Full Judgment Text
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PETITIONER:
MESSRS. R. C. MITTER & SONS
Vs.
RESPONDENT:
THE COMMISSIONER OF INCOME-TAX,WEST BENGAL, CALCUTTA
DATE OF JUDGMENT:
15/04/1959
BENCH:
SINHA, BHUVNESHWAR P.
BENCH:
SINHA, BHUVNESHWAR P.
KAPUR, J.L.
HIDAYATULLAH, M.
CITATION:
1959 AIR 868 1959 SCR Supl. (2) 641
CITATOR INFO :
RF 1961 SC 680 (5)
R 1961 SC1356 (4)
RF 1965 SC1703 (5)
F 1985 SC1572 (7)
F 1986 SC 123 (3)
ACT:
Income-tax-Registration of firm-Procedure-" Constituted
under an instrument of Partnership ", Meaning of-lndian
Income-tax Act, 1922 (XI Of 1922), S. 26A, Rules 2 to 6B.
HEADNOTE:
The question for determination in these two appeals was
whether the appellant firms were entitled to registration
under S. 26A of the Indian Income-tax Act and the common
point of law involved was the interpretation of the words "
constituted under an instrument of partnership " occurring
in that section. In Appeal No. 85 the assessee firm was
said to have been constituted by a verbal agreement in
April, 1948, and the- deed of partnership was drawn up in
September, 1949. The application for registration under s.
26A of the Act for the assessment year 1949-1950 was made
thereafter to the Income-tax Officer. In Appeal NO. 389 the
assessee firm was verbally constituted in
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June, 1944, and a memorandum of partnership was executed in
June 1948. The application for registration under S. 26A
for the assessment years 1945-46 and 1946-47 was made on
August 24, 1949.
The applications were rejected by the Income-tax Officer
and the appeals preferred by the assessees were also
dismissed by the Income-tax Appellate Tribunal. The High
Court took the view that S. 26A of the Indian Income-tax Act
contemplated a firm created or brought into existence by an
instrument of partnership and answered the questions against
the assessees. It was contended on their behalf that solong
as the assessment was not made, they were entitled to
registration irrespective of the year in which the
instrument of partnership came into existence. This was
controverted on behalf of the Revenue and their case was
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that a firm seeking registration under S. 26A of the Act
should be created by an instrument of partnership, or at any
rate, such instrument should be in existence during the
relevant accounting year, i. e. the year previous to the
year of assessment in respect of which the application for
registration was made.
Held, that the words " Constituted under an instrument of
partnership occurring in S. 26A of the Indian Income-tax Act
included not only firms that were created by instruments of
partnership but also those that were subsequent to their
creation, clothed in legal form by reducing the terms and
conditions of the partnership in writing.
Dwarkadas Khetan & Co. v. Commissioner of Income-tax, Bombay
City, Bombay, [1956] 29 I.T.R. 903, approved.
Kalsi Mechanical Woyks, Nandpur v. Commissioner of Income-
tax, Simla, [1953] 24 I.T.R. 353, Padam Parshad Rattan Chand
v. Commissioner of Income-tax, Delhi, [1954] 25 I.T.R. 335,
Bery Engineering Co., Delhi v. Commissioner of Income-tax,
Delhi, [1955] 28 I.T.R. 227, Income-tax Commissioner, Delhi
v. Messrs. Birdhi Chand Girdhari Lal, [1955] 28 I.T.R. 28o
and Khimji Walji & Co. v. Commissioner of Income-tax, Bihar
and Orissa, [1954] 25 I.T.R. 462, dissented from.
Section 26A, read with SS. 26, 28 and Rules 2 to 6B, laid
down the following essential conditions that a firm must
fulfil before it could claim registration under S. 26A of
the Act
(1) that it must be constituted under an Instrument of
Partnership, specifying the individual shares of the
partners;
(2) that an application on behalf of and signed by, all the
partners, containing all the particulars as set out in the
Rules, must be made;
(3) that the application must be made before the assessment
of the income of the firm was made under S. 23 Of the Act
for that particular year;
(4) that the profits (or loss, if any) of the business
relating
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to the previous year, i. e., the relevant accounting year,
must be divided or credited, as the case may be, in
accordance with the terms of the Instrument ; and lastly,
(5) that the partnership must be genuine and in actual
existence in conformity with the terms and conditions of the
Instrument.
Where, therefore, as in the instant cases, the partnership
did not admittedly function in terms of an instrument of
partnership which was operative during the accounting year,
it could not be registered during the following assessment
year.
Commissioner of Income-tax, Bombay North v. Shantilal
Vrajlal & Chandulal Dayalal & CO. [1957] 3I I.T.R. 903, dis-
approved.
Per M. HIDAYATULLAH, J.-While it was clearly not possible to
read " constituted by " for the words " constituted under "
occurring in S. 26A of the Act, it was doubtful whether the
instrument of partnership sought to be registered must be in
existence in the accounting year in order to entitle it to
registration.
Dwarkadas Khetan & Co. v. Commissioner of Income-tax, Bombay
City, Bombay, [1956] 29 I.T.R. 903, referred to.
JUDGMENT:
CIVIL APPELLATE, JURISDICTION: Civil Appeals Nos. 85 &
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389 of 1957.
Appeal from the judgment and order dated August 26, 1955, of
the Calcutta High Court in Income-tax References Nos. 44 of
1954 and 17 of 1953.
S. Mitra and P. K. Mukherjee, for the appellant (in C. A.
No. 85/57.)
N. C. Chatterjee and P. K. Ghosh, for the appellant (in C.
A. No. 389/57).
R. Ganapathy Iyer, R. H. Dhebar and D. Gupta, for the
respondent.
1959. April 15. The judgment of Sinha and Kapur, JJ., was
delivered by Sinha, J. Hidayatullah, J., delivered a
separate judgment.
SINHA, J.-The common question of law arising in these two
appeals on certificates of fitness granted by the High Court
of Calcutta under s. 66A(2) of the Indian Income-tax Act,
1922, is the effect and scope of the words " constituted
under an instrument of partnership" in s. 26A of the Income-
tax Act, which, in the course of this judgment, will be
referred to as the Act.
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The facts of the two cases, leading upto these appeals,
though not dissimilar, are not identical. They are,
therefore, set out separately.
In Civil Appeal No. 85 of 1957, Messrs. R. C. Mitter and
Sons, 54, Rani Kanto Bose Street, Calcutta, claim to be a
firm said to have been constituted in April 1948, with four
persons whose names and shares in the nett profits of the
partnership business, are stated to be as under
(a) Ramesh Chandra Mitter-40 per cent. of the nett profits.
(b) Sudhir Chandra Mitter-30 per cent. of the nett profits.
(c) Sukumar Mitter-20 per cent. of the nett profits.
(d)Sushil Chandra Mitter-10 per cent. of the nett profits.
The firm intimated its bank, the Bengal Central Bank,
Limited, (as it then was), of the constitution of the firm
as set out above, by its letter dated April 15, 1948. The
letter also stated that a partnership deed Was going to be
drawn up and executed by the partners aforesaid, and that
the deed so drawn up, will be forwarded to the bank in due
course. Though the firm is said to have come into existence
in April 1948, the deed of partnership which is set out as
annexure " A " at P. 5 of the paper book, was drawn up only
on September 27, 1949. This deed of partnership appears to
have been registered under the provisions of the Indian
Partnership Act, on October 1,2, 1949. It was also
forwarded to the Bengal Central Bank, Ltd., Head Office at
Calcutta, as it appears from the seal of the bank and the
signature dated December 7, 1949. An application to
register the firm under s. 26A, for the assessment year
1949-50, was made to the Income-tax Authorities. The date
of the said application does not appear from the record
before us. The application was rejected by the Income-tax
Authorities. The firm preferred an appeal to the Income-tax
Appellate Tribunal, which was also dismissed by the Tribunal
by its order dated September 7, 1953. The ground of the
order of the Tribunal was that as the firm admittedly
645
was formed by a verbal agreement in April 1948, and not by
or under an instrument in writing dated September 27, 1949,
and as the assessment was for the year 1949-50, for which
registration of the firm was sought, the registration could
not be ordered. The Tribunal also referred to the letter
aforesaid to the Bengal Central Bank, and observed that the
letter merely contained information as to the formation of
the partnership and of the personnel thereof, but it did not
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contain the terms on which the partnership had been formed.
It also showed that a partnership had been created but not
by deed. Hence, the Tribunal further observed, the letter
might be useful for consideration on the question of the
genuineness of the firm, but it could not fulfil the
requirements of s. 26A, namely, that the firm should be
constituted under an instrument of partnership. Therefore,
the Tribunal held that assuming the firm to be genuine, it
was not entitled to be registered under s. 26A of the Act.
Thereupon, the assessee moved the Tribunal under s. 66(1) of
the Act. That application was granted by the order dated
February 2, 1954, and the case stated to the High Court for
its decision on the following question :-
" Whether the assessee firm which is alleged to have come
into existence by a verbal agreement in April, 1948, is
entitled to be registered under section 26A for the purpose
of assessment for 1949-50, where the Instrument of
Partnership was drawn up only in September, 1949, after the
expiry of the relevant previous year ".
The High’ Court Bench, presided over by Chakravarti, C. J.,
by its judgment dated August 26, 1955, answered the question
in the negative. The learned Chief Justice considered the
matter from all possible view-points, including grammatical,
etymological and textual matters, and came to the conclusion
that " constituted " meant created ". He also considered
that the preposition under " is " obviously inappropriate
after having convinced himself that " constituted could be
equated with "created". He also found no difficulty in
observing that " some of the
646
paragraphs of the Form appear to be ill-adjusted to the
provisions of the Act and the Rules ". In the end,
therefore, he concluded with the remarks: " It appears to me
to be desirable that the language of the section, as also
that of the Rules should receive legislative attention ".
In Civil Appeal No. 389 of 1957, Messrs. D. C. Auddy &
Brothers, Calcutta, claim to be a partnership consisting of
Dulal Chand Auddy, Prem Chand Auddy, Gora Chand Auddy and
Kalipada Nandy. The partnership business is said to have
begun in June, 1944. An application was made on August
24,1949, for the registration of the partnership. The
Income-tax Officer and the Appellate Assistant Commissioner
were of the opinion that the partnership was not a genuine
one, and could not be registered. Another reason for not
ordering registration was that the partnership deed, having
been executed on June 2, 1948, could not be operative during
the two years under consideration, namely, 1945-46 and 1946-
47. On appeal, the Income. tax Appellate Tribunal rested
its decision on the finding that the alleged partnership had
not been constituted under an instrument of partnership
within the meaning of those words in s. 26A of the Act. At
the instance of the assessee, the Tribunal framed the fol-
lowing question for determination by the High Court:
" Whether the assessee firm constituted orally in June,
1944, can validly be registered in the assessment years
1945-46 and 1946-47 under Section 26A of the Indian Income
Tax Act on the basis of a Memorandum of Partnership executed
in June 1948."
The other parts of the statement of the case by the
Tribunal, refer to the merits of the assessment, with which
we are not concerned in this appeal. Hence, it is not
necessary to set out those facts. On this part of the
statement of the case, the High Court gave the same answer
as in the other appeal. In this case also, the High Court
granted the necessary certificate under s. 66A(2), read with
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art. 135 of the Constitution. As both the cases raise the
same question of law, they have been heard together, and
will be governed by this judgment.
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It is convenient at this stage to set out the relevant
provisions of the Act. Section 26A is in these terms :"
26A. Procedure in registration of firms.-(I) 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 super tax.
(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 verified in such manner, as
may be prescribed and it shall be dealt with ’by the Income-
tax Officer in such manner as may be prescribed."
The section contemplates the framing of rules laying down
the details of the Form in which the application has to be
made and the particulars which should be stated in the
application, and other cognate matters. Section 59 of the
Act, authorizes the Central Board of Revenue, subject to the
control of the Central Government, to make rules for
carrying out the purposes of the Act, and sub-s. (5) of s.
59 provides that rules made under the section, shall be
published in the Official Gazette, and " shall thereupon
have effect as if enacted in this Act". Income-tax Rules 2
to 6B lay down the details of the procedure for making an
application for the registration of a firm, as contemplated
under s. 26A, quoted above. These rules have been amended
extensively in 1952, but we are concerned in this case with
the rules before those amendments. Rule 2 requires such an
application to be signed by all the partners personally, and
to be made before the income of the firm is assessed for the
year, under s. 23 of the Act. Rule 3 requires that the
application be made in the Form annexed to the rule, and
that the application shall be accompanied by the original
Instrument of, Partnership under which the firm is
constituted......... The Form appearing in r. 3, requires
the assessment year to be specified. Thus, the registration
is for a particular year of assessment, and not for future
years also, and therefore, the application for registration
has
648
to be made every year, which in fact means an application
for renewal of the registration. Paragraph 3 of the Form
requires a certificate to be signed by the applicants for
registration, to the effect that the profits (or loss, if
any) of the previous year were divided or credited as shown
in Section B of the Schedule. The Form contains the
Schedule in 7 columns which require the names of the-
partners, their addresses, the date of admittance to
partnership, their shares in the profits or loss, etc., to
be filled in. Under the Schedule, there are Section A and
Section B. Section A has to contain particulars of the firm
as constituted at the date of the application, and Section B
has to contain the particulars of the apportionment of the
income, profits or gains (or loss) of the business in the
previous year between the partners who in that previous year
were entitled to share therein. Rule 4 provides that if the
Income-tax Officer. is satisfied that there is or was a firm
in existence constituted as shown in the instrument of
partnership, and that the application has been properly
made, he has to enter a certificate at the foot of the
Instrument of Partnership that the firm has been registered
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under s. 26A of the Act, and that the certificate of
registration shall have effect for the assessment for the
year specified therein. Rule 5 is as follows:"
5. The certificate of registration granted under Rule 4
shall have effect only for the assessment to be made for the
year mentioned therein."And Rule 6 makes provision for the
certificate of registration to be renewed for a subsequent
year, on an application being made in that behalf in
accordance with the preceding Rules.
It is manifest that for a true and proper construction of
the relevant provisions of the Act, relating to registration
of firms, ss. 26, 26A and 28, and the Rules summarized
above, have to be read together. So read, it is reasonably
clear that the’ following essential conditions must be
fulfilled in order that a firm may be held entitled to
registration:-
(1) That the firm should be constituted under an Instrument
of Partnership, specifying the individual shares of the
partners.
649
(2) That an application on behalf of, and signed by, all
the partners, containing all the particulars as set out in
the Rules, has been made;
(3) That the application has been made before the
assessment of the income of the firm, made under s. 23 of
the Act (omitting the words not necessary for our present
purpose), for that particular year;
(4) That the profits (or loss, if any) of the business
relating to the previous year, that is to say, the relevant
accounting year, should have been divided or credited, as
the case may be, in accordance with the terms of the
Instrument; and lastly,
(5) That the partnership must have been genuine, and must
actually have existed in conformity with the terms and
conditions of the Instrument.
It is clear from what has been said above with reference to
the relevant provisions of the Act, that the certificate of
registration has reference to a particular assessment year,
and has effect for the assessment to be made for that
particular year. In other words, the terms of the
partnership should appear in the Instrument of Partnership
in respect of the relevant accounting year. It is equally
clear that the firm to be registered, should have been in
existence during the accounting year, " constituted as shown
in the Instrument of Partnership ". The Rules, thus,
contemplate a document operative during the accounting year.
We are not here concerned with the further question whether
the document should be in existence at the very inception of
the accounting year, or before the year is out.
The provisions of the Act, set out above, do not present any
serious difficulty except for the words it constituted under
an Instrument of Partnership " occurring in s. 26A and the
relevant Rules. On the interpretation of these words, there
has been a conflict of judicial opinion, as will presently
appear. On behalf of the assessee-appellants, it has been
contended that so long as the assessment has not been made,
the assessees are entitled to have their firms registered in
accordance with the terms of the Instrument of
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650
Partnership, irrespective of the year in which the
Instrument may have come into existence. Strong reliance
was placed upon the decision of the Bombay High Court
(Chagla, C. J., and Tendolkar, J.) in the case of Dwarkadas
Khetan & Co. v. Commissioner of Income-tax, Bombay City,
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Bombay(1), wherein, the following observations have been
made:-
" Any firm can make an application under section 26A for
registration and the two conditions that it has got to
comply with are that it must be constituted under an
instrument of partnership and the second condition is that
the instrument of partnership must specify the individual
shares of the partners. If these two conditions are
satisfied it would be entitled to registration. The section
does not say that the firm must be constituted by the
instrument of partnership. It does not require that the
firm must come into existence by reason of the instrument of
partnership, or that the firm should be the creature of the
instrument of partnership, or that the firm must not exist
prior to the instrument of partnership being executed.
In the case decided by the Bombay High Court, the Instrument
of Partnership had been executed on March 27, 1946, with
effect from January 1, 1946. On an application made to the
Department to register the firm, the matter was determined
by the Income-tax Appellate Tribunal against the assessee on
the ground that the partnership was in existence before the
deed was executed, and that, therefore, it could not be
registered. Before the Bombay High Court, reliance had been
placed on behalf of the Department on the decision of the
Calcutta High Court, now before us in appeal, as also on a
decision of the Punjab High Court. The decision of the
Calcutta High Court now under examination, in the case of R.
C. Mitter & Sons v. Commissioner of Income-tax (2), takes
the view that s. 26A of the Act contemplates a firm created
or brought into existence by an Instrument of Partnership,
which governs the distribution of shares in the relevant
accounting period. Such a deed should have
(1) [1956) 29 I.T.R. 903, 907. (2) [1955] 28 I.T.R. 698,
704, 705.
651
come into existence on or, before the commencement of the
relevant accounting period. The other decision relied upon
in the Bombay High Court, had been given by a Division Bench
of the Punjab High Court, reported in Padam Parshad Rattan
Chand v. Commissioner of Income-tax, Delhi (1).
On the other hand, it has been contended on behalf of the
Revenue that in order to entitle a firm to be registered,
the firm should have been created by an Instrument of
Partnership, or at any rate, such an Instrument should be in
existence during the relevant accounting year, that is, the
year previous to the year of assessment in respect of which
the application for registration has been made. For the
first part of the submission on behalf of the respondent,
there is ample authority in the decision under appeal, which
bad been relied upon before the Bombay High Court. In that
case, (R. C. Mitter & Sons v. Commissioner of Income-tax
(supra) (2) ), Chakravarti, C. J., who delivered the opinion
of the Court under s. 66(1) of the Act, after a very
elaborate discussion, came to the conclusion which may best
be expressed in his own words, as follows:-
" If by the expression I constituted under an instrument of
partnership’ is meant a firm which originated in a verbal
agreement but with respect to which a formal deed was
subsequently executed, there would be no room in the section
for partnerships actually created by an instrument and such
partnerships, although most obviously entitled to
registration, would be excluded from the purview of the
section. Even etymologically or textually, I do Dot think
that the word constituted’, when used in relation to a firm
or such other body, can mean anything but I created when the
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reference is to some deed or instrument to which the
inception of the firm or other body is to be traced. "
After having, thus, held that s. 26A contemplated firms
created or brought into existence by a deed in writing, he
had no difficulty in substituting " by " for " under ",
thus, making the crucial words " constituted
(I) [1954] 25 I.T.R. 335.
(2) [1955] 28 I.T.R. 698, 704, 705.
652
by " instead of " constituted under ". In our opinion, the
learned Chief Justice fell into the error of re-constructing
the provisions of the statute, instead of construing them.
The word " by " could be substituted for the word " under "
in s. 26A only if the words, as they stand in the section,
were not capable of making sense, and it would, thus, have
been necessary to amend the wording of the section. Turning
his attention from the wording of the section to that of the
Rules and the Form appearing under the Rules, he again came
to the conclusion that " some of the paragraphs of the Form
appear to be ill-adjusted to the provisions of the Act ".
Referring to other parts of the Rules, he was constrained to
observe that they" would lend strong support to the view
that what is meant by ’any firm constituted under an
instrument of partnership’ in section 26A is no more than a
fir of which the constitution appears from an instrument in
writing. It is obvious that if such be the meaning of the
expression ’constituted under an instrument of partnership’,
the instrument need not be one by which the partnership was
created ". But then he attempted to get over that difficulty
by observing that the language of the Rules and the Form
could not supersede a provision contained in the Act itself.
He further opined that the language in para. 4(1) is " un-
doubtedly unsatisfactory ". In our opinion, any attempt to
reconstruct the provisions of the relevant section and the
Rules, on the assumption that the intention of the
legislature was to limit the registration of firms to only
those which have been created by an Instrument of
Partnership, is, with all respect, erroneous. The proper
way to construe the provisions of the statute is to give
full effect to all the words of the relevant provisions, to
try to read them harmoniously, and then to give them a
sensible meaning. Hence, we have to consider, at the
threshold, the question whether the words " constituted
under an Instrument of Partnership " have some meaning which
can be attributed to them harmoniously with the rest of the
relevant provisions. A partnership may be created or set up
by a contract in writing,
653
setting out all the terms and conditions of the partnership,
but there may be many cases, and perhaps, such cases are
more numerous than the other class, where a partnership has
been brought into existence by an oral agreement between the
parties on certain terms and conditions which may
subsequently be reduced to writing which will answer the
description of an Instrument of Partnership. Such an
instrument would, naturally, record all the terms and
conditions of the contract between the parties which,. at
the initial stages, had not been reduced to writing. In
such a case, though the partnership had been brought into
existence by an oral agreement amongst the partners, if the
terms and conditions of the partnership have been reduced to
the form of a document, it would be right to say that the
partnership has been constituted under that instrument. The
word " constituted " does not necessarily mean " created "
or " set up ", though it may mean that also. It also
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includes the idea of clothing the agreement in a legal form.
In the Oxford English Dictionary, Vol. II, at pp. 875 &
876, the word " constitute " is said to mean, inter alia, "
to set up, establish, found (an institution, etc.) " and
also " to give legal or official form or shape to (an
assembly, etc.) ". Thus, the word in its wider significance,
would include both, the idea of creating or establishing,
and the idea of giving a legal form to, a partnership. The
Bench of the Calcutta High Court in the case of R. C. Mitter
and Sons v. Commissioner of Income-tax(1), under examination
now, was not, therefore, right in restricting the word "
constitute " to mean only " to create ", when clearly it
could also mean putting a thing in a legal shape. The
Bombay High Court, therefore, in the case of Dwarkadas
Khetan and Co. v. Commissioner of Income-tax, Bombay City,
Bombay (2), was right in holding that the section could not
be restricted in its application only to a firm which had
been created by an instrument of partnership, and that it
could reasonably and in conformity with commercial practice,
be held to apply to a firm which may have come into
existence earlier by an
(1) [1955] 28 I.T.R. 698, 704, 705.
(2) [1956] 29 I.T.R. 903, 907.
654
oral agreement, but the terms and conditions of the
partnership have subsequently been reduced to the form of a
document. If we construe the word " constitute " in the
larger sense, as indicated above, the difficulty in which
the learned Chief Justice of the Calcutta High Court found
himself, would be obviated inasmuch as the section would
take in cases both of firms coming into existence by virtue
of written documents as also those which may have initially
come into existence by oral agreements, but which had sub.
sequently been constituted under written deeds. The purpose
of the provision of the Income-tax Acts. 26A-is not to
compel the firms which had been brought into existence by
oral agreements, to dissolve themselves and to go through
the formality of constituting themselves by Instruments of
Partnership. If we construe the words " constituted under "
in that wider sense, we give effect to the intention of the
legislature of compelling a firm which bad existed as a
result of an oral agreement, to enter into a document
defining the terms and conditions of the partnership, so as
to bind the partners to those terms, before they could get
the benefit of the provisions of s. 23 (5) (a). Section 23
(5) (a) confers a privilege upon partners who may find it
more worth their while to be assessed upon their individual
total income than upon the total income of the partnership.
It is, therefore, very important from the point of view of
the Revenue that the Department should be apprised in time
of the true constitution of the partnership, the names of
the true partners and the precise share of each of them in
the partnership profits (or loss, if any). The very object
of this provision will be defeated if the alleged partner-
ship is not genuine, or if the true constitution of the
partnership and the respective shares of the partners, are
not fully and correctly placed on record as soon as
possible, for the purpose of ’assessment. In this
connection, the provisions of s. 28(2) of the Act, are also
worth noticing. That sub-section provides that if the
Income-tax Officer or the Appellate Authorities under the
Act, are satisfied that the profits of a registered firm
have been distributed otherwise than
655
in accordance with the shares of the partners, as shown in
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the Instrument of Partnership registered under the Act, and
governing such distribution, and that any partner has
concealed any part of his profits, the penalty prescribed
therein may be imposed upon such a partner. Unless the
Instrument of Partnership has been registered in respect of
the accounting year and before the assessment has been done,
the penal provisions aforesaid cannot be enforced. It is,
therefore, essential, in the interest of proper
administration and enforcement of the relevant provisions
relating to the registration of firms, that the firms should
strictly comply with the requirements of the law, and it is
incumbent upon the Income-tax Authorities to insist upon
full compliance with the requirements of the law. But, in
our opinion, there is no warrant in the words of the
relevant provisions of the statute for restricting
registration under s. 26A of the Act to those firms only
which have been created or brought into existence by an
Instrument of Partnership. In our opinion, it is more in
consonance with the terms of the relevant provisions of the
Act, referred to above, to hold that the words " constituted
under an instrument of partnership " include not only firms
which have been created by an Instrument of Partnership but
also those which may have been created by word of mouth but
have been subsequently clothed in legal form by reducing the
terms and conditions of the partnership to writing.
We have already indicated that there has been a conflict of
judicial opinion in the different High Courts in India on
the question now before us. But on a consideration of the
facts in each case, it will be found that the decision
arrived at in most of the cases, was correct, though the
reasons given appear to have gone beyond the requirements of
the case. The decision of the Bombay High Court in
Dwarkadas Khetan & Co. v. Commissioner of Income-tax,
Bombay City, Bombay (1), discloses that the partnership then
in question had come into existence with effect from the
beginning of 1946, though the Instrument of Partnership
(1) [1956) 29 I.T.R. 903, 907.
656
was executed on March 27, 1946. Thus, the Instrument of
Partnership came into existence during the accounting year,
whatever that year may have been, because the year 1946 was
the starting year of the partner Ship. Hence, even the
earliest assessment year, presumably the year 1947-48, would
be governed by the terms and conditions of the written
Instrument of Partnership aforesaid. The decision of the
Bombay High Court was followed by the same Bench of that
Court in the case of Commissioner of Income-tax, Bombay
North v. Shantilal Vrajlal & Chandulal Dayalal & Co. (1).
In the second case, the learned Judges ruled that the second
partnership deed of September 12, 1951, which set out the
names and shares of all the partners who constituted the
partnership, could be registered in respect of the
accounting year November, 1948 to October, 1949. This
conclusion was arrived at without even a mention, far less a
discussion, of the relevant provisions of the Act.
Apparently, the matter was not critically placed before the
learned Judges, when they decided the second case. The con-
clusion in this case is, with all respect, apparently wrong
in view of our conclusion that the Instrument of Partnership
should have been in existence in the accounting year.
In the High Court of Punjab, the question was fully
discussed in a judgment of a Division Bench, given by one of
us (Kapur, J., as he then was), in the case of Kalsi
Mechanical Works, Nandpur v. Commissioner of Income-tax,
Simla (2). In that case, the firm had come into existence
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by a verbal agreement in June, 1944. The deed of
partnership was drawn up as late as May 9, 1949. The
application for registration of the firm under S. 26A for
the assessment year 1949-50, was dismissed by the lncome-tax
Authorities as also by the Tribunal. The High Court, after
an elaborate examination of the relevant provisions of the
Act, including the Rules and the Forms, upheld the orders of
the Department. The conclusion of the Bench was in these
terms:-
" The sections of the Income-tax Act show that
(1) [1957] 3I I.T.R. 903.
(2) [1953] 24 I.T.R. 353, 361.
657
for the purpose of registration it is necessary that the
firm should be constituted by an instrument of partnership
and in my opinion the Rules read with Sections 26 and 28 of
the Act indicate that such a firm as is constituted under an
instrument of partnership should have been in existence
during the account period and should not come into existence
during the assessment year, and if it was not in existence
during the account period it cannot be registered so as to
affect the liabilities of the partners for income-tax
accruing during the account period."
The conclusion reached is correct, except, with all respect,
for the observation that under s. 26A, it is necessary that
the firm should be constituted " by " an instrument of
partnership. That is the leading judgment in the High Court
of Punjab. It was followed by another Division Bench of
that Court in the case of Padam ParshadRattan Chand v.
Commissioner of Income-tax, Delhito the effect that
constituted under an instrument in s. 26A, meant
created or formed by a formal deed". In this case, the
business of the firm had started from April 1, 1947, but the
Instrument of Partnership was executed on April 10, 1950.
The application for registration was made in respect of the
assessment year 1948-49. It is clear with reference to
these dates that the Instrument of Partnership was not in
existence either during the accounting year or even during
the assessment year, and the Court, therefore, rightly held
that the partnership could not be registered in respect of
the assessment year; but they proceeded further to observe
that there was no objection to the firm being treated as
having been constituted under the Instrument as from the
date of the Instrument itself. The answer of the Court to
the question posed, was that the firm could be registered
not in respect of the assessment year for which the
application had been made, but with effect from the date of
the Instrument. Apparently, the attention of the Court was
not drawn to the Rules aforesaid, particularly, Rules 2 and
3, which require
(1) [1954] 25 I.T.R. 335.
83
658
that the application has to be made before the assessment is
completed and for a particular assessment year. More or
less to the same effect, are two other Division Bench
rulings Of that High Court in Bery Engineering Co., Delhi
v. Commissioner of Income-tax, Delhi (1) and Income-tax
Commissioner, Delhi v. Messrs. Birdhi Chand Girdhari Lal
(2). In all these cases in the Punjab High Court, the deeds
came into existence later than the accounting year or the
assessment year, and therefore, could not have been
registered. The actual decisions in these cases were
correct, though there are orbiter dicta to the effect that
s. 26A requires that the firm should have been created or
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set up by an Instrument of Partnership.
In the Patna High Court, the very same question was
discussed at great length by a Division Bench of that Court,
presided over by Ramaswami, C. J., in the case of Khimji
Walji & Co. v. Commissioner of Income-tax, Bihar and Orissa
(3). The learned Chief Justice, after an elaborate
examination of the relevant provisions of the Act, came to
the conclusion in these
terms
" It is necessary for the purpose of registration under
Section 26A that the partnership should be constituted by an
instrument of partnership and that such a partnership as is
constituted under an instrument of partnership should have
been in existence during the accounting year ".
It is on the same lines as the leading judgment of the
Punjab High Court, supra. With reference to the dates given
in the judgment, the decision is right, though, in this case
also, the words " constituted under " have been construed as
" constituted by ", without discussing the necessity for so
amending the words of the statute, even as in the Punjab
High Court decisions.
As a result of the above discussion, the conclusion is
reasonably clear that unless the partnership business was
carried on in accordance with the terms of an Instrument of
Partnership which was operative during
(1) [1955] 28 I.T.R. 227. (2) [1955] 28 I.T.R. 28o.
(3) [1954] 25 I.T.R. 462, 470.
659
the accounting year, it cannot be registered in respect of
the following assessment year. As in these cases, the
partnership did not admittedly function under such a deed of
partnership, the Department and the High Court were right in
refusing registration. We would, therefore, dismiss these
appeals, but for different reasons to those given below.
The respondent is entitled to his costs-one set of hearing
fees to be paid half and half by the appellants.
HIDAYATULLAH, J.-I have had the advantage of reading the
judgment just delivered by my brother, Sinha, J. I agree
that s. 26A of the Indian Income-tax Act must be read as it
is. The words of the section, as they stand, are not
meaningless, and in view of the decision in Commissioners
for special Purpose of the Income-tax v. Pemsel (1) it is
not possible to read for the expression " constituted under
" the words constituted by ".
I entertain, however, some doubt as to whether the
instrument sought to be registered, should be in existence
in the accounting year, before registration can be claimed.
There is nothing in the Act which says this specifically.
My brother has reasoned from the contents of the Act and the
Rules that such a condition is implied. While I entertain
some doubts, I am not prepared to record a dissent, more so
as the Board of Revenue has issued instructions that all
firms should be registered, whether the documents under
which they were constituted existed in the accounting year
or not, provided the Income-tax Officer was satisfied about
the genuineness of the firms.
In the result, I agree that the appeals should be dis.
missed with costs.
Appeals dismissed.
(1) [1891] A.C. 531. 542.
660