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TMI Blog1996 (4) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... in the circumstances of the case, the Tribunal was right in holding that the application for registration filed on December 31, 1959, for the assessment year 1960-61 was filed within the time allowed ? (iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the partnership was valid?" Assessment year 1961-62 : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the payment made to Shri Abdul Razaq was a charge on the profits of the firm ?" The facts relevant to the questions referred for the aforesaid two years and sufficient to dispose of this joint reference are these: During the accounting period relevant to the two assessment years, the assessee-firm was engaged in the business of exhibition of films in Ram Prakash Theatre, Jaipur. Originally, the firm was constituted of three partners, namely, Sarva Shri Noor Mohammed, Adbul Razaq and Hamid Hussain. The accounting year of the firm was 31st December ending of each year. In March, 1953, Shri Mohd., one of the three partners, died. The remaining two partners continued to carry on the same business under the same business na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business in the same name and style on terms hereinafter contained. And whereas the property of the old partnership has been decided to be transferred as the assets of the partnership hereby constituted. And whereas the share capital of the deceased partner has been decided to be kept in the business, it has been decided to pay to the guardian of his property equal share in the profits of the new firm in accordance with section 37 of the Indian Partnership Act, 1932, to which the guardian has agreed by appending his signatures to this deed." By clauses 4 and 5 of the partnership deed, the division of profits and losses of the business was agreed to be made in the following manner : "The capital coming to the share of Shri Abdul Razaq as the guardian and representative of Noor Mohd. (deceased partner) shall continue to be in this firm and the guardian shall be entitled to 1/3rd share in profits in this account and shall not bear any losses. The profits and losses of the new partnership shall be divided and borne as under : (a) Out of total profits 1/3rd shall be paid to the guardian of Shri Noor Mohd. (deceased). (b) The remainder thereafter shall be divided between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if any, in the application submitted under the old Act of 1922 and allowing him to submit such an application under the provisions of the new Act also. The Income-tax Officer, however, held that in his opinion, the question of giving an opportunity to the assessee-firm as per the direction of the learned Appellate Assistant Commissioner would arise only if the order was to be made under section 185 of the Act of 1961, but since he was making an order under section 184(4) no question of giving such opportunity arose and the Income-tax (Removal of Difficulties) Order, 1962, does not cover the issue. In the order made by the Income-tax Officer in the second round, the same ground for refusal of registration, which had found favour with him in his earlier order, were reiterated. The assessee-firm again approached the first appellate authority who dismissed its appeal as being not maintainable, vide his order dated September 1, 1970, in Appeal No. 16 of 1970-71. The application for grant of registration/renewal of registration for the assessment year 1961-62 was also rejected by the Income-tax Officer for almost the same reasons. An appeal against the refusal of grant of registration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... new firm in accordance with section 37 of the Partnership Act. The learned Third Member pointed out that in order to safeguard the interest of the deceased Shri Noor Mohd., there was nothing to stop the continuing partners from making a commitment which they considered to be reasonable and in conformity with requirements of section 37. In the opinion of the learned Third Member, the arrangements made by the two partners of the assessee-firm did not become unreal or artificial or invalid merely because the continuing partners and the guardian of the heirs of the deceased Noor Mohammed, made efforts to give effect to the provisions of section 37 of the Indian Partnership Act. Regarding the question as to whether payments made to the guardian of the heirs of the deceased Shri Noor Mohammed were deductible as a charge in arriving at the total income of the firm, the learned Third Member held that the guardian of the heirs did not become a partner in the firm and the payments made to him were in fact payments made to a person who was not a partner in the firm. The learned Third Member further pointed out that the deceased had a considerable share in the goodwill of the assessee-firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, to the extent to which they are made for the purposes of the business, have to be allowed in computing the total income of the firm. In order to find out the extent of such payments which will be justified, it will be necessary to find out whether Noor Mohd. had any interest in the property of the firm at the time of his death and, if so, the extent of such interest. It has to be seen whether such share of property belonging to Noor Mohd. has been used by the continuing partners in the business of the assessee-firm. It is also necessary to determine the proportion which such property bears to the total property of the firm. Only that proportion of the profits of the firm will represent the reasonable payment to the estate of the late Noor Mohd. towards utilising its property, for the purpose of the business of the assessee-firm. Such share of profits will represent a charge against the profits of the assessee-firm and the assessee will be entitled to deduct the same in determining its total income for purposes of assessment. In order to determine the above figures and to arrive at the proper deduction, if any, on that account, it is necessary to set aside the assessment for 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtners may, under the provisions of section 26A of the Indian Income-tax Act, 1922 (hereinafter in these rules referred to as the Act), register with the Income-tax Officer, the particulars contained in the said instrument on application made in this behalf. Such application shall be signed by all the partners (not being minors) personally, or in the case of a dissolved firm by all persons (not being minors) who were partners in the firm immediately before dissolution and by the legal representative of any such partner who is deceased, and shall, for any year of assessment up to and including the assessment for the year ending on the 31st day of March, 1953, be made before the 28th February, 1953, and for any year of assessment subsequent thereto, be made --- (a) where the firm is not registered under the Indian Partnership Act, 1932 (IX of 1932), or where the deed of partnership is not registered under the Indian Registration Act, 1908 (XVI of 1908), and the application for registration is being made for the first time under the Act, (i) within a period of six months of the constitution of the firm or before the end of the 'previous year' of the firm, whichever is earlier, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led by the assessee in September, 1962. By that time, the Act of 1961 had already come into force with effect from April 1, 1962, and as per the provisions of section 297(2)(b) of the Act of 1961, the assessment was to be completed in accordance with the provisions of the Act of 1961. Section 297, as is relevant for our purpose provided as under : "297. (2) .... Notwithstanding the repeal of the Indian Income-tax Act, 1922 (11 of 1922) (hereinafter referred to as "the repealed Act) . . . (b) where a return of income is filed after the commencement of this Act otherwise than in pursuance of a notice under section 34 of the repealed Act by any person for the assessment year ending on the 31st day of March, 1962, or any earlier year, the assessment of that person for that year shall be made in accordance with the procedure specified in this Act." Clause (b) of sub-section (2) of section 297 clearly mandates that where a return of income is filed after the commencement of the Act of 1961 otherwise than in pursuance of a notice under section 34 of the repealed Act by any person for the assessment year ending on the 31st day of March, 1962, or earlier year, the assessment of that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an opportunity to the assessee to file an application for renewal of registration within reasonable time. On a reading of articles 2 and 3 of the Income-tax (Removal of Difficulties) Order, 1962, along with section 297(2) of the Act of 1961, it becomes quite clear that the matter of registration of a firm was to be regarded as part of the process of assessment and in that sense of the matter was to be dealt with as per the provisions of sections 185 and 187 to 189 of the said Act. As has been discussed above, the application filed by the assessee-firm on December 31, 1959, for grant of registration for the assessment year 1961 was well within time as per the provisions of the Act of 1922 and the rules made thereunder. However, in view of section 297(2) of the Act of 1961, the assessment was to be made as per the provisions of the Act of 1961 and the matter of registration was also to be dealt with in accordance with the provisions of sections 185 and 187 to 189 of the Act of 1961. The Tribunal was, therefore, well justified in directing the Income-tax Officer to allow the assessee an opportunity to file an application for registration as per the provisions of the Act of 1961. To ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of section 246(j) of the Act of 1961. In view of the above discussion, we hold that the Tribunal was justified in holding that the Income-tax Officer's order purported to have been passed under section 184(4) was, in fact, an order under section 185(5) and as such was an appealable order. We, accordingly, answer question No. 1 in the affirmative, i. e., for the assessee and against the Revenue. Now, coming to question No. 3 in this year we find that the validity of the partnership has been challenged on the ground that the profits of the business were in reality distributed amongst three persons whereas the agreement of partnership was entered into between two persons. The scope of the question referred in the assessment year 1961-62 requires us to examine the nature and character of the payment made to the alleged third person, namely, Shri Abdul Razaq, in his capacity as guardian of the estate of the deceased partner, Shri Noor Mohammed. It would, therefore, be, we think, convenient and proper to deal with question No. 3 for the assessment year 1960-61 along with the question referred to us for the assessment year 1961-62. The assessment year 1961-62 : As pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the firm or to interest at the rate of six per cent. per annum on the amount of his share in the property of the firm : Provided that where by contract between the partners an option is given to surviving or continuing partners to purchase the interest of a deceased or outgoing partner, and that option is duly exercised, the estate of the deceased partner, or the outgoing partner or his estate, as the case may be, is not entitled to any further or other share of profits ; but if any partner assuming to act in the exercise of the option does not in all material respects comply with the terms thereof, he is liable to account under the foregoing provisions of this section." It may be mentioned that earlier there was no corresponding provision like section 37 in the repealed sections 239 to 266 of the Indian Contract Act, 1872, which were replaced by the present Indian Partnership Act, 1932. By giving a place to this section in the present Partnership Act a well recognised principle of partnership law embodied in analogous section 42 of the (U. K.) Partnership Act, 1890, and which principle is that if, after the dissolution of a partnership firm, a partner has used assets or t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the partnership firm has died or otherwise ceased to be a partner, (2) The surviving or continuing partners continue to carry on the business of the firm with the property of the firm, and (3) There has been no final settlement of accounts as between the outgoing partner or his estate and the surviving or continuing partners. If these three conditions are not satisfied section 37 cannot be brought into play. It may be noted that section 37 does not contemplate the dissolution of a partnership firm by a notice as provided in section 43 of the Indian Partnership Act, 1932. Nor does it apply to clandestine or sham arrangements spelling lack of good faith and honest exigencies of business. The arrangement made in the present case by the instrument of partnership dated January 1, 1959, read in the light of the will of the deceased Shri Noor Mohammed was not found to be of such a nature. Section 37 in fact lays down, inter alia, the substantive law relating to the liability of the surviving partners in utilising the assets of the firm with out settling accounts with the representatives of a deceased partner continuing the business as their own. Since the principle underlying sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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