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Billimora Engineering Mart v. Commissioner Of Income-Tax
Factual and Procedural Background
The assessee-firm commenced its partnership business on September 1, 1969, and filed an application for registration in Form No. 11 on November 3, 1969, as required under rule 22 of the Income-tax Rules, 1962. However, the deed of partnership was executed later on January 8, 1970, and the application was not accompanied by the original or certified copy of the partnership deed at the time of filing. The original partnership deed and its copy were submitted sometime between January 8, 1970, and August 1972, though the exact date was unknown. The Income Tax Officer (ITO) issued a show-cause notice on August 18, 1972, questioning the validity of the registration application due to the absence of the partnership instrument at the time of filing.
In response, the assessee argued that the partnership instrument need not be contemporaneous with the application and could be executed anytime before the end of the accounting year. The assessee relied on the Supreme Court decision in Mittar and Sons v. CIT and contended that the ITO should have allowed an opportunity to rectify the application. A fresh application with the instrument was filed on March 21, 1973. Despite this, the ITO rejected the application, a decision upheld by the Assistant Commissioner of Income Tax (AAC) and the Tribunal. Consequently, the assessee sought a reference on two questions regarding the validity of the registration application and compliance with legal requirements under section 185 of the Income-tax Act, 1961.
Legal Issues Presented
- Whether, on the facts and circumstances of the case, the Tribunal was justified in law in holding that the registration application filed by the assessee was invalid and that the assessee was not entitled to seek registration as prayed for?
- Whether, on the facts and circumstances of the case, the Tribunal was correct in law in holding that the assessee had not complied with the requirements of law and relevant rules for getting itself registered under section 185 of the Income-tax Act, 1961?
Arguments of the Parties
Assessee's Arguments
- The instrument of partnership need not be contemporaneous with the application and could be executed anytime before the end of the accounting year.
- Relied on the Supreme Court decision in Mittar and Sons v. CIT to support the view that a valid partnership can exist by oral agreement and the instrument can be executed subsequently.
- The ITO was required under section 185(2) to allow the assessee an opportunity to rectify the application within the prescribed period.
- A fresh application with the instrument was submitted before the ITO's final decision.
Revenue's Arguments
- The application for registration was invalid because it was not accompanied by the original instrument evidencing the partnership at the time of filing, as mandated by rule 22(2)(i)(b) and section 184(5) of the Income-tax Act, 1961.
- The absence of the instrument at the date of application constituted a fundamental defect rendering the application void ab initio.
- The instrument of partnership was not in existence on the date of the application, and subsequent submission could not cure the defect.
- The mandatory requirement of annexing the instrument could not be waived and was essential for the validity of the application.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Mittar and Sons v. CIT [1959] 36 ITR 194 (SC) | Partnership can exist by oral agreement; instrument of partnership may be executed subsequently to business commencement. | Supported the assessee's argument that the instrument need not be contemporaneous with the application and partnership validity is not dependent solely on the instrument's existence at application date. |
| Dhirendra Nath Gorai v. Sudhir Chandra Ghose [1964] AIR 1964 SC 1300 | Distinction between irregularity and nullity; whether a provision is directory or mandatory and if it can be waived. | Used to determine that the requirement to annex the original instrument is directory or capable of waiver, thus breach does not render the application void ab initio. |
| Mitter & Sons v. CIT [1955] 28 ITR 698 (Calcutta HC) | Interpretation of "constituted under an instrument of partnership". | Referenced to explain differing judicial views on the meaning of partnership constitution under an instrument. |
| Dwarkadas Khetan & Co. v. CIT [1956] 29 ITR 903 (Bombay HC) | Registration can be granted when terms of partnership are embodied though executed after business commencement. | Supported the view that the instrument can be executed after the partnership business has commenced. |
| CIT v. Patel & Co. [1959] 37 ITR 412 (SC) | Valid partnership may exist prior to execution of instrument. | Reinforced the principle that partnership validity is not strictly dependent on contemporaneous instrument existence. |
| CIT v. Joseph & George [1970] 77 ITR 292 (Ker) | Similar principle regarding partnership validity and instrument execution timing. | Further supported the assessee's position on timing of partnership instrument. |
Court's Reasoning and Analysis
The Court examined the statutory provisions under section 184 of the Income-tax Act, 1961, and rule 22 of the Income-tax Rules, 1962, which prescribe four requisites for registration of a partnership firm, including that the partnership must be evidenced by an instrument and the application must be accompanied by the original or certified copy of that instrument. The Court noted that the instrument of partnership was executed after the application date but before the end of the accounting year, and that the application was not accompanied by the instrument at the time of filing.
The Court analyzed the legislative intent behind these provisions, concluding that the requirement to accompany the application with the instrument is directory and not mandatory to the extent of rendering the application void ab initio for non-compliance. This conclusion was drawn by distinguishing between irregularity and nullity, referencing the Supreme Court's decision in Dhirendra Nath Gorai v. Sudhir Chandra Ghose.
The Court emphasized that the purpose of the instrument is to provide evidence of a genuine partnership existing during the accounting year, not necessarily to exist at the exact date of application. The Court rejected the Revenue's argument that the failure to annex the instrument at the time of application was a fundamental defect, noting that the assessee produced the instrument before the ITO's final decision and that the procedural law should facilitate justice rather than defeat substantive rights.
Ultimately, the Court found that the assessee was entitled to registration despite the initial procedural defect, as the partnership deed existed within the relevant accounting year and the defect was curable.
Holding and Implications
The Court answered both referred questions in the negative, ruling in favour of the assessee and against the Revenue. The core ruling is that the application for registration filed without the instrument of partnership at the time of filing was not void ab initio and the assessee was entitled to registration.
This decision directly affects the parties by allowing the assessee's registration to stand despite the initial procedural defect. No new precedent beyond this case's facts was established, and no order as to costs was made.
1. At the instance of the assessee, the following two questions have been referred to us for our opinion :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the registration application filed by the assessee was invalid and accordingly it was not entitled to seek registration as prayed for ?
2. Whether, on the facts and the circumstances of the case, the Tribunal was correct in law in holding that the assessee had not complied with the requirement of law and relevant Rules for getting itself registered under section 185 of the I.T. Act, 1961 ?"
2. A few relevant facts need be noticed in order to appreciate, the rival contentions urged in support and opposition of this reference.
3. The assessment year is 1970-71 and the relevant previous year was ended on March 31, 1970. It should be noted that the assessee-firm commenced its partnership business on September 1, 1969. The partners of the assessee-firm filed an a application for registration in Form No. 11 as required under rule 22 of the I.T. Rules, 1962, On November 3, 1969. It should be also recalled that it is common case that the deed of partnership was executed on January 8, 1970. In other words, the application for registration was not accompanied by the original or certified copy of the deed of partnership. It has been found that the assessee-firm had filed the original partnership deed along with the copy thereof after January 8, 1970, and before August 1972, though its exact date was not known as there was no receipt-stamp on the said document. The partnership deed is found to have been drafted on two stamp papers of Rs. 50 each; one of the which was purchased on September 1, 1969, and another was purchased on December 24, 1969. As stated above, the partnership deed was executed on January 8, 1970, i.e., after the application for registration was filed on November 3, 1969.
4. The ITO had issued a show-cause notice to the assessee-firm on August 18, 1972, to show cause us as to why registration should not be refused, since the application for registration was not in order, inasmuch as it was not accompanied by the instrument evidencing the partnership.
5. In reply to the aforesaid show-cause notice, the assessee submitted that the evidence in the nature of instrument of partnership need not be contemporaneous and could be executed at any time up to the end of the accounting year provided there was an oral agreement in that decision of the support of this submission, the assessee relied on the decision of the Supreme Court in Mittar and Sons v. CIT [1959] 36 ITR 194. The assessee also pointed out that under s. 185(2), the ITO ought to have given an opportunity to the assessee to put its application in order within the prescribed statutory period. However, as the assessment was not completed by the time if submitted its reply to the show-cause notice, a fresh application in Form No. 11 enclosing the instrument of partnership was sought to be submitted along with the said reply. It should be noted that inadvertently the assessee did not enclose the application as stated in the said letter, and the fresh application along with the necessary enclosures was actually filed somewhere on March 21, 1973, under cover of a letter of even date. Meanwhile, the ITO by his letter of March 12, 1973, in reply to the explanatory letter aforesaid of the assessee dated November 22, 1972, pointed out that the assessee was under an obligation to comply with the mandatory requirement prescribed under rule 22 of the I.T. Rules 1962, inasmuch as the instrument of partnership was not annexed with the original application for registration field on November 3, 1969, and therefore, it was liable to be rejected. It is further reply to this letter of the ITO that the assessee pointed in his aforesaid reply to this letter of March 21, 1973, that the necessary requirements of rule 22 have been carried out inasmuch as the application for registration was filed on November 3, 1969, and the partnership deed was brought into existence on January 8, 1970, that is, before the close of the accounting year. It is by way of enclosure to this letter that it filed a fresh application which it has inadvertently failed to enclose with its previous letter of November 22, 1972. The ITO was not satisfied with the explanation of the assessee as he was of the opinion that there was no valid application moved before him for registration as the failure on the part of the assessee to annex the instrument of partnership constituted a basic defect which rendered the assessee's claim for registration unsustainable. The ITO emphasised that on the day on which the application was made, that is, November 3, 1969, the deed of partnership was not in existence and, therefore, it could not have annexed any instrument to evidence the partnership at the date of the application as required under the rules. He, therefore, rejected the application for registration.
6. The appeal of the assessee, before the AAC as well as its further appeal before the Tribunal met with the same fate with the result that the assessee asked for a reference of the two question as set out hereinabove which was granted by the Tribunal.
7. What are the requisites for registration is the first question to which we must address ourselves. On a plain reading of s. 184, there are four requisites for obtaining registration of a partnership firm :
1. There should be a valid and genuine partnership in existence during the accounting year.
2. It should be "evidenced by an instrument" of partnership.
3. The instrument should specify the individual shares of the partners.
4. An application for registration together with the prescribed annexures should be made to the ITO ordinarily before the end of the accounting year.
8. It should be also noted that the ITO has been empowered under sub-ss. (4) and (5) of s. 184 of the I.T. Act, 1961, to entertain an application made after the previous year if the assessee is prevented by sufficient cause from making the application and to accept a certified copy in place of the original instrument which an assessee is required to file along with the application for registration. The short question which arises in this reference is : whether the application made by the assessee for claiming registration of the firm on November 3, 1969, can be said to be an application void ab initio, in the sense of it being non-est, so as to justify the order of the ITO as confirmed right up to the Tribunal, refusing registration ? In the opinion of the ITO, and for that matter of the AAC as well as the Appellate Tribunal, the application moved by the assessee on November 3, 1969, without the accompaniment of the instrument of partnership was so materially defective as to be treated as a non-est application. We may have, therefore, to read the material provisions relevant for purposes of this reference. Section 184, in so far as it is material for our purposes, reads as under :
"184. Application for registration. - (1) An Application for registration of a firm for the purpose of this Act may be made to the Income-tax Officer on behalf of any firm, if -
(i) the partnership is evidenced by an instrument; and
(ii) the individual shares of the partners are specified in that instrument........
(4) The application shall be made before the end of the previous year for the assessment year in respect of which registration is sought :
Provided that if the Income-tax Officer may entertain an application made after the end of the previous year, if he is satisfied that the firm was prevented by sufficient cause from making the application before the end of the previous year.
(5) The application shall be accompanied by the original instrument evidencing the partnership, together with a copy thereof :
Provided that if the Income-tax Officer is satisfied that for sufficient reason the original instrument cannot conveniently to be produced, he may accept a copy of it certified in writing by all the partners (not being minors), or, where the application is made after the dissolution of the firm, by all the persons referred to in clause (b) of sub-section (3), to be a correct copy or a certified copy of the instrument; and in such cases the application shall be accompanied by a duplicate copy of the original instrument.
(6) The application shall be made in the prescribed form and shall contain the prescribed particulars......
9. The prescribed particulars which should be comprised in the application are to be found in rule 22 of the I.T. Rules, 1962, Rule 22, in so far as it is material for our purposes, provides as under :
"22, (1) An application for registration of a firm for the purposes of the Act shall be made in accordance with the provisions of sub-rules (2) to (5).
(2) Where the application is made before the end of the relevant previous year -
(i) and where no change in the constitution of the firm or the shares of the partners has taken place during the previous year before the date of the application -
(a) the application shall be made in Form No. 11; and
(b) it shall be accompanied by the original instrument evidencing the partnership at the date of the application together with a copy thereof. A certified copy of the instrument together with a duplicate copy thereof may be attached to the application if, for sufficient reason, the original instrument cannot be produced;
(ii) and where any change or changes in the constitution of the firm or the shares of the partners have taken place during the previous year before the date of the application -
(a) the application shall be made in Form No. 11A; and
(b) it shall be accompanied by the original instrument or instruments evidencing the partnership as in existence from time to time during the previous year up to the date of the application together with copies thereof. A certified copy of the instrument or instruments together with a duplicate copy thereof may be attached to the application if, for sufficient reason, the original instrument or instruments cannot be produced...."
Form No. 11 which is the prescribed form for purposes of such application for registration required the applicant that the original/certified copy of the instrument evidencing the partnership together with a copy/ duplicate copy to be enclosed, and also to furnish prescribed particulars as required in the Schedule to the said form. The particulars which are to be furnished in the Schedule are in respect of the firm as constituted at the date of the application, and where the application is made after the end of the previous year, the apportionment of the income of the partners is to be stated. The different columns of the table given in the Schedule require the name of the partner, his address, date of his admission to the partnership, interest on capital or loans given by him, salary or commission, or other remuneration paid to him from the sum and the share in the balance of the profit or loss, and the remarks, if any, to be filled in. It is in the context of these legal requirements that we have to decide as to whether the assessee is entitled to registration. It is nobody's case that there was no valid and genuine partnership in existence during the accounting year. The only controversy between the parties centers round the point as to what is the effect of the failure on the part of the assessee of the non-compliance of the requirement of sub-s (5) of s. 184 read with r. 22(2)(i)(b). In other words, what is the effect of the application for registration not being accompanied by the instrument of partnership. The second requisite as noted above for the purpose of obtaining registration is that the firm should be evidenced by an instrument of partnership. We should remind ourselves that r. 22(2)(i)(b) enjoins that an application for registration shall be in Form No. 11 and shall be accompanied by the original instrument evidencing the partnership at the date of the application. On reading this rule and the main enactment in sub-s. (5), the income-tax authorities, including the Tribunal, are of the view that the instrument of partnership must be in existence at the date of filing of the application for registration. In this connection, we should remind ourselves of the old scheme in the 1922 Act, where s. 26A which laid down the procedure for registration of the firm enjoined that an application may be made to the ITO on behalf of any firm constituted under an instrument of partnership specifying the individual shares of the partners for the registration for the purposes of the said Act. Sub-s. (2) required that an application was to be made by such person or persons and at such times and containing such particulars and in such form and be verified in such manner as may be prescribed under the rules. Rule 3 of the relevant rules under the said Act required that an application be made in the form annexed to the rule, and that it shall be accompanied by the original instrument of partnership by which the firm is constituted. There was a conflict of judicial opinion amongst the different High Courts as to what should be the precise meaning of the term "constituted under an instrument of partnership" - whether it is tantamount to saying as constituted by the instrument of partnership. One view represented by the Calcutta High Court was that a firm was entitled to registration if it had come into existence by reason of the instrument of partnership (Vide Mitter & Sons v. CIT [1955] 28 ITR 698). The second view was that registration can be granted to a firm even on embodying the terms of the partnership though executed subsequently to the commencement of the business of the partnership firm. This view was taken in a line of decisions represented by the decision of the Bombay High Court in Dwarkadas Khetan & Co. v. CIT [1956] 29 ITR 903. The third view which was adopted was that a valid partnership can come into existence by an oral agreement and s. 26A did not enjoin that it should not have existed prior to the execution of the instrument of partnership (see Mitter & Sons v. CIT [1959] 36 ITR 194 (SC); CIT v. Patel & Co. [1959] 37 ITR 412 (SC) and CIT v. Joseph & George [1970] 77 ITR 292 (Ker)). It appears to as that in order to avoid this controversy arising from the expression "partnership constitued under an instrment" as prescribed in the 1922 Act, we find that in the present Act of 1961, the requirement is that the partnership should be evidenced by an instrument and the application shall be accompanied by the original instrument evidencing the partnership at the date of the application. The words "evidenced by an instrument of partnership" do not indicate necessarily that the evidence should be a contemporaneous evidence when the application is made, because, in the ultimate analysis, the purpose of any evidence and, for that matter the instrument of partnership, is to satisfy the authority that there was a genuine and valid partnership in existence in the accounting year. If we closely look at this requirement as prescribed in r. 22(2), it is manifestly clear to us that such evidence in the nature of instrument must be in relation of a partnership as it existed, if any, at the date of the application. We do not think that it is legislative intent that unless there is an instrument of partnership in existence at the date of the application that the assessee concerned would not be entitled to registration. If that had been the legislative intention, the Legislature would have appropriately expressed itself by saying that the application for registration shall be accompanied by the original instrument in existence at the date of the application. The requirement of the original instrument is only for purpose of providing an evidence of the partnership as existing at the date of the application. It has only a limited purpose and the provision as contained in the section or the rule cannot be overemphasised as is sought to be done by the income-tax authorities. It is no doubt true that the instrument of partnership was not annexed to the application made by the assessee for registration. Sub-section (5) of s. 184 no doubt provides that the application shall be accompanied by the original instrument evidencing the partnership. However, we do not think that this can be said to be such a mandatory provision the breach of which would render the entire application non est.
10. The learned counsel for the Revenue urged that the obligation of annexing the original instrument to the application for registration, having regard to the language in which it has been couched, appears to be mandatory. Even assuming it to be so, we do not think that the breach of such a provision can render the entire act of the application to be non est. The Supreme Court in Dhirendra Nath Gorai v. Sudhir Chandra Ghose [1964] AIR 1964 SC 1300, pointed out the difference between an irregularity and a nullity. Broadly stated, the distinction is that an irregularity is a deviation from the rule of law which does not take away the foundation or authority for the proceeding, or apply to its whole operation, whereas nullity is a proceeding that is taken without any foundation for it, or is so essentially defective as to be to avail or effect whatsoever, or is void and incapable of being validated. The Supreme Court adopted the broad tests indicated by justice Coleridge for purposes of discerning as to whether an act is in irregularity of a nullity. The safest rule to determine what is an irregularity and what is a nullity, as pointed out by, Justice Coleridge in Holemns v. Russel [1841] 9 Dowl 487, is to see whether he party can waive the objection. If it can waive it, it amounts to an irregularity; if he cannot, it is a nullity. Subba Rao J., speaking on behalf of the court, summed up the position that a directory provision can obviously be waived but a mandatory provision can only be waived if it is not conceived in the public interest, but in the interest of the party that waives it. Viewed from that angle, it cannot be gainsaid that the provision for accompaniment of the original instrument evidencing the partnership with the application for registration is directory, or, in any case, even if mandatory, is capable of being waived. The legislative intent conferring a right of condonation is an indication in that direction. Such a right of the ITO is to be found in the proviso to sub-s (5) where the ITO, if he is satisfied that for sufficient reason the original instrument is not forthcoming, may accept a certified copy of it as required therein. Similarly, the ITO has been empowered to entertain an application made after the end of the previous year if he is satisfied that the firm concerned was prevented by sufficient cause from making an application in time. Subsection (4) requires that the application is to be made before the end of the previous year for the assessment year in respect of which the registration is sought. It is an admitted position that the assessee in the present case had submitted the original instrument together with the copy before the ITO at any rate before the proceeded to decide this question of registration though it is not clear as to whether the assessee had produced the the original instrument as well as the its copy before the close of the accounting year. The learned counsel for the Revenue was at great pains to impress upon us that the date of which the application for registration was made, the instrument of partnership was not in existence and assuming that the original as well as the copy of the instrument had been produced before the close of the year, it could have been only after January 8, 1970, when the partnership deed was executed and, therefore, it could not rectify the original defect in the application, even if the court is inclined to view that defect as curable. The submission appears to be attractive but on a close scrutiny, we find ourselves, unable to accept it for the obvious reason that the assessee would have got the registration, if it had made an application on the last day of the accounting year by filling a proper application and annexing all the required documents including the present instrument of partnership, but only by a fortuitous circumstances that it applied earlier and produced the instrument of partnership later, it could not be deprived of registration which is now a matter of right under the 1961 Act. Apart from this, this would defeat the very purpose of the right of a party to remove the defect in following the procedure prescribed for obtaining a right or a privilege. The procedural law is always to be construed and applied in a manner so as to make it a hand-maid to the cause of justice, and it cannot be treated as a substantive provision so as to defeat the rights of the parties. In our opinion, the contention advanced on behalf of the Revenue would have been perfectly justified, if there had been no partnership in existence in the relevant accounting year, or by a subsequently drawn instrument of partnership after the close of the accounting year, by some fiction, the partnership is brought into existence. As observed above, it is nobody's case. In that view of the matter, we are of the opinion that this reference should be accepted and we answer both the questions in the negative, that is, in favour of the assessee and against the Revenue. However, having regard to the facts of this case, there should be no order as to costs.
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