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Shivkisan Laxminarayan Jaju and Sons Vs. Commissioner of Income-tax, Poona - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 17 of 1965
Judge
Reported in[1976]105ITR359(Bom)
ActsIncome Tax Act, 1922 - Sections 26A; Income Tax Rules, 1922 - Rule 6
AppellantShivkisan Laxminarayan Jaju and Sons
RespondentCommissioner of Income-tax, Poona
Appellant AdvocateR.J. Kola, Adv.
Respondent AdvocateR.J. Joshi, Adv.
Excerpt:
direct taxation - registration - rules 6 and 26a of income tax act, 1922 - old partnership deed of assessee firm provided that firm shall not be dissolved upon death of any partner - fresh partnership deed executed on death of one of partner - application filed for renewal of registration rejected by income tax officer - no change in constitution of firm or in individual shares of partners as specified in old partnership deed - expression 'as specified in the instrument of partnership' provided for eventually when death of partner takes place - assessee firm strictly complied with all requirements of rule 6 - held, income tax officer bound to issue certificate of renewal of registration of partnership firm. - - he thus submitted that there was both a change in the constitution of the.....kantawala, c.j. 1. the question relates to the registration of the assessee-firm for the assessment year 1959-60 for which the corresponding previous year is samvat year 2014, i.e., from october 24, 1957, to november 11, 1958. under a deed of partnership dated april 25, 1955, the assessee firm was constituted. it consisted of 9 persons and each of the 9 persons was equally entitled to his share of profits and was liable to bear equally the losses of the firm. clause 12 of the partnership deed provided that the firm shall not be dissolved upon the death of any partner and the particular provisions thereof we will refer to a little later. on january 26, 1958, laxminarayan, one of the 9 partners, died. thereafter, on december 1, 1958, a fresh partnership deed was executed according to which.....
Judgment:

Kantawala, C.J.

1. The question relates to the registration of the assessee-firm for the assessment year 1959-60 for which the corresponding previous year is Samvat year 2014, i.e., from October 24, 1957, to November 11, 1958. Under a deed of partnership dated April 25, 1955, the assessee firm was constituted. It consisted of 9 persons and each of the 9 persons was equally entitled to his share of profits and was liable to bear equally the losses of the firm. Clause 12 of the partnership deed provided that the firm shall not be dissolved upon the death of any partner and the particular provisions thereof we will refer to a little later. On January 26, 1958, Laxminarayan, one of the 9 partners, died. Thereafter, on December 1, 1958, a fresh partnership deed was executed according to which the eight of the surviving partners continued as partners and Godavaribai, widow of deceased Laxminarayan, was taken as a partner.

2. On June 29, 1959 an application for renewal of registration of the assessee-firm under section 26A if the Income-tax Act, 1922 (hereinafter referred to as 'the Act'), for the assessment year 1959-60 was filed. This application was signed by the eight surviving partners and Godavaribai.

3. The Income-tax Officer refused to register the firm, inter alia, on the ground that the shares of the legal heirs of deceased Laxminarayan inter se were not specifically mentioned.He also rejected the contention urged on behalf of the assessee that in view of the provisions of the deed of partnership, especially clause 12 thereof, the next karta of the family would succeed to the deceased's share in the firm. It was also urged before the Income-tax Officer that registration should be granted to the assessee-firm for the part of the accounting period prior to the death of deceased Laxminarayan. Even such an application was rejected by him. The reason for rejecting this contention of the assessee was that he took the view that upon a proper construction of clause 12 of the deed of partnership the heirs and legal representatives of the deceased partner did not become partners but were merely entitled to a share in profits till the end of the year. On appeal by the assessee-firm the Appellate Assistant Commissioner reversed the order of the Income-tax Officer. Upon proper construction of the deed of partnership including clause 12 thereof he took the view that the partnership continued up to the end of the accounting period for the relevant assessment year; that the application for renewal of registration was properly made in consonance with the provisions of section 26A read with the provisions of the Income-tax Rules. 1922 (hereinafter referred to as 'the Rules'). In view of this finding he held that the Income-tax Officer ought to have granted renewal of registration to the assessee-firm. On appeal by the revenue there was a difference of opinion between the Judicial Member and the Accountant Member of the Tribunal. The Judicial Member was of the view that renewal of registration could not be granted to the assessee-firm. According to him, after the death of Laxminarayan the assessee-firm as such could not continue minus that partner; either somebody must come in his place to continue the firm or there must be a fresh partnership deed between the surviving partners showing the intention of continuing the firm with their profit-sharing ratio. He applied his mind to an alternative contention that the firm continued after the death of Laxminarayan.He held that upon proper construction of the deed of partnership there was no provision indicating the ratio in which the profits were to be shared by the continuing partners after the death of Laxminarayan. The Accountant Member took a contrary view. According to him the firm was not dissolved on the death of Laxminarayan; that the partnership was continued by the surviving partners; that there was no difficulty in specifying the shares of partners inter se. In view of this difference of opinion, the matter was referred to the President who agreed with the view taken by the Judicial Member primarily holding that there was no provision regarding losses and the instrument of partnership cannot be held to specify individual shares of the partners. On these facts the question referred for our determination is as under :

'Whether, on the facts and in the circumstances of the case, the firm constituted under the partnership deed dated April 25, 1955, was entitled to registration under section 26A of the Act for the assessment year 1959-60 ?'

4. Mr. Kolah on behalf of the assessee-firm urged three contentions before us. Firstly, his submission is that upon a proper construction of the deed of partnership and especially clause 12 thereof, the heirs and legal representatives of a deceased partner stepped into his shoes qua sharing the profits of bearing the losses thereof. Secondly, he contended that in any event on January 26, 1958, when Laxminarayan died, registration ought to have been granted to the assessee-firm. Lastly, he submitted tha the constitution of the assessee-firm and the individual shares of the partners thereof as specified in the instrument of partnership dated April 25, 1955, have remained unaltered and having regard to the provisions of section 26A of the Act read with the Rules it was obligatory upon the Income-tax Officer and the other authorities to grant renewal of registration to the assessee firm. Mr. Joshi, on the other hand, on behalf of the revenue contended that before an application for renewal of registration can be granted there should be no change whatsoever either in the constitution of the partnership firm or in the individual shares of partners. He pointed out that during the lifetime of Laxminarayan, one of the partners, each of the nine partners was entitled to one-ninth share in the profits of the firm and was liable to bear one-ninth share in the losses thereof. His submission was that upon a proper construction of clause 12 upon the death of Laxminarayan the partnership is continued by only the surviving eight partners. Further, he pointed out that the shares have also changed as a result of the death of Laxminarayan. His submission was that after the death of Laxminarayan each of the surviving eight partners was entitled to one-ninth share in the profits but so far s losses are concerned each of them was to bear one-eighth share in the losses. He thus submitted that there was both a change in the constitution of the firm as well as in the quantum of the individual shares of the partners thereof. If that is so, then it cannot be said that the assessee-firm is entitled to renewal of registration of the firm.

5. The assessee-firm was constituted under a deed of partnership dated April 25, 1955, copy whereof is annexed as annexure 'A' to the statement of cases and clause 1 thereof provided that its duration will be at will of the parties. Clause 8 dealt with the shares in the profits of the firm and the liability to bear the losses of the firm. It is as under :

'8. That the net profits of the partnership business including their branches shall be divided amongst the parties in following proportion and they shall in like proportion bear losses of the business.' Thereafter, the names of nine partners are given and each one is shown as sharing 1/9th share in the profits and bearing 1/9th share in the losses. Clause 12 of the deed of partnership is as under : '12. The death of any partners shall not dissolve the partnership but the same shall be continued by the surviving partners, the heirs and legal representatives of the deceased partner being entitled to the share of the deceased up to the end of the accounting year in which the death takes place, the heirs and legal representatives, however, having no claim, rights or interest in the goodwill of the firm.'

6. Laxminarayan, one of the nine partners died on January 26, 1958, i.e., during the relevant previous year. There is no controversy that the assessee-firm was duly registered under the Act and the Rules prior to the death of Laxminarayan. On June 29, 1959, an application for renewal of registration of the assessee-firm was made under section 26A of the Act for the assessment year 1959-60 and this application has been signed by the eight surviving partners and Godavaribai, widow of the deceased Laxminarayan.

7. The first question that we have to consider is whether upon a proper construction of the deed of partnership including clause 12 thereof, the heirs and legal representatives of the deceased Laxminarayan stepped into his shoes so as to share the profits and bear the losses thereof. Partnership is the relation between partners who have agreed to share the profits of a business carried on by all or any of them acting for all. Chapter V of the Partnership Act deals with the incoming and outgoing partners. Section 37 thereof provided for the right of the outgoing partner in certain cases to share in profits. It, inter alia, lays down, where any member of a firm has died and the surviving partners carry on the business of the firm with the property of the firm without any final settlement of accounts as between them and the legal representatives of the deceased partner, then in the absence of a contract to the contrary, the legal representatives or the estate of the deceased partner are entitled at their option to such share of the profits made since the partner died as may be attributable to the use of his share of the property of the firm or to interest at the rate of six per cent. per annum on the amount of his share in the profits of the firm. Section 42 of the Partnership Act provides for the contingencies on the happening of which the partnership firm will be dissolved. Under that section subject to contract between the partners a firm is dissolved inter alia by the death of a partner. Ordinarily, in the absence of a contract to the contrary in the partnership deed or the agreement between the partners, a firm will be dissolved upon the death of a partner and his legal representatives will be entitled to such option as is specified in section 37. In the present case even though the duration of the partnership is at will, clause 12 thereof contains provisions both contrary to those of Section 37 as well as section 42. It clearly lays down that the death of any partner shall not dissolves the partnership. Thus, within the meaning of section 42 of the Partnership Act there is a contract to the contrary between the partners which provides that the firm will not be dissolved by reason of the death of a partner. Even this clause contains provisions which ordinarily will prevail over those of section 37 in view of a contract to the contrary between the partners. This clause clearly provides that notwithstanding the death of a partner the partnership will be continued by the surviving partners, the heirs and legal representatives of the deceased partner being entitled to the share of the deceased up to the end of the accounting year in which the death takes place. The heirs and legal representatives are not entitled to any share in the goodwill of the firm. The effect of this provision is that notwithstanding the death of a partner and notwithstanding the fact that the duration of the partnership is at will, the partnership will continue till the end of the accounting year in which death of a partner took place. After the death of the partner the partnership is to be continued by the serving partners. The heirs and legal representatives of the deceased partner are, however, entitled to the share of the deceased up to the end of the accounting period in which the death took place. The argument of Mr. Kolah was that upon a proper reading of clauses 8 and 12 of the partnership deed, not only the partners are entitled to share the profits and bear the losses during the lifetime of all the partners, but even after the death of a partner they are entitled to share the profits as well as to bear the losses in the same proportion. According to him, the share in the profits or the losses which ought to be received or borne by the deceased partner will be the share in profits or losses of the heir s and legal representatives of a deceased partner. His argument was that it is unnecessary to have express provision about sharing of the losses. Reliance was placed by him on the provisions of section 13(b) of the Partnership Act which provides that, subject to contract between the partners, the partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm. In our opinion, upon a proper construction of clause 12 of the deed of partnership there is a contract to the contrary within the meaning of section 13 so far as sharing of the profits and bearing of the losses after the death of a partner are concerned. While all the nine partners are alive each partner is entitled to 1/9th share in the profits and is liable to bear 1/9th share in the losses, but upon the death of a partner the firm has to be continued up to the end of the accounting year in which death took place by the surviving partners. The effect of this provision, therefore, is that it is a surviving partners who continue the firm but by the express provision contained in clause 12 liability is imposed upon the surviving partners to pay to the heirs and legal representatives of the deceased partners his share in the profits of the firm up to the end of the accounting year in which death took place. The expression 'entitled to share' clearly indicates that the heirs and legal representatives are entitled to share in the profits. If the liability to bear the losses was to be imposed upon the heirs and legal representatives of a deceased partner. Then in the absence of a specific provision to that effect they will not be liable to bear any share in the losses that may be suffered by the firm till the end of the accounting year in which death of a partner took place. The words 'entitled to share' can never be equated to 'entitled to share the profits and bear the losses of the firm'. In our opinion, upon a proper construction of clause 8, while all the nine partners are alive each one is entitled to 1/9th share in the profits and each one is liable to pay 1/9th share in the losses and upon the death of any partner the provisions of clause 12 are attracted. In such a case, the partnership till the end of the accounting year in which death of a partner took place. So far as the profits are concerned each of the eight surviving partners in the present case will have 1/9th share in the profits and the remaining 1/9th share in the profits will have to the handed over to the heirs and legal representatives of the deceased partner, Laxminarayan. If in the accounting year in which Laxminarayan died the assessee firm suffered losses, then the losses suffered in that year will have to be borne by the eight surviving partners in equal shares. The heirs and legal representatives of the deceased Laxminarayan will not be liable to bear any share in the losses for this particular year. Thus, it is not possible to take the view that upon a proper construction of the deed of partnership the heirs and legal representatives of the deceased Laxminarayan stepped into his shoes so far as their right to share the profits earned and their liability to bear the losses suffered by the firm is concerned.

8. Even the alternative contention urged by Mr. Kolah that renewal of registration ought to have been granted to the assessee-firm for the period up to January 26, 1959, cannot be acceded to. The scheme of clause 12 is that accounts are to be made only at the end of the accounting year in which death of a partner takes place. If that is so, then it is not permissible to the surviving partners and the heirs and legal representatives of the deceased partner to take accounts for the period upto the date of the death of the deceased partner and separate accounts for the balance of the period of the accounting year. As contemplated by clause 12 for the whole of the accounting year in which the partner died the accounts shall have to be made and not separately for the period up to the date of death of the partner and for the rest of the accounting period.

9. Question then arises whether having regard to the facts of the present case the assessee-firm is entitled to renewal of registration under section 26A of the Act. Section 26A of the Act prescribes the procedure for registration of firms and it is as under :

'26A. (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 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.'

10. Under this section the following conditions are essential for the registration of a firm :

(1) On behalf of the firm an application should be made to the Income-tax Officer by such person and at such times and containing such particulars and being in such form and verified in such manner as are prescribed by the Rules.

(2) The firm should be constituted under an instrument of partnership.

(3) The instrument must specify the individual shares of the partners.

(4) The partnership must be valid and genuine and must actually exist in the terms specified in the instrument.

11. If all the above conditions are fulfilled the Income-tax Officer is bound to register the firm.

12. Rule 2 of the Rules provides for registration of particulars contained in the instrument of partnership on an application being make in that behalf. It is as under :

'2. Any firm constituted under an instrument of partnership specifying the individual shares of the partners may, under the provisions of section 26A of the Indian Income-tax Act, 1922, register with the Income-tax Officer, the particulars contained in the said instrument on application made in this behalf ?'

13. The second paragraph of this rule provides for the persons by whom such application is to be signed and the time within which it is to be made. It prescribes a different period when the application is for renewal of registration under rule 6 for any year. There is a proviso to this rule within enables the Income-tax Officer to condone delay in making an application for registration or renewal of registration if a sufficient cause existed. Rule 3 provides that an application referred to in rule 2 has to be made in the form annexed to the rule and has to be accompanied either by the original instrument of partnership under which the firm is constituted or a certified copy thereof. There is no controversy in the present case that after the partnership was formed under the deed of partnership dated April 25, 1955, the assessee-firm was duly registered. Rule 4 provides for issue of certificate by the Income-tax Officer upon being satisfied that there is or was a firm in existence constituted as shown in the instrument of partnership. The certificate is to be issued in the following form, namely :

instrument of partnershipThis ---------------------------------------------- has thiscertified copy of an instrument of partnershipday been registered with me, the Income-tax Officer for.......in the State of...... been section 26A of the IndianIncome-tax Act, 1922 and this certificate of registration shall haveeffect for the assessment for the year ending on theMarch 31, 19.....'

14. Rule 5 provides that the certificate of registration granted under rule 4 shall have effect only for the assessment to be made for the year mentioned therein. Rule 6 provides for an application for renewal of registration of a firm once registered and it is as under :

'Any firm to whom a certificate of registration has been granted under rule 4 may apply to the Income-tax Officer to have the certificate of registration renewed for a subsequent year. Such application shall be signed personally by all the partners (not being minors) of the firm, or, where the application is made after dissolution of the firm, by all persons (not being minors) who were partners in the firm immediately before dissolution and by the legal representative of any such person who is deceased, and accompanied by a certificate in the form set out below....'

15. The application shall be made before June 30, of the year for which the assessment is to be made provided that the Income-tax Officer may entertain an application made after the expiry of the said date if he is satisfied that the firm was prevented by sufficient cause from making the application before that date. Paragraph 2 of the form of application for renewal of registration of a firm under section 26A is as under instrument of partnership

instrument of partnership'2. The ----------------------------------------------certified copy of the instrument of partnershipwas registered by the Income-tax Officer for........ in the Stateof........ on the....... day of........ 19... and we hereby certifythat the constitution of the firm and the individual shares ofthe partners as specified in theinstrument of partnership---------------------------------------certified copy of the instrument of partnershipso registered on .... remain unaltered.'

16. The particulars are to be furnished in a tabular form which is prescribed in this form and in one of the columns is to be mentioned the share in the balance of profits (or loss). If the assessee-firm is entitled to renewal of registration then the last date for making such an application was June 30, 1959, for the assessment year 1959-60. On June 29, 1959, an application for renewal of registration for this assessment year was made duly signed by the eight surviving partners of the assessee-firm and Godavaribai, widow of the deceased Laxminarayan. In the tabular statement it is mentioned that each of the nine persons who have signed the application is entitled to 1/9th share in the balance of profits or losses. No objection whatsoever has been taken any of the taxing authorities, namely, the Income-tax Officer or the Judicial Member or the President of the Tribunal to the registration of the firm on the ground that the quantum of share had been incorrectly stated.

17. The argument of Mr. Joshi on behalf of the revenue is that renewal of registration cannot be granted to the assessee-firm for the assessment year 1959-60, firstly, because there is a change in the constitution of the firm upon the death of Laxminarayan and, secondly, because there is a change in the individual shares of the partners of the assessee-firm after the death of Laxminarayan. It is undoubtedly true that during the lifetime of Laxminarayan the assessee firm consisted of 9 partners. Each one of them was entitled to 1/9th share in the profits and was liable to bear the losses in the same proportion. It is equally true that upon the death of Laxminarayan there is a change in the constitution of the firm so far as the partners are concerned and the individual shares in which the losses are to be borne. So far as the profits are concerned the share of the surviving partners is not altered. Question, however, arises whether a mere change in the constitution of the firm or such change in the individual shares in which the losses are to be borne will disentitled the assessee-firm for renewal of registration. Rule 6 clearly provides that an application for renewal of registration shall be accompanied by a certificate in the form set out below and the certificate has to be to the following effect :

'We hereby certify that the constitution of the firm and the individual shares of the partners as specified in the instrument of partnership so registered on......... certified copy of the instrument of partnership remain unaltered.'

18. When the application for renewal of registration was made such a certificate is appended to not only by the eight surviving partners but the application is also signed by Godavaribai, widow of the deceased Laxminarayan. Upon a proper construction of clause 12 we have to consider whether the certificate set out in this application form is correct or not. The contention on behalf of the revenue can only be accepted if the certificate that has to be set out is to the following effect :-

'We hereby certify that the constitution of the firm and the individual shares of the partners so registered on........ remain unaltered.'

19. Such certificate requires the omission of the words 'as specified in the instrument of partnership certified copy of the instrument of partnership'.

20. Sub-section (2) of section 26A clearly provides that an application has to be made in such form as is prescribed. The form prescribed requires that the constitution of the firm and the individual shares of the partners as specified in the instrument of partnership so registered should remain unaltered when an application for renewal of registration is made. It should not be overlooked that the original deed of partnership dated April 25, 1955, has not been altered at any time either during the lifetime of Laxminarayan or after his death during the accounting year in which he died. There is no change in the constitution of the firm or the individual shares of the partners thereof except in the manner specified in that instrument of partnership which was duly registered. The original deed contains ample provision as to what is to happen to the firm upon the death of a partner thereof and that provision is contained in clause 12 above referred to. Notwithstanding the death of a partner in view of the provisions of clause 12 the firm is not to be dissolved but is so continue up to the end of the accounting year in which the death took place. So far as the profits are concerned each of the surviving partners is entitled to the same share as he used to receive but the share of the deceased partner has to be given to his heirs and legal representatives. Both these things as regards the constitution of the firm upon the death of Laxminarayan and the individual shares of the partners thereof are specified in the original instrument of partnership which has been duly registered after the partnership was formed. Thus there is no change or alteration whatsoever either in the constitution of the firm or the individual shares of the partners as specified in the instrument of partnership. The expression 'as specified in the instrument of partnership' cannot be ignored because it is an integral part of the deed of partnership which provides for an eventuality when death of a partner takes place. Except as specified in the instrument of partnership neither there is alteration in the constitution of the firm nor individual shares of the partners when the application for renewal of registration was made. The Income-tax Officer was bound to issue a certificate of renewal of registration of the firm s the assessee-firm strictly complied with each one of the requirements of rule 6 and the form of application for renewal of registration appended to rule 6 including the certificate.

21. Reliance was placed by Mr. Joshi upon a decision of the Allahabad High Court in Panna Lal Babu Lal v. Commissioner of Income-tax. In that case on the death of one of the partners of the firm in July, 1954, his son became a partner. The registration of the firm which was originally constituted under a deed dated November 30, 1942, was granted for the first time in 1944-45, and the same was renewed year after year up to 1956-57. For the assessment year 1957-58, the application for renewal was signed, inter alia, by the son of the deceased partner. The officer refused renewal of registration and this was confirmed on appeal by the Appellate Assistant Commissioner and the Tribunal. On a reference to the High Court it was held that even assuming that the death of the partner in 1954 did not have the effect of dissolution of the firm and the firm continued even after 1954, it became impossible for the present partners to certify as required by clause (2) of the form provided under rule 6 of the Income-tax Rules, 1922, that the constitution of the firm was the same as the constitution when the instrument of partnership was registered and hence there was a material defect in the application for renewal warranting its dismissal. The facts of this case show that in the case before the Allahabad High Court the partnership deed not contain any provision similar to those contained in clause 12 of the partnership deed in the present case. If the original deed of partnership is duly registered under rule 4 contains comprehensive provisions to provide for happening of contingencies as a result of which either the partners may change or the individual shares may be altered, still in such a case the constitution of the firm and the individual shares of the partners as specified in the instrument of partnership remain unaltered. Ever since the deed of partnership was executed there has been no change in the terms thereof. It is the registered instrument of partnership that has to be given effect to upon a contingency happening. As such alteration either in the constitution of the firm or in the individual partners of the firm is specified in the initial instrument of partnership which is registered, the certified required to be set out in the application for renewal of registration can be truthfully given by the partners making an application for such renewal.

22. Mr. Joshi urged that the scheme of registration of a firm under the Act and the Income-tax Act, 1961, is different. So far as the Act is concerned registration of the firms has to be made for one year for which it is registered and from year to year such registration has to be renewed in order to get the benefit of the provisions of the Act as a registered firm. That is undoubtedly true but the question whether renewal of registration should be granted or not does not depend upon the fact that application for renewal of registration has to be made from year to year. The application for renewal of registration has to be considered on its own merits having regard to the requirements of rule 6 and the requirements of the form prescribed. Even if the provisions of rule 6 and the form prescribed are required to be strictly complied with, in our opinion, not a single departure from compliance with those provisions has been pointed out by Mr. Joshi. If the words 'as specified in the instrument of partnership' are not omitted from consideration, whatever is stated in the application for renewal of registration is correct having regard to what is contained in the original deed of partnership. Thus, every requirement of the form has been strictly complied with in the present case and the taxing authorities were bound to issue a certificate for renewal of registration of the assessment for the assessment year 1959-60.

23. Accordingly, our answer to the question referred is in the affirmative. The revenue shall pay the costs of the assessee-firm.

24. Question answered in the affirmative.


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