COMMISSIONER OF INCOME TAX vs. DR.ASHA V.SARAF

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 BENCH DATED 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 SAME DAY 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 28th 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 only common question of law raised for consideration is whether Section 13(b) of the Indian Partnership Act, 1932, could be invoked by the Revenue in the context of clause-7 of the Partnership Deed of the firm, M/s Saraf Trading Corporation. 2. On this issue we heard the learned Senior Counsel for the Revenue and the learned counsel appearing for the respective 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 -2- partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm. In Mandyala Govindu & Co. v. C. I. T. (SC) [1976 ITR Volume 102], the Apex Court held that Section 13(b) of the Indian Partnership Act, 1932, reproduces the provisions of the repealed Section 253(2) of the Indian Contract Act, 1872, and referred to the judgment in [1935] ILR 58 Mad. 25, 28, which explained the scope of Section 253(2), where it was held thus: “Section 253(2) of the Indian Contract Act lays down that all partners are entitled to share equally in the profits of the partnership business, and must contribute equally towards the losses sustained by the partnership. As I read the section, it lays down two presumptions with which the court should start. The two presumptions are clubbed in one sub-section. The first is, if no specific contract is proved, the shares of the partners must be presumed to be equal. In the present case, the plaintiff alleged unequal shares which were not denied by the defendants. So the parties being agreed on their pleadings as to the shares possessed by them in the profits, there is no scope for the application of this first presumption. The second presumption is

W.T.A.19/02 & con. cases -3- that where the partners are to participate in the profits in certain shares they should also participate in the losses in similar shares. Now, the section says that both should be in equal shares but implies that if unequal shares are admitted by the partners as to profits that applies equally to losses. In the absence of a special agreement, that this should be the presumption with which one should start is merely a matter of common sense and in India one has only to rely on Section 114 of the Evidence Act for such a principle.” 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 Indian Partnership Act, 1932; the two provisions are in identical terms. 4. Having thus seen the scope of Section 13(b) of the Indian Partnership Act, we shall now refer to clause-7 of the Partnership Deed, which reads thus: “7. The profits or losses of the firm shall be determined at the end of the accounting year and shall be divided between the partners and the beneficiary only as hereinafter provided :

W.T.A.19/02 & con. cases -4- (a) An amount not exceeding 10 per cent of the profits of the firm for the year shall be distributed among the partners and beneficiary every year, on such basis as may be agreed from year to year. (b) In view of the nature of the present business, the balance of profits, remaining after distribution as above, shall be accumulated to absorb losses of the firm and for other contingencies till such time as the partners decide otherwise, so however that at least 50 per cent of the accumulated profits of a year after setting off any brought forward loss shall be distributed among the partners and the beneficiary in any event before the expiry of three years from the date of accumulation. The partners do not have any specified or equal share in the accumulated profits and the partners shall decide the amount to be credited or debited as the case may be, to any one or to each partner at any time, giving weightage to the circumstances of the case. An outgoing or retiring partner shall have no share in the accumulated profits and on death, the estate of a deceased partner will get such share, if any, as the continuing partners shall decide .... (d) On the dissolution of the firm, after paying all the liabilities of the firm and the amounts standing to the credit of the partners and minor the net surplus will be divided amongst the partners and the minor in such proportion as the partners may decide by majority.”

W.T.A.19/02 & con. cases -5- 5. A reading of the above provision of the Partnership Deed would show that the partners had agreed among themselves that an amount not exceeding 10% of the profits of the firm for the year shall be distributed among the 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 be appropriated. Section 13(b), as already seen by us, would apply in a situation where there is no agreement among the partners dealing with the appropriation of the profits or losses and a reading of the aforesaid provision of the partnership deed would show that there is an agreement between the partners in this regard. Evidently therefore, in such a situation, Section 13(b) of the Partnership Act cannot be called in aid by the Revenue. 6. This very question was considered by this Court in an appeal filed by another partner of the firm in the

W.T.A.19/02 & con. cases -6- 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, the assessing authority held that section 13(b) of the Partnership Act applies and hence all the partners share profits equally and the share was fixed at 20 per cent. But as rightly stated by the Tribunal, section 13(b) of the Act applies only when there is no contract to the contrary. A look at clause 7 of the partnership deed would show that there is contract to the contrary. As to what share a partner will be entitled to is not specific. As a matter of fact, this question came up for interpretation in the decision in CIT v. Saraf Trading Corporation [1999] 239 ITR 41 (Ker.). A Division Bench of this court while interpreting this clause held as follows (headnote): “it was not the basis alone, but the factum of the agreement specifying share ratio in profits/losses that is necessary to exclude the right in share profits/losses equally. If upon scrutiny it was found that no contract specifying the share ratio in profits/losses was made after September 16, 1981, to distribute profits/losses for the assessment year 1982-83, then section 13(b) would apply. Neither the Assessing Officer nor the Appellate Officer nor the Appellate Tribunal

W.T.A.19/02 & con. cases -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. The question pertaining to the application of section 13(b) of the Indian Partnership Act had to be remanded to the Assessing Officer”. Here we find that the profit has been declared and it was shown 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 at 10 per cent. The share of the deceased partner was Rs. 9,000 and that has to be taken into account.” 7. This judgment of the Division Bench was upheld by the Apex Court by dismissing Civil Appeal No.8247 of 2004 by its judgment dated 25.11.2009. Subsequently, the same view has been taken by this Court in I.T.A. No.1170 of 2009 concerning an assessment against the firm itself. 8. However, the learned Senior Counsel for the Revenue raised a contention that in the absence of any specification in clause-7 of the Partnership Deed regarding the percentage of profit or loss per partner, the Revenue was entitled to take recourse to Section 13(b) of the Indian

W.T.A.19/02 & con. cases -8- Partnership Act. Having considered this submission, we confess our inability to accept the contention. This is for the reason that there is no provision in the Partnership Act requiring that the Partnership Deed should contain the ratio of profit and loss per partner. If that be so, the partners are free to have a provision similar to clause-7, leaving the manner of apportionment to be decided by the partners. So long as this clause reflects an agreement between the partners, irrespective of its vagueness, Section 13(b) cannot be invoked. 9. The upshot of the above discussion that the question of law raised as to whether the Revenue could rely on Section 13(b) of the Indian Partnership Act has to be answered against the Revenue and in favour of the assessee. In the light of the above the appeals filed by the Revenue 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/- A. MUHAMED MUSTAQUE JUDGE kns/- //TRUE COPY// P.S. TO JUDGE