Om Prakash, C.J. 1. In compliance with the direction of this court under Section 256(2) of the Income-tax Act, 1961 (hereinafter to be referred as "the Act"), the Income-tax Appellate Tribunal referred the following common question, at the instance of the Revenue, relating to the assessment years 1982-83 and 1986-87, for the opinion of this court :
"Whether, on the facts and in the circumstances of the case, the Revenue could treat the firm as registered under Section 183(b) of the Income tax Act, 1961 ?"
2. The facts, as found, by the Appellate Tribunal, are that the assessee-firm, engaged in the business of commission agent and export of tea, was originally constituted as a partnership firm by three partners under a partnership deed dated November 27, 1963. Vide partnership deed dated September 16, 1981, the partnership was reconstituted, inasmuch as a new partner was inducted and a minor was admitted to the benefits of partnership. The assessee did not apply for registration under the Act in respect of any assessment year right from the assessment year 1982-83 and it continued to be an unregistered firm all these years. The Inspecting Assistant Commissioner (Assessment) completed the assessment for the assessment year 1982-83 treating the assessee as a registered firm applying the provisions of Section 183(b) of the Act. While completing the assessment for the assessment year 1982-83, the income was allocated between two separate periods, that is, from November 8, 1980 to September 15, 1981 (first period) and from September 16, 1981 to October 27, 1981 (second period), considering the fact that change in constitution became effective from September 16, 1981. The profit for the first period was allocated among the partners on the basis of the profit sharing ratio, as laid down in the original partnership deed dated November 27, 1963. The Assessing Officer found that there was no specific sharing ratio as per the partnership deed dated September 16, 1981, where-under the assessee-firm was reconstituted and so, he apportioned the profits of the second period equally among all the partners applying the provisions of Section 13(b) of the Indian Partnership Act, 1932.
3. For the assessment years 1983-84 and 1984-85, which are not relevant for the purpose of the instant reference, there was no change in the constitution of the firm and the entire total income was apportioned among the partners, including the minor admitted to the benefits of partnership, in equal proportion, in view of Section 13(b) of the Partnership Act.
4. On appeal, the Commissioner of Income-tax (Appeals) held that the Assessing Officer was justified in invoking Section 13(b) of the Partnership Act and in completing the assessment for the assessment year 1982-83 treating the firm as a registered firm under Section 183(b) of the Act.
5. On further appeal, the Appellate Tribunal, in its order dated June 24, 1993, adverting to the provisions of the partnership deed dated September 16, 1981, in general and clause 7 thereof in particular, came to the conclusion that upon a perusal of clause 7 of the deed as a whole, it would be seen that what was intended is not to have a profit or loss sharing arrangement in equal proportion ; nor to have a permanent profit and loss sharing ratio. The Tribunal particularly noted that the deed is not silent about how the profits are to be dealt with. In the opinion of the Tribunal, clause 7 of the deed dated September 16, 1981, deals with the distribution of profits, but such distribution is made subject to the agreement among the partners from time to time, when the question of distribution arises. When the basis of distribution has thus been described, the Tribunal took the view that it could not be said that there was no contract among the partners with regard to the manner in which they would share the profit or loss. Therefore, the Tribunal concluded that the provisions of Section 13(b) of the Partnership Act are not attracted to the facts of the case.
6. Further, the Tribunal held that no material was brought on record to show as to how it would be advantageous for the Revenue "to treat the assessee firm as a registered firm invoking Section 183(b) of the Act". The Tribunal said that "the case has proceeded on the presumption that it would be advantageous for the Revenue, if the profits are distributed among the adult partners and the minor admitted to the benefits of partnership equally". The Tribunal also held that nowhere did the Assessing Officer indicate any working to show that "it would be profitable to treat the firm as a registered firm under Section 183(b) of the Income-tax Act. The assessee had also furnished certain working before us to buttress the point that the tax paid by the unregistered firm will be much more than the tax payable if registration is granted to the assessee firm. Having regard to these facts, we deem it fit to set aside the orders of the Commissioner of Income-tax (Appeals) and restore the issue to the file of the Assessing Officer with a direction to examine the issue afresh in the light of our discussion."
7. The partnership deed dated September 16, 1981, remained operative in the year 1986-87 as well and hence the Tribunal explicitly pointed out that the facts relating to the assessment years 1982-83 and 1986-87 "are identical".
8. The first question canvassed before us is, whether, on the facts and in the circumstances of the case, the provisions of Section 13(b) of the Partnership Act are applicable.
9. The question referred to us under Section 256(2) does not allude to Section 13(b) of the Partnership Act. But the fact remains that the Revenue certainly disputed the findings of the Appellate Tribunal that on the facts and in the circumstances of the case, Section 13(b) was not applicable. However, this court while disposing of the application made under Section 256(2) of the Act, thought it proper that only one question, reproduced above, would cover the whole controversy. Learned counsel for the assessee, therefore, fairly stated before us that the question : whether Section 13(b) can be applied to the facts of the case, also requires to be considered and hence, we examine the question whether the Assessing Officer rightly applied the provisions of Section 13(b) to the facts of this case.
10. Section 13(b) clearly indicates that in the absence of a contract between the partners, they are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm. So, the point for scrutiny is whether there was contract among the partners to share the profits earned. It is noteworthy that factum of partnership firm is not denied by the Revenue; The contention of the Revenue is that since the partnership deed dated September 16, 1981, does not specify profit/loss sharing ratio, Section 13(b) will apply. The case set up by the assessee is that Clause 7 of the partnership deed dated September 16, 1981, clearly furnishes the basis as to how the profits and losses will be distributed among the partners and the minor admitted to the benefits of partnership. Clause 7 of the deed dated September 16, 1981, in so far as relevant, runs as under :
"(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 beneficiary only as hereinafter provided :
(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 and the balance 50 per cent, of the accumulated profits before the expiry of six 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 partner shall have no share in the accumulated profits and on death, the estate of a deceased partner will get such share any, as the continuing partners shall decide.
(c) In the event of loss, it shall first be set-off against past accumulated profits, if any, and the balance if any, shall be carried forward and set-off against future profits or shall be apportioned amongst the partners and not the minor beneficiary in such proportion and such manner having regard to the circumstances in which the loss arose. . . ."
11. Adverting to clause 7, the Tribunal, in its order dated June 24, 1993, relating to the assessment year 1982-83, found as follows :
"Up to 10 per cent, of the profits each year, distribution can take place among the partners including the minor on such basis as may be agreed from year to year. Though in respect of profits up to 10 per cent, no specific share is assigned to any of the partners including the minor, a basis has been prescribed for distribution of such profits, the basis being the agreement among the partners from year to year. Thus, when the basis for distribution of profits is founded on the agreement among the partners as and when distribution takes place, it cannot be said that there was no contract between the partners in relation to their profit sharing arrangement. . . If there is a contract among the partners as to the manner or method or the basis or the principle to be followed for the distribution of profits, then, in our considered opinion, Section 13(b) cannot be invoked. Clause 7(b) of the partnership deed dated September 16, 1981, enjoins the partners to accumulate the profits in excess of what has been distributed. It is also provided that such accumulated profits to the extent of 50 per cent, is liable for distribution among the partners and here again the manner in which they will share the profits will be on the basis of the agreement between them at that point of time when the question of distribution arises. Thus the agreement among the partners regarding the profit sharing arrangement will be the basis for distribution of 50 per cent, of the accumulated profits .... The manner in which the loss is to be treated has been prescribed in Clause 7(c) of the partnership deed. It can be either set-off against the accumulated profits or can be shared among the adult partners in such proportion, or in such manner having regard to the circumstances in which the loss arose. Again the sharing of loss is made a subject-matter of agreement among the partners who will decide the issue by majority. The minor is excluded from sharing the loss. Thus, a basis had been prescribed for the distribution of loss .... ."
12. Upon the construction of Clause 7 of the deed dated September 16, 1981, the Appellate Tribunal concluded that though sharing ratio in profit/loss was not specified in the deed dated September 16, 1981, but the deed furnished the basis, manner, method or the principle for distribution of profits/losses and, therefore, the contract arrived at among the partners vide partnership deed dated September 16, 1981, would have overriding effect on the right of equality in profits. If there is no contract among the partners, then, surely, the legal principle is that all partners will share the profits equally and they will also contribute to the losses equally. The Tribunal was of the view that since there was a contract for sharing the profits and contributing to the losses of the firm, the provisions of Section 13(b) of the Partnership Act had no application to the facts of the case.
13. It is not in dispute that the deed dated September 16, 1981, itself does not specify share ratio in profits/losses. But the view taken by the Tribunal is that the said deed hinted at an arrangement as to how profits/losses of the assessee-firm would be shared by the partners. In short, Clause 7 of the deed dated September, 16, 1981, stipulates that profits up to 10 per cent, will be distributed in the assessment year 1982-83 and that the rest of the profits will be accumulated and that out of the accumulated profits 50 per cent, will be distributed among the partners before the expiry of three years and the remaining 50 per cent, of the accumulated profits will be distributed among them before the expiry of six years from the date of accumulation. So far as profit-sharing ratio is concerned, Clause 7 stipulates that they will be distributed in the share ratio as agreed upon at the time of distribution of profit/losses. So, the question is whether sequel to the deed dated September 16, 1981, the partners entered into any agreement specifying the share ratio for the profits/losses. Without seeing the follow-up agreement, if any, arrived at among the partners, no view could be expressed straightaway that the partners agreed to a particular share ratio in profits/losses.
14. In the assessment order relating to the assessment year 1982-83, the Assessing Officer, while computing the business income, observed as follows :
"The above is the total income of the assessee for the assessment year 1982 83. The assessee has allocated only Rs. 2,33,200 between the partners as per minutes of the partnership dated June 9, 1982, as per the partnership sharing ratio as given under clause 7 . ..."
15. The basis of allocation of the profits to the tune of Rs. 2,33,200 and the profit-sharing ratio of the partners in the said profits has not been stated by the Assessing Officer. Also, he has not stated whether any agreement was made by the partners in this behalf and if so, on which date and what profit-sharing ratio was mentioned therein. Before coming to the conclusion that Section 13(b) of the Partnership Act will not apply, it was the duty of the Tribunal to ensure that a follow-up agreement was made by the partners specifying the share ratio before allocating the profits.
16. We are, therefore, of the view that the question pertaining to Section 13(b) should have been remanded by the Tribunal to the Assessing Officer asking him to elaborate whether any agreement sequel to the partnership deed dated September 16, 1981, which does not specify the share ratio in profits/losses, was made among the partners specifying the profit-sharing ratio and the ratio in which the partners agreed to contribute the losses. Obsessed by the fact that the deed dated September 16, 1981, furnished the basis as to how the profits/losses will be shared by the partners, the Tribunal straightaway concluded that on the facts of the case, Section 13(b) would not apply. It is not the basis alone, but the factum of the agreement specifying share ratio in profits/losses is necessary to exclude the right to share profits/losses equally. If upon scrutiny it is 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) will apply. Neither the Assessing Officer nor the Appellate Tribunal probed into the vital aspect whether the partners, in fact, made any agreement after September 16, 1981, to specify share ratio in profit/losses.
17. The senior standing counsel argued before us that the partnership deed dated September 16, 1981, which allows accumulation of 90 per cent, profits to be shared in future within six years from the date of accumulation, is wholly vague and no notice could be taken thereof. The deed dated September 16, 1981 is the foundation of the assessee-firm, existence of which is not denied by the Revenue. Therefore, the deed dated September 16, 1981, cannot be ignored. What is argued for the Revenue is that the deed dated September 16, 1981, is wholly vague, inasmuch as that purports to say that share ratio of profits/losses could be specified in future from time to time before distributing profits and contributing losses. It is submitted that the Assessing Officer has to compute the entire income of the assessee firm at the time of making the assessment for each year and that if the deed dated September 16, 1981, is acted upon, then the Assessing Officer would not be in a position to compute the total income of the assessee. This submission of the Revenue does not impress us, inasmuch as computation of income is entirely different from the question whether the partners agreed upon to share profits/losses. If such contract is there, then certainly Section 13(b) of the Partnership Act will have no application. No doubt, the scheme of the Act, as envisaged by Section 66, read with Sections 5 and 2(45) and other provisions, is that assessment will be made in respect of total income. Computation of income will be done under the provisions of the Income-tax Act, but whether there is a contract between the partners pertaining to the share ratio of profits/losses is relevant only under Section 13(b) of the Partnership Act. If such a contract is there, then the Assessing Officer would proceed to commute the total income of the assessee under the provisions of the Income-tax Act and for making computation of total income, the Assessing Officer is not bound by the purports of the agreement, specifying the share ratio in profits/losses. With regard to invoking the provisions of Section 183(b) of the Act, the Tribunal found that the Assessing Officer proceeded on the presumption that it would be advantageous to the Revenue if the profits are distributed among the partners and the minor admitted to the benefits of partnership equally. The Tribunal also observed that in none of the assessments, the Assessing Officer indicated any working to show that it would be profitable to treat the firm as a registered firm under Section 183(b) of the Act. The Tribunal, therefore, deemed it fit to set aside the orders of the Commissioner of Income-tax (Appeals) and restore the issue to the file of the Assessing Officer with a direction to examine the issue afresh in the light of its discussion. So far as remand on the question of Section 183(b) is concerned, we do not see any error in the order of the Tribunal. An unregistered firm can be treated as registered under Section 183(b), if the Assessing Officer finds that the aggregate amount of the tax payable by the partners of the firm were treated as registered firm would be greater than the aggregate amount of tax which would be payable by the firm if it is treated as an unregistered firm and the tax which would be payable by the partners individually in respect of their other income, if any. It was, therefore, necessary for the Assessing Officer to demonstrate as to how taking recourse to Section 183(b) would be advantageous to the Revenue. In the assessment order, the Assessing Officer has not done any exercise in this behalf and, therefore, there was no option for the Tribunal but to remand the case to the Assessing Officer in this regard.
18. In view of the above observations, it is not possible to record categorical findings, on both the questions. So far as Section 183(b) of the Act is concerned, the Appellate Tribunal has already remanded the matter to the Assessing Officer with necessary directions and rightly so. In view of the above discussion, we direct the Tribunal to remand the question pertaining to the application of Section 13(b) of the Partnership Act as well to the Assessing Officer to record a clear finding, in the light of the observations made by us in the body of the judgment.
19. All observations made herein will equally apply to the reference pertaining to the assessment year 1986-87.
20. In the result, the common question referred to us for the assessment years 1982-83 and 1986-87 is returned unanswered.