1963 PLP 1026 (PTD)

S. 26A Firm Registration-Instrument of partnership executed subsequent to oral agreement-Whether firm legally constituted. A partnership formed by an oral agreement but on terms and conditions reduced to writing subsequently is validly constituted within the meaning of section 26-A of the Income tax Act and is entitled to registration for assessment. Niadar Mal Jagdish Parshad v, Commissioner of Income tax (1959) 37 I T R 349 fol. R. C. Mitter & Sons v. Commissioner of Income tax (1959) 36 I T R 194 (S C) ref. STATEMENT OF CASE By this application the assessee requires the Tribunal to refer certain questions of law which are said to arise out of the Tribunal's order in I. T. A. No. 3498 of 1957-58. As, in our opinion, a question of law does arise out of the aforesaid order of the Tribunal, we hereby draw up a statement of case and refer it to the High Court of Judicature at Chandigarh under section 66(1) of the Indian Income tax Act. 2. The statement of case relates to the assessment for 1955-56. For this year, an application for registration of the firm under section 26A of the Income tax Act was filed on April 29, 1954. Registration was sought for on the strength of the partnership deed dated April 8, 1954, showing the following partners and their profits and loss sharing ratio: 1. Shri Kalwant Singh ... 2/5th 2. Shri Gurdial Singh ... 1/5th 3. Shri Amar Singh ... 1/5th 4. Shri Naranjan Singh ... 1/5th While the first three partners mentioned above are real brothers, Shri Naranjan Singh is their step brother. The partnership consisting of the above four partners had already come into existence on April 1, 1954, by verbal agreement. This is what is stated in the partnership deed : " . . .Whereas the parties had started a firm in the name of M/s. Kalwant Singh Gurdial Singh, Contractor, Patiala, with effect from April 1, 1954, on oral agreement and whereas now the parties feel the necessity of executing a legally valid deed of partnership in order to avoid any difference in future, this deed witnesseth as under." A copy of the partnership deed is made a part of the statement of case and is marked as Annexure "A", 3. It need be stated here that the business in the name of M/s. Kalwant Singh Gurdial Singh was started and carried on by Kalwant Singh and Gurdial Singh after they had separated from their father Shri Udey Singh and was being assessed as individual for some of the years and as Hindu undivided family for some other years. It was claimed before the Income tax Officer that the business assets of the family had been equally divided between the two members on March 31, 1954, after preparing the balance sheet on that date and that the two brothers, Kalwant Singh and Gurdial Singh had started a partnership along with Amar Singh and Naranjan Singh and continued the business as a partnership concern with effect from April 1, 1954, The balances standing to the credits of Amar Singh and Naranjan Singh in the books of the family as on March 31, 1954, were said to have been treated as their capital in the new :firm. For the various reasons detailed in the assessment order, the Income tax Officer did not accept the factum of the partition of the business assets between Kalwant Singh and Gurdial Singh, as genuine. According to the Income tax Officer, the loans shown as having been raised from Amar Singh and Naranjan Singh at an earlier date also belonged to the family. The Income tax officer observed that Naranjan Singh was totally ignorant about the affairs of the firm Such as the financial position of the firm, the quantum of profits made etc. and that at the time he was taken as a partner he was merely a student studying in his B.A. class and accordingly it was not possible for him to look after the affairs of the firm. The Income tax Officer further observed that the two partners Amar Singh and Naranjan Singh were not entitled to operate upon the bank accounts. It was in these circumstances that the Income-tax Officer was of the opinion that the whole thing was a got up affair and .no genuine firm had ever come into existence to which registration could be granted under section 26A of the Income tax Act. The order of the Income tax Officer is made a part of the statement of case and is marked as Annexure "B''. 4. The Appellate Assistant Commissioner to whom the first appeal was preferred by the assessee confirmed the finding of the Income tax Officer that Naranjan Singh and Amar Singh did not introduce any new capital in the firm in return of which they could be given a share of profit. The Appellate Assistant Commissioner also observed that in the form of application for opening a current account of the concern with the Bank of Patiala, no mention was made about the firm or its constitution and the status was declared to be that of an individual. He accordingly concurred with the Income tax Officer that no genuine firm had come into existence on April 1, 1954. The Appellate Assistant Commissioner accordingly dismissed the assessee's appeal holding that the firm had been rightly refused registration under section 26A. A copy of the Appellate Assistant Commissioner's order is made a part of the statement of case and is marked as Annexure "C". 5. The assessee then preferred a second appeal before the Income tax Appellate Tribunal, The Tribunal held that the firm was not constituted under an instrument of partnership inasmuch as the instrument of partnership executed on the 8th April, 1954, categorically stated that the partnership had come into existence on the 1st April 1954. The Tribunal was, therefore, of the opinion that the assessee's case was thus clearly hit by the latest ruling of the Punjab High Court in Ramji Dass Rikhi Ram v. Commissioner of Income tax ((1958) 34 I T R 483), and accordingly dismissed the appeal. A copy of the order of the Tribunal is made a part of the statement of case and is marked as Annexure "D". 6. It is on these facts that we refer the following question of law for the opinion of their Lordships of the Punjab High Court : "Whether the applicant firm which was formed by an oral agreement on April 1, 1954, on terms and conditions reduced to writing on the 8th April 1954, was one constituted under an instrument of partnership within the meaning of those words in section 26A of the Income tax Act and entitled to registration for the purpose of the Income tax Act for the assessment year 1955-56 ? 7. The draft statement of case was placed before the parties and some of the minor modifications suggested by the assessee has been accepted. The Commissioner of Income tax has no suggestions to make. The statement is accordingly finalized. D. N. Awasthy and V. C. Mahajan for the Assessee. H. R. Mahajan for the Commissioner.