# MESSRS. R. C. MITTER & SONS v. THE COMMISSIONER OF INCOME-TAX

- **Citation:** [1959] Supp. 2 S.C.R. 641
- **Court:** Supreme Court of India
- **Decided:** 1959
- **Case number:** Civil Appeals Nos. 85 & 389 of 1957
- **Bench:** B. P. Sinha, J. L. Kapur, M. Hidayatull~H
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/messrs-r-c-mitter-sons-v-the-commissioner-of-income-tax-1717
- **Pages:** 19

## Headnote

Income-tax-Registration of firm-Procedure-" Constituted
under an instrument of partnership", Meaning of-Indian Incometax Act, r922 (XI of r922), s. 26A, Rules 2 to 6B.
The question for determination in these two appeals was
whether the appellant firms were entitled to registration under
s. 26A of the Indian Income-tax Act and the common point of
law involved was the interpretation of the WOjds "constituted
under an instrument of partnership " occurring in that section.
In Appeal No. 85 the assessee firm was said to have been constituted by a verbal agreement in April, 1948, and the deed of
partnership was drawn up in September, 1949. The application
for registration under s. 26A of the Act for the assessment year
1949-1950 was made thereafter to the Income-tax Officer. In
Appeal No. 389 the assessee firm was verbally constituted in
Si
•
I959
The State of
Bihar &· Others
v.
Bhabapritananda
Ojha
S. K. Das].
1959
April r5.
642
SUPREME COURt REPORTS
tl959] Supp.
1959
June, 1944· and a memorandum of partnership was executed in
June 1948. The application for registration under s. 26A for
Messrs. R. C.
the assessment years 1945-46 and 1946-47 was made on August
Mitter &- Sons
24, 1949.
v. . .
The applications were rejected by the Income-tax Officer
The Commissioner and tbe appeals preferred by the assessees were also dismissed
0!· Income-tax,
by the Income-tax Appellate Tribunal. The High Court took
West Bengal,
the view thats. 26A of the Indian Income-tax Act contemplated
Calcutta
a firm created or brought into existence by an instrument of
partnership and answered the questions against the assessees.
It was contended on their behalf that so long as the assessment
was not made, they were entitled to registration irrespective of
the year in which the instrument of partnership came into existence.
This was controverted on behalf of the Revenue and their
case was that a firm seeking registration under s. 26A of the Act
should be created by an instrument of partnership, or at any rate,
such instrument should be in existence during the relevant
accounting year, i. e., the year previous to the year of assessment in respect of which the application for registration was
made.
Held, that the words "Constituted under an instrument of
partnership" occurring in s. 26A of the Indian Income-tax Act
included not only firms that· were created by instruments of
partnership but also those that were subsequent to their creation,
clothed in legal form by reducing the terms and conditions of
the partnerehip in writing.
Dwarkadas Khetan & Co. v. Commissioner of Income-tax,
Bombay City, Bombay, [1956] 29 I.T.R. 903, approved.
Kalsi Mechanical Works, Nandpur v. Commissioner of Incometax, 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, dissented from.
Section 26A, read with ss. 26, 28 and Rules 2 to 6B, laid
down the following essential conditions that a firm must fulfil
before it could claim registration under s. 26A of the Act,-
(1) that i' must 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,
must be made ;
(3) that the application must be made before the assessment of the income of the firm was made under s. 23 of the Act
for that particular year ;
(4) that the profits (or loss, if any) of the business relating
•
(2) S.C.R. SUPREME COURT REPORTS
643
to the previous year, i. e., the relevant accounting year, must be
1959
divided or credited, as the case may be, in accordance with the
terms of the Instrument; and lastly,
Messrs. R. C.
(5) that t

## Text

_Characters 0–39,773 of 42,690. This is a partial read: ask again with offset=39773 for what follows._

(2) S.C.R.
SUPREME COURT REPORTS
641
The conclusion at which we have arrived is that the
Act and its several provisions do not suffer from the
vice of extra-territoriality in the sense .suggested by
learned counsel for the respondent and there is no such
conflict of jurisdiction as learned counsel for the respondent has suggested. Accordingly, the Act is good
and applies to the Baidyanath temple and the properties appertaining thereto.
The result, therefore, is that the appeal succeeds
and is allowed with costs. The judgment and order
of the High Court dated October 9, 1953, are set aside
and the petition under Art. 226 of the Constitution
made by the respondent must stand dismissed with
costs.
Appeal allowed.
MESSRS. R. C. MITTER & SONS
v.
THE COMMISSIONER OF INCOME-TAX,
WEST BENGAL, CALCUTTA
(B. P. SINHA, J. L. KAPUR and
M. HIDAYATULL~H, JJ.)
Income-tax-Registration of firm-Procedure-" Constituted
under an instrument of partnership", Meaning of-Indian Incometax Act, r922 (XI of r922), s. 26A, Rules 2 to 6B.
The question for determination in these two appeals was
whether the appellant firms were entitled to registration under
s. 26A of the Indian Income-tax Act and the common point of
law involved was the interpretation of the WOjds "constituted
under an instrument of partnership " occurring in that section.
In Appeal No. 85 the assessee firm was said to have been constituted by a verbal agreement in April, 1948, and the deed of
partnership was drawn up in September, 1949. The application
for registration under s. 26A of the Act for the assessment year
1949-1950 was made thereafter to the Income-tax Officer. In
Appeal No. 389 the assessee firm was verbally constituted in
Si
•
I959
The State of
Bihar &· Others
v.
Bhabapritananda
Ojha
S. K. Das].
1959
April r5.
642
SUPREME COURt REPORTS
tl959] Supp.
1959
June, 1944· and a memorandum of partnership was executed in
June 1948. The application for registration under s. 26A for
Messrs. R. C.
the assessment years 1945-46 and 1946-47 was made on August
Mitter &- Sons
24, 1949.
v. . .
The applications were rejected by the Income-tax Officer
The Commissioner and tbe appeals preferred by the assessees were also dismissed
0!· Income-tax,
by the Income-tax Appellate Tribunal. The High Court took
West Bengal,
the view thats. 26A of the Indian Income-tax Act contemplated
Calcutta
a firm created or brought into existence by an instrument of
partnership and answered the questions against the assessees.
It was contended on their behalf that so long as the assessment
was not made, they were entitled to registration irrespective of
the year in which the instrument of partnership came into existence.
This was controverted on behalf of the Revenue and their
case was that a firm seeking registration under s. 26A of the Act
should be created by an instrument of partnership, or at any rate,
such instrument should be in existence during the relevant
accounting year, i. e., the year previous to the year of assessment in respect of which the application for registration was
made.
Held, that the words "Constituted under an instrument of
partnership" occurring in s. 26A of the Indian Income-tax Act
included not only firms that· were created by instruments of
partnership but also those that were subsequent to their creation,
clothed in legal form by reducing the terms and conditions of
the partnerehip in writing.
Dwarkadas Khetan & Co. v. Commissioner of Income-tax,
Bombay City, Bombay, [1956] 29 I.T.R. 903, approved.
Kalsi Mechanical Works, Nandpur v. Commissioner of Incometax, 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, dissented from.
Section 26A, read with ss. 26, 28 and Rules 2 to 6B, laid
down the following essential conditions that a firm must fulfil
before it could claim registration under s. 26A of the Act,-
(1) that i' must 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,
must be made ;
(3) that the application must be made before the assessment of the income of the firm was made under s. 23 of the Act
for that particular year ;
(4) that the profits (or loss, if any) of the business relating
•
(2) S.C.R. SUPREME COURT REPORTS
643
to the previous year, i. e., the relevant accounting year, must be
1959
divided or credited, as the case may be, in accordance with the
terms of the Instrument; and lastly,
Messrs. R. C.
(5) that the partnership must be genuine and in actual
Mitter & Sons
existence in conformity with the terms and conditions of the
v. . .
Instrument.
·
The. Commissioner
of Income-tax,
Where, therefore, as in the instant cases, the partnership
West Bengal,
did not admittedly function in terms of an instrument of partnerCalcutta
ship which was operative during the accounting year, it could not
be registered during the following assessment year.
Commissioner of Income-tax, Bombay North v. Shantilal
Vrajlal & Chandulal Dayalal & Co. [1957] 31 I.T.R. 903, disapproved.
Per M. HrnAYATULLAH, J.-While it was clearly not possible
to read "constituted by" for the words "constituted under"
occurring in s. z6A of the Act, it was doubtful whether the instrument of partnership sought to be registered must be in existence
in the accounting year in order to entitle it to registration.
Dwarkadas Khetan & Co. v. Commissioner of Income-tax, Bombay City, Bombay, [1956] 29 I.T.R. 903, referred to.
CIVIL
APPELLATE JURISDICTION:
Civil Appeals
Nos. 85 & 389 of 1957.
Appeal from the judgment and order dated August
26, 1955, of the Calcutta High Court in Income-tax
Referen~es Nos. 44 of 1954 and 17 of 1953.
S. Mitra and P. K. Mukherjee, for the appellant (in
C. A. No. 85/57.)
N. C. Chatterjee and P. K. Ghosh, for the appellant
(in C. A. No. 389/57).
· R. Ganapathy Iyer, R.H. Dhebar and D. Gupta, for
the respondent.
1959.
April 15. The judgment of Sinha and
Kapur, JJ., was delivered by Sinha, J. Hidayatullah, J., delivered a separate- judgment.
SINHA, J.-The common question of law arising in
these two appeals on certificates of fitness granted by
the High Court of Calcutta under s. 66A(2) of the
Indian Income-tax Act, 1922, is the effect and scope
of the words "constituted under an instrument of
partnership" in s. 26A of the Income-tax Act, which,
in the course of this judgment, will be referred to as
the Act.
Sinha ].
•
644
SUPREME COURT REPORTS [1959] Supp.
1959
The facts of the two cases, leading upto these appeals, though not dissimilar, are not identical. They
Mess1's. R. C.
th
"
t
t
t ]
Miller~ Sons are,
ereiore, se ou separa e y.
v.
In Civil Appeal No. 85 of 1957, Messrs. R. C. Mitter
The Commissioner and Sons, 54, Rani Kan to Bose Street, Calcutta, claim
of Income-tax, to be a firm said to have been constituted in April
West Bengal,
1948 with four persons whose names and shares in the
Calcutta
'
.
.
Sinha ].
..
•
nett profits of the partnership busrness, 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) Sushi! 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 stated that a partnership deed
was going to be drawn up and executed by the partners aforesaid, and that the deed so drawn upt will be
forwarded to the bank in due cours!J.
Though the
firm is said to have come into existence in April 1948,
the deed of partnership which is set out as annexure
"A" at p. 5 of the paper book, was drawn up only on
September 27, 1949. This deed of partnership appears
to have been registered under the provisions of the
Indian Partnership Act, on October 12, 1949. It was
also forwarded to the Bengal Central Bank, Ltd., Head
Office at Calcutta, as it appears from the seal of the
bank and the signature dated December 7, 1949.
An
application to register the firm under s. 26A, for the
assessment year 1949-50, was made to the Income-tax
Authorities. The date of the said application does not
appear from the record before us. The application
was rejected by the Income-tax Authorities. The firm
preferred an appeal to the Income-tax Appellate
Tribunal, which was also dismissed by the Tribunal by
its order dated September 7, 19~3. The ground of the
order of the Tribunal was that as the firm admittedly
(2) S.C.R.
SUPREME COURT REPORTS
645
was formed by a verbal agreement in April 1948, and
·r959
not by or under an instrument in writing dated
9
d
h
,.
h
Messrs. R. C.
September 27, 1 49, an as t e assessment was 1or t e
Mitter c;. Sons
year 1949-50, for which registration of the firm was
v.
sought, the registration could not be ordered. The The Commissioner
Tribunal also referred to the letter aforesaid to the
of Income-tax,
Bengal Central Bank, and observed that the letter
w~~
1
::~;az,
merely contained information as to the formation of
the partnership and of the personnel thereof, but it
Sinha J.
did not contain the terms on which the partnership
had been formed. It also showed that a partnership
had been created but not by deed. Hence, the Tribunal further observed, the letter might be useful for
consideration on the question of the genuineness of the
·firm, but it could not fulfil the resiuirements of s. 26A,
namely, that the firm should be constituted under an
instrument of partnership. Therefore, the Tribunal
held that assuming the firm to be genuine, it was not
entitled to be registered under s. 26A of the Act.
Thereupon, the assessee nioved the Tribunal under
s. 66(1) of the Act. That application was granted by
the order dated February 2, 1954, and the case stated
to the High Court for its decision on the following
question:-
"Whether the assessee firm which 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
646
SUPREME COURT REPORTS [1959] Supp.
r959
paragraphs of the Form appear to be ill-adjusted to
the provisions of the Act and the Rules". In the end,
;,;;;;'~ R50~;, therefore, he concluded with the remarks: "It appears
v.
to me to be desirable that the language of the section,
The Commission" as also that of the Rules should receive legislative
of Income·tax, attention".
West BengrJl,
Calcutta
Sinha ].
In Civil Appeal No. 389of1957, Messrs. D. C. Auddy
& Brothers, Calcutta, claim to be a partnership consisting of Dula! Chand Auddy, Prem Chand Auddy, Gora
Chand Auddy and Kalipada Nandy. The partnership
business is said to have begun in June, 1944. An application was made on August 24, 1949, for the registration of the partnership. The Income-tax Officer
and the Appellate Assistant Commissioner were of the
opinion that the partnership was not a genuine one,
and could not be registered.
Another reason for. not
ordering registration was that the partnership deed,
having been executed on June 2, 1948, could not be
operative during the two years under consideration,
namely, 1945-46 and 1946-47. On appeal, the Income.
tax Appellate-- Tribunal rested its decision on the
finding that the alleged partnership had not been constituted under an instrument of partnership within the
meaning of those words in s. 26A of the Act.
At the
instance of the assessee, the Tribunal framed the following question for determination by .the High Court:
" Whether the assessee firm constituted orally in
June, 1944, can validly be registered in 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 executed in June 1948."
The other parts of the statement of the case by the
Tribunal, refer to the merits of the assessment, with
which we are not concerned in this appeal. Hence, it
is not necessary to set out those facts. On this part of
the statement of the case, the High Court gave the
same answer as in the other appeal. In this case also,
the High Court granted the necessary certificate under
s. 66A(2), read with art. 135 of the Constitution. As
both the cases raise the same question of law, they
have been heard together, and will be governed by this
judgment.
(2) S.C.R. SUPR:t!1ME COURT REPORTS
647
It is convenient at this stage to set out the relevant
r959
provisions of the Act. Section 26A is in these terms:-
" 26A. Procedure in regisuation of firms.-(1) Ap-
:/;:::;s&, R;,0<;;s
plication may be made to the Income-tax Officer on
v.
behalf of any firm, constituted ·under an instrument of The Commissioner
partnership specifying the individual shares of the of Income-tax,
partners, for registration for the purposes of this Act
West Bengal,
b
"
Calcutt,,
and of any other enactment for the time eing in .Loree
relating to income-tax or super tax.
Sinha J.
(2) The application shall be made by such person
or persons and at such times and shall contain such
particulars and shall be in such 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-s. (5) of s. 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 s. 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 s. 23 of the Act.
Rule 3 requires that the application be made in the
Form annexed to the rule, and that the application
"shall be accompanied by the original Instrument of
Partnership under which the firm is constituted ...... ".
The Form appearing in r. 3, requires the assessment
year to be specified. Thus, the registration is for a
particular year of assessment, and not for future years
also, and therefore, the application for registration has
648
SUPREME COURT REPORTS [1959] Supp.
to be made every year, which in fact means an application for renewal of the registration. Paragraph 3 of
Messrs. R. C.
h
F
Mitt" & sons t e
orm requires a certificate to be signed by the apI959
v.
plicants for registration, to the effect that the profits (or
The Commissione. loss, if any) of the previous year were divided or credit.
of Jn,ome-tax. ed as shown in Section B of the Schedule.
The ]'orm
West Bengal.
contains the Schedule in 7 columns which require the
Calcutta
Sinha].
names of the partners, their addresses, the da.te of
admittance to partnership, their shares in the profits
or loss, etc., to be filled in. Under the Schedule, there
are Section A and Section B. Section A has to contain
particulars of the firm as constituted at the date of the
application, and Section B has to contain the particulars of the apportionment of the income, profits or
gains (or loss) of the business in the previous year
between the partners who in that J}!:evious year were
entitled to share therein. Rule 4 provides that if the
Income-tax Officer is satisfied that there is or was a
. firm in existence constituted as shown in the instrument of partnership, and that the application has been
properly made, he has to enter a certificate at the foot
of the Instrument of Partnership that the firm has been
registered under s. 26A of the Act, and that the certificate of registration shall have effect for the assessment
for the year specified therein. Rule 5 is as follows:-
" 5. The certificate of registration granted under
Rule 4 shall have effect only for the assessment to be
made for the year mentioned therein."
And Rule 6 makes provision for the certificate of registration to be renewed for a subsequent year, on an
application being made in that behalf in accordance
with the preceding Rules.
It is mainfest that for a true and proper construction
of the relevant provisions of the Act, relating to registration of firms, ss. 26, 26A and 28, and the Rules
summarized above, have to be read together. So read,
it is reasonably clear that the following essential conditions must be fulfilled in order that a firm may be
held entitled to registration :-
(I)· That the firm should be constituted under an
Instrument of Partnership, specifying the individual
shares of the partners.
(2) S.C.R.
SUPREME COURT REPORTS
649
(2) That an application on behalf of, and signed
I959
by, all the partners, containing all the particulars as
· th R 1
h
b
d
Afessrs. R. c.-
set out m
e
u es, as een ma e;
Mitter & Sons
(3) That the application has been made before
v.
the assessment of the income of the firm, made under The Commissioner
s. 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 confor,mity 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 to be made for that particular year. In other
words, the terms of the partnership should appear in
the Instrument of Partnership in respect of the relevant accounting year. It is equally clear that the
firm to be registered, should have been in existence
during the accounting year, " constituted as shown in
the Instrument of Partnership". The Rules, thus,
contemplate a document operative during the accounting year. We are not here concerned with the further
question whether the document should be in existence
at the very inception of the accounting year, or before
the Y.ear is out.
The provisions of the Act, set out above, do not
present any serious difficulty except for the words
"constituted under an Instrument of Partnership"
occurring in s. 26A and the relevant Rules. On the
interpretation of these words, there has been a conflict
of judicial opinion, as will presently appear. On behalf
of the assessee-appellants, it has been contended that
so long as the assessment has not been made, the
assessees are entitled to have their firms registered in
accordance with the terms of the Instrument of
S:<l
of Income-tax,
West Bengal,
Calcutta
Sinha ].
650
SUPREME COURT REPORTS [1959] Supp.
Partnership, irrespective of the year in which the
Instrument may have come into existence. Strong
A1:;;;::;s~ R;,;,;, reliance was placed upon the decision of the Bombay
v.
High Court (Chagla, C. J., and Tendolkar, J.) in the
I959
The Commissfon" case of Dwarkadas Khetan & Co. v. Commissioner of
of Income-tax. Income-tax, Bombay City, Bomb(ly(1), wherein, the
West Bengal,
following observations have been made:-
Calcutta
A
fi
k
l"
·
d
/
Sinha ].
"
ny rm can ma e an app 10at10n un er 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 the case decided by the Bombay High Court, the
Instrument of Partnership had been executed on March
27, 1946, with effect from January 1, 1946. On an
application made to the Department to register the
firm, the matter was 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 & Sons v.
Commissioner of Income-tax('), takes the ·view that
s. 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
(1) [1956] 29 I.T.R. 903, 907.
(2) [1955] 28 I.T.R. 698, 704- 705.
(2) S.C.R. SUPREME COURT REPORTS
651
come into existence on or before the commencement of
z959
the relevant accounting period. The other decision
·relied upon in the Bombay High Court, had been ;f;:;:;s&, R~;;s
given by a Division Bench of the Punjab High Court,
v.
reported in Padam Parshad Rattan Chand v. Commis- The Commissioner.
sioner of Income-tax, Delhi (1).
of Income-tax,
On the other hand, it has been contended on behalf
West Bengal,
Calcutta
of the Revenue that in order to entitle a firm to be
registered, the firm should have been created by an
Sinha J.
Instrument of Partnership, or at any rate, such an
Instrument should be in existence during the relevant
accounting year, that is, the year previous to the year
of assessment in respect of which the application for
registration has been made. F'or the first part of the
submission on behalf of the respondent, there is ample
authority in the decision under appeal, which pad
been relied upon before the Bombay High Court. In
that case, (R. C. Mitter & Sons v. Commissioner of Income-tax (supra) (2) ), Chakravarti, C. J., who delivered
the opinion of the Court under s. 66(1) of the Act,
after a very elaborate discussion, came to the conclusion which may best be expressed in his own words,
as follows :-
" If by the expression ' constituted under an
instrument of partnership' is meant a firm which
originated in a verbal agreement but with respect to
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. "
After having, thus, held that s. 26A contemplated
firms created or brought into existence by a deed in
writing, he had no difficulty in substituting " by " for
"under'', thus, making the crucial words "constituted
(1) [1954] 25 I.T.R. 335·
(2) [1955] 28 I.T.R. 698, 7% 705.
652
SUPREME COURT REPORTS [1959] Supp.
1959
by " instead of" constituted under ". In our opinion,
. the learned Chief Justice fell into the error of re-con-
/:;;;;;'~ R~o~~ structing the provisions of the statute, instead of conv.
struing them. The word " by " could be substituted
The Commissioner for the word " under " in s. 26A only if the words, as
of Income-tax, they stand in the section, were not capable of making
West Bengal,
sense, and it would, thus, have been necessary to
Calcutta
d h
d'
f th
t'
T
.
j .
t
amen t e wor rng o
e sec 10n.
urnrng us at enSinha J.
tion from the wording of the section to that of the
Rules and the Form appearing under the Rules, he
again came to the conclusion that " some of the paragraphs of the Form appear to be ill-adjusted to the
provisions of the Act"'. Referring to other parts of
the Rules, he was constrained to observe that they
" would lend strong support to the view that what is
meant by 'any 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 was 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 para. 4(1) is "undoubtedly unsatisfactory". In our opinion, any attempt to re-construct the provisions of the 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 Partnership" have some meaning
which can be attributed to them harmoniously with
the rest of the relevant provisions.
A partnership
may be created or set up by a contract in writing,
(2) S.C.R. SUPREME COURT REPORTS
653
setting out all the terms and conditions of the partr959
nership, but there may be many cases, and perhaps,
h
h
h
l
Messrs. R. C.
such cases are more numerous t an t e ot er c ass, Mitt" & sons
where a partnership has been brought into existence by
v.
an oral agreement between the parties on certain The Commissioner
terms and conditions which may subsequently be
01 Income-tax,
reduced to writing which will answer the description
Wtst Bengal,
Calcutta
of an Instrument of Partnership. Such an instrument
would, naturally, record all the terms and conditions
Sinha J.
of the contract between the parties which, at the initial stages, had not been reduced to writing. In such
n case, though the partnership had been brought into
existence by an oral agreement amongst the partners,
if the terms and conditions of the partnership have
been reduced to the form of a document, it would be
right to say that the partnership bas been constituted
under that instrument. The word "constituted " does
not necessarily mean " created " or "set up '', though
it may mean that also. It also includes the idea of
clothing the agreement in a legal form. In the Oxford
English Dictionary, Vol. II, at pp. 875 & 876, the
word " constitute " is said to mean, inter alia, "to set
up, establish, found (an institution, etc.)" and also
"to give legal or official form or shape to (an assembly,
etc.)". Thus, the word in its wider significance, would
include both, the idea of creating or establishing, and
the idea of giving a legal form to, a partnership. The
Bench of the Calcutta High Court in the case of
R. O. Mitter and Sons v. Commissioner of Incometax (1), under examination now, was not, therefore,
right in restricting the word " constitute " to mean
only " to create'', when clearly it could also mean
putting a thing in a legal shape. The Bombay High
Court, therefore, in the case of Dwarkadas Khetan and
Co. v. Commissioner of Income-tax, Bombay City,
Bombay (2), was right in holding that the section could
not be restricted in its application only to a firm
which had been created by an instrument of partnership, and that it could reasonably and in conformity
with commercial practice, be held to apply to a firm
which may have come into existence earlier by an
(r) [1955] 28 I.T.R. 698, 7.04. 705.
(2) [1956] 29 I.T.R. 903, 907.
'
654
SUPREME COURT REPORTS [1959] Supp.
z959
oral agreement, but the terms and conditions of the
partnership have subsequently been reduced to the
Aicssrs. R. C.
f'
f
f
Milter o;. Sons
orm o a document. I we construe the word "conv.
stitute" in the larger sense, as indicated above, the
The Commissioner difficulty in which the learned Chief Justice of the
of Income-tax, Calcutta High Court found himself, would be obviated
w~'
1
8~~gal, inasmuch as the section would take in cases both of
a cu a
firms coming into existence by virtue of written docuSinha J.
ments 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 Acts. 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 s. 23 (5) (a).
Section 23 (5) (a) confers a privilege upon partners who
may find it more worth their w bile to be assessed
npon their individual total income than upon the total
income of the partnership.
It is, therefore, very
important from the point of view of the Revenue that
the Department should be apprised in time of the true
constitution of the partnership, the names of the true
partners and the precise share of each of them in the
partnership profits (or loss, if any). The very object of
this provision will be defeated if the alleged partnership is not genuine, or if the true constitution of
the partnership and the respective shares of the partners, are not fully and correctly placed on record as
soon as possible, for the purpose of assessment. In
tliis connection, the provisions of s. 28(2) of the Act,
are also worth noticing. That sub-section provides
that if the Income-tax Officer or the Appellate Authorities under the Act, are satisfied that the profits of a
registered firm have been distributed otherwise than
(2) S.C.R.
SUPREME COURT REPORTS
655
in accordance with the shares of the partners, as
r959
shown in the Instrument of Partnership registered
under the Act, and governing such distribution, and
/:;;;:;s~ Rs;;s
that any partner has concealed any part of his profits,
v.
the penalty prescribed therein may be imposed upon The Commissioner
such a partner. Unless the Instrument of Partnership
0! Income-tax,
has been registered in respect of the accounting year
West Bengal,
Calc1tfta
and before the assessment has been done, the penal
provisions aforesaid cannot be enforced. It is, thereSinha J.
fore, essential, in the interest of proper administration
and enforcement of the relevant provisions relating
to the registration of firms, that the firms should
strictly comply with the requirements of the law, and
it is incumbent upon the Income-t!JoX Authorities
to insist upon full compliance with the require.ments ·
of the law.
But, in our opinion, there is no warrant
in the words of the relevant provisions of the statute
for restricting registration under s. 26A of the Act to
those firms only which have been created or brought
into existence by an Instrument of Partnership. In ·
our opinion, it is more in consonance with the terms
of the relevant provisions of the Act, referred to
above, to hold that the words "constituted under an
instrument of partnership" include not only firms
which have been created by an Instrument of Partnership but also those which may have been created by
word of mouth but have been subsequently clothed
in legal form by reducing the terms and conditions of
the partnership 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, Bombay City, Bombay (1), discloses that the partnership then in question
had come into existence with effect from the beginning of 1946, though the Instrument of Partnership
(I) [1956] 29 l.T.R. 903, 907.
656
SUPREME COURT REPORTS [1959] Supp.
I959
was executed on March 27, 1946. Thus, the Instrument
of Partnership came into existence during the accountIifessrs. R. C.
h \
h
h
b
b
Mitter .,,, Sons ing year, w atever t at year may ave een,
ecause
v.
the year 1946 was the starting year of the partnerThe Commissioner ship.
Hence, even the earliest assessment year, pre0! Income-tax, sumably the year 1947-48, would be governed by the
w~\ nengol,
terms and conditions of the written Instrument of Part-
.• cutta
nership aforesaid.
The decision of the Bombay High
•
Sinha J.
Court was followed by the same Bench of that Court
in the case of Commissioner of Income-tax, Bombay
North v. Shantilal V rajlal & Ghandulal Dayalal &
Go. (' ). In the second case, the learned Judges ruled
that the second partnership deed of September 12,
1951, which set out the names and shares of all the
partnrrs who constituted the partnership, could be
registered in respect of the accounting year November,
1948 to October, 1949. This conclusion was arrived
at without even a mention, far less a discussion, of
the relevant provisions of the Act.
Apparently, the
matter was not critically placed before the learned
Judges, when they decided the second case. The conclusion in this case is, with all respect, apparently
wrong in view of our conclusion that the Instrument
of Partnership should have been in existence in the
accounting year.
In the High Court of Punjab, the question was fully
discussed in a judgment of a Division Bench, given
by one of us (Kapur, J., as he then was), in the case of
Kalsi Mechanical Works, Nandpur v. Commissioner of
Income-tax, Sinila (2). In that case, the firm had come
into existence by a verbal agreement in June, 1944.
The deed of partnership was drawn up as late as
May 9, 1949. The application for registration of the
firm under s. 26A for the assessment year 1949-50,
was dismissed by the Income-tax Authorities as also
by the Tribunal. The High Court, after an elaborate
examination of the relevant provisions of the Act,
including the Rules and the Forms, upheld the orders
of the Department. The conclusion of the Bench was
in these terms :-
"The sections of the Income-tax Act show that
(1) [1957] 31 I.T.R. 903.
(2) [1953] 24 I.T.R. 353, 361,
(2) S.C.R. SUPREME COURT REPORTS
657
for the purpose of registration it is necessary that the
• r959
firm should be constituted by an instrument of partMessrs. R. C.
nership and in my opinion the Rules read with SecMitter & sons
tions 26 and 28 of the Act indicate that such a firm as is
v.
constituted under an instrument of partnership should The Commissioner
have been in existence during the account period and of Income-tax, •
h
ld
t
.
. t
d
.
h
West Bengal,
s ou
no come mto exrn e~ce urmg t e assessment
Calcutt<•
year, and if it was not in existence during the account
period it cannot be registered so as to affect the
Sinha J.
liabilities of the partners for income-tax accruing
during the account period."
The conclusion reached is correct, except, with all
respect, for the observation that under s. 26A, it is
necessary that the firm should be constituted "by "
an instrument of partnership. That is the leading
judgment in the High Court of Punjab. It was followed by another Division Bench of that Court in the
case of Padam Parshad Rattan Chand v. Commissioner
of Income-tax, Delhi (1), to the effect that "constituted
under an instrument " in s. 26A, meant " created or
formed by a formal deed". In this case, the business
of the firm had started from April,!, 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 l~ules
aforesaid, particularly, Rules 2 and 3, which require
(r) [1954] 25 I.T.R. 335·
83
658
SUPREME COURT REPORTS [1959] Supp.
' 959
that the application has to be made before the assessMessrs. R. c.
ment is completed and for a particular assessment
Mitter & sons year. More or less to the same effect, are two other
v.
Division Bench rulings of that High Court in Bery
The Commissioner Engineering Go., Delhi v. Commissioner of lncome0{v Inc~me·
1•;· tax, Delhi (1) and Income-tax Commissioner, Delhi v.
~~lct:i;;•' Messrs. Birdhi Chand Girdhari Lal('). In all these cases
in the Punjab High Court, the deeds came into existSinha J.
ence later than the accounting year or the assessment
year, and therefore, could not have been registered.
The actual decisions in these cases were correct,
though there are obiter dicta to the effect that s. 26A
requires that the firm should have been created or set
up by an Instrument of Partnership.
In the Patna High Court, the very same question
was discussed at great length by a Division Bench of
that Court, presided over by l'tamaswami, C. J., in the
case of Khimji Walji & Go. v. Commissioner of Income·
tax, Bihar and Orissa (').