P.B. MUKHARJI, J. - (1.) THE CIT called for this reference from the Tribunal. THE question arising for an answer by this Court on this reference under s. 66(1) of the IT Act is as follows : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that registration under s. 26A of the Indian IT Act should be granted to the assessee with reference to the portion of the relevant accounting year commencing from the 1st February, 1957, and ending on the 30th September, 1957 ?"
(2.) THE facts giving rise to this question are as follows : THE assessment year in this case is 1958-59 and the relevant previous year is from February 1, 1957, to December 31, 1957. THE assessee claims to be a firm constituted under a partnership deed dated the 18th April, 1957, and applied for registration of that instrument of partnership under s. 26A for the relevant assessment year. THEre were four partners to this deed of partnership dated the 18th April, 1957, with equal shares in the profits and losses, namely, (1) Kanhaiyalal, (2) Banwarilal, (3) Nathmal, and (4) Iyer. Nathmal retired from the partnership from the 30th September, 1957, by another deed. That deed is dated the 31st January, 1958. THE controversy and the confusion in this reference arise in respect of these two deeds, one dated the 18th April, 1957, and the other dated the 31st January, 1958. It is necessary to keep these two deeds clearly and separately in mind while trying to approach this question. THE ITO held that the deed dated 31st January, 1958, recorded merely the dissolution of the firm of four partners w.e.f. 30th September, 1957, but did not bring into existence any new partnership. THE ITO, therefore, refused to allow registration to the assessee-firm by his order dated the 20th August, 1960. His finding is,"there is no instrument of partnership governing the firm after the 30th September, 1957, nor are the sharing of the profits and losses specifically laid down. THE two main conditions for grant of registration under s. 26A are thus not fulfilled, viz., (i) the firm should be constituted by a regular instrument of partnership, effective at the time of the assessment, (ii) the share of profits and losses should be specified in the instrument. As those conditions are not satisfied, the registration applied for is refused." It is needless to point out here that the application for registration on the basis of the partnership deed dated the 18th April, 1957, was made on the 5th September, 1957. It is also needless to point out, but necessary to bear in mind, that the second deed dated the 31st January, 1958, was coming after the relevant previous year which in this case was between February 1, 1957, to December 31, 1957. The assessee appealed to the AAC. There again the assessee contended that there was no dissolution but only a change in the constitution by the deed of the 31st January, 1958. The AAC accepted the assessee's contention and held, on an interpretation of the provisions of the deed dated the 31st January, 1958, that it was not a case of dissolution but a change in the constitution of the firm. The reasons and finding of the AAC can be stated in his own words as follows : "A partner may retire by various means and one of the ways under which he could retire is when the firm stands dissolved. In view of the various clauses of the indenture discussed above, it cannot be stated that the agreement stipulated only dissolution of the firm and nothing else. Unfortunately, the appellant firm has not used the word 'dissolved' in a proper manner but the real intention of the document considering all the provisions is that the partnership consisting of four partners stood dissolved on September 30, 1957, and thereafter the three continuing partners carried on the business under the same name and under the same terms and conditions and hence, in fact, there was only a change in the constitution of the firm. Taking into consideration these facts, I do not agree with the ITO." He, therefore, allowed the appeal. Now, it was the Department's turn to appeal. The Department appealed to the Tribunal. The statement of the case points out that the question before the Tribunal was whether the firm was entitled to registration under s. 26A for the whole of the relevant previous year commencing from February 1, 1957, to December 31, 1957. The Tribunal's order has raised many arguments and controversies. What the Tribunal does is as follows. The Tribunal agrees with the AAC that by the deed dated January 31, 1958, there was ex post facto declaration relating to the retirement of the partner, Nathmull, w.e.f. September 30, 1957, while the remaining three partners continued to carry on the business of the firm. In fact, the Tribunal says : "There was no dissolution of the partnership strictly so called but there was only a change in the constitution of the firm on the said date (September 30, 1957)." The Tribunal, however, did not stop with that part of the order but proceeded to discuss the question of registration of the instrument of partnership dated April 18, 1957, under s. 26A of the IT Act. The Tribunal raises the question by saying that the point for decision is whether the firm was entitled to registration under s. 26A for the whole of the previous year commencing from February 1, 1957, to December 31, 1957. The Tribunal's operative part of the order is as follows : "We hold, therefore, that the assessee-firm was not entitled to registration after September 30, 1957. So far as the period from February 1, 1957, to September 30, 1957, the application filed by the assessee under s. 26A conforms to all the statutory requirements and there is no reason why registration should be refused for the said period. In the result, the Department's appeal succeeds in part. The registration allowed by the AAC to the assessee-firm is cancelled only in respect of the period from October 1, 1957, to December 31, 1957." In coming to this conclusion, the Tribunal noticed that the requirements of s. 26A were mandatory and admitted of no exceptions r/w the Supreme Court decision in R. C. Mitter and Sons vs. CIT (1959) 36 ITR 194, which laid down the ratio that the instrument of partnership must be existing in the relevant previous year. The next step in the reasoning of the Tribunal is to interpret the deed of January 31, 1958, as equalising the shares of the three continuing partners. But, according to the Tribunal, as this deed was executed after the expiry of the relevant previous year, it could not, therefore, be held that there was any "instrument of partnership specifying the individual shares of the partners" within the meaning of s. 26A in the relevant previous year in respect of the newly constituted firm. It is difficult to see why the Tribunal was considering the registration of the second deed of partnership dated January 31, 1958, when that was not the subject-matter for registration. The partnership instrument which was for registration before the taxing authority was the one dated April 18, 1957. What the Tribunal should have considered was to find out whether that was registrable or not. By attempting to consider this subsequent deed of January 31, 1958, it confused the issues. That is where the present confusion arises. The Tribunal's order is plainly self-contradictory. If the Tribunal was agreeing with the AAC's conclusion that the deed of January 31, 1958, did not mean dissolution but was only a continuation of the old firm, then there was no point in the Tribunal's discussing and holding that the deed of January 31, 1958, was not registrable and giving the ground that it was beyond the relevant previous year and that it did not specify the shares. All that was plainly unnecessary. If the firm had not been dissolved, then the existing firm under the instrument of April 18, 1957, which was the only instrument, was to be registered, and there could not be, without dissolution, any further question of whole or part of the previous year. In other words, the Tribunal's order is vitiated by a dichotomy of attitude and facts created by the Tribunal, which resulted in splitting up and truncating the accounting year and holding that there should be really a registration for 8 months, from February 1, 1957, to September 30, 1957, in respect of the instrument of partnership dated April 18, 1957, and at the same time holding that there was no dissolution but only a change in the constitution of the firm. It is necessary in this context not to confuse the purposes of the provision of s. 26A of the IT Act with those of s. 26. Sec. 26A, with which we are directly concerned in answering this question, is only a procedure for the registration of firms for the purpose of the IT Act. Assessment of firms, registered or unregistered, has for its substantive section, s. 23(5) of the IT Act and s. 26 of the IT Act deals with what is called the change in the constitution of a firm. But neither s. 23(5) nor s. 26 of the IT Act lays down or deal with the procedure for registration of firms for the purpose of the IT Act which is done only by s. 26A of the statute. That is why Mr. Pal, appearing for the Revenue, graphically described the position by saying that while assessment may be possible under s. 26, and certainly under s. 23(5), no registration on the facts of this case is possible under s. 26A of the IT Act. On behalf of the Revenue, it is contended that the instrument of partnership dated April 18, 1957, which was sought to be registered under the IT Act by the assessee in this case, does not specify the requirements of s. 26A. In the first place, it is said that this deed or instrument of partnership dated April 18, 1957 is not a current partnership which lasted for the whole of the accounting year or rather the previous year. It is argued that this old instrument of April 18, 1957, has been scrapped altogether and there was and could be no point in registering it. It was then argued that the new instrument dated January 30, 1958, did not specify the shares and it could not be a complete instrument of partnership, because it cannot be properly understood without reference to the old deed of April 18, 1957, which has been scrapped. Lastly, of course, for the Revenue it has been repeatedly said that the application for registration in this case was not in respect of the new partnership which came into existence on January 31, 1958, but was in respect of the older one under the date, April 18, 1957. Running through all these arguments and contentions made on behalf of the Revenue, the main contention, of course, is that the instrument of partnership of April 18, 1957, has been completely scrapped and the partnership actually dissolved in fact and in law in the light of the deed of January 31, 1958. On behalf of the assessee, Mr. Sen contends that, notwithstanding the fact that the word "dissolved" is used in the deed of January 31, 1958, what happened thereunder was not dissolution in fact or in law but only retirement of one partner, Nathmull, with the continuance of the old firm of 3 partners with augmented shares.
(3.) THE registration under s. 26A of the IT Act is registration of the "instrument of partnership". It is that instrument of partnership, specifying the individual shares of the partners, which has to be registered for the purpose of the IT Act. It is not, therefore to be compared or confused with the registration of the firm under the Partnership Act. Under the Partnership Act, it is the firm which is registered Under the IT Act, it is the instrument which is registered. THE instrument is registered for the taxation of the firm and, therefore, the instrument requires the specification of the shares of the partners. Secondly, such a registration under s. 26A of the IT Act is only effected for the assessment to be made for that particular period. THErefore, it is the assessee-firm for that year which is entitled to registration. THE question is whether this test is satisfied by the assessee in this case. It will be appropriate here to notice some of the relevant decisions touching these points. In Kylasa Sarabhaiah vs. CIT (1965) 56 ITR 219 (SC) the Supreme Court laid down the principle that, although the application for registration of a firm under s. 26A had strictly to be in conformity with the Act and the Rules, in ascertaining whether the application was in conformity with the Rules, the deed of partnership had to be reasonably construed. It was laid down there that the right to registration under s. 26A being conditional upon the specification of the individual shares of the partners, a deed of partnership between a firm and an individual which specified the the collective shares of the firm, without more, could not be registered. It was further laid down by that decision that the word "specifying" used in s. 26A and r. 2 of the Indian IT Rules, 1922, meant "mentioning, describing or defining in detail" but, nevertheless, it did not mean expressly setting out in fractional or other shares. Again in Parekh Wadilal Jivanbhai vs. CIT (1967) 63 ITR 485 (SC) the Supreme Court, reading the partnership deed as a whole in that particular case, came to the conclusion that there was sufficient specification of the individual shares of the partners within the meaning of s. 26A of the IT Act and the firm was entitled to registration. In the light of these observations and the law laid down by the Supreme Court, it will, therefore, be necessary to analyse the different clauses in the deeds of 18th April, 1957, and the 31st January, 1958, to determine the issue whether there has been a dissolution of the firm as embodied in the instrument of partnership of the 18th April, 1957, in the present case. THE relevant clauses in the deed of partnership dated 18th April, 1957, are cls. 1, 5, 12, 14, 17, 21 and 22. Clause 1 provides that the partnership shall be deemed to have commenced as on and from the 1st day of February, 1957, and shall continue until determined as hereinafter provided. Clause 21 of this partnership deed provides that any of the partners may retire from the partnership after giving to the others three calendar months' notice in writing of his intention so to do. Clause 22 expressly declares that the retirement or death of any partner shall not dissolve the partnership. Clause 5 states that the capital of the partnership shall be contributed by the partners in equal proportions and cl. 12 declares that the profits and losses of the partnership shall be divided and borne by and between the partners in equal proportions. THEre were four partners under this instrument of partnership so that each partner had one-fourth share. By cl. 14 of this partnership deed, the accounts of the partnership are to be made and adjusted on the 30th day of June and the 31st day of December in each year or on such other date as the partners may determine. In other words, the year for the accounts was the calendar year adjustable once on 30th June and the other on 31st December every year. Clause 17 of this partnership deed provides for the distribution of the net profits of the partnership after payment of all income-tax, sales tax and other taxes, interest on capital, loans and advances and all other outstandings to be divided between the partners in equal proportions. Reading this deed of partnership dated April 18, 1957, and the different clauses therein, it is clear that retirement of one partner was not to dissolve the partnership in the present case and any partner could retire by giving the others notice of 3 months. Now, although Nathmull retired from this firm on September 30, 1957, and although it was not necessary under this partnership deed to create another partnership deed, for such retirement did not dissolve the partnership, yet in fact that was what was done on January 31, 1958, where a regular indenture of that date was signed by these four persons. Mr. Sen, on behalf of the assessee, contends that this deed dated January 31, 1958, on a proper interpretation, should mean not a deed of dissolution. He relies on five main features of this particular deed dated January 31, 1958, in support of his contention. We shall, therefore, now analyse this deed of January 31, 1958. In the first place, the recital in the deed shows that this was between the "continuing partners", on the one hand, and the "retiring partner", on the other. THErefore, Mr. Sen for the assessee contends that the partnership was continuing in spite of the retirement. Secondly, the recital also states : "Whereas on the said last mentioned date (October 30, 1957), it was agreed that the said partnership should be determined on the terms and conditions hereinafter appearing." Mr. Sen on this recital contends that it was "determination" of the partnership and not "dissolution". Thirdly, the recital also states : "And further the retiring partner should withdraw from the said business leaving the same to be carried on by the continuing partners under the said name and style and firm of Kejriwal Traders for the benefit of the continuing partners or otherwise as the continuing partners might think proper." THErefore, Mr. Sen, for the assessee, contends that it was only a case of retiring partner withdrawing, leaving it to the continuing partners to continue the old firm. Fourthly, in cl. 1 of the operative part of this deed, while speaking of the notice, the clause mentions "of the intended continuance of the said business by the continuing partners shall be forthwith advertised in newspapers." On this, Mr. Sen, for the assessee, contends that this was not dissolution but continuance of the old partnership business. Fifthly, in the third clause of the operative part of the deed of January 31, 1958, the words which occur are : ". . . hold the same unto the continuing partners absolutely and in proportion to their existing shares." On this, Mr. Sen contends that the partnership continued. THEre is a good deal of force behind the argument so advanced by Mr. Sen for the assessee on the basis of these clauses and expressions. But that is not the whole story of interpretation of this deed of January 31, 1958. Mr. Pal, for the Revenue, has equally relied on this deed of January 31, 1958, to show that it contains words and clauses which unmistakably and unequivocally declare that the partnership created by the instrument of partnership deed dated April 18, 1957, was in fact and in law dissolved. In support of this argument Mr. Pal relies first on the recital where it is said : "Whereas on the last mentioned date (October 30, 1957) it was further expressly agreed that all the debts and liabilities of the said firm of Kejriwal Traders to persons other than the retiring partners shall subject to the proviso contained in cl. 5 hereunder be paid by the continuing partners who shall indemnify the retiring partner against the same." Mr. Pal contends that all the debts and liabilities were, therefore, taken over by the new firm of three partners and not the old firm of four partners. Secondly, Mr. Pal, for the Revenue, contends that the operative clauses in the deed of January 31, 1958, leave no room for doubt that there was dissolution of the firm as constituted by the instrument of partnership dated April 18, 1957. In support of that argument, he relies, secondly, on cl. 1 of the deed of January 31, 1958, where it is solemnly, clearly and unequivocally declared : "In pursuance of the said agreement and in consideration of the promises they the parties hereto declare that they dissolved on the 30th day of September, 1957, and hereby dissolve as from the said 30th day of September, 1957, the partnership theretofore subsisting between them in the said business of Kejriwal Traders as aforesaid and notice of such dissolution . . . shall forthwith be advertised in newspapers." Mr. Pal, for the Revenue, contends with a good deal of force that there can be no doubt after the use of the words "dissolved" and "dissolution", not once but repeatedly, and not equivocally but clearly stating that the partnership under the deed of April 18, 1957, is dissolved, the use of the expression "intended continuance" cannot override the clear words and convert the dissolution into a continuance or a change in the constitution of a firm. Again, Mr. Pal, for the Revenue, relies on cl. 3 of the operative part of this deed of January 31, 1958, pointing out the statement : "All that the undivided 1/4th share and interest of the retiring partner of and in the said business of the partnership hereby dissolved. . ." He argues that this again is clear statement that the parties intended to dissolve the partnership under the deed dated April 18, 1957. This is not the end of the matter. Even cl. 4 of the deed of January 31, 1958, used the expression "said partnership hereby dissolved." This is again repeated in cl. 5 of this deed of January 18, 1958, whereby it is stated : "The said firm hereby dissolved." Lastly, Mr. Pal, for the Revenue, relies on the proviso to cl. 5 of this deed of January 31, 1958, where it is said : "Provided always and it is hereby agreed and declared by and between parties that the obligation to pay his share of income- tax, if any, in respect of the partnership business as also any other unforeseen liability in respect thereof shall remain with the retiring partners and the indemnity hereby given by the continuing partners will not apply thereof." On this, Mr. Pal argues that the retiring partner took the obligation to pay his share of the income- tax, thereby concluding that no question of registration of this firm could arise under s. 26A any more.;