FALSHAW, J. - The following question has been referred to us under section 66(1) of the Income-tax Act by the Income-tax Appellate Tribunal (Delhi Bench).
'Whether a firm, which comes into existence by oral agreement, without it being alleged that it was even from the outset intended that its constitution should be governed or regulated by a written instrument, is entitled to be registered under section 26A, if on the date of the application for registration the terms and conditions of the partnership have been reduced to writing and the application for registration accompanied by such an instrument ?'
The facts in this case are that the assessee firm, the Bery Engineering Company of Delhi, was originally a one-mans business belonging to Mr. T. C. Bery, who, however, alleges that on the 17th of August, 1948, he gifted a one-fourth she in the firm to each of two of his sons, and in this form the partnership carried on business from the 9th of August, 1948, to the 31st of March, 1949. He also alleged that as from the 1st of April, 1949, he reorganized the partnership by including a third son, his share from that date being ten annas and each of the three sons two annas. This arrangement remained oral until it was incorporated in a partnership deed drawn up on the 8th of September, 1949. These partnerships were relied on in connection with the firms assessments for the years 1949-50 and 1950-51 relating to account years ending on the 31st of March, 1949, and the 31st of March, 1950. His applications for the registration of both these firms based on the deed of gift dated the 17th of August, 1948, and the partnership agreement dated the 8th of September, 1949, were rejected by the Income-tax authorities and by the Tribunal. We are now no longer concerned with the earlier firm in which two sons were joined, but only with the second firm in which the father and three sons became partners. The registration of this firm was rejected on the ground that admittedly the firm had come into existence by oral agreement as from the 1st of April, 1949, and therefore it could not be said to be constituted under the instrument dated the 8th of September, 1949. The Tribunal has, however, framed the above legal question for our decision.
Section 26A provides that 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 purposes of the Act. I do not think there can be any doubt about the correctness of the view of the Appellate Tribunal expressed in full in its judgment in the appeal Messrs. Ram Gulam-Madan Lal v. Income-tax Officer, G. Ward, Delhi, which has been printed in full as part of another similar case (Civil Reference No. 22 of 1952), that the words 'constituted under an instrument' mean 'created or formed by a formal deed,' but whether the fact that the partners of the firm who jointly execute a deed choose to allege therein that they have previously been partners for some time on the same terms as those embodied in the deed debars the firm from registration under section 26A is another matter. Obviously, as Kapur, J., and I held in the case, Kalsi Mechanical Works v. Commissioner of Income-tax, Simla, the deed or instrument cannot possibly have retrospective effect as regards the income-tax assessment of the firm, but I cannot see any objection to the firms being treated as constituted under the instrument as from the date of the instrument itself. If may be that the partners in these firms act foolishly in alleging the previous existence of the partnerships on the same terms in the vain hope of securing retrospective concessions, and in the most literal sense of the words a partnership cannot be said to be constituted under an instrument when admittedly it has been in existence previously. On the other hand the intention of the law is clear, that when partners do draw up an agreement by which their shares in the partnership profits are specified, they are entitled to have the partnership registered under the Act, and thus to have the individual shares of the partners assessed for income-tax, and it seems to me to be an unduly harsh interpretation of the law to say that because the partners say they have been partners previously, they should not be entitled to have the partnership registered even when they have embodied its terms in a deed. I am accordingly of the opinion that when a deed or instrument of partnership is presented for registration under section 26A, even where the partnership is alleged in the deed to have existed previously on the same terms, this should not be a bar to the registration of the firm, and it should be treated as constituted under the instrument as from the date of the instrument. I would accordingly answer the question framed for our decision in the affirmative. It must be clearly understood that in returning this answer we are not expressing any opinion as to the effect of the answer on the assessment of the firm for the year 1950-51, which will now be decided by the Income-tax authorities, or on the question of the genuineness of the partnership, which the Tribunal has left undecided. In the circumstances I would order that the parties be left to bear their own costs.
BHANDARI C.J. I agree.
Reference answered in the affirmative.