1969 PLP 633 (PTD)

QADEERUDDIN AHMAD, J.‑The Income‑tax Appellate Tribunal has referred the following question to this Court under section 66(1) of the Income‑tax Act, 1922 :‑‑ "Whether on the facts and circumstances of the case the Tribunal was correct in law to take the date of the commence ment of the business and not the date of the execution of the document to determine the (late of the constitution of the firm."

2. The facts which form the background of this reference are that a partnership deed was executed on the 25th of August 1960 with clause (3) as follows :‑‑ "The partnership business shall commence from Ist day of November 1960."

20. The partnership was neither registered under the Partner ship Act, 1932, nor under the Registration Act, 1908, but an application was made under section 26‑A of the Income‑tax Act on the 26th of April 1961 to the Income‑tax Officer for the registra tion of the firm under that provision. The time for making such an application is prescribed by the first proviso to sub‑rule (2) of rule 3 of the Income‑tax Rules which runs as under :‑ "Provided that where such application is made for the first time and the firm is not registered under the Partnership Act, 1932 (XI of 1932), or where the deed of partnership is not registered under the Registration Act, 1908 (XVI of 1908), it shall be made within a period of six months of the constitution of the firm, or before the end of the previous year in which tile firm was constituted, whichever is earlier." In the present case the question before the Income‑tax Officer whether the application for getting the firm registered was within time. He came to the conclusion that it was barred by time because the firm was constituted on the date on which the partnership deed was executed; thus the application was found to have been made after more than 6 months of its formation and way accordingly dismissed. The respondent went in appeal to the Appellate Assistant Commissioner, who dismissed it on the 3rd of February 1964. The respondent thereafter appealed to the Income‑tax Appellate Tribunal, who accepted it and held that although the partnership deed was executed on the 25th August 1960, no firm was constituted until 1st November 1960 because no business was done in pursuance of that partnership deed until the latter date. This finding was based on clause (3) of the partnership deed, which has been reproduced above, but no attempt was made either on behalf of the respondent or on behalf of the applicant to prove the data on which business was actually commenced by the partnership. We have inquired from Mr. Ali Athar, counsel for the respondent, as to why the commencement of business was postponed by the partnership deed to the 1st of November 1960. He said that the business which the partners desired to do was of a foreign agency, and that it was expected that the firm would be able to secure foreign agencies by the 1st of November 1960. Counsel has stated that this is an explanation which he has given without being in a position to categorically state that there was no other reason for it. It is, however, clear that there was something which the partners were working for to commence business from the first day of November 1960.

3. The Appellate Tribunal has held that there cannot be any partnership unless it is carrying on business. In support of this view, it has relied on the decision in Ramniklal Sunderlal v. Commissioner of Income‑tax, Ahmedabad ((1959) 36 I T R 464), wherein according to the Appellate Tribunal it was held that "in order to constitute a firm there must be carrying on of business". The Tribunal has further observed : "In view of the matter that I have taken, it is therefore, patent that application for registration was within time and I accordingly set aside the orders of the officers below and direct the Examining Officer to grant the registration to the appellant if the application for registration is otherwise in order." The judgment on which the Appellate Tribunal has relied is of the Bombay High Court, in which the facts were that Ramniklal Sunderlal, his wife and two sons entered into an agreement of partnership whereby they agreed to divide in equal shares the income derived from certain properties and certain leases. The work pertaining to Courts, offices, recovery of rents etc., was agreed to be done by Ramniklal with the consent of the other partners. One of the clauses of the agreement provided that the : "Firm shall be entitled to carry on this partnership business and over and above this business any other business with the consent of all the partners." But neither in the assessment year 1953‑54 nor in the early years was there any dealing in land at all. The only dealings were recovery of rent and expenditure was incurred in respect of maintenance of a motor car and telephone charges. In these circumstances the Department refused to register the firm under section 26‑A of the Income‑tax Act, on the ground that there was no partnership. There was no question of limitation in that case. On reference, the High Court hell that although there was an agreement and the elements of agency and authority were also present in the case, yet the necessary element that a firm should be formed to share the profits of business, was not present. It was held that the assessee could not be said to be carrying on business, therefore, it was not entitled to the benefits of registra tion under section 26‑A. The gist of their Lordships observation is that there was no partnership in reality, because the partners did not intend to do any business, therefore, they observed that it was a prime requirement of a firm that there should be actual business before a partnership can be said to have resulted. In other words, it was laid down that a partnership cannot be said to have resulted if the intention and the genuine purpose of the ostensible document was not to do any business under partner ship and to share the profit that might accrue from it.

4. In view of the above facts of that case, we are inclined to take the view that the judgment on which the Appellate Tribunal has relied, is not an authority on the proposition for which it was cited by the assessee.

5. Mr. Ali Athar supported the view of the Tribunal by saying that it is possible for a document to be executed to day with the intention that the partnership contemplated in it should come into existence later on. In such circumstances, according to counsel, it would not be correct to say that the contemplated partnership actually came into existence on the date of the execution of such a deed. This illustration, we feel, is not apt in the circumstances of this case, because in the event of the execution of such a deed, the real situation would be that a mere agreement to create a partnership at a later date, will come into existence. An agreement to constitute a partnership is not the same thing as constituting a partnership itself, but this is entirely a different aspect from the proposition that the constitution of a partnership depends on the commencement of its business. It is possible for a partnership to be created in terms of section 4 of the Partnership Act by establishing a relationship for carrying on, business and sharing it without immediately commencing business. The definition of partnership, as given in that section; is as, follows :‑ "`Partnership' is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partner ship with one another are called individually `partners' and collectively `a firm,' and the name under which their business is carried on is called the `firm name.' " In the above definition, the establishment of the relationship of partnership is the essential consideration and not that in pursuance of that relationship, business should be started immediately. In this respect, the observation of his Lordship; Mr. Justice Fazle‑Akbar in the judgment of the Supreme Court, The Commissioner of Income‑tax; East Pakistan, Dacca v. Noor Hussain (P L D 1964 S C 657) is enlightening. It is as follows :‑ "Further the expression `constituted as shown in the instru ment of partnership' in the section as well as in the rules contemplates an instrument by which parties thereto are agreeing in the present as to a course of business to be followed by them in future." A time lag between the constitution of a firm and the' commencement of its business in actual fact, is a circumstance which can be easily envisaged in almost all cases. The relation ship of partnership is first established orally or by the execution of a document in pursuance of the terms of which the parties do business later on. The Income‑tax Department recognises written agreements of partnership only. If the meaning of the word "constitution" which is pressed by Mr. Ali Athar was accepted, then in every case it would be necessary to deter mine the date of actual commencement of business, and the date of the execution of the partnership deed, although documentary evidence, will be irrelevant.

6. In conclusion of the above discussion, our answer to the question is in the negative. Reference answered in negative.