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  • Chagla, C.J
  • Tendolkar, J.
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Smart Summary

Structured Summary of the Opinion (Chagla, C.J.)

Factual and Procedural Background

A firm applied for registration under section 26A of the Indian Income-tax Act. The assessee relied on a partnership deed dated 16 January 1948. The Income-tax Officer registered the firm under section 26A but refused to recognise the partnership for the previous year (the accounting year from 5 November 1945 to 24 October 1946) for assessment purposes for assessment year 1947–48. The Appellate Assistant Commissioner confirmed the Income-tax Officer's decision. The Tribunal reversed that decision and directed the Income-tax Officer to register the firm for assessment year 1947–48. The Commissioner contested the Tribunal's direction before the court.

Relevant factual details disclosed in the opinion:

  • A partnership deed dated 27 June 1947 related to a firm that commenced business from 19 March 1945 and was in existence during the accounting year 5 November 1945 to 24 October 1946.
  • The 27 June 1947 deed on its face showed six partners: partners 1, 2, 3 and 6 were genuine persons; partners 4 and 5 were admitted by the assessee to be not genuine individuals. Partner 4 was described as "Dayaram Gangabishan Agarwal" and partner 5 as "Shrichand Ramkishan Agarwal". Their shares were eight annas and two annas respectively.
  • The deed was signed by Gangabishan in the name of partner 4 and by Shrichand in the name of partner 5. The assessee's case was that Dayaram and Gangabishan were cousins (sharing profits) and Shrichand and Ramkishan were cousins (sharing profits), and that only Gangabishan and Shrichand signed on behalf of their cousins.
  • The partnership deed of 16 January 1948 (which the assessee relied upon before the Income-tax Officer) came into force on 25 October 1946 and correctly described four individuals (Dayaram, Gangabishan, Shrichand and Ramkishan); however, that deed did not constitute the firm in existence for the relevant accounting year (5 November 1945 to 24 October 1946).

Legal Issues Presented

  1. For the assessment year 1947–48, which firm is required to be registered under section 26A of the Indian Income-tax Act: the firm constituted under the deed dated 27 June 1947 or the firm constituted under the deed dated 16 January 1948?
  2. Whether the firm constituted by the partnership deed of 27 June 1947 could be registered under section 26A?
  3. Whether the profits of S.Y 2002 were liable to be apportioned in accordance with the provisions of section 26(1) of the Act? (framed as a consequential question)

Arguments of the Parties

Assessee's Arguments (as presented by Mr. Mehta and reflected in the Tribunal's view)

  • It was argued that persons signing a partnership deed might sign in a different name and that there is nothing to prevent a person signing in a different name; hence, the signatories (Gangabishan and Shrichand) should be treated as the partners mentioned in the deed.
  • It was also argued that a partner may have a sub-partner (i.e., profit-sharing arrangements between cousins), so Gangabishan and Shrichand might be the real partners who had agreed to share profits with Dayaram and Ramkishand respectively.
  • The Tribunal appeared to adopt the view that, absent a legal bar, a firm could be registered under section 26A.

Department's (Revenue) Arguments

  • The Department contended that the deed did not satisfy the statutory requirements because it purported to show partners who were non-existent individuals (Dayaram Gangabishan and Shrichand Ramkishan), making it impossible for the Income-tax Officer to assess the shares of those named partners in their individual assessments under section 23(5).
  • The Department argued that the partnership effectively consisted of eight persons (the four genuine persons plus the four real individuals behind the names), and the deed's form (naming only six) did not meet the conditions of section 26A.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The court undertook a textual and purposive analysis of the partnership deed(s) in light of the Income-tax Act's registration and assessment provisions, particularly sections 26A and 23(5), and of the statutory scheme for registration and assessment of firms:

  1. Section 26A requirement: The court emphasized that an application for registration under section 26A must be made on behalf of a firm "constituted under an instrument of partnership specifying the individual shares of the partners." The court read this requirement strictly because registration triggers assessment consequences under section 23(5).
  2. Section 23(5) consequence: Once a firm is registered, although the assessment is made on the firm, the profits allocated to each partner must be shown in the income of each partner and each partner is assessed to tax individually. Therefore, the instrument relied on for registration must identify real individuals whose shares can be assessed.
  3. Effect of fictitious names in the deed: The 27 June 1947 deed named as partners two persons who, the assessee admitted, did not exist as individuals (Dayaram Gangabishan and Shrichand Ramkishan). The court observed that if the deed were relied upon for registration, the Income-tax Officer would be required by section 23(5) to assess the shares of those named partners, which would be impossible because those persons do not exist.
  4. Response to Mr. Mehta's argument: The court considered Mr. Mehta's submission that signatories who used different names should be treated as the partners and that sub-partnerships could explain why only one cousin signed on behalf of another. The court rejected this reasoning for several reasons:
    • The situation was not one of a known alias; nobody suggested that Gangabishan was commonly known as Dayaram Gangabishan or that Shrichand was commonly known as Shrichand Ramkishan.
    • The assessee's own case implied that Dayaram and Gangabishan were separate persons who agreed to share profits, and likewise for Shrichand and Ramkishan — therefore it was not a mere alias situation.
    • If Gangabishan and Shrichand were the real partners who merely shared profits with cousins, the court found it puzzling why they did not themselves appear in the deed by their own names.
    • Accordingly, the court found "considerable force" in the Department's contention that the partnership effectively comprised more persons than the deed named, and thus the deed failed to meet section 26A conditions.
  5. Proper procedural basis for registration: The court explained the correct procedure under section 26A and the related forms: registration must be based on the instrument that constituted the firm in the year of account (the previous year), not merely on an instrument that constituted the firm in the year of assessment. Although information about the firm as constituted in the year of assessment may be required for certain purposes (e.g., under section 26 where changes between the year of account and year of assessment matter), the registrable firm for section 26A purposes is the firm in existence in the year of account.
  6. Application of that procedure to the facts: The deed of 16 January 1948—which the assessee relied upon before the Income-tax Officer—came into force on 25 October 1946 and did not constitute the firm in existence for the accounting year 5 November 1945 to 24 October 1946; hence it was not the proper instrument to rely on for registration under section 26A for that previous year. The court observed that the proper instrument to show the firm in the year of account would be the 27 June 1947 deed.
  7. Technical inconsistencies in the Income-tax Officer's order: The court noted that the Income-tax Officer erred in registering the firm under section 26A and then in the same order refusing to recognise the partnership for the previous year. The court regarded this as inconsistent because registration under section 26A relates to the previous year (year of account) and the Officer could not simultaneously register and deny the benefit of that registration for the same year. The court treated this as a technicality and observed that in effect the Officer had refused registration for the year of account.
  8. Answers to the posed questions: The court concluded (a) that for assessment year 1947–48 the firm required to be registered under section 26A was the firm constituted under the 27 June 1947 deed; (b) that the firm constituted by the 27 June 1947 deed could not be registered under section 26A because the deed did not satisfy the statutory conditions (due to naming non-existent partners and thus making assessment of their shares impossible); and (c) that the consequential question on apportionment of profits under section 26(1) must be answered in the negative in view of the prior answers.

Holding and Implications

Holding:

  • The firm required to be registered for assessment year 1947–48 was the firm constituted under the partnership deed dated 27 June 1947.
  • That firm (constituted by the 27 June 1947 deed) could not be registered under section 26A because the deed did not satisfy the conditions of section 26A (it named non-existent partners, rendering assessment under section 23(5) impossible).
  • The consequential question whether profits of S.Y 2002 were liable to be apportioned under section 26(1) was answered in the negative.
  • The assessee was ordered to pay the costs.
  • Reference answered accordingly.

Implications:

  • Direct effect: Registration under section 26A was not available for the firm as constituted by the 27 June 1947 deed because the instrument did not properly identify assessable partners; the firm relied upon by the assessee (16 January 1948 deed) was not the instrument constituting the firm in the relevant year of account and thus could not be the basis for registration for that year.
  • No broader precedent or law-of-partnership pronouncement is set out beyond the court's application of the statutory registration and assessment scheme; the opinion limits itself to the statutory interpretation and the consequences for the parties in this case.

This summary is drawn exclusively from the content of the provided opinion and does not add information beyond the text.

Show full summary ...

    Commissioner Of Income-Tax, Bombay South v. Dayaram Gangabishan & Co.

    Chagla, C.J:— An application was made by a firm for registration and the firm relied on a deed of partnership dated the 16th of January, 1948. The Income-tax Officer registered the firm under section 26A, but he refused to recognise the partnership for the previous year for assessment purposes for the assessment year 1947–48. The previous year was from the 5th November, 1945, to the 24th October, 1946. The Appellate Assistant Commissioner confirmed the decision of the Income-tax Officer and the Tribunal has reversed the decision and directed the Income-tax Officer to register the firm for the assessment year 1947–48. The Commissioner has come before us contesting this direction.

    2. Now, the facts of the case are that a partnership deed was executed on the 27th June, 1947, and this was a partnership deed in relation to a firm which started business from the 19th March, 1945. It is not disputed that this firm was in existence during the accounting year 5th November, 1945, to 24th October, 1946. This partnership deed on the face of it showed six partners. Partners 1, 2, 3 and 6 are genuine persons; partners shown as 4 and 5, it is admitted by the assessee, are not genuine persons. Partner 4 is described as “Dayaram Gangabishan Agarwal, aged about 25, caste Agarwal, occupation business, resident of Dehu Road”; and partner 5 is described as “Shrichand Ramkishan Agarwal, aged about 20, caste Agarwal”. In the partnership deed the share of these partners is shown as follows: that of partner 4 as eight annas and that of partner 5 as two annas.

    3. The partnership deed is signed, it is also admitted by the assessee, by Gangabishan in the name of partner 4 and by Shrichand in the name of partner 5. The case of the assessee was that Dayaram and Gangabishan were cousins and Shrichand and Ramkishan also were cousins, and that there was an understanding between Dayaram and Gangabishan on the one hand and Shrichand and Ramkishan on the other to divide the profits coming to the shares of Dayaram Gangabishan and Shrichand Ramkishan; and it is also admitted by the assessee that only one of the two cousins Gangabishan has signed on behalf of Dayaram Gangabishan and Shrichand and on behalf of Shrichand Ramkishan.

    4. Before we consider the question of the proper procedure to be followed in this case, let us deal with the deed of partnership itself. Under section 26A an application has to be made 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. Therefore, the instrument of partnership which has got to be relied upon by the assessee for the purposes of registration of the firm must specify the individual shares of the partners. This is necessary because once a firm is registered, under section 23(5), although the assessment is made on the firm, the profits allocated to each of the partners have got to be shown in the income of each of the partners and each of the partners is assessed to tax and not the registered firm. Therefore, it is quite clear that, if this deed of partnership had been relied upon for the purposes of registration of the firm, which this partnership deed brought into existence and which was in existence in the year of account, then the partners as shown by this deed of partnership were not only partners 1, 2, 3 and 6, but also partners 4 and 5. Now admittedly there is no such individual as Dayaram Gangabishan and no such individual as Shrichand Ramkishan. Therefore, for the purposes of section 23(5) the Income-tax Officer would have proceeded to assess the share of the profit coming to partners 4 and 5 in their individual assessments. Now, that would have been impossible, because however hard the Income-tax Officer might have tried he could never have discovered any individual by the name of Dayaram Gangabishan or by the name of Shrichand Ramkishan. What is urged by Mr. Mehta is—and that seems to be the view of the Tribunal also—that there is nothing to prevent a person signing in a different name; and what Mr. Mehta says is that Gangabishan, who signed for partner 4, and Shrichand, who signed for partner 5, were real individuals and they should be looked upon as the partners and section 23(5) can be given effect to in the case of these two partners. Now we can understand a case were a man has an alias and he is known both by his own name and by the name of the alias, and it may be open to the person to use his alias in a partnership deed and sign in the name of that alias. But that is not the case here. Nobody suggests that Gangabishan is known to the world as Dayaram Gangabishan and Shrichand is known to the world as Shrichand Ramkishan. The very case of the assessee is that Dayaram and Gangabishan represent two different individuals who had agreed to share the profits and Shrichand and Ramkishan also represent two individuals who had agreed to share the profits. What Mr. Mehta says is that it is open to a partner to have a sub-partner and therefore there is nothing wrong if Gangabishan agreed to share his profits with his cousin and Shrichand agreed to share his profits with Ramkishan. But it is difficult to understand why if the real partners were Gangabishan and Shrichand, and if Dayaram and Ramkishan were merely sub-partners, Gangabishan and Shrichand did not come on the record in the deed of partnership in their own names. Therefore, there is considerable force in the contention of the Department that the partnership really consisted of eight partners and not six and the deed of partnership merely gave the names of six partners and not the names of eight partners. Therefore, whichever way one looks at this deed of partnership, it does not satisfy the conditions of section 26A and therefore, in our opinion, it cannot be registered under the provisions of that section.

    5. Before we part with this reference, it is necessary to say a few words about the proper procedure to be followed in the case of registration of firms. Curiously enough, in this case the firm relied on the deed of partnership of the 16th of January, 1948. That partnership came into force on the 25th October, 1946, and there the four, partners are correctly described as Dayaram, Gangabishan, Shrichand and Ramkishan: they are our old friends partners 4 and 5 of the partnership deed of the 27th June, 1947. Here they are correctly described as four individuals. But this deed of partnership has nothing whatever to do with the firm which is to be registered for the purposes of section 26a. under section 26a the firm that has to be registered is the firm which has to be assessed for the previous year. As already pointed out, the previous year of the assessee was 5th November, 1945, to 24th October, 1946. Therefore, if the assessee relied on the partnership deed of the 16th January, 1948, this was not the instrument of partnership which constituted the firm which was in existence and which had to be registered and which had to be assessed in the year of account. Now it is true, as we shall presently point out, that for certain purposes the firm which is in existence in the assessment year is also to be pointed out by the assessee for certain purposes of the Department. For instance, under section 26, if there is a change in the firm after the year of account and that change has come about in the year of assessment, then the assessment has to be made on the firm as constituted at the time of making the assessment. The reason for it is that under that very section not only the partners who constituted the firm in the year of account are liable to pay tax, but also the partners who constituted the firm at the time of making the assessment. Therefore, when we look at the rules and the forms which have been prescribed under section 26a, sub-section (2), the Department requires information both with regard to the firm which was in existence in the year of account and also with regard to the firm which was in existence in the year of assessment. But although information with regard to the firm which was in existence in the year of assessment may be necessary, primarily for the purposes of section 26A itself, the only firm which has got to be registered is the firm which was in existence in the year of account; because, as already pointed out, it is only with regard to the firm in existence in the year of account that the Income-tax Officer is concerned for the purposes of assessment under section 23(5). Now, if there is any practice which is being followed, as Mr. Mehta suggests, of only giving particulars by relying on an instrument of partnership which constitutes the firm in existence in the year of assessment, in our opinion that practice is wholly erroneous. An application for registration should be made on the basis of an instrument of partnership which constitutes a firm in existence in the year of account. For the purpose of indicating to the Department which firm was actually in existence in the year of assessment, it may be necessary, if the earlier firm has changed or ceased to exist, to give further particulars. In such a case, it may be necessary also to rely on another instrument of partnership which has brought the new firm into existence in the year of assessment. Therefore, the proper procedure for the assessee to have followed in this case was to have relied first on the deed of partnership of 27th June, 1947, as constituting the firm in existence in the year of account and he should also have relied on the partnership deed of the 16th January, 1948, for showing which firm was in existence in the year of assessment. But curiously enough the assessee only relied on the partnership deed of the 16th January, 1948, and not on the partnership deed of the 27th June, 1947. Strictly, he is not entitled to registration of any firm under the partnership deed of the 16th January, 1948, because no firm came into existence under that partnership deed which would be relevant for the purpose of the accounting year. But we have not taken this technicality into consideration and we have considered the validity of the deed of partnership of the 27th June, 1947.

    6. We may also point out that the Income-tax Officer was in error in passing the order that he did. If he registered the firm under section 26A, then he could not proceed to say that he would not recognise the partnership for the previous year for assessment purposes for the assessment year 1947. If the partnership was registered at all under section 26A, it could only be for the purpose of the previous year, namely, the year of account. By this order he gives effect to section 26A in the first sentence, and in the very next sentence he denies to the assessee the benefit of section 26A. But this again is a pure technicality, because what in effect the Income-tax Officer held is that he refused to recognise the firm for the year of account and in effect he refused registration to the firm for the year of account.

    7. The first question which has been submitted to us is: “For the assessment year 1947–48 which firm is required to be registered under section 26A of the Indian Income-tax Act, i.e, whether the firm constituted under the deed of partnership dated 27th June, 1947, or the firm constituted under the deed of partnership dated 16th January, 1948 ?” Our answer is, in view of our judgment, “The firm constituted under the deed of partnership dated 27th June, 1947”.

    8. With regard to the second question, as it is framed, the Tribunal seems to be under the impression that, if there is no legal bar to the registration of a firm, a firm can be registered under section 26A. Now that is a clear fallacy. An oral partnership is a valid partnership in law. We dare say that the partnership deed of the 27th, June, 1947, brings into existence a legal partnership. But we are not concerned here with the law of partnership or the law of contract. We are concerned with the. Income-tax Act and the real question is whether the firm which was constituted under the partnership deed of the 27th June, 1947, was a firm which could be registered under section 26A. Therefore, we will re-draft the question to read: “Whether the firm constituted by the partnership deed of the 27th June, 1947, could be registered under section 26A ?” and our answer to that question is in the negative.

    9. Question (3) is: “Whether the profits of S.Y 2002 were liable to be apportioned in accordance with the provisions of section 26(1) of the Act?” This is a consequential question and it must follow, in view of our answers to questions (1) and (2), that the answer to this question should be in the negative.

    10. Assessee to pay the costs.

    11. Reference answered accordingly.

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    Commissioner Of Income-Tax, Bombay South v. Dayaram Gangabishan & Co.
    (Feb 12, 1957)