Partnership deed can be rectified with retrospective effect

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HIGH COURT OF ALLAHABAD

Commissioner of Income-tax

v.

Alison Singh & Co.

IT REFERENCE No. 140 OF 1987

MARCH 18, 2013

JUDGMENT

 

The partnership is governed under the provisions the Indian Partnership Act, 1932. Section-4 defines partnership as “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”. Section-5 provides that the relation of the partnership may be reduced in writing through a contract between them while Section-7 provides that where there is no written contract, the partnership be treated as partnership at will. In that case, terms between the partners can be examined through their conduct and other circumstances. Under this Act, the only restriction is that the contract should be a lawful contract according to the provisions of Indian Contract Act. Division of share in profit/loss of the business between the partners is governed by the mutual agreement between the partners and not by any statutory provisions. It was case of the partners that through out their agreement was to share profits/loss in the ratio of their share capital but due to inadvertent mistake in clause-5 of the deed dated 24.05.1974, sharing of profit/loss of the business in the ratio of their capital investment in the business was not mentioned, as such deed dated 06.02.1980 was executed and signed by all the partners in order to rectify this mistake. All the partners admitted that they were sharing profit/loss of the business in the ratio of their capital investment in the business through out which was also proved by producing the previous income-tax records. Thus the deed dated 06.02.1980 is only a rectification deed. Even otherwise also the partners can change terms and conditions under the law. Since deed dated 06.02.1980 is a rectification deed and has been executed according to real agreement between the partners, which is proved from their previous record as such objection of the IAC that the deed would have no retrospective effect, is not liable to be accepted.

Section 184 (4) provides that application for registration of the firm shall be made before end of the previous year for the assessment year. Section 184 (8) of the Act requires that on any change in the constitution of the firm fresh registration be obtained. Explanation of Section 185 (1) of the Act has limited scope of the inquiry of the Income-tax Officer to the extent that as to whether any partner stand in relationship of a spouse or minor child or any income of the firm being shared by benaimdar. In this case, the respondent moved for fresh registration well within time. The income of the firm was not shared by any benamidar, nor any partner stand in relationship of a spouse or minor, as such, the application could not be rejected. Income-tax Authority cannot question the change in the constitution of the firm.