Chakravaetti, C. J.
1. This is a Reference under Section 66(1), Indian Income-tax Act of a question of law which so far as this Court is concerned, is a question of first impression. Broadly stated, the question is whether the only partnership which can be registered under Section 26A, Income-tax Act for the purposes of a particular assessment is a partnership created, by an instrument executed at or before the commencement of the relative accounting year or whether a partnership created by verbal agreement can also be registered, if the agreement is subsequently embodied in an instrument although, so far as the relative accounting year is concerned, the partnership may have rested solely in the verbal agreement,
2. The facts out of which the question has arisen in the present case are as follows. With respect to its assessment for the assessment year 1949-50, an alleged firm, calling itself Messrs R. C. Mitter and Sons, made an application for registration and, along with the application, filed an instrument of partnership executed on 27-9-1949. The relative accounting year was the period between 14-4-1949, and 13-4-1949.
The applicant's case was that a partnership had been formed by verbal agreement on 14-4-1948, and that throughout the accounting year that partnership had subsisted. In support of its case that the partnership had come into existence on 14-4-1948, the applicant relied on a letter addressed to a bank on 15-4-1948, whereby the constitution of the firm was communicated to the bank.
It would, however, appear from that letter that if it represented the correct state of things, the firm had been constituted even earlier and what had happened on 14-4-1948, was that a third son of Sri. R. C. Mitter had been admitted to the partnership. The letter contained no specification of the shares of the individual partners.
3. The Income-tax Officer rejected the application for registration and so did the Appellate Assistant Commissioner and the Appellate Tribunal. The reason given by the Tribunal was that as the instrument of partnership had been executed only in September, 1949, long alter the close of the relevant previous year, it could not possibly govern the distribution of the profits of the firm In that year and, therefore, no registration under Section 26A of the Act could be claimed on the basis of that instrument.
It is obvious that the Tribunal proceeded on the view that what Section 26A requires is an instrument of partnership by which the firm is created and an instrument creating the firm at or before the commencement of the relevant accounting year.
4. After the rejection of the application by all the authorities, the alleged firm applied to the Tribunal for a reference to this Court of a question of law said to arise out of the refusal to register the partnership. The Tribunal acceded to the application and has referred the following question to this Court:
'Whether the assessee firm which is alleged to have come into existence by a verbal agreement fin April, 1943, is entitled to be registered Under Section 26A for the purpose of assessment for 19-13-50, where the Instrument of Partnership was drawn up only in September, 1949, after the expiry of the relevant previous year?'
The answer to the question depends upon the true construction of Section 26A, Income-tax Act read with Rules 2 and 3 and the prescribed form of the application. Sub-section (1) of the section reads thus: '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 tills Act and of any other enactment for the time being in force relating to income-tax or super-tax.'
5. Mr. Mitra, who appeared on behalf of the assessee, contended that what the section really required was merely a deed in writing, pin-bodying therein the particulars regarding the firm which were required to be registered under the Rules. If there was an instrument in writing which contained all relevant information about the constitution of the firm, the shares held by the members and other particulars specified in the Rules, the requirements of Section 26A were, according to Mr. Mitra. satisfied.
It was not required that the partnership should originate in a written instrument and should be created by it. He pointed out that the section spoke of a firm constituted 'under' an instrument of partnership and not a firm constituted 'by' an instrument. The preposition 'under, Mr. Mitra contended, could not possibly connote that the instrument to which it referred would be an instrument by the force of which the firm had been constituted.
6. Mr. Khaltan, who appeared in the next Reference, -- 'D. C. Auddy and Brothers v. Commissioner of Income-tax. West-Bengal'. : 28ITR713(Cal) (A), submitted to us that one of the points involved in his case was identical and praved that before we decided the point in connection with the present Reference, he also might be given an opportunity for making his submissions.
We accordingly heard Mr. Khaitan as well. He adopted the arguments of Mr. Mitra and in addition relied on the provisions of Section 28 (2) of the Act.
7. It must be admitted that as a matter of language if Section 26A contemplates a firm created by an instrument of partnership, the preposition 'under' has been a very inappropriate preposition to use. The learned Counsel for both parties made extensive searches among all available sources for an instance of a like use of the word 'under', but their searches did not result in the discovery of any similar instance.
It is not surprising that the search failed, because the preposition 'under' is obviously inappropriate, if what is intended to be expressed is the idea that the deed or act concerned brought into existence a certain result by its own force. One can say correctly that one has a right 'under' a deed. He can also say correctly that 'under' a deed of partnership, the distribution of the shares is of a certain kind.
But when one wishes to express the idea that a particular deed created a certain relationship or brought about a certain result, one would not use the preposition 'under', because, if I may borrow an expression used in connection with verbs, the operation of the preposition 'under' is not transitive but intransitive. In that preposition there is no import of causation at all, which is required of a word if it is to mean that the deed or instrument, in relation to which it is used, operated to produce or cause a certain result.
The real import of the word 'by' and its significance, as contrasted with that of the word 'under' appear clearly from two decisions of English Courts, which have frequently been referred to in the Indian case law under Section 26A, Income-tax Act.
The first case is that of -- 'R. v. Registrar of Joint Stock Companies, Ex parte Johnston', (1891) 2 QB 598, where Section 180, English Companies Act, 1862, fell to be construed. Under that section, companies 'constituted by law' were entitled1 to recognition for certain purposes and the question was whether a company formed by mere agreement of parties could be a company constituted by law within the meaning of the section.
The Court of Appeal held that a company formed by the mere consensus of private parties would be a company formed in accordance with law, but would not be a company constituted by law, because towards the constitution of such a company no force of any law directly operated. According to their Lordships, what the expression 'constituted by law' meant was that a company, truly described by that phrase, would be a company brought into existence by some legislative enactment, so that it would be the law itself which would constitute the company directly and by its own force.
Briefly stated, the view of the Court was that companies constituted by law meant statutory companies. The other case to which I would refer is the case of -- 'In re, Smith, Davidson v. Myrtle' (1896) 2 Ch 590. which was concerned with a provision under which certain trustees had power to invest funds in companies 'incorporated by Act of Parliament'.
The trustees invested their funds in a company properly constituted under the Companies Act and it was contended that since the Companies Act was an Act of Parliament and the company was constituted under or in accordance with the provisions of that Act, it was a company incorporated' by an Act of Parliament. Once again, the Court held that such a company could not come under the description 'incorporated by Act of Parliament', because what the expression contemplated was a company directly incorporated under the provisions of some legislative enactment.
The company in which the funds had actually been invested was only a company incorporated under an Act of Parliament, but it was not incorporated by such an Act. These decisions, to my mind, only give effect to the ordinary grammatical meaning of the words 'by' and 'under' and are only useful as containing authoritative declarations that, 'under' cannot be a substitute for 'by' at least so far as the constitution of some body or organisation by some Act or instrument is concerned.
I should, therefore, think that if the true construction of Section 26A depended solely upon the correct import of the word 'under', there would be great force in Mr. Mitra's contention.
8. Really, however, Mr. Mitra built his argument not so much on the true import of the word 'under' as on what he claimed to be the meaning of the word 'constituted', as used in the present context. He went to the Oxford Dictionary and placed before us one of the meanings of the word 'constitute' which is 'to give an official form or shape to.'
Applying it to the facts relevant to Section 26A, Mr. Mitra contended that when a partnership was first formed by a verbal agreement and thereafter a formal instrument of partnership was executed, the instrument merely gave a formal shape to the parole agreement and thereby constituted a partnership in that sense.
On the basis of such meaning of the word 'constituted', Mr. Mitra contended that when a firm was first constituted by an oral agreement and subsequently a formal deed embodying the agreement was executed, the partnership was constituted under an instrument of partnership within the meaning of Section 26A and, consequently, such a partnership would be entitled to registration under the terms of the section.
9. I am unable to accept Mr. Mitra's contention that the word 'constituted', as occurring in Section 26A, bears the meaning which he would attribute to it. The other words of the section, in juxtaposition with which the word is used, would themselves exclude that meaning, but I might also point out that were Mr. Mitra's contention to be accepted, a very strange result would follow. The only expression which the section uses is 'constituted under' and not 'constituted by or under'.
If by the expression 'constituted under an instrument of partnership' is meant a firm which originated in a verbal agreement but with respect to which a formal deed was subsequently executed, there would be no room in the section for partnerships actually created by an instrument and such partnerships, although most obviously entitled to registration, would be excluded from the purview of the section.
Even etymologically or textually, I do not think that the word 'constituted', when used in relation to a firm or such other body, can mean anything but 'created', when the reference is to some deed or instrument to which the inception of the firm or other body is to be traced. Apart from the textual meaning, I consider it impossible to adopt a construction which would have no room for firms really created by an instrument as distinguished from firms created by a verbal agreement which is subsequently embodied in a formal deed.
10. The difficulty created by the word 'under' however remains. But, in my view, any embarrassment caused by that very unfortunate preposition is removed by the use of the expression 'instrument of partnership,' which carries, in itself, the meaning that the deed contemplated is one by which the parties thereto are agreeing in the present as to a course, of business to be followed by them in the future.
Whatever the ambiguity about the word 'Constituted' or the word 'under', there is none about the expression 'instrument of partnership' and if such instrument can only be an instrument, speaking in the present and into the future, Section 20A cannot obviously contemplate or even comprise instruments which do not bring into existence a partnership, but merely record the fact of its formation by a verbal agreement in the past.
What a deed of partnership is, would appear clearly from the relevant sections of the Partnership Act of 1932, but as Section 26A was introduced in the year 1930, it would not be right to refer to the present Partnership Act. But even were one to refer to the corresponding provisions in the Indian Contract Act, one would find that they too were based, as they were bound to be, on the basic concept of a partnership agreement or a deed of partnership, which is that certain persons agree to engage in a joint venture or business, agree further to carry it on by all of themselves or any of them,' acting for all and, lastly, agree to share the profits.
Such an agreement, in the very nature of things, can only be an agreement, come to at the present time and an agreement intended to operate in the future. An instrument of partnership is an instrument which embodies such an agreement, not in the way of recording past history but in the way of forming a part of the transaction which results in the creation of the partnership.
I should, therefore, think that the clear and unambiguous meaning of the expression 'instrument of partnership' must rule the construction of the controversial words in Section 26A and so far as the language of that section is concerned', it must be held that it contemplates firms created or brought into existence by a deed in writing and further that it contemplates a deed which governs the distribution of shares in the relevant accounting period and, therefore, a deed, executed at or before the commencement of such period and remaining operative from the date of its execution at least up to the date when the period ended.
11. The task of the interpreter of Section 26-A does not, however, end with extracting some meaning out of the language of the section itself, because Sub-section (2) of the section refers him to the Rules. That sub-section reads as follows:-
'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.' In view of the terms of Sub-section (2), it is obvious that no construction of Section 26A can be accepted as the true construction, unless it can stand alongside the Rules & unless there is no disharmony between what the section, as construed, enjoins, and what the Rules prescribe.
12. The Rules, as they now stand contemplate that not only a firm existing at the time of the application for registration, but also a dissolved firm, can be registered. It was pointed out to us that the Rules, as they stood originally, did not provide for the registration of a dissolved firm and that it was only by an amendment made in 1941 that dissolved firms were brought within the purview of the Rules.
13. Taking up the Rules now, it is not necessary to refer to any of them for the present purpose, except Rule 2 (a), which provides for the normal case and lays down that an application for registration must be made before the income of the firm is assessed for any year under Section 23 or the Act. What really requires attention is the form of application prescribed by the Rules and the directions as to procedure and other matters contained in some of the paragraphs.
I may say at once that some of the paragraphs of the form appear to be ill adjusted to the provisions of the Acts and the Rules, as they now stand and it is perfectly clear that when they were amended, all the amendments really required were not carried out. Nor do the framers of the amendments seem to have had any clear idea of what the Act provided and what changes they themselves were otherwise introducing.
To take para 2 of the Form, for example, it says that the original or certified copy of the instrument of partnership tinder which the firm 'is' constituted is enclosed. In view of the fact that the Rules now provided for the registration of both existing and dissolved firms the verb 'is' in the present tense is clearly inappropriate in the absence of an alternative like 'or was'.
The other matter to be noticed in para 2 is a matter pertinent to the problem of construction which we are trying to solve and it is the provision that the instrument of partnership under which the firm is constituted and which is being enclosed must specify the individual shares of the partners. The next paragraph provides for a certification that the profits were or will be divided or credited as shown in the sub-joined Schedule and that the information given in para 2 as well as in the Schedule is correct.
These two paragraphs, taken together, suggest in unambiguous terms that the instrument of partnership must be one which governed the distribution of shares in the relevant accounting year and it would, therefore, follow that it must be an instrument executed at or before the commencement of that year, since otherwise it could not, by its own force, govern the distribution of shares.
One of the Notes, intitulled A, appearing in the Form after the Schedule causes some difficulty, because it says that 'particulars of the firm as constituted at the date of this application', are to be mentioned. If this was an invariable requirement, it would follow that registration could be claimed only in respect of firms which Were existent in the same form, both during the relative accounting period and at the date of the application for registration.
The result would be to exclude not only dissolved firms, but probably other firms as well, the constitution of which had changed. But we are informed that this Note is required to be complied with only when it is applicable and that, in practice, it is scored through in other cases. Proceeding now with the paragraphs, the next one is para 4, of which only the first sub-paragraph is relevant.
It says that on receipt of an application for registration, the Income-tax Officer shall enter a certificate of registration at the foot of the instrument or certified copy, if he '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'.
I am bound to say that this paragraph, if it is to be taken literally and containing the whole provision as to what the Income-tax Officer is to be satisfied about, would lend strong support to the view that what is meant by 'any firm constituted under an instrument of partnership' in Section 26A is no more than a firm of which the constitution appears from an instrument in writing.
It, is obvious that if such be the meaning of the expression 'constituted under an instrument of partnership', the instrument need not be one by which the partnership was created. If one takes para 4(1) by itself, it undoubtedly directs the Income-tax Officer as to what he is to do before he agrees to grant a certificate of registration and the direction given is that he must see if there exists, or existed in the past, a firm of the same constitution as appears from the instrument filed and if the application has been properly made.
The words 'constituted' as shown in the instrument of partnership' can only mean that the composition of the firm, namely, the number of the members and their names and probably also the shares held by them must appear from the instrument and the direction contained in the sub-paragraph must mean that the Income-tax Officer has only to be satisfied that the firm, of which the registration is being prayed, is the same firm as that to which the deed relates and that its composition is as set out in the deed.
There is certainly no clear direction to see that the partnership was created by that particular instrument. On behalf of the Commissioner of Income-tax it was conceded that the language used in paragraph 4(1) was certainly not consistent with the meaning of Section 26A of the Act for which the Department was contending, but it was contended that the defect lay in the language of the form which could not supersede a provision contained in the Act itself.
In my opinion, the language in which para 4(1) has been expressed is undoubtedly unsatisfactory and I can think of no reason for the use of the expression 'constituted as shown in the instrument of partnership', unless it was thought that by para 2, it had already been enjoined that an instrument of partnership by which the firm had been constituted and which would govern or had governed the distribution of profits in the relevant accounting year would have to be filed.
It is quite true that the preposition used in para 2 is again 'under' and not 'by' and in that respect the paragraph follows the language of the section. But if, as I have held, the meaning inherent in the expression 'instrument of partnership' avoids and overcomes the difficulty created by the use of the word 'under', para 2 may fairly be read as itself requiring that what has got to be filed is a deed by which the firm is or was constituted.
If the stage of para 2 cannot be passed without filing an instrument of partnership, being an instrument of the character I have just described, it was perhaps not thought necessary to provide in para 4(1) that the instrument of partnership should be examined in order to see whether it created the partnership or merely recorded an earlier constitution.
I must, however, confess that however much one might try to reconcile the language of para 4(1) with what, to my mind, Section 26A clearly means and implies, some disharmony remains. The effect of the disharmony is strengthened by the provision contained in Sub-section (2) of Section 26A to the effect that the application for registration 'shall be dealt with by the Income-tax Officer in such manner as may be prescribed'.
If the manner prescribed in para 4(1) of the Form be that the Income-tax Officer shall only see whether the constitution of the firm, is as shown in the instrument of partnership, it would seem that an instrument, not creating the partnership but merely placing on record its creation at an earlier point of time by a verbal agreement, might get past the Income-tax Officer and earn a certificate of registration.
I prefer to think, however, that the defect in para 4(1) is a drafting error and that the ruling provision is that contained in para 2 which requires an instrument of partnership, specifying the individual shares of the partners, and nothing else or less to be filed, before any action is taken or can be expected to be taken by the Income-tax Officer.
In that view, no difficulty remains in the way of harmonising the provisions of the Act with those of the statutory form. I may also observe that if the provision in the main paragraph of Section 26A be clear, no seeming inconsistency in a form, to the following of which the Income-tax Officer is directed by Sub-section (2), can override that meaning.
14. The only other provision of the Act to which reference need be made is Section 28 (2) on which. Mr. Khaitan relied. That section provides for a penalty if any of the taxing authorities or tribunals
'is satisfied that the profits of a registered firm have been distributed otherwise than in accordance with the shares of the partners as shown in the instrument of partnership registered under this Act governing such distribution'. Mr. Khaitan pointed out that the language of this provision also, which was a provision in the Act itself, was 'as shown in the instrument of partnership'. I do not think that the language, whatever difficulty it may create in para 4(1) of the Form, creates any difficulty in Section 28(2) because there it refers to the shares of the partners and the expression 'as shown in the instrument of partnership' can properly be used as describing the shares, without involving the consequence that the instrument of partnership may be one in which the constitution of the partnership is only recorded.
It is to be noticed that Section 28(2) not only uses the expression 'as shown in the instrument of partnership' in connection with the shares of the partners, but also describes the instrument as 'governing such distribution', that is, the distribution of the profits.
It thus emphasises the' true nature of the instrument and in no way detracts from the meaning of the expression 'constituted under an instrument of partnership', as connoting or signifying 'created by'. I do not think that any argument in favour of the assessee's contention can be founded on Section 28(2) of the Act.
15. Certain decisions were referred to at the Bar to which I may now refer. In 'Kalsi Mechanical Works Nandpur v. Commissioner of I. T., Simla', (D) and 'Income-tax Commissioner, Delhi v. Messrs. Birdhi Chand Girdhari Lal' 1955-28 ITR 280 (E), both decided by the East Punjab High Court, it was held that where a firm was constituted by a verbal agreement, and such verbal agreement was followed by an instrument in writing, the instruments could not have retrospective effect and registration of the firm with respect to its assessment for any period prior to the date of the instrument could not be claimed.
In 'Padam Prasad Rattan Chand v. Commissioner of Income-tax, Delhi', (F) and 'Bery Engineering Co. Delhi v. Commissioner of Income-tax, Delhi' 1954 28 ITR 227 (Punj) (G), the proposition laid down in the two cases, which I have just referred to, was carried a little further and) it was held that the fact that an instrument of partnership recorded the formation of the firm at an earlier date by a verbal agreement would not bar the registration of the firm with effect from the date on which the instrument was executed.
Two other cases cited at the Bar do not appear to have any relevancy to the point under examination. In 'Khimji Walji and Co. v. Commissioner of Income-tax, Bihar and Orissa', AIR 1954 41 Pat 396 (H), there were two instruments and it was held that no registration could be had on the basis of either, inasmuch as the first one did not specify the shares of the partners and the second one came into force only on the 1st of April of the year succeeding the relative accounting year ending on the 31st of March.
In 'Bhimraj Bansidhar v. Commissioner of Income-tax, Bihar and Orissa', : 26ITR185(Patna) (I), no question of any registration of any firm arose in the present form. The assessee in that case was a Hindu undivided family and the business carried on by it was converted into a partnership business by an instrument executed in the middle of the relative accounting year.
The accounting year was the period between 30-6-1946, and 19-3-1947 and the deed was executed on 3-9-1946. It however, stated that the partnership was being formed with effect from 30-6-1946. The contention of the family was that the business had passed to the partnership on 30-6-1946 and the partnership wanted registration on the same basis.
The only question considered was whether the conversion of the joint family business into a partnership business was a genuine and effective one and if genuine and effective the date on which it had taken place. It was held that a partnership had come into existence on 30-6-1946, but whether the execution of the deed on the 3rd September debarred, registration with effect from the 30th June was not considered.
16. I do not think that much assistance can be derived from any of the decisions cited at the Bar. They seem to have proceeded on broad considerations and no assistance can be found in them with regard to the difficulties which I have already noticed. Those difficulties, as I have endeavoured to explain, do not exclude the construction of Section 26A which the plain intention of the section and the use of the expression 'instrument of partnership' suggest.
In my view, the true construction of Section 26A is that it requires an instrument of partnership by which the firm of which registration is sought was constituted, an instrument executed at or before the commencement of the relative accounting year and an instrument which governed the distribution of the profits in that year.
I do not intend to say that some apparent difficulty may not be experienced in some cases in applying Section 26A, as so construed. If there is a deed of partnership executed on a certain date, but it says that the partnership shall be deemed to have commenced on some date in the past, though actually there was no such partnership in existence then no difficulty would arise. An application for registration could succeed only in respect of the firm constituted as on the date of the deed and with reference to the period commencing with and subsequent to that date.
As was pointed out by Rowlatt, J., in 'Wad-dington v. O'Callaghan', (1932) 16 Tax Cas 187 (J), when people enter into a deed of partnership and say that they are to be partners as from some date which is prior to the date of the deed, that does not have the effect that they were partners before the beginning of the deed. No one, the learned Judge observed, could after the past by an agreement.
As Lord Lindley observed in another connection, when parties agree to form a partnership and agree further that the partnership shall be deemed to have commenced on some date in the past, that only means that they agree to take their accounts back to a prior date as between themselves but it does not mean that they become partners in law or are entitled to be so treated by third parties.
Taking next the second case, where a partnership has originated in a verbal agreement and after it has existed for some time, a formal deed of partnership is 'executed, there can be no question that, so far as the period prior to the date of the deed is concerned, there cannot possibly be any claim to registration. In so far as it was so held in the two decisions of the East Punjab High Court, to which I have referred, I am in respectful agreement with that view.
It does not, however, follow that, in every such case, registration can be claimed as of right with respect to the period subsequent to the date of the deed, because whether or not such a claim is sustainable will depend upon the language of the instrument.
If the instrument merely records the earlier origin of the partnership and the agreement then entered into and says in the usual phraseology that the parties desire that the terms of the agreement should be placed: on record, no partnership is constituted by the deed even with respect to the period subsequent to its execution.
The deed in such a case is merely a deed of a declaratory character or a memorandum. If, however, in addition to recording the earlier origin of the firm in a verbal agreement and its subsequent history, the deed also states that the partners shall carry on business in future in accordance with its terms, it can undoubtedly be construed and should, in my view, be construed as creating or originating a partnership for the future as from its date and only in such case can an instrument of such a composite character be made the basis of a claim to registration with respect to the subsequent period.
17. The third case is one where an instrument of partnership is executed in the middle of the accounting year when, prior to the date of the execution of the deed, there was no firm at all. In such a case no difficulty will arise.
But where there was a partnership in fact, though originating in a verbal agreement, during the period prior to the execution of the deed and so there was an unregistered firm and thereafter a deed is executed on the basis of which registration is claimed and) allowed, the operation making the actual assessment may be a little difficult, but I do not consider it impossible that it can be performed under the provisions of Section 26(1), Income-tax Act.
18. It appears to me to be desirable that the language of the section, as also that of the Rules, should receive legislative attention. Apart from the instances of disharmony which I have noticed. the Legislature does not seem to have known very well what it would direct to be registered. Under Section 26A(1) itself, what is to be registered is the firm. Under Rule 2 of the Rules, certain particulars are to be registered. Under paragraph 4(1) of the Form, what is to be registered is the instrument of partnership. Such draftsmanship is obviously not the best.
19. In accordance with the view which I have taken with respect to the true meaning of Section 26A (1) and for the reasons I have given, the answer to the question referred to this Court must be in the negative.
20. We would make no order for costs.
21. I agree.