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AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
  • Mr. C.S Rama Rao Sahib for Applicant.
  • Mr. T.M Krishnaswami Aiyar for Mr. M. Subbaraya Aiyar for Respt.
Judges
  • Rajamannar, C.J
  • Yahya Ali, J.
Acts
  • S. 17 of the Partnership Act. Clause (b) of S. 17
  • S. 17 of the Partnership Act.
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
  • Mr. C.S Rama Rao Sahib for Applicant.
  • Mr. T.M Krishnaswami Aiyar for Mr. M. Subbaraya Aiyar for Respt.
Judges
  • Rajamannar, C.J
  • Yahya Ali, J.
Acts
  • S. 17 of the Partnership Act. Clause (b) of S. 17
  • S. 17 of the Partnership Act.
See more information ...
Smart Summary

Concise Analytical Summary of the Judgment (Delivered by the Chief Justice)

Factual and Procedural Background

Three individuals executed a deed of partnership on 30 August 1939 which declared that they would carry on business in partnership for three years from 28 May 1939. The deed contained a provision governing distribution of assets and attendance to uncollected dues after the three-year period.

The firm was registered with the Income-tax Officer and was granted a certificate of registration for 1940–1941, and renewals were granted for 1941–1942, 1942–1943 and 1943–1944. The present dispute concerns an application for renewal of registration for the assessment year 1944–1945 (accounting year ended 5 July 1943).

The Income-tax Officer refused renewal on the ground that the partnership deed had ceased to exist (the firm had been dissolved) and therefore no instrument of partnership existed for the relevant period. The Appellate Assistant Commissioner construed the deed to mean that, after the expiry of the three-year term, if the partners were not at variance a partnership at will arose; on that basis he granted renewal.

The Tribunal disagreed with the Appellate Assistant Commissioner on the question whether a partnership at will came into existence automatically; the Tribunal held the deed ceased to be operative after 29 May 1942. Nevertheless the Tribunal held that S.26-A of the Income-tax Act and the rules did not require an instrument of partnership to be operative at the time of application for renewal, and therefore upheld entitlement to renewal. The Commissioner of Income-tax applied for a reference of the legal question to the High Court; the Tribunal drew a statement of the case and referred the question.

Legal Issues Presented

  1. The principal question referred (quoted in the opinion): “Whether on the facts and in the circumstances of this case, the application of the assessee for renewal of registration satisfied the requirements of S. 26-A and the rules made thereunder and whether the firm is entitled in law to renewal of registration for purposes of the assessment for 1944-1945 (accounting year ended 5th July 1943)?”
  2. Ancillary issues that were argued before the Tribunal and dealt with in the opinion:
    1. Whether on construction of the deed of partnership a partnership at will came into existence immediately after expiry of the three-year term.
    2. Whether, for the purpose of renewal under the rules, there must be an instrument of partnership operative at the time of the application or relating to the accounting period, or whether it suffices that the partners and their shares remain unaltered.

Arguments of the Parties

Assessee's Arguments

  • The application for renewal was signed personally by all the partners and stated that partners and shares remained unaltered; thus it complied with R.6 and the requirements for renewal.
  • It was contended before the Court that the deed should be construed as creating a partnership for three years in the first instance and thereafter a partnership at will (i.e., the deed continued to govern the relationship after the fixed term).
  • The assessee argued (in the High Court) that the question whether the deed continued to be operative after 29 May 1942 was a subsidiary question and could be considered within the terms of the reference; counsel conceded, however, that if that question was an independent question of law not referred, it could not be urged before the Court.

Revenue / Commissioner and Appellate Assistant Commissioner's Arguments

  • The Income-tax Officer (revenue) maintained that the partnership deed was not in existence for the accounting period and therefore the application for renewal was incompetent because there was no firm constituted under an instrument of partnership at the relevant time.
  • The Appellate Assistant Commissioner (initially) argued that on construction the deed produced a partnership at will after expiry of the fixed term if the partners remained united, and therefore renewal could be granted; he accordingly granted the application.
  • The Commissioner applied for a reference to determine whether the renewal application satisfied S.26-A and the rules, contesting the Tribunal's conclusion that no operative instrument was required for renewal.

Table of Precedents Cited

No precedents were cited in the provided opinion.

Court's Reasoning and Analysis

The Court began by construing the relevant statutory provisions and rules as they apply to registration and renewal under the Income-tax Act and the subordinate rules. The Court noted that S.26-A (as framed in the Act) does not expressly mention the word “renewal”; consequently each renewal is effectively treated as a fresh registration under that section.

The Court observed that sub-section (1) of S.26-A requires that an application must be made on behalf of "a firm constituted under an instrument of partnership." There was nothing in the rules made under S.59 which contradicted this requirement. The substantive rule on renewal, R.6, permits a firm which has been granted a certificate under R.4 to apply for renewal and prescribes who must sign the application (all partners, etc.), but R.6 presupposes the existence of "any firm to whom a certificate of registration has been granted under R.4" at the relevant time.

The Tribunal had found as a fact that the firm constituted under the partnership deed came to an end on 29 May 1942. The Court treated this factual finding as decisive for the legal question of entitlement to renewal: if the original firm had been dissolved on that date, then on the date of the renewal application there was not in existence the very firm to which the original certificate had been granted under R.4.

The Tribunal had relied on S.17 of the Partnership Act (clause (b)) to support its conclusion that it was unnecessary for an operative instrument to exist at the time of the application. The Court examined S.17 (mutual rights and duties if a fixed-term firm continues to carry on business after expiry) together with S.42 (which provides that a firm constituted for a fixed term is dissolved by expiry of that term). The Court noted the Tribunal's finding that the deed did not contain any contract to the contrary.

The Court reasoned that, in the absence of a contract to the contrary, the firm is dissolved upon the expiry of the fixed term (S.42). If the partners nonetheless continued to carry on business, their mutual rights and duties thereafter would be governed by S.17 so far as consistent with incidents of a partnership at will. But the Court emphasised that such a partnership at will is a different legal entity from the dissolved fixed-term firm. Consequently, S.17 does not eliminate the requirement that a firm seeking renewal of registration under S.26-A/R.6 must be an entity "constituted under an instrument of partnership" operative for the purposes of the registration or renewal. In short, the statutory text and the Tribunal's factual finding combine to show a fundamental defect in the renewal application: at the time of application there was no operative instrument constituting the firm originally registered.

The Court also addressed the assessee's contention that the Tribunal's factual finding (that the deed ceased to be operative after 29 May 1942) was erroneous and that the deed should be construed to continue as a partnership at will. The Court held that that question was an independent question of law arising out of the Tribunal's order and that no application had been made for a reference on that point by the assessee. The Court declined to entertain the assessee's challenge to that specific finding because it had not been referred for decision; the Court treated the Tribunal's finding on that factual/legal point as binding for the present reference.

Because the Tribunal had found the deed ceased to operate after the three-year period and because no reference had been sought by the assessee on that point, the Court limited its determination to the framed question and refused to re-open the independent question of the deed's construction.

Holding and Implications

Holding: The Court answered the referred question in the negative. The application for renewal of registration did not satisfy the requirements of S.26-A and the rules because, on the Tribunal's finding, the firm constituted under the partnership deed had ceased to exist at the relevant time and therefore there was no firm "constituted under an instrument of partnership" to make the application.

Direct consequences and costs:

  • The assessee's claim to renewal for the assessment year 1944–1945 failed.
  • The assessee was ordered to pay the costs of the reference to the Commissioner in the amount of Rs. 250.

The opinion does not set out any broader policy pronouncement or establish a novel precedent beyond applying statutory text (S.26-A and the rules) and Partnership Act provisions (S.17 and S.42) to the facts and to the Tribunal's findings.

Show full summary ...

    The Commissioner Of Income-Tax, Madras v. Messrs D. Arokiaswami Chetti & Co.

    (Delivered by the Chief Justice)

    The question referred for our decision in this case is as follows:

    “Whether on the facts and in the circumstances of this case, the application of the assessed for renewal of registration satisfied the requirements of S. 26-A and the rules made thereunder and whether the firm is entitled in law to renewal of registration for purposes of the assessment for 1944-1945 (accounting year ended 5th July 1943”.)

    The three individuals who are the partners of the respondent firm executed a deed of partnership on the 30th August 1939 in and by which it was declared that they shall carry on business in partnership for a period of three years from 28th May 1939. It was inter alia provided in that deed that,

    “On the expiration of three years, if there is no unity between the partners, after paying off all the liabilities of the firm and after taking back the capital contributed by the partners, the balance of profit or loss shall be divided equally; if any dues to the firm remain uncollected, and if proceedings have to be instituted No. 1. Arokiasami Chetty shall attend to them.”

    The firm was registered with the Income-tax Officer and a certificate of registration was granted for the year 1940-1941. For the year 1941-1942 the certificate was again renewed by the Income-tax Officer and likewise for the following two years 1942-1943 and 1943-1944. We are concerned in this reference with an application for renewal of registration for the assessment year 1944-1945. The Income-tax Officer refused to grant a renewal on the ground that the partnership deed in force during the accounting period was not in existence as the firm had been dissolved. He also held that there should be a firm constituted under an instrument of partnership and there being no partnership during the relevant year, the application was incompetent. The Appellate Assistant Commissioner on a construction of the deed held that after the expiry of the period of three years if there were no difference between the partners by virtue of the terms of the deed a partnership at will would come into existence which would of course continue until dissolved according to law. He therefore granted the application for registration. Before the Tribunal both the points were argued, namely, (1) on a construction of the deed of partnership, after the expiry of the three years fixed therein a partnership at will must be deemed to have come into existence and (2) that for the purpose of renewal it was not necessary that there should be an instrument of partnership operative at the time of the application or relating to the accounting period and it was sufficient if the partners and the shares remained unaltered. The Tribunal disagreed with the Appellate Assistant Commissioner on the first point. They held that once the period of three years was over, the deed ceased to be operative, i.e, after the expiry of the 29th May 1942. But they held that under the provisions of S. 26-A of the Act and the relevant rules framed under the Act, it was not necessary that there should be an instrument operative at the time of the application for the grant of a renewal of registration already granted when a deed of partnership was in force. In coming to this conclusion they relied upon S. 17 of the Partnership Act. The Commissioner of Income-tax thereupon made an application for a reference of the question of law in the terms already set out above and the Tribunal granted the application and have drawn up a statement of the case and referred the question to us.

    We do not agree with the view of Tribunal that for a renewal of registration there is no necessity for the existence of an instrument of partnership operative at the time of the application or relating to the accounting period. S. 26-A does not refer in terms to renewal of registration. It follows that every renewal of registration is in effect a registration under that section. Sub-S. (1) of that section clearly lays down that the application must be made on behalf of a firm constituted under an instrument of partnership. Nor is there anything in the rules made under S. 59 of the Act which leads to a different conclusion. The substantive rule dealing with renewal is R. 6. It runs thus:

    “Any firm to whom a certificate of registration has been granted under R. 4 may apply to the Income-tax Officer to have the certificate of registration renewed for a subsequent year. Such application shall be signed personally by all the partners (not being minors) of the firm or by all persons (not being minors) who were partners in the firm immediately before dissolution end by the legal representation of any such person who is deceased and accompanied by a certificate in the form set out below. …”

    It was contended that in this case the application was signed personally by all the partners of the firm and it complied with all the requisite conditions because it was stated that the partners and the shares remained unaltered. But, in our opinion, there is one fundamental defect in the application which precludes the respondent from taking advantage of R. 6. According to the finding of the Tribunal the firm constituted under the deed of partnership came to an end on the 29th May 1942. On this finding it must follow that on the date of the application in this case, there was not in existence the firm to whom a certificate of registration was originally granted under R. 4. That firm must be deemed to have come to an end on the expiry of three years specified in the deed.

    The Tribunal relied upon S. 17 of the Partnership Act. Clause (b) of S. 17 is the material provision and it is as follows:

    “Subject to contract between the partners … where a firm constituted for a fixed term continues to carry on business after the expiry of that term, the mutual rights and duties of the partners remain the same as they were before the expiry, so far as they may be consistent with the incidents of partnership at will.”

    This provision must be read along with another provision in S. 42 the material portion of which is as follows:

    “Subject to contract between the partners the firm is dissolved—

    (a) if constituted for a fixed term, by the expiry of that term”.

    In this case it has been found by the Tribunal that the deed of partnership does not contain a contract to the contrary. The result is that on the expiry of the prescribed term, the firm as such became dissolved. If, therefore, the partners of the dissolved firm continued to carry on business, no doubt their mutual rights and duties would be governed by S. 17 of the Act, but the partnership in law would be a different partnership, a partnership at will which must be deemed to come into existence immediately on the expiry of the prescribed period. We do not think that there is anything in the provisions of S. 17 to justify the conclusion that there is no necessity for an operative deed of partnership to entitle a firm to obtain renewal of registration. No other rule has been relied upon to support the conclusion of the Tribunal.

    For the assessee it was sought to be contended that the Tribunal erred in its finding that the deed ceased to be operative after the expiry of 29th May 1942. It was said that according to the terms of the deed it must be construed as a deed providing for a partnership for three years in the first instance and thereafter at will. Objection was taken on behalf of the department that it is not competent to this Court to go into that question as it was an independent question of law which had not been referred to this Court. The learned Counsel for the assessee conceded that if it be held that the question as to whether the deed was operative after the expiry of 29th May 1942 is deemed to be an independent question of law arising but of the order of the Tribunal and if that has not been referred to this Court, he would not be entitled to urge it. But he argued firstly that it was a subsidiary question of law and secondly that the terms of the reference for decision were so wide that it would include this question of law. We find it impossible to agree with him that this question of law is a subsidiary question of law. In fact learned Counsel himself conceded that if the Tribunal had held in his favour on that question, he would have succeeded and it would have been unnecessary to go into any other question. It is equally true that the finding in his favour on the other question, namely, the necessity for an operative deed of partnership would also be sufficient to dispose of the matter. Nevertheless, the Tribunal did give its decision on both the questions. In so far as the answer to one of the questions was against the department, the department has made an application for reference, but the assessee has not chosen to apply for a reference as regards the question decided against him. The terms of the reference may no doubt appear to be wide. The routine clause “on the facts and in the circumstances of this case” may be stretched to take in anything. But we consider that in construing this clause with reference to a particular case, due regard must be had to any findings of fact by the Tribunal and to findings of law which have not been sought to be questioned by either the assessee or the Commissioner by an application for reference. One of the facts in this case is that the Tribunal held that the deed of partnership was not operative after the 29th May 1942 and there was no application for a reference on the question as to the correctness of that finding. We do not therefore think that there is anything in the frame of the question which compels this Court to deal with the question of law with reference to which there has been no application to refer to this Court. We therefore hold that the assessee is not entitled to be heard on the question whether the finding of the Tribunal that the deed of partnership ceased to be in force after the expiry of the period of three years is right or wrong.

    The answer to the question will be in the negative. Because the assessee has failed, he will pay the costs of this reference, Rs. 250.

    V.N.J

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    Comments

    The Commissioner Of Income-Tax, Madras v. Messrs D. Arokiaswami Chetti & Co.
    (Aug 9, 1948)