Somnath Iyer, J.
1. This reference made by the Income-tax Appellate Tribunal, Madras, under section 66(1) of the Indian Income-tax Act, 1922, arises out of two applications presented under section 26A of the Act for renewal of registration of the assesses firm. The firm consisted of four partners and was constituted under an instrument of partnership executed on December 10, 1957. There was a registration of there firm under section 26A for the assessment years 1958-59 and 1959-60. But renewal of registration for the succeeding two years was refused by the Income-tax Officer on the ground that appropriation of profits had been made otherwise than in accordance with the instrument of partnership. The Appellate Assistant Commissioner, to whom the assessee appealed, concurred in the view taken by the Income-tax Officer and the further appeal to the Income-tax Appellate Tribunal was also dismissed.
2. The question of law referred to us for our decision, on the application of the assessee, reads :
'Whether the assesses firm is entitled to renewal registration under section 26A of the Indian Income-tax Act, 1922, for the assessment years 1960-61 and 1961-62 ?'
3. In the application presented for renewal of registration in accordance with the form prescribed by rule 6 of the Indian Income-tax Rules, 1922, it was stated by the assessee that, although the four partners were during the relevant period entitled to a four annas share each, in the balance of the profits or the loses, two of the partners had been paid salaries during that period. One of them, Raghunath Rao, it was stated, was paid a salary of Rs. 3,600 and the other, Dattatreya, was paid a salary of Rs. 1,800 during each previous year. The instrument of partnership did not, in so many words, provide for the payment of any salary to any of the partners. The Income-tax Officer was of the opinion that, such the instrument of partnership was not suitably altered so as to provide for payment of salary, the constitution of the firm during the relevant period was not the same as what it was, during the earlier periods, under the instrument of partnership.
4. The Appellate Assistant Commissioner, who did not discuss the question whether there was a change in the constitution of the firm, came to the conclusion that there was a variation in the distribution of profits by payment of salary which the instrument of partnership did not authorise, and that such variation disentitled the firm to renewal of registration. The view taken by the Appellate Tribunal was that, if the partnership deed did not provide for the payment of salary, but there was such payment, there was 'non-compliance with the partnership deed' and registration should be refused. The Tribunal recorded finding that there was not even a decision by the majority of the partners under the partnership deed for the payment of salary. In paragraph 10 of its order the Tribunal concluded thus :
'Rules 3, 4 and 6 require that the profits should have been divided as mentioned in the deed. If salary had been paid to the partners and the deed does not provide for it, to that extent, the profits made by the firm have been divided otherwise than provided for in the deed, and as laid down by the Supreme Court, the Income-tax Officer has a duty cast upon him to insist on full compliance with the requirements of the law.'
5. On the question whether there was a change in the constitution of the firm, the Tribunal expressed its opinion in somewhat obscure language. It said this :
'Constitution is one of the elements which has to be looked into by the Income-tax Officer before granting registration. Satisfaction of the sole point does not give the assessee an automatic right to renew registration. Equally unsubstantial is the contention that the expression 'constitution of a firm' does not have any reference to the profit-sharing proportion of the partners. The constitution of the firm and sharing of profits are interminably linked together.'
6. So, although the Income-tax Appellate Assistant Commissioner did not say whether there was a change in the constitution of the firm, the Appellate Tribunal thought, though it did not say so very clearly, that if a salary was paid without a provision in the instrument of partnership authorising such payment, there was a change in the constitution of the firm.
7. We are concerned in this case with the provisions of the Income-tax Act, 1922, under which renewal of registration was sought. Although section 26A does not in terms provide for renewal of registration, it is clear from the language of sub-section (2) of that the Income-tax Officer was invested with the power to renew a registration previously made. The procedure to be adopted for renewal of registration is prescribed by rules as provided by section 26A(2), and the relevant rule is rule 6 of the Indian Income-tax Rules, 1922. Rule 4 prescribes the procedure for an application for initial registration and rule 6 says that a firm to whom such certificate of registration has been granted under rule 4 may apply to the Income-tax Officer for renewal of the certificate of registration. It directs that the application for such renewal has to be made in the form prescribed by that rule, and paragraph 2 of that form requires the assessee to certify that the constitution of the firm specified in the instrument of partnership as previously registered remains unaltered. It is thus clear that if there is no other reason refusal of renewal of registration, such renewal could be refused on the that there was an alteration in of the firm which was constituted the constituted by the instrument of partnership previously registered.
8. The principal reason for which the Tribunal reached the conclusion that the renewal of registration was properly refused was that there was an alteration in the constitution of the firm in consequence of the variation in the profit sharing proportion resulting from the payment of a salary for which the instrument of partnership contained no provision.
9. From the statement of the case what is clear is that the Tribunal did not think that the firm was bogus firm or that a partnership was not created under the instrument of partnership when it was initially registered. So, the question before us is whether there was a change in the constitution of the firm such as the one to which the Tribunal had alluded and whether the payment of a salary to two partners altered the constitution of the firm in that way.
10. There was no provision in the old Income-tax Act explaining when the constitution of firm gets altered. Section 187 of the Income-tax Act of 1961, however, states that, for the purpose of that section the constitution of firm changes when a new partner is included or an old partner retires, or when there is a change in the shares in the partnership. But a provision to that effect has relevance only for the purpose of that section which does not concern itself with the registration of the firm or its renewal.
11. We should, therefore, address ourselves to the question as to what is an alteration in the 'constitution of the firm' to which paragraph 2 of the form prescribed by rule 6 of the Indian Income-tax Rules, 1922, refers, and whether, if there was a change in the constitution of the firm within the meaning of that paragraph, the assessee in this case was not entitled to renewal.
12. The words 'constitution of a firm' have, according to their plain meaning, reference to the composition or the structure of the firm. Generally speaking, the composition of a firm is determined by the partners who constitute it and its constitution would get altered when there is an inclusion of a new partner or an old partner ceases to be one.
13. Section 26 of the old Act also speaks of a change in the 'constitution of a firm' and its consequence, and the question is whether the 'constitution of a firm' changes not only when the persons constituting the firm at a given point of time are not those who constituted the firm earlier, but also where the shares of the partners are varied, although the partners continue to be the same as those who originally became partners.
14. We take the view that, according to the plain meaning of the words, there is no change in the constitution of a firm when the partners do not change but there is only a change in the proportion in which the profits are to be distributed or the loses have to be borne. The view that we take receives support from the decision of the High Court of Calcutta in In re Moolji Sicka, in which Derbyshire C.J. said this :
'There is no question here of a firm having been newly constituted. The only question is whether a change has occurred in the constitution of a firm. There is no previous decision to guide us as to the meaning of 'change in the constitution of a firm. The relevant explanation of the word 'constitution' given in the New English Dictionary by Sir James Murray, vol. II, page 876, is 'the way in which anything is constituted or made up; the arrangement or combination of its parts or elements, as determining its nature and character; make, frame, composition.' From a consideration of that definition a 'change in its partners but not a change in the proportion in which the partners divided the profits.'
15. With this enunciation we respectfully agree. What we have said so far would produce an answer to the question referred to us in favour of the assessee. But even if we can take the view that the change in the proportion in which the profits are to be distributed or the lose have to be borne involves a change in the constitution of a firm, there was no such change in the case before us. It seems to us that the Appellate Tribunal was in error in thinking that the payment of salary to a partner, in the absence of a provision authorising such payment, produces a change in the proportion in which the profits or the lose have to be shared. The provision of section 13 of the Indian Partnership Act make it clear that, whatever may be the position in England, a partner would, under contract, be entitled to receive remuneration for participation in the conduct of the business of the firm. The right created in a partner to receive such remuneration for conducting the business of the firm make the discussion of the question, whether a partner could be his own employee which arose in Ellis v. Joseph Ellis & Co., irrelevant.
16. Section 13 incorporates a prohibition against the payment of remuneration to a partner who takes part in the conduct of the business of the firm. But the prohibition is not absolute, and it stands removed by a consensual contract for its payment. So, in the case before us, if there was a contract for the payment of remuneration to the two partners to whom such remuneration was paid, the payment would be a good payment, and not one made in transgression of section 13. If not, the partners who conducted the business of the firm could not claim any remuneration and its payment would be impermissible.
17. The decision of the Tribunal was that the instrument of partnership did not authorise the payment of any remuneration and that there was no decision by the majority of the pretenders, under clause 14 of the instrument of partnership, to make such payment. So what follows from this finding of fact, which is not open to discussion in this reference, is that the payment of remuneration to the two partners, to whom we have referred, was prohibited by the section 13 of the Partnership Act and was impermissible. But it does not follow that a payment of remuneration in disobedience to section 13 is the payment of an addition share of profits. The Appellate Tribunal did not state that the payment of remuneration was camouflage to which the partners resorted to for making the distribution of a larger share of the profits to the partners.
18. The erroneous assumption made by the Tribunal was that in all cases where there was a payment of remuneration in disobedience to section 13, there was an alternation in the proportion in which profits had to be shared between the partners. Whatever may be the consequences emanating from an impermissible payment of remuneration in transgression of section 13 of the Partnership Act, such payment does not necessarily involve, unless the facts justify such inference, an alteration or change in the proportion in which the profits have to be shared. The Tribunal did not subscribed to the view that there was any material beyond the fact that there was an improper payment remuneration, which could transport it to the conclusion that there was a variation in which the profits should be distributed.
19. Mr. Rajasekhara Murthy however asked us to say that, since in column 5 underneath paragraph 3 of the form prescribed by rule 6, an applicant for the renewal of registration has to mention the salary or commission, and in column 6 the share in the balance of profits or lose had to be specified, we should reach the conclusion that the salary or commission paid to a partner is part of the profits to be distributed amongst them. It is obvious that that inference does not follow from anything which is required to be stated either under column 5 or under column 6, for the obvious reason that the profits or losse to be specified under column 6, is the balance of profits or the balance of the lose, and that balance is the balance which remains after the payment of salary or commission to be stated under column 5.
20. That that is the clear meaning of those two columns is also clear from the note appended underneath paragraph 3 from which it becomes clear that the payment of interest, salary or commission exceeding the total profits and which leaves a balance of net loss does not result in the constitution of the firm.
21. From the facts stated by the Tribunal in the reference made to us, it is clear that the payment of salary to the two partners amounted to no more than disobedience to section 13 of the Partnership Act. Such payment did not, in our opinion, result in any change in the proportion in which the profits had to be shared or the lose had to be borne.
22. So, in our opinion, there was no change in the constitution of the firm during the relevant periods.
23. In Commissioner of Income-tax v. Sivakasi Match Exporting Co. the meaning of section 26A of the Income-tax Act, 1922, and the rules made thereunder was explained in the following words by the Supreme Court :
'The combined effect of section 26A of the Act and the Rules made thereunder is that, if the application made by a firm given the necessary particulars prescribed by the Rules, the Income-tax Officer cannot reject it, if there is a firm in existence as shown the instrument of partnership. A firm may be said to be not in existence if it is a bogus or not a genuine one, or if in law the constitution of the partnership is void. The jurisdiction of the Income-tax Officer is therefore confined to the ascertaining of two facts, namely, (i) whether the application for registration is in conformity with the Rules made under the Act, and (ii) whether the firm shown in the document presented for registration is a bogus one or has no legal existence.'
24. This elucidation which was made in the context of an application for registration for the first time under section 26A has equal application even to an application for renewal of registration, except in the context of the question whether, after the initial registration, there was a change in the constitution of the firm.
25. Mr. Srinivasan appearing for the assessee does not dispute that he could not, on the basis of the exposition made by the Supreme Court, contend that the renewal of registration can be claimed as of right even if there was a change in the constitution of the firm. But what is clear from the pronouncement of the Supreme Court is that, if there be no such change and the partnership was in existence when it was registered and was not a bogus or not a genuine one, and its constitution was not void, registration could not be refused.
26. The Tribunal did not doubt that the partnership was in existence when it was registered and that it was neither a bogus firm nor a non-existent firm; nor did it say that the constitution of the firm was void.
27. Since there was no other reason for which registration was refused, our answer to the question referred to us should be in favour of the assessee. Our answer to that question is that the assesses firm was entitled to renewal of registration under section 26A of the Indian Income-tax Act, 1922, for the assessment years 1960-61 and 1961-62.
28. The assessee will be entitled to its costs. Advocate's fee, Rupees two hundred and fifty (Rs. 250).
29. Question answered in favour of the assessee.