to that effect from the term providing for sharing of profits by the adult partners and the minor admitted to the benefits of the partnership. Our reading of the Supreme Court decision leads us to this irresistible conclusion. ;