- (1.) THIS is a reference under Section 66 (1) of the Indian Income-tax Act. On 10-4-1948 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 17-10-1948 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 1949-50 (previous year ending 31-3-1949 ). 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 19-18, the instrument of partnership was drawn up only on 17-10-1948, and the firm cannot 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 meaning of those words in Section 26a and entitled to registration for the purposes of the Income-tax Act for the assessment year 1949-50?"
(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 26a 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 into existence as the result of an oral agreement; it recognises only partnerships which are constituted under an instrument of partnership. If therefore any person wish in like 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 cm-ploy, for Section 26a of the income-tax Art provides : "26-A (1) Application may be made the Income-Sax 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. " The expression "constituted under an instrument of partnership" has come up for judicial interpretation in certain eases in this country. Two different sets of views have been expressed. According to one view S. 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 synonymous 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 and Co. v. Commr. of Income-tax, (1956) 29 ITR 903; ( (S) AIR 1956 bom 321) (A ).
(3.) 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 Gulab-Madan Lal v. Income-tax officer, G Ward, Delhi, (1954) 25 ITR 339n (B) and by the Calcutta High Court in R. C. Mittar and Sons v. Commissioner of Income-tax, (1955) 28 ITR 698 : (AIR 1956 Cal 303) (C ). 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," The learned Chief Justice accordingly propounded the following four principles regarding registration of terms : 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 deed in such a case is merely a deed of declaratory character or a memorandum. ;