Commissioner of Income Tax vs Rajmohan Saha and Others

Dr. B.P. Saraf, J.—This reference u/s 256(1) of the Income Tax Act, 1961, has been made by the Income Tax Appellate Tribunal, Gauhati Bench, Gauhati, at the instance of the Commissioner of Income Tax and the following question of law has been referred for our opinion :

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee-firm should have been granted registration under the Income Tax Act, 1961, without a fresh deed of partnership embodying the new constitution of the firm ?"

The assessee is a partnership firm. It was constituted by a deed of partnership dated May 1, 1972. It comprised three partners, namely, Rajmohan Saha, Akhil Chandra Saha and Meghanand Saha. The firm, as evidenced by the said partnership deed, was registered by the Income Tax Officer, A-Ward, Tripura Circle, Agartala, under the Income Tax Act, 1961 (hereinafter referred to as "the Act"), for the assessment year 1973-74. The benefit of continuation of registration was also granted for the assessment years 1974-75 and 1975-76. During the assessment year 1976-77, there was a change in the constitution of the firm. One of the partners, Shri Akhil Chandra Saha, retired and, in his place, Shri Gautam Chandra Saha was taken as a partner. This change was made by an agreement dated April 15, 1975. The said agreement was executed between the continuing partners, Rajmohan Saha and Meghanand Saha, and the incoming partner, Gautam Chandra Saha. In Clause (2) of the agreement, it was stated that the said agreement and several clauses of the partnership deed dated May 1, 1972, except Clauses (3), (4), (5) and (6) which were modified by the said agreement shall bind and regulate the relationship of the parties. As the aforesaid change amounted to a change in the constitution of the firm, an application was submitted for registration in Form No. 11A as required by Section 184(8) of the Act and the rules framed thereunder. The application was accompanied by an attested copy of the agreement dated April 15, 1975. The original deed of partnership dated May 1, 1972, was already lying in the office of the Income Tax Officer. The Income Tax Officer, however, refused to register the firm as, in his opinion, since no fresh deed of partnership had been executed, the agreement dated April 15, 1975, could not be considered a valid partnership. On appeal, the Appellate Assistant Commissioner did not agree with the opinion of the Income Tax Officer and held that the original partnership continued subject to the change effected by the subsequent agreement. He, accordingly, directed the Income Tax Officer to allow registration to the firm. The Revenue went on appeal before the Tribunal against the order of the Appellate Assistant Commissioner. The Tribunal upheld the decision of the Appellate Assistant Commissioner and rejected the appeal of the Revenue. It was held by the Tribunal that the change could be effected by an agreement between the partners without undergoing the formality of executing a fresh partnership deed. It was, therefore, held that the application in Form No. 11A was competent and that the firm was entitled to registration. Aggrieved by the decision of the Tribunal, the Revenue applied to the Tribunal u/s 256(1) of the Act for reference of the question of law referred to above to this court. The application was allowed by the Tribunal and the present reference was made.

The question that falls for determination is whether, in the case of a change in the constitution of a firm, it is necessary to execute a fresh deed of partnership or whether the change can be effected by an agreement in writing modifying some of the terms of the original deed and adopting the rest as has been done in the present case.

To properly appreciate the issue, it may be expedient to refer to the relevant provisions of the Income Tax Act. Section 184 lays down the requirements for grant of registration. Sub-section (1) thereof provides that an application for registration of a firm may be made if-

(i) the partnership is evidenced by an instrument; and

(ii) the individual shares of the partners are specified in the instrument.

Section 185 deals with the power of the Income Tax Officer to grant or refuse registration. It provides that, if the Income Tax Officer is satisfied that there is or was a genuine firm in existence, constituted as shown in the instrument of partnership, he shall register the firm. Registration once granted u/s 185 continues to have effect u/s 184(7) for every subsequent year if there is no change in the constitution of the firm or in the shares of the partners, on the furnishing of a declaration by the firm in the prescribed form within the prescribed time.

Rule 22 prescribes the form of application for registration. Clause (ii) of Sub-rule (2) of Rule 22 provides that an application for registration in the case of a change in the constitution of the firm or in the shares of the partners should be made in Form No. 11A and should be accompanied by the original instrument or instruments evidencing the partnership as in existence from time to time during the previous year up to the date of the application.

From the aforesaid provisions of the Act and the Rules, it is clear that the legal requirement, inter alia, is that a partnership is "evidenced by an instrument" ; what is an "instrument" has not been spelt out. The whole controversy, therefore, revolves round the meaning or true import of this expression. According to the Revenue, it means a formal deed of partnership and nothing less than that. The assessee''s understanding of it is in the sense of a writing--a document which gives formal expression to the agreement between the parties. If the latter view is accepted, the constitution of a partnership need not be shown in one instrument--there may be more than one instrument evidencing the partnership. In such a case, all such documents taken together shall be an "instrument" within the meaning of Section 184(1) of the Act. On a careful consideration, we find ourselves in agreement with the latter interpretation. In our opinion, the word "instrument" has been used in Section 184(1) of the Act in the sense of a writing--a document or, as observed in Rose v. Otis, 33 p 77, 5 Cols App 472, 473 (quoted in 44 Corpus Juris Secundum p. 420), a formal expression in writing of some agreement or obligation, or of some act upon which the rights of the parties are dependent. The word "instrument" cannot be given too narrow a construction so as to mean only a regular deed of partnership.

A partnership may be evidenced by one document or several documents. In the case of several documents, all such documents together shall constitute the instrument of partnership. The number of documents is not determinative. So long as the terms of the partnership are specified in any document or documents which goes to constitute the instrument of partnership, the condition of Section 184(1) is fulfilled. It will be a partnership "evidenced by an instrument".

This view of ours gets full support from a number of decisions of different High Courts which had interpreted the expression "evidenced by an instrument" in the context of Section 184 of the Act or the corresponding section of the Indian Income Tax Act, 1922, namely, Section 26A. In this connection, we may first refer to the decision of the Calcutta High Court in Ramlal Murlidhar v. CIT [ 1930] 5 ITC 150 where it was held that registration cannot be refused merely on the ground that the instrument of partnership does not contain in itself the complete agreement constituting the partnership but requires supplementation by other evidence.

We may next refer to the decision of the Bombay High Court in Chhotalal Devchand Vs. Commissioner of Income Tax, Bombay City II, where Chagla C. J. observed (P. 361) :

"So long as the terms are specified in any document which goes to constitute the instrument of partnership, the condition of Section 26A corresponding to Section 184 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 terms of Section 26A (corresponding to Section 184 of the 1961 Act) have not been complied with." ''

To the same effect is the decision of the Madras High Court in V.M. Periasamy Chettiar and Co. and Another Vs. Commissioner of Income Tax, Madras, where it was observed at page 138 of the report :

"... in a particular case where the partners of a firm execute several agreements between them for the conduct of the business of the firm all the documents might be treated as a composite integral whole despite the fact that the agreements themselves are actually engrossed in different documents or instruments."

In C1T v. Wholesale District Cloth Importers Association [1973] Tax LR 867 the Allahabad High Court also held :

"The instrument of partnership may be a single document or may be spelt out of several documents all existing in the relevant accounting year, which will together form an instrument of partnership."

The latest decision that may be referred to is the decision of the Calcutta High Court in Commissioner of Income Tax Vs. East India Lamp and Components, where in a survey of a number of authorities, it was reiterated (at page 438 of the report) :

"Thus, in our opinion, ''instrument'' does not mean only a regular partnership deed but it may constitute any other formal transfer. If the terms of a partnership are contained in a number of documents or in the correspondence between the parties, the documents or letters would constitute the ''instrument of partnership''."

In view of the aforesaid discussion, we are of the clear opinion that, for the purpose of Section 184 of the Act, it is not necessary that with every change of the constitution of a firm, a fresh deed of partnership should be executed. The change may be effected by an agreement which may refer to the terms contained in the original deed of partnership and agree to run the partnership in accordance therewith subject to the modifications or changes made by such agreement. In such a case, both the agreement and the original deed of partnership would constitute the instrument of partnership within the meaning of Section 184(1) of the Act. We are, therefore, of the opinion that the learned Tribunal was right in its conclusion that the assessee-firm was entitled to registration without a fresh deed of partnership and, accordingly, the question referred to us is answered in the affirmative and against the Revenue.

H.K. Sema, J.

I agree.