Patel and Co. vs Commlasioner of income Tax

Baxi, J.—The Assessee is the firm of Patel and Co., and the assessment vends are 1949-50 and 1350-61, the accounting years being the

calendar years 1948 and 1949 respectively. The firm was constituted by a deed of partnership dated G-2-48. According to this deed the partners

and .their shares were follows:

Patel and Co., (hereinafter referred to ns the smaller Patel and Co.,) 0-7-6

Shcth and Co., 0-7-6

Mahaishi Dayanandl Malm Vldalaya. 0-1-0

The deed was executed by Arjun Kunverjl Patel, a partner of the smaller Patel and Co., Jamnadas Bhanji Patel, a partner of Sheth and Co., and

Nanji Kalidas Mehta, a trustee of Maharshl Dayanand Maha Vidyalaya.

The Smaller Patel and Co., did not have a deed of partnership until 12-7-49. Its partners were Arjun Kunv-jrjl Patel and Nanjl Kalidas Mehta.

The showe of the smaller Patel and'' Co., In Patel and Co., was to be cevided between them Nanjl Kalidas Mehta having 0-6-6 and Arjun

Kunverji Patel having 0-1-0. The puiners of Shcth and Co., were the following:

(1) Jamnadas Bhanji Patel.

(2) Mulehand Jethalal Doshi,

(3) Tlmkarshi Ialelumd,

(4) Huttilblmt Bomehund.

It appears that this partnership was started from 5-3-46 under an oral agreement. Iiathibhai Som-chand died on 5-5-48 and the three surviving

partners continued the partnership and executed a formal partnership deed dated 11-6-43. The deed was signed by the three surviving partners.

There after Thakarshi Lalchand disappeared in March 1949 and Mulehand Jethalal died in October 1950.

The larger Patel and Co., was dissolved as from 30-6-40 by a deed of dissolution dated 12-7-49. On the same day, i.e. on 12-7-49, a fresh

partnership deed was executed in respect of the business carried on by Patel and Co. The partners of the Arm were Nanjibhai Kalidas Mehta and

Arjun Kunverjl Patel i.e. the partners of the smaller Patel and Co.

This partnership was only for the purposes of disposing of certain stock-in-trade and was to be treated as terminated on the disposal of the stock-

in-tradfe. According to this partnershio deed, the share of Nanjl Kalidas Menta was 0-15-0 and the snare of Arjan Kunverjl Patel was 0-1-0.

Two applications were made on 11-5-51 to the Income Tax Officer for registration of the larger Patel and Co. The first, application was u/s 37

of the Saurashtra Income Tax Ordinance, 1919 for registration for the assessment year 1949-50 (accounting year 1948) on the strength of the

partnership deed dated 6-2-48. The second application was made u/s 2(>A, Income Tax Act, 1922 for registration of the partnership constituted

by the deed dated 12-7-1949 for the assessment year 1950-51.

Both the partnerships were registered by the Income Tax Officer by two separate orders dated 6-51. The Commissioner of Income Tax,, Bombay

North, Kutdi and Saiirasntra Baroda, cancelled the registrations granted by the Income Tax Officer on the ground that as the partnership D/- 6-2-

by which the larger Patel and Co., was first constituted had not been .signed by all the Individual partners of Patel and Co. and Sheth and Co.,

there was no validly constituted partnership.

In append by the assesses against the Commissioner''s order, the Income Tax Appellant Tribunal by a consolidated order dated 18-4-53

confirmed the Commissioner''s order refusing registration for the assessment year 1949-50 but wanting registration for the assessment year 1950-

51 In resneet of the amounting period of six months commencing from 1-7-49 and ending on 31-12-49. The decision with regard to the first six

months of 1.949 was the same with regard to the assessment year 1949-59.

On an application by the Assessee, the Tribunal has referred the following questions of law to this Court u/s 60(b),'' Indian Income Tax Act,

1922:

(1) Whether on the true Interpretation of the Deed of Partnership dated 0-2-1048 the partners were:

(i) Smaller Patel and Cp. (ii) Sheth and Co.

(ii) Maharshl Dayanand Maha Vidyalaya.

or (i) Arjun Kunverjl Patel (ii) Jamnadas Bhanji Pate.

(iii) Maharshl Dayanand Maha Vidyalaya.

(2) Whether the firm Patel and Co., was entitled in-law to be registered for the year 1IK3 50 under the Saurashtra Income Tax Ordinance and the

rules made there under.

Or

(3) Whether the registration granted by the Appellate Tribunal for the your 1060-51 should be for the entire year of account, namely, 1949 or for

the period from 1-7-1949 to 31-12-1949.

The deed of partnership dated 6-2-48 recites that the partners were (1) Patel and Co. i.e. the smaller Patel and Co., (2) Sheth and Co., & (3)

Maharshi Dayanand Vidyalaya. The particulars of the share of each partner have also been specified therein. Under the ordinary law of

partnership, the firm as such cannot enter into a partnership with Anr. firm or individual and where '' two firms enter into a partnership or where a

enters into a partnership with a third party, the larger partnership is, in the eye of law, between the individual partners of the constituted firm or

firms or between such partners and the third party.

This principle is too well known to need discussion and was conceded by learned Counsel for the Assessee. But he urged that for the purposes of

the Income Tax Act a'' firm is regarded as is separate assessable entity -apart from the partners constituting it. We agree with learned Counsel for

reasons which we shall presently state. Therefore if the deed of'' partnership recites that the partnership is between two firms or a firm and a third

party, the firm or firms constituting the larger partnership, being an independent assessable unit, should be treated as a partner for the purposes of

the Indian Income Tax Act, In the case before us, according to the partnership deed, two of the partners were the smaller Patel and Co., and

Sheth and Co., and they should be regarded as the partners of the larger Patel and Co., for the purposes of the Indian Income Tax Act.

Consequently our answer to the first question is that the partners under the deed of partnership dated 6-2-48 were

(i) Smaller Patel and Co.

(ii) Sheth and Co.,

(iii) Maharshl Dayanand Maha Vidyalaya.

The second question is whether the firm of Patel and Co., was entitled in law to be registered for the year 1949 under the Saurashtra Income

Tax Ordinance 1949 and the Rules made there under. We may state that the section well as the Saurashtra Income Tax Rules are in identical terms

Will Section 26A. Income Tax Act, Rules 1922 and consequently the decisions under the Indian Income Tax Act may be taken or, a guide in

answering the question.

Section 37, Saurashtra Income Tax Ordinance requires that the partnership deed should specify the individual shares of the partners. The Tribunal

was of the opinion that the partnership deed dated 6-2-48 did not specify the profit sharing ratics between the partners of each of the smaller patel

and Co., and Sheth and Co., and, there for it could not be registered. Therefore, the question which has to be decided is whether where a firm is a

partner in a larger partnership and the partnership is evidenced by a deed, which, while specifying the share of the partner firm, does not specify

the shares of each of the individual partners of that firm, registration can be refused u/s 37, . Saurashtra Income Tax Ordinance.

There are numerous decisions to the effect, that a firm as such cannot legally be a partner with Anr. firm or individuals even for the purposes of the

Indian Income Tax Act. See In re: Narain-Das Mohan Lal of Benares, ; ''Shiv Naram and Sons v. Commissioner of Income Tax, Punjab AIR

1935 Lab 896 (''B); ''Mian Chamu Factories Union v. Commissioner of in-erne-tax, Punjab AIR 1936 Lah 548 (C) Chandrika Prasad Ram

Swarup Vs. Commissioner of Income Tax, and Commissioner of Income Tax Laxmi Trading Co, ITR 1953 24 173 (Punj)(E).

The decision in Chandrika, Prasad''s'' case (D) is by a Fuli Bench of the Allahabad High Court and it was held there that though a firm as such

Could not enter into a partnership with Anr. firm, not being a legal entity, yet where two firms enter into a larger partnership, the larger partnership

is in law a partnership between the memovent of the two firms.

It Jabalpa fee (1955) 27 ITR 88 it was held that if firms enter into any partnership, the partners of the smaller firms would individually become the

partners of the bigger firm, and unless their individual shares are denned and each of them personally signs the application for registration, the

requirements of law would not be fulfilled.

The Tribunal''s view is thus supported by a scries of decisions of various High Courts, But the view that for the purposes of the Indian Income Tax

Act the firm as such cannot be regarded as a separate entity from its partners and. therefore, where a firm inters into a partnership with Anr. firm or

a third party, the larger partnership is in law only a partnership between the individual partners of the constituent firm or firms has undergone,

modification In Jesingbhai Ujamshi v. Commr. of Income Tax AIR 1950 Hum 198 (G). Chagla C. J. expressed the view that though under the

ordinary law a film Is not a legal entity and is merely a compendious way of defer the partner who entry on the particular business, under the Indian

Income tax Act the position is different because a firm is recognised by the Indian Income Tax Act as are assessor: as much as an individual or a

joint Hindu family, In Commissioner of Income Tax, West Bengal Vs. A.W. Figgies and Co. and Others, , which was a case u/s 25, Income Tax

Act, the Supreme Court observed'' as follows (p. 456):

The partners of the firm are distinct assessable entitles, where the firm as such is a separate and distinct unit for the purposes of assessment.

Sections 26, 48 and 55 of the Act fully bear out this position. These provisions of the Act go to show that the technical view of the nature of a

partnership under English law or Indian law, cannot be taken in applying the law of in come-tax.

The earlier decisions cited above are all decided on principles of the general law of partnership and did not recognise a firm�s separate entity

under the Income Tax Act. The attention of the Nagpur High Court in 1955 (1955) 27 ITR 88 does not appear to have been drawn to the

Supreme Court''s decision cited above.

Therefore though for the purposes of the otdinary law of partnership, the partners Patel and Co., evidenced of the deed of partnership dated 6-2-

1948 were the individual partners of the smaller Patel and Co., and Sheth and Co., for the purposes of the Indian Income Tax Act, the two firms

had an independent entity. It was, therefore, open to the parties to Specify the profit sharing ratios of the individual partners of each of the smaller

Pate; and Co., and Sheth and Co., in the partnership deed under the ordinary law or to specify the shares of the constituent stouten firms only. In

either case the larger firm would be entitled to receive registration.

Another objection against the grant of registration was suggested by the learned Advocate General. His argument was that as the application for

registration was made after dissolution, the application should have been signed by an partners of the smaller Patel and Co., and Sheth and Co.,

under the proviso to R. 2 (A), Saurasntra Income Tax Rules. The application has been signed by Janmnadas Bhanji Patel of Sheth and CO. The

signatures of Thakarshi Lalchand and Mulchand Jetbajai could not be obtained as Thakarshi was absconding and Mulchand was dead.

But the learned Advocate General argued that as all the partners are required to sign the application personally, the signature of Thakarshi could

not be dispensed with even though he was absconding and it was physically impossible to obtain his signature. Similarly the application should have

been signed by the legal representatives of mulchand and as the application had not been so signed registration should be refused. He cited several

authorities in support of this contention.

But it is not necessary to discuss them here. The application was made on 11-5-51 and we have to see whether the larger Patel and Co. which

was constituted by the partnership deed of 6-2-48 was continuing on the date of the application, and, it so, who were the partners of that, firm on

that date. If the application is signed by these partners then no exception can be taken to the legality of the application.

It is true that the larger Patel and Co., was dissolved by the deed of dissolution dated 12-7-49 but the dissolution consisted in the retirement of

two of its partner; only and its business was carried on by the partners of the smaller Patel and Co, should only for the purpose of winding up that

firm.

In Commissioner of Income Tax, West Bengal Vs. A.W. Figgies and Co. and Others, referred to above the Supreme Court held on a construction

of Section 25, Income Tax Act that a mere change in the constitution of the partnership does not necessarily bring into existence a new assessable

unit or a distinct assessable entity and In such a case there is no devolution of the business as a whole. In that case there were several changes in

the constitution of the partnership by some partners go ins out and new partners entering the partner-ship.

The same principle would apply for the purposes of Section 23A, In this case although there has been a change in the constitution of the larger

ftrin, its continuity has not been disrupted and consequently u must be regarded as in existence on the date of the application.

On that date the only partners of that firm were Nanji Kalidas Mehta and Arjun Kunverji Patel i.e., the partners of the smaller Paiel and Co., ftisd

as the application has been signed by them it quite in order. The registration of the firm for the NseHsinont year 19-49-50 cannot, therefore, be

refused.

As regards the third question the rule has been stated at p. 750 in ""Law and Practice of Income Tax"" by Kanga and Palkhivala (3rd edition) as

follows:

In the case of a registered firm, the total income of the firm as constituted at the time of making the assessment is computed just as in the ease of an

unregistered firm. But the tax payable by the registered firm on such total income is not determined; instead, the firm''s profits are apportioned

between the old and the new partners who in the previous year were entitled to receive the same .

If the tax assessed upon any partner cannot be recovered from him. it must be recovered from (he an as c instituted1 at the time of making the

assessment; thus in the case of default by any old partner the new partners would be liable for. the amount of the tax in respect of which the default

in commuted.

We therefore, hold that the registration for the assessment year 1950-51 should be for the entire year of account, namely 1949.

Our answers to the reference, are, therefore, as follows.

(1) On a true interpretation of the deed of partnership dated 6-2-43 the partners were-

(i) Smaller Patel and Co., (ii) Sheth and Co.,

(iii) Maharshi Davanand Maha Vidyalaya.

(2) In the affirmative.

(3) The registration for the year 1950-51 should be for the entire year of ''accounts namely 949.

As the Department has lost on all points, it Is ordered to pay the Assessee''s cost of the reference.

Shah, C.J.

I agree.