1981 PLP (Trib (PTD)

MUHAMMAD MAZHAR ALI (MEMBER).‑--Aggrieved by the order under section 26‑A of the Income‑tax Act, passed by the Assistant Income‑tax Officer, 'S' Division, Karachi refusing to allow registration to the appellant firm for the second period of the charge year 1966‑67 commencing from 6‑6‑1965 and ending on 31‑3‑1966, the assessee has brought this appeal. Mesers A. S. & Co. is the assessee. This firm was constituted under a deed of partnership executed on 10‑1‑1951 which was made effective from 29‑11‑1949. It consisted of five partners :‑- (1) Mr. A ..Y ..S (2) Mrs. H .A S (3) Mr. M ..S .A .S (4) Mr. A .A ..S This partnership was at will. It was also specifically stipulated and mentioned in the deed of partnership that the partnership shall not terminate with the death of any partner but shall continue and the share of the deceased partner shall automatically devolve on the heirs of the deceased. The manage ment of the partnership business was agreed to be jointly handled by all the partners. The firm was registered under section 26‑A of the Income‑tax Act and the registration was renewed from year to year up to the assessment year 1965‑

66. Mr. A Y .S one of the partners, who was the husband of the partner No. 2 and the father of the partners Nos. 3, 4 and 5 above‑named, died on 4‑6‑1965 i. e. in the assessment year under consideration. The business according to the impugned order remained closed for three days viz. 4th and 6th June, 1965 due to demise of the said partner. The business of the firm was recommenced on 7‑6‑1965. On 14‑6‑1965, the three above‑named sons of the deceased partner executed a fresh partnership deed between themselves. It was on the basis of this Partnership Deed that the registration of firm for the purpose of income‑tax, for the second period of the year under consideration was sought for. The application for the registration was also signed only by the said three partners, vlz. (I) Mr. M A ..S ..(2) Mr. A .S ..A S .and (3) Mr. A A .S ..The Income‑tax Officer after obtaining explanations from, the appellant as well as from Mrs. H .a surviving and continuing partner of the original firm, for reasons recorded by him in his impugned order, held that the firm which was reconstituted under the Partner ship Deed dated 14‑6‑1965 was not genuine and the application for registration of firm accordingly disallowed. Consequent to the refusal of registration firm, the assessment for the second period has been made in the status of an Association of Persons. Before proceeding to record and deal with the contentions raised before us by the learned counsel of the appellant, we would also like to reproduce hereunder the recitals and some of the relevant clauses of the partnership Deed dated 15‑6‑1965. "This Deed of Partnership made at Karachi, this 14th day of June, 1965 between :‑ (1) M A S ..the party of the FIRST PART. (2) A .S A ..S the party of the SECOND PART. (3) A A .S .the party of the THIRD PART. all muslims, adults, sons of the late A.. .H ..Y .S residing at Karachi. Whereas the partners aforesaid have been carrying on a partnership with their deceased father the late A ..H ..Y .S under the name and style of Messrs A ..S .& Co. And whereas the partnership was on then condition that it would not terminate on the death of any of the partner and the heirs of the deceased partners would not be entitled to inherit the assets left behind by the deceased partners in accordance with law: And whereas owing to the death of the late A ..S on 4‑6‑1965 only his sons have been left as the surviving partners and it has become necessary to reconstitute the Partnership and make provision for the heirs in accordance with Muhammadan Law ; And whereas with a view that the relations of the partners inter se may remain cordial and happy it is not deemed desirable to reduce the facts above -stated to writing, this Deed now witnesses as under :‑- (1) That the pre‑existing partnership will continue to be carried on in the name and style of Messrs A S & Co. and the business of the partnership shall be running of the NAZ CINEMA business alongwith Film Distribution and Production and much other business that may be connected therewith or agreed upon ; (2) That partnership business shall be at WILL. (3) That the partnership shall be deemed to have been commenced from 29th November, 1949. (4) That the capital of the partnership business has been subscribed by all the partners in proportion to their respective shares and all further investments shall be made in the same proportion ; (9) That every partner shall have to devote/ his time to the partnership business accordingly as may be mutually decided or fixed from time to time. However, the management and control of the business (including the entering into contracts on behalf of the firm etc.) and all matters relating to the expenditures, taking of overdrafts, investments etc. of whatever nature shall be exclusively in the hands of the party of the SECOND PART and the other parties shall accept his (sic)." (Paras. 10 to 13 are also not very relevant)

14. That in order to avoid any uncertainty and dispute which may have ruinous effect on the NAZ CINEMA concerns, it is necessary that a mutual Agreement be entered in (‑‑10) by the heirs as soon as practicable so that each one may get his share of the assets under Muhammadan Law and good rela tions are maintained. Nothing in this Deed shall be interpreted to deny the heirs their rights to the assets under Muhammadan Law." Mr. A ..A .learned counsel for the appellant admitted that clause (5) of the original Partnership Deed provides that the firm shall not stand dissolv ed on the death of any one of the partners. He submitted that no document is available on record to show that the other heirs of the deceased partners ever desired to become the partners of the firm. According to him, all these heirs of the deceased partner except the two daughters from Mrs. H ..were adult. In his submissions, the three sons of the deceased partner, in fact, constituted the firm among themselves notwithstanding the clause 12 of the original Partnership Deed as the other heirs of the deceased could not be forced to become partners of the firm. Partnership, he maintained, is the outcome of the agreement of contract and since the other heirs of the deceased partner were not agreeable to become the partners in the firm, they could not be com pelled to do so. The finding of the L..T...O... that the firm was not genuine, according to Mr. A .A .was not justified in view of the fact that neither Mrs. H nor any adult heir of late A ..Y S ever desired to become partner. These three sons of the deceased while entering into a fresh deed of Partnership were in fact managing the business affairs of the firm and it was specifically provided the deed of the partner ship dated 14‑6‑1965 that the provisions for the heirs of the deceased will be duty made in accordance with the Muhammadan Law and, that nothing in the deed shall be interpreted to deny the heirs of their rights to the assets under the Muhammadan Law. The learned counsel for the appellant vehemently argued that the I .. T O .'s concern about M .H ..and others in streneous and irrelevant for the purpose of determining whether the Partnership between the three sons is or is not genuine. In the submissions of the learned counsel for the appellant, the firm constituted by the three sons of the deceased is ex facie a regular partnership in accordance with the Partner ship Act. It fulfils all conditions which it is required to fulfils under the provisions of the Income‑tax Act and the Rules. It has according to him, not been held by the Income‑tax Officer that they are not partners inter se. He at the same time admitted that the entire assets of the present firm were acquired from the first Partnership and that Mrs. H ..and other heirs of the deceased were entitled to their shares in the assets left by the deceased in the firm. He also admitted, on being so enquired, that the assessee was making use of the whole of the amount of the original firm. It was, in his submission, for the betterment of the other heirs also. According to the learned counsel for the appellant the present management is producing profits and in accord ance with the terms of the present Partnership Deed, the partners were bound to make provisions and settle the claim of the others heirs of the deceased partners. He again, laid great stress upon the fact that none of the other heirs of the deceased partner came forward to become partners with the three sons who have executed a new Partnership Deed, He also pointed out that the income‑tax officer has, in his assessment order under section 23(3) in respect of the assessment year under consideration, held that each of the three partners of the appellant firm is entitled to 1/3 share and thereby he has recognised the existence sat a genuine firm. It is further borne out from the individual assessment of the partners concerned that the Income‑tax Officer has held them to be the partners of this firm to the extent of 1/3 shares each. He also argued that if the Income‑tax Officer would not have accepted the partner ship in question as genuine then the actual share of each of the three partners would have been something else than 1/3 share each. With regard to the objection of the Income‑tax Officer that this present Partnership has been given retrospective effect from 1949, the learned counsel for the appellant drew our attention to the following observation of Justice Rawalatt in a case reported in 16 Tax Cas. 187 at page 197 :‑- "When people enter into a deed of partnership and say that they are to be partners as from some day which is prior to the date of deed, that does not have the effect that they were partners from the beginning of the deed. You cannot alter the past in that way. What it means is that they begin to be partners at the date of the deed but then they are to take accounts back to the date that then mentioned as from which the deed provides that they shall be partners." He also contended that the observation of the Income‑tax Officer that the deed of partnership dated 14‑6‑1965 purported to give retrospective effect to the partnership was only with the intention to say that the partnership evidenced by this deed commenced from November, 1949. He, however, admitted that the past cannot be and did not in fact alter by stating that the partnership shall be deemed to have commenced in 1949. In his submission the partners meant to say that the deed of partnership dated 14‑6‑1965, came into force on the death of H. A. S. (4‑6‑1965) but as it is a continuation of the original firm which had commenced in November, 1949, therefore, the partnership business of Messrs A S & Co. is deemed to have commenced from November, 1949. He further contended that even if it was assumed that the real meaning of clause 3 of the new partnership deed is that the partners intended to give retrospective effect to the terms incorporated in the deed dated 14‑6‑1965 from 1949 then such an averment is clearly erroneous on facts and can at best he held to be wrong. It could not however, be made a legal ground to refuse the registration of partnership firm under section 26‑A. In this connection he sought to place, reliance on a decision of Allahabad High Court reported in (1952) 22 I T R

311. He also cited another ruling of the Supreme Court of India reported as (1955), 55 I T R 651, to contend that once it is shown that the partnership is genuine and valid, registration cannot be refused on the ground that whether there is also an interest either in the assets of the firm or in the income of the firm. In his submission for the purpose of registration under section 26‑A the only things to be seen are :‑‑‑ (1) Whether a partnership as envisaged by the deed exists, (2) Whether the agreement between, the partners shown in the Deed is pen genuine, (3) Whether the shares of the persons given in the Partnership Deed are specified and ; (4) Whether the application for registration is proper and complete. All these conditions were, according to the appellant's counsel, fulfilled in this case. The question of rights of Mrs. H .or other heirs of the deceased were absolutely irreverent for the purpose of registration. The Departmental Representative, as usual, did not receive the relevant case file of the appellant‑assessee from the officer concerned and hence he could not make any submissions in this case. Having considered the facts and circumstances of the case as well as the argument of the learned counsel of the appellant, we are clearly of the opinion that the Income‑tax Officer was fully justified in refusing to register the firm which had conic into being by virtue of deed of Partnership executed between the three continuing partners of the firm of which the deceased H . A .S .was also a partner. It cannot be denied that in the presence of specific agreement between the parties executing the partnership deed dated 10‑1‑1951, as is evident from clause 12 thereof, that Partnership was not terminable on the death of any partner but to continue, the partnership did not dissolve on the death of H .A .S a partner, on 4‑6‑1965. It means that after the death of Mr. A .Y S ..... the partnership with the remaining four partners, with a right of the other heirs of the deceased partner to joint the firm as partners, remained in existence. Mr. A .A .could not make any submission as to how could the continuing partner, namely, Mrs. H .A .S stood eliminated‑from tile scene. It was undoubtedly open for the other heirs of the deceased partner either to have joined the partnership in terms of clause 12 of the Partnership Deed dated 10‑1‑1951, or not to have done so, but so far as Mrs. H A .S ..was concerned, her case was different inasmuch as she was already a full‑Hedged partner under the deed of partnership dated 10‑1‑1951 and continued to enjoy the status of a partner in the said firm even after death of Mr. A Y ..S .. The application for renewal of registration should have been presented by the four continuing partners together with the heirs of the deceased as is required under the Rules of Registration of Farms but the execution of a new Partnership Deed by and between the three out of the four continuing partners was, in the facts and circumstances of this case, in no way proper, legal and justified and it did not give birth to another genuine firm. Either there should have been a dissolution of a firm by agreement or other‑wise after the death of Mr. A .A ..S ..between the remaining partners or the same firm should applied for the registration or renewal of registration as it might have deemed fit, on the change in the constitution of the firm. We are fortified in our view by the decision of the Supreme Court of Pakistan in the case of Revoli Theatre v. C. I. T. (1971 S C M R 621) where their Lordships in a case where partnership agreement provides for continuation of partnership on death of a partner, if surviving partners so decided, held that same assessable entity, namely, Mrs. A ..S ..& Co. continued even after the death of the partner in case also the same assessable entity which came into existence by virtue of Deed of Partnership dated 10‑1‑1951 continued with 4 partners even after the death of H .A ..A S .In this view of the matter the drawing up and execution of a new partnership Deed between only the three sons of the deceased was uncalled for and it did not, as already stated, give birth to genuine firm. It may also be noted here that even in clause 1 of the deed dated 14‑6‑1965, it has been clearly and specifically mentioned that the pre‑existing partnership will continue meaning thereby that the original firm did not come to an end. In these circumstances, in our opinion, the Income‑tax Officer was fully justified to refuse registration of the firm applied for on of the basis of the Partnership Deed executed on 14‑6‑1965. It is an undisputable proposition that the other heirs of the deceased partner could not be compelled to become partners, if they did not want to avail of the option but it cannot, at the same time, be ignored that on the death of H. A A ..S ..the firm continued with four partners and not with three partners who sought to get registration of the firm under section 26‑A by exe cuting fresh Partnership Agreement. The contents of the recitals are also obvious ly facts in certain respects. It is clearly provided in section 42 of the Partnership Act that subject to the contract between the partners a firm is dissolved by the death of a partner. But in this case as already stated, there was a contract between the parties to the contrary as embodied in clause (12) of the Part nership Deed dated 10‑1‑1951 as such the firm was not dissolved on the death of A A ..S Thus the Application for registration of firm under section 26‑A of the Income‑tax Act was obviously incomplete and was not presented on behalf of the genuine firm. The fact that Mrs. H A S .had filed a suit for dissolution of a firm and for rendition of accounts further indicated that the firm was not in fact dissolved and hence the same old firm continued to exist as the same assessable entity on which it was assessed in the earlier assessment years. Since the application for renewal of registration of firm has not properly made before the Income‑tax Officer, he was fully justified in not according registration to the appellant firm on the basis of the fresh Deed of Partnership. Even if it be assumed that the execution of a fresh partnership deed was proper then too it did not in the least change the legal effects and consequence resulted from the death of H A .A .S ..in the terms of the Partnership Deed dated 10‑1‑1951. On this view of the matter, we do not deem it necessary to go into the other aspect of tire case and discuss the various authorities cited by the learned counsel for the appellant, which in our view have no relevancy to the facts of this case. In the result the appeal fails and is hereby dismissed. Appeal dismissed.