P L D 1959 (W (PLP)

ORTCHESON, J.‑This order will dispose of three connected references under section 66 (1) of the Income‑tax Act (XI of 1922) by the Income‑tax Appellate Tribunal, Pakistan, Lahore, Nos. 190 of 1956, 239 of 1956 and 23 of 1957.

2. The facts out of which these references arise are similar, but may be given as under:

1. Reference No. 190 of 1956. The respondent‑firm came into existence on the 1st of June 1948. An instrument of partnership was drawn up on the 16th of April 1951 and an application for registration of the firm under section 26‑A of the Income‑tax Act was made on the 9th of September 1953.

2. Reference No. 239 of 1956. The firm came into existence on the 11th of October 1949, and an instrument of partnership was drawn up on‑ the 14th of January 1950. The application for registration was made on the 20th of October 1954.

3. Reference No. 23 of 1957. The firm came into existence in March 1950. In respect of the charge years 1951‑52 and 1952‑53, applications for registra tion were made on the 14th of May 1954 accompanied by an instrument of partnership dated the 25th of November 1952. The assessments of both the years were completed on the 9th of June 1955.

3. In all the three cases, the Income‑tax Officer refused registration on the ground that the instrument of partnership had been executed after the expiry of the relevant years of account. In the first case (Ref. No. 190 of 1956) the Appellate Assistant Commissioner dissented from the view taken by the Income‑tax Officer, but in the other two he upheld the order of refusal of registration on the basis of the Punjab High Court decision, Kalsi Mechanical Works, Nandpur v. Commissioner of Income‑tax, Simla ((1953) 24 I T R 353). The Appellate Tribunal did not agree with the above authority, and in Reference No. 190 of 1956, the Accountant Member, sitting singly, dismissed the departmental appeal. In Reference No. 239 of 1956, the appeal was also allowed by the Tribunal, while in Reference No. 23 of 1957 also, the Assessee's contention was accepted by the Tribunal, the Income -tax Officer being directed to accord registration for the assess ment years 1951‑52 and 1952‑53.

4. In all the three cases the Commissioner of Income‑tax, South Zone, West Pakistan, required the Tribunal to refer the following question of law to this Court: "Whether a firm is entitled to be registered under section 26‑A of the Income‑tax Act for the purpose of Assessment in any year where the instrument of partnership was drawn up after the expiry of the relevant previous year." As the Tribunal considered the above formulation to be too abstract, the question was re‑framed so as to bring out the facts of each particular case. The question framed in Reference No. 190 of 1956 is cited below as an example, the others being identical, save for the necessary differences in dates "Whether, in the facts and circumstances of the case, the assessee firm which came into existence by a verbal agreement, long before the relevant year of account is entitled to be registered under section 26‑A of the Income‑tax Act, in respect of the assessment year 1951‑52 relevant to the previous year ending the 31st March 1951, when the instrument of partnership was drawn up on the 16th April 1951, that is to say, after the expiry of the relevant `previous year?"

5. Section 26‑A of the Income‑tax Act, the interpretation of which is in dispute, as it stood at the time the present references were made, runs "S. 26‑A.‑(l). Application may be made to the Income‑tax Officer on behalf of any firm, constituted under an instrument of partnership specifying the individual shares of the partners for registration for the purposes of this Act and of any other enactment for the time being in force relating to income‑tax or super‑tax. (2) The application shall be made by such person or persons, and at such time and shall contain such particulars and shall be in such form, and be verified in such manner, as may be prescribed ; and it shall be dealt with by the Income‑tax Officer in such manner as may be prescribed."

6. The question before us may be narrowed down still further to that of the construction to be placed on the phrase "constituted under an instrument of partnership." Two divergent views have been expressed, one by the Calcutta, Punjab and Madras High Courts, and the' other by the High Courts of Bombay and Dacca.

7. Mr. Abdul Aziz, who represented the Income‑tax Department, supported the former view, which is adverse to the assessee, and the first authority he cited is the case of R. C. Muter and Sons v. Commissioner of Income‑tax, West Bengal (A I R 1956 Cal. 303). The first point to be noted in connection with that decision is that the learned Judges agree that if the word "under" is used in the sense that the deed of partnership brought the partnership into existence, it is by no means appropriate. The relevant portion of the judgment runs: "It must be admitted that as a matter of language if section 26‑A contemplates a firm created by an instrument of partnership, the preposition 'under' has been a very inappro priate preposition to use. The learned counsel for both parties made extensive searches among all available sources for an instance of a like use of the word 'under', but their searches did not result in the discovery of any similar instance. It is not surprising that the search failed, because the preposition 'under' is obviously inappropriate, if what is intended to be expressed is the idea that the deed or act concerned brought into existence a certain result by its own force. One can say correctly that one has a right 'under' a deed. He can also say correctly that 'under' a deed of partnership, the distribution of shares is of a certain kind. But when one wishes to express the idea that a particular deed created a certain relationship or brought about a certain result, one would not use the preposition 'under' because it' I may borrow an expression used in connection with verb, the operation of the preposition 'under' is not transitive but intransitive. In that preposition there is no import of causation at all, which is required of a word if it is to mean that the deed or instrument, in relation to which it is used, operated to produce or cause a certain result . . . . . I should, therefore, think that if the true construction of section 26‑A depended solely upon the correct import of the word 'under', there would be great force in Mr. Mitra's contention."

8. The conclusion of the learned Judges that in spite of the above discussion the word 'under' is used in a sense equivalent to 'by' is based on an analysis of the expressions 'constitute' and 'instrument of partnership'. The contention of Mr. Mitra for the assessee that when a firm is first constituted by an oral agreement, and subsequently a formal deed embodying the terms of partnership is executed, the partnership is consti tuted under an instrument of partnership within the meaning of section 26‑A, and that consequently such a partnership will be entitled to registration under the terms of the section, was rejected by the learned Judges, Chakravarti, C. J. remarking: "I am unable to accept Mr. Mitra's contention that the word 'constituted', occurring in section 26‑A bears the meaning which he would attribute to it. The other words of the section, in juxtaposition with which the word is used, would themselves exclude that meaning, but I might also point out that were Mr. Mitra's contention to be accepted, a very strange result would follow. The only expression which the section uses is 'constituted under' and not 'constituted by or under'. If by the expression 'constituted under an instrument of part nership' is meant a firm which originated in a verbal agreement but with respect to which a formal deed was subsequently executed, there would be no room in the section for partner ships actually created by an instrument and such partnerships, although most obviously entitled to registration, would be excluded from the purview of the section. Even etymologically or textually, I do not think that the word 'constituted,' when used in relation to a firm or such other body, can mean anything but `created,' when the reference is to some deed or instrument to Which the inception of the firm or other body is to be traced. Apart from textual meaning I consider it impossible to adopt a construction which would have no room for firms really created by an instrument as, distinguished from firms created by a verbal agreement which is subsequently embodied in a formal deed."

9. With the greatest respect, I feel constrained to hold that neither of the two reasons given above is conclusive. In the first place, although Mr. Mitra contended that a firm first con stituted by an oral agreement was entitled to registration, he did not, in my opinion, intend to imply that only such firms would be so entitled. It is, therefore, carrying his argument too far to take the view that it excluded those firms which first came into existence under the instrument of partnership.

10. Further, to argue that when used in relation to a firm or other body, the word 'constituted' can mean nothing but 'created' when the reference is to some deed or instrument to which the inception of the firm or other body is to be traced, is to assume the very point to be proved, namely, that the word 'under' is equivalent to 'by'.

11. Passing on to the interpretation of the expression 'instrument of partnership,' the learned Judges remark that the concept of a partnership agreement or a deed of partnership is that certain persons agree to engage in a joint venture or business, agree further to carry it on, all of themselves or any of them acting for all and, lastly, agree to share the profits, and that such an agreement, in the very nature of things, can only be an agreement come to at the present time and an agreement intended to operate in the future. According to their view, an instru ment of partnership is an instrument which embodies such an agreement, not in the way of recording past history, but in the way of forming a part of the transaction which results in the creation of the partnership. Their Lordships are further of the opinion that if an instrument purporting to be an instrument of partnership merely records the earlier origin of the partnership and says in the usual phraseology that the parties desire that the terms of the agreement should be placed on record, no partnership is constituted by the deed even with respect to the period subsequent to its execution, the deed in such a case being merely a deed of a declaratory character or a memorandum.

12. The answer to the above argument was given by Chagla, C. J., in Dwarkadas Khetan and Co., Bombay v. Commissioner of Income‑tax, Bombay City (A I R 1956 Bom. 321) in the following terms : "The learned Chief Justice (Chakraverti, J.) also takes the view that when a partnership deed is executed the partnership can only come into existence in future and that the partnership deed cannot record the fact of a pre‑existing partnership. Again with very great respect, it is the knowledge of all Judges who have had anything to do with commercial litigation in the city of Bombay that a large number of partnership deeds record the fact of an already existing partnership."

13. The learned Judges of the Calcutta High Court employ a further argument, namely, that subsection (2) of section 26‑A of the Act refers the interpretor of the section to the Rules. The learned Judges remark: "In view of the terms of subsection (2), it is obvious that no construction of section 26‑A can be accepted as the true construction, unless it can stand along side the Rules and unless there is no disharmony between what the section, as construed, enjoins, and what the Rules prescribe." This implies that section 26‑A is to be interpreted in the light of the Rules, and that if there is any discrepancy between the Act, and the Rules, the Rules must prevail. With the greatest respect, I am unable to accept this contention. Section 59 of the Income‑tax Act, provides that the Rules are to be made by the Central Board of Revenue, subject to the control of the Central Government. Therefore, although subsection (5) of the same section provides that the Rules when published in the Official Gazette shall have the‑ same effect as if enacted in the Act itself, the rules are not framed by the legislature, but by the executive. Discussing the question of the effect of such rules, Maxwell in his Interpretation of Statutes, 10th Edition, p. 303, remarks: "Where Parliament has delegated its legislative function to a Minister of the Crown without retaining any specific control over the exercise of that function by the Minister (such as a condition that an order made by the Minister should be laid before Parliament and be subject to annulment by Parliament) the Court has the right and duty to decide whether the Minister has acted within the limits of his delegated power." ' In the present case the power granted to the executive to make rules under section 26‑A of the Act is confined to specifying by whom the application is to be made, what particulars it shall contain, in what form it must be, and how it is to be verified. It was not contemplated that the rules framed under the section should have the effect of either extending or res tricting the meaning of the section itself. With great respect therefore, I am of the view that if any discrepancy arises between the language of the section and the language of the Rules, the section, and not the Rules, must prevail. Moreover, Chakravarti, C. J., concedes that para. 4 of Note A appearing in the form of application for registration tells against the view he has adopted. The paragraph in question states that on receipt of an applica tion for registration, the Income‑tax Officer shall enter a certificate of registration at the foot of the instrument or certified copy if he is satisfied that there is or was a firm in existence "constituted as shown in the instrument of partnership", and that the application has been properly made. The learned Judge observes: "I am bound to say that this paragraph, if it is to be take literally and containing the whole provision as to what the Income‑tax Officer is to be satisfied about, would lend strong support to the view that what is meant by any firm constituted under `an instrument of partnership' in section 26‑A is no more than a firm of which the constitution appears from an instru ment in writing."

14. It is obvious that if such be the meaning of the expression "constituted under an instrument of partnership", the instrument need not be one by which the partnership was created. The learned Judge explains the above discrepancy between his view and the Paragraph in question as being due to a drafting error in the paragraph, but with great respect it appears to me that an equally probable explanation is that the framers of the paragraph took the view that it was not necessary that the partnership should have been brought into existence by the instrument, it being sufficient that there should be a partner ship, the constitution of which is set out under the instrument, irrespective of whether the partnership existed previously on the basis of an oral agreement.

15. In the Bombay ruling referred to in para. 11 above, Chagla, C. J., discussing the Calcutta decision, observed: "It will be noticed in that judgment that the learned Chief Justice realised that it was not possible to take the view which he took by reason of the fact that the Legislature had used the expression `under' and not `by' and the learned Chief Justice in terms says that the expression `under' was an inappropriate expression. With respect, if the Legislature chose to use the expression `under' and not `by', the duty of the Court is to give effect to the use by the Legislature of that expression and to construe the expression used by the Legislature. It would not be correct canon of construction to substitute for the expression `under an instrument' the expression `by an instrument' and then construe the section as if the latter expression had been used by the Legislature".

16. Mr. Abdul Aziz next cited three authorities of the Punjab High Court. In the earliest of these, Kalsi Mechanical Works, Nandpur, v. Commissioner of Income‑tax, Simla (A I R 1953 Pb. 301), it was held that for the purpose of registration it is necessary that a firm should be constituted by an instrument of partnership, that such a firm as is constituted under an instrument of partnership should have been in existence during the account period and should not come into existence during the assessment year, and that if it was not in existence under an instrument of partnership during the account period, and is alleged to have existed on an oral agreement, it cannot, upon the production of an instrument of partnership executed during the assessment year, be registered so as to affect the liabilities of the partners for income‑tax accruing during the account period. In paragraph 6 of that judgment, the learned Judges observe:- "There are no words used in section 26‑A which would indicate that this section is meant to be 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. This is supported by the language used in sections 26 and 28 of the Income- tax Act."

17. In support of the interpretation placed upon section 26, the learned Judges quoted an example given by Sampath Iyengar in his Indian Income‑tax Act, Volume II, page 846, but an examination of the example in question shows that it deals with the case where there was a change in the shares allotted to each partner in the firm, whereas in the cases now under discussion, there has been no such change. This example is accordingly of no assistance.

18. With reference to section 28 (2) of the Act, the learned Judges point out that the section mentions the registration of an instrument of partnership governing the distribution of profits, and argue that this clearly shows that the instrument which is to be registered is the one relating to the accounting period. The section in question runs:- "28 (2). If the Income‑tax Officer, the Appellate Assistant Commissioner, or the Appellate Tribunal in the course of any proceedings under this Act, is satisfied that the profits of a registered firm have been distributed otherwise than in accord ance with the shares of the partners as shown in the instru ment of partnership registered under this Act governing such distribution, and that any partner has thereby returned his income below its real amount, he or it may direct that such partner shall in addition to the income‑tax and super-tax, if any, payable by him pay by way of penalty a sum not exceeding one and a half times the amount of income‑tax and super‑tax which has been avoided, or would have been avoided if the income returned by such partner had been accepted as his correct income; and no refund or other adjustment shall be claimable by any other partner by reason of such direction". With great respect, the only conclusion I can draw from the above provision is that where a firm has been registered, the profits must be distributed strictly in accordance with the shares of the partners as shown in the instrument. It is clear that if the shares of the partners under an alleged previous oral agreement differed from those laid down in the instrument itself, the deed of partnership would have to be considered as either creating a new firm, or reconstituting the previously existing one, but the subsection does not deal with the case where the shares have not altered.

19. A passage from "Lindley on Partnership" was cited before the learned Judges to the effect that: "Persons may agree that as between themselves the partner ship between them shall be deemed to have commenced at some time before its actual commencement. Proof of such an agreement as this would not enable a stranger to make the parties to it liable to him as partners for what took place before the partnership in point of fact began." With great respect, I fully agree with this principle, but it does not apply to cases where the previous date shown in the instrument as being that of the commencement of the partnership is not fictitious but real.

20. The learned Judges discuss certain previous authorities but, with great respect, none of them is strictly in point. One lays down as an obiter dictum that the meaning of the words "duly constituted by law" is that they refer to companies constituted by the intervention of the legislature or other tribunal competent to constitute companies and not to consensual contracts, a point not in issue in the present case, while the others merely hold that one requisite of registration is an instrument of partnership operative at the time of the application, a principle with which I respectfully express full agreement.

21. In the next Punjab High Court authority cited by Mr. Abdul Aziz, Messrs Padam Parshad Rattan Chand of Delhi v. Commissioner of Income‑tax, Delhi (A I R 1954 Pb. 188) the point decided was that even where a partnership it alleged in a deed to have existed previously under oral agreement on the same terms, this should not be made a bar to the registration of the firm, which should be treated as constituted under the instrument as from the date of the instrument. The significance of this finding will be discussed later.

22. Before dealing with the last Punjab decision relied upon by Mr. Abdul Aziz, it will be convenient to call attention to the case of Dwarkadas and Co. v. Commissioner of Income‑tax, Bombay City, Bombay (A I R 1956 Bom. 321), already referred to, since this authority is discussed by the learned Judges of the Punjab High Court. The relevant portion of the Bombay judgment runs: "The second contention, in our opinion, also must be answered against the view taken by the Tribunal. This partnership deed, although it is dated 27‑3‑1946, recites in clause (3): `The partnership shall be deemed to have commenced from 1‑1‑1946 and shall continue until the partners hereto decide unanimously in writing to terminate the same.' The view taken by the Tribunal is that inasmuch as the partnership deed is dated 27‑3‑1946, the partnership which commenced on 1‑1‑1946 prior to the execution of the deed cannot be registered under section 26‑A. Before we look at the authorities let us look at the section itself and see what are the requirements of that section. "Any firm can make an application under section 26‑A for registration and the two conditions that it has got to comply with are that it must be constituted under an instrument of partnership and the second condition is that the instrument of partnership must specify the individual shares of the partners. If these two conditions are satisfied it would be entitled to registration. The section does not say that the firm must be constituted by the instrument of partnership. It does not require that the firm must come into existence by reason of the instrument of partnership, or that the firm should be the creature of the instrument of partnership, or that the firm must not exist prior to the instrument of partnership being executed. The requirement of law is that there must be a written document which has set up the firm which is applying for registration and which document specifies the individual shares of the partners. If a firm comes into existence at a relevant point of time in the accounting year, carries on business, and then the partners decide to have a written partnership and recite the fact that the partnership came into existence on a particular date, that partnership deed would be the instrument of partnership under which the firm was constituted. But the fact would still remain that the partnership was doing business prior to the execution of the instrument of partner ship. What must not be overlooked is that what is sought to be registered is not the instrument of partnership but the firm, and the firm is seeking registration for the purpose of certain indulgence which is shown to a registered firm and if the firm can satisfy the authorities that it was carrying on business during the accounting period, then the fact that the partnership deed was executed subsequently can have no bearing on the question of registration. If this be the provision of law, then it is not open to add any further conditions to section 26‑A which the Legislature itself has not imposed. In our opinion, it would be totally opposed to any plain construction of section 26‑A to suggest that only that firm can be registered which has come into existence by reason of the instrument of partnership."

23. In reply to the above argument, the learned Judges of the Punjab High Court in B. N. Dheer and Sons v. Commissioner of Income‑tax, Delhi (A I R 1958 Pb. 463), adhered to their own former view, and observed :‑ "One of the reasons for this (the Bombay) view appears to be the view of the learned Chief Justice that constituted under an instrument' means something different from 'consti tuted by an instrument', but no explanation of any such difference has been given and with the utmost difference to this view I find myself in complete disagreement with it. I am aware that in many contexts the word `by' means something quite different from the word `under', but in this particular context by which I mean coupled with the word `constituted', it does not seem to me to make any difference, and the plain meaning of section 26‑A (1) appears to me to be that unless and until a partnership is constituted by an instrument in which the shares of the partners are specified it cannot be registered, and so cannot be taken into account in the income‑tax assess ment of the partners. It would seem to me to be quite contrary to the intention of this part of the Income‑tax Act if an instrument relied on for registration of the partnership were to be given retros pective effect up to some date mentioned in it as the date on which the partnership has actually started. The learned Chief Justice is no doubt correct in his view that an oral partnership is quite legal for ordinary purposes, but this does not mean that an oral partnership has to be recognised by the Income‑tax of the partners, which can only be done when the partnership is embodied in an instrument of partnership and when the partner ship has been registered under section 26‑A."

24. With the greatest respect, the view taken by the learned Judges has placed them in a dilemma. If, as they believe, the word "under" in the disputed expression is equivalent to "by", and if, as stated in the passage above cited, unless and until a partnership is constituted by an instrument in which the shares of the partners are specified, it cannot be registered, then a firm which originally came into existence through an oral agreement but subsequently incorporated the terms of the partnership in a deed, must be ineligible for registration even in respect of the period subsequent to the execution of the deeds since the partnership cannot be deemed to have been constituted by the instrument of partnership within the meaning attached by the learned Judges to section 26‑A. That the learned Judges are cons cious of this difficulty is clearly shown by the following passage in their judgment: "Obviously, as we held in the case referred to above, the deed or instrument cannot possibly have retrospective effect as regards the income‑tax assessment of the firm, but 1 cannot see any objection to the firms being treated as constituted under the instrument itself. It may be that the partners in those firms act foolishly in alleging the previous existence of the partnership on the same terms in the vain hope of securing retrospective concessions, and in the most literal sense of the words a partner ship cannot be said to be constituted under an instrument when admittedly it has been in existence previously." In other words, what the learned Judges have done is this they first construe the word "under" as being equivalent to "by" in considering whether retrospective effect is to be given to the instrument, and consequently answer that question in the negative; but realising that to give it the same meaning in respect of the period subsequent to the execution of the instrument would logically result in the refusal of registration, a result which they recognise as harsh, they modify the meaning of the word accordingly, thus using it in two different senses to suit the context. Logically, this procedure is hard to justify.

25. Taking into consideration all the above authorities, (none of the others cited by Mr. Abdul Aziz adds anything to the discussion) I am respectfully of the opinion that the view expressed by the Bombay High Court and in a recent case decided by the Dacca High Court, Commissioner of Income‑tax, East Bengal v. Messrs Rashid Motors Chittagang (P L D 1957 Dacca 459) is the correct one, taking into account the settled legal position that, an instrument of partnership is not necessary to bring a partner ship into existence, that such an instrument may legitimately!' record the previous history of the partnership, and that what is being registered is not the instrument but the firm.

26. Finally, there is another aspect of the matter to be considered. The mere fact that such eminent authorities as those cited above have disagreed on the question of the interpretation of section 26‑A of the Act shows that some doubt exists or existed (the enactment having since been amended) and, as pointed out by Mr. Ali other, it is well known that in the case of statutes that impose a pecuniary burden, if a reasonable doubt' exists the construction most beneficial to the subject must be adopted. Another relevant consideration is that upto the period to which these references relate the Income‑tax Department had taken the view adhered to by the Bombay and Dacca High Courts.

27. For the above reasons, I would answer the questions) referred to us in the affirmative. WAHIDUDDIN AHMED, J.‑I agree. A. H. Reference answered.