1. The assessee firm consisted of two partners Hirji Jeram and Velji Morarji and this partnership was in existence in the Samvat year 2005. It was alleged by the assessee that there was a change in the constitution of the partnership on Kartik Sud 1st, Samvat year 2006, that is 22nd October, 1949, and on that date a new partnership was constituted consisting of five partners - two of them the old partners, Hirji and Velji, and three new partners. The new partnership made an application on the basis of a partnership deed dated 15th June, 1951, for registration for the assessment year 1951-52, which corresponds with 22nd October, 1949, to 9th November, 1950. The partnership deed recited that the partnership had commenced with effect from 22nd October, 1949, although, as just stated, it was dated the 15th of June, 1951. The firm was registered on the strength of this partnership deed under section 26A. This was after the total income of the firm had been assessed by the Income-tax Officer at Rs. 2,12,353. On considering the application of the assessee firm under section 26A, the Income-tax Officer came to the conclusion that it did not appear that it was the intention to give effect to this partnership from the beginning of Samvat Year 2006 and he gave various reasons why he came to that conclusion; and ultimately his finding was that the firm did actually consist of five partners on the date when he made this order, that is on the 18th of December, 1952, but that during the accounting year it consisted only of two partners; and he then proceeded to register the firm. But he also directed that the profits should be divided between the two partners in the same proportion as in the preceding years. The Appellate Assistant Commissioner cancelled the registration, holding that the partnership was not genuine. The Tribunal disagreed with the view of the Appellate Assistant Commissioner with regard to the genuineness of the firm, but it agreed with the Income-tax Officer that the firm of five partners did not come into existence on the 22nd of October, 1949, but it really came into being in the middle of June, 1951. The Tribunal therefore, restored the registration granted by the Income-tax Officer and sustained the order of the Income-tax Officer with regard to the allocation of profits. This reference raises the question as to what is the effect of registration on the allocation of shares to the partners of the firm.
2. Now, a firm is registered under section 26A and there can be no doubt, looking to the relevant rules framed, that the registration has to be for the year of account. The form of application makes it clear that the person applying for registration has to state that he requires registration for a particular year of account and the certificate of registration which is granted by the Income-tax Officer also grants the certificate for a particular year of account. As a matter of fact, an application for registration has got to be made for every year of account. Therefore, looking to section 26A and the form of application and the form of certificate to be issued by the Income-tax Officer, it is clear that when the assessee applied for registration for the year of account, Samvat year 2006, and its application was granted and the firm was registered, the registration was for the Samvat year 2006, and what we have to consider is the effect of that registration.
3. The first relevant section is section 23, sub-section (5) which provides as follows :
'Notwithstanding anything contained in the foregoing sub-sections, when the assessee is a firm and the total income of the firm has been assessed under sub-section (1), sub-section (3) or sub-section (4), as the case may be, -
(a) in the case off registered firm, the sum payable by the firm itself shall not be determined but the total income of each partner of the firm, including therein his share of its income, profits and gains of the previous year, shall be assessed and the sum payable by him on the basis of such assessment shall be determined.'
4. Therefore, where we have a registered firm, the tax payable by that firm is not to few determined, but the total income of each partner of that firm has to be determined and in that total income his share of the firm's income, profits and gains of the previous year has to be assessed and the sum payable by the individual partner has to be determined. Now, the 'Partner' contemplated by this sub-section is clearly the partner of the registered firm. This is clear, because the registration being for the year of account, what the law requires is that you must look at the partnership subsisting in the year of account on the basis of which the registration has been granted and allocate the profits or loss according to the share appearing in the partnership. Unless the Income-tax Officer accepts ask fact that there is a partnership as alleged by the assessee in the year account, that the partners of that partnership are as alleged by the assessee and the shares of the partners as alleged by the assessee, he should not - and indeed cannot - grant registration to that firm under section 26A. By the act of registration he accepts the position, if the assessee has come to him on the strength of a written partnership, and indeed, and in the particulars which the assessee has to supply, he has got to set out who the partners are in the year of account. It is not disputed in this case, that, when the assessee made his application for registration, he showed in the form of application the names of the five partners and also showed their respective individual shares. It is on the strength of this form that registration was granted by the Income-tax Officer and, we may repeat, in granting the registration the Income-tax Officer accepted the position as set out in this application form.
5. But the section that creates difficulty is section 26 and that section provides as follows :
'Where, at the time of making an assessment under section 23, it is found that a change has occurred in the constitution of a firm or that a firm has been newly constituted, the assessment shall be made on the firm as constituted at the time of making the assessment.'
6. Therefore, whereas for the purposes of section 23(5) and for the purposes of allocation of profits or losses the firm that has got to be considered is the firm in existence in the previous year, the year of account, for the purpose of making the assessment order the firm that has to be considered is the firm as constituted at the time of making the assessment. The reason for this is obvious, because at the time when the Income-tax Officer passes the assessment order he is more concerned with the entity whom he would call upon to make the payment of tax. As far as the payment of the tax is concerned, not only the partners of the firm which was in existence in the year of account would be liable, but also the partners of the firm in existence at the date of assessment. So far the matter presents no difficulty. But when we come to the first proviso to section 26(1), that proviso lays down that 'the income, profits and gains of the previous year shall, for the purpose of inclusion in the total incomes of the partners, be apportioned between the partners who in such previous years were entitled to receive the same;' and both the Income-tax Officer and the Tribunal have relied on this proviso to come to the conclusion that notwithstanding registration, inasmuch as the actual partners in the previous year were the two partners and not the five partners, and inasmuch as in reality only the two partners were entitled to receive the income of the partnership, the allocation was properly made only with regard to these two partners and not with regard to the five partners. Now, in our opinion, that is not a correct reading of this proviso. Section 26 is general and it refers to both a registered and an unregistered firm; and sub-section (1) of section 26 having provided that the assessment shall be made on the firm existing at the time of making the assessment the Legislature had to provide by a proviso that notwithstanding the assessment the apportionment must be between the partners who were entitled to receive the income of the partnership. The question is : who are the partners who are entitled to receive this income in the case of a partnership The answer can only be given by looking at section 23, sub-section (5)(a). Inasmuch as that section has made it obligatory upon the assessing authority to allocate profits to the partners who are the partners according to the registration of the firm and who are entitled to the shares - again according to the registration of the firm - it is clear that in the proviso to section 26(1) the same meaning must be given to the expression 'were entitled to receive the same'. The title here suggested is not a little debtors the partnership which has been accepted by the Income-tax Officer and which has been registered. Therefore, it is not open to the Department to launch upon a separate and independent inquiry to find out who were in fact or in law the partners of a registered firm in the previous year. The effect of registration is clear. The Income-tax Officer accepts the document on which the registration is sought and thereby also accepts the partners who constitute the partnership and the shares of the partners.
7. Therefore, the order passed by the Income-tax Officer was, with respected to him, entirely illogical. If he was of the opinion that there were only two partners in the Samvat year 2006, and that the partnership of five partners came into existence only in samvat year 2007, then he should have refused registration. But what he did was, he granted registration and then, instead of accepting the effects of registration, he went on to give a finding which was diametrically opposed to the effect of registration : and the Tribunal also, with respect, has fallen into the same error. This is exactly what happened in the case of Commissioner of Income-tax v. Dayaram Gangabishan & Co., and there we have pointed out what the correct procedure is with regard to an application under section 26A and we have emphasized the fact there that the registration under section 26A is a registration of a firm for the previous year or the year of account. There the Income-tax Officer had committed the same mistake, but it was possible for unto take the view there that in effect he had refused registration. Unfortunately, we cannot do so here because both the parties have come before us on the assumption that there is a valid registration and have asked us to give our opinion as to the effect of that registration. We cannot, therefore, practically destroy the substance of the question put to us by proceeding to hold that registration was not granted by the Income-tax Officer.
8. There is also an earlier judgment of this court which throws some light on this question and that is Shapurji Pallonji v. Commissioner of Income-tax. In that case, Mr. Justice Kania, as he then was referred to the decision of the Calcutta High Court in Neemchand v. Commissioner of Income-tax and quoted with approval the observation of Rankin, C.J., that 'But the partners as individuals get the certain rights while the registration stands and the income-tax authorities cannot dispute the amount of the individual's share are shown in the document which they have accepted for registration'; and Mr. Justice Kania explains this remark by saying : 'That only means that in making the firm's assessment, and showing the distributive share of each partner, the Income-tax Officer should show the amount according to the instrument registered. That, however, is not in respect of the assessment of the individual partner, and does not preclude the officer from inquiring whether the income shown against the individual partner's name is the true income of that partner, or stand in his name as a nominee of another partner or another person.'
9. Mr. Kolah conceded that the question as to whether certain profit in fact came to the share of a particular partner could be agitated in the assessment of the individual partner; but as far as the assessment of the firm is concerned, and the allocation of shares under section 23(5) is concerned, the Income-tax Officer has no option but to give effect to the registration of the firm, which registration is for the previous year.
10. The result is that we must answer the question submitted to us in the negative.
11. Commissioner to pay the costs.
12. Questions answered in the negative.