IN HIGH COURT OF KERALA AT ERNAKULAM PRESENT: HONOURABLE MR.JUSTICE ANTONY DOMINIC & HONOURABLE MR. JUSTICE A.MUHAMED MUSTAQUE FRIDAY, 28TH DAY OF JULY 2017/6TH SRAVANA, 1939 WTA.No.19 of 2002 AGAINST ORDER IN WTA 139/1993 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 06-02-2002 APPELLANT/APPELLANT: 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, COURT ON SAME DAY DELIVERED 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 28th day of July, 2017 JUDGMENT Antony Dominic, J. 1. aIn these appeals arising under Wealth Tax Act, 1957, and references under Income Tax Act, only common question of law raised for consideration is whether Section 13(b) of Indian Partnership Act, 1932, could be invoked by Revenue in context of clause-7 of Partnership Deed of firm, M/s Saraf Trading Corporation. 2. On this issue we heard learned Senior Counsel for Revenue and learned counsel appearing for respective assessees. 3. Section 13(b) of Indian Partnership Act, 1932, provides that subject to contract between partners, W.T.A.19/02 & con. cases -2- partners are entitled to share equally in profits earned, and shall contribute equally to losses sustained by firm. In Mandyala Govindu & Co. v. C. I. T. (SC) [1976 ITR Volume 102], Apex Court held that Section 13(b) of Indian Partnership Act, 1932, reproduces provisions of repealed Section 253(2) of Indian Contract Act, 1872, and referred to judgment in [1935] ILR 58 Mad. 25, 28, which explained scope of Section 253(2), where it was held thus: Section 253(2) of Indian Contract Act lays down that all partners are entitled to share equally in profits of partnership business, and must contribute equally towards losses sustained by partnership. As I read section, it lays down two presumptions with which court should start. two presumptions are clubbed in one sub-section. first is, if no specific contract is proved, shares of partners must be presumed to be equal. In present case, plaintiff alleged unequal shares which were not denied by defendants. So parties being agreed on their pleadings as to shares possessed by them in profits, there is no scope for application of this first presumption. second presumption is W.T.A.19/02 & con. cases -3- that where partners are to participate in profits in certain shares they should also participate in losses in similar shares. Now, section says that both should be in equal shares but implies that if unequal shares are admitted by partners as to profits that applies equally to losses. In absence of special agreement, that this should be presumption with which one should start is merely matter of common sense and in India one has only to rely on Section 114 of Evidence Act for such principle. Thereafter, Apex Court held that principles stated in context of Section 253(2) of Contract Act, 1872, would apply equally to Section 13(b) of Indian Partnership Act, 1932; two provisions are in identical terms. 4. Having thus seen scope of Section 13(b) of Indian Partnership Act, we shall now refer to clause-7 of Partnership Deed, which reads thus: 7. profits or losses of firm shall be determined at end of accounting year and shall be divided between partners and beneficiary only as hereinafter provided : W.T.A.19/02 & con. cases -4- (a) amount not exceeding 10 per cent of profits of firm for year shall be distributed among partners and beneficiary every year, on such basis as may be agreed from year to year. (b) In view of nature of present business, balance of profits, remaining after distribution as above, shall be accumulated to absorb losses of firm and for other contingencies till such time as partners decide otherwise, so however that at least 50 per cent of accumulated profits of year after setting off any brought forward loss shall be distributed among partners and beneficiary in any event before expiry of three years from date of accumulation. partners do not have any specified or equal share in accumulated profits and partners shall decide amount to be credited or debited as case may be, to any one or to each partner at any time, giving weightage to circumstances of case. outgoing or retiring partner shall have no share in accumulated profits and on death, estate of deceased partner will get such share, if any, as continuing partners shall decide .... (d) On dissolution of firm, after paying all liabilities of firm and amounts standing to credit of partners and minor net surplus will be divided amongst partners and minor in such proportion as partners may decide by majority. W.T.A.19/02 & con. cases -5- 5. reading of above provision of Partnership Deed would show that partners had agreed among themselves that amount not exceeding 10% of profits of firm for year shall be distributed among partners, who, admittedly, are five in number. Clause 7 (b) also contains agreement among partners, regarding manner in which remaining 50% is to be appropriated. Section 13(b), as already seen by us, would apply in situation where there is no agreement among partners dealing with appropriation of profits or losses and reading of aforesaid provision of partnership deed would show that there is agreement between partners in this regard. Evidently therefore, in such situation, Section 13(b) of Partnership Act cannot be called in aid by Revenue. 6. This very question was considered by this Court in appeal filed by another partner of firm in 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 Partnership Act is inapplicable and in that context, it was held thus: So far as first question is concerned, assessing authority held that section 13(b) of Partnership Act applies and hence all partners share profits equally and share was fixed at 20 per cent. But as rightly stated by Tribunal, section 13(b) of Act applies only when there is no contract to contrary. look at clause 7 of partnership deed would show that there is contract to contrary. As to what share partner will be entitled to is not specific. As matter of fact, this question came up for interpretation in decision in CIT v. Saraf Trading Corporation [1999] 239 ITR 41 (Ker.). Division Bench of this court while interpreting this clause held as follows (headnote): it was not basis alone, but factum of agreement specifying share ratio in profits/losses that is necessary to exclude right in share profits/losses equally. If upon scrutiny it was found that no contract specifying share ratio in profits/losses was made after September 16, 1981, to distribute profits/losses for assessment year 1982-83, then section 13(b) would apply. Neither Assessing Officer nor Appellate Officer nor Appellate Tribunal W.T.A.19/02 & con. cases -7- probed into vital aspect whether partners, in fact, made any agreement after September 16, 1981, to specify share ratio in profits/losses. question pertaining to application of section 13(b) of Indian Partnership Act had to be remanded to Assessing Officer . Here we find that profit has been declared and it was shown as Rs.9,000. Hence, according to us, section 13(b) of Partnership Act will not apply. Tribunal was not correct in fixing share at 10 per cent. share of deceased partner was Rs. 9,000 and that has to be taken into account. 7. This judgment of Division Bench was upheld by Apex Court by dismissing Civil Appeal No.8247 of 2004 by its judgment dated 25.11.2009. Subsequently, same view has been taken by this Court in I.T.A. No.1170 of 2009 concerning assessment against firm itself. 8. However, learned Senior Counsel for Revenue raised contention that in absence of any specification in clause-7 of Partnership Deed regarding percentage of profit or loss per partner, Revenue was entitled to take recourse to Section 13(b) of Indian W.T.A.19/02 & con. cases -8- Partnership Act. Having considered this submission, we confess our inability to accept contention. This is for reason that there is no provision in Partnership Act requiring that Partnership Deed should contain ratio of profit and loss per partner. If that be so, partners are free to have provision similar to clause-7, leaving manner of apportionment to be decided by partners. So long as this clause reflects agreement between partners, irrespective of its vagueness, Section 13(b) cannot be invoked. 9. upshot of above discussion that question of law raised as to whether Revenue could rely on Section 13(b) of Indian Partnership Act has to be answered against Revenue and in favour of assessee. In light of above appeals filed by Revenue will stand dismissed and I.T.Rs at instance W.T.A.19/02 & con. cases -9- of assessee will stand disposed of as above. Sd/- ANTONY DOMINIC JUDGE Sd/- A. MUHAMED MUSTAQUE JUDGE kns/- TRUE COPY P.S. TO JUDGE Commissioner of Wealth-tax, Cochin v. Asha V. Saraf