M.R. Raju Chettiar vs The Commissioner of Income Tax

Srinivasan, J.—The assessee firm, carrying on business in jiggery, was constituted under a deed of partnership dated 27th January, 1955.

There were two partners, M.R. Raju Chettiar, who provided the capital, and S. Raju Chettiar, the working partner. The document set out that the

partnership had been carrying on business from the 13th September, 1953, though it contained no reference to any instrument governing the

partnership.'' For the asessment year 1955-56, the relevant account year for which ended on the 31st March, 1955, an application was made u/s

26-A of the Indian Income Tax Act for the registration of the firm. The document of partnership was enclosed thereto. It is not in dispute that this

document specified the shares of the partners in the profits of the firm. It is not also in dispute that the application conformed to the requirements of

the Act and the Rules framed thereunder. The Income Tax Officer refused registration for the principal reason that "" there was no firm throughout

the year of account and the deed of partnership is dated only 27th January, 1955."" He relied also upon the fact that for the earlier assessment year

1954-55, a claim was put forward that the business was carried on by a firm and that the claim was not allowed then,

as there was no evidence to show that there was a partnership in the account year 1953-54 relevant for 1954-55 assessment and there was no

partnership deed. Now it is claimed that there is a deed of partnership dated 27th January, 1955 and that the profits have been credited on 31st

March, 1955, in the respective accounts of the partners....

It has been held in the previous year of assessment that there was no firm in the accounting year 1953-54 and the only evidence for the coming into

existence of a firm is a deed of partnership dated 27th January, 1955. For these reasons, registration was refused and the assessment was made in

the individual name of M.R. Raju Chettiar.

In appeal, it was contended before the Appellate Assistant Commissioner that the share of profits had been duly recorded in the books of

account in accordance with the partnership agreement which had been in force from the 13th of September, 1953, and that the arrangement had

been regularised by the execution of an instrument of partnership. It was therefore pressed before the Appellate authority that all the formalities

required by Section 26-A were fully complied with and that there was no justification for refusing registration. The Appellate Assistant

Commissioner, however, thought that the document dated 27th January, 1955, did not create a new partnership, nor did it re-create the old

partnership. He took the view that the instrument under which the partnership was created should have been in existence during the accounting

year. He was of the further opinion that

if the document does not by itself constitute or create the partnership or if the partnership does not owe its birth to the instrument of partnership, if

the instrument does not declare that it had brought the partnership into existence, it is not entitled to the benefits of the registration.

The appeal was accordingly dismissed. A further appeal to the Tribunal met with like fate. After referring to the agreement dated 13th September,

1953, which the Tribunal thought could not have really come into existence, the Tribunal held that there was no instrument of partnership during the

year of account and it relied upon N.T. Patel and Co. Vs. The Commissioner of Income Tax, in upholding the order of refusal to register.

On the application of the assessee, the following question was referred by the Tribunal for a decision of this Court:

Whether the firm is entitled to registration u/s 26-A for the assessment year 1955-56?

We are of the view that the orders of the Departmental Officers and the Tribunal cannot be supported. It is not in dispute that in so far as the

assessment year is concerned, an application which complied with the requirements of the section and the rules was duly made. No technical

defect of any description has been alleged which would disentitle the firm to registration. In the deed of partnership dated 27th January, 1955,

there is specific reference to the fact that

the partnership is carrying on business from the 13th September, 1953, and the firm will be at the will of the partners.

In the form of application also, the date of admittance to partnership of the respective partners is mentioned as 13th September, 1953. Even in the

application for registration for the earlier assessment year, the claim was made that the profits had been credited in the respective accounts of the

partners, but that earlier application was dismissed principally for the reason that there was no instrument of partnership. There is no suggestion in

any of the orders of the officers that the firm was not found to be genuine either in the earlier year of account or in the year of account now in

question. The reason given by the Income Tax Officer was that as the deed of partnership is dated only 27th January, 1955, there was no firm

throughout the year of account. We can only understand this statement to mean that the deed of partner- ship having come into existence during the

year of account, it did not cover the relationship of the partners during the entirety of the period of account. The precise reason why the Appellate

Assistant Commissioner upheld the refusal to register the firm is not clear. He observes:

It is necessary that the partnership should be constituted by an instrument of partnership; that such a partnership as is constituted under the said

instrument should be in existence during the account year.

The further observations of the Appellate Assistant Commissioner appear to indicate that in his view the document should have come into existence

even at the date of the commencement of the account year; otherwise, the instrument could not be said to be in existence during the account year.

Nor do we find in the order of the Tribunal any clearer expression of opinion. The question therefore resolves itself into determining whether where

a partnership has been commenced under an agreement oral or written, such agreement being prior to the date of the commencement of the

accounting year, and if the terms of the agreement are embodied in a written instrument during the accounting year, the partnership cannot be said

to have been constituted under a deed of partnership operative for the whole of the account year.

Before we deal with this question, we may refer to N.T. Patel and Co. Vs. The Commissioner of Income Tax, upon which the Tribunal purports

to rely in refusing to register the firm. We can find nothing in this decision which deals with that aspect of the case which is presented to us in the

present reference. In that decision, a deed of partnership had been executed, but it contained no specific provision regarding the division of profits

and losses. After the close of the account year, the partners executed a supplementary document purporting to remedy the omission in the original

deed and in this later document, the shares in which the profits or losses should be apportioned were specified. The question accordingly arose

whether this later document, which came into existence after the expiry of the relevant accounting year, could be taken along with the earlier

documents for the purpose of holding that there was adequate provision for the sharing of the profits and the losses. It was held that what Section

26-A requires was the factual existence in the year of account of an instrument of partnership which specified the individual shares of the partners.

Though there was a deed of partnership which came into existence in the course of the account year, it failed to give any specification of the shares

of the partners and the further document by which this defect was sought to be cured only came into existence beyond the account year. In effect,

therefore, there was a valid document complying with the requirements of Section 26-A and the Rules only after the close of the account year.

That was the principal reason why the refusal to register the firm was upheld. We are unable to see anything in this decision relying upon which the

Tribunal could have felt justified in refusing to register the firm in the present case.

We may refer to Mitler & Sons v. Commissioner of Income Tax (1958) S.C.J. 1011 : 36 ITR 194 a decision of the Supreme Court. This

decision is of considerable importance as it sets at rest one of the principal questions which generally comes in for consideration in cases of this

kind. The question that arose in that case was where a firm was created orally and the deed of partnership was written up subsequently, it can be

said to have been constituted under an instrument of partnership. Their Lordships, while holding that the instrument of partnership should have been

in existence in the account year in respect of which the assessment is being made, held that the expression "" constituted under an instrument of

partnership "" occurring in Section 26-A of the Act would 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. It follows therefore that where a firm has been created by an oral arrangement, the terms whereof have been later

reduced to writing, so long as the instrument so executed has been in existence in the account year, it complies with the requirement that it has been

constituted under an instrument of partnership. Though their Lordships observed in the course of their judgment:

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 year is out.

it seems to us to be implicit in the decision in circumstances such as set out above, the partnership must be regarded as one which has been

constituted under a deed of partnership with effect from the point of time when the oral agreement was come to.

In our opinion, therefore, the effect of the above decision of the Supreme Court clearly is that where it is the case of an instrument which only

puts down in writing an earlier oral arrangement, or reaffirms an earlier written agreement, the instrument is effective from the date of the

arrangement, and if that is so, if this arrangement was in existence at the commencement of the relevant account year, the subsequent execution of

an instrument during the course of the accounting year gives the firm the character of a firm constituted under a deed of partnership throughout the

accounting year.

We are supported in this view by a Full Bench decision of the Punjab High Court in NIADAR MAL JAGDISH PARSHAD Vs.

COMMISSIONER OF Income Tax, SIMLA., . It will be sufficient to quote the Headnote:

A firm which came into existence by a verbal agreement was entitled to be registered u/s 26-A if on the date of the application for registration, the

terms and conditions of the partnership had been reduced to writing and the application for registration had been accompanied by such an

instrument, provided that the instrument of partnership was in existence during the relevant accounting year. Under the Partnership Law, if a

partnership comes into being by an oral agreement and later on an instrument of partnership is executed, the rights and liabilities of the partners will

be governed by that instrument from the very inception of the partnership.

We may amplify the Headnote by reference to the fact that in that case the oral agreement was come to on a date prior to the commencement of

the relevant account year and the terms of the agreement were reduced to writing during the relevant account year. This decision is in clear support

of the view that we have taken, a view which we consider to be implicit in the decision of the Supreme Court.

Mr. Ranganathan, learned Counsel for the Department, purports to argue that the refusal to register for the earlier assessment year was based

on the view that there was no genuine firm in existence. The orders of the Departmental Authorities relevant to that assessment year have not been

placed before us. There is only a vague reference to those proceedings in the order of the Income Tax Officer. It seems to us that in so far as the

order of the Income Tax Officer gives any clue to that aspect of the matter, the refusal to register the firm for the earlier assessment year was based

and rightly so on the ground that there was no instrument of partnership during that accounting year. We are unable to find any statement anywhere

that the firm itself was found to be not genuine.

We have referred to the fact that even in the earlier assessment year a statement was made by the assessee that the firm had been in existence

from 13th September, 1953. In the application for registration also, this statement was re-affirmed by the entries in the form. It does not appear to

be in dispute that the profits of the partners had been credited in the accounts in accordance with the agreement that subsisted from 13th

September, 1953. Despite all these facts, though the earlier agreement had also been reduced to writing that document was produced before the

Income Tax Officer on 4th October, 1957, before the assessment of this firm was completed for the assessment year 1955-56, the Appellate

Tribunal thought that the failure to refer to the agreement of 13th September, 1953, in the auditor''s letter justified the rejection of the claim that the

partnership had come into existence even on 13th September, 1953. When we find a specific reference made to the agreement of 13th

September, 1953, in the earlier assessment year and further in the form of application for the assessment year 1955-56, and when we further find

that the original agreement was also produced before the Income Tax Officer on a date prior to the assessment for the present assessment year,

we can hardly find any warrant for the conclusion reached upon a very specious reasoning by the Tribunal that the so-called agreement, dated 13th

September, 1953, could not have been executed on the date it bears. The evidence to our minds is clinching that the parties did enter into an

agreement on 13ih September, 1953, but because of its non-production in the assessment proceedings for the assessment year 1954-55, the

registration of the firm for that assessment year was rightly refused. But the failure to produce that document does not reflect upon the genuineness

of the firm and, as we have stated, there is no recorded finding that the firm was not genuine. If the firm is genuine and if the firm was constituted

under an instrument of partnership within the meaning of Section 26-A, and this instrument of partnership was in existence in the relevant account

year, the firm is undeniably entitled to registration.

The question referred to us is answered in the affirmative and in favour of the assessee. The assessee will be entitled to his costs. Counsel''s fee

Rs. 250.