1969 PLP 194 (PTD)

MUHAMMAD FAZLE GHANI KHAN, J.‑In this case under section 66 (1) of the Income‑tax Act of 1922 the Tribunal has referred the following question of law for the decision of this Court arising out of its order of 25th October 1961 on the appeal of the Department in respect of assessment years 1951‑52 and 952‑53 in the case of Messrs Haji Muhammad Abdullah Abdul Rehman & Co., the assessee :- "Whether, in the facts and circumstances of the case, the instrument of partnership dated the 14th December 1949, and the applications for registration fulfil the requirements of section 26‑A of the Act and Rules 2 and 3 of the Income‑tax Rules as they stood at the material time?" The facts fur both the years are identical and may be summarised as follows :‑ Tile firm of Haji Muhammad Abdullah Abdur Rehman was constituted under a deed of partnership dated the 1st November 1947 which was duly registered under section 26‑A of the Income‑tax Act by the Income‑tax Officer for the assessment years 1951‑52 and 1952‑53 This firm which is commonly known as smaller firm had the following as its partners :- Rs. A. P.

1. Mian Muhammed Hussain 0 2 0

2. Hafiz Fazal Hussain 0 7 2

3. Hafiz Allah Ditta 0 2 0

4. Hafiz Mohammad Bashir 0 0 9

5. Mohammad Saeed 0 1 8

6. Mohammad Latif 0 2 41 On the 14th of November 1949 the applicant firm (hereinafter called the bigger firm) was constituted under a separate instrument of partnership which was to come into existence with effect from she Ist of December 1949. By this partnership the smaller firm M/s. Haji Muhammad Abdullah Abdul Rehman & Co., was allocated a share of 12 annas while two new partners Sh. Fazal Ilahi and Sh. Nur Ilahi were allotted a share of two annas each in the bigger firm. The accounts of the bigger firm were closed for the first time in May 1950, so its first assessment year was 1951‑52.

2. There is no dispute about the registration of smaller firm as it was already registered by the Income‑tax Officer under section 26‑A of the Act, in the year 1947. However, when the application for the registration of the bigger firm was made for the relevant years 1951‑52 and 1952‑53 the Income‑tax Officer refused to register it with the following observations :‑‑ "It would thus appear that Rs. 0/12/0‑1/0/0 share goes to No. 1 which is in fact comprises of 6 partners. Nowhere in the partnership deed the individual shares of these partners are specified. It was held in Kannappa Naicker & Co. v. C. I. T. (1937) 5 I T R 49 and in C. I. T. v. Abdullah Sahib (1942) 10 I T R 7 that where the partnership is constituted under a deed which does not specify the individual shares of each of the partners the Registration must be refused. Secondly, as per the partnership deed dated 14‑12‑1949 the remaining partners are: (1) Fazal Ilahi Allah Din 0‑2‑0 (2) Noor Ilahi Allah Din 0‑2‑0 Falling to the shares of these partners however are credited only to the account of Fazal Ilahi. Thus there is no distribution of profit as certified in application for Registration. In these circumstances I do not see my way to accede to the request of the firm for the benefit of Registration which is accordingly refused." On appeal by the bigger firm the Appellate Assistant Commissioner slid not agree with the reasonings of the Income‑tax Officer and held that the individual share of each and every partner was clearly specified in clause 7 of the instrument of partnership which was sought to be registered. The second objection of the Income‑tax officer that the profits falling to the share of two partners Sh. Fazal Idahi and Sh. Nur Ilahi were to be credited to the account of Sh. Fazal Ilahi and thus there was no distribution of the profits, was repelled by the Appellate Assistant Commissioner with the remarks that the mere fact that in the account books the profits falling to the shares of these two partners had not been taken into their separate accounts was not material as the relevant partnership deed clearly shows how these profits were to be divided between the two partners and ascertainment of the exact amount to each of the two partners could easily be worked out by arithmetical calculation.

3. Against the above order of Appellate Assistant Commis sioner the Department filed a second appeal before the Income‑tax appellate Tribunal, Lahore. The learned tribunal set aside the order of the appellate Assistant Commissioner and held that a partnership could not be registered under section 26‑A of the Act where the instrument of partnership did not specify, on the face of it, the names and the individual shares of all the partners, and the mere fact that the smaller partnership was a registered firm and the shares of its partners were specified was not material. The Tribunal support for its view from an earlier decision of its own in S. A. Rahim Maula Bux v. The Commis sioner of Income‑tax, Punjab (unreported) which was approved by the Supreme Court in 1959 P T D 315 with particular reliance on the following observations of Amiruddin Ahmad, J. "So under the provisions of section 26‑A and rule 2, it was essential that the document required to be registered must on the face of it specify the individual shares of the partners and these should be not of the component firms but individuals having a share in it. Though these rules underwent some changes in April 1952, and in August, 1954, the provisions requiring these essentials are the same. The instrument of bigger partnership in the present case neither contained the names, nor specified shares of the twelve individual partners of the two component firms. The instrument, therefore, was not in accordance with the terms of section 26‑A and Rule 2 aforesaid and the registration was rightly rejected. The individual shares in the new bigger partnership cannot be legitimately inferred from their shares in the smaller concerns when they are not mentioned in the new instrument." The Tribunal, therefore, held that in its opinion the individual shares of the partners were also not specified in the deed of the bigger firm and clause 7, on which reliance was placed by the Appellate Assistant Commissioner did not safeguard these stipulated shares and since the application for registration was also not signed by all the partners it was rightly refused by the Income‑tax Officer.

4. On the application of the bigger firm under section 66 (1) the Tribunal was of the opinion that the contentions which were raised by the applicant before the Tribunal had already been set at rest by the authoritative pronouncement of the Supreme Court in the above‑noted case but since the applicant firm insisted that the facts of its case were different from the case before their Lordships of the Supreme Court, the Tribunal, therefore, has referred the above question for our opinion.

5. Mr. Muhammad Amin Butt, learned counsel for the bigger firm argued that the Tribunal was in error in upholding the order of the Income‑tax Officer on the ground that the deed of bigger firm did not contain specifically the individual shares of each partner. According to the learned counsel the individual shares of the bigger and the smaller firms were separately ascer tainable as the smaller firm was duly registered under section 26‑A of the Act and its partnership deed was already on the record of the Income‑tax Officer in which the shares of the smaller firm were clearly given. In this connection he pointed out that the Income tax Officer had clearly mentioned in his order the names of all the six partners of the smaller firm and their respective shares, therefore, the smaller firm of Haji Muhammad Abdullah Abdur Rehman & Co., which was allocated a share of twelve annas, had to distribute those twelve annas' share amongst their partners according to the shares mentioned in the order of the Income‑tax Officer and, therefore it cannot be said that the names and shares of the smaller firm were not ascertainable. On the strength of this argument the learned counsel tried to distinguish the case of S. A. Rahim & Co., decided by the Supreme Court and pointed out that their Lordships had declined the registration of the bigger firm in that case for the reason that the deed of partnership of Haji Maula Bakhsh Muhammad Sharif, the bigger partnership was not produced before the Income‑tax Officer and even that deed of partnership of Haji Maula Bakhsh Muhammad Sharif related to Ginning Factory Chak Jhumra and not to Chichawatni Factory the registration of which was subject‑matter of the dispute. He, therefore, urged that in the present case no such difficulty arose and since the applicant firth had placed before the income‑tax Officer both the documents the above authority will not be attracted to the facts of the present case.

6. We have given the facts of the present case in detail and in order to appreciate, whether these facts are distinguishable from the facts of the case decided by the Supreme Court we feel it will be useful to give the brief facts of S. A. Rahim's case as they emerge from the judgment of the Supreme Court, since the only point involved in this case is that the facts of the two cases are distinguishable.

7. Two firms S. A. Rahim & Co., and Haji Maula Bakhsh Muhammed Sharif were running cotton ginning business factories. Firm Haji Maula Bakhsh Muhammed Sharif had their factory at Chak Jhumra in the district of Lyallpur. The firm of S. A. Rahim & Co., was doing business under an instrument of partnership dated 5‑11‑1949 which expired after one year. The firm Haji Mauls Bakhsh Muhammad Sharif started cotton ginning and pressing business sometimes in December 1947. A deed of instrument of partnership was executed by its partners on the 24th of January 1948. S. A. Rahim & Co. was reconstituted under an instrument of partnership, dated the 5th of December 1950 when a half share of an evacuee cotton factory of Dhanpat Mal Bhagwan Das situated at Chichawatni in the District of Montgomery was allotted to them. The other half share was allotted to the firm of Haji Maula Bakhsh Muhammed Sharif. The firm of S. A. Rahim & Co., consisted of three partners, namely, S. A. Rahim, Nisar Ahmad and Muhammed Rafiq, each of whom had a one‑third share in the business done by that partnership, while the firm of Haji Maula Bakhsh Muhammed Sharif, under the instrument of 24th of January 1948, consisted of nine share‑holders, whose shares in the business ranged from four annas to one anna. After the allotment of half share to S. A. Rahim & Co., and Haji Maula Bakhsh, Muhammed Sharif at Chichawatni the two firms entered into a bigger partnership on the 10th of March 1951 for running the said factory jointly. The instrument of partnership provided that half share of the capital was to be contributed by S. A. Rahim & Co. and the other half by Haji Maula Bakhsh Muhammed Sharif and the name of the bigger partnership was to be United Cotton Factory and that both the parties would actually be entitled to profits and bear loss as previously. On these facts their Lordships of Supreme Court were pleased to observe that besides this there was no specification of shares of any individual having share in the bigger partnership, viz. the United Cotton Factory consisting of 12 persons and the instrument of partnership of the bigger firm was executed by two persons, namely, S. A. Rahim and Muhammed Sharif. S. A. Rahim signed the same in his individual capacity while the latter signed for Haji Maula Bakhsh Muhammed Sharif.

8. Mr. Muhammed Amin Butt drew our attention to the following observations of their Lordships of the Supreme Court at page 175 where the contentions on behalf of the assessee that the shares of the individual partners of the two component firms were separately ascertainable from the other two partnership deeds read along with the instrument of the bigger firm dated the 10th of March 1951, were repelled : "We are unable to accept this contention. In fact, it is evident from the order of the Income‑tax Officer that only the deed of partnership of Haji Maula Bakhsh, Muhammad Sharif and that of the bigger partnership were produced before him. Even this deed of partnership of Haji Maula Bakhsh, Muhammed Sharif related to a ginning factory at Chak Jhumra and not to the Chichawatni factory, with which we are concerned in this case." He urged that in S. A. Rahim's case the partnership deed of the S. A. Rahim & Co., was not produced before the Income‑tax Officer and, secondly, the partnership of Haji Maula Bakhsh Muhammed Hussain also did not relate to their business of ginning factory of Chak Jhumra. Therefore, in that case the income‑tax Officer was perfectly justified in refusing registration to S. A. Rahim & Company as it was impossible for him on the facts as were presented before him to come to a definite conclusion about the precise specification of the shares of each partner. But no such difficulty arises in the present case because clause 7 of the instrument of partnership is clearly worded and its plain reading leaves no doubt that at the end of a working year the profits and loss of the wool business will be ascertained and the share of profits of party No.1 will be credited to the personal accounts of each of the six partners in accordance with their share.

9. Therefore, on facts both cases are distinguishable from each other and the above decision of the Supreme Court does not govern the present case. It will be useful at this stage to reproduce the translation of clause 7 of the deed of partnership's of the bigger firm which has been reproduced in the order of reference by the Tribunal in the following words :‑ "There will be no separate Khata in this partnership but there will be a separate Khata in the name of "wool account" in the ledger account of Messrs Haji Mohammad Abdullah Abdur Rehman & Co. partner No. 1 in which account will be entered all the receipts and expenses and all transactions of sales and purchases of wool. At the end of the year the profit and loss of the wool business will be worked out and the share of profits of Haji Mohammad Abdullah Abdur Rehman & Co., partner No. 1 will be credited to the respective Khatas of their" partners in accordance with the stipulated shares." The plain reading of clause 7 leaves no doubt in our mind that there was no ambiguity in this clause about the ascertainment of the specific shares of partners. This clause clearly indicates that the accounts will be maintained in a separate Khata under the 8 heading of wool account in the name of Haji Muhammed Abdullah Abdur Rehman & Co., and the shares were to be distributed amongst the six persons of that firm which was admitted to twelve annas share of the bigger firm according to their respective shares. The language adopted by the draftsman is only a device of convenience. Instead of mentioning the shares of the six partners of the smaller firm in the new partnership instru ment of the bigger firm he has mentioned the name of the smaller firm, which would be entitled to twelve annas, and two annas each has been given to the two new partners, Sh. Fazal Ilahi and Sh. Nur Ilahi. We were unable to see as to what difference it would have made for the purposes of registration if instead of mentioning the names of another firm and its twelve annas share the draftsman would have repeated the names of the six partners together with their respective shares separately in the new partnership deed of the bigger firm. We are in agreement with the learned counsel for the applicant that on facts the two cases are quite distinguishable. As already noted by us above, their Lordships were pleased to find that in S. A. Rahim's case the partnership deed of firm S. A. Rahim & Company was not produced and even the partnership deed of Haji Maula Bakhsh Muhammed Sharif did not relate to the Chichawatni Factory. The bigger firm in that case United Cotton Factory was seeking the registration of an instrument of partnership of 10th of March 1951 for the business of the factory which was allotted to them at Chichawatni and by a joint venture of S. A. Rahim & Co., and Haji Maula Bakhsh Muhammed Sharif came into existence but since the firm S. A. Rahim's partnership deed was not there and as well as the deed of Haji Maula Bakhsh Muhammed Sharif did not speak of the business at Chichawatni Factory, therefore, in the circumstances of that case it was obviously difficult to ascertain with precision the specific shares of the partners of the two firms. In the present case clause 7 of the instrument partnership of the bigger firm clearly shows that the shares of each partner of the smaller firm in profit and loss will be according to their stipulated shares, which clearly means their respective shares in the smaller firm. It was, therefore, note difficult to find out what exactly the shares of the two partners in t the bigger firm were because both the partnership deed were produced before the Income‑tax Officer and the smaller firm was a duly registered firm with the Income‑tax Officer since 1947.

10. Now, we come to the second ground which prevailed with the Income‑tax Officer about the shares of Fazal Ilahi and Nur Ilahi. The Appellate Assistant Commissioner held that clause 7 provided that annas four share was to be divided equally between these two partners and the mere fact that in the account books the profit falling to the shares of these two partners have not been taken into their separate account was no ground for the rejection of the registration as the relevant partnership clearly indicated that these four annas share was to be divided between Fazal Ilahi and Nur Ilahi in equal shares. The learned appellate Tribunal did not give any finding about the shares of Fazal Elahi and Nur Ilahi and only considered its observations about the shares of smaller firm. We will, therefore, presume that the appellate Tribunal did not attach any importance to the objection which was taken by the Income‑tax Officer about the shares of Fazal Elahi and Nur Elahi and has accepted the finding of the Appellate Assistant Commissioner that their shares were properly specified. As a result of our finding that the shares of the partners of smaller firm were properly specified and the four annas share of Fazal Elahi and Nur Elahi was to be divided between them equally, we conclude that so far as the facts of the present case are concerned, they are sufficiently distinguishable from the facts of the case of S. A. Rahim before the Supreme Court and the registration of the bigger firm in the case could not be refused on this ground alone that the shares of its different partners were not specifically ascertainable.

11. Mr. Abdul Haq, learned counsel for the Department, has, however, urged that assuming, without conceding, that the shares of various partners were clearly ascertainable, and on that ground we may be able to hold that the facts of the present case are distinguishable from the facts of the case of S. A. Rahim yet the Income‑tax Officer was fully justified to refuse the registration of the firm. This argument of Mr. Abdul Haq was based on two fold grounds. In the first place, he maintained that the registration of the firm was not a general or common law right and the person claiming an exemption must fulfil all the technical requirements of law because this privilege is given to a firm in order to enable it to get the benefit of the lower rate of assessment and if a firm wanted to have this privilege it has to conform strictly and rigidly with the requirements of law. In support of this contention learned counsel relied on Rujjuchattiar v. Commissioner of Income‑tax ((1949) 17 ITR51) and pointed out that the six partners of the smaller firm did not sign the application for registration of the firm and it was signed only by Haji Fazle Hussain on behalf of the smaller firm while Nur Ilahi and Fazal Elahi have signed their names as new partners in the absence of the signatures of all the partners of the smaller firm the Income‑tax Officer was fully justified to reject the application of the firm for registration under section 26‑A of the Act.

12. Mr. Muhammed Amin Butt, counsel for the assessee, attempted to meet this abjection saying that the absence of the signatures of all the partners of the smaller firm on the application for registration of the firm was a mere technicality and the registration could not be validly refused on this simple ground alone. In support of his contention Mr. Butt relied on a Division Bench authority of this Court, to which one of us (Wahiduddin Ahmed, C. J.) was a party, Commissioner of Income tax v. Rajah Ali (1967PTD295) to contend that the provisions of section 26‑A and the Rules made thereunder are not mandatory in nature and non‑compliance with the formalities of these provisions was not fatal to the assessee's case. However, it was conceded by the learned counsel for the assessee that the fact found by the Tribunal that the application for registration made on behalf of the bigger firm did not bear the signatures of all the partners, was correct.

13. We have noticed that one of the grounds given by the learned Tribunal in its appellate order is that the application for registration was also not signed by all the partners and was signed by Fazal Elahi (individual) Nur Elahi (individual) and Fazal Hussain of the smaller firm. This, in the view of the learned Tribunal, was not permissible and tote application for registration should have been signed by all the six the smaller firm who were to be taken to be the bigger firm. We regret to say that the Tribunal has taken a too narrow and technical view of section 26‑A and Rule 2 of the Income‑tax Rules, 1922, made by the Central Board of Revenue in exercise of its powers under section 59 of the Income‑tax Act. In order to appreciate this observation of the Tribunal we consider it necessary to reproduce the relevant provisions of section 26‑A of the Act and Rule 2 framed thereunder, according to which an application for registration of the firm was to be made. They read as:‑ "26‑A. Procedure in registration of firms. (1) Application may be made to the Income‑tax Officer on behalf of any firm, constituted under an instrument of partner ship 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 times 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." Rule 2 as it stood at the relevant time reads as under :‑ "

2. Any firm constituted under an Instrument of partnership specifying the individual shares of the partners may, under the provisions of section 26‑A of the Indian Income‑tax Act, 1922 . . . . . . register with the Income‑tax Officer, the particulars contained in the said Instrument on application made in this behalf." A reading of these two provisions together leaves no doubt in our mind that there were only two conditions which required to be satisfied, firstly that the firm was duly constituted under an instrument of partnership and, secondly, that the instrument has specified the shares of the partners. It these two conditions were satisfied, the firm was entitled to its registration. We are, there fore, satisfied that under these provisions of the law it was not necessary for all the partners to have subscribed their signatures to the application for the registration of the bigger firm which was made before the Income‑tax Officer on the 14th of November 1949. The view taken by the Appellate Tribunal, therefore, was not correct that the application for registration should have been signed by all the partners. We, therefore, see no justification to hold that the application for registration of the bigger firm should have been thrown out on this technical ground.

14. The second part of the objection of Mr. Abdul Haq was that the deed of partnership of the bigger firm was not legally made and it suffers from a patent defect which does not make it a genuine partnership. In this connection he pointed out that the instrument of partnership of the bigger firm was not signed by all the partners of the smaller firm and as such the bigger firm cannot be deemed to have come into existence in the absence of their signatures. To meet this argument Mr. Muhammed Amin Butt, learned counsel for the assessee, urged that it was not open for the Income‑tax authorities to question the validity of the bigger firm on this ground. This was a matter for the other partners who could urge the absence of authority on the part of Haji Fazle Hussain and since they have not disowned the authority this argument is not open to the learned counsel for the respondent. He further submitted that in the present case the instrument was duly acted upon by the parties and as such it was no longer open to question.

15. In order to appreciate the respective contentions of the learned counsel for the parties we have scrutinised the instrument of partnership of the smaller firm executed on the Ist of November 1947. There is no stipulation in this document to authorise Haji Fazle Hussain to enter into partnership on behalf of the smaller firm. The instrument of partnership of bigger firm (Exh. P F.) shows that this was signed and written by firm Haji Muhammed Abdullah Abdur Rehman & Co., through Haji Fazle Hussain, one of the partners of the smaller firm, and he signed the same on behalf of the smaller firm. Fazal Elahi and Noor Elahi, the two new partners, subscribed their signatures to Exh. P. F. and there is no other signature on this partnership deed. The partnership deed of bigger firm was not signed by all the partners of the smaller firm, therefore, it cannot, in law, be considered a valid document creating a partnership between the two enterprises. It, therefore, follows that the agreement of partnership of bigger firm Exh. P. F. which was signed by Hafiz Fazle Hussain on behalf of the smaller firm could not, in law, be considered to have been duly made and executed either on behalf f of the firm or on behalf of the remaining partners of the smaller firm, as Hafiz Fazle Hussain was not authorised to enter into partnership on behalf of the smaller firm with the bigger firm.

16. In the case of S. A. Rahim, referred to above, a similar point arose before their Lordships of the Supreme Court wherein it was held that the instrument of 10th of March 1951 was executed only by few persons, one signing on his own behalf and the other signing for his firm and since the signatures on this deed were not of all the partners, therefore, the partnership deed was hit by the provisions of section 19(2)(h) of the partnership Act. It will be useful to reproduce the relevant observations of the Supreme Court in the above case relating to the signature on the partnership by various partners in this context :‑ "This instrument of partnership also suffers from another infirmity, which does not make it a genuine partnership between the individual partners of the two component firms. The document dated the 10th of March 1951, as already stated before, has been executed by only two persons one signing on his own behalf alone and other signing for his firm, although according to section 18 of the Pakistan Partnership Act of 1932, a partner is the agent of the firm for the purpose of business of the firm subject to the provisions of this Act, section 19(2)(h) clearly lays down :‑ (2) In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not empower him to (h) enter into partnership on behalf of the firm . . . " Mr. Muhammad Amin Butt was unable to satisfy us that there was any usage or custom of trade of hide and wool which authorised Haji Fazle Hussain as a partner of the smaller firm to enter into partnership with another firm on behalf of the smaller firm. In these circumstances the principles of law laid down by their Lordships of the Supreme Court about the genuineness of the deed of partnership will apply with equal force to the present case.

17. We would like to note further that the business of the smaller firm was to deal in hide and skins while the business which was undertaken by the bigger firm was dealing only in wool. The non‑maintenance of separate accounts by the bigger firm and opening of Khata in the names of Noor Elahi and Fazal Elahi in the account books of the smaller firm also throws a great deal of doubt that a genuine partnership was created when the bigger firm was brought into existence by the second instru ment of partnership in December 1949. It appears to us that the smaller firm while expanding its business from hide and skins to that of wool wanted to save taxation at a higher rate under the colour of introducing two new partners for its wool business. We, therefore, consider that the objection raised by Mr. Abdul Haq about the genuineness of the incorporation of the bigger firm has great force and is almost fatal to the case of the assessee.

18. In view of our finding that the partnership deed of bigger firm was not signed by all the remaining partners of the smaller firm the assessee farm cannot be said to have been legally and properly constituted in view of the above‑mentioned decision of the Supreme Court. Therefore, the second condition that the firm has been constituted under an instrument of partnership has not been fulfilled. The application for registration could, therefore, be validly rejected under subsection (3) of section 26‑A of the Income‑tax Act, 1922. The question is, therefore, answered in favour of the department and against the assessee. In view of the partial success of the parties we leave them to bear their own costs. The reference may be returned accordingly. A. E. Reference answered accordingly.