1. In this reference under Section 256(1) of the I.T. Act, 1961, made at the instance of the Addl. CIT, Madras-1, the following questions have been referred for the opinion of this court:
'(1) Whether the Tribunal was right in holding that the release deed dated March 4, 1963, and the original partnership deed dated February 28, 1958, constitute instrument of partnership evidencing the existence of partnership by the two continuing partners with their respective shares and in directing to grant registration to the firm on that basis ?
(2) Whether the Appellate Tribunal was justified in holding that there was compliance with Section 184(1) of the I.T. Act, 1961, for the assessment year 1963-64 ?
(3) Whether, on the facts and circumstances of the case, the Tribunal was right in law in granting registration to the firm for the assessment year 1963-64?'
2. From the question set out above, it could be seen that the real question is question No. 3, and the other questions merely set out certain facets of the issues that ultimately require consideration in granting the registration for the firm for the assessment year 1963-64.
3. There was a partnership firm consisting of three partners by name M. Zahurul Huq, A. Sattar Khan and Mrs. Manzurunissa Begum. Of the three persons named above, the last is the wife of the second. This firm of three partners came into existence in accordance with the terms set out in a deed dated February 28, 1958. The name of the firm was Messrs. A. Abdul Kareem and Company. The business of the firm was the manufacture and sale of beedies and allied products and the running of a printing press. The duration of the partnership was a fixed period of 10 years commencing from February 28, 1958. On the termination of the fixed term, the partners could continue the business of the firm on such conditions and terms as they might then mutually agree upon. The accounts of the firm were closed for the first time on the 31st March, 1958, and thereafter annually on the 31st of March every year. The profit and loss were shared between the three parties as follows :
(i)Mohamed Zahurul Huq9/16(ii)Sattar Khan3/16(iii)Manzurunnisa Begum3/16
Only the two male partners were to operate the bank accounts and conduct the business, as Manzurunnisa Begum was a gosha lady, unable to attend personally to the affairs of the firm. She had, however, agreed to execute a power-of-attorney in favour of her husband, Sattar Khan, and did so. There were other clauses showing as to what should happen in the event of the death of any of the partners and as regards withdrawals to be made. It is unnecessary to refer to those terms of the deed. It may, however, be mentioned that under Clause 17 of the partnership deed, the provisions of the Indian Partnership Act would apply to this partnership, except in regard to matters provided otherwise in the deed.
4. This firm was registered under Section 26A of the Indian I.T. Act, 1922, and continued to have the benefit of registration for all assessment years up to and including the assessment year 1961-62 under the Act of 1922 and also for the assessment year 1962-63 under the Act of 1961. Manzurunnissa Begum, one of the partners, retired from the firm on March 3, 1963. A deed of release was executed by her on March 4, 1963. She received a sum of Rs. 20,000 in consideration of her release and the release was in favour of her husband, Sattar Khan. It was stated in the release deed that the releasee, Sattar Khan, would thereafter be entitled to 7/16ths share in the partnership and that he would continue in the said partnership on his own responsibility without any manner of claim, demand, interference or interruption from or by the releasor. The releasee was entitled to continue the said partnership business along with Mohamed Zahurul Huq using the same firm name of A. Abdul Kareem and Co. There were certain immovable properties belonging to the firm and the schedule to the release deed describes those properties.
5. A new partnership deed with the two partners, Zahurul Huq and Sattar Khan, came to be executed on January 1, 1964. In the recitals in the said document it is stated that under the deed of partnership dated February 28, 1958, the duration of the partnership was fixed for a period of ten years commencing from 28th day of February, 1958, and ending on 27th day of February, 1968, and that notwithstanding the release, the partnership would have continued for the said fixed term as envisaged in the deed of partnership dated 28th February, 1958, and that in order to notify the change brought about by the release to the income-tax department and the banks, the execution of the deed was found necessary. Under the new document several of the clauses as specified in the old deed were to be part and parcel of the new deed. The new deed was to be effective on and from March 4, 1963, in so far as the changes brought about by the release was concerned. There are a few other clauses in the new deed to which reference is unnecessary for our present purpose.
6. The books of the firm were closed on March 31, 1963 ; but the profits were apportioned on time basis and credited in favour of the three partners up to March 3, 1963, and in favour of the two partners from March 4, 1963, to March 31, 1963. A declaration in Form No. 12 prescribed by the I.T. Rules, 1962, duly signed by the three partners was filed for the purpose of continuance of the registration of the firm for the period April 1, 1962, to March 3, 1963. This declaration is dated March 30, 1964, and was actually filed on April 1, 1964. A registration application in Form No. 11A as prescribed by the Rules was also filed by the continuing partners on the same date, viz., April 1, 1964.
7. The ITO considered the question of registration for the assessment year 1963-64 on the basis of the aforesaid applications and passed an order dated March 28, 1968. In the said order he pointed out that the treatment in the books of account and the conduct of the parties in filing the application for registration showed that there was a change in the constitution of the firm in the previous year relevant to the assessment year. In his view, in accordance with Section 184(8) of the Act, the assessee ought to have applied for fresh registration for this assessment year and the partnership deed executed on January 1, 1964, was outside the year of account relevant for the said assessment year. Consequently, he held that the application for registration could not be taken cognizance of for this assessment year. He rejected, therefore, the application in Form No. 11A. As regards the application under Form No. 12, he pointed out that the declaration under Section 184(7) proceeded as if there was no change in the constitution of the firm or the sharing ratio of the partners since the last day of the previous year relevant for the assessment year 1962-63 to the last day of the previous year relevant for the assessment year 1963-64. In his view, the assessee could not change the last day of the previous year as March 3, 1963, as was done in the declaration and he, therefore, considered that the benefit of continuance of registration requested up to March 3, 1963, could not also be granted. As there was no operative deed for the period March 4, 1963, to March 31, 1963, and no valid application for registration for that period had been filed, registration even for that period could not also be granted. He, therefore, took the status of the firm as an unregistered firm.
8. The assessee challenged this order before the AAC who, after elaborately considering the facts and also the legal position, held that the ITO should have granted registration for the firm on the strength of the partnership deed executed on January 1, 1964, as that deed made it clear that the new firm came into existence on and from March 4, 1963. He condoned also the delay in filing the necessary application and he directed the ITO to grant registration for the firm for the year under consideration. The delay that he condoned was obviously referable to the failure of the assessee to file the application for registration before the end of the previous year, viz., March 31, 1963, the relevant application having been filed only on April 1, 1964.
9. The ITO who felt aggrieved by the said order of the AAC, filed an appeal before the Tribunal. The Tribunal came to the conclusion that the registration could not be granted to the firm on the basis of the instrument of partnership dated January 1, 1964, as the said partnership deed came to be executed after the expiry of the relevant year of account. The Tribunal, however, confirmed the order of the AAC taking the view that the partnership deed dated February 28, 1958, read along with the release deed dated March 4, 1963, evidenced the existence of the partnership by the two continuing partners with their respective shares and that there was compliance with Section 184(1) of the Act. To hold otherwise was, in the view of the Tribunal, technicality with a vengeance. It is this order of the Tribunal that has given rise to the present reference raising the questions set out already.
10. The genuineness of the firm is not in dispute. The fact that the profits have been shared between the partners, who were entitled to it during the respective periods in accordance with the shares as set out in the documents dated February 28, 1958, and March 4, 1963, is not also in dispute. The only point raised is that the firm has not complied with the provisions of the Act and the Rules so as to be eligible for the registration. It is this aspect which requires to be examined.
11. As the present reference arises out of the proceedings for the assessment year 1963-64, to which the I.T. Act, 1961, is applicable, it is enough for our present purpose to go into the provisions of this Act and the Rules framed thereunder. As some substantial changes have been made in the Act of 1961, compared with the Act of 1922, it would be really unnecessary to go into any cases decided under the earlier Act. Section 184 in so far as it is relevant is given below :
'184. Application for registration.--(1) An application for registration of a firm for the purposes of this Act may be made to the Income-tax Officer on behalf of any firm, if--
(i) the partnership is evidenced by an instrument; and
(ii) the individual shares of the partners are specified in that instrument.
(2) Such application may, subject to the provisions of this section, be made either during the existence of the firm or after its dissolution.......
(4) The application shall be made before the end of the previous year for the assessment year in respect of which registration is sought:
Provided that the Income-tax Officer may entertain an application made after the end of the previous year, if he is satisfied that the firm was prevented by sufficient cause from making the application before the end of the previous year.
(5) The application shall be accompanied by the original instrument evidencing the partnership, together with a copy thereof:
Provided that if the Income-tax Officer is satisfied that for 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 the dissolution of the firm, by all the persons referred to in Clause (b) of Sub-section (3), to be a correct copy, or a certified copy of the instrument; and in such cases the application shall be accompanied by a duplicate copy of the original instrument.
(6) The application shall be made in the prescribed form and shall contain the prescribed particulars.
(7) Where registration is granted to any firm for any assessment year, it shall have effect for every subsequent assessment year : Provided that--
(i) there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the registration was granted ; and
(ii) the firm furnishes, before the expiry of the time allowed under Sub-section (1) or Sub-section (2) of Section 139 (whether fixed originally or on extension) for furnishing the return of income for such subsequent assessment year, a declaration to that effect, in the prescribed form and verified in the prescribed manner, so, however, that where the Income-tax Officer is satisfied that the firm was prevented by sufficient cause from furnishing the declaration within the time so allowed, he may allow the firm to furnish the declaration at any time before the assessment is made.
(8) Where any such change has taken place in the previous year, the firm shall apply for fresh registration for the assessment year concerned in accordance with the provisions of this section.'
12. Section 185 sets out the procedure to be adopted on receipt of such an application. Under it, the ITO is required to go into the genuineness of the firm and its constitution as specified in the instrument of partnership and if he was satisfied that there was a genuine firm in existence during the previous year, he should pass an order in writing registering the firm for the said assessment year. If he was not so satisfied, he had to pass an order refusing to register the firm. Where the ITO considered that the application for registration was not in order, Sub-section (2) of Section 185 required him to intimate the defect to the firm and give it an opportunity to rectify the defect in the application within a period of one month from the date of such intimation ; and if the defect was not rectified within that period, he could, by order in writing, reject the application. Similarly, on receipt of a declaration in pursuance of Sub-section (7) of Section 184 for the continuance of registration after the initial registration was granted, he had to intimate the defect, if any, to the firm and give it an opportunity to rectify the defect in the declaration within a period of one month from the date of such intimation. (See Section 185(3)). Rule 22 of the I.T. Rules, 1962, deals with the mode of and the procedure regarding the application for registration of a firm. Rule 22(2) deals with a case where an application is made before the end of the relevant previous year and Rule 22(4) deals with an application made after the end of the relevant previous year. In both these sub-rules, the provisions are more or less identical. Where no change in the constitution of the firm or the shares of the partners has taken place during the previous year before the date of the application, the application has to be made in Form No. 11, whether the application was made before the end of the relevant previous year or after the end of the relevant previous year. Where any change or changes in the constitution of the firm or the shares of the partners have taken place during the previous year, whether the application is made before the end of the relevant previous year or after the end of the previous year, it has to be in Form No. 11 A. In the present case, the application has been made after the end of the relevant previous year, that is, on April I, 1964. It would, therefore, follow that Rule 22(4)(ii) would apply to the present case. As indicated already, in a case where a change or changes in the constitution of the firm or the shares of the partners have taken place during the previous year or after the end of the previous year and before the date of the application, the application has to be in Form No. 11A and it has to be accompanied by the instrument or instruments evidencing the partnership as in existence from time to time during the previous year and up to the date of the application together with copies thereof. In the present case, as pointed out earlier, Form No. 11A has been filed and, in addition, application in Form No. 12 has also been filed. Rule 24 deals with declaration for continuance of registration, to be furnished under Sub-section (7) of Section 184, which, as prescribed under Rule 24, is to be in Form No. 12. This declaration having been filed, the question is whether the assessee is eligible for the continuance of the registration as prayed in the application in Form No. 12 or whether the assessee is eligible for registration as prayed in Form No. 11A. The ITO had not pointed out any defect in either of the two applications. Consequently, he did not give the assessee the necessary opportunity as contemplated by Section 185(2) and (3) for rectifying the defects in the application. We, therefore, proceed on the basis that the applications were not defective. We have only to consider whether the said applications were in order in the present case.
13. We may first dispose of the contentions taken on behalf of the revenue in so far as it relates to the application in Form No. 12 for continuance of the registration. As far as this Form is concerned, the only point that is raised is that the assessee could not take liberty with the said Form and proceed as if the relevant previous year ended on March 3, 1963, while actually the account had been closed on March 31, 1963. This Form would be applicable to two cases, viz., where, (1) the firm, which had already been registered, continues throughout the previous year; and (2) the firm is dissolved during the relevant previous year. In the case of dissolution, the application could only be with reference to the period commencing with the first day of the relevant previous year and ending on the date of the dissolution. In the present case, the learned counsel for the Commissioner stated that as a result of the retirement of Manzurunissa Begum, the firm of three partners stood dissolved and there was a succession by another firm consisting of two partners. Our attention was drawn to the following passage in Lindley on Partnership, 13th edn,, at page 154, which runs, to the extent necessary, as follows:
'Where a partnersip is entered into for a fixed period, a change in the partners will terminate that particular partnership and create a new one......'
14. In the present case, as already seen, the partnership was for a fixed period of 10 years. There was a change in the partners by reason of the retirement of one of them. It would, therefore, follow that there is a termination of that partnership and when the two partners continued as partners, there was the creation of a new partnership. Consequently, the assessee could not be said to have taken any liberty with the Form when it was stated in the Form that there was no change in the constitution of the firm or the shares of the partners since the last date of the previous year relevant to the assessment year 1962-63, up to the last date of the previous year relevant to the assessment year 1963-64, or the date March 3, 1963, viz., the date of dissolution of the firm. The fact that the accounts were continued up to March 31, 1963, would not be relevant for this purpose. If the firm was dissolved on March 3, 1963, then the assessee could have filed an application only in Form No. 12 for continuance of registration up to the date of the dissolution as contemplated by the Form itself, the necessary declaration being that there was no change in the constitution up to that date. There is no dispute that there was no change in the constitution up to March 3, 1963. The ITO could not, therefore, have properly refused to grant the application in Form No. 12 in the present case. If the declaration in Form No. 12 is effective, then the continuance of the registration would be up to March 3, 1963. It may be that from March 4, 1963, up to March 31/1963, the assessee would not be eligible for registration under that application, but the assessment with reference to only the said broken period could be made in the status of unregistered firm and not for the whole year in case the application in Form No. 11A is to be rejected for any reason. Mr. Jayaraman, the learned counsel appearing for the Commissioner, brought to our notice a decision of the Calcutta High Court in CIT v. Kejriwal Traders : 71ITR463(Cal) , in support of his contention that registration has to be for a whole year and not for less than a year. That case arose under the provisions of the Indian I.T. Act of 1922. The assessee-firm was originally constituted by a partnership deed dated 18th April, 1957. On 30th September, 1957, one of the partners retired and a new partnership deed was executed on 31st January, 1958, that is, after the relevant accounting year. In the partnership deed dated 31st January, 1958, it was recited that the partnership constituted under the deed dated 18th April, 1957, was 'dissolved'. For the assessment year 1958-59, for which the previous year ended on 31st December, 1957, the firm applied on 5th September, 1957, for registration under Section 26A of the Indian I.T. Act of 1922. It may be seen that on the date when this application was made the firm as constituted under the deed dated 18th April, 1957, continued, one of the partners retiring only thereafter, on 30th September, 1957. The ITO, having refused the registration of the firm, the assessee appealed to the AAC, who held that there was only a change in the constitution of the firm and allowed the registration for the whole year. On appeal by the department, the Tribunal cancelled the registration of the firm from 1st October, 1957, to 31st December, 1957; but allowed registration for the period up to 30th September, 1957, after which date one of the partners retired. It was held by the High Court that this conclusion of the Tribunal was not correct and that the firm could not have been granted registration for any period during the relevant year. It was pointed out also that the Tribunal could not have granted registration for a part of the accounting year. As we have already pointed out, changes have been made in the Act of 1961 and as a result of those changes, we do not consider that the decision rendered under the Act of 1922 would have any application. The Forms that have been prescribed under the new Act are different and Form No. 12 specifically provides for an application for continuance of registration up to the date of dissolution. Further, that was not a case of dissolution as here. The conceivable consequence that there could be an assessment as an unregistered firm, subsequent to that date, consisting of the two partners is not relevant in the context of Form No. 12. The learned standing counsel did not contend that either the rules or the Forms are in any manner ultra vires and, therefore, we have to proceed on the basis that the rules and the Forms reflect correctly the legal position regarding the construction of the statutory provision in respect of which the Rules and the Forms have been prescribed. In this view, the grant of registration for the whole year by the Tribunal would be wrong and continuance of registration would have to be confined up to March 3, 1963.
15. We may now consider the question as to whether the assessee is eligible for registration under Form No. 11A prescribed under the Act. Paragraph 2 of the Form provides that the original or certified copy of the instrument evidencing the partnership in existence from time to time during the previous year up to the date of application together with a copy thereof is to be enclosed. In the present case, the application had been made after the end of the relevant previous year. Therefore, Rule 22(4)(ii) would alone apply. In the present case the application having been made after the relevant year, any instrument that was in force up to the date of application would require consideration by the ITO. The partnership deed dated January 1, 1964, was relied on in support of the application for the benefit of registration under Form No. 11 A. This deed being after the relevant previous year, the question that arises for consideration is whether it could be looked into The learned, counsel for the C.IT referred us to a decision in CIT v. Joseph and George : 77ITR292(Ker) . That was a case of a firm applying on 10th April, 1964, to the ITO for registration for the assessment year 1964-65. The relevant partnership deed itself came into existence on 10th April, 1964, after the relevant previous year. The Kerala High Court held that there could be no question of condonation of delay as provided under Section 184 with reference to such a document. In view of this decision, the learned counsel for the assessee was not in a position to sustain his plea that the firm should be registered after March 4, 1963, as prayed under Form No. 11 A. We do not, therefore, think it necessary to go into this aspect further. The result is that the first question would be answered in the negative and against the assessee. The second question would be answered in the affirmative and in favour of the assessee with reference to the period up to March 3, 1963. The third question is answered as follows: The Tribunal was right in law in granting registration for the firm for the assessment year 1963-64, but could only do so up to the period March 3, 1963, and the firm cannot be registered after that date for that year. There will be no order as to costs.