Dulichand Lakshminarayan vs The Commissioner Of Income Tax, Nagpur

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 195 of 1955

Decision Date: 17 February 1956

Coram: Natwarlal H. Bhagwati, DAS, Sudhi Ranjan

In this matter the petitioner Dulichand Lakshminarayan contested an assessment for the year 1949-1950 and sought registration of an unregistered firm under section 26-A of the Indian Income-Tax Act, 1922. The application was filed before the Income-Tax Officer at Raigarh and was based on a deed of partnership dated 17 February 1947. The opening paragraph of that deed listed five parties: three of them were separate firms created under three distinct deeds of partnership, a fourth party was a business conducted by a Hindu undivided family, and the fifth party was an individual. The signatures of five persons were appended at the foot of the deed, each signing on behalf of one of the five parties. It was agreed that the three firms were represented by partners who signed for their respective firms, that the Hindu undivided family’s signature was affixed by the karta, and that the individual signed in his own name. The Income-Tax Officer rejected the registration, holding that the entity named in the deed comprised three firms, one Hindu undivided family business and one individual, and that a firm or a Hindu undivided family could not, as a unit, become a partner with other firms or individuals. The petitioner’s appeal to the Appellate Assistant Commissioner was dismissed, but the Income Tax Appellate Tribunal set aside that dismissal and directed that the firm be registered. Subsequently the Commissioner of Income Tax made an application under section 66(1) of the Income-Tax Act, and the High Court ruled that, on the facts, the petitioner was not entitled to registration under section 26-A. The petitioner then appealed to the Supreme Court. The Court observed that a careful reading of the deed demonstrated that the parties intended the three constituent firms, rather than the individual signatories, to be partners in the larger firm created by the deed. The claim that only the five individual executants were partners was contrary to the tenor of the deed and therefore untenable. Section 26-A of the Income-Tax Act presupposes the existence of a firm, yet the Act does not define the term. Section 2(6-B) clarifies that “firm” and “partnership” carry the same meaning as in the Indian Partnership Act, 1932. Section 4 of that Act defines “partnership”, “partner”, “firm” and “firm name”, requiring three essential elements: an agreement, the existence of persons, and a common name under which they carry on business. The Supreme Court thus analyzed the statutory definitions and the factual matrix to determine the eligibility for registration.

The Court observed that the deed left no doubt that the parties intended each of the three constituent firms, rather than the individual partners who signed for those firms, to become partners in the larger firm created by the deed. Consequently, the argument that only the five individuals who signed the deed were partners of the newly formed firm conflicted with the language of the deed and therefore could not be sustained. Section 26-A of the Indian Income-Tax Act provides for the existence of a firm, but the Act does not define what a firm is or how it must be formed. Section 2(6-B) of the Act expressly states, inter alia, that the terms “firm” and “partnership” have the same meaning as they possess in the Indian Partnership Act of 1932. Section 4 of that Partnership Act, which defines “partnership,” “partner,” “firm” and “firm name,” requires three essential elements: first, an agreement must be entered into by two or more persons; second, the agreement must provide for sharing the profits of a business; and third, the business must be carried on by all or any of those persons acting for all. The general principle of partnership under both English and Indian law is that a firm is not a legal entity or “person” but merely an association of individuals, and a firm name is simply the collective designation of those individuals. In other words, a firm name is an expression that identifies the persons who have agreed to conduct business together. The word “persons” in Section 4 of the Indian Partnership Act, which replaced Section 239 of the Indian Contract Act, refers only to natural or artificial persons, that is, legal persons. Accordingly, a firm is not a person and cannot enter into a partnership with another firm, a Hindu undivided family, or an individual. Thus, there was no basis for registering a partnership that purported to be one among three firms, a Hindu undivided family business and an individual under Section 26-A of the Act in the present case. The Court referred to the authorities Jabalpur Ice Manufacturing Association v. Commissioner of Income Tax (Madhya Pradesh and Bhopal) ([1965] 27 I.T.R. 88), Ex parte Oorbett, In re Shad ([1880] L.R. 14 Cb. 122, 126), Bhagwanji Morarji Goculdas v. Alembic Chemical Works Co. Ltd. and others (A.I.R. 1948 P.C. 100), Commissioner of Income Tax, West Bengal v. A.W. Figgies & Co. and others ([1954] S.C.R. 171), and In re Jai Dayal Madan Gopal ([1933] I.T.R. 186). The judgment was rendered in a civil appellate jurisdiction for Civil Appeal No. 195 of 1955, arising from the Nagpur High Court order dated 30 December 1953 in Miscellaneous Civil Case No. 35 of 1952.

Kirpa Ram Bajaj and Hardyal Hardy appeared for the appellant, while C. K. Daphtary, Solicitor-General of India, was assisted by G. N. Johi and R. H. Dhebar for the respondent. The judgment was delivered on 17 February 1956 by Chief Justice Das. The matter before the Court was an appeal against the order dated 30 December 1953 of a Nagpur High Court Bench, which had answered negatively a question referred to it by the Income Tax Appellate Tribunal, Bombay, under section 66(1) of the Indian Income Tax Act, 1922. The question concerned the assessment for the year 1949-1950 of Dulichand Laxminarayan, an unregistered firm. An application had been filed under section 26-A of the Act before the Income Tax Officer in Raigarh seeking registration of the firm as one constituted by a deed of partnership dated 17 February 1947. The opening paragraph of that deed identified the parties in the following terms: “We, Dulichand Laxminarayan Firm, through Malik (partner) Laxmi Narayan son of Laljimal; Laxmi Narayan Chandulal Firm through Malik (partner) Chandulal son of Nanakchand; Mukhram Bholaram Firm through Malik (partner) Tekchand son of Bholaram; Jeramdas Hiralal Firm through Malik (partner) Beharilal son of Asharam; and Mangatrai Ganpatram through Malik (partner) Ganpatram son of Mangatrai, Agarwar Bani, aged 50, 40, 28, 25, 45, residing at Raigarh, are partners in equal shares with effect from 5-January-1946 in the firm Dulichand Laxminarayan, in whose name an Importers’ Licence of cloth is issued for the Raigarh State group including Raigarh, Jaipur, Saraigarh, Udeypur and Sakti State, on the following terms and conditions…”. The deed contained fifteen clauses setting out the conditions of the partnership, and at its foot the signatures were affixed in the order: Laxminarayan for Dulichand Laxmi Narayan; Beharilal for Jairam Das Hiralal; Ganpatram for Mangatrai Ganpatram; Tekchand for Mukhram Bholaram; Chandulal for Laxminarayan Chandulal. It was common ground that among the five constituent parties, Dulichand Laxminarayan, Jairamdas Hiralal and Laxminarayan Chandulal each represented separate firms created under three distinct partnership deeds, and that Laxminarayan, Beharilal and Chandulal, who signed on behalf of those firms, were partners in their respective firms. There was also no dispute that Mukhram Bholaram was the name of a business carried on by a Hindu undivided family, whose Karta was Tekchand, who had signed for it, and that Mangatrai Ganpatrai was an individual. The registration application had been signed by the same five individuals who had signed the partnership deed. The Court found that Dulichand Laxminarayan, as constituted by the deed of 17 February 1947, comprised three firms, one Hindu undivided family business and one individual, and held that a firm or a Hindu undivided family could not, by itself, enter into a partnership with other firms or individuals, leading the Income-Tax Officer to conclude that the entity could not be registered as a firm under section 26-A and to reject the application on 26 February 1950.

The Income-Tax Officer concluded that the entity known as Dulichand Laxminarayan could not be entered in the register of firms under section 26-A because it was composed of a partnership of other firms and an individual, and therefore rejected the registration application on 26 February 1950. The matter was taken to the Appellate Assistant Commissioner, who held that when a firm joins in partnership with another firm, the law treats all partners of the smaller firms as partners of the larger firm, so that the larger firm of Dulichand Laxminarayan was not illegally constituted. However, the Commissioner also observed that the registration application had not been signed personally by every partner of the three smaller firms, as required by section 26-A of the Act and by rule 2 made under section 59 of the Act. Because this formal requirement was missing, the Commissioner found the application to be invalid and consequently ordered that the firm could not be registered. On 5 August 1950 the Appellate Assistant Commissioner dismissed the appeal. The assessee then appealed to the Income Tax Appellate Tribunal. The Tribunal accepted the finding of the Appellate Assistant Commissioner that a valid partnership had been created, but it disagreed with the earlier conclusion that the application was defective. The Tribunal reasoned that all five persons who executed the deed of partnership had also signed the registration application, satisfying the legal requirements. Accordingly, on 12 June 1951 the Tribunal directed that the firm be entered in the register.

Following a request by the Commissioner of Income Tax, Madhya Pradesh, the Tribunal, invoking section 66(1) of the Act, prepared a Statement of Case and referred a specific question of law to the High Court of Nagpur: whether, on the facts of the case, the assessee was entitled to registration under section 26-A of the Income-Tax Act. The reference was heard before a Bench of the Nagpur High Court on 30 December 1953. In a decision rendered the same day, and after citing its earlier judgment in Miscellaneous Civil Case No 189 of 1951, Jabalpur Ice Manufacturing Association v. Commissioner of Income Tax, Madhya Pradesh and Bhopal, the High Court answered the referred question in the negative, holding that the requirements for registration were not met. Recognising the significance of the issue, the High Court, under section 66-A(2) of the Act, issued a certificate of fitness for appeal to this Court, thereby bringing the present appeal before the Supreme Court. Section 26-A of the Act, under which the original application had been made, provides that an application may be submitted to the Income-Tax Officer on behalf of any firm constituted by a partnership instrument that specifies each partner’s individual share, for the purpose of registration under the Act and any other law relating to income tax or supertax. The application must be made by the appropriate persons at the prescribed time, contain the required particulars, and be executed in the form prescribed by the law.

The rule provides that the application for registration must be varied in a manner prescribed and that the Income-tax Officer must deal with the application according to the same prescribed manner. Rule 2 of the Rules made under section 59 of the Act states that any firm created under an Instrument of Partnership, which specifies each partner’s individual share, may, under the provisions of section 26-A of the Indian Income-tax Act, 1922 (referred to in these rules as “the Act”), register with the Income-tax Officer by furnishing the particulars contained in that Instrument. The rule further requires that such an application be signed personally by all the partners who are not minors, or by an authorized representative, before it can be considered for registration. During the hearing before the Court, one argument was advanced that the partners of the firm comprised the five individuals who had signed the deed, each holding an equal share as indicated in that deed, and that because all five individuals had signed the registration application, the conditions of section 26-A of the Act and rule 2 had been satisfied, thereby entitling the assessee to be registered as a firm for the purposes of the Act. Upon a careful examination of the deed and, in particular, the portions previously highlighted, it became evident beyond any doubt that the parties intended that each of the three constituent firms, rather than the individual member of each of those three firms who signed the deed on behalf of his respective firm, should be the partner in the larger firm created by the deed. Consequently, the contention that only the five individual signatories of the deed were the partners of the newly formed firm contradicted the clear tenor of the deed and could not be entertained. Moreover, counsel appearing on behalf of the appellant did not press this point. The principal issue before the Court therefore centered on the broader question of whether a firm, as a legal entity, can act as a partner in another firm. Section 26-A of the Act, as quoted, presupposes the existence of a firm; otherwise, the question of its registration would not arise. However, the Act itself does not define the term “firm” or explain how such an entity is to be constituted. Section 2(6B) of the Act expressly provides, inter alia, that the words “firm” and “partnership” bear the same meanings as they have in the Indian Partnership Act, 1932. Accordingly, it was necessary to consult the Indian Partnership Act, 1932 to determine the meaning of a firm and the manner of its creation. Section 4 of that Act defines “partnership”, “partner”, “firm” and “firm name”. It states that a partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all, and that persons who have entered into such a partnership are called “partners”. This definition underscores that a firm is a collective of persons, not a separate legal person, and thus raises the issue of whether a firm can itself be a “person” capable of entering into a partnership with another firm.

Section 4 of the Indian Partnership Act, 1932 defined “partnership”, “partner”, “firm” and “firm name”. The definition required three essential elements: first, an agreement entered into by two or more persons; second, that the agreement mandated the sharing of profits of a business; and third, that the business be carried on by all or any of those persons acting for all. According to that definition, the persons who entered into partnership with one another were collectively called a “firm”, and the name under which their business was carried on was called the “firm name”. The Court then examined the preliminary question of whether a firm, as a legal entity, could itself enter into an agreement with another firm or with an individual. The answer to that question depended upon whether a firm could be regarded as a “person” within the meaning of the statute. The Partnership Act contained no definition of the word “person”. However, the General Clauses Act, 1897, in section 3(42), provided that “person shall include any company or association or body of individuals whether incorporated or not”. The Court noted that a firm was not a company but was certainly an association or body of individuals, and therefore fell within that broader definition of “person”. Accordingly, the Court reasoned that applying the General Clauses definition to the word “persons” occurring in section 4 would permit an unincorporated association such as a firm to enter into a partnership, just as the same definition allowed a company to become a partner in a firm. The Court further observed, however, that the definitions in section 3 of the General Clauses Act applied only when there was nothing repugnant in the subject or context. It found no apparent repugnancy in the context of section 4 that would prevent the definition from being applied to the word “persons” therein. The Court then considered whether any principle in partnership law itself might be repugnant to that application. Referring to Lindley on Partnership, eleventh edition, page 153, the Court stated that merchants and lawyers possessed different conceptions of a firm. Commercial persons and accountants tended to view a firm in the same manner that lawyers regarded a corporation – as a body distinct from its members and possessing a separate, independent existence for business purposes. The Court acknowledged that some legal systems, for example Scotland, had formally recognized such separate personality of a firm. Nevertheless, the Court emphasized that this was not the English common-law conception. English lawyers did not treat a firm as an entity distinct from its partners. Consequently, the Court concluded that Indian partnership law, being derived from English law, adopted the English lawyers’ view of a firm as merely a relationship among persons, not a separate legal entity.

The Court explained that the discussion concerns a partnership firm and noted that certain commercial practices traditionally associated with a firm have gradually been incorporated into partnership law. For example, when merchants maintain partnership accounts, they customarily record the firm as a debtor to each partner for the amount each partner contributes to the common capital, and they likewise record each partner as a debtor to the firm for the amount the partner withdraws from that capital. Under traditional English common law, however, a firm was not recognised as a legal entity; consequently the firm could not sue or be sued in its own name, nor could a partner sue the firm or be sued by the firm, because one cannot sue oneself. The Court observed that this strict procedural rule was later softened for the sake of commercial convenience. The law of procedure was amended to allow a firm to sue or be sued in its own name as if it were a corporate body, referring to the provisions of the Code of Civil Procedure, Order XXX, which corresponds to the rules of the English Supreme Court Order XLVIII-A. Further procedural developments, such as Order XXX, rule 9 of the Code of Civil Procedure, permit a firm to sue or be sued by another firm that shares some partners, and even allow a firm to sue or be sued by one or more of its own partners, treating the firm as if it were a distinct entity separate from its members. The Court also noted that, in the preparation of partnership accounts and the administration of partnership assets, the law has partly adopted the mercantile viewpoint. The liabilities of the firm are treated as the liabilities of the partners only to the extent that the firm cannot satisfy those liabilities from its own assets. Creditors are first paid from the partnership’s assets; if any surplus remains, each partner’s share of that surplus is applied to his personal debts, if any, or is returned to him. Conversely, a partner’s separate property is first used to settle his personal debts, and any remaining surplus is then applied to the firm’s debts, as provided in Section 49 of the Indian Partnership Act, 1932. The Court further observed that Section 3 of the Indian Income-Tax Act, which is the charging provision, treats a partnership firm as a unit of assessment for tax purposes. From this discussion, the Court concluded that both English and Indian law, for certain specific purposes mentioned above, have relaxed the rigid doctrinal stance and have granted a limited personality to a partnership firm. Nevertheless, the Court affirmed that the fundamental concept of partnership, firmly rooted in both legal systems, remains that a firm is not a separate legal person but merely an association of individuals, and that the firm’s name is simply a collective designation for the persons who have agreed to carry on business together. According to the principles of English jurisprudence, the firm is thus an expression and a convenient shorthand for the individual partners rather than an independent legal entity.

In this case the Court noted that English jurisprudence, as expressed by James L.J. in the decision Ex parte Corbett, In re Shand, states that the law does not recognise a firm as a distinct legal entity. Accordingly, the Court observed that importing the definition of “person” found in section 3(42) of the General Clauses Act, 1897 into the definition of “person” in section 4 of the Indian Partnership Act would, in the view of both English and Indian lawyers, be completely inconsistent with the established principles of partnership law. The Court reiterated the long-standing position in India that a firm cannot itself become a party to a partnership with another firm or with individuals. Although many cases support this proposition, the Court referred specifically to the decision in Jabalpur Ice Manufacturing Association v. Commissioner of Income-Tax, Madhya Pradesh, which has already been mentioned, and to the Privy Council judgment in Bhagwanji Morarji Goculdas v. Alembic Chemical Works Co. Ltd. In the latter case the Privy Council held that Indian law does not confer a separate legal personality on a firm apart from its partners. This view, the Court said, is also reflected in the observations made in Commissioner of Income-Tax, West Bengal v. A.W. Figgies & Co. and others. The Court further cited the decision of Sulaiman C.J. in Jai Dayal Madan Gopal, where the Chief Justice followed the Calcutta decisions and declined to read the word “person” in section 239 of the Indian Contract Act, 1872 to include a firm. Although the Chief Justice expressed that nothing in section 239 itself makes the application of the General Clauses Act definition of “person” repugnant, the Court noted that the Chief Justice did not examine whether the broader context of partnership law in this country precludes such an application. In the Court’s opinion, the term “persons” used in section 4 of the Indian Partnership Act, which has superseded section 239 of the Indian Contract Act, is intended to refer only to natural persons or artificial legal persons. Because a firm does not qualify as a “person” under this meaning, it cannot lawfully enter into a partnership with another firm, a Hindu undivided family, or an individual. Consequently, the Court concluded that a partnership purportedly formed between three firms, a Hindu undivided family business and an individual could not be registered under section 26-A of the Act, since the statute does not permit registration of a partnership that is essentially between entities that are not recognised as persons.

The counsel for the appellant argued that the partnership could not be deemed illegal because no legal impediment existed for any member of the three constituent firms, the karta of the Hindu undivided family, and the individual to enter into an agreement, and therefore the deed of partnership under consideration had created a valid partnership. Assuming that this contention might be plausible in view of the language employed in the deed for describing the parties, the appellant’s position would nevertheless not improve. In order to qualify for the benefit of registration under the Act, it must be shown that the shares of every individual partner are expressly specified in the deed and that each partner has personally signed the application for registration as mandated by section 26-A of the Act read with Rule 2. The deed provides that each of the five constituent parties is entitled to an equal one-fifth share, but it fails to specify the individual shares of the partners belonging to each of the three smaller constituent firms. Moreover, the members of those three firms have not personally signed the registration application. It was submitted that the three persons who executed the deed on behalf of the smaller firms should be deemed to have the authority of their co-partners in their respective firms to sign the registration application, just as they possessed authority to execute the deed itself. Even if such authority were assumed—an assumption for which the record contains no evidence—the statutory requirement of section 26-A and Rule 2 is that each partner, who is not a minor, must sign the application personally. That requirement has not been satisfied, and consequently the application was not in proper form. In our judgment, the answer given by the High Court to the question is correct. Accordingly, the appeal must be dismissed with costs.