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TMI Blog1968 (3) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... partners to this deed of partnership dated the 18th April, 1957, with equal shares in the profits and losses, namely, (1) Kanhaiyalal, (2) Banwarilal, (3) Nathmal, and (4) Iyer. Nathmal retired from the partnership from the 30th September, 1957, by another deed. That deed is dated the 31st January, 1958. The controversy and the confusion in this reference arise in respect of these two deeds, one dated the 18th April, 1957, and the other dated the 31st January, 1958. It is necessary to keep these two deeds clearly and separately in mind while trying to approach this question. The Income-tax Officer held that the deed dated 31st January, 1958, recorded merely the dissolution of the firm of four partners with effect from 30th September, 1957, but did not bring into existence any new partnership. The Income-tax Officer, therefore, refused to allow registration to the assessee-firm by his order dated the 20th August, 1960. His finding is, " there is no instrument of partnership governing the firm after the 30th September, 1957, nor are the sharing of the profits and losses specifically laid down. The two main conditions for grant of registration under section 26A are thus not fulfille ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from February 1, 1957, to December 31, 1957. The Tribunal's order has raised many arguments and controversies. What the Tribunal does is as follows. The Tribunal agrees with the Appellate Assistant Commissioner that by the deed dated January 31, 1958, there was ex post facto declaration relating to the retirement of the partner, Nathmull, with effect from September 30, 1957, while the remaining three partners continued to carry on the business of the firm. In fact, the Tribunal says : " There was no dissolution of the partnership strictly so called but there was only a change in the constitution of the firm on the said date (September 30, 1957). " The Tribunal, however, did not stop with that part of the order but proceeded to discuss the question of registration of the instrument of partnership dated April 18, 1957, under section 26A of the Income-tax Act. The Tribunal raises the question by saying that the point for decision is whether the firm was entitled to registration under section 26A for the whole of the previous year commencing from February 1, 1957, to December 31, 1957. The Tribunal's operative part of the order is as follows : " We hold, therefore, that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnecessary. If the firm had not been dissolved, then the existing firm under the instrument of April 18, 1957, which was the only instrument, was to be registered, and there could not be, without dissolution, any, further question of whole or part of the previous year. In other words, the Tribunal's order is vitiated by a dichotomy of attitude and facts created by the Tribunal, which resulted in splitting up and truncating the accounting year and holding that there should be really a registration for 8 months, from February 1, 1957, to September 30, 1957, in respect of the instrument of partnership dated April 18, 1957, and at the same time holding that there was no dissolution but only a change in the constitution of the firm. It is necessary in this context not to confuse the purposes of the provision of section 26A of the Income-tax Act with those of section 26. Section 26A, with which we are directly concerned in answering this question, is only a procedure for the registration of firms for the purpose of the Income-tax Act. Assessment of firms, registered or unregistered, has for its substantive section, section 23(5) of the Income-tax Act and section 26 of the Income-tax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the "instrument of partnership". It is that instrument of partnership, specifying the individual shares of the partners, which has to be registered for the purpose of the Income-tax Act. It is not, therefore to be compared or confused with the registration of the firm under the Partnership Act. Under the Partnership Act, it is the firm which is registered Under the Income-tax Act, it is the instrument which is registered. The instrument is registered for the taxation of the firm and, therefore, the instrument requires the specification of the shares of the partners. Secondly, such a registration under section 26A of the Income-tax Act is only effected for the assessment to be made for that particular period. Therefore, it is the assessee-firm for that year which is entitled to registration. The question is whether this test is satisfied by the assessee in this case. It will be appropriate here to notice some of the relevant decisions touching these points. In Kylasa Sarabhaiah v. Commissioner of Income-tax the Supreme Court laid down the principle that, although the application for registration of a firm under section 26A had strictly to be in conformity with the Act and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th share. By clause 14 of this partnership deed, the accounts of the partnership are to be made and adjusted on the 30th day of June and the 31st day of December in each year or on such other date as the partners may determine. In other words, the year for the accounts was the calendar year adjustable once on 30th June and the other on 31st December every year. Clause 17 of this partnership deed provides for the distribution of the net profits of the partnership after payment of all income-tax, sales tax and other taxes, interest on capital, loans and advances and all other outstandings to be divided between the partners in equal proportions. Reading this deed of partnership dated April 18, 1957, and the different clauses therein, it is clear that retirement of one partner was not to dissolve the partnership in the present case and any partner could retire by giving the others notice of 3 months. Now, although Nathmull retired from this firm on September 30, 1957, and although it was not necessary under this partnership deed to create another partnership deed, for such retirement did not dissolve the partnership, yet in fact that was what was done on January 31, 1958, where a reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of January 31, 1958, to show that it contains words and clauses which unmistakably and unequivocally declare that the partnership created by the instrument of partnership deed dated April 18, 1957, was in fact and in law dissolved. In support of this argument Mr. Pal relies first on the recital where it is said : " Whereas on the last mentioned date (October 30, 1957) it was further expressly agreed that all the debts and liabilities of the said firm of Kejriwal Traders to persons other than the retiring partners shall subject to the proviso contained in clause 5 hereunder be paid by the continuing partners who shall indemnify the retiring partner against the same. " Mr. Pal contends that al1 the debts and liabilities were, therefore, taken over by the new firm of three partners and not the old firm of four partners. Secondly, Mr. Pal, for the revenue, contends that the operative clauses in the deed of January 31, 1958, leave no room for doubt that there was dissolution of the firm as constituted by the instrument of partnership dated April 18, 1957. In support of that argument, he relies, secondly, on clause 1 of the deed of January 31, 1958, where it is solemnly, clearly an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arties clearly used the word " dissolution ", not once but repeatedly, in this document of January 31, 1958. The context appears to exclude the construction that it was a mere change in the constitution or that it was only the retirement of one partner while the others continued the old firm. Sections 39 and 40 of the Partnership Act clearly provide that the dissolution of the partnership between all the partners of a firm is called a dissolution of the firm and that a firm may be dissolved with the consent of all the partners. All the partners in this case by this deed of January 31, 1958, do clearly state that the firm of 1957 is dissolved. Under the Partnership Act, the dissolution is, therefore, a dissolution of the firm of April, 1957, and there is no escape from it. Mr. Sen, for the assessee, relied on the decision of the Madras High Court in Tyresoles (India), Calcutta v. Commissioner of Income-tax. The Madras High Court there expressed the view that in determining whethe there was a dissolution or reconstitution of a firm, the terms used by the parties to describe the change is not important and the real intention of the parties is to be ascertained. As a principle of gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a crucial difference between the partnership deed of Tyresoles case and the present reference before us. Here it is only those called the continuing partners who form into a new partnership with augmented shares of 1/3rd each and with no benefit whatever to the retiring partner for the profits that would accrue after this new firm came into existence. Indeed, as pointed out by us, the clause in the deed of January 31, 1958, expressly made it clear that the business thereafter was to continue only for the benefit of the continuing partners and not for the retiring partner. We are, therefore, unable to hold, on the interpretation of the specific clauses in the deeds dated April 18, 1957, and January 31, 1958, in the present reference before us that what has happened is only a retirement or a change in the constitution and not a dissolution. We hold that there has been on, the specific and express terms and clauses in the deed a dissolution both in fact and in law. That is the only interpretation to which we can arrive at reading the deeds as a whole. We also find it difficult to uphold that order of the Tribunal as made in the present case. The kind of allocation suggested by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of partnership' in section 26A of the Income-tax Act include not only firms which have been created by an instrument of partnership but also those which may have been created by word of mouth but have been subsequently clothed in legal form by reducing the terms and conditions of the partnership to writing. It is also stated there that the firms, which were created by word of mouth but the constitution of which was subsequently reduced to writing, could also be registered under section 26A. But, it was pointed out by the majority that it is essential that the instrument of partnership should have been in existence in the accounting year in respect of which assessment has been made. One would normally think that it must be in existence for the whole of the accounting year and not a part of the accounting year. That seems to be the trend of the decision as we read it. Otherwise the effect of annual registration for the whole year will be nullified. The next important principle laid down by the Supreme Court in this case is that five essential conditions must be satisfied to qualify for registration under section 26A, viz., (1) the firm should be constituted under an instrument of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income-tax it was decided that the requirements of law as to the registration of partnership under section 26A of the Indian Income-tax Act were (a) the factual existence of the partnership during the whole of the accounting year either under an oral agreement or a written instrument, (b) the existence of a written instrument during the accounting year specifying the individual shares of the partners. The Punjab High Court decided that if those requirements were satisfied then the firm could be registered for the assessment year to which the accounting year corresponded and it was immaterial when during the accounting year the instrument was in fact executed. Now that decision clearly is against the contention of Mr. Sen for the assessee before us in the present case. This decision proceeds on the basis that there must be one partnership during the whole of the accounting year. Different partnerships during parts of the year will not do : see the observations of the Punjab Full Bench at pages 357-58 of that report. The principle there laid down by the Punjab High Court has been followed by the Kerala High Court in Malankara Timbers v. Commissioner of Income-tax. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en them by a court of law. It emphasises the meaning and interpretation of the words, "specifying the individual shares of the partners" in section 26A. If the shares have to be found by interpretation of the clauses in the deed and the application of the sections of the Partnership Act and the Income-tax Act, then the better opinion is it does not answer the test of the instrument itself "specifying the shares ". The same view was taken by a Division Bench of this court in Commissioner of Income-tax v. Khetan Co. : see the observations made therein at pages 186-88. Lastly, we shall refer to the Supreme Court decision in N. T. Patel Co. v. Commissioner of Income-tax. It lays down the principle that registration under section 26A of the Act is a right which can be claimed only in accordance with the statute and the rules made thereunder and the person seeking the relief under that section must bring himself strictly within the terms of that section. It was said there that, unless the instrument of partnership specified the individual shares of the partners, the instrument of partnership would not conform with the requirements of section 26A of the Income-tax Act : see the observat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the authorities discussed above, we answer the question in the negative holding that the Tribunal was wrong in permitting registration under section 26A of the Income-tax Act to the assessee with reference to the portion of the accounting year commencing from the 1st February, 1957, and ending on the 30th September, 1957. In the circumstances, there will be no order as to costs. K. L. Roy J.- I entirely agree with the judgment just delivered by my Lord and the answer to the question referred to us. I only wish to add a few words on one aspect of the case before us. Even assuming that there was no dissolution and the assessee-firm was reconstituted on the 30th September, 1957, and that the assessment has been properly made on the reconstituted firm for the entire accounting period relevant to the assessment year 1958-59, was registration in respect of a part of the year only permissible under the provisions of the Income-tax Act? The application for registration under section 26A in this case was made for registration for the assessment year 1958-59 of a firm of four partners with equal shares constituted under a deed dated the 18th April, 1957. The application was made on t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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