This is a reference under section 66 (1) of the Indian Income-tax Act, 1922, which arises out of the decision of the Income-tax Appellate Tribunal, Bombay, in I. T. A. No. 3228 of 1951-52. The question of law referred to the High Court for Judgment is the following viz., "Whether the assessee firm could be registered under section 26A of the Indian Income-tax Act and rules 2 to 5 of the Indian Income-tax Rules, 1922".
2. The assessee Jabalpur Ice Manufacturing Association, Jabalpur, claims to be a firm constituted by a deed of partnership dated the 18th February, 1949. The partners are (i) Bharat Ice and Aerated Waters, Ltd., and (ii) The Nerbudda Ice Factory, holding equal shares in profits and losses. The deed of partnership was signed by the managing director Shri M. J. Umrigar for Bharat Ice and Aerated Waters, Ltd., and by Purushottam Lal Sood for and on behalf of Messrs. Saligram & Co., which is a firm consisting of two partners, viz., Purushottam Lal Sood and Bhoora Ram, and owns the Nerbudda Ice Factory.
3. The assessee firm applied under section 26A of the Indian Income-tax Act, 1922, for registration for the assessment year 1950-51 by an application dated 7th August, 1950, which was signed by Shri M. J.Umrigar and Purushottam Lal Sood. The Income-tax Appellate Tribunal, Bombay, held in I.T.A. No. 3228 of 1951-52 that the partners of the firm were (1) Bharat Ice and Aerated Waters, Ltd., (2) Purushottam Lal Sood, and (3) Bhoora Ram, and inasmuch as the individual shares of Purushottam Lal Sood and Bhoora Ram were not defined and the application for registration was not signed by Bhoora Ram, the firm could not be registered. It is the legality of this decision which is the subject-matter of the present reference.
4. The answer to the reference depends upon the question as to whether a firm as such is entitled to enter into partnership with another firm or individuals. If it can do so, then in the present case the Nerbudda Ice Factory would be deemed to be a partner of the assessee firm with a defined share in profits and losses, and consequently the decision of the Tribunal refusing registration under section 26A of the India Income-tax Act, 1922, would be erroneous. If not, only the partners of Messrs. Saligram & Co. would individually become partners in the assessee firm and as their shares inter se were not defined, the requirements of section 26A of the Indian Income-tax Act, 1922, would not be fulfilled and there would be no case for registration of the assessee firm.
5. This question was first considered in Seodoyal Khemka v. Joharmull Manmull, in which it was held : "A partnership under section 239 (of the Contract Act) is a relationship which subsists between persons; but a firm is not a person; it is not an entity; it is merely a collective name for the individuals who are members of the partnership. It is neither a legal entity, not is it a person." In this view, it has been consistently held that a firm as such is not entitled to enter into partnership with another firm or individuals.
[See Brojo Lal v. Budh Nath, Shiv Narain v. Income-tax Commissioner, Kanhaiyalal v. Devi Dayal, Kader Bux v. Bukt Behari, Hakmaji v. Punnaji Naraindas v. Dina Nath, Basanti Bibi v. Babu Lal Poddar, Firm Brij Kishore v. Sheo Charan Lal, Ram Das v. Ram Babu and In the Matter of Jai Dayal Madan Gopal. The reason for this view is that under section 239 of the Indian Contract Act, 1872, only individuals can combine in a common business and that the term "firm" is only a compendious name for the persons composing the partnership.
6. It was, however, urged by the learned counsel for the assessee firm that whatever view might be held on the basis of section 239 of the Indian Contract Act, 1872, it cannot hold good since the passing of the Indian Partnership Act, 1932, which recognises a distinct entity for a firm apart from the members composing it. It was also urged that keeping in view the definition of the term "person" in section 3 (42) of the General Clauses Act, 1897 there is no reason why a firm, even if it may be only a short name to denote its members, should not have a legal entity and be deemed to be a partner within the meaning of section 26A of the Indian Income-tax Act, 1922.
7. On the question coming up before the Allahabad High Court in In the matter of Jai Dayal Madan Gopal, Sulaiman, C.J., expressed doubt regarding the correctness of the view taken in Seodoyal Khemka v.Joharmull Manmull and followed in the subsequent decisions. He observed : "If the definition of person as given in the General Clauses Act were to be applied to the word person in section 239, there would be absolutely no reason to exclude a firm from the scope of that word. No doubt the definitions in the General Clauses Act apply only when there is nothing repugnant in the subject or context. But it would be difficult to say that there is something repugnant in section 239 itself to the applicability of that definition of person." However, Sulaiman, C.J., was not prepared to dissent from the view that the word "person" in section 239 of the Indian Contract Act, 1872, should not be interpreted so as to include a firm. "Such an interpretation", he observed "avoids complication in dissolution of partnerships and may well be accepted." 8. The question was mooted before their Lordships of the Privy Council in Bhagwanji v. Alembic Chemical Works in which they observed : "It is true that the Indian Partnership Act goes further than the English Partnership Act, 1890, in recognising that a firm may possess a personality distinct from the persons constituting it; the law in India in that respect being more in accordance with the law of Scotland, than with that of England. But the fact that a firm possesses a distinct personality does not involve that the personality continues unchanged so long as the business of the firm continues. The Indian Act, like the English Act, avoids making a firm a corporate body enjoying the right of perpetual succession." Similarly, in Ghishulal Ganeshilal v. Gambhirmal Pandya, it was observed that the view of the Indian commercial men to regard the firm as having some sort of legal entity apart from the partners has been recognised for some purposes in the Indian Partnership Act, 1932.
However, in neither of these cases is it indicated that the change effected in the partnership law is sufficient to hold that a firm has a distinct legal entity and is entitled to enter into partnership with another firm or individuals.
9. Partnership as defined in section 4 of the Indian Partnership Act, 1932, does not differ materially from either the definition in section 239 of the Indian Contract Act, 1872, or section I of the English Partnership Act, 1890. There is no doubt that it would appear from some of the provisions of the Indian Partnership Act, 1932, that the firm as such is distinct in certain respects from its members. As for instance, in section 14 and 15, the property of the firm stands on a different footing from the personal property of the partners; under section 16, a partner is liable to account to the firm for any profit that he may derive for himself from any transaction of the firm or from the use of the property or business connection of the firm; and in section 17, the continuity of the firm, in certain circumstances, to an extent beyond its fixed term is recognised. However, similar provisions existed in the Indian Contract Act, 1872, and also, although to a smaller extent, find place in the English Partnership Act, 1890, which do not regard a firm as legal entity. [See sections 253, 256, 258 and 259 for the Indian Contract Act, 1872, and sections 20, 21, 27, 29 and 30 of the English Partnership Act, 1890]. These incidents regard the firm as distinct from its members only for certain purposes and do not invest the firm with a legal entity capable of entering into partnership with another firm or individuals.
10. Section 3 (42) of the General Clauses Act, 1897, gives the following definition of "person" : "person shall include any company or association or body of individuals whether incorporated or not." This term has not been defined either in the Indian Contract Act, 1872, or in the Indian Partnership Act, 1932. In the Indian Income-tax Act, 1922, it is defined in section 2 (9) as below : "person includes a Hindu undivided family and a local authority." Kanga and Palkhivala in their book "The Law and Practice of the Income-tax," Second Edition, have expressed the view on page 179 that the inclusive definition of the General Clauses Act would apply under the Indian Income-tax Act, 1922. This, however, would be subject to anything repugnant in the subject or context in the Indian Income-tax Act, 1922, which governs the case.
11. The object of registration of a firm under section 26A of the Indian Income-tax Act, 1922, is to tax each individual partner in respect of his share of the firms profits. [See section 23 (5) of the Indian Income-tax Act, 1922]. It is for this purpose that section 26A requires that the individual shares of the partners must be specified in the instrument of partnership. Rule 2 of the Indian Income-tax Rules, 1922, provides that the application under section 26A shall be signed "by all the partners (not being minors) personally" and, in the case of a firm which has dissolved, "by all persons who were partners in the firm immediately before dissolution and by the legal representative of any such person who is deceased." The scheme of the Act in respect of a registered firm is to treat only the individuals composing the firm as the units of assessment, and for this purpose the rules require the application to be signed only by the said persons and not even by their agents. This rule cannot, therefore, be complied with unless all the persons who are partners of that firm individually sign the application, for in any other case the executant would be acting as an agent, in which capacity he is debarred from signing the application. It would, therefore, be repugnant to the purpose of the Indian Income-tax Act, 1922, to treat constituent firms, as such, partners in the bigger firm for purposes of registration under section 26A.12. It is no doubt true that a Hindu undivided family which is included within the definition of "person" in the Indian Income-tax Act, 1922, may be fleeting and transient just as a firm. In Lachhman Das v.Commissioner of Income-tax it was held that the principle governing a firm cannot be applied to a joint Hindu family in transactions where it acts through the agency of the karta. A Hindu undivided family is based on status and its entity for purposes of income-tax has been expressly recognised by statute. Therefore, the fact that is incidents may, in certain respects, be analogous to those of a firm would not be a ground for giving to the firm the same legal status. So far as firms are concerned, the Indian Income-tax Act, 1922, and the rules framed thereunder recognise only the individual partners as the persons composing the bigger firm, and do not give to them, i.e., the firms constituting the bigger firm, any legal entity. If, therefore, they enter into any partnership, their partners would individually become the partners of the bigger firm, and unless their individual shares are defined and each of them personally signs the application for registration, the requirements of law would not be fulfilled. [See Kannappa Naicker & Co. v. Commissioner of Income-tax and Chandrika Prasad Ram Swarup v. Commissioner of Income-tax.] A similar limited interpretation has been given to the term "person" for purposes of the Companies Act, 1913. [See Senaji Kapurchand v. Pannaji Devichand.] There would be obvious difficulties in the administration of the income-tax law where a fluctuating body like a firm is to be given a legal status. We, therefore, hold that a firm as such is not entitled to enter into partnership with another firm or individuals for purposes of section 26A of the Indian Income-tax Act, 1922.
13. Our answer to the question of law that is referred to us is in the negative. Costs of the proceedings and of the paper-book shall be borne by the assessee. Counsels fee Rs. 100.