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TMI Blog1953 (12) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... had, and specifying their shares in the partnership on the 10th of April, 1950. This application was dismissed by the Income-tax Officer on the 26th of May, 1950, and an appeal against his order was dismissed by the Appellate Assistant Commissioner who apparently had before him two appeals relating to both the assessment years 1948-49 and 1949-50. The ground of dismissal was that the profits had not been distributed between the partners. A further appeal was made to the Appellate Tribunal which apparently only related to the year 1948-49. This appeal was also dismissed, but on a different ground, namely that according to the deed itself the partnership business had been carried on since the 1st of April, 1947, and therefore the partnership could not be deemed to be coed under an instrument dated the 10th of April, 1950, within the meaning of Section 26A. It was also held that such an instrument could certainly not apply to the account year ending March 1948. The assessee firm thereupon moved the Appellate Tribunal under Section 66(1) with the result that the question set out above has been framed for our decision. The learned counsel for the respondent has relied on a recent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi, which has been n full as part of this case that the words constituted under an instrument mean created or formed by a formal deed, but whether the fact that the partners of a firm who jointly executed such a deed choose to allege therein that they have previously been partners for some time on the same terms as those embodied in the deed debars the firm from registration under Section 26A is another matter. Obviously, as we held in the case referred to above, the deed or instrument cannot possibly have retrospective effect as regards the income-tax assessment of the firm, but I cannot see any objection to the firms being treated as constituted under the instrument as from the date of the instrument itself. It may be that the partners in these firms act foolishly in alleging the previous existence of the partnership on the same terms in the vain hope of securing retrospective concessions, and in the most literal sense of the words a partnership cannot be said to be constituted under an instrument when admittedly it has been in existence previously. On the other hand the intention of the law is clear, that when partners do draw up an agreement by which their shares in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as over. This instrument was filed with an application for registration of the firm under Section 26A, on 15th November, 1948, and was dismissed on the same day. 2. The ground on which the dismissal order by the Appellate Assistant Commissioner is based cannot bear a moment's scrutiny. It is that the partners have not divided the profits (or loss) on the basis of account books which conformed to any recognized method of book keeping. This is introducing a new requirement not found in the section or the prescribed rules. It is not even necessary according to the rules to state the amount of profits which each partner got in division. If the Income-tax authorities were not satisfied about the correctness of the division, they could go behind it. But so long as the bona fides of the alleged division is not open to doubt, it is no reason to refuse registration of the firm that the details of the division do not meet with the approval of the Income-tax authorities. 3. But there is another ground on which, it appears to me, this firm was not entitled to registration under Section 26A. This appeal was heard in part on 23rd October, 1951, and was specially adjourned to 26th Octob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in the context, set up, establish or found (Webster's Dictionary and Oxford Dictionary). The word means that the firm comes into being on the making of the instrument of partnership. There will be no difficulty whatsoever in understanding the expression constitute , if a firm like a limited company, for example, cannot be validly formed except by an instrument in writing. But as a firm can come into being whether by agreement by word of mouth or sometimes even by agreement implied from conduct of the partners, or also by a written instrument, full e must be given to the words constituted under an instrument of partnership which occur in Section 26A. While a firm may be constituted in more than one legal manner, only a firm constituted in that one of the permissible modes which is specified in Section 26A is entitled to be registered for the purposes of the Income-tax Act. One and the same firm cannot be born or come into being more than once. If the firm was constituted by a verbal agreement early in 1946, the constitution being completed, the same firm cannot be described as again being constituted under the instrument of partnership dated 13th November, 1948. Indee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstituted by agreement between the parties, but the agreement must be one in writing. 8. It is true that the words used in Section 26A are constituted under and not constituted by . But that hardly improves the appellant s position. The precise point of the distinction between by and under in such a context had to be considered in In re Smith [1896] 2 Ch. 590 and it was held a power in a trustee to invest funds in a company incorporated by Act of Parliament did not authorise an investment in a company incorporated by registration under the Companies Act (which, of course, was an Act of Parliament). This merely shows that when the word under is used, the ultimate source of validity for the constitution of the company must be an Act or something else preexisting, in conformity with which steps are taken to constitute the company. But in the case of a firm, the constitution of which may be by mere agreement between the partners, there can be no real difference in meaning between constituted under an instrument and constituted by an instrument. Indeed, where a partnership deed is for a fixed term, and the partners continue to carry on the business jointly after the expir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , draws our attention to rulings which assume or decide that the instrument of partnership to be filed with the application for registration should be the one in force on the date of the application, the point being of importance where a firm dissolved or reconstituted before such date. In Krishna Aiyar Sons v. Commissioner of Income-tax, Madras [1929] 52 Mad. 367, a firm constituted under a deed of partnership dated 31st August, 1923, for a term of three years continued to carry on business after 31st August, 1926, without a fresh deed. Its application dated 26th July, 1927, for registration was refused, on the ground that at the time of the application there was no operative document to be registered. I shall have to refer again to the origin of the notion of registering a document instead of a firm, but it is enough to observe here that there was no provision in the Rules force in 1927-28 for registering a dissolved firm, as there is in the present' rules. The decision, however, so, far as it goes, is against the present appellant. For, it establishes that it is not enough that terms and conditions of a partnership are found recorded in a deed. The partnership itself must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g with the Income-tax Officer the particulars contained in the instrument of partnership. This was in strict accordance with the terms of Section 2(14) as it then stood. Bat the certificate contained in rule 4 was to be endorsed on the instrument and was to be to the effect: This instrument. .has this day been registered with me. This was manifestly wrong. This certificate should have been, the prescribed particulars of this instrument have this day been registered with me. Perhaps no great harm was done, so long as it was clearly understood that the effect of the certificate was to make the firm a registered firm ' within the meaning of Section 2(14); especially as there was no provision then to register a dissolved firm though it did business in a part of the accounting year. But with the extensive amendments made to the Income-tax Act in 1939, the position became radically different. Section 2(14) was amended to read: registered firm means a firm registered under the provisions of Section 26A. Then in Sections 23(4), 26A, 30(1), 31(3) the amended Act refers again and again to the registration of a firm. The Central Board of Revenue however failed to make all the nece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , consistently with the other provisions of the amended Act above referred to, with the words on the basis of which the firm was inserted after the words the instrument of partnership. But even Section 28(2) mentions the instrument of partnership as governing the distribution of the profits. Therefore, obviously, it must be an instrument which was in existence and operative in the year of account in which the profits were earned and not merely an instrument brought into existence for the first time after the year of account, and in the assessment year. The sooner the rules are amended to bring them into conformity with the amended Act, so as to obviate unnecessary confusion, the better will it be for all concerned. Where the construction of the Act is ambiguous and doubtful on any point, recourse may be had to the rules which have been made under the authority of the Act, and if in the rules any particular construction has been put on the Act, the Court will adopt and follow that construction, particularly where the rules are made almost contemporaneously with the Act and by persons of such high authority as the Board of Inland Revenue (now the Central Board of Revenue) whos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as. 187. His Lordship observed :- 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 from the beginning of the deed. You cannot alter the past in that way. What it means is that they begin to be partners at the date of the deed, but then they are to take the accounts back to the date that they mention as from which the deed provides that they shall be partners. His Lordship recognizes that it is quite possible that before the deed was executed the partners may in point of fact have been carrying on business in partnership which would give rise to partnership accounts and which would give rise to partnership liabilities and so on. But he goes on to point out that where it was clear that the intention of the parties was that there was not to be a partnership except such as should be regulated by the deed to be executed, then, as there would have never been a partnership if the intending partners could not agree about that deed, it could not have been said that there was a partnership in fact from some day before the execution of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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