MAHAJAN, J. - This case has come to this court on a case stated by the Income-tax Appellate Tribunal, Delhi Bench, under section 66(1) of the Indian Income-tax Act, 1922, on an application by the assessee.
The assessee, Messrs. Naider Mal and Sons, was a joint Hindu family firm carrying on the business of dealing in brass on wholesale basis in the name and style of Messrs. Naider Mal Jagdish Prasad, and held three-fourth share in Ramesh Metal Works at Jagadhri. This business was partitioned and it was resolved to carry it on partnership basis. The parties entered into an oral agreement of partnership on the 23rd of March, 1947. The terms of this oral agreement were reduced to writing on the 2nd July, 1948, under a duly executed instrument of partnership. It is not disputed that the partnership instrument was executed during the relevant accounting year, i.e., 1948-49. An application under section 26A of the Act was made to the Income-tax Officer for registration of this firm for the assessment year 1949-50. This application was rejected by the Income-tax Officer on the 30th of November, 1949, on the ground that there was no genuine partnership. An appeal was taken to the Appellate Assistant Commissioner of Income-tax, who also rejected the same and upheld the order of the Income-tax Officer. A further appeal was taken to the Income-tax Tribunal, which on the question of fact held that the partnership was formed by a verbal agreement, but the registration was refused on the ground that the firm had not been constituted under an instrument of partnership as required by section 26A of the Act but under an oral agreement. An application was made to the Tribunal under section 66(1) of the Act praying that the following questions of law that arose out of the Tribunals orders be referred to the High Court :
'(i) Whether in the circumstances of the case of the Income-tax Appellate Tribunal could legally refuse the registration of the assessees firm under section 26A of the Income-tax Act and Income-tax Rules made thereunder ?
(ii) Whether the Income-tax Appellate Tribunal could legally refuse to allow the registration of a firm on the ground that a formal partnership deed was written some time after the partnership firm had come into existence although the deed was executed during the previous year in question ?
(iii) Whether there is any evidence on record to substantiate a finding by the Tribunal to the effect that there was nothing to suggest that it was the intention of the parties from the commencement to have these partnership relations governed by a written agreement ?'
This application was allowed by the Tribunal on the 30th of January, 1953, and the following question has been referred to the High Court for decision :
'Whether a firm which comes into existence by a verbal agreement 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 has been accompanied by such an instrument ?'
This reference came up for hearing before the honble the Chief Justice and Dulat, J., on the 12th of August, 1958, and in view of the conflicting decisions of this court, Dheer and Sons v. Commissioner of Income-tax, Ramji Dass Rikhi Ram v. Commissioner of Income-tax, Padam Parshad Rattan Chand, v. Commissioner of Income-tax, the matter was referred to a larger Bench.
Before dealing with the question referred to, it will be advisable to set out the relevant provisions of the Act and the Rules made thereunder as they stood during the relevant assessment year.
'Section 26A : (1) 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 this Act and of any other enactment for the time being in force relating to income-tax or super-tax.
(2) The application shall be made by such person or persons, and at such times and shall contain such particulars and shall be in such form, and be verified in such manner as may be prescribed; and it shall be dealt with by the Income-tax Officer in such manner as may be prescribed.'
'Rule 2 : Any firm constituted under an instrument of partnership specifying the individual shares of the partners may, under the provisions of section 26A of the Indian Income-tax Act, 1922, (hereinafer in these rules referred to as the Act), register with the Income-tax Officer, the particulars contained in the said instrument on application made in this behalf.
Such application shall be signed by all the partners (not being minors) personally and shall be made -
(a) before the income of the firm is assessed for any year under section 23 of the Act, or
(b) if no part of the income of the firm has been assessed for any year under section 23 of the Act, before the income of the firm is assessed under section 34 of the Act, or
(c) with the permission of the Appellate Assistant Commissioner hearing an appeal under section 30 of the Act, before the assessment in confirmed, reduced, enhanced or annulled, or
(d) if the Appellate Assistant Commissioner sets aside the assessment and directs the Income-tax Officer to make a fresh assessment, before such fresh assessment is made, or
(e) before or after the dissolution of the firm in respect of the assessment or assessments to be made on its income up to the date of the dissolution :
Provided that where an application is made under clause (e) after dissolution of the firm, it shall be signed by all persons who were partners in the firm immediately before dissolution and by the legal representative of any such person who is deceased.
3. The application referred to in rule 2 shall be made in the form annexed to this rule and shall be accompanied by the original instrument of partnership under which the firm is constituted together with a copy thereof; provided that if the Income-tax Officer is satisfied that for some sufficient reason the original instrument cannot conveniently be produced, he may accept a copy of it certified in writing by all the partners (not being minors) or where the application is made after dissolution of the firm, by all the persons referred to in the proviso to the said rule, to be a correct copy, and in such a case the application shall be accompanied by a duplicate copy.
4. (1) If, on receipt of the application referred to in rule 3, the Income-tax Officer is satisfied that there is or was a firm in existence constituted as shown in the instrument of partnership and that the application has been properly made, he shall enter in writing at the foot of the instrument or certified copy, as the case may be, a certificate in the following form, namely :-
This instrument of partnership/certified copy of an instrument of partnership, has this day been registered with me, the Income-tax Officer for... in the province of... under section 26A of the Indian Income-tax Act, 1922, and this certificate of registration shall have effect for the assessment for the year ending on the 31st day of March 19.
(2) If the Income-tax Officer is not so satisfied, he shall pass an order in writing refusing to recognise the instrument of partnership, or the certified copy thereof, and furnish a copy of such order to the applicants.
(3) The certificate referred to in paragraph (1) above shall be signed by the Income-tax Officer, who shall thereupon return to the applicants the instrument of partnership or the certified copy thereof, as the case may be, and shall retain the copy or the duplicate copy thereof.
5. The certificate of registration granted under rule 4 shall have effect only for the assessment to be made for the year mentioned therein.'
There has been a serious conflict of judicial opinion in the various High Courts on the interpretation of section 26A. The words 'constituted under an instrument of partnership' in the section led to this conflict. One view is that before a firm is entitled to registration, it must come into being by reason of the instrument of partnership. The leading case for this view is the decision of the Calcutta High Court, R. C. Mitter & Sons v. Commissioner of Income-tax. The other view is that it is not necessary that the firm must be constituted by the instrument of partnership, that is it does not require that the firm must come into existence by reason of the instrument of partnership or that the firm must not exit prior to the instrument of partnership being executed. It can come into being by an oral agreement and the requirements of section 26A are satisfied if later on an instrument of partnership specifying the individual shares of the partners is executed. The leading case for this view is the decision of the Bombay High Court in Dwarka Dass Khetan & Co. v. Commissioner of Income-tax. This conflict of opinion was resolved by their Lordships of the Supreme Court in the case of R. C. Mitter & Sons v. Commissioner of Income-tax, incidentally in an appeal from the very decision of the Calcutta High Court, which I have indicated above, is the leading case for the former view. Their Lordships of the Supreme Court at page 198 observed as under :
'It is manifest that for a true and proper construction of the relevant provisions of the Act, relating to registration of firms, section 26, 26A and 28, and the rule summarised above, have to be read together. So read, it is reasonably clear that the following essential conditions must be fulfilled in order that a firm may be held entitled to registration :
(1) That the firm should be constituted under an instrument of partnership, specifying the individual shares of the partners;
(2) That an application on behalf of, and signed by, all the partners, containing all the particulars as set out in the rules, has been made;
(3) That the application has been made before the assessment of the income of the firm, made under section 23 of the Act (omitting the words not necessary for our present purpose), for that particular year;
(4) That the profits (or loss, if any) of the business relating to the previous year, that is to say, the relevant accounting year, should have been divided or credited, as the case may be, in accordance with the terms of the instrument; and lastly,
(5) That the partnership must have been genuine, and must actually have existed in conformity with the terms and conditions of the instrument.
It is clear from what has been said above with reference to the relevant provisions of the Act, that the certificate of registration has reference to a particular assessment year, and has effect for the assessment to be made for that particular year. In other words, the terms of the partnership should appear in the instrument of partnership in respect of the relevant accounting year. It is equally clear that the firm to be registered should have been in existence during the accounting year, constituted as shown in the instrument of partnership. The rules, thus, contemplate a document operative during the accounting year. We are not here concerned with the further question whether the document should be in existence at the very inception of the accounting year, or before the year is out.'
It will thus be clear from the decision of the Supreme Court that their Lordships of the Supreme Court have adopted the second view, that is, the view of the Bombay High Court, with one modification that the instrument of partnership should be in existence during the relevant accounting year. In this view of the matter, it cannot be disputed that the question referred to by the Tribunal should be answered in the affirmative.
The learned Advocate-General on behalf of the Department urges that, on the facts of the present case, the question referred cannot be answered in the affirmative, inasmuch as the instrument of partnership did not come into being in the beginning of the accounting year, but it came into being in the middle of the accounting year. His argument is that the application for registration is for the assessment year 1949-50 and over and above the requirements laid down by their Lordships of the Supreme Court it can only be allowed if the instrument of partnership came into being at the very inception of the accounting year. His alternative argument is that in any case effect should be given to this instrument from the date on which this instrument came into being. It is no doubt true that this matter was not decided by their Lordships of the Supreme Court. But as I have already said that so far as the question referred is concerned, it has to be answered in the affirmative. The matter, which Mr. Sikri has raised, on which he invited our opinion was neither raised before the Tribunal nor was it present to their minds. There the controversy rested on the question, which of the two views was correct, and the Calcutta view prevailed with them. It may be of interest to mention here that at that time the Bombay decision was not in the field; though of course there were decisions of this court where the existence of the oral partnership was ignored and the partnership was treated to have come into being on the date the written instrument was executed; though the reasoning adopted was more or less in line with the Calcutta view. (Padam Parshad Rattan Chand v. Commissioner of Income-tax, is one of them). Thus it is clear that what we are called upon to decide is something in addition to what the question as framed indicates, though in a way, as observed by my learned brother Dulat, J., during the course of the hearing, the further question is inherent in the question that has been referred.
So far as the further question raised by the learned Advocate-General is concerned, it is not bare of authority. In Dwarka Dass Khetans case, the firm came into existence on the 1st January, 1945, and the instrument of partnership came into existence on the 27th March, 1946, and it was held that the firm must be registered with effect from the date when it came into existence not by reason of the date of the instrument, but in point of fact. If it came into existence on 1st January, 1946, then it should be registered from that date. If it came into existence at a later date, then from such date. This decision is, therefore, directly opposed to the contention of the learned Advocate-General. I have, therefore, thought it fit to quote in extenso the reasoning of the learned Chief Justice of Bombay. At page 909 of the report it is thus stated :
'The agreement of partnership may be oral and the oral partnership agreement is as effective as a written partnership agreement. It is only for the purpose of section 26A and for the purpose of registration that an instrument of partnership is necessary, and partners who have already started doing business by an oral agreement would be perfectly justified in saying to themselves : We want our partnership to be registered. The income-tax law does not permit us to do so unless we have an instrument in writing, and therefore we will now proceed to have an instrument in writing. That is exactly what seems to have been done in this case, and in our opinion it was done with perfect propriety. The same view of the law was taken by the Punjab High Court in an earlier case reported in Padam Parshad Ratan Chand v. Commissioner of Income-tax.'
Similarly in Dheer & Sons v. Commissioner of Income-tax, the oral partnership started in January, 1948. The deed was executed in June, 1950, i.e., (accounting year 1950) and registration was allowed for the assessment year 1951-52. Thus the benefit of section 26A was given for the entire assessment year even when the instrument was executed in the middle of the accounting year.
The observations of the Madras High Court in Patel & Co. v. Commissioner of Income-tax, are also in line with the aforesaid decisions. At page 365 it was stated :
'... what section 26A of the Act requires is the factual existence in the year of account of an instrument of partnership, which further specified the individual shares of the partners. It is only then that the statutory right of registration can be claimed and registration can be granted in the relevant year of assessment.'
There is also a decision of the Assam High Court reported as Amarchand Pannalal v. Commissioner of Income-tax, on which Mr. Ganga Parshad strongly relies in support of the proposition that if the firm is already in existence under an oral agreement in the accounting year and sometime during the accounting year an instrument of partnership is executed, the firm is entitled to registration.
This authority does support his contention, and I think it fit to quote in extenso the observations on this part of the case of the learned Chief Justice, at page 245 :
'I agree that the law of income-tax is not always logical; but then it must be assumed that in framing taxation legislation, the Legislature takes into account and I should think primarily takes into account existing sources of taxation in preference to mere possibilities or potential sources of revenue. I cannot therefore conceive that in enacting section 26A of the Act, the Legislature had in mind only firms which came into existence in future and to deprive firms which had been already paying taxes to the exchequer of this privilege under section 26A, even where they later conformed to the condition laid down in the section, namely, that they determined the shares of the partners and regulated their rights and obligations by a regular deed of partnership.
When, therefore, the partnership deed has come into existence within the period of accounting, I see no reason why the privilege of getting registration under section 26A of the Act for the accounting period should be denied to the assessee. I have said so with reference to the accounting period and I think that unless some difficulty is presented to the Department on account of the terms of the document itself or on account of some circumstances disclosed in the accounts of the registered assessee firms, the principle inculcated in section 26A of the Act for assessing on the individual profits of the partners should be adopted.
In such cases, the registration of the firm should not be refused under section 26A of the Act. The course suggested by me will not mean that the document is given any retrospective operation because in any case, effect is not being given to the document beyond the accounting period during which the document came into being and that also is limited by the conditions which I have indicated above.
My view on the point is to a large extent confirmed by the rules framed by the Department for the purpose of allowing registration of such firms. The intention of the rules obviously is not to put limitations upon the right of the assessee to get registration within a particular period provided he can do so before the assessment is closed. In other words, at any stage of the assessment, if the firm is registered under section 26A of the Act, the assessee firm or the partners thereof get the benefit of assessment upon the individual income of the partners.
Under the rules as they applied to this case, there is no prescribed period within which such an application for registration had to be made. Even under the present amended rules, a period of six months has been conceded to the firm from the date of the partnership deed to get itself registered under section 26A of the Act. These factors lead me to hold that the mere fact that the instrument of partnership, if genuine, came into being a few months after the commencement of the accounting year, does not affect the legal position and its right to be registered under the Income-tax Act.'
Mr. Sikri, learned Advocate-General, on the other hand, relies on the observations at page 245 and wants the order in the present case in these terms. Those observations are :
I should therefore think that the answer to the question referred to us should be in the affirmative subject to the conditions given above.
But as I pointed out, it would be for the Tribunal to consider... whether the application made by the assessee was a proper application as required by section 26A of the Act and whether in the circumstances of this case, although the document came into being two and half months after the commencement of the accounting year, the assessee was none the less entitled to the benefit of registration under section 26A of the Act for the entire period, - in other words, whether the partners should be assessed on their individual shares for the entire accounting period.
Indeed, this last contingency would only arise after the question of registration has been settled.'
With utmost respect to the learned Chief Justice, I fail to understand how the question was left open for decision by the Income-tax Officer after, according to the learned Chief Justice, the question of registration had been settled. It has been observed by the learned Chief Justice that the firm in the circumstances of the case had to be registered and on that basis the question referred was answered in the affirmative. The registration of the firm before the assessment is for the previous year, which is the same in income-tax parlance as the accounting year. How the income of an existing partnership in that year can be assessed on two different bases is hard to comprehend. Therefore, in my view the further observations in this decision on which Mr. Sikri relies are not justified and this I say so with utmost respect to the learned Chief Justice. Otherwise the decision is directly in point so far as the contention raised by Mr. Ganga Parshad is concerned and I am in respectful agreement with the same.
It will be clear from the language of section 26A, the rules on the subject and the decisions quoted above, that the requirements of law or (a) the factual existence of the partnership during the whole of the accounting year either under an oral agreement or a written instrument, (b) the existence of a written instrument during the accounting year specifying the individual shares of the partners. If these requirements are satisfied then the firm has to be registered for the assessment year to which the accounting year corresponds. It is immaterial when during the accounting year the instrument is executed.
It will not be out of place to mention that under the partnership law, if a partnership comes into being by an oral agreement and later on an instrument of partnership is executed, the rights and liabilities of the partners will be governed by that instrument from the very inception of the partnership. I put this statement of law to the learned Advocate-General, and he did not dispute its correctness. All that he stated was that for the purposes of section 26A effect could not be given to such a partnership before the date of the execution of the instrument. This is so, because for the purposes of section 26A, there has to be a written instrument of partnership specifying the shares of each individual partner, and the effect of it would be that if during the life of that partnership for the accounting year, its existence continued under on oral agreement it would not be entitled to apply for registration. But the moment, in any accounting year, the instrument comes into existence, the requirements of law are satisfied and there is no reason, and none has been shown to me, why its registration should be refused even if the instrument comes into existence, not at the very inception of the accounting year but sometime later.
The learned Advocate-General admitted that so far as the present application for registration is concerned, it is in order according to section 26A of the Act and the rules, and if that be so, then the Income-tax Officer had no option but to allow registration. The only argument which the learned Advocate-General could urge in support of his contention was based on the form of the certificate, particularly on the words 'registration shall have effect for the assessment for the year ending the 31st of March 19.' From this it is sought to be concluded that as the registration is to be effective for the whole of the accounting year, therefore, the instrument of partnership must be in existence at the very inception of the accounting year. I am afraid that this conclusion is not warranted. It is really begging the question. Rather it shows that once the firm is registered the benefit of registration ensures for the assessment in that year. There is no justification for introducing two different bases for the assessment in that year.
For the reasons stated above, the question referred to us must be answered in the affirmative. The Department will pay the costs of these proceedings to the assessee, which are assessed at Rs. 250.
BHANDARI, C.J. - I agree.
S. S. DULAT, J. - I agree.
Question answered in the affirmative.