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A. Asha and Co. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 311 of 1966 (Reference No. 76 of 1966)
Judge
Reported in[1973]87ITR57(Mad)
ActsIncome Tax Act, 1922 - Sections 26A
AppellantA. Asha and Co.
RespondentCommissioner of Income-tax
Appellant AdvocateK. Srinivasan and ;K.C. Rajappa, Advs.
Respondent AdvocateV. Balasubramanyan and ;J. Jayaraman, Advs.
Cases ReferredChhotelal Devchand v. Commissioner of Income
Excerpt:
.....is sufficient for purpose of section 26a - value of specific shares could be ascertained through partnership deed -specification of shares possible through constituting documents of partnership - held, assessee-firm entitled to registration under section 26a. - - commissioner of income-tax, [1963]48itr692(mad) .on a further appeal, the tribunal was of the view that the substance of the instrument could not be permitted to be overlooked merely by the use of the collective description of some of the partners who agreed to be the partners, that the recitals in the partnership deed clearly showed that it was not the firm of arjandas & co. commissioner of income-tax are no longer good law in view of two later judgments of the supreme court in kylasa sarabhaiah v. commissioner of..........section 26a of the income-tax act, 1922, for the assessment year 1961-62 '2. the assessee is a firm of partnership constituted under a deed of partnership dated january 15, 1960. the deed was executed between arjandas & co., a firm consisting of three partners whose names have been set out in the deed, and another partner by name t. muralidhar. the partnership deed was signed by the three partners of arjandas & co. and the said muralidar. under the terms of the partnership deed, arjandas & co. consisting of the three partners was called the party of the first part, and muralidhar was called the party of the second part. the party of the first part was entitled to a share of 75 paise and the party of the second part to a share of 25 paise in the partnership. in the books of the.....
Judgment:

Ramaswami, J.

1. The question that has been referred in this case is:

' Whether, on the facts and in the circumstances of the case, the assessee-firm was entitled to registration under Section 26A of the Income-tax Act, 1922, for the assessment year 1961-62 '

2. The assessee is a firm of partnership constituted under a deed of partnership dated January 15, 1960. The deed was executed between Arjandas & Co., a firm consisting of three partners whose names have been set out in the deed, and another partner by name T. Muralidhar. The partnership deed was signed by the three partners of Arjandas & Co. and the said Muralidar. Under the terms of the partnership deed, Arjandas & Co. consisting of the three partners was called the party of the first part, and Muralidhar was called the party of the second part. The party of the first part was entitled to a share of 75 paise and the party of the second part to a share of 25 paise in the partnership. In the books of the assessee-firm the 75 paise share in the profits of the assessee-firm for the accounting year relevant to the assessment year 1961-62 was credited in the name of Arjandas & Co, In the application for registration made under Section 26A of the Income-tax Act, 1922 (hereinafter called 'the Act'), and the Rules framed thereunder in the column relating to the share of profits in the Schedule, the combined share of the three individual partners constituting Arjandas & Co. was given as 75 paise, but with a note that it has to be credited and distributed between the partners of Arjandas & Co. in the ratio mentioned in the deed of partnership of Arjandas & Co.

3. The assessee filed the application under Section 26A for registration of the firm for the assessment year 1961-62 along with the deed of partnership dated January 15, 1960, of the assessee-firm and also the partnership deed of Arjandas & Co. The Income-tax Officer refused to register the same on two grounds--firstly, the partnership was only between the firm, Arjandas & Co., and the individual, Murajidhar, and that such a partnership was illegal: secondly the individual shares of the three partners of Arjandas & Co. had not been specifically stated in the instrument of partnership dated January 15, 1969. On appeal, the Appellate Assistant Commissioner did not go into the question as to the validity of the partnership deed but held that the refusal of registration by the Income-tax Officer was valid as, in his view, neither the partnership deed nor the application for registration gave the particulars of the individual shares of all the members constituting the firm. In support of this view, the Appellate Assistant Commissioner relied on the decision of this court in A.S.S.R. Guruswami Chettiar v. Commissioner of Income-tax, : [1963]48ITR692(Mad) . On a further appeal, the Tribunal was of the view that the substance of the instrument could not be permitted to be overlooked merely by the use of the collective description of some of the partners who agreed to be the partners, that the recitals in the partnership deed clearly showed that it was not the firm of Arjandas & Co. on the one hand and Muralidhar on the other that had formed the partnership but that the partnership had been formed between the three individual partners of Arjandas & Co. and Muralidhar and that, therefore, it was a partnership consisting of four partners who have signed the partnership deed. The partnership has thus been held to be a valid partnership. This point is not in question in this reference. But the Tribunal upheld the order of the Income-tax Officer refusing registration on the ground that neither in the application for registration nor in the instrument of partnership the individual shares of the three members of the partnership of Arjandas & Co. had been specified and that it was not permissible to look into the deed of partnership of Arjandas & Co. or the books of that firm to ascertain the individual shares of the three members. In support of this view the Tribunal has relied on the two decisions of this court in A. S. S. R. Guruswami Chettiar v. Commissioner of Income-tax and V. M. Periasamy Chettiar & Co. v. Commissioner of Income-tax, : [1964]52ITR134(Mad) .

4. In this reference the learned counsel for the assessee contented that the law laid down in the decisions in A. S. S. R. Guruswami Chettiar v. Commissioner of Income-tax and V. M. Periasamy Chettiar & Co. v. Commissioner of Income-tax are no longer good law in view of two later judgments of the Supreme Court in Kylasa Sarabhaiah v. Commissioner of Income-tax, : [1965]56ITR219(SC) and Parekh Wadilal Jivanbhai v. Commissioner of Income-tax, : [1967]63ITR485(SC) .

5. It is necessary to set out the statutory provisions in respect of the registration of the firm. Section 26A of the Act reads as follows :

'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 all 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.'

6. Rule 3 of the Income-tax Rules, 1922, required that the application shall be made in the form annexed therein and shall be accompanied by the original instrument of partnership under which the firm was constituted and in the Schedule to the form there is a column requiring ' share in the balance of profits (or loss) ' to be mentioned.

7. The learned counsel for the assessee contended that, although the individual shares of the three partners of Arjandas & Co. had not been specifically mentioned in the partnership deed dated January 15, 1960, and the application for registration, their individual shares could easily be ascertained by reference to the partnership deed of Arjandas & Co., which was produced before the Income-tax Officer along with the application for registration. The partnership deed dated January 15, 1960, refers only to the joint share of the three partners of Arjandas & Co. and does not say how the share has to be divided between three partners. In the application for registration in the column of the Schedule relating to shares of income, again the joint share alone was mentioned but with a note that the share will have to be distributed among the three partners of Arjandas & Co. in the ratio mentioned in the partnership deed of Arjandas & Co. It is not in dispute that the partnership deed of Arjandas & Co. and the assessee-firm was a genuine partnership and if one were to refer to the partnership deed of Arjandas & Co. or the books of that firm one can easily ascertain the individual shares of the three members who constituted the firm of Arjandas & Co. The question for consideration therefore is whether, under these circumstances, the individual shares of the three partners of the assessee could be said to have been specified in the instrument of partnership of the assessee-firm and whether the assessee is entitled to registration under Section 26A of the Act and the Rules framed thereunder.

8. The Tribunal has relied on the two decisions of this court in A.S.S.R. Guruswami Chettiar v. Commissioner of Income-tax and V. M. Periasamy Chettiar v. Commissioner of Income-tax in respect of its view that the deed and the application had not complied with the provisions of Section 26A and the Rules framed thereunder for registration of firms. In A. S. S. R. Guruswami Chettiar v. Commissioner of Income-tax the firm which applied for registration was constituted under an instrument of partnership executed between two firms, but the deed was executed by the individual partners of the said two firms. The deed did not refer to the profit sharing ratio of the four individuals who had signed the instrument of partnership but referred only to the shares of the two firms and stated that they should have equal shares in the profits. The learned counsel for the assessee contended in that case that the share of each individual partner can easily be verified by reference to the instrument of partnership relating to the two firms, that it was permissible to look into those documents for the ascertainment of the shares and that therefore the refusal of registration of the firm was improper. A Division Bench of this court held :

' An application for registration under Section 26A cannot be maintained unless there is an instrument of partnership and that specifies the share of each partner. The language of the statue is so plain that there is no scope for any misinterpretation. There can be no specification of the shares in the instrument unless the shares are set out and do find a place on the face of the instrument. The partnership law presumes equality of shares in the absence of a contract to the contrary (vide Section 13 of the Partnership Act). An omission in the deed of partnership to mention the shares, by accident or design, cannot be cured for purposes of registration under Section 26A by reference to the relevant statutory provision. The question that needs consideration in the registration proceedings is whether the shares are noted in the instrument and not whether they are capable of ascertainment by evidence aliunde or by application of legal principles. The intention of the legislature--this intention is made plain by the specific words in the section--is that there should not be a roving enquiry as to who the partners of the firm are or as to what their respective shares are.'

9. The above view of the judges was elaborated in the further portions of the judgment and some references have been made to earlier decisions. It is seen from this judgment that three main grounds have been given for upholding the refusal of registration--(1) there can be no specification of the shares in the instrument unless the shares are set out and do find a place on the face of the instrument; (2) the shares could not be determined by reference to the relevant statutory provisions of the Partnership Act or by reference to any other document or evidence aliunde; and (3) the provisions of the section and the Rules are mandatory in nature and when the legislature used the expression 'instrument of partnership' it did confine the scope and jurisdiction of the registration proceedings to a consideration of the basic instrument and to that instrument alone. The decisions of the High Courts of Patna and Nagpur and Lahore in Khimji Walji & Co. v. Commissioner of Income-tax, : [1954]25ITR462(Patna) Jabalpur Ice Manufacturing Association v. Commissioner of Income-tax, and United Cotton Factory v. Commissioner of Income-tax, (West Pakistan) which were referred to and followed in the above judgment, do not contain any further additional grounds than what was set out in that judgment. The decision of the Bombay High Court in Chhotelal Devchand v. Commissioner of Income-tax, : [1958]34ITR351(Bom) took a contrary view and held that the failure to mention the profit sharing ratio in the instrument of partnership itself was immaterial if it could be ascertained with reference to other documents which were produced before the Income-tax Officer. The full facts of this case will be discussed later on, but suffice it to say at this stage that the decision of the Bombay High Court was dissented from and was not followed by the learned judges who decided the case in A. S. S. R. Guruswami Chettiar v. Commissioner of Income-tax.

10. The correctness of the decision in A.S.S.R. Guruswami Chettiar v. Commissioner of Income-tax was questioned before the same judges in another case in V. M. Periasamy Chettiar v. Commissioner of Income-tax and in this connection reliance was placed on the decision in N. T. Patel & Co. v. Commissioner of Income-tax, : [1961]42ITR224(SC) , which was a decision of the Supreme Court. The learned judges affirmed their earlier view and did not think that there were any grounds for revising their earlier opinion. Being two Bench judgments of this court, we are bound to follow those decisions unless the Supreme Court has taken a different view.

11. It is, therefore, necessary to consider whether the ratio of the decisions of the Supreme Court in Kylasa Sarabhaiah v. Commissioner of Income-tax and Parekh Wadilal Jivanbhai v. Commissioner of Income-tax in any way conflict with or impliedly overrule the decisions of this court and make the law laid down in A.S.S.R. Guruswami Chettiar v. Commissioner of Income-tax as no longer good law. The facts in Parekh Wadilal Jivanbhai v. Commissioner of Income-tax were these : The assessee was a partnership firm constituted under a deed of partnership, dated March 19, 1950. Prior to November, 1949, the three partners of the assessee-firm in partnership with eight others carried on business in Bombay and other places in the name and style of Rajnikant Vithaldas & Co. In the larger one each one of the three brothers of the assessee-firm had an equal 2 annas share, the other 8 partners having the remaining 10 annas share. There was a dissolution of the larger partnership and on its dissolution the business of two of its branches at Nagpur were allotted to the three brothers. Thereafter, the three brothers entered into a partnership among themselves as evidenced by the partnership deed dated March 19, 1950. Under Clause 3 of the partnership deed the capital allotted to each partner was equal and Clause 10 provided that ' after meeting all expenses, interest and other charges, resulting net profit or loss shall be ascertained and shall be divided amongst all partners '. The Income-tax Officer granted registration of this partnership under Section 26A for the assessment year 1951-52 and renewed the same for 1952-53. But for the assessment year 1953-54 the renewal was refused on the ground that there was no clause in the deed specifying the individual shares of each partner as required by Section 26A of the Act. This refusal was confirmed by the Appellate Assistant Commissioner, the Appellate Tribunal and the High Court in a reference under Section 66(1) of the Act. On appeal, the Supreme Court while holding that, since registration of a firm confers a benefit by not taxing directly the firm on its income, the requirements of Section 26A of the Act and the Rules framed thereunder must be strictly complied with, was of the view that the assessee therein was entitled to registration. In holding that the firm was entitled to registration, though the shares of the individual partners were not specified on the face of the document, the Supreme Court relied on Section 13 of the Partnership Act and the fact that in the application for registration the three partners have been shown to share the profits of the partnership firm equally and in the books of account the share is apportioned equally among the three partners. Section 13 of the Partnership Act has been referred to in order to hold that, in the absence of a contract to the contrary, the partners are entitled to share equally in the profits earned and shall contribute equally to the losses sustained by the firm. This view of the Supreme Court is directly against the view of this court in A.S.S.R. Guruswami Chettiar v. Commissioner of Income-tax, where it was held that Section 13 of the Partnership Act could not be invoked for the purpose of ascertaining the shares of the partners. After referring to the particulars given in the application for registration the Supreme Court also referred to the entries in the account books of the assessee-firm and held that, while reading the partnership deed as a whole and in the context of the relevant circumstances of the case, one would find that there was specification of the individual shares of the partners in the profits within the meaning of Section 26A of the Act. The Supreme Court also held that, although the application for registration of a firm under Section 26A had strictly to be in conformity with the Act and the Rules, in ascertaining whether the application was in conformity with the Rules, the deed of partnership had to be reasonably construed. If, therefore, the principle of the decision in A.S.S.R. Guruswami Chettiar v. Commissioner of Income-tax, is to be applied, since the deed before the Supreme Court did not, on its face, specify the shares of the partners, no evidence could be entertained or looked into or referred to for ascertainment of the shares and the provisions of Section 13 of the Partnership Act also could not be invoked for the purpose of ascertainment of the shares. The Supreme Court has held that that was not the legal position and if the shares could be ascertained by application of the legal principles and the relevant circumstances of the case, there was specification of the individual shares of the partners within the meaning of Section 26A of the Act. The Supreme Court also referred to their earlier decision in Kylasa Sarabhaiah v. Commissioner of Income-tax.

12. The facts in Kylasa Sarabhaiah v. Commissioner of Income-tax are these : The partnership consisted of five parties of whom the party of the first part was a partnership by itself. The deed was signed by the major partners of the party of the first part along with the other four parties. The names of the three major partners were given in the document itself and it was recited in the preamble that the four minors whose names were mentioned were admitted to the benefits of partnership with equal shares in the profits falling to the share of that party and losses were to be shared in equal shares only by the major partners whose names are mentioned. The share of profits of the first party firm in the assessee-firm was given as 6 annas 9 pies in the profits but there was no mention of the individual shares of the first party firm. In considering the question whether the .assessee-firm was entitled to registration under Section 26A, the SupremeCourt held, the word 'specified 'is used in Section 26A and Rule 2 asmeaning ' mentioning, describing or defining in detail; it does not meanexpressly setting out any fractional or other shares'. Then the SupremeCourt referred to the various clauses in the partnership deed and came tothe conclusion that since the shares among the party of the first part wasmentioned in the preamble portion, the absence of clear division and allocation of the shares of 6 annas 9 pies allotted to that party was immaterial.These two judgments of the Supreme Court, in our view, have cut at theroot of the ratio of the decision in A.S.S.R. Guruswami Chettiar v. Commissioner of Income-tax.We are also not able to subscribe to the view that a reference to theplurality of documents for ascertainment of the shares is neither contemplated or permitted under Section 26A. The learned judges who decidedA.S.S.R. Guruswami Chettiar v. Commissioner of Income-tax and V. M. Periasamy Chettiar & Co. v. Commissioner of Income-tax were willing to hold that ifthere were amending or supplementary documents between the same partiesto the partnership deed, such amending or supplementary documents couldbe looked into for ascertainment of the shares of the partners when theoriginal instrument of partnership itself did not contain the specific sharesof the individual partners. If the instrument of partnership itself did notspecify the terms, how do you refer to the amending or supplementarydeeds The answer given is that both form part of the same instrument.But the learned judges were not willing to refer to the partnership deedamong a few only of the partners in order to ascertain the individual sharesof those partners, if at least there is no reference to that deed in the deedwhich comes for registration. They were of the view that there was noprovision of law under which the two partnerships 'can be assimilated as tomake the terms of one agreement part and parcel of the terms of the otheragreement. They also expressed the view that the ' collective sharearranged to the members who constitute a different firm need not necessarily be shared in the ratio of their shares in their separate partnership'.This reasoning of the learned judges clearly overlooked the fact that thepartners, who constituted the firm which became a partner in a bigger firm,when they become a partner in the partnership name they are pursuing an,activity of their own partnership and therefore no question of their shares,being different in the bigger partnership from that of their original partnership could arise. They Will be sharing their own profits and losses only inthe shares in which they were entitled to share under their own partnership. It is, therefore, merely a case of looking into the terms of their partnership in order to ascertain their individual shares which have been given as a collective share in the bigger partnership. In fact, this is what the assessee had done in the present case in its application for registration. After setting out the collective share it is stated that as between the partners they will have to share profit in the ratio in which they would share their profit under the partnership. The assessee also produced the partnership deed among themselves. There would have been no difficulty at all in ascertaining the shares if one were to look into the partnership deed of the assessee and that of Arjandas & Co. This, in our view, is the ratio of the decision in Chhotelal Devchand v. Commissioner of Income-tax of the Bombay High Court wherein it was held that an instrument of partnership may be constituted by one or several documents and what Section 26A requires is that the documents which constitute the instrument of partnership must specify the shares of the partners and that it is not necessary that the shares must be specified in one document. That was also a case where the partnership deed that was sought to be relied on for the purpose of proving the shares of the individual partners was a partnership deed among some of the partners and the assessee-firm which required registration. We are, therefore, of the view that refusing to look into the deed of partnership among some of the partners in order to ascertain their individual shares when there is no dispute about their genuineness is a hyper technicality with no , substance and cannot be upheld.

13. For the foregoing reasons, we hold that the assessee-firm was entitled to registration under Section 26A of the Income-tax Act for the assessment year 1961-62 and we answer the reference in the affirmative and in favour of the assessee with costs. Counsel's fee Rs. 250.


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