This is a reference under Section 66 (2) of the Indian Income-tax Act, 1922, and was made at the instance of Messrs. Mohan Lal Shyam Lal of Benaras. The assessment year is 1938-39. It has been conceded in the course of argument that the Income-tax Act of 1922 before the amendment by the Act of 1939 will govern the present reference.
There was a man by the name of Lala Shyam Lal whose fathers name was Mohan Lal. Shyam Lal had two wives. One was Mst. Muni and from this union there were two sons, Kanhiaya Lal and Kishen Das. The second wife was Mst. Shyam Kumari and from this union there were two sons, Basant Lal and Gobind Prasad. His business, consisted of Benares cloth, gold and silver thread and money-lending. The assessee Messrs. Mohan Lal and Shyam Lal were always assessed as an 'association of individuals'. An attempt was made in the year 1934-35 for the assessment being made as an unregistered firm, but the application was withdrawn and in that assessment year also Messrs. Mohan Lal and Sayam Lal were assessed as an 'association of individuals'.
During the assessment year 1938-39 some time about September 1938 an application was made by Baij Nath Das on behalf of Messrs. Mohan Lal Shyam Lal under Section 26-A of the Act for registration for purpose of the Act. Section 26-A runs as follows :
'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 purpose of this Act and any other enactment for the time being in force relating to income-tax or super-tax'.
The pre-requisites of a successful application under Section 26-A are the existence of a firm and an instrument of partnership. The firm further must have been constituted under an instrument of partnership.
The Income-tax Officer on the 21st of September 1938 rejected the petition holding that there was no firm and no need of partnership and there could, therefore, be no question of allowing registration under Section 26-A of the Income-tax Act. He then said that the assessee would be treated as an association of individuals last year and would be assessed as such. After the assessment there was an appeal to the Assistant Commissioner from the assessment order and that appeal was dismissed on the 11th of November 1938 by means of a short order but reference was made to a previous order dated the 2nd of December 1937 where detailed reasons are given.
There was a combined application under Section 33 and Section 66 (2) of the Act to the Commissioner. The Commissioner refused to give any relief under Section 33, but under Section 66 (2) of the Act he has prepared a statement of the case and has referred for our decision the following question of law :-
'Whether, in the circumstances of this case, the Income-tax Officer was correct in law in rejecting the application for the registration of the firm under Section 26-A of the Act? '
We have already given the language of Section 26-A and said that there must be a firm constituted under an instrument of partnership before an application under Section 26-A can succeed. The terms 'firm' and 'partnership' as not defined in the Income-tax Act, but in Section 2 (6A) it is said 'firm', 'partner' and 'partnership' have have the same meanings respectively as in the Indian Contract Act, 1872. Although Chapter XI of the Indian Contract Act of 1872 was repealed by the Indian Partnership Act of 1932, but the words in Section 2 (6A0 of the Indian Income-tax Act were not latered, and it has again been conceded before us that for the definition of these expression 'firm', 'partner' and 'partnership' we have to look not to the Indian Parnership Act but to the Indian Contract Act, It is only by the Amending Act of 1939 that it has been made clear that the terms 'firm', 'partner' and 'partnership' will have the same meanings respectively as in the Indian Partnership Act of 1932.
Section 239 of the Indian Contract Act was as follows :-
' Partnership is the relation which subsists between persons who have agreed to combine their property, labour or skill in some business, and to share the profits thereof between them.
Person who have entered into partnership with one another are called collectively a firm'.
The definition of partnership, therefore, consists of two distinct elements-(1) there must an agreement entered into all the persons concerned, (2) the agreement must be to combine their property, labour or skill in some business, and to share the profits thereof between them. Obviously therefore the sharing of profits alone will not result in a partnership and there must be an agreement between the person concerned.
Having cleared the ground so far we have to find out whether in the present case at the material date, namely about september 1938, there was a firm constituted under an instrument of partnership. It is alleged that about that time there was a partnership between Baij Nath on the one hand and the sons of Shyam Lal on the other, but the share of Baij Nath was six annas in the rupee and the share of the four sons jointly was ten annas in the rupee. It has to be conceded that there is no formal of informal instrument of partnership, but it is contended that two documents, namely a will of Shyam Lal dated the 5th of November 1930 and a compromise dated the 4th of August 1934, taken separately or taken together, constitute and instrument of partnership.
Shyma Lals father Mohan Lal had a sister and that sister had a son by the name of Baij Nath. This Baij Nath appears to have been brought up by Shyam Lal, and in the will dated the 5th November 1930 and a compromise dated the 4th of August 1934, taken separately or taken together, constitute an instrument of partnership.
Shyam Lals father Mohan Lal had a sister and that sister had a son by the name of Baij Nath. This Baij Nath appears to have been brought up by Shyam Lal, and in the will dated the 5th of November 1930 Shyam Lal stated that as he had brought up Baij Nath from childhood he, Shyam Lal, had taken him as a partner and share-holder in the business of Shyam Lal Mohan Lal. It is not clear from the will or from any other evidence that this business was an ancestral business or was started by Shyam Lal personally. In the will it was further mentioned that a non-fifth share had been credited in the account books in the name of Shyam Lals father Mohan Lal. It is said that a will might operate a testamentary disposition of property after the death of the testator and might contain other provisions which might amount to a document of a different nature, and in support of this contention our attention has been drawn to the case of Chand Mal v. Lachmi Narain I. L. R. 22 All. 162., It is further argued that it is not necessary that an instrument of partnership should be a bilateral instrument signed by all the partners, and in support of this contention we have been referred to the case of Bulchand Keshavdas v. Commissioner of Income-tax Bombay (1930) A. I. R. 1930 Sind 301. Further it is said that it is possible to spell out partnership by means of exchange of letter, and the case of In re Ramlal Murlidhar (1931) I. L. R. 58 Cal. 1005 and Haridas Premji v. Commissioner of Income-tax, Bengal, (1932) A. I. R. 1932 Cal. 409. are cited.
We shall assume for the purpose of the present case that the general contentions advanced by Mr. Gopi Nath Kunzru are sound, but we have got to see how far they are applicable to the facts of the present case. It man be-we are not deciding this point-that the will of Shyam Lal constitutes an instrument of partnership between Shyam Lal and Baij Nath Das, but, as we have indicated before, it is not clear if the business was an ancestral business. One thing, however, it is absolutely clear, that at the time when the will was drawn up the four sons of Shyam Lal were minors, the eldest of whom was twelve years old and the youngest was only thirty-one days old. They could not possible have been taking any interest in the business and a perusal of the entire will make it clear that the sons were to have interest in this business only after the death of the father. The partnership, if any, must, therefore, have been a partnership between Shyam Lal and Baij Nath Das.
Shyam Lal died soon after in 1930 and under the provisions of Section 253 (10) of the Indian Contract Act the partnership was dissolved. Further it is not the partnership between Baij Nath and Shyam Lal which would be of any avail to the assessee in the present case, but it is the state of affairs in 1938 which would control the situation.
In the will Shyam Lal appointed Baij Nath Das as the guardian of his four sons. There was in 1931 a guardianship case No. 96 of 1931 in which Baij Nath Das figured as the applicant and Mst. Shiam Kumari as the opposite party. A compromise was effected in that case and the terms of the compromise are set out at page 8 of the printed statement of the case. It is also clear from the order of the Income-tax Officer, dated the 21st of September, 1938, that Baij Nath had made a statement before him to the effect that Baij Nath had been appointed a guardian by the civil courts and the minors would attain majority at the age of twenty-one. Up till the 4th of August 1934 (the date of the Compromise), therefore, none of the minors had attained majority. From the terms of the compromise it appears that Shiam Kumari was the guardian for the purpose of that guardianship case of her two minor son Basant Lal and Govind Prasad, and Baij Nath was the guardian of the other two sons of Shiam Lal, namely Kanhaiya Lal and Kishan Das. Some sort of arrangement about the conduct of the business was agreed upon and effect was given to it by the Judge.
It is said that this compromise amount to an instrument of partnership. As we have said before, on of the essential elements of partnership is the agreement between the persons concerned. We have to find out if there was any agreement between the persons concerned. Four of the persons concerned were minors and they could not agree; somebody on their behalf might agree and agree with some other person. The agreement must, therefore, be between Baij Nath Das on the one hand and the minors on the other represented by a guardian. Baij Nath could not as the guardian of the minors agree with himself. As the Income-tax Officer points out, 'So far as Lala Baij Nath is concerned he cannot be allowed to have the dual capacity of entering into such contractual relationship, that is, for himself and as guardian for these minor bothers.' There is, therefore, no document from which any agreement by an authorised person could be spelt out on behalf of the minor sons of Shyam Lal, and it is impossible to hold that there was a firm constituted under an instrument of partnership which made the application for registration before the Income-tax Officer. The Income-tax Officer and the appellate authorities were, therefore, right in rejecting the application for registration. We, therefore, answer the question referred to us in the affirmative.
The assessee must pay the costs of this reference. We fix the fee of the learned Advocate-General at Rs. 200. Let a copy of our judgment under the seal of the Court and the signature of the Registrar be sent to the Commissioner of Income-tax.
Reference answered in the affirmative.