1955 (8) TMI 43 - HC - Income Tax

Summary

Issues Involved:

1. Whether a partnership created by verbal agreement can be registered under section 26A of the Indian Income-tax Act if the agreement is subsequently embodied in an instrument.
2. Interpretation of section 26A of the Indian Income-tax Act concerning the requirement of an instrument of partnership.
3. The relevance of the timing of the execution of the partnership instrument concerning the accounting year.
4. The implications of the rules and prescribed forms related to section 26A.
5. The impact of previous judicial decisions on the interpretation of section 26A.

Issue-wise Detailed Analysis:

1. Registration of Partnership Created by Verbal Agreement:

The court examined whether a partnership formed by verbal agreement and subsequently documented in an instrument can be registered under section 26A. The assessee argued that a formal deed embodying the verbal agreement should suffice for registration. The court, however, emphasized that section 26A necessitates an instrument of partnership that creates the firm, not merely records a pre-existing verbal agreement.

2. Interpretation of Section 26A:

The court scrutinized the language of section 26A, particularly the phrase "constituted under an instrument of partnership." The court noted that the preposition "under" is inappropriate if it implies that the instrument merely records a pre-existing agreement. The court concluded that the term "constituted" in this context means "created," implying that the partnership must originate from the instrument itself.

3. Timing of Execution of Partnership Instrument:

The court emphasized that for a partnership to be registered under section 26A, the instrument of partnership must be executed at or before the commencement of the relevant accounting year. This ensures that the instrument governs the distribution of profits for that year. The court rejected the notion that an instrument executed after the accounting year could retroactively affect the distribution of profits.

4. Rules and Prescribed Forms Related to Section 26A:

The court analyzed the rules and prescribed forms under section 26A. Rule 2(a) and the form of application were examined, highlighting that the instrument of partnership must specify the individual shares of the partners. The court found inconsistencies in the language of the rules and forms but ultimately held that the instrument must create the partnership and govern profit distribution during the relevant accounting period.

5. Impact of Previous Judicial Decisions:

The court referred to several previous decisions, including cases from the East Punjab High Court, which held that an instrument executed after the accounting year could not be the basis for registration. The court agreed with these decisions, emphasizing that a partnership created by a verbal agreement and later documented cannot claim registration for periods before the instrument's execution.

Conclusion:

The court concluded that section 26A requires an instrument of partnership that creates the firm and governs the distribution of profits during the relevant accounting year. An instrument executed after the accounting year cannot retroactively affect profit distribution or partnership creation. The answer to the referred question was in the negative, indicating that the assessee firm was not entitled to registration under section 26A based on an instrument executed after the relevant accounting year. The court made no order for costs.