1959 (4) TMI 4 - SC - Income Tax

Partnership Appeals Dismissed for Registration Issue under Section 26A

The Supreme Court dismissed the appeals, ruling that partnerships could not be registered under Section 26A as the partnership instruments were not ... Whether the assessee firm constituted orally in June, 1944, can validly be registered in the assessment years 1945-46 and 1946-47 under section 26A of the Indian Income-tax Act on the basis of a memorandum of partnership executed in June, 1948? Held that:- The conclusion is reasonably clear that unless the partnership business was carried on in accordance with the terms of an instrument of partnership which was operative during the accounting year, it cannot be registered in respect of the following assessment year. As in these cases, the partnership did not admittedly function under such a deed of partnership, the Department and the High Court were right in refusing registration. We would, therefore, dismiss these appeals. Issues Involved:1. Interpretation of 'constituted under an instrument of partnership' in Section 26A of the Indian Income-tax Act, 1922.2. Requirements for the registration of a partnership firm under Section 26A.3. Validity of registration of firms constituted by verbal agreements later formalized by written instruments.Issue-wise Detailed Analysis:1. Interpretation of 'constituted under an instrument of partnership' in Section 26A of the Indian Income-tax Act, 1922:The primary legal question in these appeals was the interpretation of the phrase 'constituted under an instrument of partnership' in Section 26A of the Indian Income-tax Act, 1922. The court examined whether this phrase meant that a partnership must be created by a written instrument or if it could include partnerships initially formed by verbal agreements and later formalized by a written instrument.The High Court of Calcutta had interpreted 'constituted' to mean 'created,' suggesting that a partnership must be created by an instrument of partnership to be eligible for registration. The court found this interpretation too restrictive and instead held that the phrase should be understood more broadly to include partnerships initially formed by verbal agreements but later formalized by a written instrument. The court emphasized that the word 'constituted' does not necessarily mean 'created' but can also mean 'clothed in legal form.'2. Requirements for the registration of a partnership firm under Section 26A:The court outlined the essential conditions for a firm to be eligible for registration under Section 26A:- The firm must be constituted under an instrument of partnership specifying the individual shares of the partners.- An application on behalf of and signed by all the partners must be made, containing all particulars as set out in the Rules.- The application must be made before the assessment of the firm's income for that particular year.- The profits (or loss) of the business relating to the previous year must have been divided or credited in accordance with the terms of the instrument.- The partnership must be genuine and must have existed in conformity with the terms and conditions of the instrument.The court emphasized that the instrument of partnership must be operative during the accounting year, meaning it should be in existence during the relevant accounting period.3. Validity of registration of firms constituted by verbal agreements later formalized by written instruments:The court addressed the conflicting judicial opinions on whether a firm initially constituted by a verbal agreement but later formalized by a written instrument could be registered under Section 26A. The Bombay High Court had held that such firms could be registered, while the Calcutta and Punjab High Courts had taken a more restrictive view.The Supreme Court agreed with the broader interpretation of the Bombay High Court, holding that Section 26A could apply to firms initially formed by verbal agreements but later formalized by written instruments. The court reasoned that the purpose of Section 26A was to ensure that the terms and conditions of the partnership were clearly defined and legally binding before the firm could benefit from the provisions of the Income-tax Act.The court concluded that the words 'constituted under an instrument of partnership' should be interpreted to include partnerships initially formed by verbal agreements but later formalized by written instruments, provided the instrument was in existence during the accounting year.Separate Judgment by Hidayatullah, J.:Hidayatullah, J., delivered a concurring judgment, agreeing with the majority's interpretation of Section 26A but expressing some doubts about whether the instrument of partnership needed to be in existence during the accounting year. He noted that there was no specific requirement in the Act for the instrument to exist during the accounting year but ultimately agreed with the majority's reasoning and conclusion.Conclusion:The Supreme Court dismissed the appeals, holding that the partnerships in question could not be registered under Section 26A because the instruments of partnership were not operative during the relevant accounting years. The court emphasized that the requirements of the law must be strictly complied with for a partnership to be eligible for registration under Section 26A. The respondent was entitled to costs, with one set of hearing fees to be paid half and half by the appellants.