Full Judgment Text
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PETITIONER:
DULICHAND LAKSHMINARAYAN
Vs.
RESPONDENT:
THE COMMISSIONER OF INCOME-TAX,NAGPUR.
DATE OF JUDGMENT:
17/02/1956
BENCH:
DAS, SUDHI RANJAN
BENCH:
DAS, SUDHI RANJAN
BHAGWATI, NATWARLAL H.
AIYYAR, T.L. VENKATARAMA
CITATION:
1956 AIR 354 1956 SCR 154
ACT:
Indian lncome Tax Act,1922(Act XI of 1922), s. 26-A and 2(6-
B)-Indian Partnership Act, 1932 (Act IX of 1932), s. 4-
Registration of an unregistered firm constituted under a
deed of partnership-Five constituent parties-Three separate
firms constituted under three separate deeds of partnership-
Signatures on deed by three different persons on behalf of
three firms respectively-Fourth party a Hindu undivided
family of which karta put the signature on deed-Fifth party
an individual-’Whether registration of such a firm competent
under a.26-Aof Indian Income Tax Act, 1922-Firm and
partnership-Definitions of-Indian Partnership Act, 1932, s.
4-Firm-Firm name-PartnershipPartner-Meanings of-Partnership,
general concept of-Word "persons" ins. 4-Meaning of-Firm-
Whether a person and whether entitled to enter into
partnership with another firm or Hindu undivided family or
individuals.
HEADNOTE:
In connection with the assessment for the assessment year
1949-1950 of Dulichand Lakshminarayan an unregistered firm,
an application was made under s. 26-A of the Indian Income-
Tax Act, 1922 before Income-Tax Officer, Raigarh, for its
registration as a firm constituted under a Deed of
Partnership dated 17th February, 1947. In the opening
paragraph of the deed the names and descriptions of the five
parties thereto were set out. The signatures of five per-
sons were appended on behalf of five parties respectively at
the foot of the deed.
It was common ground that out of the five constituent
parties, D.L., J.H., and L.C., were separate firms
constituted under three separate deeds of partnership. The
three different persons who signed the deed on behalf of
those three firms respectively were partners in their
respective firms. The fourth party M.B. was the name of a
business carried on by a Hindu undivided family of which the
person who signed it was the karta. The fifth party M.G.
was an individual.
The Income-Tax Officer rejected the application on the
ground that Dulichand Lakshminarayan, constituted under the
deed dated 17th February 1947, consisted of three firms, one
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Hindu undivided family business and one individual and that
a firm or a Hindu undivided family could not as such enter
into a partnership with other firms or individual,
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The assessee’s appeal to the Appellate Assistant
Commissioner was dismissed but it succeeded before the
Income Tax Appellate Tribunal who directed registration of
the firm. On the application of the Commissioner of Income
Tax under s. 66(1) of the Income Tax Act the High Court held
that on the facts of the case the assessee was not entitled
to registration under s. 26-A of the Income Tax Act. On
appeal to the Supreme Court:
Held that a perusal of the deed would indicate beyond any
doubt that the intention of the parties quite clearly was
that each of the three constituent firms and not the
particular member of each of the said three firms who had
signed the deed for his respective firm was to be the
partner in the bigger firm constituted under this deed.
The contention that only the five individual executant of
the deed were the partners of the newly created firm was
against the tenor of the deed and was therefore without
force.
Section 26-A of the Indian Income Tax Act postulates the
existence of a firm. The Act, however, does not indicate
what a firm signifies or how it is to be constituted.
Section 2(6-B) of the Act clearly provides, inter alia, that
"firm" and "partnership" have the same meaning respectively
as they have in the Indian Partnership Act, 1932.
Section 4 of the Indian Partnership Act (which gives the
definitions of "partnership", "partner", "firm" and "firm
name") clearly requires the presence of three elements
namely (1) that there must be an agreement entered into by
two or more persons: (2) that the agreement must be to share
the profits of a business; and (3) that the business must be
carried on by all or any of those persons acting
for all.
The general concept of partnership according to both systems
of
law, English as well as Indian, is that a firm is not an
entity or
"person" in law but is merely an association of individuals
and a
firm name is only a collective name of those individuals who
constitute the firm. In other words a firm name is merely
an expression, only a compendious mode of designating the
persons who have agreed to carry on business in partnership.
The word "persons" in s. 4 of the Indian Partnership Act,
which has replaced s. 239 of the Indian Contract Act,
contemplates only natural or artificial, i.e., legal persons
and therefore a firm is not a person and as such is not
entitled to enter into a partnership with another firm or
Hindu undivided family or individual and there is no
question of registration of a partnership purporting to be
one between three firms, a Hindu undivided family business
and an individual as a firm unders. 26-A of the Act, as in
the present case.
Jabalpur Ice Manufacturing Association v. Commissioner of
Income Tax, Madhya Pradesh and Bhopal ([1965] 27 I.T.R. 88),
Exparte Oorbett, In re Shad, ([1880] L.R. 14 Cb. 122, 126),
Bhag-
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wanji Morarji Goculdas v. Alembic Chemical Works Co. Ltd.
and others (A.I.R. 1948 P.C. 100), Commissioner of Income
Tax, West Bengal v. A. W. Figgies & Co. and others ([1954]
S.C.R. 171), and In re Jai Dayal Madan Gopal, ([1933] I.T.R.
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186), referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 195 of 1955.
Appeal from the judgment and order dated the 30th day of
December 1953 of the Nagpur High Court in Miscellaneous
Civil Case No. 35 of 1952.
Kirpa Ram Bajaj, Hardyal Hardy, with him) for the appellant.
C. K. Daphtary, Solicitor-General of India (G. N. Jo8hi
and R. H. Dhebar, with him) for the respondent.
1956. February 17. The Judgment of the Court was delivered
by
DAS C.J.-This is an appeal from the judgment and order
passed by a Bench of the Nagpur High Court on the 30th
December, 1953 in Miscellaneous Civil Case No. 35 of 1952,
whereby the Bench answered in the negative the question that
had been referred to them by the Income Tax Appellate
Tribunal, Bombay under section 66(1) of the Indian Income
Tax Act, 1922 (hereinafter referred to as the Act).
In connection with the assessment for the assessment year
1949/1950 of Dulichand Laxminarayan, an unregistered firm,
an application was made under section 26-A of the Act before
the Income Tax Officer, Raigarh for its registration as a
firm constituted under a Deed of Partnership dated the 17th
February 1947. In the opening paragraph of that deed the
names and descriptions of the parties thereto were set out
in the following words:--
"We, Dulichand Laxminarayan Firm, through Malik (partner)
Laxmi Narayan son of Laljimal, Laxmi Narayan Chandulal Firm
through Malik (partner) Chandulal son of Nanakchand,
Mulkhram Bholaram Firm through Malik (partner) Tekchand son
of Bholaram, Jeramdas Hiralal Firm through
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Malik (partner) Beharilal son of Asharam and Mangatrai
Ganpatram through Malik (partner) Ganpatram son of
Mangatrai, Agarwar Bani, aged 50, 40, 28, 25, 45 residing at
Raigarh are partners in equal shares - with effect from 5-1-
1946 -in the firm Dulichand Laxminarayan in whose name
Importers’ Licence of cloth is issued for Raigarh State
group Raigarh, Jaipur Saraigarh, Udeypur and Sakti State, on
the following terms and conditions........................
Then follow 15 clauses containing the terms on which the
partnership business was agreed to be done. At the foot of
the deed signatures were appended in the following order one
below the other:-
Laxminarayan for Dulichand Laxmi Narayan.
Beharilal for Jairam Das Hiralal.
Ganpatram for Mangatrai Ganpatram.
Tekchand for Mukhram Bholaram.
Chandulal for Laxminarayan Chandulal.
It is common ground that out of the five constituent parties
Dulichand Laxminarayan, Jairamdas Hiralal and Laxminarayan
Chandulal are separate firms constituted under three
separate deeds of partnership and that Laxminarayan,
Beharilal and Chandulal, who signed the deed on behalf of
those firms are partners in their respective firms. There
is also no dispute that Mukbram Bholaram is the name of a
business carried on by a Hindu undivided family of which
Tekchand, who has signed for it, is the Karta. It is also
conceded that Mangatrai Ganpatrai is an individual. The
application for registration was signed by the same five
individuals who bad signed the deed of partnership.
Finding that Dulichand Laxminarayan constituted under the
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aforesaid Deed of Partnership dated the 17th February 1947
consisted of three firms, one Hindu undivided family
business and one individual and taking the view that a firm
or a Hindu undivided family could not as such enter into a
partnership with other firms or individuals, the Income-Tax
Officer held that the said Dulichand Laxminarayan could not
be registered as a firm under section 26-A and
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accordingly on the 26th February 1950 he rejected the
application.
On appeal the Appellate Assistant Commissioner held that
when a firm entered into a partnership with another firm the
result in law was that all the partners of each of the
smaller firms became partners of the bigger firm and,
therefore, there was no legal flaw in the constitution of
the bigger firm of Dulichand Laxminarayan. He, however,
took the view that, as the application for registration had
not also been signed personally by all the partners of those
three smaller firms as required by section 26-A of the Act
and rule 2 of the Rules framed under section 59 of the Act,
there was no valid application for registration and
consequently the firm could not be registered. The result
was that on the 5th August 1950 the Appellate Assistant
Commissioner dismissed the appeal.
The assessee appealed to the Income Tax Appellate Tribunal.
The Tribunal agreed with the Appellate Assistant
Commissioner that a valid partnership had been brought into
existence but reversed the decision of the Appellate
Assistant Commissioner on the ground that as all the five
executants of the deed had signed the application for
registration, the requirements of law had been satisfied.
Accordingly on the 12th June 1951 the Tribunal directed
registration of the firm.
On the application of the Commissioner of Income Tax,
Madhya Pradesh the Tribunal under section 66(1) of the Act
drew up a Statement of Case and submitted to the High Court
of Nagpur the following question of law, namely:-
Whether on the facts of the Case the assessee is entitled to
registration under section 26-A of the Income Tax Act?
The reference came up for hearing before a Bench of the
Nagpur High Court on the 30th December 1953. Following
their own judgment delivered earlier in the day in
Miscellaneous Civil Case No. 189 of 1951, Jabalpur Ice
Manufacturing Association v. Commissioner of Income Tax,
Madhya Pradesh and Bhopal(1),
(1) [1955] 27 I.T.R. 88.
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the High Court answered the referred question in the
negative. In view, however, of the importance of the
question involved in the reference the High Court, under
section 66-A(2) of the Act, gave a certificate of fitness
for appeal to this Court. Hence the present appeal.
Section 26-A of the Act under which the application for
registration was made provides as follows:-
(1) Application may be made to the Income-tax Officer on
behalf of any firm, constituted under an instrument of
partnership specifying the individual shares of the
partners, for registration for the purposes of this Act and
of any other enactment for the time being in force relating
to income-tax or supertax.
(2) The application shall be made by such person or
persons, and at such times and shall contain such
particulars and shall be in such form, and be varied in such
manner, as may be prescribed; and it shall be dealt with by
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the Income-tax Officer in such manner as may be prescribed.
The relevant portion of rule 2 of the Rules made under
section 59 of ’the Act runs thus: -
"Any firm constituted under an Instrument of Partnership
specifying the individual shares of the partners may, under
the provisions of section 26-A of the Indian Income-tax Act,
1922 (hereinafter in these rules referred to as the Act),
register with the Income-tax Officer, the particulars
contained in the said Instrument on application made in this
behalf.
Such application shall be signed by all the partners (not
being minors) personally, or..............
At the hearing before us it was at one time suggested that
the partners of the firm consisted of the five individuals
who had signed the deed and each of them had an’ equal share
as specified therein and that as all the said five partners
had signed the application for registration the requirements
of section 26-A of the Act and rule 2 had been fully
complied with -and the assessee should have been registered
as a firm for the purposes of the Act. A perusal of the
deed and par-
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ticularly the portions hereinbefore set out indicate beyond
any doubt that the intention of the parties quite clearly
was that each of the three constituent firms and not the
particular member of each of the said three firms who had
signed the deed for his respective firm was to be the
partner in the bigger firm constituted under this deed. The
contention that only the five individual executants of the
deed were the partners of the newly created firm runs
counter to the apparent tenor of the deed and cannot be
entertained. Indeed learned counsel appearing in support of
this appeal did not press this point. The main argument
before us has centred round the larger question as to
whether a firm as such can be a partner in another firm.
Section 26-A of the Act quoted above postulates the
existence of a firm, for otherwise no question of its
registration can possibly arise. The Act, however, does not
indicate what a firm signifies or how it is to be
constituted. Indeed section 2(6B) of the Act clearly
provides,inter alia, that "firm" and "partnership" have the
same meanings respectively as they have in the Indian
Partnership Act, 1932. We have, therefore,, to go to the
last mentioned Act to ascertain what a firm is and how it
can be created.
Turning, then, to the Indian Partnership Act, 1932 we come
to section 4 which defines ’partnership", "partner", "firm"
and "firm name" in the words following:-
4. Definition of "Partnership", "Partner", "firm" and
"firm name:-"Partnersbip" 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.
Persons who have entered into partnership with one another
are called individually "partners" and collectively "a
firm", and the name under which their business is carried on
is called the "firm name".
This section clearly requires the presence of three
elements, namely (1) that there must be an agreement entered
into by two or more persons; (2) that the agreement must be
to share the profits of a business;
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and (3) that the business must be carried on by all or any
of those persons acting for all. According to this
definition "persons" who have entered into partnership with
one another are collectively called a "firm" and the name
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under which their business is carried on is called the "firm
name". The first question that arises is as to whether a
firm as such can enter into an agreement with another firm
or individual. The answer to the question would depend on
whether a firm can be called a "person".
There is no definition of the word "person" in the
Partnership Act. The General Clauses Act, 1897, however, by
section 3 (42) provides that "person shall include any
company or association or body of individuals whether
incorporated or not". The firm is not a company but is
certainly an association or body of individuals. The
argument is that applying that definition to the word
"persons" occurring in section 4, one can at once say that
an unincorporated association or body of persons, like a
firm, can enter into a partnership just as by the
application of that definition to section 4 of the Indian
Partnership Act a company can become a partner in a firm.
The definitions given in section 3 of the General Clauses
Act, 1897, however, apply when there is nothing repugnant in
the subject or context. It is difficult to say that there
is anything repugnant in the context of section 4 itself
which will exclude the application of that definition to the
word "Persons" occurring in section 4. Is there, however,
anything repugnant in the subject of partnership law, which
will exclude the application of that definition to section
4?
As pointed out in Lindley on Partnership, llth Edition, at
page 153, merchants and lawyers have different notions
respecting the nature of a firm. Commercial men and
accountants are apt to look upon a firm in the light in
which lawyers look upon a corporation, i.e., as a body
distinct from the members composing it. In other words
merchants are used to regard a firm, for purposes of
business, as having a separate and independent existence
apart from its partners. In some systems of law this
separate per-
162
sonality of a firm apart from its members has received full
and formal recognition, as, for instance, in Scotland. That
is, however, not the English Common Law conception of a
firm. English Lawyers do not recognize a firm as an entity,
distinct from the members composing it. Our partnership law
is based on English Law and we have also adopted the notions
of English lawyers as regards a partnership firm.
Some of the mercantile usages relating to a firm have,
however, found their way into the law of partnership. Thus
in keeping accounts, merchants habitually show a firm as a
debtor to each partner for what he brings into the common
stock and each partner is shown as a debtor to the firm for
all that he takes out of that stock. But under the English
Common Law, a firm, not being a legal entity, could not sue
or be sued in the firm name or sue or be sued by its own
partner, for one cannot sue oneself. Later on this rigid
law of procedure, however, gave way to considerations of
commercial convenience and permitted a firm to sue or be
sued in the firm name, as if it were a corporate body (see
Code of Civil Procedure, Order XXX corresponding to rules of
the English Supreme Court Order XLVIII-A). The law of
procedure has gone to the length of allowing a firm to sue
or be sued by another firm having some common partners or
even to sue or be sued by one or more of its own partners
(see Order XXX, rule 9 of the Code of Civil Procedure), as
if the firm is an entity distinct from its partners. Again
in taking partnership accounts and in administering
partnership assets, the law has, to some extent, adopted the
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mercantile view and the liabilities of the firm are regarded
as the liabilities of the partners only in case they cannot
be met and discharged by the firm out of its assets. The
creditors of the firm are, in the first place, paid out of
the partnership assets and if there is any surplus then the
share of each partner in such surplus is applied in payment
of his separate debts, if any, or paid to him. Conversely,
separate property of a partner is applied first in the
payment of his separate debts and the surplus, if any is
utilised in meeting the
163
debts of the firm (see section 49 of the Indian Partnership
Act, 1932). In the Indian Income Tax Act itself a firm is,
by section 3, which is the charging section, made a unit of
assessment.
It is clear from the foregoing discussion that the law,
English as well as Indian, has, for some specific purposes,
some of which are referred to above, relaxed its rigid
notions and extended a limited per,personality of a firm.
Nvertheless, the general concept of partnership, firmly
established in both systems of Law, still is that a firm is
not an entity or "person" in law but is merely an
association of individuals and a firm name is only a
collective name of those individuals who constitute the
firm. In other words, a firm name is merely an expression,
only a compendious mode of designating the persons who have
agreed to carry on business in partnership. According to
the -principles of English jurisprudence, which we have
adopted for the purposes of determining legal rights "there
is no such thing as a firm known to the law" as
was said by James, L. J. in Ex parte Corbett, In re Shand(1)
In these circumstances to import the definition of the word
"person" occurring in section 3(42) of the General Clauses
Act, 1897 into section 4 of the Indian Partnership Act will,
according to lawyers, English or Indian,, be totally
repugnant to the subject of partnership law as they know and
understand it to be. It is in this view of the matter that
it has been consistently held in this country that a firm as
such is not entitled to enter into partnership with another
firm or individuals. It is not necessary to refer in detail
to those decisions many of which will be found cited in
Jabalpur Ice Manufacturing Association v. Commissioner of
Income-tax, Madhya Pradesh(2) to which a reference has
already been made. We need only refer to the case of
Bhagwanji Morarji Goculdas v. Alembic Chemical Works Co. Ltd
and others(3), where it has been laid down by the Privy
Council that Indian Law has not given legal personality to a
firm apart from the partners. This
(1) [1880] L.R. 14 Ch. 122, 126. (2) [1955] 27 I.T.R. 88.
(3) A.I.R. 1948 P.C. 100.
164
view finds support from and is implicit in the observations
made by this Court in the Commissioner of Income-Tax, West
Bengal v. A. W. Figgies & Co. and others(1).
In Jai Dayal Madan Gopal(2), Sulaiman C. J. followed the
Calcutta decisions and was not prepared to dissent from the
view that the word "person" in section 239 of the Indian
Contract Act, 1872 should not be interpreted so as to
include a firm. The learned Chief Justice, however,
expressed the view that it was difficult to say that there
was anything in section 239 itself which made the
application to that section of the definition of "person" as
given in General Clauses Act in any way repugnant. The
learned Chief Justice, however, does not appear to have con-
sidered whether there was anything repugnant in the subject
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of partnership law, as it prevails in this country, which
operates to exclude the application of that deanition to the
word "person" occurring in section 239 of the Indian
Contract Act. In our opinion, the word "Persons" in section
4 of the Indian Partnership Act, which has replaced section
239 of the Indian Contract Act, contemplates only natural or
artificial, i.e., legal persons and for the reasons stated
above, a firm is not a "person" and as such is not entitled
to enter into a partnership with another firm or Hindu
undivided family or individual. In this view of the matter
there can arise no question of registration of a partnership
purporting to be one between three firms, a Hindu undivided
family business and an individual as a firm under section
26-A of the Act.
The learned Advocate for the appellant then urges that at
any rate the partnership was not illegal, for there was no
legal impediment in the way of all the members of all the
three constituent firms and the karta of the Hindu undivided
family and the individual entering into an agreement and
that, therefore, a valid partnership was constituted by the
deed of partnership under consideration. Assuming that this
contention is possible in view of the language which
(1) [1954] S.C.R. 171; 1953 I.T.R. 405.
(2) [1983] I.T.R. 186.
165
has been used in this deed for describing the parties, the
position of the appellant will not improve, for in order to
be entitled to the benefit of registration under the Act, it
will have to be shown that the shares of all individual
partners are specified in the deed and that all the partners
have personally signed the application for registration as
required by section 26-A of the Act read with Rule 2. The
deed specifies that each of the five constituent parties is
entitled to an equal, i.e., 1/5 share but it does not
specify the individual shares of each of the partners of
each of the three smaller constituent firms. Further all
the members of those three firms have not signed the
application for registration personally. It is said that
each of the three persons who executed the deed for the
three smaller firms must be regarded as having the authority
of their co-partners in their respective firms to sign the
application for registration just as they had their
authority to execute the deed itself for them. Even if they
had such authority-as to which there is no evidence at all
on the record-the section and rule 2 require that each
partner (not being minors) must sign personally. That
admittedly has not been done, and., therefore, the
application was not in proper form. In our judgment the
answer given by the High Court to the question is correct.
This appeal must, therefore, be dismissed with costs.
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