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S.P Pandey And Brothers v. Commissioner Of Income-Tax, Bihar And Orissa
Structured Summary of the Opinion (Untwalia, C.J.)
Factual and Procedural Background
Three brothers — Sheo Prasad Pandey, Kesho Prasad Pandey and Kamla Prasad Pandey — together with Srimati Phuleshwari Devi (said to be their mother) formed a partnership by a deed dated 31 May 1956, the partnership commencing from 1 June 1956. All four partners had equal shares. The partnership deed was registered on 8 June 1956 and was registered with the Income-tax Officer for the first time on 11 March 1958 for assessment year 1957–58. The firm was registered for each successive year up to assessment year 1961–62.
For assessment year 1962–63, due to a common confusion, the assessee initially filed a renewal application under the then-applicable 1922 Act on 16 April 1962. Subsequently, the assessee filed the correct declaration (Form No. 12 under the 1961 Act) on 17 December 1962 under section 184(7) of the Income-tax Act, 1961. The Income-tax Officer accepted the declaration and completed the assessment on 15 March 1963, allocating profits equally among the four partners.
Departmental authorities later discovered that the original partnership deed of 31 May 1956 had been for a fixed term of five years and thus expired on 31 May 1961. The assessee produced a fresh deed dated 23 May 1961, said to continue the old partnership, and furnished a copy on 27 April 1964.
The Commissioner of Income-tax, invoking section 263(1) of the 1961 Act, set aside the Income-tax Officer's order, holding that the new deed brought a new partnership into existence and that renewal of registration was not permissible — the firm should have applied for fresh registration. The assessee appealed to the Income-tax Appellate Tribunal (Tribunal), which dismissed the appeal and upheld the Commissioner's annulment of registration. The Tribunal concluded that the 23 May 1961 deed effected a new partnership because of considerable changes in terms.
The Tribunal (Patna Bench) referred two questions of law to the High Court under section 256(1) of the 1961 Act. The High Court consolidated the matters and re-framed the issue for determination.
Legal Issues Presented
- Whether the instrument of partnership dated 23 May 1961 brings into existence a new partnership?
- Whether the registration of the firm was correctly annulled in the circumstances of the case?
- As reframed by the High Court: Whether, on the facts and in the circumstances of the case, the assessment for the assessment year 1962–63 after granting registration to the assessee‑firm was wrong in law, as held by the Commissioner and the Tribunal?
Arguments of the Parties
Commissioner / Department (as represented in the record)
- The partnership instrument dated 23 May 1961 constituted a new partnership because the earlier deed had been for a fixed five‑year term that had expired.
- Accordingly, renewal of registration (rather than a fresh registration) was improper; the assessee ought to have applied for fresh registration under the 1961 Act.
- The Commissioner relied on the decision in National Motor Company v. Commissioner Of Income‑Tax, M.P. (Bombay High Court) for the proposition that where a partnership is constituted for a fixed term, upon expiry registration of the firm cannot be allowed on the basis of the earlier instrument.
- Section 17(b) of the Partnership Act was considered in the discussion; the Commissioner rejected the assessee's reliance on that provision for renewing registration.
Tribunal
- The Tribunal compared relevant terms of the two partnership deeds and concluded that there were considerable changes in terms, warranting the view that the 23 May 1961 deed created a new partnership.
- On that basis, the Tribunal sustained the Commissioner's cancellation of the registration.
Assessee
- The assessee contended that the 23 May 1961 deed did not change the personnel of the firm nor the equal shares of the partners; thus it did not constitute a new partnership.
- The 23 May 1961 deed was said to have the effect of continuing the old partnership (extending its duration) rather than creating a fresh partnership.
- The assessee relied on the declaration filed under section 184(7) (Form No. 12) and the Income‑tax Officer's acceptance and assessment as supporting continuance of the earlier registration.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| National Motor Company v. Commissioner of Income‑Tax, M.P. [1963] 48 I.T.R. 986 (Bom.) | Proposition that where a partnership is constituted for a fixed term, on expiry registration of the firm could not be allowed (i.e., instrument ceasing to be operative entails need for fresh registration). | The High Court held that the Commissioner and Tribunal misapplied this ratio. The court expressed doubt whether the Bombay High Court's view would hold under the 1961 Act and concluded the ratio decidendi of National Motor Company was not applicable on the facts here. |
| Moolji Sicka, In re (Full Bench of the Calcutta High Court) | Interpreted “change in the constitution of a firm” (under the 1922 Act) as referring to change in personnel (partners); a mere change in shares (partners remaining the same) was not a change in constitution. | The Court referred to this authority as reflecting the earlier view under the 1922 Act, but noted the 1961 Act's later provision (section 187(2)) that alters the concept by deeming changes in shares to be changes in constitution for certain purposes. |
| C. Srinivasa Rao and Brothers v. Commissioner of Income‑tax [1967] 63 I.T.R. 102 (Mys.) | Expressed the view that “constitution of a firm” refers to the composition of partners; constitution is altered when a partner is added or ceases to be one (i.e., change in personnel). | The Court cited this decision as another example of the pre‑1961 approach; but again the High Court explained that the 1961 Act introduced a different deeming provision that changes the legal meaning for the later statute. |
Court's Reasoning and Analysis
The court conducted a statutory and factual analysis pivoting on whether the conditions of section 184(7) of the Income‑tax Act, 1961 were met so that registration granted for an earlier year could continue to operate for the assessment year 1962–63.
- The court observed that neither the Commissioner nor the Tribunal found any change in the personnel of the partnership — the same four partners continued — nor any change in the equal shares of the partners. Thus factual predicates of personnel and share‑change were unchanged.
- The court reviewed the renewal scheme under the earlier 1922 Act (section 26A and the form prescribed) which required a declaration that the constitution of the firm and the individual shares of the partners as specified in the registered instrument remained unaltered. Renewal under the 1922 Act necessarily proceeded on the basis of the original deed.
- Turning to the 1961 Act, the court explained the new scheme: section 184(1) prescribes registration where partnership is evidenced by an instrument and shares are specified; crucially subsection (7) provides that registration granted shall have effect for subsequent years provided (i) there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument on which registration was granted, and (ii) the firm furnishes the prescribed declaration (Form No. 12) with its return.
- The court noted that after enactment of the 1961 Act, statutory language shifted: section 187(2) now deems a change in shares (even with same partners) to be a change in constitution for the purposes of the corresponding provision — thereby altering the earlier judicial understanding under the 1922 Act. However, this deeming provision was discussed to clarify what constitutes a “change in the constitution” under section 184(7).
- Factually, the court analyzed the 23 May 1961 deed (annexure “D”) and concluded it was executed before expiry of the original five‑year term and explicitly stated that the partnership would be deemed to have commenced on 1 June 1956, was continuing and would continue as a partnership at will. The court held that this deed operated to supplement and extend the earlier deed (effectively continuing the old partnership), not to create a new partnership.
- The court examined the alleged differences relied upon by the Tribunal (office location phrasing, interest on capital, phrasing about carrying on business) and found them insubstantial — changes in phraseology or non‑material terms that did not alter personnel or shares and did not create a new partnership.
- On that basis the court concluded that the proviso to subsection (7) of section 184 (no change in constitution or shares) was satisfied and that the declaration required by subsection (7)(ii) had been filed in Form No. 12 and was consistent with the true state of affairs. Consequently, an application under section 184(1) for fresh registration was not necessary.
- The court further concluded that the Commissioner and the Tribunal erred in applying the ratio of National Motor Company and in failing to apply the correct legal principle to the facts; the Bombay High Court decision was of doubtful application under the new statutory scheme (1961 Act).
Holding and Implications
The re‑framed question was answered in the negative: the High Court held that the assessment for assessment year 1962–63, made after granting registration to the assessee‑firm, was not wrong in law.
Direct consequences and orders given in the opinion:
- The High Court ruled in favour of the assessee and against the department on the referred questions.
- The court held that the instrument dated 23 May 1961 continued the original partnership rather than creating a new one, so renewal of registration (on the basis of the earlier registration and the declaration under section 184(7)) was valid.
- The assessee was awarded the costs of the reference; the hearing fee was assessed at Rs. 100.
- The court expressed that the ratio of National Motor Company was doubtful in its applicability under the 1961 Act, indicating that the earlier Bombay High Court view may not hold under the later statutory regime; however, the court did not purport to overrule that decision — it limited its conclusion to the facts and legal provisions before it.
Judge concurring: S.K. Jha, J. agreed with the judgment.
Untwalia, C.J:— This is a reference by the Income-tax Appellate Tribunal, Patna Bench, under section 256(1) of the Income-tax Act, 1961 (hereinafter called “the 1961 Act”). In the statement of the case mention of section 66(1) of the old Act seems to be a mistake as the assessment year in question is 1962–63 governed by the 1961 Act. Sheo Prasad Pandey, Kesho Prasad Pandey and Kamla Prasad Pandey are three brothers. They along with one Srimati Phuleshwari Devi, who is said to be their mother, constituted a partnership by a partnership deed dated May 31, 1956; the partnership commenced from June 1, 1956. All the four partners had equal shares. The partnership deed was registered on June 8, 1956, in the registration office, and it was registered with the Income-tax Officer for income-tax purposes for the first time on March 11, 1958, in relation to the assessment year 1957–58. For every successive year the partnership was registered till the assessment year 1961–62. For the assessment year 1962–63, under a confusion which was common, the assessee filed an application for renewal of registration in Form No. I.T I-A. This was an application for renewal of registration under the Income-tax Act, 1922 (hereafter referred to as “the 1922 Act”). This application was filed on April 16, 1962. Eventually, the assessee filed an application in the correct form on December 17, 1962, which was described as Form No. 12 under the Rules which came into force after coming into force of the 1961 Act. This was a declaration under section 184(7) of that Act. The Income-tax Officer accepted the declaration and completed the assessment on March 15, 1963. In his order he recorded that the partners had filed a declaration under section 184(7) on December 18, 1962, and since there was no change in the constitution of the firm, registration of the firm was granted for the assessment year 1962–63. Allocation of the profits assessed was made accordingly equally among the four partners.
2. Later on, the departmental authorities noticed that the partnership dated May 31, 1956, was for a fixed term of five years. It, therefore, expired on May 31, 1961. In the course of the enquiry in a letter dated March 23, 1964, the assessee had explained that there was a fresh deed executed on May 23, 1961, and it was claimed that it had the effect of continuing the old partnership. A copy of this deed was furnished to the Income-tax Officer on April 27, 1964.
3. The Commissioner of Income-tax, in exercise of his power under section 263(1) of the 1961 Act, interfered with the order of the Income-tax Officer allowing registration of the firm and held that the assessee was not entitled to renewal of registration because a new partnership deed had come into effect. He was of the opinion that the assessee ought to have applied for a fresh registration of the new firm and not merely for its renewal. The assessee went up in appeal before the Tribunal. The Tribunal dismissed the appeal and maintained the cancellation of the registration done by the Commissioner. The Tribunal also did not accept the contention of the assessee that by the new deed the old partnership had been continued. In their opinion, there was a considerable change in the terms of the two partnerships and, therefore, the Tribunal thought that the Commissioner was justified in annulling the registration. On the facts aforesaid the Tribunal has referred for the determination of this court the following questions of law:
“1. Whether the instrument of partnership dated May 23, 1961, brings into existence a new partnership?
2. Whether the registration was correctly annulled in the circumstances of the case?”
4. I think the two questions of law in this case can be consolidated in one and reframed as hereunder:
“Whether, on the facts and in the circumstances of the case, the assessment for the assessment year 1962–63 after granting registration to the assessee-firm was wrong in law, as held by the Commissioner and the Tribunal?”
5. The Commissioner or the Tribunal has nowhere found that there was any change in the personnel of the partnership. The very four partners who had constituted it in the beginning were also the partners under the new deed, which I shall discuss hereinafter in this judgment. Nor has it been found that there was any change in the shares of the partners; the shares remained equal as before. The Tribunal has compared the relevant terms of the two partnership deeds and come to the conclusion that there are changes in the terms, and, therefore, the new deed must be construed as a fresh deed of partnership.
6. The Commissioner of Income-tax had referred to the case of National Motor Company v. Commissioner Of Income-Tax, M.P [1963] 48 I.T.R 986 Bom.. for the proposition that if under an instrument of partnership it has been constituted for a fixed term, then on the expiry of that term registration of the firm could not be allowed. The argument advanced before the Commissioner with reference to section 17(b) of the Partnership Act was rejected. The Tribunal seems to hold that the partnership created by the deed dated May 23, 1961, was a new one and, hence, registration could not be allowed on the basis of a declaration filed by the assessees in accordance with section 184(7) of the 1961 Act. I shall presently show that both the Commissioner and the Tribunal have committed errors of law and have misdirected themselves in that they have not applied the correct principle of law which was applicable to the facts of the case.
7. Application for the renewal of registration of a firm was provided in section 26A of the 1922 Act. The application for the renewal had to be made in the form prescribed in rule 6. In paragraph 2 of that application it had to be stated:
“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……… 19……… 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.”
8. It will thus be noticed that in order to get renewal of registration the partners of the assessee-firm had to state that the constitution of the firm as also the individual shares of the partners were the same as specified in the instrument of partnership already registered. In other words, renewal could be claimed on the basis of the original deed of partnership and not on the basis of a new deed, whatever its effect may be. It may, however, be pointed out here that there was a provision in the 1922 Act contained in section 26(1) that:
“Where, at the time of making an assessment under section 23, it is found that a change has occurred in the constitution of a firm or that a firm has been newly constituted, the assessment shall be made on the firm as constituted at the time of making the assessment.”
9. Since the expression used in section 26(1) was “change in the constitution of a firm”, it was held by a Full Bench of the Calcutta High Court in Moolji Sicka, In re, that change in the shares of the partners, the partners remaining the same, was not a change in the constitution of the firm. Change in the constitution of the firm would mean a change in its partners. Sections 38 and 63(1) of the Partnership Act were pressed into service in support of this view, and it was held that change in the constitution of a firm means change in the personnel of the firm, that is to say, a change in the persons who were partners in the firm. The same view was taken by the Mysore High Court in C. Srinivasa Rao and Brothers v. Commissioner of Income-tax [1967] 63 I.T.R 102, 105 Mys.., and it was said at page 105:
“The words ‘constitution of a firm’ have, according to their plain meaning, reference to the composition or the structure of the firm. Generally speaking, the composition of a firm is determined by the partners who constitute it and its constitution would get altered when there is an inclusion of a new partner or an old partner ceases to be one.”
10. The scheme of registration or its renewal has undergone a change under the 1961 Act, and the forms in force after coming into force of that Act are different. Under section 184(1), an application for registration of a firm has to be made to the Income-tax Officer on behalf of the firm if the partnership is evidenced by an instrument and the individual shares are specified in that instrument. There is a separate form given for making such an application. Sub-section (7) of section 184 provides:
“Where registration is granted to any firm for any assessment year, it shall have effect for every subsequent assessment year:
Provided that—
(i) there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the registration was granted; and
(ii) the firm furnishes, along with its return of income for the assessment year concerned, a declaration to that effect, in the prescribed form and verified in the prescribed manner.”
11. The scheme under the 1961 Act, therefore, is that once registration is granted to any firm for any assessment year under the 1961 Act, the registration shall have effect for every subsequent assessment year on compliance with the requirement of the proviso to sub-section (7). The Income-tax Officer is merely required to record the fact of the continuance of the registration every year on the instrument of partnership in accordance with sub-section (4) of section 185. The declaration to be given in accordance with Sub-section (7) of section 184 is to be in Form No. 12 prescribed under rule 24. In this form, after stating that the firm was granted registration for the earlier year, the only declaration which has to be made is that:
“there has been no change in the constitution of the firm or the shares of the partners since the last day of the previous year relevant to the assessment year 19……19…… up to the last date of the previous year relevant to the assessment year 19…… 19…… or to the date (……19……) of dissolution of the firm”.
12. There is some observation in the order of the Commissioner as also of the Tribunal that since a new partnership deed had been executed, the assessee-firm ought to have applied for registration under section 184(1) of the 1961 Act. But all seem to be agreed that if it was not constitution of a new firm or a new partnership, then the registration granted for the year 1961–62 could be taken to be the registration granted for the purpose of section 184(7). In this case, therefore, the only question which falls for consideration is whether the requirement of Sub-section (7) of section 184 of the 1961 Act was fulfilled by the assessee.
13. But before I do so, I may refer to the change brought about in section 187 of the 1961 Act which no longer permits the acceptance of the principle laid down by the Calcutta and the Mysore High Courts with reference to section 26(1) of the 1922 Act. In sub-section (2) of section 187 it has been provided now that, for the purposes of this section, there will be deemed to be a change in the constitution of the firm if one or more of the partners cease to be partners or one or more new partners are admitted, or where all the partners continue with a change in their respective shares or in the shares of some of them. In other words, for the application of the provision contained in section 187(1) of the 1961 Act, which corresponds to section 26(1) of the 1922 Act, it would be deemed that there is a change in the constitution of the firm not only when there is a change in the personnel but also when there is a change in the shares of the partners. I have referred to this aspect of the matter to indicate as to what is meant by the expression “change in the constitution of the firm” occurring in subsection (7) of section 184 of the 1961 Act.
14. The only requirement of the declaration given under the said provision of law is that there is no change in the constitution of the firm or that the shares of the partners as evidenced by the instrument of partnership on the basis of which registration was granted had remained unchanged. On the facts of this particular case, registration was granted and renewed under the 1922 Act, on the basis of the instrument of partnership dated May 31, 1956. Even on execution of the partnership deed dated May 23, 1961, there was no change either in the personnel of the partners or in their shares. That being so, the requirement of proviso (i) was fulfilled. Undoubtedly, the declaration as required by proviso (ii) of Sub-section (7) of section 184 had been filed. Even according to the new Form No. 12, the statement in paragraph (ii) was not inconsistent with the true state of affairs of the assessee-firm.
15. It seems, as I have said above, that neither the Commissioner nor the Tribunal has approached this case from the right angle and applied the correct law. I now proceed to refer to the reasonings given by the Tribunal with reference to the two deeds of partnership which are annexures “C” and “D” to the statement of the case. Annexure “D” clearly indicates that there was a necessity for execution of this deed because in the original deed the term of partnership had been fixed for five years. The partners wanted to continue the partnership further. Merely extending the duration of the partnership by the deed (annexure “D”) will not make it a fresh partnership. Annexure “D” was executed before the expiry of the period. It had, therefore, the effect of supplementing the earlier partnership deed and continuing the period beyond five years. It is expressly mentioned in clause 2 of annexure “D” that the partnership shall be deemed to have commenced on June 1, 1956, was continuing and would continue as a partnership at will. The Tribunal is wrong in arriving at a different conclusion on the basis of the third and the fourth paragraphs of the preamble of the deed (annexure “D”) that it is not a continuance of the old partnership. Without a fresh partnership deed, the old partnership could not be continued for the purposes of the Income-tax Act, although under section 17(b) of the Partnership Act it could be continued even without a fresh deed. The purpose of executing a fresh deed was to give a new life of extension to the old deed. The Tribunal has also compared some of the terms of the two deeds to arrive at the conclusion that there was some change in the terms. Firstly, it is to be pointed out that there is no substantial change in the two deeds. Even if there is any, it is merely the changing of the terms of carrying on the partnership business and it has not the effect of bringing into existence a. new partnership, or changing its constitution or changing the shares of the partners. In the original deed it was stated that the office of the partnership would be carried on “at Japla and at such other place or places”, but in the new deed it is mentioned only “Japla”. If no necessity was felt for opening the office at any other place, the place for running the office was fixed at Japla only. It was not a substantial change of the term at all. There was no substantial change in regard to the payment of interest on the capital investment of the partners. A sum of Rs. 4,000 was invested, free of interest, and any party investing more than his share will be entitled to interest at 6 ½ per cent per annum on that amount. In regard to the carrying on of the business also by other firms, there was merely a change in the phraseology, but no other substantial change. I have, therefore, no difficulty in holding that it was not a new partnership which was created by the new deed, rather the old one was continuing. Therefore, an application under section 184(1) of the 1961 Act for the registration of the firm was not necessary. Nor the ratio decidendi of the case of National Motor Company was applicable. It is doubtful whether the view expressed by the Bombay High Court in that case will hold good under the provisions of the 1961 Act. section 17(b) of the Partnership Act makes the continuance of a partnership constituted for a fixed term as a partnership at will without any fresh deed. But for the purposes of the renewal of registration this could not be so as held by the Bombay High Court, because the instrument of partnership under which the firm was constituted ceased to be operative. Under the new law and the form in force after the coming into force of the 1961 Act, it is doubtful whether section 17(b) of the Partnership Act cannot be pressed into service for continuing the registration under section 184(7) and Form No. 12. For the reasons stated above, I answer the re-framed question in the negative, in favour of the assessee and against the department. I hold that, on the facts and in the circumstances of the case, the assessment was correctly made by the Income-tax Officer on grant of registration to the assessee-firm in accordance with section 184(7) of the 1961 Act. The assessee must have the costs of this reference. Hearing fee is assessed at Rs. 100 only.
S.K Jha, J.:— I agree.
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