1981 PLP 183 (PTD)

1. Ch. Sher Ahmad Khan. 25 paisa in a rupee.

2. Sub. Major Raja Feroz Khan. 25 paisa in a rupee.

3. Malik Abdullah Khan. 25 paisa in a rupee. 4. (a) Raja Sher Bahadur Khan. (b) Raja Muhammad Ajaib Khan. 25 paisa in a rupee. (c) Raja Muhammad Aslam Khan. It will be noted that Zafar Ali Khan son of Raja Sultan Khan, was partner of the second part under the Partnership Deed dated 7th of October, 1952 but in the firm constituted in pursuant to the subsequent Partnership Deed dated 27th of August, 1968 he was not a partner. Further that whereas the shares of the first three partners of the firm constituted under the latter Partnership Deed are specifically mentioned in para. 2 of the deed reproduced above, in relation to the partners of the fourth part who became partners consequent to demise of Raja Ali Haider Khan, their share has been collectively given as 25 paisa to a rupee, i.e. the several and specific shares of each of these partners has not been specified.

3. On 2‑4‑1969 the firm applied to the Registrar of Firms for registration of the firm as constituted under the Partnership Deed dated 27th of August, 1968. The firm applied for renewal of its registration for the period from 1‑4‑1968 to 25‑8‑1968 under the old Constitution and for the period 26‑8‑1968 to 31‑3‑1969 under the new Constitution. Later, on 14‑9‑1970 the firm also applied for the renewal of the registration of the firm for the assessment year 1970‑71.

4. On 1‑11‑1972 the Income‑tax Officer allowed the renewal of the registration of firm as originally constituted for the period 1‑4‑1968 to 25‑8‑1968 but refused to renew it for the subsequent period of 27‑8‑1968 to 13‑3‑1969. He also refused to register it as a newly‑constituted firm for assessment year 1970‑71 under section 26‑A of the Income‑tax Act. No appeal was filed against the refusal of the Income‑tax officer to renew registration of the firm under section 26‑A for the period 27‑8‑1968 to 13‑3‑1969. The Income‑tax Officer treated the application for renewal of registration for the assessment year 1970‑71 as an. application for registration of the firm under the new Constitution and refused to register the firm on the ground that the firm was not registered under the Partnership Act and further that the share of the Individual partners of the fourth part were not specified nor were the profits shown separately credited to each of the persons shown as Party No.

4. As has been noted, the new firm had applied for registration under Partnership Act, 1932 on 2‑4‑1969 which application was allowed by ,]he Registrar of Firms on 12‑5‑1972, i.e. prior to the order of the Income‑tax Officer refusing registration under the Income‑tax Act, 1922.

5. The firm went in appeal before the Income‑tax Appellate Tribunal which dismissed the appeal by its order dated 8‑5‑1973. The Tribunal held that the application for the registration of the firm under the Partnership Act submitted on 2‑5‑1969 had remained pending with the Registrar of Firms up to 12‑5‑1972 on which date the certificate of .registration had been issued to it. The Tribunal accepted the contention of the assesses that on the date the order was passed by Income‑tax Officer the firm stood registered and the Tribunal was agreeable to the remand of the case to the Income‑tax Officer for condonation of delay on this point, but the appeal failed before the Tribunal on two other grounds namely, that the individual shares of Party No. 4 who were the heirs of Raja Haider Ali Khan were not shown separately and that in the Account Books the collective shares of the profit of Party No. 4 had been shown which were not found to have been distributed to the three persons constituting Party No.

4. The Tribunal found that although the deed of 7th of October, 1972 stipulated for the continuance of the firm in case of the death of any of the partners' but the subsequent conduct of the surviving partners showed that this was not done, in so far as, on 27‑8‑1968 a fresh deed of partnership was executed, whereby all the heirs of the deceased Raja Haider Ali Khan were not made partners and instead only 3 of his sons were made partners and one of the partners of the original firm, namely Zafar Ali Khan ceased to be a partner. Consequently, the Tribunal was of the view that the partners who executed the Partnership Deed on 27‑8‑1968 did not intend to continue the old firm in terms of para. 11 of the original Partnership Deed and that a new partnership had been brought into existence, and therefore, only an application for the registration of the new firm could be submitted. The firm has now approached this Court and has formulated the following questions for our decision:‑ (i) Whether on the facts and in the circumstances of the case the Income tax Authorities could refuse the Registration of the Firm as evidenced by the Partnership Deed dated 7‑10‑1952 read with deed dated 27‑8‑1968? (ii) Whether in the facts and in the circumstances of the case the shares of the partners specified in the instrument of partnership were in accordance with section 26‑A of the income‑tax Act?

6. Section 26‑A of the income‑tax Act, 1922, sets down the procedure for the registration of firms for the purposes of the Act and subsection (1) thereof states "26‑A. Procedure in registration of fans.‑(1) Application may he made to the Income‑tax Officer on behalf of a firm constituted by an instrument of partnership executed in writing before the end of the previous year for the year for which the assessment is to be made and 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."

7. The Income‑tax Rules have prescribed the form of the application and also specified the person or persons who are to make the application. The contents of the application inter alia include as specification of the shares of each partner and a certification to the effect' that the profits or losses of the previous heirs were or will be divided amongst or credited to the accounts of partners in the manner indicated in the schedule which forms a part of the application. It will be noted that the findings of the Income‑tax Officer as affirmed by the Tribunal are that the shares of the three persons who had been taken as partners of the fourth part are not specified and that the profits of the period of assessment have not been divided and credited to the personal accounts of these persons individually and that in fact there is no individual personal accounts of any of these persons who constitute partners of the fourth part, in the firm's ledger.

8. Before the Tribunal it was contended by the assessee that no doubt separate shares of the partners of the fourth part had not been specified in the Deed of Partnership, but their share could be determined by the provisions of section 13(b) of the Partnership Act, 1932 which provides that in the absence of any contract to the contrary the partners are entitled to share equally in the profits earned by the firm. It was contended that by virtue of this provision, the Income‑tax Officer should have come to the conclusion that each of the three partners of the fourth part were to share equally their 1/4 share, i.e. 1/12th each. This contention was repelled by the Tribunal on the ground that the first three partners had been given specific shares of 25 paisa each in a rupee, whilst the three partners of the fourth part were collectively given that much share. It was of the view that if the shares of all the partners had not been mentioned at all, then of course the provisions of section 13(b) of the Partnership Act, could have been invoked but in the case before it, this was not so, as it could not in any manner be implied that each of the three partners of the fourth part were to equally share their collective 25 paisas share. It found support for this inference from the fact that even in the assessee's books of accounts no separate ledger for these three partners had been kept and the allocation of profits had been made jointly.

9. Before us also learned counsel for the assesses contended that by virtue of the provisions of section 13(b) of the Partnership Act, 1932 it was evident that the three partners of the fourth part held equal shares and in support of his submission relied on the judgment in the case of Commissioner of Income‑tax v. Lahore Central Iron & Hardware Machinery Merchants P L D 1973 Lah. 396.

10. As was observed by M. R. Kiyani, J. (as he then was), in C. I. T. v. Kirpa Ram P L D 1952 Lah. 67, the object of registration of firms under section 26‑A of the Income‑tax Act is "not that the sum payable by the firm itself shall be determined, but that each partner should be assessed separately, with the result that lower rate of taxation will be applied to him". It has been repeatedly held by the superior Courts that an assessee seeking registration of a firm under section 26‑A of the Income‑tax Act, 1922 must strictly confirm to the provisions of Act and the rules and that the provisions of section 26‑A of the said Act grant an exemption and privilege and have to be strictly construed. Ire this context reference may be made to the judgments of the Supreme Court in Rehmat Ullah, etc. v. C. I. T. 1974 S C M R 127, In re : Muhammadi Steamship Company P L D 1966 S C 828 and C. I. T. v. Noor Hussain PLD 1964 SC

657. In the case of Noor Hussain afore-referred it was observed that:- "Section 26‑A confers a privilege on the assessee firm. It provides that the firms seeking benefit under section 23(5) (a) of the Act must conform to the provisions of section 26‑A of the Act. Therefore no question of liberal interpretation of section 26‑Awhlch merely provides procedure for registration of an assesses firm arises". In the case of Muhammadi Steamship Company it was observed: provisions granting exemptions or privileges have to be construed strictly against the person claiming the exemption or the privilege. It is for him to show that h. is entitled to the exemption."

11. Reverting back to the judgment in Kirpa Ram Sethi's case it was observed by the learned Judge that the information required to be given for the purpose of registration under section 26‑A should specify the individual shares of the partners as stipulated in subsection (1) of section 26‑A of the income‑tax Art. Where such share is not specified it is obvious that the stipulations contained in subsection (1) aforereferred have not been fulfilled. In such circumstances it was held by the Supreme Court in the case of S. A. Rahim, etc. v. C. I. T. P L D 1969 S C 172 that :‑ " under the provisions of section 26‑A and rule 2 (of the Income tax Rules), it was essential that the documents required to be registered must on the face of it specify the individual shares of the partners and these should not be of the component firms but individuals having a share in it . . . . The instrument of bigger partnership in the present cast neither contained the names nor specified shares of the 12 individual partners of the two competent 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 duty of the Income‑tax Officer to register the firm is subject of course to the fulfilment of the conditions laid down in the Act and the Rules. See C. I. T. v. Surridge and Beecheno P L D 1968 Kar. 178.

12. On the statement and facts it is apparent that the shares of the partners of the fourth part were not specified and there is no basis on which an inference can be drawn to the effect that it was intended that they should have equal shares in the 1/4th share of the fourth party. The provision of section 13(b) of the Partnership Act, 1932, arc not attracted and neither is the judgment in the case of C. I. T. v. Lahore Central Iron & Hardware Machinery Merchants aforereferred. In that case, the dead of partnership did not provide allocation of the partners shares in the profits. In the present case this is not so, as the deed does allocate severally the share of the partners of the first, second and third part as welt as the joint share of the throe partners of the fourth part to be 25 paisa in a rupee each, but does not specify the several shares of the partners of the fourth part. Therefore, It does not fulfil the requirement of section 26‑A of the Income tax Act, The shares at specified in the instrument of partnership were not in accordance with section 26‑A of the Income‑tax Act and on the facts and circumstances of the case, the Income‑tax Authorities could refuse the registration of the firm constituted by the Partnership Deed dated 27‑8-1968.

13. For the reasons stated above we answer the question No. (1) In the affirmative and question No. (2) in the negative and against the assessee. The assessee shall boar the costs of this reference. Order accordingly