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Petitioner: KERALA PUBLICITY BUREAU VS Respondent: COMMISSIONER OF INCOME TAX , 586
Court Name: Kerala High Court Judge(s): M. Jagannadha Rao, K. S. Paripoornan, K. K. Usha Title: KERALA PUBLICITY BUREAU vs COMMISSIONER OF INCOME TAX , 586 Case No.:Income Tax References Nos. 49 of 1982, 586 of 1985, 4 and 40 of 1986 and 10
JUDGMENT
Reported As: 1993 PTD 1019 Result: Question answered Judgment JUDGMENT ' MRS. K.K. USHA, J.---Income Tax Reference No, 49 of 1982 and I.T.Rs, Nos. 10 and 11 of 1987, are coming up for consideration of the Full Bench in view of separate orders of reference by two Benches of this Court. The issue involved in the above cases relates to the question of registration of firms under the Kerala Agricultural Income Tax Act, 1950, and the Income Tax Act, 1961. The provisions regarding registration of firms under the above-mentioned statutes and the rules issued thereunder are substantially similar. While I.T.R. No,49 of 1982 relates to a reference under section 60(2) of the Kerala Agricultural Income Tax Act, 1950, ITRs, Nos.10 and 11 of 1987 relate to a reference under section 256(1) of the Income Tax Act, 1961. ' The detailed reference order is in ITR No, 49 of 1982. The learned Judges of the Bench doubted whether an earlier Bench decision of this Court in CIT v. Ithappiri and George (1973) 88 ITR 332 and the decisions following the same, taking the view that the individual shares of partners in losses also should be specified in the partnership deed, to enable registration under section 184 of the Income Tax Act, would apply even in cases where minors are not admitted to the benefits of partnership and there are indications to show that the partners are to share equally. It was also felt that the matter requires reconsideration in the light of later decisions of the Supreme Court in Mandyala Govindu & Co. v. CIT (1976) 102 ITR 1, and the Full Bench decision of the Andhra Pradesh High Court in CIT v. Krishna Mining Co. (1980) 122 ITR 362. We make it clear that we are not concerned in this case as to what will happen if in a particular case, minors are admitted to the benefits of partnership and the individual losses of the partners are not specified in the partnership deed. We leave that aspect open.
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' Relevant facts.---Income Tax Reference No,49 of 1982 is at the instance of an assessee under the Kerala Agricultural Income Tax Act, 1950, which is a firm constituted by an instrument of partnership dated January 6, 1959. Registration was granted to the firm under section 27 of the Kerala Agricultural Income Tax Act read with rule 2 of the. Kerala Agricultural Income Tax Rules, 1951, and it was being assessed as a registered firm. For the assessment years 1961-62, 1962-63 and 1963-64, even though the Commissioner of Agricultural Income-tax initiated proceedings to cancel the registration for the reason that there was no stipulation of individual shares of the partners in the partnership deed, it was finally dropped on being convinced that there were materials available to show that the partners had equal shares. Up to the year 1965-66, assessments were completed assigning the status of a registered firm. Renewal of registration had been granted even for the subsequent years up to 1975-76 and assessments were completed on that basis. For the year 1965-66, proceedings were again initiated to cancel the renewal of registration already granted and by an order, dated April 20, 1981, the Deputy Commissioner of Agricultural Income-tax took the view that the firm was not entitled to registration since the individual shares of the partners were not specified in the deed. The above order is the subject-matter of ITR No, 586 of 1985. ' The Commissioner of Agricultural Income-tax issued notice, dated May 2, 1980, proposing to withdraw the renewal of registration granted for the years 1960-70 to 1975-76, on the allegation that the individual shares of the partners were not specified in the deed of partnership, dated January 6, 1959, and, therefore, the instrument of partnership would not conform to the requirements envisaged under section 27 of the Agricultural Income-tax Act. While objecting to the above proposal, the assessee contended that the individual shares of the partners of the firm were clearly specified in the partnership deed, dated January 6, 1959, and that the above question was considered in detail by the Commissioner of Agricultural Income-tax, Thiruvananthapuram, in his order, dated March 3, 1969, and it was held that the instrument of partnership specified the individual shares of the partners. The assessee placed strong reliance on the decisions of the Supreme Court in Kylasa Sarabhaiah v. CIT (1965) 56 ITR 219 and Parekh Wadilal Jivanbhai v. CIT (1967) 63 ITR 485. It was contended that the clause relating to division among the partners in the partnership deed dated January 6, 1959, stipulated that the net profit shall be divided among the partners and the division was to be made in equal shares. It was also submitted that the books of account would reflect division in the above manner. Reliance was placed on the provisions contained in section 13(b) of the Indian Partnership Act, 1932. It was contended by the assessee that, in the absence of a different profit sharing ratio stipulated in the partnership deed, the partners shall share the profit/loss equally. ' Rejecting the objections raised by the assessee, the Commissioner of Agricultural Income-tax held in his order, dated August 6, 1981, that the order passed in the revision petitions for the years 1961- 62, 1962-63 and 1963-64 was not binding for the other assessment years, that there was no mention regarding the capital allotted to each partner though there is a stipulation' that the net profit should be divided among the partners and that as specification of shares in the partnership deed is a condition precedent to granting registration and for allowing the application for renewal of registration, the registration and renewal granted to the assesee were wrong. It was further held that the facts of the cases relied on by the assessee were entirely different and, therefore, those decisions were of no help to the assessee, that in order to ascertain the shares of the partners, it was not open to refer to extraneous evidence, that the provisions in section 13 of the Partnership Act would apply only to profit and loss, and not to capital and, therefore, the defect of failure to refer to the share capital in the deed cannot be rectified. By taking recourse to the decisions of the Supreme Court in R.C. Miller & Sons v. CIT (1959) 36 ITR 194; AIR 1959 SC 868 and N.T. Patel & Co. v. CIT (1961) 42 ITR 224; AIR 1961 SC 1356, it was held that non-specification of the shares of the partners in the firm disqualified it for registration under section 27 of the Agricultural Income-tax
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Act. The renewal of registration granted for the year 1975-76 was withdrawn and the assessing authority was directed to modify the assessment order assigning to the assessee the status of an unregistered firm. Similar view was taken by the Deputy Commissioner of Agricultural Income-tax and Sales Tax for the assessm ent years 1969-70 to 1974-75 under proceedings dated July 20, 1981, which is the subject-matter of ITR No,4 of 1986. ' At the instance of the assessee, in ITR No, 49 of 1982, which relates to the assessment year 1975-76, the following question is referred: "On the facts and in the circumstances of the case, whether the Commissioner of Agricultural Income-tax is justified in holding that the firm was not entitled to registration or renewal of registration under section 27 of the Agricultural Income-tax Act, 1950?" ' The assessee had filed Original Petition No, 1453 of 1982-B before this Court for compelling the Commissioner of Agricultural Income-tax to refer all the three questions sought to be referred by the assessee for the year 1975-76. Pursuant to the judgment of this Court in the above original petition, dated March 8, 1985, the Commissioner of Agricultural Income-tax referred all the three questions in ITR No,40 of 1986. Question No,1 in ITR No,40 of 1986 is the same as the sole question referred in ITR No,49 of 1982. In ITR No,586 of 1985 relating to the assessment year 1965-66 and in ITR No,4 of 1986 relating to the assessm ent years 1969-70 to 1974-75, all the three questions referred in ITR No,40 of 1986 are referred. Since the reference order of Bench covers only one question, namely, the sole question referred in ITR No,49 of 1982 which is the same as question No,1 in the other ITRs, it is only that question which is being considered in this judgment. ' Income-tax References Nos. 10 and 11 of 1987 are at the instance of an assessee under the Income-tax Act, 1961. They relate to the assessment years 1978-79 and 1979-80. The assessee-firm consisting of two partners was formed under a partnership deed, dated February 28, 1977, with effect from January 1, 1977, in the name and style "Kerala Publicity Bureau". While the head office of the partnership was at Ernakulam, it had a branch office at Kottayam. ' Clause 10 of the instrument of partnership provided that the net profit of the firm, after usual business outgoings, shall be shared by the two partners. The whole of the profit of the Ernakulam office was set apart to the share of Sri Kuriakose, one of the partners and the whole of the profit of Kottayam branch to the share of the other partners, Sri Philipose. It is the above partnership deed which is relevant for the assessm ent year 1978-79. Later, the two partners executed a fresh partnership deed, dated November 20, 1978, which was to take effect from January 1, 1978. The above partnership deed which is relevant for the assessment year 1979-80 refers to a branch office at Calicut and provision for opening branches at other places. Clause 11 of the deed provided for the manner in which profits were to be shared by the partners. While Sri Kuriakose was entitled to the whole of the profit of the Ernakulam office and Sri Philipose to the profit from the Kottayam office, it was further provided that profit/loss of any branch or branches of the firm situate outside Ernakulam and Kottayam shall be shared by Sri Kuriakose and Sri Philipose in the ratio of 55 per cent. And 45 per cent., respectively. ' The assessee was directed to show cause why registration should not be refused in the absence of specific mention in the partnership deed of profit and loss to be apportioned among the partners. It was contended on behalf of the assessee for the year 1978-79 that their intention at the time of forming the partnership was to share the profit by allotting 100 per cent. Profit of the Erankulam office to Sri Kuriakose, 100 per cent. Profit of the Kottayam office to Sri Phillipose and to share the loss on the same basis. Two affidavits signed by the partners were also submited to the above effect. For the assessm ent year 1979-80, the objection raised was that the partnership deed, dated November 20, 1978, did not specify as to how the losses are to be absorbed in respect of the business done at the Ernakulam and Kottayam offices. The Income Tax Officer passed orders dated July 23, 1980; and February 6, 1982, under section 185(1)(b) of the Income Tax Act refusing
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registration to the firm under section 184 of the Income Tax Act, 1961. The finding of the Income Tax Officer was affirmed by the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal. The Tribunal, following the decisions of this Court in United Hardwares v. CIT (1974) 96 ITR 348, CIT v. Ithappiri and George (1973) 88 ITR 332 and CIT v. Best Automobiles (1979) 117 ITR 877, took the view that, in order to be eligible for registration under section 184 of the Income-tax Act, there must be specification of shares in the loss as well in the instrument of partnership and on this view it was held that the assessee was not entitled to registration. At the instance of the assessee, the following question is referred in ITRs, Nos. 10 and 11 of 1987:-- "Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the assessee-firm is not entitled to registration?" ' The relevant provision regarding the registration of a firm under the Kerala Agricultural Income Tax Act, 1950, reads as follows: "Section 27. Procedure in registration of firms.---(1) Application may be made to the Agricultural Income Tax Officer on behalf of any firm constituted under an instrument of partnership specifying the individual shares of the partners, for registration for the purpose of this Act and of any other enactment for the time being in force relating to agricultural income-tax or super-tax. (2) The application shall be made by such person or persons and at such times and shall contain such particulars and shall be in such form, and be verified in such manner, as may be prescribed; and it shall be dealt with by the Agricultural Income-tax Officer in such manner as may be prescribed." ' Detailed provisions are made under rule 2 to rule 6 of the Kerala Agricultural Income-tax Rules, 1951, regarding the form and the manner in which the application for registration has to be made. ' As far as registration under the Income Tax Act, 1961, is concerned, detailed provisions are made under sections 184 and 185. The relevant portions of section 184 for the purpose of this case reads as follows: "184. Application for registration.----(1) An application for registration of a firm for the purposes of this Act may be made to the Assessing Officer on behalf of any firm, if--- the partnership is evidenced by an instrument; and the individual shares of the partners are specified in that instrument." The relevant portion of section 185 reads as follows: 185. Procedure on receipt of application,---(1) On receipt of an application for the registration of a firm, the Assessing Officer shall inquire into the genuineness of the firm and its constitution as specified in the instrument of partnership, and--- (a) if he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified, he shall pass an order in writing registering the firm for the assessm ent year; (b) if he is not so satisfied, he shall pass an order in writing refusing to register the firm." ' The definition of "partnership" under section 4 of the Partnership Act is as follows: `Partnership' is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all." ' Section 13(b) of the Partnership Act reads as follows: "13. Mutual rights and liabilities.---Subject to contract between the partners--... (b) the partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm;" ' Arguments were addressed by learned counsel, Sri Jose Joseph, on behalf of the applicant in ITR No,49 of 1982 and by learned counsel, Sri Premjith Nagendran, on behalf of the applicant in ITRs, Nos. 586 of 1985, 4 of 1986 and 40 of 1986 and Sri T. Karunakaran Nambiar, learned Sepcial Government Pleader (Taxes) representing the respondents. In ITRs, Nos. 10 and 11 of 1987, learned
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counsel, Sri P. Raman, appeared on behalf of the applicant, and standing counsel, Government of India (Taxes), Sri P.K.R. Menon, represented the respondents. ' The main contention raised on behalf of the applicants is that specification of the individual shares of the partners required under section 27 of the Agricultural Income Tax Act, 1950, and section 184 of the Income Tax Act, 1961, does not contemplate expressly setting out in fractional or other shares. If there is no provision in the partnership deed indicating a contra-intention, it should be taken that the partners are entitled to share the profits equally by applying the provisions contained under section 13 of the Partnership Act. It is also to be presumed that the partners are to bear the losses in proportion to the share of their profits. A further submission is that, for the purpose of ascertaining the individual shares of the partners, it is competent to refer to and rely on materials other than the recitals in the deed such as the accounts of the partnership and other connected documents. ' It is contended on behalf of the applicants in ITRs, Nos. 49 of 1982, 586 of 1985, 4 of 1986 and 40 of 1986, that specification of the individual shares of the partners in the capital is not a requirement at all under section 27 of the Kerala Agricultural Income-tax Act, 1950. Therefore, the view taken by the Commissioner that the firm is not entitled to registration in the absence of specification of the individual shares of the partners in the capital is erroneous. The relevant portions of the partnership deed to be construed in ITR No,49 of 1982 and connected cases read as follows: "Para. 1. Whereas we felt that it is essential to make an agreement containing future -administration and procedures regarding the property called Padannaparambu the boundaries and measurements of which are described in the schedule below, which was jointly obtained by utilising the funds of each of us and possessed by us with the entire rights such as Ottikkanam for Rs,31,000, Kuzhikkanam interest on mortgage amount, simple Kanam, etc., thereon fro Kunnummal Appa Nair, Azhikode Amsom and Desom as per the registered deed No, 1449 of the Sub Registry, Valapattanam, o August 26, 1953; and, therefore, this agreement happened to b executed. ' Para. 6. It is also hereby decided that an account of the net incom after deducting the entire expenses for supervising and collection o proceeds, cost of maintenance, tax payment, etc., should be prepare on March 31, in the respective year and rendered to the remainin shareholders before April 30, and assign the shares of each person, the account or to disburse to each sharer the amount due to him the and there and obtain receipts thereof." ' The above would show that the partners had jointly acquired th property under a registered deed No, 1449 of 1953, dated August 26, 195 Reference is made to the above document in the proceedings of th Commissioner of Agricultural Income-tax, dated March 3, 1969 (Exhibit A-6 while finding that the registration granted to the firm for the assessment yea 1961-62, 1962-63 and 1963- 64 were in order. It was pointed out on behalf of applicants that the, abovementioned sale-deed and the accounts of M/s. Rajeswa ri Weaving Mills, Azheekode, where the partners had shares would show that they had contributed equally towards the purchase price of the property. It was based on the above material and an affidavit filed by the advocate on behalf of the firm regarding the payment of balance consideration in equal shares of the partners, that the Commissioner of Agricultural Income-tax came to the conclusion in Exh. A-6 that the shares of the partners were equal. It is, therefore, contended that there is no justification for taking a different view for the subsequent years. The applicants submit that there is nothing in the recitals in the partnership deed, the relevant portion of which is quoted above, which would go to show that the partners are not entitled to share equally. No minor is admitted to the benefits of the partnership. Therefore, according to the applicants, it is a case where the presumtion under section 13(b) of the
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Partnership Act can be drawn in their favour and they should be treated as sharing the profits earned equally and contributing equally to the losses sustained by the firm. ' Reliance was placed by the applicants in support of their contention on the decisions of the Supreme Court in Kylasa Sarabhaiah v. CIT (1965) 56 ITR 219, Parekh Wadilal Jivanbhai v. CIT (1967) 63 ITR 485, CIT v. Bayyalakshmi & Co. (1965) 55 ITR 660 and Mandyala Govindu & Co. v. CIT (1976) 102 ITR 1. They also relied on a decision of this Court in T.V. Mathew & Sons v. Commr. Of Agrl. I.T. (1977) 108 ITR 47 and the decisions of the Andhra Pradesh High Court in Addepally Nageswara Rao and Bros. v. CIT (1971) 79 ITR 306, CIT v. Hyderabad Stone Depot (1977) 109 ITR 686 (FB) and CIT v. Krishna Mining Co. (1980) 122 ITR 362 (FB). Learned counsel appearing on behalf of the applicants sought to distinguish the decision in N.T. Patel & Co. v. CIT(1961) 42 ITR 224 (SC) and R.C. Mitter & Sons v. CIT (1959) 36 ITR 194; AIR 1959 SC 868, relied on by the Commissioner of Agricultural Income- tax for the reason that the facts of these cases are entirely different from those of the present case. ' Learned counsel appearing on behalf of the applicants in I.T.Rs, Nos.10 and 11 of 1987, also put forward similar contentions and relied on the same decisions in support of his contention. The relevant portion of the partnership deed, dated February 28, 1977 (Annexure C-1), to be considered for the assessm ent year 1978-79 reads as follows:-- "4. The head office of this firm shall be at Ernakulam and branch office at Kottayam and this firm may open any branches at any other place or places as may be decided upon by the partners from time to time. 9. The initial capital of the firm shall be a sum of Rs,1,25,000 (Rupees one lakh twenty-five thousand only), Rs,65,000 (Rupees sixty-five thousand only) contributed by Sri T.O. Kuriakose, party of the first part and Rs,60,000 (Rupees sixty thousand only) contributed by Sri T.O. Philipose, party of the second part. 10. The net profit of the firm after the usual business outgoings shall be shared by the partners as follows: (a) Sri T.O. Kuriakose, party of the first part shall be entitled for the whole of the profits of Ernakulam office. (b) Sri T.O. Philipose, party of the second part shall be entitled for the whole of the profits of Kottayam office." ' The relevant portion of the partnership deed, dated November 20, 1978 (Annexure C-2), to be considered in the assessm ent year 1979-80, reads as follows: "4. The head office of this firm shall be at Emakulam and branch offices at Kottayam and Calicut and this firm may open any branch or branches at any other place as may be decided upon by the partners from time to time. 10. The initial capital of the firm shall be a sum of Rs,1,25,000 (Rupees one lakh twenty-five thousand only). Rs,65,000 (Rupees sixty-five thousand only) contributed by Sri T.O. Kuriakose, party of the first part and Rs,60,000 (Rupees sixty thousand only) contributed by Sri T.O. Philipose party of the second part. 11. The net profit of the firm after the usual business outgoings shall be shared by the partners as follows: (a) Sri T.O. Kurialkose, party of the first part, shall be entitled for the whole of the profit of Ernakulam office. (b) Sri T.O. Philipose, party of the second part, shall be entitled for the whole of the profits of Kottayam office. (c) Profits or losses of any branch or branches of the firm situated outside Ernakulam and Kottayam shall be shared by Sri T.O. Kuriakose, party of the first part and Sri T.O. Philipose, party of the second part in the ratio of 55 per cent. And 45 per cent., respectively."
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' It is contended on behalf of the applicants in the light of the above provisions that it should be assumed that losses are also to be contributed by the partners in the same ratio in which they are to share profits as provided in the deed. Absence of a specific reference to the share in the loss, therefore, shall not be a reason for refusing registration. Learned counsel appearing on behalf of the applicants in ITRs, Nos. 10 and 11 of 1987 submits that the question referred has to be answered in the negative. ' According to the learned Special Government Pleader (Taxes) who represented the respondents in ITR No, 49 of 1982, and connected cases, in order to qualify for registration under section 27 of the Agricultural Income Tax Act, the partnership should contain an agreement to share the profit and loss, there must be express specification regarding the sharing of the profit and loss and it is not permitted to resort to either section 4 or section 13(b) of the Partnership Act to ascertain the individual shares of the partners in profit and loss. According to him, the terms of section 27 shall be strictly complied with since registration under section 27 makes the firm entitled to certain advantages in the matter of assessment under the Agricultural Income Tax Act, 1950. Strong reliance was placed by him on the decision of the Supreme Court in N.T. Patel & Co. v. CIT (1961) 42 ITR 224. He relied on the earlier decision of the Supreme Court in Rao Bahadur Ravulu Subba Rao v. CIT (1956) 30 ITR 163, where the Supreme Court had occasion to consider the claim for registration under section 26A of the Indian Income Tax Act, 1922. He submits that the Kerala Agricultural Income Tax Act, 1950, and the rules framed thereunder should be treated as…
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