Civil Appeal No 63 of 1971
Appeal by Special Leave from the Judgment and order dated the 19th February 1970 of the Andhra Pradesh High Court in RC No 50 of 1966
section T Desai and K Rajendre Choudhary for the Appellant G C Sharma and section P Nayar for the Respondent
The Judgment of the Court was delivered by GUPTA J
This appeal by special leave is directed against an order of the High Court of Andhra Pradesh at Hyderabad answering in the negative and in favour of the revenue the following question referred to it under sec
661 of the Indian Income Tax Act 192 hereinafter referred to as the Act
Whether the Assessee is entitled to registration under Section 26A of the Income Tax Act 1922 for the assessment year 1961 62
 The assessee is a firm
The instrument of partnership was executed on January S 1959 but the application for registration under sec
26A remained undisposed of until the assessment for the year 1961 62 was taken up
The instrument shows that three persons Mandyala Narayana Mandyala Venkatramaiah Mandyala Srinivasulu and a minor Mandyala Jaganmohan who was admitted to the benefits of the partnership held the following shares Narayana 31 per cent Venkatramaiah 23 per cent Srinivasulu 23 per cent and minor Jaganmohan 23 per cent Clause 2 of the instrument which sets out the 133 shares of the partners add that the profits of the above partnership A business shall be divided and enjoyed according to the shares specified above
 There is no clause in the instrument specifying the proportion in which the three adult partners were to share the losses if any
Having set out all the terms of agreement the instrument closes with clause 9 which states We the partners are bound to act according to the above mentioned stipulations and also according to the provisions of the Indian Partnership Act  The High Court was of the view that unless the instrument of partnership specified the shares of the partners not only in the profits hut also in the losses the firm would not be entitled to registration under sec
26A and negatived the contention raised on behalf of the assessee that clause 9 of the instrument indicated how losses were to be apportioned between the partners
The correctness of this decision is challenged by the appellant firm
It is not that a firm to be able to trade must be registered under sec
26A A firm registered or unregistered is an assessee under the Act and can do business as such
However registration under sec
26A confers on the partners a benefit as would appear from the provisions of sec
23 5 of the Act to which they would not have been entitled but for section 26A and such a right being a creature of the statute can be claimed only in accordance with the statute which confers it and a person who seeks relief under section 26A must bring himself strictly within its terms before he can claim the benefit of it Rao Bahadur Ravulu Subba Rao and others vs Commissioner of Income tax Madras1 The question in this case is whether in the absence of a specific statement in the instrument as to the proportion in which the partners were to share the losses the requirement of sec
26A can be said to have been satisfied
Sec 26A reads 26A 1 Application may be made to the 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 purposes of this Act and of any other enactment for the time being in force relating to 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 shall be in such form and be verified in such manner as may be prescribed and it shall be dealt with by the Income tax officer in such manner as may be prescribed
 The required particulars are specified in rules 2 and 3 of the Rules framed under the Act and the form of application including the Schedule annexed to rule 3
Paragraph 3 of the Form requires the partners to  certify that the profits or loss if any  of the relevant period were or will 1 134 be as the case is divided or credited as shown in Section 8 of the Schedule
In Section 8 of the Schedule are to be recorded the particulars of the apportionment of the income profits or gains or loss of the business profession or vocation in the previous year between the partners who in that previous year were entitled to share in such income profits or gains or loss
Note 2 appended to this Schedule states that if any partner is entitled to share in profits but is not liable to bear a similar proportion of any losses this fact should be indicated
It is clear therefore that the application for registration which has to be made in the prescribed form must include particulars of the apportionment of the loss if any
It does not appear to have been considered in this case whether the application for registration made by the firm conforms to the prescribed rules the dispute is confined to the question whether sec
26A requires the instrument of partnership to specify the individual shares of the partners in the profits as well as the losses of the business
Section 235 of the Act provides different procedures in the assessment of a registered firm and a firm that is unregistered
Without going into details in the case of a registered firm the share of each partner in the firm s profits is added to his other income and he is assessed on his total income which includes his share of the profits and the tax payable by him is determined accordingly
There is a proviso which lays down that if such share of any partner is a loss it shall be set off against his other income or carried forward and set off in accordance with the provisions of section 24
Thus the loss if any affects the assessment proceeding and therefore the Income tax officer has to know what are the respective shares of the partners in the losses before allowing the firm to be registered
It is not disputed that the Income tax officer must be in a position to ascertain how losses are to be apportioned the question is whether it is a condition for registration under sec
26A that the instrument of partnership must specify the respective shares of the partners in the losses
According to the appellant sec
26A has no such requirement
The appellant contends that sec
26A does not require specification of the shares in losses in the instrument of partnership and it is sufficient if the proportion in which the losses are to be shared is otherwise ascertainable and that assuming the section did so require clause 9 of the instrument satisfies that requirement
The contention that clause 9 specifies the respective shares of the partners in the losses is obviously untenable
This clause says that the partners are bound to act according to the provisions of the Indian Partnership Act that they are in any case and it is not clear which provision of the Partnership Act indicated the proportion in which the partners were to bear the losses in this case
Counsel for the appellant refers to sec
13b of the Partnership Act in this connection
12b reads Subject to contract between the partners a x x x x b the partners are entitled to share equally in the profits earned and shall contribute equally to the losses sustained by the firm  135 We shall refer to sec
13b in more detail when we consider the other contention of the appellant but assuming that this provision has any relevance to the facts of this case which it has not bringing in by implication sec
13b from a general statement that the partners are to act in accordance with the Partnership Act does not amount to specification of the partners  shares in the losses and the instrument of partnership it must therefore be held fails to comply with sec
26A of the Act were this a requirement of that section
The other contention of the appellant is that it is not essential for registration under sec
26A of the Act that the shares of the partners in the losses must be specified in the partnership deed
In support of this contention reliance is placed mainly on two decisions one of the Mysore High Court R Sannappa and Sons vs Commissioner of Income tax Mysore 1 and the other of the Allahabad High Court Hiralal Jagannath Prasad vs Commissioner of Income tax UP 2 on behalf of the revenue it is claimed on the authority of a decision of the Gujarat High Court Thacker  Co vs Commissioner of Income tax Gujarat 3 that the shares in the profits and losses have both to be specifically stated in the instrument of
partnership in order to comply with the conditions laid down in sec
26A to obtain registration
The view taken by the Gujarat High Court appears to have been followed by the Kerala High Court in the following cases among others C T Palu  Sons vs Commissioner of Income tax Kerala 4 and Commissioner of Income tax Kerala vs Ithappiri  George 5 There is thus a conflict of opinion in the High Courts on the point
It will not be necessary however for the purpose of this appeal to consider at any length the conflicting views of the different High Courts and decide which view is correct according to us because on the facts of the case the appeal is bound to fail on any view
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 sec
26A did not require the shares in the losses to be specified in the instrument of partnership
Counsel for the appellant argues that clause 9 of the instrument refers to sec
13b of the Partnership Act by implication and accordingly in the absence of any contrary indication it must be held that the partners are liable to share the losses equally
The argument is not based on a correct appreciation of the scope of sec
13b and the facts of the case
13b it seems plain to us makes the partners liable to contribute equally to the losses only when they are entitled to share equally in the profits
In this case the shares of the partners are not equal
In the absence of any indication to the contrary where the partners have agreed to share the profits in certain proportions the presumption is that the losses are also to be shared in like proportions
Jessel M R states the principle in In re Albion Life Assurance Society G as follows 1 2 31966 4 5 6 16 Ch
83 87
10 L1276SCI75 136 It is said as a general proposition of law that in ordinary mercantile partnerships where there is a community of profits in a definite proportion the fair inference is that losses are to be shared in the same proportion
 In the case before us the partners having unequal shares in the profits there can be no presumption that the losses are to be equally shared between them Sec
13b of the reproduces the provisions of the repealed sec
2532 of the 
In K Pitchiah Chettiar vs GSubramaniam Chettiar1 Ramesam J explained the scope of sec
253 2 of the  Section 2532 of the lays down that all partners are entitled to share equally in the profits of the partnership business and must contribute equally towards the losses sustained by the partnership
As I read the section it lays down two presumptions with which the Court should start
The two presumption are clubbed in one sub section
The first is if no specific contract is proved the shares of the partners must be presumed to be equal
In the present case the plaintiff alleged unequal shares which were not denied by the defendants
So the parties being agreed on their pleadings as to the shares possessed by them in the profits there is no scope for the application of this first presumption
The second presumption is that where the partners are to participate in the profits in certain shares they should also participate in the losses in similar shares
Now the section says that both should be in equal shares but implies that if unequal shares are admitted by the partners as to profits that applies equally to losses
In the absence of a special agreement that this should be the presumption with which one should start is merely a matter of common sense and in India one has only to rely on section 114 of the Evidence Act for such a principle
 The law stated here in the context of sec
2532 of the Contract Act 1872 applies equally to sec
13b of the Partnership Act 1932 the two provisions are in identical terms
On the facts of the present case and having regard to the scope of sec
13b the section has plainly no application
1 I L R 28
137 The other rule that where the shares in the profits are unequal the A losses must be shared in the same proportions 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
For the reasons stated above the appeal fails and is dismissed with costs
PHPAppeal dismissed


Summary:
The appellant assessee is a firm having three Partners and one minor admitted to the benefits of the partnership
One of the partners has 31 share and the remaining two partners and the minor have 23 share each in the profit of the firm but the partnership deed is silent about their shares in the losses
Clauses 9 of the partnership deed provides that the partners are bound to act according to the provisions of the Indian Partnership Act
The firm applied for registration under section 26A of the Income Tax Act 1922 which was refused by the Income Tax officer
The High Court in a reference under section 661 held that unless the instrument r of partnership specified the shares of the partners not only in the profits but also in the losses the firm would not be entitled to registration under section 26A
The High Court negatived the contention of the assessee that clause 9 of the instrument indicated how losses were to be apportioned between the partners
On appeal by special leave it was contended by the appellant 1 section 26A does not require that the instrument of partnership must specify the respective shares of the partners in the losses and it is sufficient if the proportion in which the losses are to be shared is otherwise ascertainable
2 Assuming that section 26A does require mentioning the proportion of losses in the instrument of partnership clause 9 of the instrument read with s 13b of the Partnership Act satisfies that requirement
Dismissing the appeal  HELD 1 A firm whether registered or unregistered is an assessee under the Act and can do business as such
However registration under section 6A confers on the partners a benefit to which they would not have been entitled but for section 26A and such a right being a creature of a statute can be claimed only in accordance with the statute which confers it and the person who seeks relief under section 26A must bring himself strictly within its terms before he can claim the benefit of it
133D E Rao Bahadur Revulu Subba Rao and others vs Commissioner of Income Tax Madras  relied on
2 In the case of a registered firm the share of each partner in the profit or loss is added to or set off against as the case may be to the other income of the partner
Thus the loss if any affects the assessment proceedings and
therefore Income Tax officer has to know what are the respective shares of the partners in the loss before allowing the firm to be registered
134 C D 3 There is a conflict of opinion amongst the High Courts whether it is essential for registration under section 26A that the shares of the partners must be specified in the partnership deed
It is not necessary to decide for the purpose of this appeal which of the conflicting views is correct because in the present case the appeal is bound to fail on any view
It is not disputed and cannot be disputed that the Income Tax Officer before allowing the application for 132 registration must be in a position to ascertain the shares of the partners in the losses
even if section 26A did not require this to be specified in the instrument of partnership
135E F 4 The contention that clause 9 brings in by implication section 13 b of the Partnership Act and thus specifies the shares of the partners in the losses is untenable
section 13b makes the partners liable to contribute equally to the losses only when they are entitled to share equally in the profits
ID this case the shares of the partners are not equal
The case of K Pitchiah Chettiar
vs G Subramaniam Chettiar ILR and In re Albion Life Assurance Society 16 Ch
83 87 applied
135 G H The law stated in these cases in the context of section 2532 of the contract Act applies equally to section 13b of the Partnership Act which is in identical terms
In the absence of any indication to the Contrary where the partners have agreed to share the profits in certain proportions the presumption is that the losses are also to be shared in like proportions
The other rule that where the shares in the profits are unequal the losses must be shared in the same proportions as profits in the absence of an agreement as to how the losses are to be apportioned also does not apply to this case since there is a minor admitted to the benefits of the partnership
Even if the adult partner 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
Whether the partners between themselves will bear this loss equally or to the extent of their own individual shares is not even suggested in the instrument of Partnership
TD There is therefore no means of ascertaining in this ease how the losses are to be apportioned
136 H 137A C