1956 (2) TMI 4 - SC - Income Tax

Whether on the facts of the case the assessee is entitled to registration under section 26A of the Income-tax Act ? Held that - The answer given by the High Court Iin negative to the question is correct. Appeal dismissed.

Issues Involved:
1. Whether a firm or a Hindu undivided family can enter into a partnership with other firms or individuals.
2. Whether the application for registration of the firm was valid under section 26A of the Indian Income-tax Act, 1922, and rule 2 of the Rules framed under section 59 of the Act.

Issue-wise Detailed Analysis:

1. Whether a firm or a Hindu undivided family can enter into a partnership with other firms or individuals:

The core issue revolves around the interpretation of whether a firm, as such, can be a partner in another firm. The judgment explores the legal definition of a firm under the Indian Partnership Act, 1932, and the Indian Income-tax Act, 1922. Section 26A of the Income-tax Act postulates the existence of a firm, but does not define it, referring instead to the Indian Partnership Act for definitions.

Section 4 of the Indian Partnership Act defines "partnership" as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The term "persons" here does not include a firm, as a firm is not recognized as a separate legal entity distinct from its partners. The judgment cites several precedents and legal principles to affirm that a firm is merely an association of individuals and not a "person" in law. Consequently, a firm cannot enter into a partnership with another firm or individuals.

The judgment references the General Clauses Act, 1897, which defines "person" to include any company or association or body of individuals, whether incorporated or not. However, it concludes that applying this definition to the Partnership Act is repugnant to the subject of partnership law, which does not recognize a firm as a separate legal entity. Thus, the judgment firmly establishes that a firm or a Hindu undivided family cannot enter into a partnership with other firms or individuals.

2. Whether the application for registration of the firm was valid under section 26A of the Indian Income-tax Act, 1922, and rule 2 of the Rules framed under section 59 of the Act:

The application for registration was made under section 26A of the Income-tax Act, which requires that the firm must be constituted under an instrument of partnership specifying the individual shares of the partners. Rule 2 of the Rules framed under section 59 mandates that the application must be signed personally by all the partners.

The judgment notes that the deed of partnership dated 17th February 1947, specified that the partnership consisted of three firms, one Hindu undivided family business, and one individual. The Income-tax Officer rejected the application on the grounds that a firm or a Hindu undivided family could not enter into a partnership. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal had differing views on the validity of the partnership and the application for registration.

The Supreme Court examined whether the shares of all individual partners were specified in the deed and whether all partners had personally signed the application. The deed specified that each of the five constituent parties had an equal share but did not specify the individual shares of each partner in the three smaller firms. Additionally, not all members of those firms had signed the application personally, which is a requirement under section 26A and rule 2.

The judgment concludes that even if the individuals who signed the deed had the authority to do so, the legal requirement is that each partner must sign personally. Since this was not done, the application was not in proper form, leading to the conclusion that the firm could not be registered under section 26A.

Conclusion:

The Supreme Court upheld the decision of the Nagpur High Court, answering the referred question in the negative and dismissing the appeal with costs. The judgment reaffirms that a firm or a Hindu undivided family cannot be a partner in another firm, and the application for registration must comply strictly with the requirements of section 26A and rule 2.

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