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Panna Lal Babu Lal v. Commissioner Of Income-Tax, U.P
Factual and Procedural Background
This is a reference under section 66(1) of the Indian Income-Tax Act, 1922 concerning the renewal of registration of the firm Messrs. Panna Lal Babu Lal. The firm was constituted by a partnership deed dated November 30, 1942, with four partners: Babu Lal, Suraj Prasad, Girdharilal, and Pannalal. The firm was registered under section 26A of the Act for the assessment year 1944-45, with registration renewed annually up to 1956-57. Girdharilal died in July 1954 during the accounting period for assessment year 1955-56, but registration was renewed for 1955-56 and 1956-57. For the assessment year 1957-58, the renewal application was signed by Babu Lal, Suraj Prasad, Panna Lal, and Hari Shanker, who was said to represent the deceased partner Girdharilal's share as his son. The Income-Tax Officer refused renewal on these facts, a decision upheld by the Appellate Assistant Commissioner and the Income-Tax Appellate Tribunal, Allahabad. The Tribunal referred the question of law to this court.
Legal Issues Presented
- Whether, on the facts and circumstances of the case, the renewal of registration under section 26A was rightly refused?
Arguments of the Parties
Department's Arguments
- Renewal was rightly refused because the firm did not produce a valid deed of partnership reflecting the current constitution of the firm.
- There was a change in the constitution of the firm between 1942 and the assessment year 1957-58 due to the death of a partner.
Assessee's Arguments
- The son of the deceased partner, Hari Shanker, automatically became a partner upon Girdharilal’s death.
- The original deed of partnership dated November 30, 1942, remained effective and contained a provision that the death of a partner would not dissolve the firm.
- Reference was made to a supplementary deed dated July 19, 1954, though this document was rejected by the authorities as suspicious and unreliable.
- The assessee distinguished the case from precedent by arguing that the heir automatically succeeded as partner, unlike cases where trustees had only an option to join.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| In re Makerwal Colliery | Legal representatives of a deceased partner cannot automatically take the deceased partner’s place without a special agreement; death alters firm constitution. | The court relied on this to support the principle that a change in firm constitution occurs upon death of a partner unless expressly provided otherwise. |
| Girdharilal Seetaram and Bros. v. Commissioner of Income-Tax | Where the partnership deed provides that the heir of a deceased partner automatically becomes a partner, the firm does not dissolve on death. | The court assumed the original deed contained such a provision and acknowledged that death did not dissolve the firm in this case. |
Court's Reasoning and Analysis
The court analyzed the applicability of section 26A of the Indian Income-Tax Act, 1922, which requires an application for renewal of registration to be supported by an instrument of partnership specifying the shares of partners and to be made in a prescribed form. The prescribed form demands a certification that the constitution of the firm and the individual shares are unaltered since registration.
The court observed that although the death of a partner ordinarily dissolves the firm under section 42 of the Partnership Act, the original deed of partnership likely contained a provision preventing dissolution upon death. However, the key issue was whether the firm’s constitution remained unchanged. Since Girdharilal died and his son Hari Shanker took his place, the court found that the constitution of the firm had changed because the partners at the time of original registration and at the time of renewal differed.
The court noted the absence of a valid supplementary deed confirming this change and doubted that Hari Shanker automatically became a partner without any option to refuse. Even assuming the heir became a partner, the prescribed renewal form required a certification that the firm’s constitution was unaltered, which could not be truthfully made in this case. Whether the certificate was falsely given or omitted, the application was materially defective.
Consequently, the renewal was rightly refused because the statutory conditions for renewal under section 26A and the prescribed rules were not met.
Holding and Implications
The renewal of registration under section 26A of the Indian Income-Tax Act, 1922, was rightly refused.
The court answered the referred question in the affirmative and against the assessee, confirming the correctness of the refusal of renewal. The assessee was ordered to pay costs of Rs. 200 to the Commissioner of Income-Tax, U.P. This decision directly affects the parties by upholding the denial of renewal but does not establish any new precedent beyond the application of existing statutory requirements and partnership principles.
V.G Oak, C.J:— This is a reference under section 66(1) of the Indian Income-Tax Act, 1922, hereafter referred to as the Act. Messrs. Panna Lal Babu Lal is the assessee. This firm was constituted under a deed of partnership executed on November 30, 1942. At that time there were four partners, 1. Babu Lal, 2. Suraj Prasad, 3. Girdharilal and 4. Pannalal. The firm was registered under section 26A of the Act for the assessment year 1944-45. Registration was renewed from year to year up to the assessment year 1956-57. Girdharilal, partner, died in July, 1954, during the accounting period corresponding to the assessment year 1955-56. In spite of Girdharilal's death, registration was renewed for the assessment years 1955–56 and 1956-57. An application for renewal of registration was filed for the assessment year 1957-58. This application for renewal was signed by Babu Lal, Suraj Prasad, Panna Lal and one Hari Shanker. It was explained on behalf of the firm that Girdharilal was dead; and his share in the partnership is now represented by his son, Hari Shanker. The Income-Tax Officer concluded that on these facts the firm was not entitled to renewal of registration. The application for renewal was, therefore, dismissed. The decision was upheld in appeal by the Appellate Assistant Commissioner and by the Income-Tax Appellate Tribunal, Allahabad. At the request of the assessee, the Tribunal has referred to this court the following question of law:
“Whether, on the facts and in the circumstances of the case, the renewal of registration under section 26A was rightly refused?”
2. It will be seen that Girdharilal was a partner of the firm, when it was constituted in the year 1942. He died between the constitution of the firm and the application for registration for the year 1957-58. The question, therefore, arose whether renewal could be granted on the basis of the original deed of partnership, dated November 30, 1942. When the matter went before the Appellate Assistant Commissioner, the assessee filed another document dated July 19, 1954, purporting to be a supplementary deed of partnership. Both the Tribunal and the Appellate Assistant Commissioner concluded that this document was suspicious, and could not be relied upon. So, for purposes of the present reference, we have to ignore the document, dated July 19, 1954. The question is whether the original deed of partnership, dated November 30, 1942, was sufficient for the purposes of renewal of registration. Section 26A of the Act laid down the procedure in the registration of firms. Section 26A ran thus:
“(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……
(2) The application shall be made by such person or persons, and at such times and shall contain such particulars and shall be in such form, and be verified in such manner, as may be prescribed……”
3. It will be seen that section 26A lays down two conditions. Firstly, an application must be supported by an instrument of partnership specifying the shares of partners. Secondly, the application must be in the prescribed form. We have to examine whether the assessee in the instant case fulfilled the two conditions.
4. It was urged for the department that renewal was rightly refused in the present case, because the applicant firm did not produce any deed of partnership, and there was change in the constitution of the firm between 1942 and the assessment year.
5. In the case of Makerwal Colliery, In re1 the facts were these. A and B entered into a partnership for a fixed period. One of the clauses in the deed provided that the death of either partner shall not terminate the partnership business, and the legal representative of a deceased partner shall be entitled to the benefit of the said lease from Government jointly and equally with the surviving partner. A, by his will, appointed three persons as trustees of his own property, and directed that the trustees should carry on, or join in carrying on as they might think fit, the trade or business carried on by him in partnership with B.A died, and the trustees applied for registration of the firm or for renewal of registration of the firm. It was held that the trustees could not take the place of A in the absence of a special agreement to that effect. Mohammad Munir J. observed on page 429:
“Where in a partnership constituted by a deed of partnership for a fixed period the legal representatives of a deceased partner, who by reason of a provision in the deed are entitled, but not bound, to come in as partners in place of the deceased partner for a period which may be the same as, or different from, the period fixed by the deed, elect to continue the partnership for the unexpired portion of the period, the constitution of the firm is altered and therefore the new firm cannot apply for the renewal of registration.”
6. The learned Advocate-General appearing for the assessee distinguished the present case from the case before the Lahore High Court on the ground that in that case the trustees had the option of joining the partnership, whereas in the present case Hari Shanker automatically became a partner of the firm, Pannalal Babulal. Unfortunately, there is on the record no copy of the partnership deed dated October 30, 1956. It appears from the judgment of the Tribunal that it was argued before the Tribunal on behalf of the assessee that there was a provision in the partnership deed that the death of a partner would not dissolve the firm, and the heir of the deceased would be taken as partner.
7. In Girdharilal Seetaram and Bros. v. Commissioner of Income-Tax the facts were these. The assessee was a firm registered under the Indian Income-Tax Act, 1922. It applied for renewal of registration in June, 1944, for the assessment year 1944-45. The partnership deed provided that in the case of death of a partner his legal representative would be entitled to join the partnership, and the partnership would be carried on without dissolution. One of the partners had died in February, 1944, and the application was signed by the son of the deceased partner. It was held that the application for renewal of registration was not defective and should not have been rejected. It was observed at page 285:
“It may be that ordinarily on the death of any of the partners, the firm gets dissolved automatically, but it does not so dissolve where the deceased partner's heir automatically by virtue of the terms of the deed, becomes a partner without any fresh agreement.”
8. Section 42 of the Partnership Act provides for dissolution on the happening of certain contingencies. Section 42 lays down that, subject to contract between the partners, a firm is dissolved by the death of a partner. Ordinarily, the death of a partner has the effect of dissolution of the firm. But the deed of partnership may provide that death of a partner would not involve dissolution of the firm. It appears that the deed dated November 30, 1942, contained a provision of this nature. We are, therefore, prepared to assume with the assessee that Girdharilal's death in 1954 did not have the effect of dissolution of the firm. The firm established in 1942 continued even after the year 1954.
9. The learned Advocate-General urged before us that Girdharilal's son, Hari Shanker, became a partner automatically upon Girdharilal's death. This contention finds support from the observation made by the Orissa High Court in Girdharilal's case quoted above. But we have some doubt as to whether Hari Shanker became a partner of the firm automatically. Even if the deed of partnership provided that the heir of a partner would be a partner in any firm upon the death of the original partner, the heir would be at liberty not to join the partnership. Since we have held that Girdharilal's death did not put an end to the partnership, it may be possible for the present firm to urge before the court that the firm was constituted in 1942 under the deed of partnership dated November 30, 1942.
10. The Tribunal, however, rejected the assessee's claim for renewal of registration on the ground of change in the constitution of the firm. It will be noticed that the partners of the firm at the time of original registration were Babulal, Suraj Prasad, Girdharilal and Pannalal. The present partners of the firm are Babulal, Suraj Prasad, Pannalal and Hari Shanker. There has been a change in the constitution of the firm. The question arises whether renewal is possible in spite of change in the constitution of the firm. The Indian Income-Tax Rules, 1922, laid down the procedure for application for fresh registration and renewal of registration. Rule 6 provided for applications for renewal of registration. There was a form prescribed for applications for the renewal of registration under section 26A of the Act. Clause (2) of that form ran thus:
“The instrument of partnership/certified copy of the instrument of partnership was registered by the Income-Tax Officer for… in the State of…. on the…. of…. and we hereby certify that the constitution of the firm and the individual shares of the partners as specified in the
instrument of partnership/certified copy of the instrument of partnership so registered on remain unaltered.”
11. It will be seen that the form prescribed under rule 6 made it necessary for the partners to certify that the constitution of the firm is the same as the constitution when the instrument of partnership was registered. In the present case, the instrument of partnership was registered for the year 1944-45. At that time Girdharilal was alive. Now Girdharilal is dead, and his share is represented by his son, Hari Shanker. The Tribunal rightly observed that where a partner dies and his son steps into his shoes, the constitution of the firm is necessarily changed. Under such circumstances, it became impossible for the present partners to certify as required by clause (2) in the prescribed form. We do not know if the applicants gave the necessary certificate in the instant case. If they did, the certificate would be false. If they did not, they did not comply with the requirement of the form under rule 6. In either case, there was material defect in the application for renewal. The application for renewal was, therefore, rightly dismissed.
12. We answer the question referred to the court in the affirmative, and against the assessee. The assessee shall pay the Commissioner of Income-Tax, U.P, Rs. 200 as costs of this reference.
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