Textile Supply Co., Assam vs Commissioner Of Income-Tax, Assam

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 7 April, 1959

Coram: M. Hidayatullah, N.H. Bhagwati

In the matter titled Textile Supply Co., Assam versus Commissioner of Income-Tax, Assam, decided on 7 April 1959, the Supreme Court of India recorded that the bench consisted of Justices M Hidayatullah and N H Bhagwati, and that Justice Bhagwati authored the judgment. The case concerned an appeal filed with leave under section 66A of the Indian Income-Tax Act, 1922, hereinafter referred to as “the Act.” The appeal arose because the income-tax authorities had refused to register the appellant firm, which had been constituted by a deed of partnership dated 6 March 1946, under the provisions of section 26A of the Act. The Income-Tax Appellate Tribunal, invoking section 66(1) of the Act, referred a question of law to the High Court of Assam, asking whether, in view of the facts and circumstances, the Tribunal was correct in refusing the registration claim for the assessee firm under section 26A.

The High Court answered the referred question affirmatively, thereby upholding the Tribunal’s decision, and consequently the present appeal was taken before this Court. The partnership deed dated 5 March 1946 had been executed by nine partners. Among those partners were Rameshwarlal Ajitsaria, son of Kissendayal Ajitsaria, residing at No. 43/44 Cotton Street, Calcutta, who represented the firm of Ramswarup Maliram (the first part), and Dwarkanath Himatsingka, son of the deceased Mahadeolal Himatsingka, who represented the firm of Ghasiram Dwarkadas, Gauhati (the seventh part). The profit-and-loss sharing ratio allotted to Rameshwarlal Ajitsaria was Rs 0-5-3, while the share allocated to Dwarkanath Himatsingka was Rs 0-2-0. The deed provided that the partnership’s work would be supervised and managed, inter alia, by Rameshwarlal Ajitsaria. It further stipulated that, upon the death of any partner, the adult heirs of the deceased partner could, if they wished, be admitted as partners in place of the deceased; if the heirs declined, the remaining partners would continue the business and the deceased partner’s heirs would be paid the amount due to them as of the date of death.

Subsequent to the formation of the partnership, the appellant firm submitted an application for registration under section 26A of the Act. The application bore signatures, among others, of Rameshwarlal Ajitsaria “for Ramswarup Maliram” and D N Himatsingka “representing Ghasiram Dwarkadas.” The original deed of partnership was attached to the application. By an order dated 30 June 1951, the Income-Tax Officer held that, for the larger partnership consisting of the appellant firm, the partners of the component firms should be treated as individual partners, and consequently their individual shares ought to have been specified in the partnership deed. The Officer observed that it was not known what shares the individual partners of the component firms possessed in the profits of the appellant firm, and, because the language of section 26A allowed no flexible interpretation, the officer rejected the registration application.

Following the officer’s order, an appeal was filed, and the matter proceeded to the next stage of appellate review.

The Appellate Assistant Commissioner issued an order on 23 August 1951 in which he relied on the instructions of the Central Board of Revenue that were applicable at the relevant time. He held that the Income-tax Officer should have allowed the registration because the two partner firms were themselves formed under partnership deeds that specified the individual shares of their partners. Nevertheless, the Appellate Assistant Commissioner observed that the application for registration had not been signed by every partner personally. He therefore concluded that the requirement of rule 2 of the Income-tax Rules, made under section 59 of the Act, had not been satisfied and that the application was not in accordance with law. Consequently, he affirmed the Income-tax Officer’s decision to refuse registration. On further appeal, the Income-tax Appellate Tribunal confirmed the Appellate Assistant Commissioner’s order by way of an order dated 26 February 1953. The Tribunal stated that if a firm were capable of entering into a partnership with another firm, then the individual shares of the partners of such a firm must be disclosed under section 26A of the Act. In the present case, the Tribunal found that the necessary disclosure of individual shares was absent, and therefore the Department was correct in refusing registration. The Tribunal subsequently referred, at the appellant’s request, the question of law to the High Court for determination under section 66(1) of the Act. The High Court considered the broader issue raised before it, namely whether a firm could enter into a partnership with another firm. After reviewing a series of decisions of the High Court and the Privy Council, the High Court held that a firm, as a legal entity, was not capable of entering into a partnership with another firm through a partner who was expressly authorised to do so. The High Court further noted that the mandatory provisions of section 26A of the Act and rule 2 of the Income-tax Rules required the application for registration to be signed by each partner of the constituent firms and to specify the individual shares of those partners. The High Court observed that the application in the present case failed to satisfy these essential requirements, being unsigned by every partner and lacking a clear statement of individual shares.

The appellant firm argued before the Court that, under section 19(2)(h) of the Partnership Act, a partner does not possess the authority to bind his firm by entering into a partnership on its behalf; if a partner does so, he becomes a partner only in his individual capacity and not on behalf of the firm. Accordingly, the appellant contended that Rameshwar Lal Ajitsaria and D.N. Himatsingka should be regarded solely as individual partners in the appellant firm, and that the remainder of the party names and the signatures appended to the deed of partnership and to the registration application were merely surplusage. The appellant further asserted that, despite these formal deficiencies, both the deed of partnership and the application for registration should be treated as complying with the legal requirements. This position was presented to the Court for consideration as part of the appellant’s overall challenge to the refusal of registration.

In the appeal before the Appellate Assistant Commissioner, counsel for the appellant firm submitted a written argument. The argument asserted that the appellant firm had as its partners two partnership firms, namely Messrs. Ramswarup Mahaliram and Messrs. Ghasiram Dwarkanath, each represented by their managing partners, together with seven individual partners. The counsel further argued that the shares held by the partners of the two partnership firms had not been disclosed separately in the partnership deed; instead, the shares were shown only in a collective manner. The same collective presentation of the shares, the counsel contended, had been adopted in the application for registration filed under section 26A of the Income-Tax Act. The counsel maintained that because the shares of the two firms were presented collectively, the requirement of the Income-Tax Rules concerning the disclosure of individual partner shares had been complied with. Accordingly, the counsel urged that the application for registration should be treated as satisfying the statutory requirements.

The Court examined the factual record and identified two circumstances that, in its view, undermined the appellant’s position. First, the Court noted that, irrespective of the theoretical argument advanced by the counsel, the profit distribution for the accounting year under consideration had been recorded in the books of the appellant firm not in the names of the two individuals, Rameshwar Lal Ajitsaria and D. N. Himatsingka, but solely in the names of the two partnership firms they represented. No separate allocation of profit to those individuals as individual partners was evident. This factual pattern contradicted the claim that the individuals were partners in their personal capacity and indicated that the two firms were, in effect, the partners. Second, the Court observed that if two out of the nine partners of the appellant firm were indeed the two partnership firms, then neither the deed of partnership nor the registration application filed under section 26A complied with the legal requirement of specifying the individual shares of each partner. Consequently, the Department’s decision to reject the registration application was legally justified. The Court further relied on its earlier judgments in Dulichand Laxminarayan v. Commissioner of Income-Tax and Ravulu Subba Rao v. Commissioner of Income-Tax, which had addressed similar issues of partner disclosure and registration compliance. On the basis of these findings, the Court concluded that the appeal lacked any substantive merit. Accordingly, the appeal was dismissed, and costs were awarded against the appellant. The order of dismissal stood as the final determination of the matter.