Kylasa Sarabhiah, Bombay Cloth Shop,
Secunderabad Vs. Commissioner of Income-Tax, Andhra Pradesh  INSC 279 (1
01/12/1964 SHAH, J.C.
GAJENDRAGADKAR, P.B. (CJ) HIDAYATULLAH, M.
CITATION: 1965 AIR 1411 1965 SCR (2) 310
F 1967 SC 448 (5)
Income Tax Act, 1922 (11 of 1922), s. 26-A,
r. 2Registration of firm -Partnership consisting of firm and other
persons-Income Tax Officer, powers-"Specify", meaning of.
The appellant firm applied for registration
under s. 26-A of the Indian Income-tax Act. In the application the persons
recited as partners were a Yam shop-another firm and four other persons and the
collective share of the Yarn shop and the shares of the other partners were set
out. The Incometax Officer rejected the application and his order was confirmed
in appeal by the Appellate Assistant Commissioner and by the Income-tax
Appellate Tribunal. The Tribunal held that because in the deed of partnership
benefits to which certain minors were admitted and particulars "about the
distribution of profits or losses in the manner in which the firm wanted the
same to be distributed" were not specified, and because by the deed of
partnership the yarn shop was introduced as a partner in the firm, the
privilege of registration under s. 26A must be denied to the firm. The question
was referred to the High Court, which too answered similarly. In appeal by
special leave, HELD: The appeal must be allowed.
(i) If the statutory conditions which qualify
the firm for registration are fulfilled, an arrangement between some of the
partners, which binds them to distribute the profits under a stipulation which
is not a part of the partnership agreement does not effect the right to claim
registration of the partnership agreement. [314 H] Dulichand Laxminarayan v.
Commissioner of Income-tax, Nagpur,  S.C.R. 154, distinguished.
(ii) The word "specify" is used in
s. 26A and Rule 2 as meaning mentioning, describing or defining in detail; it
does not mean expressly setting out in fractional or other shares. [314 D-E]
(iii) If the conditions for registration of a firm are fulfilled, the
Income-tax Officer has no power to reject the application. Undoubtedly, the
application must strictly be in conformity with the Act and the Rules, but in
so ascertaining, the dead of partnership must be reasonably construed. [311 G]
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 83 of 1964.
Appeal by special leave from the judgment and
order dated August 18, 1960 of the Andhra Pradesh High Court in R. C.
Appeal No. 34 of 1957.
A. Ranganadham Chetty, K. Venkaramaiah, A.
Vedavalli and A. V. Rangam, for the appellants.
311 R. Ganapathy Iyer and R. N. Sachthey, for
The Judgment of the Court was delivered by
Shah, J. The appellants who are a firm carrying on business in cloth at
Secunderabad applied on June 30, 1955, for registration under s. 26-A of the
Indian Income-tax Act, 1922, for the assessment year 1956-57. The following
persons were, it was recited in the application, partners, having share in the
profits and lossess in proportions specified against their names :1 . M/s
Kylasa Sarabhiah a firm consisting of the following partners :
(a) Kylasa Veeresalingam.
(b) Kylasa Nagendrarao Rs. As. Ps.
(c) Kylasa Madhusudhanarao 069
2. Mahendrakar Narayanarao 033
3. Nune Vittayya 026
4. Pottupalli Chandrayya 026
5. Gande Ramayya 010 For facility of
reference we will call No. 1 'the Yarn Shop'.
The Income-tax Officer rejected the application,
and his order was confirmed in appeal by the Appellate Assistant Commissioner
and by the Income-tax Appellate Tribunal. The Tribunal held that because in the
deed of partnership benefits to which certain minors were admitted, and
particulars "about the distribution of profits or losses in the manner in
which the firm wanted the same to be distributed" were not specified, and
because by the deed of partnership the Yarn Shop was introduced as a partner in
the farm, the privilege of registration under s. 26-A must be denied to the
firm. The High Court of Andhra Pradesh recorded on the following question
referred under s. 66(1) of the Income-tax Act "Whether on the facts and
circumstances of the case, the assessee is entitled to registration under s.
26-A of the Income tax Act ?", a negative answer.
Section 26-A of the Indian Income-tax Act,
1922, provides "(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 purpose of this
Act Sup.165--4 312 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 and
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." By securing registration under the Act, the partners of the
firm obtain a benefit of lower rates of assessment and no tax is directly
charged on the income of the firm. This is an important benefit to which the
partners of a registered firm become entitled as a consequence of registration,
and if it is intended to secure that benefit, requirements of s. 26-A and the
rules framed under the Act must be strictly complied with. Rule 2 framed under
s. 59 requires that the application shall be signed by the partners (not being
minors) personally, and prescribes the period within which the application
shall be made for the year in question.
Rule 3 provides that the application shall be
made in the prescribed form and shall be accompanied by the original instrument
of partnership under which the firm is constituted. By Rule 4 it is provided
that if on receipt of the application, the Income-tax Officer is satisfied that
there is or was a firm in existence constituted as shown in the instrument of
partnership, and that the application has been properly made, he shall enter in
writing at the foot of the instrument or certified copy, as the case may be, a
certificate in the prescribed form. By Rule 6 of the certificate of
registration may be renewed for subsequent years.
Registration of the firm may be obtained on
an application to the Income-tax Officer on behalf of any firm, if the firm be
lawfully constituted under an instrument of partnership which specifies the
individual shares of partners and the Income-tax Officer is satisfied that
there is or was a genuine firm in existence as shown in the instrument. If the
conditions are fulfilled, the income-tax Officer has no power to reject the
application. Undoubtedly, the application must strictly be in conformity with
the Act and the Rules, but in ascertaining whether the application is in
conformity with the Rules, the deed of partnership must be reasonably
Under the Indian Partnership Act, 1932
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. A firm
313 is strictly not a person : it is an association of persons, and an
agreement by which a firm purports to enter into a partnership with an individual
or another firm merely makes the partners of that firm individually partners of
the larger partnership. The problem posed by such a partnership agreement is
under the general law academic, but the right to registration under s. 26A
being conditional upon specification of the individual shares of the partners,
a deed of partnership between a firm and an individual, which specifies the
collective share of the firm, without more, cannot be registered. It has been
held by this Court in Dulichand Laxminarayan v. Commissioner of Income-tax,
Nagpur(1) that a partnership constituted between an individual, a joint Hindu
family and three firms could not be registered under s. 26-A of the Act. In
Dulichand's case(1) the partnership deed was signed by five individuals, viz.,
the karta of the joint Hindu family, one partner each of the three firms and
the individual. It was held that the partnership could not be admitted to
registration, because a firm as such cannot enter into an agreement as partner
with another firm or individual, and also because all the members of the three
firms had not personally signed the application as required by Rule 2 of the
The application in the present case was
rejected by the Tribunal, because in its view the benefits to which the minors
were admitted and the shares of the major partners who were members of the Yarn
Shop were not specified, and that the Yam Shop was introduced as a partner in
But the Tribunal, in our judgment, erred in
holding that the benefits to which the minors were admitted and the shares of
the major members of the Yarn Shop were not specified in the deed of
partnership. It is clearly recited in the preamble that K. Rajeshwarrao, K.
Haranath Babu, K. Ramesh Babu and K. Shivakumar-the four minors-were admitted
to the benefit of the partnership with equal shares in the profits falling to
the share of the Yam Shop, and losses were to be shared in equal shares only by
the major partners K. Veeresalingam, K. Nagendrarao and K. Madhusudhanarao. The
scheme of the deed therefore was that the Yam Shop collectively had a share of
0-6-9 in the profits and was liable in the same proportion in the losses in the
appellant firm. Out of this 0-6-9 share, seven persons who constituted the Yam
Shop were entitled to share the profits equally, whereas losses were to be
shared by the three major members of the Yam Shop equally. It is true that in
the deed of partnership, the first partner is described as "Kylasa
(1) S.C.R. 154.
314 Sarabhiah Yam firm"-the Yam
Shop-constituted under an instrument of partnership dated May 12, 1955, and in
paragraphs 3 and 8 this Yam Shop is also described as the first partner. But
the substance of the agreement cannot be permitted to be overshadowed merely by
the use of the collective description of some of the persons who agreed to be
partners. The agreement was between K. Veeresalingam, K. Nagendrarao, K.
Madhusudhanarao, Mahendrakar Narayana Rao, Noone Vittayya, Pottipalli
Chandrayya and Gande Ramayya to enter into partnership with the covenant that
the profits and losses shall be divided in the shares specified in the
instrument. The partnership agreement was signed by the major partners; the
application for registration was in conformity with the rules framed under the Act,
the certificate regarding the distribution of the profits in the previous year
was given, the original instrument of partnership was produced and the
instrument specified the individual shares of the partners. Merely because the
deed of partnership set out in paragraph 8 the collective share of the Yarn
Shop, registration could not be refused, for in the preamble the division of
the shares of profits and losses among the three members of the Yam Shop and
those admitted to the benefit of the partnership is clearly indicated. The word
"specify" is used in s. 26-A and Rule 2 as meaning, mentioning,
describing or defining in detail :
it does not mean expressly setting out in
fractional or other shares. In the deed of partnership, the shares are clearly
defined, though they are not worked out in precise fractions. Nor is it true to
say that the Yam Shop is introduced as a partner. The agreement is in truth
between three major members out of those who constitute the Yarn Shop and four
outsiders. Each of them has signed the application and the covenants of the
partnership agreement bind the partners individually. Indication in the deed of
partnership that three of them held qua the Yam Shop a certain relation did not
affect their status as partners of the appellant firm individually.
It was urged that in the deed dated February
20, 1952, constituting the Yarn Shop, as amended by the deed dated May 12,
1955, no profit sharing ratio was mentioned. But we are not concerned with the
registration of the Yarn Shop. We are unable to appreciate how a defect (even
if there be one in the agreement constituting the Yarn firm) affects the right
of the appellant firm to be registered. If the statutory conditions which
qualify the appellants for registration are fulfilled, an arrangement between
some of the partners of the appellants which binds them to distribute the
pro-fits under a stipulation which is not a part of the partnership agreement
does not affect the right to claim registration of the partner-ship agreement.
The answer recorded by the High Court must
therefore, be discharged, and an affirmative answer must be recorded.
The appeal is allowed. The appellants will be
entitled to their costs in this Court and the High Court.