P. C. PANDIT J. - The following two questions of law have been referred to us by the Income-tax Appellate Tribunal at the instance of this court under section 66(2) of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act) :
'1. Whether, in the circumstances of this case, and on the interpretation of the partnership deed, the finding of the Income-tax Appellate Tribunal that the appellant-firm could not be registered under section 26A of the Income-tax Act is correct in law ?
2. Where the Tribunal in appeal finds that the proceedings initiated by the Commissioner of Income-tax under section 33A and the order passed by him thereon could not be sustained, whether the Tribunal had jurisdiction to dismiss the assessees appeal on another issue not raised by the Commissioner ?'
The assessee in this case is the firm known as the Wholesale Cloth Dealers Association of Ludhiana. The deed of partnership under which this firm was constituted was executed on November 2, 1948, though it had started its business on October 11, 1948. During the assessment proceedings for the assessment year 1949-50, this firm made an application for its registration under section 26A of the Act. On August 21, 1949, the Income-tax Officer came to the conclusion that the firm had come into existence with 16 partners and the application for registration had been signed personally by all of them. The profits had been divided and credited respective accounts of all the partners. The firm was a genuine one and all the other legal formalities had been observed. He, therefore, granted the application for the assessment year 1949-50. On August 20, 1951, the Commissioner of Income-tax, however, took action under section 33B of the Act and vacated this order of the Income-tax Officer and directed him to reframe the assessment treating the firm as an association of persons. He was of the view that 16 persons, who were shown as partners in the instrument of partnership, were representing their respective firms and, therefore, the number of partners of all their firms had to be counted for the purpose of ascertaining the total number of partners of the assessee-firm. Since this number, according to him, exceeded 20, it was not entitled to registration. Against this order, the assessee-firm filed an appeal before the Appellate Tribunal. It found that the view of the Commissioner of Income-tax that the smaller firms had also become partners in the assessee-firm and, as a result, the number of partners exceeded 20 was incorrect. It, however, came to the conclusion that partner No. 8, Gopal Dass, had described himself in the deed of partnership as the representative of Laxmi Trading Company, Ludhiana. Gopal Dass had signed this deed also as the representative of this company. It was, therefore, clear that the deed of partnership of Messrs. Laxmi Trading Company, Ludhiana. Since this company consisted of two partners, therefore, the shares of all its partners should also have been specified in the deed of partnership. This deed did not show in what proportion the one-anna share allotted to Gopal Dass had to be divided by him and his other co-partners in the firm, Messrs. Laxmi Trading Company. The Tribunal, consequently, held that the assessee-firm was not entitled to registration under section 26A of the Act. It, accordingly, dismissed the appeal and directed the Income-tax Officer to give to the assessee the status of an unregistered firm instead of an association of persons. Since later on the Tribunal refused the prayer of the assessee-firm to refer the questions of law to this court, therefore, the latter, at their instance, directed the Tribunal to state the case and refer the above-mentioned questions of law for the opinion of this court. That is how the matter has come before us.
It may at once be stated that the learned counsel for the assessee-firm did not address any arguments on the second question and frankly conceded that its reply should be in the affirmative.
As regards the first question, his submission was that even if Gopal Dass enterd into partnership as the representative of Laxmi Trading Company, Ludhiana, the partners of the company did not become the partners of the assessee-firm, because he had entered into this partnership in his individual capacity. For this submission, he placed his reliance on a Supreme Court decision in Commissioner of Income-tax v. Bagyalakshmi & Co., where it was observed :
'A contract of partnership has no concern with obligation of the partners to others in respect of their shares of profit in the partnership. It only regulates the rights and liabilities of the partners. A partner may be the karta of a joint Hindu family; he may be a trustee; he may enter into a sub-partnership with others; he may, under an agreement, express or implied, be the representative of a group of persons; he may be a benamidar for another. In all such cases he occupies a dual position. Qua the partnership, he functions in his personal capacity; qua the third parties, in his representative capacity. The third parties, whom one of the partners represents, cannot enforce their rights against the other partners nor can the other partners do so against the said third parties. Their right is only to a share in the profits of their partner-representative in accordance with law or in accordance with the terms of the agreement, as the case may be.'
He also submitted that, in any case, it was not necessary to specify the individual shares of the partners of Laxmi Trading Company in the partnership deed dated November 2, 1948, as held by the Tribunal. For this, he relied on the Supreme Court decision in Kylasa Sarabhaiah v. Commissioner of Income-tax.
After hearing the counsel for the parties, I am of the opinion that there is no substance in either of these contentions. The partnership deed clearly mentions that Gopal Dass was entering into the partnership as the representative of Laxmi Trading Company, Ludhiana, and he wanted that all the partners of this company be made the partners in the assessee-firm. Moreover, it had been found by the Appellate Tribunal that he had acted with the authority of his partners of the Laxmi Trading Company in entering into this partnership. Since the company as such could not enter into partnership, it was, therefore, essential that all the partners of the company should have been made partners of the assessee-firm and their shares specified in the deed. The Supreme Court in Dulichand Laxminarayan v. Commissioner of Income-tax had held that a firm was not a 'person' and as such was not entitled to enter into partnership with another firm or Hindu undivided family or an individual. It was also observed that the partnership deed in that case did not specify the individual shares of each of the partners of each of the three smaller constituent firms, who wanted to enter into partnership with others. It was further found that it was necessary for all the partners of the three smaller constituent firms to have personally signed the deed of partnership. In the absence of that, the firm was refused registration under section 26A of the Act. In Commissioner of Income-tax v. Bagyalakshmi & Co. the observations made by the Supreme Court do not at all help the petitioners, because in that case in the partnership deed, the partners had not described themselves as the representatives of any other firms. All the partners therein had signed the deed in their individual capacity. The Supreme Court was merely saying that if, in fact, those partners were representing some other firms and were sharing their profits with them, that circumstances did not in any way affect the validity of the partnership. This authority never laid down that if in the partnership deed itself, a certain partner specifically mentioned that he was representing a particular firm, then the members of that firm would not be deemed to be the partners of the partnership. The Supreme Court authority reported as Kylasa Sarabhaiah v. Commissioner of Income-tax is also of no assistance to the petitioners, inasmuch as it now where lays down that it was not necessary to specify the individual shares of the partners. As a matter of fact, in that case in the partnership deed itself the shares of all the partners had been clearly defined, though they were not worked out in precise fractions.
In view of what has been stated above, I would answer both the questions in the affirmative. In the circumstances of this case, however, there will be no order as to costs.
I. D. DUA J. - I agree.
Questions answered in the affirmative.