1. This is a reference at the instance of the assessee under s. 256(1) of the I.T. Act, 1961, from the order of the Tribunal dated 7th December, 1968, in Income-tax Appeals Nos. 18810 and 18811 of 1966-67. We are concerned with two assessment years, viz., 1962-63 and 1963-64. The question lies within a very narrow compass. It appears that as from 1st January, 1946, there was a firm consisting of four partners Bulakhidas Bhailalbhai Patel, Gordhanbhai Bhailalbhai Patel, Haridas Vaghjibhai Patel, and Nagjibhai Bhailalbhai Patel. The business of the partnership was as manufacturers and founders of non-ferrous alloys. On 13th December, 1953, Negjibhai Patel died and under an indenture of partnership dated 30th March, 1954, a fresh partnership came into being which was between Bulakhidas, Gordhanbhai and Haridas, the three surviving partners of the erstwhile firm and the 4th partner of this second partnership, as we may call it, was Chandrakant, son of Nagjibhai Patel. This partnership continued till 17th January, 1962, on which date Bulakhidas expired. A new deed of partnership was executed on 5th February, 1962, with which we are principally concerned. A copy of this deed of partnership is annexed as annex. 'A' to the statement of case. It may be mentioned that Bulakhidas left a will dated 1st January, 1962. As considerable reliance was placed on the said will by learned counsel for the assessee before the lower authorities, the Tribunal has annexed to the statement of case a copy of the said will as annex. 'E'. Before the ITO an application was made for registration of the new firm constituted by the deed of partnership dated 5th February, 1962. The ITO for the various reasons mentioned in his order for the year 1962-63 held that the reconstituted firm was not entitled to registration. In the first place, reliance was placed by the ITO on clause 16 of the partnership of March, 1954, where under an heir of a deceased partner was entitled to succeed to his share in the firm and the capital, goodwill and future profits thereof if mentioned by the deceased partner. According to the ITO, since there was no nomination and the two executors under the will of Bulakhidas had purported to step into the shoes of the deceased partner as representatives of the estate of the deceased, the partnership was not proper. Further, according to the ITO, the share of the two executors had been jointly mentioned in the deed of partnership as four annas. In his opinion, this was a fatal defect disentitling the reconstituted firm from registration. The fact that the two executors had both signed the partnership deed was, in his opinion, not material. In his opinion, the two constituted an association of persons and such an association of persons could not be a partner in a firm. Accordingly, for both the assessment years, the ITO refused to register the reconstituted firm.
2. Analysing the order of the ITO we find three principal grounds on which he was inclined to refused registration : (1) In the opinion of the ITO the new partnership of 1962 was somehow not in accordance with clause 16 of the partnership deed of 1954, (2) The two executors of the estate of the deceased partner Bulakhidas, according to the ITO, constituted an association of persons, and such an association of persons could not be a partner in a firm, (3) The individual shares of the partners were not specified.
3. Being aggrieved by the decision of the ITO, the assessee carried the matter in appeal to the AAC. The AAC directed the ITO to grant registration to the partnership firm (presumably of 1954) up to the date of death of Bulakhidas, viz., 17th January, 1962. However, in respect of subsequent period, the AAC agreed with the view taken by the ITO, though he gave his reasons in a somewhat different manner.
4. Dissatisfied with the order of the AAC, the assessee carried the matter in further appeal to the Tribunal. Before the Tribunal, a number of contentions were raised on behalf of the assessee. Learned counsel for the assessee urged in the first instance that the two executors should be considered as one body and, if considered as such, there was a specified share of 25 paise given to them. It was submitted by him that the law enjoins on the two executors to act jointly and, therefore, no share could be attributed to each of the executors individually. It may be mentioned that it had been contended before the Tribunal on behalf of the revenue that the order of the ITO was under s. 184 and not under s. 185. We are not inclined to accept the submission of the revenue on this part of the matter and, therefore, we will not advert in detail to the arguments advanced on behalf of the assessee on this point. These arguments will be noted when the said question will be answered by us. On behalf of the revenue, the arguments of learned counsel for the assessee were traversed by contending that the two executors between them could not legally be accepted to be one partner. It was pointed out that the estate as such did not have any claim for continued representation in the partnership; therefore, the beneficiaries under the will could have no claim in becoming partners in the new firm through the two executors acting jointly. In reply, learned counsel for the assessee contended that on the death of a partner the firm did not get dissolved. On the other hand, according to his contention, the new partnership with the joint executors was in continuation of the old firm. It was contended that one of the two joint executors could act for another executor. It was also urged that the expression 'individual' would also include the plural and in that sense, according to his submission, the shares of the individual partners were mentioned in the deed. We have set out the above arguments of learned counsel for the assessee as mentioned in para. 8 of the statement of case, but most of these have just to be stated to be rejected. It may be pointed out that learned counsel for the assessee in this reference has abandoned these contentions and proceeded to argue the reference from a totally different angle.
5. Two questions arise for determination in this reference. The first is : Who are the partners under the deed of partnership, annex. 'A' to the statement of case The second question to be considered after answering the first question is : Whether the requirements specified by s. 184 are satisfied or not The requirement with which we are principally concerned and on which we must lavish attention is obviously the requirement to be found in s. 184(1)(ii), which requires that the individual shares of the partners have to be specified in the instrument. The third question which in our opinion is a minor and a subsidiary one, is as regards the appealability of the order of the ITO. This question arises in an unusual manner. The ITO passed his order refusing registration for both the years in question and the orders were specified as made under s. 185 of the I.T. Act, 1961. Under s. 246(j) orders under the several clauses of s. 185 are made appealable. The assessee carried the matter in appeal from this order to the AAC and partial relief was given by the AAC. When the matter was carried in further appeal to the Tribunal, it was urged on behalf of the department by the departmental representative that the orders refusing registration were made under s. 184 and not under s. 185. The contention of the departmental representative is set out in para. 8 of the appellate order of the Tribunal and was that s. 184 itself was an independent section under which it is open to the ITO when he finds prima facie defects in the application for registration to hold so. In the submission of the departmental representative, this was merely an executive order from which no appeal lay. Further, according to the departmental representative, s. 185 was concerned with the question of genuineness of the firm and its constitution as specified in the instrument of partnership, and the ITO could refuse registration under s. 185 only on these grounds. According to the departmental representative's submission, these grounds did not exist and hence the order refusing registration could not be regarded as one made under s. 185. These contentions urged on behalf of the department before the Tribunal were rejected by the Tribunal. The Tribunal observed that s. 184 contains certain procedural requirements but the order passed by the ITO would be one under s. 185; and in the view of the Tribunal, the order passed in the instant case was clearly an appealable order.
6. Although the Commissioner has sought a reference on this point, in our opinion, the point urged is totally devoid of merit and if the scheme of the two sections is perused, it will have to be held that the substantial ground on which registration could be refused will convert the order into one under s. 185. If there are some procedural defects in the application, the scheme of the Act evidenced by the provision contained in sub-s. (2) of s. 185 suggests that the attention of the party applying for registration is to be drawn to these defects and it is entitled to one month's time to cure such defects. In our opinion, further discussion or elaborate consideration of this point is not called for, and the question raised on behalf of the revenue will have to be answered in favour of the assessee. It may be mentioned, however, that the Tribunal upheld the decision of the AAC and the ITO on the main question of the firm being entitled to registration and it is from that decision of the Tribunal that the assessee has claimed the reference. It may be pointed out further that the Tribunal chose to rest its ground principally on the question that there was no separate specification of the share of the two executors. It would appear, therefore, that the Tribunal considered that the two executors had separately become partners in the new firm. Since according to the deed of partnership, they had been given a consolidated share of 25 paise, the Tribunal opined that this was contrary to what was required under s. 184(1)(ii). It rejected the argument advanced at the bar before it that the terms of the will could be looked at or that otherwise the share of 25% could be equally apportioned between the two so called partners. It is on these facts that the following two question of law have been referred to us : Question No. 1 set out below is at the instance of the assessee and question No. 2 is at the instance of the revenue :
Question No. 1,
'Whether, on the facts and in the circumstances of the case, the refusal of registration to the appellant firm was proper ?'
Question No. 2.
'Whether, on the facts and in the circumstances of the case, the order of the Income-tax Officer could be under section 185 or under section 184 according to law ?'
7. As stated earlier, as far as question No. 2 is concerned, we 'are of opinion that the contentions raised on behalf of the revenue, which have been set out in the order of the Tribunal, are merely to be stated to be rejected. If there are procedural defects in the application for registration, it is incumbent on the ITO to point them out to the assessee, and the time of one month has been prescribed within which the assessee is to have an opportunity to rectify these defects. From that limited point of view, the procedural defects in the application of the firm for registration under s. 184 can be regarded as non-appealable.
8. However, if the application for registration is to be refused on a more substantial ground, viz., a ground which in the opinion of the ITO does not pertain to procedural defects which can be allowed to be rectified by the assessee as contemplated by s. 185(2), then the order must be regarded as one made under s. 185, and such orders have been made appealable by s. 246(j), to which we have earlier alluded.
9. As stated earlier, as far as question No. 1 is concerned, it will have to be first ascertained who are the persons who obtain the status of partners under the deed of partnership dated 5th February, 1962.
10. It is found from annex. 'A' to the statement of case as cyclostyled by the party and as annexed to the original statement of case that either annex.'A' is incomplete or the original deed of partnership itself contains certain omissions which are easily perceivable when one turns to the opening words of the recitals as also to the recitals as also to the concluding portion. As neither party has been able to give us the original deed of partnership or a copy from their records, we have to proceed with the existing unsatisfactory state of affairs.
11. Turning to the first aspect which we have mentioned earlier, viz., the aspect of determining the persons who are constituted partners by the deed of partnership, it may be pointed out that the argument before the Tribunal was that the two executors jointly constituted a single partner whose share was specified at 25 paise, and in that manner it was sought to be contended that the requirements specified in s. 184(1)(ii) were fully met. When we posed the question to learned counsel for the assessee, viz., whether the law of partnership or the law of contract contemplated two persons jointly being constituted a single partner, it was submitted to us that this argument urged on behalf of the assessee-company before the Tribunal did not proceed on a proper footing and that the correct position in law was that the two executors were both partners in the new partnership constituted with effect from 18th January, 1962, by the deed of partnership dated 5th February, 1962. In other words, the contention was that Surajben separately and in her individual capacity and her son Remesh Bulakhidas also separately and individually would both be partners, though given a joint share of 25 paise under the deed of partnership. The question to be considered is whether this contention is correct.
12. It is to be noted in the first instance that both these persons are jointly described in the opening words of the recitals as 'of the Fourth Part' whereas the other three partners, viz., Gordhanbhai, Haridas and Chandrakant (the surviving partners of the earlier partnership) are described as being of the first, second and third part respectively. The recitals further record that after the death of Bulakhidas, the three surviving partners had continued and carried on the partnership business with the consent of the executors (the executors being Surajben and Remesh, as it borne out by the will, annex, 'E' to the statement of case). The recitals end with the statement that 'the parties hereto have become and shall remain partners'. It is to be noted once again that the party of the Fourth Part are two persons jointly.
13. Some difficulty is caused by the phraseology of clause 1 of the partnership deed, annex. 'A', which reads as follows :
'The parties hereto agree and declare that the parties of the fourth part have been taken as partners as and from 18th day of January 1962.'
Clause 2 gives the shares in profits and may be fully set out :
'2. The net profits of the partnership business shall be divided and apportioned between the partners as under :- Gordhanbhai Bhailalbhai Patel 25 nP.Haridas Vaghjibhai Patel 25 nP.Chandrakant Nagjibhai Patel (representing the branchof Nagjibhai Bhailalbhai Patel, deceased). 25 nP.Surajben Bulakhidas and Ramesh Bulakhidas(representing the estate of Bulakhidas B. Patel,deceased). 25 nP.
14. Finally, it may be pointed out that the deed of partnership ends, with the signatures, by being mentioned that the four parties to the document have put their respective hands and seals; and the first three parties who have signed the document are the surviving partners Gordhanbhai, Haridas and Chandrakant, and the fourth party on whose behalf two persons, viz., Surajben Bulakhidas and Ramesh Bulakhidas, have signed as party of the fourth part are the two executors under the will of Bulakhidas. The signatures of Surajben Bulakhidas and Ramesh Bulakhidas are against the following description :
SIGNED SEALED AND DELIVERED BY THE WITHINNAMED SURAJBEN BULAKHIDAS AND RAMESH BULAKHIDAS in the presence of.....'
15. The argument of the learned advocate for the assessee before us was that by the deed of the partnership there were five persons who became partners, viz., Gordhanbhai, Haridas, Chandrakant, Surajben and Ramesh Bulakhidas, and the view expressed by the ITO that Surajben and Ramesh Bulkhidas constituted an association of persons which was inducted as a partner and that this could not be legally done, was not warranted and was totally improper. It was submitted that there was nothing improper in the two persons being taken as partners representing the estate of Bulakhidas and particularly so if they were the two executors under the will of Bulakhidas. It was submitted in the alternative that even if it be regarded that the two executors, as representing the estate of Bulakhidas, were inducted jointly as one partner, this could be permitted and a broad view was required to be taken of the partnership agreement and its substance cannot be permitted to be overshadowed by the apparent form.
16. Before we turn to a consideration of the interesting argument advanced at the bar on the alternative footing, it will have to be first considered whether Surajben and Ramesh Bulakhidas separately and individually have been made partners under the deed of partnership The proper test is whether either of them acting individually can enter into transactions on behalf of the firm or otherwise bind the firm
17. Once the proper question is posed it is quite clear that neither of these two persons acting by herself or himself can claim to be a partner of the firm as constituted by the partnership deed of 5th February, 1962. The status of a partner is given to the two jointly and it is only if they act jointly that they can purport to be a partner of the firm, represent the firm, be the agent of the firm, obtain rights and incur liabilities for the firm. The manner in which they have been described in the recitals and the manner in which they have signed, leave no room for any doubt that both of these persons collectively are the partners and not separately.
18. The next question is that when the right of the partnership or the status of a partner is being sought to be conferred by the agreement on the two persons jointly, whether the agreement could be accepted as an agreement of partnership as ordinarily understood by law. 'Partnership' has been defined by the Partnership Act as the relation between persons who have agreed to share profits of the business carried on by all of any of them acting for all. Thus, it is clear that each of the parties who together constitute the multiple entity described by law as a partnership firm must have the status of a personality in law. Such status of personality is possessed by an individual or by a limited company, and these in jurisprudence are described as natural and artificial persons respectively. It is not necessary that persons who become partners are necessarily partners in their individual capacity. They may have entered into a partnership agreement with others, representing a group, a firm, a Hindu family or some other entity which because of some restrictions or lack of capacity or other reason may not be entitled directly to be a partner or does not wish to be one.
19. Thus, ordinarily two persons together or collectively cannot be considered to be one single partner of a firm. It was, however, urged that there are a number of decisions of the Supreme Court in which such partnership has been accepted as valid; and it will, therefore, become necessary to consider these Supreme Court decisions.
20. In Kylasa Sarabhaiah v. CIT : 56ITR219(SC) , where the Supreme Court had before it the case of a firm, the larger firm B as described in the headnote, was constituted under a deed or partnership in which a smaller firm A was described as the first partner. It was opined by the Supreme Court that a firm is strictly not a person in law (though it may have got a separate special status for tax purposes). Accordingly, it was noted that an agreement by which a firm purports to enter into a partnership with an individual or another firm merely makes the partners of that firm individually partners of the larger partnership. Thus in the view of the Supreme Court, if in the larger firm B the smaller firm A was constituted a partner, it only meant that the major partners of firm A individually became partners of the larger firm B. We do not think that the observation in the above case can be extended further and applied to an association of persons. In our opinion, they have to be restricted to the case of a firm; they would not warrant acceptance of the general proposition that it would be permissible in law for an association of persons to be collectively a partner of another partnership, or each of them would thereby become a partner.
21. Our attention was also drawn to CIT v. Sir Hukumchand Mannalal and Co. : 78ITR18(SC) , where two of the five partners represented the interest of a HUF. It was sought to be argued that the party of the fourth part in the partnership under consideration by us, viz., that constituted by the deed of partnership dated 5th February, 1962, were the two executors representing the estate of Bulakhidas. It was submitted that if the Supreme Court in Sir Hukumchand Mannalal and Co.'s case : 78ITR18(SC) found that the partnership not to be invalid, the same conclusion must be extended to the partnership under consideration by us. Mr. Joshi on behalf of the revenue, however, pointed out that the nature of the partnership in Sir Hukumchand Mannalal and Co.'s case : 78ITR18(SC) will be clear if the decision of the Madhya Pradesh High Court in CIT v. Hukumchand Mannalal and Co. : 57ITR213(MP) , is scrutinised; and it is found therefrom that these two persons had both signed the partnership deed as partners and their shares were specified at four annas and two annas respectively. Thus there was no defect in the new partnership, although these two persons getting four annas and two annas shares respectively represented the joint firm of Sir Hukumchand. It is clear that once there is a valid partnership, the fact that one or more of the partners may represent some other entity and that entity may collectively or in some specified proportion be entitled to the share of profits earned by these persons, would not affect the question of validity of the partnership. That, however, is not the case before us. The position may have been different had we been able to accept the contention of the learned advocate for the assessee that both Surajben and Ramesh, considered separately and individually, became partners under the deed of partnership. We have not been able to accept the said contention. The true position under the deed of partnership as it appears to us is that the two of them jointly or collectively have been constituted a single partner and it is only when they act jointly that they can purport to exercise the rights of a partner. In our opinion, such a partner is not contemplated in law and a partnership having such a partner cannot be considered to be legally valid. If there is an agreement constituting such a partnership, it will have to be regarded as being contrary to law and, therefore, on that count, in our opinion, the ITO was entitled to refuse registration.
22. It may be pointed out that the decision on the other point which found favour with the Tribunal, viz., the non-specification of the shares of individual partners, will turn upon the question as to whether the two, viz., Surajben and Ramesh are collectively a single partner or individually partners. If the two together can legally constitute a single partner, then the share of profits of that single partner is specified. Difficulty, however, comes in the way of the assessee only if the two persons are to be considered separately to be partners. The question in such a case would be whether there is any breach of the requirements of s. 194(1)(ii) by the share being given to them collectively. Our attention, as far as this aspect of the question was concerned, was drawn to the observations to be found in the decision of the Madhya Pradesh High Court in CTI v. R. S. Nikhera Construction Co. (1978) 114 ITR 294, which observations would have gone a long way to help the assessee if we were of opinion that the two persons, Surajben and Ramesh, were separately constituted partners by the deed of partnership dated 5th February, 1962. In the above decision, it was observed by the Madhya Pradesh High Court that the specification of shares of the partners need not be express but may be implied. According to the High Court, the requirement of the section is satisfied if the deed can be reasonably construed as clearly implying that the shares of the two partners are equal. On that footing it was urged before us that Surajben and Ramesh Bulakhidas should be regarded separately as partners, each of these two having an equal one-half share in the 25 paise share of profits allotted jointly to the two of them. It would appear that the observations in the aforesaid decision would to a large extent meet the objection to the registration which found favour with the Tribunal. In the view that we have taken, however, objection to registration cannot rest on this point but on the more fundamental point which we have earlier noted. In the view that we have taken, it is unnecessary to consider whether there was any violation of the prescribed condition enjoined by s. 184(1)(ii), or whether the purported violation could be met in the manner as was done by the Madhya Pradesh High Court in R. S. Nikhera Construction Co.'s case (1978) 114 ITR 294. In our opinion, the partnership purported to be constituted by the deed of partnership dated 5th February, 1962, was not a legal partnership and, if that is so, it could not be granted registration.
23. In the result, the two questions referred to us are answered as follows :
24. Question No. 1 - (at the instance of the assessee). - In the affirmative and in favour of the Commissioner.
25. Question No. 2 - (at the instance of the Commissioner). - In our opinion, the order of the ITO must be deemed to be one made under s. 185 and hence appealable.
26. There has been partial failure and partial success and although question No. 1, in which the Commissioner has succeeded, was the more substantial question, we have found in favour of the Commissioner on a point somewhat different from the one which had appealed to the Tribunal. Accordingly, we direct the parties to bear their own costs of this reference.