Case: N. T. Patel And Company Vs. Commissioner Of Income-Tax, Madras

The assessee is the appellant and the Commissioner of Income-tax is the respondent.2. A partnership consisting of four persons was formed by a deed of partnership dated March 31, 1949. On July 27, 1951 another partner was taken into partnership and a new deed was drawn up. The previous partnership deed was considered as the principal deed. The new partnership like the old one was to end on March 31, 1954. On March 29, 1954, a new partnership was entered into and a sixth partner was taken and a new deed was executed. The new partner contributed Rs. 40,000 as his share to the capital but in the partnership deed no express provisions was made as to the manner in which profits and losses were to be divided between the partners. In order to rectify this, a deed of rectification was executed on September 17, 1955, which was after the close of the account year 1954-55. This deed recited that an error had crept in typing the partnership deed dated March 29.1954, by omitting to type Cl. 21 of the old partnership deed in the new deed. The parties had therefore agreed to rectify the error by adding Cl. 20-A as follows:-"We hereby agree that for purpose of clarification the following clause shall be added as Cl .20-A in the Partnership instrument, dated 29th March, 1954:-The parties shall be entitled to shares in the profits and losses of the firm in proportion to the contribution of the capital of each of the partners and whenever fresh capital is required for the business, each partner shall be liable to contribute the additional capital in the same proportion as the paid up capital referred to in Cl. 4 of the deed, dated 29th March, 1954."This is signed by all the partners.3. Up to the end of assessment year 1954-55, the old firms i.e., the one constituted of four partners and the other constituted of five partners were registered under S. 26-A of the Income-tax Act (hereinafter termed the Act). The appellant firm then applied for registration for the assessment year1955-56.The Income-tax Officer pointed out to the appellant firm that there was no specification of shares of the partners in the deed of partnership. Thereupon the appellant submitted the deed of rectification dated September 17, 1955, above mentioned and submitted that the original deed did specify the shares of the partners and the deed of rectification only clarified the position. But the registration was refused by the Income-tax Officer and an appeal taken against that order of the Assistant Commissioner was dismissed. Further appeal was taken to the Income-tax Appellate Tribunal which also failed. At the request of the appellant the following question was referred to the High Court for its opinion:-"Whether the assessee firm is entitled to registration u/s 26-A of the Income-tax Act for the assessment year 1955-56."The High Court held that under S. 26-A of the Act the factual existence in the year of account of an instrument of partnership was necessary, a requisite which, in the present case, was lacking and therefore the provisions of S. 26-A were not satisfied and that the specification of shares only took place on September 17, 1955, when the deed of rectification was executed. The question was therefore answered in the negative. Against this judgment and order the appellate has come in appeal to this court by certificate of the High Court.

Court's reasoning:
None of these clauses specify the shares of the partners. Clause 9 has reference to extra contribution made by the partners which was to be treated as capital contribution for the purpose of dividing profits but was not otherwise taken to be paid up capital. Clause 11 provides for interest on the extra capital subscribed. Clause 34 authorises the senior partner during the subsistence of the partnership to bring in one or more of his sons as partners who on being so brought in were entitled to remuneration and profits in proportion to their capital contribution. Clause 41(a) provides that in the event of dissolution of partnership the capital available except for debts etc., was to be paid to the outgoing partners in proportion to the capital contribution of the outgoing partner. But in none of these clauses is it stated what the shares of the partners in the profits and losses of the firm were to be and that in our opinion was requisite for registration of the partnership under S. 26-A of the Act and as that was wanting, registration was rightly refused. Registration under S. 26-A of the Act confers a benefit on the partners which the partners would not be entitled to but for S. 26-A. The right can be claimed only in accordance with the statute which confers it and a person seeking relief under that section must bring himself strictly within the term of that section. The right is strictly regulated by the terms of thatthe purpose of this case the relevant words of that section are "constituted under an instrument of partnership specifying the individual shares of the partners." Therefore unless the instrument of partnership specified the individual shares of the partners the instrument of partnership does not conform to the requirements of thethe present case an instrument of partnership was in existence but it did not specify the shares which was one of the requirements for registration and that condition was fulfilled by the deed of rectification dated September 17, 1955. Therefore it cannot be said that there was the requisite instrument of partnership specifying the individual shares of the partners during the year of account. The High Court, in our opinion, was right in answering the question in the negative.