M.V. Krishna Aiyar and Sons vs Commissioner of Income Tax

Sir Murray Coutts Trotter, Kt., C.J.—This is a reference put up by the Commissioner of income tax u/s 66 of the Act. The question on

which our opinion is asked is, whether, in such circumstances as this case discloses, the Assessees were entitled to be registered under Rule 4 of

the Rules framed under the Act. I will briefly summarize the material circumstances of this case. The original partnership was entered into by deed

on the 3rd of November 1917 the contracting parties being Venkatarama Ayyar and Sons of the one part and D. Krishnaswami Ayyangar of the

other. The business they carried on was that of silk merchants and the term of the partnership deed was expressed to be for five years, so that it

expired on the 3rd of November 1922. On the 31st of August 1923 a new partnership deed came into effect for a period of 3 years, so that it

would expire on the 31st of August 1926. In fact the business was continued thereafter by the partners as before, for aught we know, down to this

day. A return was called for by the income tax authorities for the year, April 1926-April 1927, for the purposes of assessment. That return was

made, and besides the return on the 26th of July 1927 the Assessees put in an application for registration of the firm. The Commissioner has

refused to register the partnership for the purposes of the Act and the question is whether he was right. I will now shortly refer to the two or three

material Sections and Rules of the income tax Act. By Section 2(14)-

A ''registered firm'' means a firm constituted under an instrument of partnership specifying the individual shares of the partners of which the

prescribed particulars have been registered by the income tax officer in the prescribed manner and the manner is prescribed in the Rules. The

material Rule is Rule 2 which runs as follows:

Any firm constituted under an instrument of partnership specifying the individual shares of the partners may, for the purposes of Clause 14 of

Section 2 of the Indian income tax Act, register with the income tax officer particulars contained in the said instrument on application in this behalf

made by the partners or any of them.

and then follows a form which sets out the particulars which are to be given. This form was filled in and the application was accompanied by a

copy of the instrument of partnership of the 31st of August 1923. The Commissioner bases his refusal to register the particulars forwarded by the

Assessee firm on the ground that, when the application for registration was made, the instrument of partnership had ceased to be operative, that the

partnership was at that date being carried on under what must be regarded as a new, agreement which, being verbal, could not be said to be an

instrument of partnership within the meaning of the Rules. The contention of the Assessees is that the true view of the position was that the business

was, by verbal arrangement or tacit consent between the partners, being carried on under the original instrument of 31st August 1923, whose life

had been prolonged and continued by the act of the parties. The dividing line no doubt is a very narrow one and language is used from time to time

in the English authorities, which speaks of a contract to renew by implication and it is said that enabled the partnership, whose life had been

continuous since the deed of 1923, to have it registered as the document governing their relations throughout. In one sense there clearly was no

new partnership here, in the sense, that is, that there was no change in the personnel and that the trading carried on was continuous without break

from August 1923. The real question we have to determine is whether in contemplation of law, the original contract was actually continued in

existence, or whether the true view is that such of its terms as could be taken to govern the subsequent period could only do so on the footing that

they were impliedly revived, in so far as they are applicable to the partnership at will, by the tacit verbal agreement which is to be regarded as

arising from the continuance of the trade thereafter. We think that there are two decisions which conclude this question in favour of the Crown. The

first is a decision of Westbury, L.C., in Clark v. Leach (1869) 1 De. G.J. and S. 409, and the Lord Chancellor says this:

Ordinarily a contract for a term constituted by a written agreement must be considered as having come to an end at the expiration of the period for

which it was entered into; and the contract daring the term differs from that which arises from the continuance of the relation by the mutual

consensus of the parties after the term has expired. The one is to last for a certain term; the other only for so long a time as they both shall choose.

Am I then by any principle of law bound to assume or justified in assuming that all the special articles and conditions in the original written deed of

partnership for a term are at once transferred by law to this new contract, which has no particular limit to the term of its duration? That would be a

strong and extravagant assumption, and one that is not warranted by any principle or authority.

That passage appears to me to make it clear that Lord Westbury considered the contractual nexus of the parties after the expiry of the deed to

rest upon the new implied oral agreement, and that the articles of the deed which are to be considered as preserved, are preserved not by virtue of

the original deed which had ceased to operate but of the new agreement. In the case of Neilson v. Mossend Iron Co. (1886) 11 A.C. 296, Lord

Selbokne puts the matter thus:

There is no doubt about the law that, when there is a partnership for a term of years, and it is afterwards, after the expiration of the term, continued

at will, the Rule, in the absence of a contract to the contrary, is that it may be presumed that the new business is carried on upon the old terms as

far as they are applicable to it, and only so far, and as far as the principle is concerned, I do not think there is any discrepancy between any of the

authorities. It is not at all necessary to examine into the particular oases in which it has been held that a particular term of a written contract did or

did not go into the new and unwritten contract, because every case has turned upon its own particular circumstances, and upon the question as

applied to the words of the particular instrument, whether the old term was or was not applicable to the new contract.

Similar language is used by Lord Watson who speaks specifically at page 308 of a distinction between the ""old"" contract and the ""new"". And the

new contract is none the less a new contract, we must take it, because it, by implication, contains within itself certain terms of the old written

contract, as it were, re-enacted. These pronouncements do not turn on any special provision of any statute but are based on the general ''principles

of the law of partnership and we should end eavour respectfully to follow those high authorities. I think that there is nothing in the language of

Section 256 of the Indian Contract Act which in any way modifies the effect of these decisions. The result is that at the time that the Assessees

applied for registration there was no operative document to be registered.

Another contention is raised, and that is this: The year of assessment with which we are concerned is the year 1927-28 and it is said that as that

will be a return of trading profits for the year 1925-27 registration ought not to have been refused as four months of that trading year were before

the expiration of the deed of the 31st of August 1923. We cannot accede to this contention. What we have to look to is the year of assessment;

and had the application of the 21st of July 1927 been granted, it would still in our opinion only apply to the financial year 1927-28. On these

grounds, we think that the Commissioner was right in rejecting the application for registration and that we must so answer the question submitted to

us and order the Assessee to pay the Government Rs. 250 as the cost of this reference.

My learned brothers have seen this judgment and agree with it.