M.B Farooqi, J.:— The assessee is a partnership firm. The firm was formed under the partnership deed dated March 25, 1970, with effect from April 1, 1969. The firm consisted of six partners. By an oral arrangement between the partners, a new partner, namely, Firdoos Ahmad Bhat, was taken in on February 22, 1972. The new arrangement was evidenced in writing by a document styled as a “partnership deed” executed on 27th day of March, 1972, by the existing partners and the new partner, who was taken in. The relevant clauses of the deed dated March 25, 1970, are as follows:
“6. The net profits of the partnership shall be divided amongst the partners and the net losses shall also be borne by them in the following proportion:
Party No. 1 (Gh. Ahmad Khan)
24%
Party No. 2 (Gh. Rasool Bhat)
33%
Party No. 3 (Mohd. Amin Khan)
11%
Party No. 4 (Mohd. Shafi Khan)
11%
Party No. 5 (Gh. Mohi-ud-din)
11%
Party No. 6 (Abdul Hamid Khan)
10%
100%
7. The accounts of the partnership shall hithertofore be maintained on mercantile basis and on the last day of March every year a trading and profit and loss account and a balance-sheet shall be prepared soon there- after. The resultant net profit or loss of each partner shall be credited or debited to his personal account as per clause 6 of this deed.”
2. The deed dated March 27, 1972, recites:
“Whereas the party of the 7th part, Firdoos Ahmad Bhat, was taken in as a partner of the firm on 22nd Feb., 1972, the parties heretonow desire to put down the terms and conditions under which the business shall be continued to be carried on in future.”
3. And, thereafter, inter alia, provides:
“1. The partnership business shall be deemed at WILL and operative from 1st April, 1971.
2. The firm's name under which the business is carried on shall continue to be M/s. Ghulam Ahmad Khan and Brothers, Kashmir Art Dealers, with its head office at Nawab Bazar, Srinagar. The parties by mutual consent can open a branch or branches at any place or places of business. The parties hereto also can embark upon any other nature of business if they mutually decide upon.
5. The net profits or losses of the partnership business shall be divided or borne by the parties hereto in the following shares:—
i.
Kh. Ghulam, Ahmad Khan
Share 24%
ii.
Kh. Ghulam Rasool Bhat
Share 17%
iii.
Kh. Mohd Amin Khan
Share 11 %
iv.
Mohd Shafi Khan
Share 11%
v.
Kh. Gh. Mohi-ud-in-Khan
Share 11%
vi.
Kh. Abdul Hamid Khan
Share 10%
vii.
Kh. Firdoos Ahmad Bhat
Share 16%
Total 100
6. The a/c. books of the firm shall be closed on the 31st day of March every year when a profit and loss account and a balance-sheet shall be prepared soon thereafter. The resultant profit or loss, as the case may be, shall be divided or borne by them in the shares as per clause five (5) above.”
4. Thus, there was a slight change in the share allocation. The share of Gh. Rasool Bhat was reduced from 33% to 17% and the difference of 16% was allotted to his son, Firdoos Ahmad, new partner. The account books were closed on March 31, 1972. The profits of the business of the entire year were, however, distributed amongst all the seven partners in the ratio given in cl. 5 of the deed dated March 27, 1972. The firm filed a proper application for registration for the assessment year 1972-73 under s. 184 of the I.T Act, 1961. The ITO rejected the application holding that the firm was not in existence with effect from April 1, 1971, to February 21, 1972. He held that the firm came into being with effect from February 22, 1972, when Firdoos Ahmad Bhat was taken in as a new partner. The new partnership could not be made effective from April 1, 1971, and, moreover, the new partner could not be given a share in the profits for the entire year when he had joined the firm only on February 22, 1972. The AAC agreed with this view. On further appeal, the Tribunal took a different view and allowed registration observing as under:
“In our opinion the grounds relied upon by the lower authorities are not material or sufficient for rejecting the benefit of registration to the firm. We agree with the departmental representative that the firm as constituted under the deed dated March 27, 1972, could not be made operative with effect from April 1, 1971, as the new partner had joined only on February 22, 1972. However, the earlier period was governed by the deed dated March 25, 1970. Both the periods of the year-under appeal were properly governed by two different deeds and it is wrong to say that there was no deed covering the period up to February 22, 1972. As regards the distribution of shares the authorities relied upon by the learned counsel for the assessee clearly support his case. The shares are clearly ascertainable as they have been duly mentioned in the respective deeds. There is only a mistake in the distribution of profits at the end of the year which is not in conformity with the second deed. However, the courts have held that that cannot be made the basis for rejecting the registration. We, therefore, direct the Income-tax Officer to allow registration to the firm for the assessment year 1972-73.”
5. At the instance of the Commissioner, the Tribunal has referred the following question for the opinion of this court:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in directing the Income-tax Officer to allow registration to the firm for the assessment year 1972-73.”
6. The matter is governed by s. 185. Sub-section (1) of s. 185, omitting portions not relevant, reads:
“(1) On receipt of an application for the registration of a firm, the Income-tax Officer shall inquire into the genuineness of the firm and its constitution as specified in the instrument of partnership, and—
(a) if he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified, he shall pass an order in writing registering the firm for the assessment year;
(b) if he is not so satisfied, he shall pass an order in writing refusing to register the firm.”
7. On the terms of this sub-section, an application for registration is liable to be dismissed if the firm, as shown in the partnership deed, is not genuine or, though genuine, it has not sprung into existence during the relevant accounting year. Once it is found that the firm is genuine and has sprung into existence during the relevant year, the registration cannot be refused merely on the ground that the partners have failed to divide the profits in accordance with the terms of the partnership deed. It is true that in accordance with the decision of the Supreme Court in R.C Mitter & Sons v. CIT, [1959] 36 ITR 194 (SC), on which reliance was placed by the departmental counsel, one of the essential conditions to be fulfilled in order that a firm may be entitled to registration is that the profit or loss, if any, of the business relating to the previous year, that is to say, relevant accounting year, should have been divided or credited, as the case may be, in accordance with the terms of the instrument. But the decision is based upon rules which were in force before the Income-tax Act of 1961 was enacted, and even before, the rules were amended in the year 1952. Rule 4 of the then prevailing rules provided as under:
“(1) If, on receipt of the application referred to in rule 3, the Income-tax Officer is satisfied that there is or was a firm in existence constituted as shown in the instrument of partnership and that the application has been properly-made, he shall enter in writing at the foot of the instrument or certified copy, as the case may be, a certificate in the following form, namely:—
This instrument of partnership/certified copy of an instrument of partnership, has this day been registered with me, the Income-tax Officer, for… in the State of… under section 26A of the Indian Income-tax Act, 1922, and this certificate of registration shall have effect for the assessment for the year ending on the 31st day of March 19.
(2) If the Income-tax Officer is not so satisfied, he shall pass an order in writing refusing to recognise the instrument of partnership, or the certified copy thereof, and furnish a copy of such order to the applicants.”
8. The provisions of this rule are materially different from the provisions of s. 186 which governs the matter of registration under the present Act.
9. The departmental authorities rejected registration on two grounds: firstly, that there was no firm in existence with effect from April 1, 1971, to February 21, 1972. Secondly, that the new partner had been given a share for the entire year whereas he had joined the firm only on February 22, 1972. Taking first the second ground, there can be hardly any doubt that there was an error in the division of the profits. The new partner could not be given a share in the profits for the entire year. On the principle stated above, this could not by itself furnish any ground for rejecting the registration.
10. Dwelling on the first ground, the departmental authorities have stated that the firm had come into existence with effect from February 22, 1972, when the new partner was taken in. There was no firm in existence with effect from April 1, 1971, to February 21, 1972. This view is based upon a misconception of facts and law.
11. In Tyresoles (India), Calcutta v. Commissioner Of Income-Tax, Coimbatore., [1963] 49 ITR 515 (Mad), Jagadisan J. observed (at p. 529):
“The dissolution and reconstitution of a partnership are two different legal concepts. The dissolution puts an end to the partnership, but reconstitution keeps it subsisting, though in another form. A dissolution followed by some of the erstwhile partners taking over the assets and liabilities of the dissolved partnership and forming themselves into a partnership is not reconstitution of the original partnership. The partnership formed after the dissolution is a new partnership and not a continuation of the old partnership, for, it would be a contradiction in terms to say that what ceased to exist was continued. A reconstitution of a firm of partnership necessarily implies that the firm never became extinct. What it denotes is a structural alteration of the membership of the firm, by addition or reduction of members, and an incidental redistribution of the shares of the partners.”
12. We might add here that, in accordance with s. 17(a) of the Partnership Act, the mutual rights and duties of the partners in the pre-constituted firm remain (subject to the contract between the parties) the same as they were immediately before the change, as far as may be.
13. In this context, let us now proceed to consider the true scope of the so-called deed of partnership dated 27th March, 1972. The key to this problem is provided by the recital in the deed which unmistakably suggests that the integrity of the business as it was under the previous instrument of partnership dated March 25, 1970, was in no way broken on 22nd February, 1972, when it is impossible to say that there was a dissolution in fact of the entire partnership and that a new partnership came into existence, as the departmental authorities seem to assume when they say that there was no partnership with effect from April 1, 1971, to February 22, 1972. The new partner was taken in on February 22, 1972, which brought about a reconstitution and not a dissolution of the partnership, as shown in the instrument of partnership deed March 27, 1972. The instrument of partnership deed dated March 27, 1972, is to be read as supplemental to and not in derogation of the instrument of partnership deed dated March 25, 1970. The departmental authorities have seemingly misconstrued the instrument of partnership dated March 27, 1972, as an instrument bringing to an end the partnership as shown in the partnership deed dated March 25, 1970, and bringing about a new partnership, distinct and independent from the partnership as shown in the deed dated March 25, 1970. In taking this view, they have been apparently influenced by the provisions of cl. (1) of the deed dated March 27, 1972. Clause (1) of the deed dated March 27, 1972, is no doubt significant when it says that the partnership business shall be deemed to be operative from April 1, 1971. They have construed it as providing that the partnership shall be deemed to have come into existence from April 1,. 1971. On these premises, they have held that the new partnership could not be treated to be in existence for the period preceding February 22, 1972, when in fact it did not exist. This view proceeds upon a mistaken interpretation of cl. (1) of the deed dated March 27, 1972. Properly construed, what cl. (1) conveys is that the accounts shall relate back to 1st April, 1971. This, interpretation receives support from the recital in the deed which categorically states that the new partner was taken in from February 22, 1972,. and that “the parties desire now to put down the terms under which the business shall be continued to be carried on in future”.
14. In Waddington v. O’ Callaghan, [1931] 16 TC 187, 197 (KB) Rowlatt J. observed:
“When people enter into a deed of 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 the 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 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.”
15. On this principle also cl. (1) of the deed dated March 27, 1972, must be held as providing that the accounts shall relate back to April 1, 1971, and not that the partnership shall be deemed to have come into existence from that date.
16. In the view expressed above, the articles of the partnership deed dated March 25, 1970, read with the modification introduced under the document dated March 27, 1972, would sufficiently satisfy the requirements of law regarding the existence of a written instrument to obtain registration. Accordingly, the departmental authorities were not justified in refusing registration. The Tribunal was right in holding that the registration had been unjustifiably refused, and in directing that the same be accorded to the firm for the year 1972-73.
17. In what we have stated above, we have assumed that the words, during, the previous year; used in s. 186 imply that the partnership should have come into existence at the inception of the relevant accounting year and not any subsequent time before the year is out. We, however, leave this question open. For these reasons, we are of the opinion that the question referred to us must be answered in the affirmative, in favour of the assessee and against the department and we hereby do so; As the assessee has not appeared, we make no order as to costs. Counsel's fee is assessed at Rs. 150.
G.M Mir, J.:— I agree.