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  • A.N Bhandari, C.J
  • Chopra, J.
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Smart Summary

Court Opinion Summary — Reference under section 66(1) (Registration under section 26A)

Factual and Procedural Background

Bhandari, C.J. considered a reference under section 66(1) of the Indian Income-tax Act arising from a dispute about registration under section 26A. On 10 April 1948 Rattan Lal and his brother Jai Parkash entered into an oral agreement to carry on business in partnership under the name Messrs Ramji Das Rikhi Ram. On 17 October 1948 they reduced the terms of that agreement into writing. The partners applied to the Income-tax Officer for registration of the firm under section 26A for the assessment year 1949–1950 (previous year ending 31 March 1949).

The Income-tax Officer concluded that no genuine firm had come into existence in April 1948; the Appellate Assistant Commissioner confirmed that view. The Tribunal reached a different conclusion: it held that a genuine firm had been constituted in April 1948 but that the instrument of partnership was drawn only on 17 October 1948 and, therefore, the firm could not be said to have been "constituted under an instrument of partnership." On the question of registration under section 26A the Tribunal dismissed the appeal. At the parties' request the Tribunal referred the following question of law to the Court:

Whether the applicant firm which was formed by oral agreement in April, 1948 on terms and conditions reduced to writing in October 1948 was one constituted under an instrument of partnership within the meanings of those words in section 26A and entitled to registration for the purposes of the Income-tax Act for the assessment year 1949–1950?

Legal Issues Presented

  1. Whether a firm formed by an earlier oral agreement but whose terms were later reduced into writing (on 17 October 1948) can be regarded as a firm "constituted under an instrument of partnership" within the meaning of section 26A of the Income-tax Act, and therefore entitled to registration for the assessment year 1949–1950.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Dwarkadas Khetan & Co. v. Commissioner of Income-tax, 29 I.T.R. 903 (Chagla, C.J.) Expressed the view that section 26A does not require that a firm must be constituted by the instrument; the word "under" is not synonymous with "by". A firm originating in oral agreement can be registered with effect from its date of origin if an instrument is executed subsequently. The Court considered this view (the "first view") and explicitly rejected it. Bhandari, C.J. declined to follow Chagla, C.J.'s approach and endorsed the contrary position that a firm must be constituted by or under an instrument to claim section 26A benefits.
Ram Gulam Madan Lal v. Income-tax Officer, G. Ward, Delhi, 1964 25 I.T.R. 339 Propounds that an instrument of partnership must be executed at or before the commencement of the relevant accounting year, should govern distribution of profits in that year, and should form part of the transaction creating the partnership (i.e., an instrument that creates the partnership rather than merely records a prior oral partnership). The Court endorsed the principles associated with this "second view" (as applied in this case and related decisions) and adopted them as the correct interpretation of section 26A. The Court also distinguished an earlier passage in the same case (Falshaw, J.'s observation that registration could be granted from the date of the instrument even if the deed alleges prior existence) and expressly disagreed with that more permissive approach.
R.C. Mittar & Sons v. Commissioner of Income-tax, 1955 28 I.T.R. 698 (Calcutta High Court) The Calcutta High Court held that section 26A contemplates firms created or brought into existence by a written deed and further that the deed should govern distribution of shares in the relevant accounting period (i.e., the deed should not be merely declaratory of prior oral arrangements). The Court found itself in respectful agreement with the Calcutta High Court's position and relied on this authority in endorsing the requirement that an instrument must constitute the firm (not merely memorialize a prior oral partnership) for registration under section 26A.
Alsop v. Pierce, 19 So. 2nd 199, 802 Used as authority for meanings of words and the interpretative latitude of the word "under" in statute; considered in construing "constituted under" and related terms. The Court cited Alsop v. Pierce among authorities to support its interpretation that "constituted under" and "constituted by" an instrument of partnership convey the same idea and must be understood as requiring that the partnership owe its creation to the written instrument.
Powell v. City of Baira, 128 S.W.2d 786, 790 Used for illustrating meanings of "under" (e.g., "by authority of") in statutory contexts. The Court invoked this authority to help substantiate the interpretation that "under" may mean "by virtue of" or "by authority of" and therefore supports the view that a firm must be created by the instrument to claim section 26A benefits.
Re East and West India Dock Company Authority cited for the meaning of "constitute" (to "set up", "establish", or "found"). The Court relied on this authority to explain that "constitute" means to establish or found, reinforcing the conclusion that a firm must be established by the instrument to be "constituted under" it.

Court's Reasoning and Analysis

The Court's analysis proceeds from statutory text, ordinary meaning of words, policy considerations, and prior authorities. The essential steps of the reasoning, as stated in the opinion, are:

  1. Definition and statutory starting point: The Court began with a broad description of partnership as a relationship founded on agreement to share profits, and noted that section 26A expressly provides that application for registration may be made only on behalf of a firm "constituted under an instrument of partnership." Thus the statute does not, in the Court's view, take notice of partnerships that arise solely from oral agreements for the purposes of registration under section 26A.
  2. Two competing interpretative views were identified:
    • The first view (attributed to Chagla, C.J. in Dwarkadas Khetan & Co.) treats "constituted under" as not requiring that the firm be created by the instrument; accordingly a firm arising earlier by oral agreement could be registered from its date of origin once an instrument is executed later.
    • The second view (adopted in Ram Gulam Madan Lal and by the Calcutta High Court in R.C. Mittar & Sons) requires that the instrument of partnership be the document by which the partnership is created (or at least be an instrument that governs distribution of profits in the relevant accounting period) and not merely a memorial of earlier oral arrangements.
  3. Presentation of criteria/principles: The opinion reproduces four principles (numbered 1–4 in the text) that govern registration when title deeds and alleged prior oral partnerships interact:
    • A partnership deed cannot retrospectively create a partnership for an earlier date merely by stating it shall be deemed to have come into existence earlier.
    • If a partnership originates in a verbal agreement and later a formal deed is executed, there can be no claim to registration for the period prior to the date of the deed unless the deed itself creates or reconstitutes the partnership.
    • Whether registration can be claimed for the period after the deed depends on the instrument's language; a deed that merely records earlier arrangements and is declaratory in character will not by itself constitute a partnership for subsequent periods.
    • If the deed, in addition to recording past history, expressly states that the partners shall carry on business in future in accordance with its terms, it can be construed as creating or originating a partnership for the future from its date and may support registration for the subsequent period.
  4. Policy and purposive considerations: The Court emphasised the protective purpose of section 26A — to prevent unfounded, retrospective claims based on oral assertions and to protect the revenue from fraud and perjury. This purpose supports a textual and purposive interpretation that requires partnerships seeking the benefits of section 26A to be "constituted by or under" a writing which actually creates (or re-creates) the partnership.
  5. Textual analysis of key words: The Court examined the ordinary meanings of "constitute" ("set up", "establish", "found") and "under" (various senses including "by", "by virtue of", "in accordance with") using dictionary and authority citations. The conclusion drawn was that "constituted under" and "constituted by" carry essentially the same idea in this context and require that the partnership owe its creation to the instrument.
  6. Application to the facts: Applying these principles to the present case, the Court found that:
    • The partnership's birth and creation occurred as a result of the oral agreement of 10 April 1948, not by the written instrument of 17 October 1948.
    • The October instrument merely recited the prior oral agreement, reducing into writing the terms agreed in April; it did not declare that the partnership was being created or reconstituted by that instrument, nor did it purport to regulate distribution of shares in the relevant accounting period.
    • Consequently, the instrument was a memorial/declaratory document and not an instrument that "constituted" the firm under section 26A.
  7. Alternative possibility acknowledged: The Court noted that a partnership originally constituted orally could, by mutual agreement, dissolve and reconstitute itself under a new instrument; if the parties did so and the instrument clearly created or reconstituted the partnership, the conditions of section 26A would be satisfied for the period after such reconstitution. That is, a bona fide reconstitution under a written instrument can support registration prospectively.

Holding and Implications

Holding: The Court answered the reference in the negative: the firm in question was not constituted under an instrument of partnership and is not entitled to registration under section 26A for the assessment year 1949–1950.

Implications (direct effects stated in the opinion):

  • Direct effect on the parties: The firm's application for registration under section 26A for the assessment year 1949–1950 is refused because the partnership owed its creation to an oral agreement of 10 April 1948 and the later writing of 17 October 1948 merely memorialised the earlier oral arrangement rather than creating or reconstituting the firm.
  • Prospective guidance: The Court explained that a partnership originally formed orally may obtain the benefit of section 26A prospectively if the partners validly dissolve and reconstitute the firm under a written instrument which, by its terms, creates the partnership (or reconstitutes it) from the instrument's date. A mere memorandum of prior oral arrangements is insufficient.
  • Costs: The Court directed that there be no order as to costs.
  • Other: Chopra, J. agreed with the decision; the reference was answered.

This summary is limited to the information expressly contained in the provided opinion and does not add facts or assertions beyond that text.

Show full summary ...

    Ramji Das Rikhi Ram v. Commissioner Of Income Tax

    Bhandari, C.J:— This is a reference under section 66(1) of the Indian Income tax Act. On the 10th April, 1948 Rattan Lal and his brother Jai Parkash entered into an oral agreement to carry on business in partnership under the name and style of Messrs Ramji Das Rikhi Ram and on the 17th October, 1948 they reduced the terms of this agreement into writing. On a later date they made an application to the Income Tax Officer to register their firm under the provisions of section 26A of the Income-tax Act for the assessment for 1949–1950 (previous year ending 31st March, 1949). The Income-tax Officer came to the conclusion that no genuine firm had come into existence in April 1948 and his conclusion in this behalf was confirmed by the Appellate Assistant Commissioner. The Tribunal, however, came to a contrary conclusion. It held that although a genuine firm was constituted in April 1948, the instrument of partnership was drawn up only on the 17th October, 1948, and the firm can not be said to have been “constituted under an instrument of partnership.” In this view of the case the Tribunal dismissed the appeal in so far as the firm's registration under section 26A was concerned. At the request of the parties the Tribunal has referred the following question of law to this Court, namely:—

    “Whether the applicant firm which was formed by oral agreement in April, 1948 on terms and conditions reduced to writing in October 1948 was one constituted under an instrument of partnership within the meanings of those words in section 26A and entitled to registration for the purposes of the Income-tax Act for the assessment year 1949–1950?”

    2. Although it is difficult to give a definition of partnership which is accurate, comprehensive and exclusive, a partnership may be stated broadly to be a relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The Indian Income-tax Act does not take notice of any partnerships which come into existence as the result of an oral agreement, for section 26-A provides quite clearly that application can be made only on behalf of any firm “constituted under an instrument of partnership”. One of the chief characteristics of the partnership relation is that it is created only by the voluntary agreement of the parties. The agreement may be oral or in writing or it may be express or implied, but an agreement must precede the creation of the relationship. The element of agreement is fundamental. The Income-tax Act does not take notice of any partnerships which come in to existence as the result of an oral agreement; it recognises only partnerships which are constituted under an instrument of partnership. If therefore any person wishes to take advantage of the lower rates of assessment applicable to partnerships, they must constitute the firm under an instrument of partnership. This is clear from the language which the Legislature has chosen to employ, for section 26A of the Income-tax Act provides—

    “26A. (1) Application may be made to the Income-tax Officer on behalf of any firm, constituted under an instrument of partnership specifying the individual shares of the partners, for registration for the purposes of this Act and of any other enactment for the time being in force relating to income-tax or super-tax.”

    3. The expression “constituted under an instrument of partnership” has come up for judicial interpretation in certain cases in this country. Two different sets of views have been expressed. According to one view section 26A does not require that the firm for the registration of which the application is made must be constituted by the instrument of partnership, or that it must come into existence by reason of the instrument of partnership, or that the firm should be the creature of the partnership, or that the firm must not exist prior to the execution of the instrument of partnership. It provides merely that it should be constituted under an instrument of partnership. The expression “under” is not synonmous with the expression “by”. It follows as a consequence that a firm which has come into existence as the result of an oral agreement is entitled to registration with effect from the date on which it came into existence, provided of course an instrument of partnership was executed subsequently. This view has been expressed by Chagla, C.J in Dwarkadas Khetan & Co. v. Commissioner of Income-tax . 29 I.T.R 903. According to the second view the instrument of partnership by which the firm was constituted, must be an instrument executed at or before the commencement of the relative accounting year and an instrument which governs the distribution of the profits in that year. It should be an instrument which forms part of the transaction which results in the creation of the partnership and should not be an instrument which merely records previous history and declares in the usual phraseology that the parties desire that the terms of the agreement should be placed on record. This view has been propounded by this Court in Ram Gulam Madan Lal v. Income-tax Officer, G. Ward, Delhi . 1964 25 I.T.R 339., and by the Calcutta High Court in R.C Mittar & Sons v. Commissioned of Income-tax . 1955 28 I.T.R 698.. In the Calcutta case Chakravarti, C.J, observed as follows:—

    “I should therefore think that the clear and unambiguous meaning of the expression ‘instrument of partnership’ must rule the construction of the controversial words in section 26A and so far as the language of that section is concerned, it must be held that it contemplates firms created or brought into existence by a deed in writing and further that it contemplates a deed which governs the distribution of shares in the relevant accounting period.”

    4. The learned Chief Justice accordingly propounded the following four principles regarding registration of firms:—

    1. Where a deed of partnership executed on a certain date merely states that it shall be deemed to have come into existence at an earlier date, that does not create a partnership from that earlier date.

    2. Where the partnership has originated in a verbal agreement and after it has existed for some time, a formal deed of partnership is executed, so far as the period prior to the date of the deed is concerned, there cannot possibly be any claim to registration.

    3. It does not, however, follow that in every such case, registration can be claimed as of right with respect to the period subsequent to the date of the deed. Whether or not such a claim is sustainable will depend upon the language of the instrument. If the instrument merely records the earlier origin of the partnership and the agreement then entered into, and says in the usual phraseology that the parties desire that the terms of the agreement should be placed on record, no partnership is constituted by the deed even with respect to the period subsequent to its execution. The died in such a case is merely a deed of declaratory character or a memorandum.

    4. If, however, in addition to recording the earlier origin of the firm in a verbal agreement and its subsequent history, the deed also states that the partners shall carry on business in future in accordance with its terms, it can, and should, be construed as creating or originating a partnership for the future as from its date, and only in such case can an instrument of such a composite character be made the basis of a claim to registration with respect to the subsequent period.

    5. I must confess with great regret that I am unable to ??? in the first view and must unhesitatingly endorse the second. The purpose of section 26A is to prevent the enforcement of unfounded claims for relief from taxation by requiring that agreements of partnership should be evidenced by a writing, for it is not safe to let proof of the existence of partnerships rest in parol. It is designed to protect the State from fraud and perjury to remove uncertainty and prevent imposition through the assertion of false claims, and to reduce the dangers from the enforcement of fraudulent claims by the use of oral evidence alone, to secure written evidence of the existence of partnerships and to obviate the possibility of valuable official time being wasted in ascertaining by parol the precise date on which a particular partnership came into existence. It requires that a firm which is desirous of obtaining the benefits of low rates of income-tax applicable to partnerships must be constituted under an instrument of partnership.

    6. The expression “constitute” means to “set up”, “establish”, or “found”. It is not equivalent to “incorporated”. It is of wider import. It seems to be equivalent to “established” (Re East and West India Dock Company4). The word “under” has various meanings. It means “by”, “by reason of”, “by means of”, “by virtue of”, or “because of”. It has the same signification as the phrase “by virtue of” which is defined in the Century Dictionary as meaning “by or through the authority of”. It is also defined “in subordination to” (Worcest Dictionary) and “in conformity with” (Century Dictionary). It may mean “in accordance with” or “in conformity with”. It may be used in a statute in its literal sense as indicating condition of inferiority or subservience, or as meaning subject to or in conformity with, denoting curtailment or restriction of, but nevertheless agreement or congruity with, something else to which it is made applicable (Alsop v. Pierce . 19 So. 2nd 199, 802.). The words “under” and “by” when used with reference to the crime of obtaining money by false pretences mean the same thing (43 Words and Phrases Under). A poll-tax levied by a city, by authority of a statute is levied “under” state laws, “under” being used as a preposition, indicating subjection, guidance or control, and meaning “by authority of” (Powell v. City of Baira . 128 S.W 2d. 786, 790.). The precise meaning that should be attached to a word which is not purely technical often depends upon the connection in which it is used and with reference to the subject matter treated. I am of the opinion that the expressions “constituted under”, and “constituted by” when used with reference to an instrument of partnership convey the same idea, and mean the same thing. This interpretation appears to me to be consonant with sound public policy, principles of justice, the object of the statute and the manifest intention of the Legislature.

    7. Now, what was the intention of the Legislature when it declared in section 26A that the firm must be “constituted under” an instrument of partnership? The Legislature could not have intended that it may be established under an oral agreement. If that had been the intention there would have been no real purpose in requiring that it should be constituted under a written instrument. Nor could the legislature have intended that although the firm was established under an oral agreement it should be entitled to the privileges conferred by section 26A only if the terms and conditions of the agreement are reduced into writing several months after the partnership had come into being. If that had been the intention the Legislature would not have curtailed the power of registration—us undoubtedly it has—by subjecting it to the limitation that the firm should be constituted “under” an instrument of partnership. The Legislature could have had no difficulty in declaring that the benefits of registration would be available to every partnership, however constituted, the terms of which have been reduced into writing. I am clearly of the opinion that before a partnership can claim registration it must satisfy the appropriate authority that it was constituted by or under an instrument of partnership. The writing must be one by virtue of which the partnership has been established. No particular form of language is necessary to constitute an instrument of partnership. A memorandum wholly non-technical in form may be sufficient. It may consist of any kind of writing from a solemn deed down to mere hasty notes but it must be an instrument by virtue of which the partnership is created.

    8. A question at once arises: How should a partnership which was established under an oral agreement proceed if it wishes to claim the benefit of section 26A of the Income-tax Act. The answer is simple. As partnerships are formed by the mutual agreement of all parties they may be altered, modified or dissolved by like agreement. If therefore a partnership which has been established under an oral agreement is anxious to obtain the benefit of section 26A all that is necessary is that this partnership should execute another instrument of partnership declaring that hence forward the provisions of the instrument will regulate the relations of the partners. If the instrument declares expressly or by necessary implication that the partnership would be created under this instrument, the conditions set out in section 26A would be completely satisfied. If on the other hand the document is merely a memorandum of an oral transaction and does not by itself constitute or create the partnership, it cannot achieve the object which the framers of the instrument may have had in view.

    9. This brings me to the consideration of the question which has been referred to us for decision, viz., whether the applicant firm which was formed by an oral agreement in April, 1948 on terms and conditions reduced to writing in October 1948 was constituted under an instrument of partnership and entitled to registration for the assessment year 1949–1950. The answer is clearly in the negative. This partnership owed its birth and creation to an oral agreement which was entered into in April 1948 and not to the so called instrument of partnership which was executed in October 1948 with the avowed object of reducing into writing the arrangement which had been agreed upon six months previously. For the reasons mentioned above it is obvious that the firm cannot claim the benefit of section 26A prior to the date on which the document was executed.

    10. We are now confronted with the question whether the firm can claim the benefit of this section even after the 17th October, 1948 when the instrument was executed. This question too must be answered in the negative. This instrument declares that Rattan Lal and Jai Parkash constituted a joint family and were carrying on joint family business at Jagadhari, that on account of diverse reasons the parties had mutually agreed to partition the joint family business, and to carry on business as a separate partnership concern, that the business had been carried on as a separate concern with effect from the 10th April, 1948, that there was no proper instrument to witness the arrangements which had been arrived at between the parties and that it was essential to reduce the terms of the partnership into writing to obviate the possibility of doubts arising. The firm was not constituted by or under this instrument for the instrument does not declare that it had brought a partnership into existence or that a partnership which had already been formed under an oral agreement was being continued under the provisions of the instrument. It merely recites that a partnership was formed by means of an oral agreement on the 10th April, 1948 and sets out the terms and conditions of the oral agreement. It does not create a new partnership; it does not recreate an old partnership; and it does not regulate the distribution of shares between the several partners in the relevant accounting period. It merely contains a recital of the terms of the partnership which had been entered into several months before. It has been strongly pressed upon us that the benefit of section 26A should be extended to this firm at least with effect from the 17th October, 1948 when the instrument was reduced to writing, and our attention has been invited to Ram Gulam Madan Lal v. Income-tax Officer G. Ward, Delhi, where Falshaw, J. observed as follows:—

    “Obviously as we held in the case referred to above, the deed or instrument cannot possibly have retrospective effect as regards the income-tax assessment of the firm, but I cannot see any objection to the firm's being treated as constituted under the instrument as from the date of the instrument itself. It may be that the partners in these firms act foolishly in alleging the previous existence of the partnership on the same terms in the vain hope of securing retrospective concessions, and in the most literal sense of the words a partnership cannot be said to be constituted under an instrument when admittedly it has been in existence previously. On the other hand the intention of the law is clear, that when partners do draw up an agreement by which their shares in the partnership profits are specified, they are entitled to have the partnership registered under the Act, and thus to have the individual shares of the partners assessed for income-tax, and it seems to me to be an unduly harsh interpretation of the law to say that because the partners say they have been partners previously, they should not be entitled to have the partnership registered even when they have embodied its terms in a deed. I am accordingly of the opinion that when a deed or instrument of partnership is presented for registration under section 26A, even where the partnership is alleged in the deed to have existed previously on the same terms, this should not be a bar to the registration of the firm, and it should be treated as constituted under the instrument as from the date of the instrument.”

    11. Although I was a party to the above decision I must confess with great regret that I am unable to support this view which appears to have been recorded somewhat hastily. The question which must arise in every such case is whether the firm has been constituted under an instrument of partnership; whether it owes its birth and creation to the said instrument. If the firm has been constituted not under an instrument, of partnership but under an oral agreement it is obvious that it cannot claim the benefit of section 26A. But I can see no legal objection to a firm which has been constituted under an oral agreement dissolving itself and reconstituting itself into a new firm under an instrument of partnership. If it is constituted or reconstituted under a deed of partnership it will certainly be entitled to all the privileges of registration. If, on the other hand, it is not constituted or reconstituted under an instrument of partnership and if the so called instrument of partnership is nothing more than a memorandum of what had taken place before it cannot be deemed to be an instrument contemplated by section 26A. I find myself in respectful agreement with the view taken by the Calcutta High Court that when the instrument merely records the earlier origin of the partnership and the agreement then entered into and says that the terms of the agreement should be placed on record, no partnership is constituted by the deed even with respect to the period subsequent to its execution. The present instrument recites only the past history and does not constitute or reconstitute the firm. It seems to me therefore that this firm is not entitled to be registered under section 26A. For these reasons I am of the opinion that the firm in question was not constituted under an instrument of partnership and that it is not entitled to registration for the assessment year 1949–1950. No order as to costs.

    12. Chopra, J.:— I agree.

    13. Reference answered.

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    Ramji Das Rikhi Ram v. Commissioner Of Income Tax
    (Apr 24, 1958)