1953 (12) TMI 35 - HC - Income Tax

Oral Partnership Can Be Registered Under Income-tax Act Through Written Agreement

Padam Parshad Rattan Chand Versus Commissioner of Income-tax

The High Court held that a partnership constituted by an oral agreement can be registered under Section 26A of the Income-tax Act if the terms are later ... - Issues Involved:1. Whether a firm constituted by an oral agreement can be registered under Section 26A of the Income-tax Act if the terms and conditions are later reduced to writing and submitted with the registration application.Detailed Analysis:1. Firm Constituted by Oral Agreement and Subsequent Written Instrument:The primary question referred to the High Court was whether a firm that initially came into existence through an oral agreement is entitled to be registered under Section 26A of the Income-tax Act if, by the date of the registration application, the terms and conditions of the partnership have been documented in writing and submitted with the application.Facts of the Case:The assessee firm, Messrs. Padam Parshad Rattan Chand, began business on April 1, 1947. During the assessment for the year 1948-49, an application for registration under Section 26A was made based on a partnership deed executed on April 10, 1950. The Income-tax Officer dismissed this application on May 26, 1950, and the Appellate Assistant Commissioner upheld this dismissal for both the 1948-49 and 1949-50 assessment years, citing that profits had not been distributed between partners.Tribunal's Decision:The Appellate Tribunal dismissed the appeal for the year 1948-49 on the grounds that the partnership, according to the deed, had been operational since April 1, 1947. Therefore, it could not be considered as constituted under an instrument dated April 10, 1950, within the meaning of Section 26A. The Tribunal also noted that such an instrument could not apply retroactively to the account year ending March 1948.High Court's Analysis:The High Court noted that the central issue was whether a partnership alleged in an instrument to have existed previously on the same terms could be considered constituted under that instrument for registration purposes. The Court emphasized that the question was a pure question of law and not about the effect of the instrument on the assessee's assessment for the year 1948-49.Legal 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 High Court agreed with the Tribunal's interpretation that 'constituted under an instrument' means 'created or formed by a formal deed.' However, the Court found it unduly harsh to deny registration simply because the partners alleged previous existence on the same terms. The Court opined that the partnership should be treated as constituted under the instrument from the date of the instrument itself, even if it claims prior existence.Conclusion:The High Court concluded that when a partnership deed is presented for registration under Section 26A, the previous existence of the partnership on the same terms should not bar registration. The partnership should be treated as constituted under the instrument from the date of the instrument. The question was answered in the affirmative, but it was noted that this decision would not affect the assessment of the firm for the year 1948-49.Appellate Tribunal's Judgment in Related Case:The Tribunal in Messrs. Ram Gulam Madan Lal v. Income-tax Officer, G-Ward, Delhi, highlighted a similar issue where the firm was constituted by an oral agreement and later documented in writing. The Tribunal dismissed the registration application, emphasizing that the firm must be constituted under a written instrument to be eligible for registration under Section 26A. The Tribunal criticized the practice of treating firms constituted by oral agreements as eligible for registration upon later documentation, stating that the law clearly requires the firm to be constituted by the written instrument itself.Key Legal Principle:The firm must be constituted by an instrument of partnership to be eligible for registration under Section 26A. An instrument created after the fact cannot retroactively constitute the firm for the purposes of registration. The High Court's interpretation allows for the registration of firms from the date of the written instrument, even if the partnership claims prior existence on the same terms.This comprehensive analysis maintains the legal terminology and significant phrases, providing an in-depth understanding of the issues and the court's reasoning.