1953 (7) TMI 17 - HC - Income Tax

Partnership Deed Timing Key for Registration: Precedents and Statutes Guide Decision

Kalsi Mechanical Works Versus Commissioner of Income-tax

The court held that a firm claiming formation by verbal agreement in June 1944 but executing a written partnership deed in May 1949 was not entitled to ... - Issues Involved:1. Whether a firm alleged to have come into existence by a verbal agreement in June 1944 is entitled to be registered under Section 26A for the assessment year 1949-50 when the instrument of partnership was drawn up only in May 1949, after the expiry of the relevant previous year.Issue-wise Detailed Analysis:1. Entitlement to Registration under Section 26A:The primary issue revolves around whether a firm, which claims to have been formed by a verbal agreement in June 1944 but executed a written deed of partnership in May 1949, is entitled to registration under Section 26A of the Income-tax Act for the assessment year 1949-50. The firm applied for registration during the assessment year 1949-50, which was rejected by the Income-tax Officer and subsequently by the Income-tax Appellate Tribunal. The Tribunal held that since the partnership was formed by an oral agreement in June 1944 and the written instrument was executed in May 1949, after the relevant accounting year, the firm was not entitled to registration under Section 26A.Legal Provisions and Interpretation:Section 26A of the Income-tax Act allows for the registration of a firm constituted under an instrument of partnership specifying the individual shares of the partners. The application for registration must be made according to prescribed rules. Rules 2 and 3 stipulate that the application must be accompanied by the original instrument of partnership under which the firm is constituted. Rule 4 empowers the Income-tax Officer to certify the registration if satisfied that the firm is constituted as shown in the instrument of partnership.Arguments and Judicial Interpretation:The applicant's counsel argued that under Section 26A and the accompanying rules, the firm was entitled to registration even though the instrument of partnership was executed during the assessment year. However, the court noted that the rules and Section 26A do not indicate that the section is retrospective or that a firm constituted by an instrument of partnership after the last day of the accounting period can be registered for the purpose of affecting the income-tax of that period.The court referred to the language used in Sections 26 and 28 of the Income-tax Act, which suggests that the object of registration is to assess individually the total income of the partners who were entitled to receive the same in the account year. The court emphasized that the registration should apply to a firm that was constituted by an instrument of partnership during the accounting period, not during the assessment year.Supporting Case Law and Commentary:The court cited Sampath Iyengar's commentary on the Indian Income-tax Act, which supports the view that the deed to be registered should relate to the accounting year. The court also referred to several judicial precedents, including Krishna Aiyar & Sons v. Commissioner of Income-tax, Madras, and Commissioner of Income-tax, Madras v. Gelli Krishnamurthy, which held that for registration under Section 26A, there must be an operative instrument of partnership during the accounting period.Conclusion:The court concluded that for a firm to be registered under Section 26A, it must be constituted by an instrument of partnership during the accounting period relevant to the assessment year. Since the firm in question executed the instrument of partnership in May 1949, after the relevant accounting period, it was not entitled to registration for the assessment year 1949-50. The court answered the referred question in the negative, agreeing with the Tribunal's decision.Separate Judgments:Falshaw, J. concurred with the judgment.