A.S.S.R. Guruswamy Chettiar vs Commissioner of Income Tax

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 u/s 26-A of the Indian Income Tax 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 two firms, (i) A.S.S.R. Sanjeevi

Raja, Rajapalayam and (ii) R.K.P. Gurusami 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 income

tax 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, Bombay, . But the Assistant Commissioner, rightly felt bound by the decision of this

Court in Kanniappa Naicker''s case ILR (1937) Mad. 814, 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 Income Tax Appellate Tribunal which again confirmed the decision of the income tax

Officer, and that of the Appellate Assistant Commissioner. On an application preferred u/s 66(1) of the Indian Income Tax Act, the Tribunal has

referred the following question of law for consideration by this Court:

Whether the Assessee is entitled to renewal of registration u/s 26-A of the Act.

The Tribunal observes that the Appellate Assistant Commissioner preferred to rely upon the decision of this Court in Kanniappa Naicker''s case

ILR (1937) Mad. 814, as against the decision of the Bombay High Court in Chhotalal Devchand Vs. Commissioner of Income Tax, Bombay City,

Bombay, . 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 Commissioner observes in his order:

The Appellant''s representative relied upon the decision of the Bombay High Court in the unreported case of Chhotalal Devchand Vs.

Commissioner of Income Tax, Bombay City, Bombay, . 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

income tax 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 Kanniappa Naicker''s case ILR (1937) Mad. 814 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 Kanniappa Naicker''s case

ILR (1937) Mad. 814, 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 u/s 26-A of the Act. The

instrument of partnership, dated 29th May 1954, on which the claim for registration was founded, mentions only two partners, namely, (i)

A.S.S.C. Sanjivi Raja & Co. and (ii) R.K.P. Gurusami Chettiar & Co. The recitals in the partnership instrument show that the partnership of

A.S.S.R. Gurusami Chettiar & Co., is composed of the two firms, A.S.S.C. Sanjivi Raja & Co., and R.K.P. Gurusami Chettiar & Co. The shares

of the partners axe thus set out in the deed:

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

& Co., partnership firm, the individual No. 2 shall have one, out of two shares;

The signatories to this instrument are four in number: (i) A. Sadayandi Chettiar, (ii) A.S. Sanjivi Raja, (iii) K. Ramalingam Chettiar and (iv) P.

Gurusami Chettiar. The first two signatories are the partners of the firm, A.S.S.C. Sanjivi Raja & Co., and the last two signatories are the partners

of the other firm, R.K.P. Gurusami Chettiar & Co. If this instrument of partnership is to be construed as constituting an agreement of partnership

between the two firms, Sanjivi Raja & Co., and Gurusami Chettiar & 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 firms, but is only a partnership of the four persons

who have signed the instrument. The department and the 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 partners, 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, Sanjivi Raja & Co., and Gurusami Chettiar & 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

instruments of partnership relating to the two firms, Sanjivi Raja & Co., and Gurusami Chettiar & Co., that it is permissible to look into those

documents for the proper ascertainment of the shares, and that it is even incumbent on the authorities to do so. We have now to examine whether

this contention is sound or not.

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

(1) 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 u/s 59 of the Act deal with registration of firms. Rule 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 Section 26-A, namely,

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

An application for registration u/s 26-A 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 for 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 Section 13 of the Partnership Act.) An omission in a deed of partnership to mention the shares, by

accident or design, cannot be cured for purposes of registration u/s 26-A by referring 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 aliundi 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 Kanniappa Naicker & Co. v.

Commissioner of income tax ILR (1937) Mad. 814, is a decision of this Court. It was held in that case that a partnership cannot be registered as a

firm u/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 profits and loss

were to be shared between the firm and the other partners respectively, and did not specify the shares of the partners of the firm which was a

member of the partnership. Registration u/s 26-A was refused. At page 826, the learned Judges observed thus:

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 stated, treats the partnership of M.K. Naicker & Sons which was made up of four partners as one

of the three partners in the firm of M.K. Naicker & Co., and to this partnership a seven annas share in the rupee in the profits and losses is given.

The contention of income tax authorities is that, as M.K. Naicker & 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. Naicker & Sons were each Re. 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 income tax authorities,

would show this.... Notwithstanding this knowledge the income tax 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 income tax Officer could refuse registration on that ground.

The Patna High Court followed Kanniappa Naicker''s case ILR (1937) Mad. 814 in the decision in Khimji Walji and Co. Vs. Commr. of

Income Tax, . The facts in that case were that a partnership business 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 annas share 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 for the assessment years 1945-46 and 1946-47, and in 1947, for registration for the assessment year 1947-48. The income tax 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 income tax authorities. On a reference u/s 66(3), 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 u/s 26-A, and the provisions as to the specification of

the share of each partner in the application form prescribed under Rule 3, are mandatory in nature and unless these provisions are strictly complied

with, the partnership firm is not entitled to get itself registered under the provisions of Section 26-A. It should be remembered in this connection

that the registration of firms under the income tax Act is not a general right but it is a mere privilege given to the partnership 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 would individually partnership the

partners of the smaller firms would individually become the partners of the bigger firm and unless their 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 Kanniappa Naicker''s case ILR (1937) Mad. 814.

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 Section 26-A of the income tax Act and

the rules prescribed thereunder, in the case of a partnership between two firms, the names and the individual shares of all the partners of the firms,

which have 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 share or of the signature of every individual partner

of the component firms, the income tax 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 two firms. But this decision of the Lahore 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,

Bombay, , which is indeed the main plank in the argument of the 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 grounds: (i) that it was not a valid

partnership, as it was constituted of two firms and an individual, (ii) that in the books of account of the partnership the profits were credited not to

the names of each constituent individual but only to the names of the firms, and (iii) 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 firm, as entities, that had entered into a partnership with 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 have specified 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 pages 1199, 1200.

Now it is perfectly true that u/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 of partnership.... Now an instrument of partnership may be

constituted by one or several documents. What Section 26-A requires is that the documents which constitute the instrument of partnership must

specify the shares 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 one could gather both who the partners are and

what their shares are.... So long as the terms are specified in any document which goes to constitute the instrument of partnership, the condition of

Section 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 various 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 twins of Section 26-A, have not been complied with.

With greet 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 the 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 parties are not the same. There may not be any

identity between the several businesses. The collective share assigned 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 sharers 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 partners in their own right for one purpose and immediately stultify that position by treating them as representatives of a firm

for another purpose.

The importance and the significance of the expression an instrument of partnership in Section 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 statutes is...not always that which a rigid grammarian would use Lyons v. Tucker, Grove, J. (1881) 6 Q.B.D. 660, 664.

A strict adherence to grammar might lead to doubts and obscurity. But Courts should not depart from rules of grammar readily without any

proper justification in interpreting statutes. The rule was enunciated by an Irish Judge in Warburton v. Loveland 1 Huds. Bros. 632, 648 in the

following terms:

I apprehend it is a rule in the construction of statutes that in the first instance the grammatical sense of the words is to be adhered to. If that is

contrary to, or inconsistent with, any expressed intention or declared purpose of the statutes, or if it would involve any absurdity, repugnance, or

inconsistency the grammatical sense must then be modified, extended or abridged, so far as to avoid such an inconvenience, but no further.

In Grey and Ors. v. Pearson (1857) 6 H.L.C. 61 a House of Lords case, the rule is stated, thus:

...in construing wills and indeed statutes, and all written instruments, the grammatical and ordinary sense of the words is to be adhered to, unless

that would lead to borne 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 farther.

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 matter 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 to 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 Sanjivi Raja &

Co. and Gurusami Chetty & 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 registered is 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 have to be distributed between the four

signatories of this latter instrument. We find ourselves in respectful agreement with the ratio of the decision in Kanniappa Naicker''s case ILR

(1937) Mad. 814, and we express our respectful dissent from the view of the Bombay High Court in Chhotalal Devchand Vs. Commissioner of

Income Tax, Bombay City, Bombay,

The reference is answered against the Assessee, who will pay the costs of the department.