Messrs. R. C. Mitter and Sons vs The Commissioner Of Income-Tax, West Bengal

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

Court: supreme-court

Case Number: Civil Appeals Nos. 85 and 389 of 1957

Decision Date: 15 April 1959

Coram: Bhuvneshwar P. Sinha, J.L. Kapur, M. Hidayatullah

In this case the Supreme Court of India heard an appeal by Messrs R C Mitter and Sons against the Commissioner of Income-Tax, West Bengal. The judgment was delivered on 15 April 1959 by a bench consisting of Justice Bhuvneshwar P Sinha, Justice J L Kapur and Justice M Hidayatullah. The petitioners were the firm Messrs R C Mitter and Sons and the respondent was the Commissioner of Income-Tax, West Bengal, Calcutta. The decision is reported as 1959 AIR 868 and 1959 SCR Supplement (2) 641 and has been cited in later reports such as RF 1961 SC 680, R 1961 SC 1356, RF 1965 SC 1703, F 1985 SC 1572 and F 1986 SC 123. The dispute concerned the provisions of the Income-Tax Act, 1922, specifically section 26A together with Rules 2 to 6B, which govern the registration of firms constituted under an instrument of partnership. The central question for determination in the two appeals was whether the appellant firms were entitled to registration under section 26A of the Indian Income-Tax Act and, in particular, how the words “constituted under an instrument of partnership” should be interpreted. In Appeal No 85 the assesse firm claimed it had been constituted by a verbal agreement in April 1948 and that a deed of partnership was drawn up in September 1949. Following that, the firm applied for registration under section 26A for the assessment year 1949-1950 to the Income-Tax Officer. In Appeal No 389 the assesse firm asserted that it was verbally constituted in June 1944 and that a memorandum of partnership was executed in June 1948. That firm made an application for registration under section 26A for the assessment years 1945-46 and 1946-47 on 24 August 1949. Both applications were rejected by the Income-Tax Officer and the respective appeals were dismissed by the Income-Tax Appellate Tribunal. The High Court held that section 26A contemplated a firm created or brought into existence by an instrument of partnership and accordingly ruled against the assessees. The petitioners argued that, so long as no assessment had been made, they were entitled to registration regardless of the year in which the instrument of partnership was created. The Revenue contested this, maintaining that a firm seeking registration under section 26A must be created by an instrument of partnership, or at the very least such an instrument must exist during the relevant accounting year, namely the year preceding the assessment year for which registration is sought. The Supreme Court held that the phrase “constituted under an instrument of partnership” occurring in section 26A includes not only firms that were created by instruments of partnership but also those that, after their creation, were clothed in legal form by reducing the terms and conditions of the partnership in writing.

The Court cited several authorities to illustrate the approach taken by earlier decisions. It approved the rulings in Dwarkadas Khetan & Co. v. Commissioner of Income-tax, Bombay City, Bombay, reported in [1956] 29 I.T.R. 903; Kalsi Mechanical Works, Nandpur v. Commissioner of Income-tax, Simla, [1953] 24 I.T.R. 353; Padam Parshad Rattan Chand v. Commissioner of Income-tax, Delhi, [1954] 25 I.T.R. 335; Bery Engineering Co., Delhi v. Commissioner of Income-tax, Delhi, [1955] 28 I.T.R. 227; Income-tax Commissioner, Delhi v. Messrs. Birdhi Chand Girdhari Lal, [1955] 28 I.T.R. 280; and Khimji Walji & Co. v. Commissioner of Income-tax, Bihar and Orissa, [1954] 25 I.T.R. 462, which was expressly dissented from. The Court then set out the essential requirements contained in Section 26A, read together with Sections 26 and 28 and Rules 2 to 6B, that a firm must satisfy before it can obtain registration under that provision. First, the firm must be constituted under an Instrument of Partnership that specifies each partner’s share in the profits. Second, an application signed by all partners and containing every detail prescribed in the Rules must be filed. Third, the application must be submitted before the assessment of the firm’s income for the relevant year is made under Section 23 of the Act. Fourth, the profits or loss of the business for the preceding accounting year must be distributed or credited in accordance with the terms of the Instrument of Partnership. Fifth, the partnership must be genuine and actually existing, conforming to the conditions laid down in the Instrument. Accordingly, the Court held that where, as in the present matters, the partnership did not actually operate under an Instrument that was operative during the accounting year, registration could not be granted in the subsequent assessment year. The judgment noted that the decision in Commissioner of Income-tax, Bombay North v. Shantilal Vrajlal & Chandulal Dayalal & Co., [1957] 3 I.T.R. 903, disapproved this view. Justice M. Hidayatullah observed that it was impossible to read the phrase “constituted by” in place of “constituted under” as it appears in Section 26A, and expressed doubt whether the Instrument of Partnership sought to be registered must be in existence during the accounting year in order to qualify for registration. He referred again to the authority of Dwarkadas Khetan & Co. v. Commissioner of Income-tax, Bombay City, Bombay, [1956] 29 I.T.R. 903.

The judgment proceeded to identify the matter as a civil appellate case, namely Civil Appeals Nos. 85 and 389 of 1957, arising from an order dated 26 August 1955 of the Calcutta High Court in Income-tax References Nos. 44 of 1954 and 17 of 1953. Counsel for the appellant in Appeal 85/57 were S. Mitra and P. K. Mukherjee, while N. C. Chatterjee and P. K. Ghosh appeared for the appellant in Appeal 389/57. The respondent was represented by R. Ganapathy Iyer, R. H. Dhebar and D. Gupta. The judgment was delivered on 15 April 1959. The opinions of Justices Sinha and Kapur were reported as being given by Justice Sinha, whereas Justice Hidayatullah delivered a separate opinion. Justice Sinha opened his opinion by stating that the common question of law arising in these two appeals concerned…

In this case, the Court addressed the question of what the words “constituted under an instrument of partnership” meant in section 26A of the Income-Tax Act, hereafter referred to as the Act, and how those words related to certificates of fitness that the High Court of Calcutta could grant under section 66A(2) of the Indian Income-Tax Act, 1922. The two appeals that came before the Court involved facts that were similar but not identical, and therefore the Court set out the facts of each appeal separately. In Civil Appeal No. 85 of 1957, the petitioner, Messrs R. C. Mitter and Sons, a firm located at 54, Rani Kanto Bose Street, Calcutta, claimed that it had been constituted in April 1948. The firm asserted that it consisted of four partners whose respective shares of the net profits were as follows: Ramesh Chandra Mitter – forty per cent; Sudhir Chandra Mitter – thirty per cent; Sukumar Mitter – twenty per cent; and Sushil Chandra Mitter – ten per cent. To inform the Bengal Central Bank, Limited, of the firm’s formation, the partners sent a letter dated 15 April 1948. That letter stated that a partnership deed would be prepared and executed by the partners and that the deed, once drawn up, would be forwarded to the bank. Although the firm claimed to have come into existence in April 1948, the actual partnership deed, annexed as “Annexure A” on page 5 of the record, was prepared only on 27 September 1949. The deed was subsequently registered under the Indian Partnership Act on 1 October 1949, and a copy of it was sent to the head office of the Bengal Central Bank on 7 December 1949, as shown by the bank’s seal and the signature on that date.

An application was made to register the firm under section 26A of the Act for the assessment year 1949-50, although the exact date of that application is not recorded in the material before the Court. The Income-Tax authorities rejected the application, and the firm appealed the rejection to the Income-Tax Appellate Tribunal. The Tribunal dismissed the appeal by order dated 7 September 1953. The Tribunal’s reasoning was that the firm had been formed by a verbal agreement in April 1948 and not by a written instrument dated 27 September 1949; consequently, because the registration was sought for the assessment year 1949-50, the registration could not be granted. The Tribunal examined the April 1948 letter to the Bengal Central Bank and observed that the letter merely conveyed information about the formation of the partnership and the identities of the partners, but it did not set out the terms governing the partnership. Accordingly, the Tribunal concluded that while the letter might help establish the genuineness of the firm, it did not satisfy the requirement of section 26A that the firm be “constituted under an instrument of partnership.” Assuming the firm was genuine, the Tribunal held that it was nevertheless not entitled to registration under section 26A. The petitioner then invoked section 66(1) of the Act, and the Tribunal granted a certificate of fitness on 2 February 1954, referring the matter to the High Court for determination of whether a firm that allegedly came into existence by verbal agreement in April 1948 could be registered under section 26A for the assessment year 1949-50 when the written instrument of partnership was drawn up only in September 1949, after the relevant previous year had ended.

The Tribunal observed that the letter demonstrated the existence of a partnership but confirmed that the partnership had not been created by a deed; consequently, the letter could assist in assessing the firm’s authenticity yet failed to satisfy the requirement of section 26A that a firm be constituted under a written instrument of partnership. Hence, the Tribunal concluded that, even if the firm were genuine, it could not be registered under section 26A. The assessee then filed an application before the Tribunal under section 66(1) of the Act, and this application was granted by order dated 2 February 1954. The matter was subsequently presented to the High Court for determination of the question whether a firm alleged to have arisen by a verbal agreement in April 1948 could be registered under section 26A for the assessment year 1949-50, when the instrument of partnership was only drawn up in September 1949, after the relevant previous year had elapsed. The High Court bench, presided over by Chief Justice Chakravarti, delivered its judgment on 26 August 1955 and answered the question in the negative. The Chief Justice examined the issue from every conceivable angle, including grammatical, etymological and textual considerations, and held that the term “constituted” meant “created”. He further observed that the preposition “under” following the verb “is” was inappropriate once “constituted” was equated with “created”. He also noted that several paragraphs of the prescribed Form appeared poorly aligned with the provisions of the Act and the Rules, and he concluded that both the language of the section and that of the Rules deserved legislative reconsideration. In Civil Appeal No. 389 of 1957, Messrs D. C. Auddy & Brothers, claiming to be a partnership of Dulal Chand Auddy, Prem Chand Auddy, Gora Chand Auddy and Kalipada Nandy, asserted that their business had commenced in June 1944. They filed an application for registration on 24 August 1949. The Income-Tax Officer and the Appellate Assistant Commissioner held that the partnership was not genuine and therefore could not be registered; they also argued that the partnership deed, executed on 2 June 1948, could not be operative for the two assessment years in question, namely 1945-46 and 1946-47. On appeal, the Income-Tax Appellate Tribunal based its decision on the finding that the alleged partnership had not been constituted under an instrument of partnership within the meaning of section 26A. At the request of the assessee, the Tribunal framed the following question for the High Court: whether a firm allegedly constituted orally in June 1944 could validly be registered for the assessment years 1945-46 and 1946-47 under section 26A of the Income-Tax Act on the basis of a memorandum of partnership executed in June 1948.

In the matter before the Tribunal, the question that was framed for determination was whether the firm, which had allegedly been formed orally in June 1944, could be registered for the assessment years 1945-46 and 1946-47 under Section 26A of the Indian Income-Tax Act on the basis of a Memorandum of Partnership that was executed later, in June 1948. The Tribunal’s statement of the case also contained other passages that dealt with the substantive merits of the income-tax assessment, but those passages were not relevant to the present appeal, and therefore the Court found it unnecessary to reproduce them. On the portion of the statement that concerned the registration question, the High Court gave the same decision as it had rendered in a parallel appeal, and in both cases the High Court granted the requisite certificate under Section 66A(2) read with Article 135 of the Constitution. Because the two appeals presented the identical legal issue, the Court decided to hear them together and to decide them by a single judgment. At this point it is helpful to set out the statutory provisions that govern the registration of firms. Section 26A, titled “Procedure in registration of firms,” provides that an application may be made to the Income-Tax Officer on behalf of any firm that has been constituted by an instrument of partnership which specifies the individual shares of the partners, for the purpose of registering the firm under this Act and any other law in force relating to income tax or super-tax. The section further requires that the application be made by the appropriate person or persons at the times prescribed, contain the particulars and form prescribed, be verified in the manner prescribed, and be dealt with by the Income-Tax Officer in the manner prescribed. The provision therefore anticipates the creation of detailed rules that will prescribe the form of the application, the particulars to be disclosed, and related matters. Under Section 59 of the Act, the Central Board of Revenue, subject to the control of the Central Government, is empowered to make such rules, and subsection (5) of Section 59 provides that any rule made under this authority shall be published in the Official Gazette and shall thereafter have the same effect as if it were enacted by the Act itself. Accordingly, Income-Tax Rules 2 to 6B elaborate the procedure for making an application for firm registration as envisaged in Section 26A. Although those rules were substantially amended in 1952, the Court’s analysis is confined to the version of the rules that existed prior to those amendments. Rule 2 mandates that the application be signed personally by all the partners and that it be submitted before the income of the firm is assessed for the relevant year, as required by Section 23 of the Act. Rule 3 requires that the application be filed in the specific Form annexed to the rule and that it be accompanied by the original instrument of partnership that constitutes the firm. The Form prescribed by Rule 3 also requires the assessment year for which registration is sought to be clearly indicated, indicating that registration is limited to a particular assessment year rather than extending automatically to future years.

The registration under section 26A is limited to a particular assessment year and does not extend to future years; consequently, the firm must submit a fresh application each year, which effectively serves as a renewal of the registration. Paragraph 3 of the application form requires a certificate, signed by all applicants for registration, affirming that the profits or loss of the preceding year were divided or credited in accordance with the details shown in Section B of the Schedule. The form includes a Schedule laid out in seven columns, each column demanding the name of a partner, the partner’s address, the date of admittance to the partnership, the partner’s share in profit or loss, and other relevant particulars. Within this Schedule, Section A must set out the particulars of the firm as it existed on the date of the application, while Section B must record how the income, profits, gains or losses of the business for the previous year were apportioned among the partners who were entitled to share in that year. Rule 4 provides that if the Income-Tax Officer is satisfied that a firm exists or existed in the manner described by the instrument of partnership and that the application has been properly made, the Officer must enter a certificate at the foot of the instrument stating that the firm has been registered under section 26A and that the certificate of registration shall have effect for the assessment year specifically mentioned. Rule 5 then declares that the certificate of registration granted under Rule 4 shall have effect only for the assessment to be made for the year mentioned therein. Rule 6 makes provision for the certificate of registration to be renewed for a subsequent year, provided an application is made in accordance with the preceding rules. It is evident that a proper construction of the relevant provisions of the Act, namely sections 26, 26A and 28, together with the Rules summarized above, requires them to be read jointly. Accordingly, the essential conditions that must be satisfied for a firm to be entitled to registration are as follows: first, the firm must be constituted under an instrument of partnership that specifies each partner’s individual share; second, an application signed by all partners and containing all particulars prescribed by the Rules must have been made; third, the application must have been filed before the assessment of the firm’s income under section 23 for that particular year, omitting the words not necessary for the present purpose; and fourth, the profits or loss of the business relating to the previous accounting year must have been divided or credited, as the case may be, in accordance with the terms of the instrument of partnership.

In this case, the Court observed that, in order for a firm to qualify for registration under the Act, five essential conditions must be satisfied. First, the firm must be constituted under an Instrument of Partnership that specifies each partner’s individual share. Second, an application signed by all partners and containing all particulars prescribed in the Rules must be submitted. Third, the application must be filed before the assessment of the firm’s income for the relevant assessment year is made under section 23 of the Act. Fourth, the profits or loss of the business for the preceding accounting year must be divided or credited in accordance with the terms of the Instrument. Fifth, the partnership must be genuine and must actually exist in conformity with the terms and conditions of the Instrument.

The Court noted that the certificate of registration refers to a specific assessment year and operates only for the assessment of that year. Consequently, the terms of the partnership must be reflected in the Instrument of Partnership with respect to the relevant accounting year, and the firm to be registered must have been in existence during that accounting year as “constituted as shown in the Instrument of Partnership.” The Rules therefore required a document that was operative during the accounting year. The Court clarified that it was not required to decide whether the document had to exist at the very commencement of the accounting year or before the year ended; the provisions of the Act, as set out, did not present any serious difficulty except for the wording that the firm be “constituted under an Instrument of Partnership,” which appeared in section 26A and the relevant Rules.

The Court then turned to the conflict of judicial opinion on the interpretation of those words. On behalf of the assessee-appellants, it was contended that, so long as the assessment had not been made, the assessee could have their firm registered in accordance with the terms of the Instrument of Partnership, regardless of the year in which the Instrument was created. The assessee relied heavily on the decision of the Bombay High Court in Dwarkadas Khetan and Co. v. Commissioner of Income-tax, Bombay City, Bombay, where the following observations were made: “Any firm can make an application under section 26A for registration and the two conditions that it has got to comply with are that it must be constituted under an instrument of partnership and the second condition is that the instrument of partnership must specify the individual shares of the partners. If these two conditions are satisfied it would be entitled to registration. The section does not say that the firm must be constituted by the instrument of partnership. It does not require that the firm must come into existence by reason of the instrument of partnership, or that the firm should be the creature of the instrument of partnership, or that the firm must not exist prior to the instrument of partnership being executed.” In that case, the Instrument of Partnership had been executed on 27 March 1946 with effect from 1 January 1946. When the assessee applied to the Department for registration, the Income-tax Appellate Tribunal held against the assessee on the ground that the partnership existed before the deed was executed and therefore could not be registered.

The Department, when appearing before the Bombay High Court, placed reliance upon two earlier judicial decisions: one rendered by the Calcutta High Court, which is presently before this Court on appeal, and another issued by the Punjab High Court. The Calcutta High Court decision, cited in the case of R. C. Mitter & Sons v. Commissioner of Income-tax (2), held that section 26A of the Income-Tax Act envisions a firm that is created or brought into existence by an Instrument of Partnership which determines the allocation of shares for the accounting period in question. According to that view, such a partnership deed must have, as indicated by the authorities (1) [1956) 29 I.T.R. 903, 907 and (2) [1955] 28 I.T.R. 698, 704, 705, been brought into existence on or before the commencement of the relevant accounting period. The other authority referenced by the Bombay High Court was a Division Bench judgment of the Punjab High Court reported in Padam Parshad Rattan Chand v. Commissioner of Income-tax, Delhi (1).

Conversely, the Revenue argued that, for a firm to qualify for registration, it must have been created by an Instrument of Partnership, or at the very least, such an Instrument must have been in existence during the accounting year that precedes the assessment year for which the registration application is made. The Revenue’s first contention drew considerable support from the decision that is under appeal and which had previously been relied upon before the Bombay High Court. In that appeal, R. C. Mitter & Sons v. Commissioner of Income-tax (2), Chief Justice Chakravarti, delivering the opinion of the Court pursuant to section 66(1) of the Act, after an extensive discussion, articulated his conclusion in these words: “If by the expression ‘constituted under an instrument of partnership’ is meant a firm which originated in a verbal agreement but for which a formal deed was subsequently executed, there would be no room in the section for partnerships actually created by an instrument and such partnerships, although most obviously entitled to registration, would be excluded from the purview of the section. Even etymologically or textually, I do not think that the word ‘constituted’, when used in relation to a firm or such other body, can mean anything but ‘created’ when the reference is to some deed or instrument to which the inception of the firm or other body is to be traced.” Having held that section 26A contemplates firms created or brought into existence by a written deed, the Chief Justice found no difficulty in substituting the word “by” for the word “under”, thereby rendering the decisive phrase as “constituted by” instead of “constituted under”. In our opinion, the learned Chief Justice’s reasoning on this point is noteworthy.

In the earlier judgment the learned judge erred by attempting to redesign the language of the statute rather than interpreting it. The substitution of the term “by” for the word “under” in section 26A could be justified only if the language as written were incapable of being understood, which would have required a revision of the statutory wording. After turning his attention away from the statutory text to the language of the Rules and the Form that accompany those Rules, the judge again concluded that certain paragraphs of the Form appeared to be poorly aligned with the provisions of the Act. Referring to other sections of the Rules, he felt compelled to state that they supported the view that the expression “any firm constituted under an instrument of partnership” in section 26A merely described a firm whose constitution was evident from a written instrument. He observed that, if that were the meaning of the phrase, the instrument need not necessarily be the one by which the partnership was originally created. To resolve this difficulty he then noted that the language of the Rules and the Form could not override a provision contained in the Act itself, and he further expressed the opinion that the wording in paragraph 4(1) was undeniably unsatisfactory.

In our view any effort to reconstruct the relevant statutory section and the Rules on the assumption that the legislature intended to limit registration only to firms created by an Instrument of Partnership is mistaken. The correct approach to statutory interpretation is to give effect to every word of the relevant provisions, read them in harmony, and assign them a sensible meaning. Consequently, the first issue to consider is whether the words “constituted under an Instrument of Partnership” can be given a meaning that integrates smoothly with the remaining provisions. A partnership may indeed be formed by a written contract that sets out all its terms and conditions, but there are many instances, perhaps more numerous than the opposite class, where a partnership arises from an oral agreement between the parties. That oral agreement may later be reduced to writing, thereby constituting an Instrument of Partnership. Such an instrument would naturally record the terms and conditions of the original oral contract. In those circumstances, although the partnership was initially created by an oral agreement, once the terms have been captured in a written document, it is correct to say that the partnership has been constituted under that instrument.

In this case the Court observed that when a partnership is reduced to a written document, it is appropriate to say that the partnership has been “constituted under” that instrument. The term “constituted” does not have to be limited to the meaning of “created” or “set up”; it also embraces the notion of giving a legal form to an agreement. The Oxford English Dictionary, volume two, pages 875 and 876, defines “constitute” to mean, among other things, “to set up, establish, found (an institution, etc.)” and “to give legal or official form or shape to (an assembly, etc.)”. Accordingly, the wider sense of the word includes both the creation of a partnership and the giving of legal shape to it. The Calcutta High Court, in R. C. Mitter and Sons v. Commissioner of Income-tax (1), was therefore not justified in restricting “constitute” solely to “create”, because the term can also signify putting the partnership into a legal form. The Bombay High Court, in Dwarkadas Khetan and Co. v. Commissioner of Income-tax, Bombay City, Bombay (2), was correct in holding that the statutory provision should not be limited only to firms that were created by a written instrument of partnership. The provision can, in accordance with commercial practice, also apply to a firm that originally came into being by an oral agreement, provided that the terms of the partnership were later reduced to a written document. If “constitute” is read in the broader sense explained above, the difficulty encountered by the learned Chief Justice of the Calcutta High Court would disappear, since the section would then cover both firms that originated through written documents and those that first arose by oral agreement but were subsequently given legal form by a written deed. The purpose of the Income-tax Acts provision 26A is not to force firms that began with oral agreements to dissolve and then reform themselves through a formal instrument of partnership. By interpreting “constituted under” in this expansive way, the legislature’s intention is honoured: a firm that existed by oral agreement must enter into a document that specifies the partnership’s terms and binds the partners before they may enjoy the benefits of section 23 (5) (a). Section 23 (5) (a) grants a privilege to partners who find it more advantageous to be assessed on their individual total income rather than on the partnership’s total income.

The Court observed that the tax law permits each partner to be taxed on his or her own total income instead of on the aggregate income of the partnership, and therefore it is crucial for the revenue administration that the Tax Department be promptly informed of the authentic constitution of every partnership, of the exact names of the genuine partners, and of the precise proportion of profit or loss that each partner is entitled to. The purpose of the statutory provision would be frustrated if a partnership alleged to exist were in fact fictitious, or if the true composition of the partnership and the respective shares of the partners were not accurately and fully recorded at the earliest possible moment for assessment purposes. In this regard the Court stressed the relevance of section 28(2) of the Income-Tax Act, which provides that where the Assessing Officer or the appellate authority is satisfied that the profits of a registered firm have been distributed in a manner inconsistent with the share ratios set out in the Instrument of Partnership filed under the Act, and that any partner has concealed part of his share of the profits, the penalty prescribed in that section may be imposed on the offending partner. However, the Court noted that such penal provisions cannot be invoked unless the Instrument of Partnership has been registered for the relevant accounting year before the assessment is made. Consequently, the Court held that, for the purpose of proper administration and enforcement of the registration requirements, firms must strictly observe the statutory mandates, and the Income-Tax authorities are bound to demand full compliance with those legal requirements. The Court further expressed the view that the language of the statute does not justify limiting registration under section 26A solely to firms that came into existence by way of a formal Instrument of Partnership. Rather, in harmony with the intent of the provisions, the expression “constituted under an instrument of partnership” should be interpreted to cover not only firms created by a written partnership deed but also those that initially arose from oral agreements and were later reduced to writing. The Court acknowledged a divergence of opinion among various High Courts on this point, but on examining the facts of the individual cases it found that the rulings reached in the majority of those decisions were sound, even though some of the reasoning extended beyond what was strictly necessary. The Court then referred to the Bombay High Court’s decision in Dwarkadas Khetan & Co. v. Commissioner of Income-Tax, Bombay City, which disclosed that the partnership in that case...

In the first case considered, the partnership was held to have been created at the beginning of 1946 even though the Instrument of Partnership was signed on 27 March 1946, because the partnership itself was deemed to have commenced with the start of that year. Consequently, the written instrument came into being during the relevant accounting year, whichever year that may have been, since 1946 marked the inaugural year of the partnership. Therefore, the earliest assessment year, which would have been 1947-48, was subject to the terms and conditions set out in that written Instrument of Partnership. The Bombay High Court’s ruling was subsequently affirmed by the same bench in Commissioner of Income-tax, Bombay North v. Shantilal Vrajlal & Chandulal Dayalal & Co., where the judges held that a second partnership deed dated 12 September 1951, enumerating the names and shares of all partners, could be registered for the accounting period November 1948 to October 1949. That conclusion was reached without any reference to, let alone discussion of, the pertinent provisions of the Income-Tax Act, suggesting that the matter was not thoroughly presented before the bench. In light of the present Court’s view that the Instrument of Partnership must exist within the accounting year, the conclusion reached in that second case appears to be erroneous. A Division Bench of the Punjab High Court, including Justice Kapur, examined the issue in Kalsi Mechanical Works, Nandpur v. Commissioner of Income-tax, Simla. In that matter, the firm had been formed by a verbal agreement in June 1944, but the formal deed of partnership was not prepared until 9 May 1949. The income-tax authorities, as well as the Tribunal, dismissed the firm’s application for registration under Section 26A for the assessment year 1949-50. After an extensive analysis of the Act, its rules and forms, the High Court upheld the department’s orders, stating that the provisions of the Income-tax Act require a firm to be constituted by an instrument of partnership and that, according to the Rules read with Sections 26 and 28, such a firm must exist during the account period and cannot be deemed to have been created during the assessment year. Accordingly, a firm not existing in the account period cannot be registered to affect the partners’ liability for income-tax arising in that period. The Court affirmed this conclusion as correct, while respectfully noting that the observation regarding Section 26A’s requirement that a firm be constituted “by” an instrument of partnership needed clarification.

In the Punjab High Court the leading judgment held that for registration under section 26A it is necessary that the firm be constituted by an instrument of partnership. That decision was subsequently followed by another Division Bench of the same court in the case of Padam Parshad Rattan Chand v. Commissioner of Income-tax, Delhi, where the court interpreted the expression “constituted under an instrument” in section 26A to mean that the partnership must be created or formed by a formal deed. In the facts of that case the partnership’s business had actually commenced on 1 April 1947, but the formal Instrument of Partnership was not executed until 10 April 1950. The applicant sought registration of the firm for the assessment year 1948-49. When the dates are compared it becomes evident that the Instrument of Partnership did not exist during either the relevant accounting year or the assessment year. Accordingly the court correctly concluded that the partnership could not be registered for the assessment year in which the application was filed. However the court also observed that there was no impediment to treating the firm as having been constituted by the instrument from the date on which the instrument itself became operative. The court therefore answered the question by holding that registration could be granted, not for the assessment year in question, but with effect from the date of the instrument. The court’s reasoning did not take into account the specific provisions of the Income-Tax Rules, particularly Rules 2 and 3, which require that an application for registration be made before the assessment is completed and must specify the particular assessment year to which it relates (see (1) [1954] 25 I.T.R. 335). Similar conclusions were reached in two other Division Bench decisions of the Punjab High Court, namely Bery Engineering Co., Delhi v. Commissioner of Income-tax, Delhi (1) and Income-tax Commissioner, Delhi v. Messrs. Birdhi Chand Girdhari Lal (2). In each of those cases the partnership deed was executed after the close of the accounting year or the assessment year, and the courts held that registration could not be granted for the earlier period. The judgments in those cases were also correct, although they contain dicta suggesting that section 26A requires a partnership to be created or set up by an instrument of partnership. The same issue was examined in great detail by a Division Bench of the Patna High Court, presided over by Chief Justice Ramaswami, in the case of Khimji Walji & Co. v. Commissioner of Income-tax, Bihar and Orissa (3). After an exhaustive analysis of the statutory provisions, the learned chief justice pronounced that for the purpose of registration under section 26A the partnership must be constituted by an instrument of partnership and that such a partnership must have been in existence during the accounting year. This pronouncement mirrors the earlier leading judgment of the Punjab High Court.

In this case the Court observed that, based on the dates set out in the judgment, the decision of the lower tribunal was correct, although the words “constituted under” had been interpreted as “constituted by” without a discussion of whether the statutory language should be amended, a point that had been raised in the Punjab High Court decisions. The Court then explained that the discussion led to a clear conclusion: unless the partnership business was carried on in accordance with the terms of an Instrument of Partnership that was operative during the accounting year, as referred to in the authorities (1) [1955] 28 I.T.R. 227, (2) [1955] 28 I.T.R. 280 and (3) [1954] 25 I.T.R. 462, 470, the partnership could not be registered for the subsequent assessment year. Because in the present matter the partnership admittedly did not function under such a deed of partnership, the Department of Revenue and the High Court were justified in refusing registration. Consequently the appeals were ordered to be dismissed, although the Court noted that the reasons for dismissal differed from those later expressed by another judge. The respondent was entitled to his costs, and the hearing fees were to be shared equally between the appellants.

Justice Hidayatullah, having read the opinion delivered by his brother, Justice Sinha, said that he agreed that section 26A of the Indian Income-Tax Act must be read according to its plain terms. He held that the language of the provision, as it stands, is not meaningless and, in light of the decision in Commissioners for Special Purpose of the Income-Tax v. Pemsel (1) [1891] A.C. 531, it is not permissible to substitute the phrase “constituted under” with “constituted by”. Nevertheless, Justice Hidayatullah expressed a lingering doubt about whether the instrument sought to be registered must have existed in the accounting year before registration could be claimed, noting that the Act contains no explicit requirement to that effect. He recognised that his brother had inferred such a condition from the Act and the Rules, but he was not prepared to record a dissent. He further observed that the Board of Revenue had issued instructions directing that all firms should be registered, irrespective of whether the documents under which they were constituted existed during the accounting year, provided that the Income-Tax Officer was satisfied as to the genuineness of the firms. In the result, Justice Hidayatullah concurred that the appeals should be dismissed with costs, and he affirmed that the appeals were dismissed.