1954 (3) TMI 80 - HC - Income Tax

Summary

Issues Involved:
1. Registration of the firm under Section 26A of the Indian Income-tax Act for the assessment years 1945-46, 1946-47, and 1947-48.
2. Specification of individual shares of partners in the partnership deed and application.
3. Validity of the second deed of partnership executed after the accounting period.

Detailed Analysis:

1. Registration of the Firm under Section 26A for Assessment Years 1945-46 and 1946-47:

The primary issue was whether the firm constituted by the partnership deed dated May 1, 1931, could be registered under Section 26A of the Indian Income-tax Act for the assessment years 1945-46 and 1946-47. The Income-tax Officer rejected the applications for these years on the ground that the shares of the individual partners were not specified in the partnership deed or the applications. The court emphasized that Section 26A requires the instrument of partnership to specify the individual shares of the partners. The rules framed under Section 59 of the Act, particularly Rule 2, mandate that the application for registration must be signed by all partners and must specify the individual shares of each partner.

The court held that the provisions of Section 26A and the rules are mandatory. The failure to specify individual shares in the partnership deed and the application forms was not a mere procedural irregularity but a substantive requirement. Therefore, the Income-tax authorities rightly rejected the applications for the assessment years 1945-46 and 1946-47.

2. Specification of Individual Shares of Partners:

The court rejected the argument that the shares should be presumed to be equal under Section 13(b) of the Partnership Act, which states that partners are entitled to share equally in the profits unless otherwise agreed. The court emphasized that Section 26A explicitly requires the specification of individual shares in the partnership deed and the application. The court cited the case of Kannappa Naicker & Co. v. Commissioner of Income-tax, where the absence of specified shares in the partnership deed led to the refusal of registration under Section 26A.

3. Validity of the Second Deed of Partnership Executed After the Accounting Period:

For the assessment year 1947-48, the assessee argued that the second deed of partnership dated April 1, 1947, specified the individual shares of the partners and should be considered for registration. The court noted that the second deed of partnership explicitly stated that the rights and liabilities of the partners would take effect from April 1, 1947, which was after the accounting period ended on March 31, 1947. The court held that for a partnership to be registered under Section 26A, the partnership must be constituted by an instrument of partnership that was in existence during the accounting year. Since the second deed of partnership was executed after the accounting period, it could not be registered for the assessment year 1947-48.

The court further supported its conclusion by referencing the East Punjab High Court's decision in Kalsi Mechanical Works, Nandpur v. Commissioner of Income-tax, where a firm constituted by a verbal agreement and later formalized by a written deed after the accounting year was not entitled to registration under Section 26A.

Conclusion:
The court concluded that the firm constituted under the partnership deed dated May 1, 1931, was not entitled to be registered under Section 26A of the Indian Income-tax Act for the assessment years 1945-46, 1946-47, and 1947-48. The question referred to the High Court was answered in favor of the Income-tax Department.