TMI Blog1959 (4) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... these two appeals on certificates of fitness granted by the High Court of Calcutta under, section 66A(2) of the Indian Income-tax Act, 1922, is the effect and scope of the words "constituted under an instrument of partnership" in section 26A of the Income-tax Act, which, in the course of this judgment, will be referred to as the Act. The facts of the two cases, leading up to these appeals, though not dissimilar, are not identical. They are, therefore, set out separately. In Civil Appeal No. 85 of 1957, Messrs. R. C. Mitter and Sons, 54, Rani Kanto Bose Street, Calcutta, claim to be a firm said to have been constituted in April, 1948, with four persons whose names and shares in the nett profits of the partner ship business are stated to be as under : (a) Ramesh Chandra Mitter-40 per cent. of the nett profits. (b) Sudhir Chandra Mitter-30 per cent. of the nett profits. (c) Sukumar Mitter-20 per cent. of the nett profits. (d) Sushil Chandra Mitter-10 per cent. of the nett profits. The firm intimated its bank, the Bengal Central Bank, Limited, (as it then was), of the constitution of the firm as set out above, by its letter dated April 15, 1948. The letter also sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich is alleged to have come into existence by a verbal agreement in April, 1948, is entitled to be registered under section 26A for the purpose of assessment for 1949-50, where the instrument of partnership was drawn up only in September, 1949, after the expiry of the relevant previous year." The High Court Bench, presided over by Chakravarti, C.J., by its judgment dated August 26, 1955, answered the question in the negative. The learned Chief Justice considered the matter from all possible view points, including grammatical, etymological and textual matters, and came to the conclusion that "constituted" meant "created". He also considered that the preposition "under" is "obviously inappropriate", after having convinced himself that "constituted" could be equated with "created". He also found no difficulty in observing that "some of the paragraphs of the Form appear to be ill-adjusted to the provisions of the Act and the Rules". In the end, therefore, he concluded with the remarks : " It appears to me to be desirable that the language of the section, as also that of the Rules should receive legislative attention." In Civil Appeal No. 389 of 1957, Messrs. D. C. Auddy Brother ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form, and be verified in such manner, as may be prescribed ; and it shall be dealt with by the Income-tax Officer in such manner as may be prescribed. The section contemplates the framing of rules laying down the details of the form in which the application has to be made and the particulars which should be stated in the application, and other cognate matters. Section 59 of the Act, authorizes the Central Board of Revenue, subject to the control of the Central Government, to make rules for carrying out the purposes of the Act, and sub-section (5) of section 59 provides that rules made under the section, shall be published in the Official Gazette, and "shall thereupon have effect as if enacted in this Act". Income-tax Rules 2 to 6B lay down the details of the procedure for making an application for the registration of a firm, as contemplated under section 26A, quoted above. These Rules have been amended extensively in 1952, but we are concerned in this case with the Rules before those amendments. Rule 2 requires such an application to be signed by all the partners personally, and to be made before the income of the firm is assessed for the year, under section 23 of the Act. Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sential conditions must be fulfilled in order that a firm may be held entitled to registration : (1) That the firm should be constituted under an instrument of partnership, specifying the individual shares of the partners. (2) That an application on behalf of, and signed by, all the partners, containing all the particulars as set out in the Rules, has been made ; (3) That the application has been made before the assessment of the income of the firm, made under section 23 of the Act (omitting the words not necessary for our present purpose), for that particular year ; (4) That the profits (or loss, if any) of the business relating to the previous year, that is to say, the relevant accounting year, should have been divided or credited, as the case may be, in accordance with the terms of the instrument ; and lastly, (5) That the partnership must have been genuine, and must actually have existed in conformity with the terms and conditions of the instrument. It is clear from what has been said above with reference to the relevant provisions of the Act, that the certificate of registration has reference to a particular assessment year, and has effect for the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determined by the Income-tax Appellate Tribunal against the assessee on the ground that the partnership was in existence before the deed was executed, and that, therefore, it could not be registered. Before the Bombay High Court, reliance had been placed on behalf of the Department on the decision of the Calcutta High Court, now before us in appeal, as also on a decision of the Punjab High Court. The decision of the Calcutta High Court now under examination, in the case of R. C. Mitter and Sons v. Commissioner of Income-tax, takes the view that section 26A of the Act contemplates a firm created or brought into existence by an instrument of partnership which governs the distribution of shares in the relevant accounting period. such a deed should have come into existence on or before the commencement of the relevant accounting period. The other decision relied upon in the Bombay High Court had been given by a Division Bench of the Punjab High Court, reported in Padam Parshad Rattan Chand v. Commissioner of Income-tax, Delhi. On the other hand, it has been contended on behalf of the Revenue that in order to entitle a firm to be registered, the firm should have been created by an i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny firm constituted under an instrument of partnership' in section 26A is no more than a firm of which the constitution appears from an instrument in writing. It is obvious that if such be the meaning of the expression 'constituted under an instrument of partnership', the instrument need not be one by which the partnership is created". But then he attempted to get over that difficulty by observing that the language of the Rules and the Form could not supersede a provision contained in the Act itself. He further opined that the language in paragraph 4(1) is " undoubt and unsatisfactory". In our opinion, any attempt to re-construct the provisions of relevant section and the Rules, on the assumption that the intention of the Legislature was to limit the registration of firms to only those which have been created by an instrument of partnership, is, with all respect, erroneous. The Proper way to construe the provisions of the statute is to give full effect to all the words of the relevant provisions, to try to read them harmoniously, and then to give them a sensible meaning. Hence, we have to consider, at the threshold, the question whether the words "constituted under an instrument of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of a document. If we construe the word "constitute" in the larger sense, as indicated above, the difficulty in which the learned Chief Justice of the Calcutta High Court found himself would be obviated inasmuch as the section would take in cases both of firms coming into existence by virtue of written documents as also those which may have initially come into existence by oral agreements but which had subsequently been constituted under written deeds. The purpose of the provision of the Income-tax Act section 26A--is not to compel the firms which had been brought into existence by oral agreements to dissolve themselves and to go through the formality of constituting themselves by instruments of partnership. If we construe the words "constituted under" in that wider sense, we give effect to the intention of the Legislature of compelling a firm which had existed as a result of an oral agreement to enter into a document defining the terms and conditions of the partnership, so as to bind the partners to those terms, before they could get the benefit of the provisions of section 23(5)(a). Section 23(5)(a) confers a privilege upon partners who may find it more worth their while to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artnership to writing. We have already indicated that there has been a conflict of judicial opinion in the different High Courts in India on the question now before us. But on a consideration of the facts in each case, it will be found that the decision arrived at in most of the cases was correct, though the reasons given appear to have gone beyond the requirements of the case. The decision of the Bombay High Court in Dwarkadas Khetan Co. v. Commissioner of Income-tax discloses that the partnership then in question had come into existence with effect from the beginning of 1946, though the instrument of partnership was executed on March 27, 1946. Thus, the instrument of partnership came into existence during the accounting year, whatever that year may have been, because the year 1946 was the starting year of the partnership. Hence, even the earliest assessment year, presumably the year 1947-48, would be governed by the terms and conditions of the written instrument of partnership aforesaid. The decision of the Bombay High Court was followed by the same Bench of that court in the case of Commissioner of Income-tax v. Shantilal Vrajlal Chandulal Dayalal Co. In the second case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the effect that "constituted under an instrument" in section 26A meant, "created or formed by a formal deed". In this case, the business of the firm had started from April 1, 1947, but the instrument of partnership was executed on April 10, 1950. The application for registration was made in respect of the assessment year 1948-49. It is clear with reference to these dates that the instrument of partnership was not in existence either during the accounting year or even during the assessment year, and the court, therefore, rightly held that the partnership could not be registered in respect of the assessment year; but they proceeded further to observe that there was no objection to the firm being treated as having been constituted under the instrument as from the date of the instrument itself. The answer of the court to the question posed was that the firm could be registered not in respect of the assessment year for which the application had been made, but with effect from the date of the instrument. Apparently, the attention of the court was not drawn to the rules aforesaid, particularly, rules 2 and 3, which require that the application has to be made before the assessment is compl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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