Law: Income Tax Act, 1961

Section: 182

Sections 182 to 186 of the Income-tax Act, 1961 [Corresponding to section 26A of the Indian Income-tax Act, 1922] read with section 13(b) of the Indian Partnership Act, 1932 - Firm - Position prior to 1-4-1993 - Assessment year 1961-62 - ITO denied registration of assessee-firm on ground that there was no clause in Partnership deed specifying proportion in which partners were to share losses - Whether ITO before allowing firm's application for registration must be in a position to ascertain share of partners in losses even if section 26A of 1922 Act does not require shares in losses to be specified in instrument of partnership - Held, yes - Whether since in instant case instrument of partnership deed did not suggest any means for ascertaining as to how amount of loss were to be apportioned, assessee was not entitled to registration under section 26A of 1922 Act - Held, yes FACTS The assessee-firm consisted of three partners, namely 'N', 'V', 'S' and a minor, partner 'J' who was admitted to the benefits of the partnership. 'N' was holding 31 per cent shares in the profit, 'V', 'S' and minor, 'J' were holding 23 per cent shares in the profit. Clause 2 of the instrument of the partnership deed specified that the profits of the partnership business shall be divided and enjoyed according to the said proportion. There was no clause in the instrument specifying the proportion in which the three adult partners were to share the losses, if any. The assessee applied for its registration under section 26A of the 1922 Act. The High Court, however, rejected said application and held that unless the instrument 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, 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. On appeal to the Supreme Court : HELD Section 23(5) provides different procedures in the assessment of a registered firm and a firm that is unregistered. In the case of a registered firm the share of each partner in the firm's profits is added to…

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