A.S.S.R. Guruswami Chettiar vs The Commissioner of IncomeTax, Madras

Jagadisan, J.—The firm of partnership called A.S.S.R. Guruswami Chettiar and Co. carrying on business in forest coupe contract at Rajapalayam and its surrounding area was registered under S. 26A of the Indian Incometax Act by the department. The firm was constituted under an instrument of partnership dated 29th May 1954. Detailed reference to this instrument will be made later. The firm was registered for the assessment year 1955-56. For the subsequent assessment year 1956-57, an application for renewal of registration signed by four persons claiming to be partners of the firm was preferred to the department. The profits of the previous year ending 31st March 1956 earned by the firm were divided in the books of account not between the four persons who signed the application for renewal but between the two firms (1) A.S.S.R. Sanjeeva Raja, Rajapalayam and (2) R. K. P. Guruswami Chettiar, Rajapalayam. The Additional income tax Officer. Virudhunagar, refused to renew registration and dismissed the application on the ground that the profit sharing ratio of each of the four signatories to the application who claimed to be partners were not specified either in the instrument of partnership or in the application for renewal. The assessee firm took the matter on appeal to the Appellate Assistant Commissioner who however concurred with the view of the Incometax Officer. On behalf of the assessee reliance was placed before the appellate authority on the decision of the Bombay High Court in Chhotalal Devchand Vs. Commissioner of Income Tax, Bombay City II, . But the Assistant Commissioner, rightly felt bound by the decision of this Court in Kannappa Naicker''s Case 1937 I. T. R. 49, which is in conflict with the decision of the Bombay High Court and dismissed the appeal. There was a further appeal by the assessee to the Incometax Appellate Tribunal which again confirmed the decision of the Incometax Officer and that of the Appellate Assistant Commissioner. On an application preferred under S. 66 (1) of the Indian Incometax Act, the Tribunal has referred the following question of law for consideration by this Court :

Whether the assesses is entitled to renewal of registration under S. 26A of the Act.

The Tribunal observed that the Appellate Assistant Commissioner preferred to rely upon the decision of this Court in Chhotalal Devchand Vs. Commissioner of Income Tax, Bombay City II, . This is not a correct reading of the Appellate Assistant Commissioner''s order. We do not think that the Appellate Assistant Commissioner chose to follow the Madras ruling in preference to the ruling of the Bombay High Court even assuming he had any such choice in the matter. This is what the Appellate Assistant Commissioner observes in his order:

The appellant''s representative relied upon the decision of the Bombay High Court on the unreported case of Messrs. Chotalal Devichand (83 ITR 1957) I agree that, if this decision has been correctly quoted by the appellant and were held to lay down the law finally, the appellant''s contention should be accepted. But there is a decision of the Madras High Court referred to by the Incometax Officer expounding the contrary view......In view of the decision of the Madras High Court which is binding here, the appellant''s plea cannot be accepted.

The following observation of the Tribunal in its order

We see no reason to depart from the ratio laid down in Kannappa Naicker''s case 1937 I. T. R. 49 and cannot accept the request for registration of the assessee

is somewhat equivocal We have however no doubt that the Tribunal meant to say that the decision of this Court in Kannappa Naicker''s Case 1937 I. T. R. 49, was binding as it would not be fair to hold that the Tribunal was not aware of its elementary duty that so far as Madras cases are concerned the decisions of this Court have a compelling force.

The short point that arises for consideration in this reference is whether the assessee firm is entitled to registration under S. 26A of the Act. The instrument of partnership dated 29th May 1954, on which the claim for registration was founded, mentions only two partners, namely, (1) A. S. S. Sanjeeva Raja & Co., and (2) R. K. P. Guruswami Chettiar and Co. The recitals in the partnership instrument show that the partnership of A.S.S.R. Guruswami Chettiar and Co. is composed of the two firms, A. S. S. C. Sanjeeva Raja and Co. and R. K. P. Guruswami Chettiar and Co. The shares of the partners are thus set out in the deed:

The said A.S.S.C. Sanjeeva Raja and Co. partnership firm, the individual No. 1 shall have one, out of two shares and that R. K. P. Guruswami Chettiar and Co. partnership firm, the individual No. 2 shall have one, out of the two shares.

The signatories to this instrument are four in number (1) A. Sadayandi Chettiar, (2) A. S. Sanjeeva Raja, (3) K. Ramalinga Chettiar and (4) P. Guruswami Chettiar. The first two signatories are the partners of the firm, A. S. S. C. Sanjeevi Raja and Co. and the last two signatories are the partners of the other firm, R. K. P. Guruswami Chettiar and Co. If this instrument of partnership is to be construed as constituting an agreement of partnership between the two firms, Sanjeeva Raja and Co. and Guruswami Chettiar and Co., it is obvious that the assessee is not entitled to registration as there can be no partnership in law between the two firms. This position has now been made clear by the decision of the Supreme Court in Dulichand Lakshminarayan Vs. The Commissioner of Income Tax, Nagpur, . Indeed the contention of the assessee in the course of the entire proceedings has only been that the partnership as constituted under the instrument is not a partnership of the firm, but is only a partnership of the four persons, who have signed the instrument. The department and Tribunal have proceeded on the footing that there is a valid partnership in law as between the four persons who signed the instrument and this reference will therefore be dealt with on that basis.

Registration has been refused only on the ground that the profit sharing ratio of the four persons, namely, the four individuals who have signed the instrument of partnership does not appear on the face of the document. As stated already the shares disclosed by the document are that the two firms, Sanjeevi Raja and Co. and Guruswami Chettiar and Co., should have equal shares. There can be no doubt that, prima facie taking into account only the instrument of partnership dated 29th May, 1954, the view taken in the matter that the assessee is disentitled to registration is well founded. But learned Counsel for the assessee contends that the share of each individual partner can easily be ascertained by reference to the instrument of partnership relating to the two firms, Sanjeeva Raja and Co. and Guruswami Chetti and Co., that it is permissible to look into those documents for proper ascertainment of the shares, and that if is even incumbent on the authorities to do so. We have to examine whether this contention is sound or not.

Section 26-A in so far as it is material reads as follows :

Application may be made to the income tax Officer on behalf of any firm, constituted under an instrument of partnership specifying the individual shares of the partners for registration for the purposes of this Act and of any other enactment for the time being in force relating to income tax or super-tax.

Rules 2 to 6 (B) framed under S. 59 of the Act deal with registration of firms. R. 3 prescribes the form of the application to be made and provides that the application should be accompanied by the original instrument of partnership. It is unnecessary to refer to the rules elaborately as the point that has now to be decided really turns upon the crucial words occurring in S. 26A namely :

under the instrument of partnership specifying the individual shares of the partners.

An application for registration under S. 26A cannot be maintained unless there is an instrument of partnership and that specifies the share of each partner. The language of the statute is so plain that there is no scope of any misinterpretation. There can be no specification of the shares in the instrument unless the shares are set out, and do find a place on the face of the instrument. The partnership law presumes equality of shares in the absence of a contract to the contrary (Vide S. 13 of the Partnership Act). An omission in the deed of partnership to mention the shares, by accident or design, cannot be cured for purposes of registration under S. 26-A by reference to the relevant statutory provision. The question that needs consideration in the registration proceedings is whether the shares are noted in the instrument, and not whether they are capable of ascertainment by evidence aliunde or by application of legal principles. The intention of the Legislature--this intention is made plain by the specific words in the section--is that there should not be a roving enquiry as to who the partners of the firms are or as to what their respective shares are.

We shall now refer to a few decisions which have a bearing on the question to be answered. The decision in Kannappa Naicker and Co. v. Commissioner Incometax 1937 I. T. R. 49, is a decision of this Court. It was held in that case that a partnership cannot be registered as a firm under S. 26-A of the Act where the instrument of partnership does not specify on the face of it the individual shares of the partners. The partnership in that case consisted of a firm and some individuals. The deed of partnership mentioned the proportion in which the profit and loss were to be shared between the firm and the other partners respectively, and does not specify the shares of the partners of the firm who were members of the partnerships, Registration under S. 26-A was refused. At p. 60, the learned Judges observed these

The application was refused on the ground that the individual shares of the partners were not specified in the instrument of partnership. The instrument of partnership as has already been slated treats the partnership of M.K. Naick and Sons which was made up of four partners as one of the three partners in the firm of M. K. Naick and Co., and to this partnership a seven annas share in the rupee in the profits and losses is given. The contention of incometax authorities is that as M. K. Naick and Sons consists of four partners, the shares of each of them should have been set out in the partnership deed............The shares of the partners in M. K. Naick and Co., are each Rs. 0-1-9 totalling seven annas and as that partnership had previously been registered, a reference to the instrument relating to it, a copy of which was filed with the Incometax Authorities, would show this....Not with standing this knowledge the Incometax Officer--and his action has been upheld by the Commissioner--presumably took the view that he was rigidly bound by the words of the section and that as in the Instrument of partnership these Individual shares were not given, registration must be refused......The Individual shares of the partners must be specified in the instrument of partnership. They were not. That being so, the Incometax Officer could refuse registration on that ground.

The Patna High Court followed Kannappa Naicker''s Case 1937 ITR 49 in the decision in Khimji Walji and Co. Vs. Commr. of Income Tax, . The facts in that case were that a partnership firm was constituted by a deed executed in the year 1916. There were two partners K and R, K''s share being ten annas and R''s share being six annas. On the death of K, his three sons acquired the ten annas interest and on the death of R. his son and grandson acquired his six annas interest. In 1931 these five members, the three sons of K and the son and grandson of R, executed a partnership deed in which the sons of K were collectively shown as having ten shares and the heirs of R as collectively having a six annas share. On 1st April 1947 these five persons executed a second deed of partnership affirming the first deed and in addition specifying the individual shares of the five partners. Applications for registration were made in 1945 and 1946 for the registration of the firm of the assessment years 1945-46 and 1946-47, and in 1947 for registration for the assessment year, 1947-48. The Incometax Officer and the Appellate Assistant Commissioner rejected all the three applications on the ground that the shares of the individual partners were not specified in the first partnership deed and that the second deed of partnership submitted along with the third application was executed after the accounting period had expired. The Appellate Tribunal confirmed the orders of the Incometax authorities. On a reference under S. 66 (1), the High Court held that the firm constituted by the partnership deed executed in 1931 could not be registered for any of the assessment years. At page 469 Ramaswami, J. as he then was, observed thus:

........ I am of opinion that the provisions as to the specifications of the shares in the deed enacted under S. 26-A of the Act and the provisions as to the specification of share of each partner in the application form prescribed under R. 3 are mandatory in nature and unless these provisions were strictly complied with the partnership firm is not entitled to get itself registered under the provisions of S. 26-A. It is to be remembered in this connection that registration of firms under the Incometax Act is not a general right but it is a mere privilege given to the partners in order to enable the individual partners to get the benefit of the lower rates of assessment applicable wherever such rates are lower than the rate applicable to the total income of the firm computed as a whole.

The decision in (1955) 27 ITR 88 is that of the Nagpur High Court. It was held in that case that if firms enter into any partnership the partners of the smaller firms would individually become partners of the bigger firm and unless these individual shares are defined and each of them personally signs the application for registration, the requirements of the law would not be fulfilled. In support of this view the learned Judges followed the decision in Kannappa Naicker''s Case 1937 ITR 49.

It was held by the Lahore High Court in (1957) 32 ITR 117 that even though a partnership between two firms may be held to be legal on the ground that it is a partnership between all the partners of the two component firms, yet for purposes of S. 26A of the Incometax Act, and the rules prescribed thereunder in the case of a partnership between two firms, the names and the individual shares of the partners of the firm, who has combined to form a larger partnership, must be specified in the instrument of partnership, and each one of them must personally sign the application for registration. It was further held that in the absence of the specification of the shares or of the signature of every individual partner of the component firms the Incometax Officer would be justified in refusing registration for the larger partnership. We have already expressed the view that there can be no partnership in law between the two firms. But this decision of the Labour High Court is authority for the position that regard must be had only to the instrument of partnership for the ascertainment of the shares of the individual partners, and not to any other document.

We shall now refer to the decision of the Bombay High Court in Chhotalal Devchand Vs. Commissioner of Income Tax, Bombay City II, , which is indeed the main plank in the argument of learned Counsel for the assessee. Under a deed dated 13th September 1945 a partnership was constituted between three parties, namely, two firms and an individual One of the firms had four partners and the other firm had two partners. The deed was signed by all the seven individuals. In order to ascertain the shares of the seven individuals, the partnership deed of the two firms which were filed with the department were relied on. Registration was refused on the following ground : (1) That is not a valid partnership, as it was constituted of two firms and an individual ; (2) that in the books of account of the partnership the profits were credited not to the names of each constituted individual but only to the names of the firms and (3) that the deed of partnership did not specify the share of each of the individuals constituting the two firms. On a reference to the High Court, it was held that it was the constituent members of the two firms and not the firms as entities that had entered into a partnership which the individual, and therefore the partnership so constituted was a valid partnership, that the failure to credit the profits to the individual accounts of the constituent members of the two firms was immaterial and that as there were different deeds constituting the two firms and those deeds were in the file of the department it was not necessary that the deed of partnership itself should be specified in the shares of the individuals. In this case we are really concerned with the correctness of the view of the Bombay High Court in regard to the third ground. The learned Chief Justice dealing with the third ground observed thus at p.

Now it is perfectly true that under S. 26-A it is the instrument of partnership which must specify the shares of the partners and unless the Instrument of partnership so specifies, the firm cannot be registered on the basis of that instrument or partnership. Now an instrument of partnership may be constituted by one or several documents. What S. 26 A requires is that the document which constitutes the instrument of partnership must specify the share of the partners Let us first take a simple case before we come to the facts of this case. Two partners may draw up a partnership deed setting out the capital to be brought by the partners, the work to be done, the terms of the partnership, but they may not mention in this document the shares of the partners. They may draw up another document in which they may only specify the shares. Now both these documents together would constitute the instrument of partnership, and from this instrument of partnership they could gather both who the partners are and what their share are.....So long as the terms are specified in any document which goes to constitute the instrument of partnership, the condition of S. 26-A is satisfied. You may have only one instrument of partnership, in which case all the terms must be found in that instrument. But you may have more than one instrument and if all the terms of the partnership and the shares of the partners can be gathered from such documents, then so long as the assessee is relying on these documents, there is no reason why the department should refuse to look at any other document than the partnership deed, and also there is no reason to hold that the terms of S. 26-A have not been complied with.

With great respect to the learned Chief Justice we are unable to agree with his view. The illustration posed by the learned Chief Justice of the terms of the partnership being found in several documents can have no application to a case where the partnership is between individuals, some of whom constitute a separate firm amongst themselves. It must be remembered that the document constituting the partnership sought to be registered has nothing to do with the latter partnership. A plain case where the partners of a firm embody the terms and conditions of the firm under several documents instead of one document cannot certainly help to resolve the problem now before us.

It is artificial to construe a partnership of which another firm is ostensibly a member, as a partnership composed of the members of the latter firm, because of their having signed the instrument. This is only a convenient mode to get over the legal obstacle that a firm as such, not being a legal entity,cannot be a member of another firm. After this first hurdle is jumped over the next hurdle encountered in the way of registration is the absence of profit sharing ratio of the so-called partners who constitute the other firm. This difficulty is sought to be dispelled by inviting the attention of the department to the other deed or deeds of partnership. We do not understand what there is in common between the two or more agreements of partnership, the one which is the subject matter of registration and the other or others. The partners are not the same. There may not be any identity between the several businesses. The collective share arranged to the members who constitute a different firm need not necessarily be shared in the ratio of their shares in their separate partnership. The instrument sought to be registered is silent about it. In order to split up the collective share in the ratio of the shares as agreed to by the collective shares in their partnership agreement, an assumption has to be made that they represent that firm. Logic and consistency are necessary desiderata even in the matter of construction of documents. We cannot treat the signing individuals as partner in their own right, for one purpose and immediately stultify that position by treating them as representatives of the firm for another purpose.

The importance and significance of the expression "an instrument of partnership" in S. 26-A cannot be missed. The ordinary rule of construction of statutes is that words should be construed according to their plain, literal and grammatical meaning. It is true that the "language of statute is not always that which a rigid grammarian would use." [Leyon v. Tunker 6 Q. B. D. 660 at 664 Grove J.]. A strict adherence to grammar might lead to doubts and obscurity. But Courts should not depart from rules of grammar without any proper justification in interpreting statutes. The rule was enunciated by an Irish Judge in Warburton v. Loveland 1 Hud. Bros. 632 at 648 in the following terms :

I apprehend it is a rule in the construction of of statutes that in the first instance the grammatical sense of the words is to be adhered to. If that ft contrary to, or inconsistent with, any expressed intention or declared purpose of the statute, or if it would Involve any absurdity, repugnance, inconsistency the grammatical sense must then be modified, extended or abridged, so far as to avoid such an inconvenience, but no further.

In Grey v. Pearson 6 H. L. C. 61, 106, a House of Lords case, the rule is stated thus :

.......In construing wills, and indeed statutes and also other instruments, the grammatical and ordinary sense of the words is to be adhered to, unless that would lead to some absurdity, or some repugnance or inconsistency with the rest of the instrument, in which case the grammatical and ordinary sense of the words may be modified, so as to avoid the absurdity and inconsistency, but no further.

We do not think that any absurd results would follow by holding that when the Legislature uses the expression "an instrument of partnership" it did confine the scope and jurisdiction of the registration proceedings to a consideration of the basic instrument and to that instrument alone. The object of the Legislature is to have a summary enquiry in the manner of registration and precaution has therefore to be taken to limit the enquiry to as narrow a compass as possible. We are therefore of opinion that evidence regarding the shares of the partners should be afforded within the four corners of the instrument used as the basis of the claim for registration and should not be made to depend on a reference and scrutiny of a number of documents either between the same partners or between the partners and other third parties.

Assuming that it would be permissible for the department to refer to the instrument of partnership composing the two firms of Sanjeeva Raja and Co., and Guruswami Chetti and Co., it is very clear that those documents cannot throw any light as to how the share income of the partnership of the firm sought to be derived by the signatories of the instrument dated 27th September 1954. In other words while the deeds of partnership relating to the other firms provide only for the distribution of the income of those firms, there is nothing either in those instruments or in the instrument of 27th September 1954 as to indicate how the profits of the firm sought to be registered has to be distributed between the four signatories of this latter instrument. We find ourselves in respectful agreement with the ratio of the decision in Kanaappa Naicker''s case 1937 I. T. R. 49 and we express our respectful dissent from the view of the Bombay High Court in Chotalal''s case 34 I. T. R. 35. The reference is answered against the assessee, who will pay the costs of the department. Counsel''s fee Rs. 250.