And Shall Contribute Equally To The Losses Sustained By Thefirm. In Mandyala Govindu & Co v. W.t.a.19/02 & Con. Cases

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE ANTONY DOMINIC &THE HONOURABLE MR. JUSTICE A.MUHAMED MUSTAQUE FRIDAY, THE 28TH DAY OF JULY 2017/6TH SRAVANA, 1939 WTA.No.19 of 2002 ----------------------- AGAINST THE ORDER IN WTA 139/1993 of I.T.A.TRIBUNAL,COCHIN BENCHDATED 06-02-2002 ------------- APPELLANT/APPELLANT: --------------------------- THE COMMISSIONER OF WEALTH TAX, COCHIN. BY ADVS.SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.GEORGE K. GEORGE, SC FOR IT RESPONDENT/RESPONDENT: -------------------------------- DR.ASHA V.SARAF, SARAF TRADING CORPORATION, COCHIN-3. BY ADV. SMT.NIVEDITA A.KAMATH BY ADV. SRI.ANIL D. NAIR THIS WEALTH TAX APPEAL HAVING BEEN FINALLY HEARD ON 28-07-2017, A/W WTA NO.14/2003 & CON. CASES, THE COURT ON THE SAMEDAY DELIVERED THE FOLLOWING: ANTONY DOMINIC, & A. MUHAMED MUSTAQUE, JJ. ------------------------------------------------ W.T.A. Nos.19 of 2002, 14 of 2003, 154, 171,173, 178, 181, 182, 184 of 2009, ITR Nos.15,16, 17, 18, 19, 20, 21, 22, 23, 24, 25 & 26 of 2001 ------------------------------------------------ Dated this the 28[th ]day of July, 2017 JUDGMENT Antony Dominic, J. 1. aIn these appeals arising under the Wealth Tax Act, 1957, and references under the Income Tax Act, the onlycommon question of law raised for consideration is whetherSection 13(b) of the Indian Partnership Act, 1932, could beinvoked by the Revenue in the context of clause-7 of thePartnership Deed of the firm, M/s Saraf Trading Corporation. 2. On this issue we heard the learned Senior Counselfor the Revenue and the learned counsel appearing for therespective assessees. 3. Section 13(b) of the Indian Partnership Act, 1932,provides that subject to contract between the partners, the W.T.A.19/02 & con. cases partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by thefirm. In Mandyala Govindu & Co. v. C. I. T. (SC) [1976 ITRVolume 102], the Apex Court held that Section 13(b) of theIndian Partnership Act, 1932, reproduces the provisions ofthe repealed Section 253(2) of the Indian Contract Act,1872, and referred to the judgment in [1935] ILR 58 Mad.25, 28, which explained the scope of Section 253(2), whereit was held thus: “Section 253(2) of the Indian Contract Actlays down that all partners are entitled to shareequally in the profits of the partnership business,and must contribute equally towards the lossessustained by the partnership. As I read thesection, it lays down two presumptions withwhich the court should start. The twopresumptions are clubbed in one sub-section. Thefirst is, if no specific contract is proved, theshares of the partners must be presumed to beequal. In the present case, the plaintiff allegedunequal shares which were not denied by thedefendants. So the parties being agreed on theirpleadings as to the shares possessed by them inthe profits, there is no scope for the application ofthis first presumption. The second presumption is W.T.A.19/02 & con. cases -3- that where the partners are to participate in theprofits in certain shares they should alsoparticipate in the losses in similar shares. Now,the section says that both should be in equalshares but implies that if unequal shares areadmitted by the partners as to profits that appliesequally to losses. In the absence of a specialagreement, that this should be the presumptionwith which one should start is merely a matter ofcommon sense and in India one has only to relyon Section 114 of the Evidence Act for such aprinciple.” Thereafter, the Apex Court held that the principles stated in the context of Section 253(2) of the Contract Act,1872, would apply equally to Section 13(b) of the IndianPartnership Act, 1932; the two provisions are in identicalterms. 4. Having thus seen the scope of Section 13(b) of the Thereafter, the Apex Court held that the principles stated in the context of Section 253(2) of the Contract Act,1872, would apply equally to Section 13(b) of the IndianPartnership Act, 1932; the two provisions are in identicalterms. 4. Having thus seen the scope of Section 13(b) of the Indian Partnership Act, we shall now refer to clause-7 of thePartnership Deed, which reads thus: “7. The profits or losses of the firm shall bedetermined at the end of the accounting year andshall be divided between the partners and thebeneficiary only as hereinafter provided : (a) An amount not exceeding 10 per cent ofthe profits of the firm for the year shall bedistributed among the partners and beneficiaryevery year, on such basis as may be agreed fromyear to year. (b) In view of the nature of the presentbusiness, the balance of profits, remaining afterdistribution as above, shall be accumulated toabsorb losses of the firm and for othercontingencies till such time as the partners decideotherwise, so however that at least 50 per cent ofthe accumulated profits of a year after setting offany brought forward loss shall be distributedamong the partners and the beneficiary in anyevent before the expiry of three years from thedate of accumulation. The partners do not haveany specified or equal share in the accumulatedprofits and the partners shall decide the amountto be credited or debited as the case may be, toany one or to each partner at any time, givingweightage to the circumstances of the case. Anoutgoing or retiring partner shall have no share inthe accumulated profits and on death, the estateof a deceased partner will get such share, if any,as the continuing partners shall decide .... (d) On the dissolution of the firm, afterpaying all the liabilities of the firm and theamounts standing to the credit of the partners andminor the net surplus will be divided amongst thepartners and the minor in such proportion as thepartners may decide by majority.” W.T.A.19/02 & con. cases 5. A reading of the above provision of the Partnership Deed would show that the partners had agreed amongthemselves that an amount not exceeding 10% of theprofits of the firm for the year shall be distributed amongthe partners, who, admittedly, are five in number. Clause 7(b) also contains an agreement among the partners,regarding the manner in which the remaining 50% is to beappropriated. Section 13(b), as already seen by us, wouldapply in a situation where there is no agreement among thepartners dealing with the appropriation of the profits orlosses and a reading of the aforesaid provision of thepartnership deed would show that there is an agreementbetween the partners in this regard. Evidently therefore, insuch a situation, Section 13(b) of the Partnership Act cannotbe called in aid by the Revenue. 6. This very question was considered by this Court inan appeal filed by another partner of the firm in the W.T.A.19/02 & con. cases judgment in Nalini V. Saraf v. Controller of Estate Duty[268 ITR 223] where this Court has held that Section 13(b) of the Partnership Act is inapplicable and in that context,it was held thus: 6. This very question was considered by this Court inan appeal filed by another partner of the firm in the W.T.A.19/02 & con. cases judgment in Nalini V. Saraf v. Controller of Estate Duty[268 ITR 223] where this Court has held that Section 13(b) of the Partnership Act is inapplicable and in that context,it was held thus: “So far as the first question is concerned, theassessing authority held that section 13(b) of thePartnership Act applies and hence all the partnersshare profits equally and the share was fixed at20 per cent. But as rightly stated by the Tribunal,section 13(b) of the Act applies only when there isno contract to the contrary. A look at clause 7 ofthe partnership deed would show that there iscontract to the contrary. As to what share apartner will be entitled to is not specific. As amatter of fact, this question came up forinterpretation in the decision in CIT v. SarafTrading Corporation [1999] 239 ITR 41 (Ker.). ADivision Bench of this court while interpreting thisclause held as follows (headnote): “it was not thebasis alone, but the factum of the agreementspecifying share ratio in profits/losses that isnecessary to exclude the right in shareprofits/losses equally. If upon scrutiny it wasfound that no contract specifying the share ratioin profits/losses was made after September 16,1981, to distribute profits/losses for theassessment year 1982-83, then section 13(b)would apply. Neither the Assessing Officer nor theAppellate Officer nor the Appellate Tribunal -7- probed into the vital aspect whether the partners,in fact, made any agreement after September 16,1981, to specify share ratio in profits/losses. Thequestion pertaining to the application of section13(b) of the Indian Partnership Act had to beremanded to the Assessing Officer”. Here we findthat the profit has been declared and it wasshown as Rs.9,000. Hence, according to us,section 13(b) of the Partnership Act will not apply.The Tribunal was not correct in fixing the share at10 per cent. The share of the deceased partnerwas Rs. 9,000 and that has to be taken intoaccount.” 7. This judgment of the Division Bench was upheld by the Apex Court by dismissing Civil Appeal No.8247 of 2004by its judgment dated 25.11.2009. Subsequently, the sameview has been taken by this Court in I.T.A. No.1170 of 2009concerning an assessment against the firm itself. 8. However, the learned Senior Counsel for the Revenue raised a contention that in the absence of anyspecification in clause-7 of the Partnership Deed regardingthe percentage of profit or loss per partner, the Revenuewas entitled to take recourse to Section 13(b) of the Indian W.T.A.19/02 & con. cases Partnership Act. Having considered this submission, weconfess our inability to accept the contention. This is for thereason that there is no provision in the Partnership Actrequiring that the Partnership Deed should contain the ratioof profit and loss per partner. If that be so, the partners arefree to have a provision similar to clause-7, leaving themanner of apportionment to be decided by the partners. Solong as this clause reflects an agreement between thepartners, irrespective of its vagueness, Section 13(b) cannotbe invoked. 9. The upshot of the above discussion that thequestion of law raised as to whether the Revenue could relyon Section 13(b) of the Indian Partnership Act has to beanswered against the Revenue and in favour of theassessee. In the light of the above the appeals filed by theRevenue will stand dismissed and the I.T.Rs at the instance W.T.A.19/02 & con. cases -9- of the assessee will stand disposed of as above. Sd/- ANTONY DOMINIC JUDGE Sd/- JUDGE A. MUHAMED MUSTAQUE kns/- //TRUE COPY// P.S. TO JUDGE