N. T. Patel and Co. vs Commissioner of Income Tax Madras

Rajagopalan, J.—The assessee firm consisting of six partners was constituted by the deed of partnership dated March 29, 1954, which

came into effect from April 1, 1954. The specific provision in the earlier deeds of partnership for the division of profits in proportion to the capital

contributed by each of the partners was unfortunately omitted to be included in the deed dated March 29, 1954. This omission was noticed in the

course of the proceedings before the Income Tax Officer, when the firm applied for registration u/s 26A of the Income Tax Act for the assessment

year 1955-56. The year of account had ended on March 31, 1955. On September 17, 1955, the partners executed another document, which was

supplemental to the deed of partnership dated March 29, 1954, and which provided : ""the parties hereto agree to rectify that error though the

same subject matter is clear from clauses 11, 34 and 41-A of the deed, dated March 29, 1954. We hereby agree that for purposes of clarification

the following clause shall be added as clause 20-A in the partnership instrument dated March 29, 1954. The parties hereto shall be entitled to

shares in the profits and losses of the firm in proportion to the contribution of the capital of each of the partners and whenever fresh capital is

required for the business, each partner shall be liable to contribute the additional capital in the same proportion as the paid up capital referred to in

clause 4 of the deed dated March 29, 1954."" None the less the registration was refused for the assessment year 1955-56 and that decision was

eventually confirmed on appeal by the Tribunal. u/s 66(1) of the Act, the Tribunal referred to this court :

Whether the assessee firm is entitled to registration u/s 26A of the Income Tax Act for the assessment year 1955-56.

Learned counsel for the assessee urged against before us the contention rejected by the Tribunal, that, even without clause 20-A added to the

terms of the partnership on September 17, 1955, the deed dated March 29, 1954, satisfied the requirements of section 26A, and that it specified

the individual shares of the partners. Learned counsel submitted that clauses 4, 11, 34 and 41(a) of the deed dated March 29, 1954, - it may not

be necessary to set them out - led to the inference, that was made explicit in clause 20 - A which was subsequently added, that the profits were to

be apportioned among the partners in proportion to their contribution of capital. Clause 4 only specified the contribution of capital. Clauses 11, 34

and 41(a) each provided for a contingency other than the division of the normal profits of the firm in relation to the capital subscribed under clause

The Tribunal was right in holing that without clause 20 - A there was no specification of the individual shares of the partners. It is not therefore

necessary for us to decide in these proceedings whether an inference that could be drawn from the other terms of the deed of partnership would

satisfy the test of specification of the shares prescribed by section 26A of the Act.

We are, however, unable to agree with the Tribunal, that the deed of partnership, after it had been rectified by the further deed dated

September 17, 1955, still failed to specify the shares of the individual partners. The provision in clause 20A read with clause 4 was specific enough

to satisfy the requirements of section 26A. But that specific provisions was made only on September 17, 1955, i.e., after the close of the year of

account relevant to the year of assessment. Did that satisfy the requirements of section 26A to enable the assessee to obtain the statutory right of

registration in the year of assessment is the question.

In Shaik Mohamed Rowther and Co. v. Commissioner of Income Tax, the deed was executed on July 22, 1949, but it purported to give effect

to the dissolution of the partnership as on March 28, 1949. The principle applicable to constitution of partnership as laid down by Rowlatt, J., in

Waddington v. Ocallaghan [1931] 16 Tax Cas. 187., was extended to dissolution of partnership by a Division Bench of this court, and it was held

that the date of the dissolution was July 22, 1949, however, the rights inter se the contracting parties were regulated.

In Waddington v. Ocallaghan [1931] 16 Tax Cas. 187., Rowlatt, J., held : ""When people enter into a deed of partnership and say that they are

to be partnership and say that they are to be partners as from some date which is prior to the date of the deed, that does not have been effect that

they were partners from the beginning of the deed. You cannot alter the past in that way. What it means is that they begin to be partners at the date

of the deed, but then they are to take accounts back to the date that they mention as from which the deed provides that they shall be partners.

The learned counsel for the assessee relied on Commissioner of Income Tax v. Shantilal Vrajlal and Chandulal Dayalal and Co. In that case an

application for registration of the firm was made in August, 1951, in respect of the year of account which ran from November 2, 1948, to October

21, 1949, on the basis of a deed of partnership dated October 26, 1950, which itself was beyond the year of account which had ended on

October 21, 1949. The assessee made a second application on September 12, 1949. The assessee made a second application on September 12,

1951, and produced an agreement of that date which satisfied the requirements of section 26A of the Act. On these facts the learned judges

allowed the application for registration ; they held that even the second application dated September 12, 1951, which satisfied the requirements of

section 26A of the Act, was enough to grant the registration sought u/s 26A. This court has not shared the view taken by the Bombay High Court -

see also Dwarkadas v. Commissioner of Income Tax - that the requirements of section 26A are satisfied when the deed of partnership came into

existence after the year account. With all respect to the learned Judges of the Bombay High Court we see no reason to depart from the principle

that underlay the decision of this court in Shaik Mohamed Rowther v. Commissioner of Income Tax.

In our opinion, what section 26A of the Act requires is the factual existence in the year of account of an instrument of partnership, which further

specifies the individual shares of the partners. It is only then that the statutory right of registration can be claimed and registration can be granted in

the relevant year of assessment. That test the assessee unfortunately failed to satisfy. There was, no doubt, a deed of partnership in existence in the

year of account 1954-55. But that deed itself did not specify the shares of the individual partners. The specification of shares was only on

September 17, 1955, though that left intact the constitution of the partnership under the earlier deed dated March 29, 1954. The effect was that

the requirements of section 26A were satisfied only on September 17, 1955, but that was beyond the year of account. That the rectification

effected on September 17, 1955, governed the rights and liabilities inter se as from April 1, 1955, could in no way enlarge their statutory right u/s

26A of the Act. As we have already pointed out, for the purpose of section 26A there was a specification of shares only on September 17, 1955.

The Tribunal, in our opinion, was right in refusing registration in the year of assessment 1955-56. We answer the question in the negative and

against the assessee. The assessee will pay costs of this reference. Counsels fee Rs. 250. Question answered in the negative.