Law:

Section:

Section 184 of the Income-tax Act, 1961 [Corresponding to section 26A of the Indian Income-tax Act, 1922] - Firm - Position prior to 1-4-1993 - Assessment year 1961-62 - ITO rejected assessee firm's application for registration under section 26A of 1922 Act relying upon two clauses in partnership deed which provided that no partner would be entitled to withdraw his share of profit without consent of other partners during first ten years and that any partner retiring within first ten years would not be entitled to any profits - Whether fact that no partner would, as of right, be entitled to draw profits during first ten years did not mean that there was no agreement to share profits; all that that clause means was that profits had to accumulate and should remain to credit of partner who was entitled to it - Held, yes - Whether such a covenant between partners was not inconsistent with existence of partnership - Held, yes - Whether, therefore, assessee firm was entitled to registration under section 26A of 1922 Act - Held, yes FACTS The assessee-firm, consisted of three partners and was constituted under the instrument of partnership executed on 27-11-1959. Under the partnership deed, they were entitled to share the profits and bear the losses in the proportion of 50:37:13. Clause 6 of said deed provides that no partner shall withdraw, without the consent of other partners, his share of profits during the first ten years. Clause 9 read that if any partner would at any time during the subsistence of the partnership be desirous of retiring from the firm, it would be competent for him so to do, provided always that he would in such case give at least one calendar month's notice of his intention so to do. However, any partner retiring within the first ten years from the date of its commencement would not be entitled to any profits. The ITO rejected application for registration under section 26A of 1922 Act on ground that clauses 6 and 9 of the partnership deed contained covenants which impelled the view that there was no partnership in the eye of law. The AAC, however, dissented from that view and directed the ITO to register the firm. But that order made by him was…

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