Commissioner Income Tax vs Madanlal Chaganlal

Pandey J.

At the instance of the Commissioner of income tax, Madhya Pradesh, the Tribunal has, u/s 66 (1) of the income tax Act, 1922, referred to this Court the following question of law :

Whether the firm is entitled to registration u/s 26-A on the basis of the application dated 4-1-1958 annexure B aforesaid ?

The facts giving rise to this reference, as disclosed in the statement of the case, are these, Madanlal, who was dealing in silver and gold ornaments, was the sole proprietor of the business which he carried on. He entered into an agreement with his brother Chhaganlal by which they became equal partners in the business with effect from 24 October 1957, The terms and conditions on which they joined the partnership are contained in the deed dated 9 January 1958, One of these terms provides that each partner will be entitled to interest at 6 per cent per annum on his capital investment. This partnership was duly registered with the Registrar of Firms and the bankers were also informed of the change in the ownership of the business. On 4 April 1958, the partners duly made an application in the prescribed form for registration of the firm u/s 26-A of the income tax Act stating, inter alia, that the profits or losses of the previous year would be divided as disclosed in section B of the Schedule to that application. That Schedule showed that the profits or losses would be divided equally after deducting interest on capital advance made by the partners. Subsequently, when the account of the profits for the relevant year was made, interest was not credited. The income tax Officer rejected the application because "not only the clause regarding provision of interest has not been complied with but also division of profit has not been made in accordance with the specific provision of the deed". The Appellant Assistant Commissioner of income tax took the same view. On further appeal, the Tribunal took a different view mainly on the ground that the declaration in the application had reference only to the proportion in which the partners would share the profits and it was not the case of the Department that the profits were not divided in that proportion.

Having heard the counsel, we have formed the opinion that the firm is entitled to registration on the basis of the application dated 4 April 1958. The matter is governed by rule 4 of the Rules framed u/s 59 of the income tax Act. Sub-rules (1) and (2) of rule 4 read as follows :

(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 26-A 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''.

(a) 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."

It is implicit in these provisions that an application made under rule 3 is liable to be dismissed if the income tax Officer is not satisfied that-

(a) there is or was a firm in existence constituted as shown in the instrument of partnership; and

(b) the application has been properly made.

Now, on the date on which the application was made, it is accepted that it was properly made. Again, the existence of the firm constituted as shown in the instrument of partnership is also not doubted. What is said is that because, subsequent to the date of the application, interest allowable on the capital investments of the partners in accordance with the terms of the partnership deed was not in fact credited, the declaration that the profits would be so divided was incorrect and that fact also indicated that the farm as existing was not constituted on the terms contained in the partnership deed. In our opinion, the application dated 4 April 1958 did not cease to be one properly made merely because, subsequentin, making a division of the profits, the partners failed to credit interest on the capital investments. Further, that fact may no doubt be one of the several considerations relevant for determining whether or not the firm as constituted by the instrument of partnership was in existence, but once it is found that the firm as so constituted was in existence, the mere fact that the partners did not adhere to the term relating to payment of interest as provided in that instrument can be no ground for refusing to register the firm. This is what the Tribunal stated:

It is not the Department''s case that the profits as ascertained by the firm were not divided amongst the partners in accordance with their individual shares as specified in the instrument of partnership governing the constitution of the firm.

What we wish to emphasise is that the ground for refusing to register can be the non-existence of the firm as constituted by the instrument of partnership and not mere subsequent deviation from one of the terms relating to the making of account. In this view, the firm is entitled to registration u/s 26-A of the income tax Act on the basis of the application dated 4 April 1958.

The reference is, therefore, answered in the manner indicated above. All costs of this reference shall be borne by the Department. Hearing fee Rs. 50.