Additional Commissioner of Income Tax vs Central India Corporation

D.K. Kapur, J.—The assessee in the present reference is a partnership firm, Central India Corporation, which was constituted by a deed dated 29-4-1961, for doing business in goat and sheep skins. The term of the partnership was for three years commencing from 1-4-1961. The business of the firm, however, continued to be carried on till 16-1-1969. The firm was granted registration under the income tax Act not only for the assessment years up to 1964-65, but also for subsequent years up to 1968-69, although the firm fixed by the partnership deed had expired in those years. The Additional Commissioner. Delhi-II, passed an order u/s 263 of the income tax Act, 1961 ("the Act") cancelling the continuation of the registration for the assessment year 1968-69. He was of the opinion that the ITO was not right in law in continuing the registration and, accordingly, he directed the ITO to treat the assessee as an unregistered firm for the year 1968-69.

There was an appeal to the Tribunal which was accepted. The Tribunal was of the view that the conditions set out in section 184(7) of the Act were fulfilled and, hence, the registration could not be discontinued by the ITO, inter alia, it was held that the identity of the firm was the same as before, the shares of the partners were not altered, and hence, the ITO''s order continuing the registration was not wrong or invalid. In the course of the discussion in the order, it was pointed out that there was difference between the renewal of registration u/s 26A of the Indian income tax Act, 1922 ("the 1922 Act"), and the continuation of registration under the 1961 Act.

Now, at the instance of the Additional Commissioner, Delhi-II, the following questions have been referred to us:

Whether, on the facts and in the circumstances of the case, the assessee-firm was entitled to continuation of registration for the assessment year 1968-69?

Whether, on the facts and in the circumstances of the case, the Additional Commissioner of income tax was justified in cancelling the income tax Officer''s order continuing registration of the firm for the assessment year 1968-69 and directing the income tax Officer to treat the firm as an unregistered firm?

Learned counsel for the Commissioner has relied on certain observations in S.P. Pandey and Brothers Vs. Commissioner of Income Tax, to contend that it was held there that if the term of partnership fixed by the deed has expired, then the old partnership is not continued for the purposes of the income tax Act, although the partnership could continue u/s 17(b) of the Indian Partnership Act even with out a fresh deed. Reliance was also placed on Nawab and Brothers Vs. Commissioner of Income Tax, , where it was held that if a partner retires and no new partnership deed is drawn up, then renewal cannot be granted. Lastly, reference was made to Durgaprasad Rajaram Adatiya Vs. Commissioner of Income Tax, , wherein it was held that if a minor became a partner on attaining majority and there was no fresh partnership deed, then the firm could not be registered.

We are of the view that these judgments are not applicable to the questions which have arisen in the present case. The observations in the Patna High Court''s case were obiter, and have been distinguished in a similar case as the one before us, by the Punjab and Haryana High Court. The other two judgments are concerned with the effect of section 184(7).

We are clearly of the view that the pro visions of the 1961 Act require that the registration should be renewed unless the conditions provided in section 184(7) are not fulfilled. It is now necessary to repeat the relevant provisions for reference. The sub section (7), as it stood at the relevant time, reads as follows:

(7) Where registration is granted to any firm for any assessment year, it shall have effect for every subsequent assessment year:

Provided that--

(i) there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the registration was granted; and

(ii) the firm furnishes, along with its return of income for the assessment year concerned, a declaration to that effect, in the prescribed form and verified in the prescribed manner.

The provision shows that only two conditions are necessary for continuation of the registration. One is that there should be no change in the constitution of the firm or the shares of the partners as evidenced by the original partnership deed. Now, it can happen that though the term of the partnership has expired as per deed, still the firm may continue to operate. This is specially provided for by section 17(6) of the Indian Partnership Act. Also, section 42 of that Act shows that a dissolution of a firm constituted for a fixed term is subject to contract between the parties. This means that even if there is a contract providing for dissolution on a particular date, that term of the partnership is subject to further contract between the parties. The parties may agree to continue the period or continue the partnership in some other way even after the specified date of dissolution. Thus, there is a distinct possibility of the firm being carried on even after the specified dissolution date either because section 17(b) of the Partnership Act provides or, because the parties mutually agreed that the partnership should continue notwithstanding the expiry of the fixed term.

The provisions of the Act, as they now stand, require that registration should be continued if the conditions provided by section 184(7) are satisfied. They were satisfied in this case, and, therefore, there was no way in which the registration could come to an end. Even the declaration, which has to be in Form No. 12, appended to the income tax Rules, 1962, shows that all that is required is a statement that the constitution of the firm has not changed and the shares of the partners remain the same.

This view of the law that we have taken has also been taken in Commissioner of Income Tax Vs. Standard Plastic Industries, , by the Punjab and Haryana High Court. We asked learned counsel as to how the registration could not be renewed in view of the express terms of section 184(7). He submitted that there has to be a written partnership deed and if the old deed ceases to operate, then the conditions are not satisfied. We do not find this to be so u/s 184(7). All that the provision states is that the constitution of the firm and the shares of the partners as evidenced by the partnership deed on the basis of which the registration was granted should not have altered. It does not state that the same deed must continue to operate. Undoubtedly, the position under the 1922 Act was that there had to be a renewal of registration every year, so there had to be a written partnership in force. But, that is not so under the 1961 Act. The 1961 Act requires the original partnership to be by a written partner ship deed, but the renewal is on the basis that the same firm continues. This continuation comes about, because the firm actually continues and a declaration is filed to that effect. If the declaration is erroneous, or any other defect can be found therein, then the ITO can act under the provisions of section 185 to point out the defect and give one month''s time to rectify the same, or he can cancel the registration u/s 186 after giving notice to the firm. But, even for cancelling the registration, it has to be established that there is no genuine firm in existence. Then there is section 187 which states that if there is a change in the constitution of the firm then the firm as constituted at the time of making the assessment has to be assessed.

There is no provision in the Act which provides that if the term fixed by the partnership deed has expired then the registration cannot be continued. We, therefore, uphold the decision of the Tribunal.

The result will be that we answer Question No. 1 in the affirmative to hold that the firm was entitled to continuation of registration and we answer Question No. 2 in the negative by holding that the Additional Commissioner was not justified in cancelling the ITO''s order continuing the registration. As the question has arisen because of the leave the parties to bear their own costs. We alteration made in the 1961 Act, as compared order accordingly, with the 1922 Act, we consider that we should leave the parties to bear their own costs. We order accordingly.