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CIT v. M/s Raj Kamal Stores - INCOME TAX REFERENCE No. 99 of 1984 [2004] RD-AH 1770 (21 December 2004)


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Court  No.37

Income Tax Reference No.99 of 1984

The Commissioner of Income Tax  Vs. M/s Raj Kamal Stores, Varanasi.

Hon'ble  R.K. Agrawal, J

Hon'ble P. Krishna, J

The Income Tax Appellate Tribunal, Allahabad  has referred the following question of law under section  256 (1) of the Income Tax Act 1961 (hereinafter referred to as the Act)  for opinion to this Court:-

"Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was legally correct in holding that the shares of the adult partners in loss were specified in the partnership deed dated 11.12.1972 and, therefore, the assessee was entitled to the benefit of registration?"

The facts giving rise to the present reference are as follows:-

The reference relates to the assessment year 1974-75 to 1976-77.

We have heard Shri Dhananjay Awasthi, the learned standing counsel for the department.

The assessee respondent is a firm which was constituted by an instrument of partnership executed on11.12.1972. There are five partners in the firm. Besides, a minor Shri Raju Barman was also admitted to the benefits of partnership according to section 30 of the Indian Partnership Act, 1932. Clause-5 of this deed is reproduced below:-

"That, at the close of each the account of the firm shall be prepared after adjusting all the business expenses and in case of profit  the same shall be credited to the respective accounts of each partners according to their shares as mentioned in para 3 and in case of loss the same shall be borne by the partners according to their shares, and the amount of loss shall be debited to their respective accounts according to their shares.

Besides this Shri Raju Barman minor shall get the benefit of partnership as specified in para 3 and shall also be liable for the loss to the extent of his share according to section 30 of Indian Partnership Act."  

On the interpretation of the clause - 5 of the partnership deed the minor Shri Raju Barman shall get the benefit of partnership as specified in para 3 and shall also be liable for the loss to the extent of his share according to section 30 of Indian Partnership Act. Therefore, the partnership deed was not entitled for registration under the Income Tax Act as the partnership was void in view of section 30 of the partnership Act. The Income-tax Officer noticed the language of clause  5 of the aforesaid partnership deed stating that the minor was liable for the loss to the extent of his share according to section 30 of the Partnership Act. He observed that the partnership deed nowhere stated as to who was to bear the loss of the minor in case it exceeded his share. From this, he drew an inference that the share ratio for allocation of the profit as well as the loss had not been clearly specified in the deed and that the provisions of the latter were vague and the share of loss was indeterminable. He finally refused the benefit of registration to the assessee firm.

In appeal the Appellate Assistant Commissioner has held that the assessee is entitled for registration  and consequently he directed the Income Tax Officer to register the firm for all the above three years. The said order has been confirmed by the Income Tax Appellate Tribunal.

Shri Dhananjay Awasthi, the learned standing counsel for the department submitted that the controversy stands concluded in view of the decision of the Division Bench of this Court in the case of Commissioner of Income Tax vs. Vijai Kumar Rajesh Kumar (1998), 231 ITR 625.  In this case it has been held by this Court that a perusal of the partnership  deed showed  that the share ratio of profits and losses of the major partners was well specified. The share ratio in profits of minors was also clearly stated. The share ratio in losses up to 40 per cent, was well defined amongst the major partners. The question was in which ratio they would share 60 per cent losses falling to the share of minors. In the absence of any agreement to the contrary it would be inferred that the partners would share losses falling to the share of minors in the same ratio in which they agreed to share losses up to 40 per cent. The firm was entitled to registration.

Respectfully following the aforesaid judgment we are of the opinion that the Tribunal committed no illegality in holding that the partnership was entitled for registration.

In view of the above discussion we answer the question of law referred to us in affirmative i.e. in favour of the assessee and against the department.

However, there shall be no order as to costs.




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