1968 PLP 626 (PTD)

Provided that the registration of the firm shall not be cancelled until fourteen days have elapsed from the issue of a notice by the Income-tax Officer to the firm intimat ing his intention to cancel its registration." Subsections (3) and (4) of section 26-A were added by the Finance Act of 1956. Subsection (4) was incorporated in consequence of the deletion of rule 6-B which empowered the Income-tax Officer to cancel the registration of a firm which was not found to be genuinely constituted.

8. On its analysis, section 26-A of the Income-tax Act, yields the following results : (1) For the purposes of registration or renewal of regis tration, an application has to be made to the Income-tax Officer ; (2) Such an application may be made on behalf of any firm, there being no exception or bar against any particular kind of firm; (3) the firm should be constituted by an instrument of partnership executed in writing ; (4) the instrument should specify individual shares of the partners; (5) the application should be made in the prescribed mode and manner containing all the requisite particulars in full; (6) the Income-tax Officer should be satisfied (i) that the application is complete in all respects ; (ii) that the firm is or was at the relevant time a genuine firm in existence and not a bogus and fictitious entity ; (iii) that its constitution is or was at the relevant time in accordance with the stipulations contained in the instrument ; (7) if the Income-tax Officer is satisfied on, the above points he may register the firm ; (8) if the firm has already been registered, the Income-tax officer may renew the registration. The application has to be submitted in accordance with the manner prescribed in the Rules framed under section 26-A of the Act, rules 3 to 7 which are relevant lay down the procedure for making an application for registration .are reproduced below :- "3. (1) Any firm constituted by an instrument of part nership specifying the individual shares of the partners may make an application for registration for purposes of section 26-A. Such application shall be signed by all the partners (not being minors) personally, or, in the case of a dissolved firm, by all persons (not being minors), who were partners in the firm immediately before its dissolution and by the legal representative of any partner, who is deceased. (2) The application referred to in sub-rule (1) shall be made before the end of the previous year: 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 the firm was constituted, whichever is earlier: Provided further that the Income-tax Officer may entertain an application after the expiry of the time-limit specified in this rule if he is satisfied that the firm was prevented by sufficient cause from making the application within the specified time.

4. The application referred to in rule 3 shall be made and verified in the form annexed to this rule and shall be accom panied by the original instrument of partnership by which the firm is constituted together with a copy thereof: Provided that where the Income-tax Officer is satisfied that for some sufficient reason the original instrument cannot conveniently be produced, he may accept a copy thereof certified in writing by all the partners (not being minors) of the firm, or, where the application is made after the dissolution of the firm, by all persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such person, who is deceased to be a correct copy ; and in such a case the application shall also be :accompanied by a duplicate copy.

5. If, on receipt of the application referred to in rule 4, the Income-tax Officer is satisfied that there is or was a genuine firm in existence constituted as shown in the instrument or instru ments of partnership, executed in writing, and in force, in the relevant previous year, and that the application has been properly made, he may pass an order registering the firm and enter in writing at the foot of such instrument or instruments or the certified copy or copies thereof, as the case may be, a certificate in the following form namely :- The firm, as constituted by this instrument of partnership, has this day been registered by me, the Income-tax officer under section 26-A of the Income-tax Act, 1922, and this certificate of registration shall have effect for the assessment for the year ending on the 31st day of March. 30th day of June (2) If the Income-tax Officer is not so satisfied, he shall pass an order in writing refusing to register the firm and shall furnish a copy of such order to the applicants. (3) 'The certificate referred to in sub-rule (1) shall be signed by the income-tax Officer, who shall thereupon return to the applicants the instrument or instruments of partnership or the certified copy or copies thereof, and shall retain the copy or copies or the duplicate copy or copies, as the case may be. (4) The certificate of registration granted under this rule shall have effect only for the assessment to be made for the year mentioned therein. 6. (1)(a) Any firm to whom a certificate of registration has been granted under rule 5 may apply for the renewal of the registration for a subsequent year. (b) Such application may also be made where an application referred to in rule 3 has been made but no order under sub-rule (1) or sub-rule (2) of rule 5 has been passed up to the date of the first-mentioned application. (c) Such application shall be signed by all the partners (not being minors) of the firm or, where the application is made after the dissolution of the firm, by all persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such person deceased. (2) The application referred to in sub-rule (1) shall be made after the profits of the firm have been divided among or credited to the accounts of the partners (and in the case of loss, after the loss has been debited to the accounts of the partners) but not later than the date laid down in clause (a) or clause (b), as the case may be, of subsection (1-A) of section 22 for filing the return of total income and total world income: Provided that the Income-tax Officer may entertain an application made after the expiry of the date "specified above if he is satisfied that the firm was prevented by sufficient cause from making the application within the prescribed time-limit. (3) The application under this rule shall be made and verifi ed in the form annexed hereto. 7. (1) On receipt of an, application under rule 6, the Income tax Officer shall, if he is satisfied that there exists (or was in existence) a firm as set out in the instrument of partnership on which the firm was registered in respect of the assessment year specified in the application, pass an order renewing the registra tion of the firm and grant a certificate in the following form, namely: The registration of the firm of . . . . . . . . . granted on the . . . . . . . . is hereby renewed under section 26-A of Income-tax Act, 1922. This certificate of renewal of registra tion shall have effect for the assessment for the year ending on the 31st/30th day of March/June 19: (2) If the Income-tax Officer is not satisfied as aforesaid, he shall pass an order in writing refusing to renew the registration of the firm and furnish a copy of such order to the applicant. (3) 'The certificate referred to in sub-rule (1) shall be signed by Income-tax Officer, who shall thereupon return the applicants the instrument of partnership or the certified copy thereof and. shall retain the copy, or the duplicate copy, of the said instrument, as-the case may be. (4) Where an application is made under clause (b) of sub-rule (1) of rule 6, and an order under sub-rule (2) of rule 5 is passed in respect of the original application for the grant of registra tion, the Income-tax Officer may treat the first mentioned application as an application for the grant of registration and, in such event; the provisions of rule 5 shall, so far as may be, apply as they apply to an application referred to in rule 4."

9. A comparative study of the aforesaid statutory provisions dealing with registration, and of the relevant rules, shows that the rules are an amplification of the mode in which an application is to be submitted laying down a certain time-limit which could be varied or condoned by the Income-tax Officer in his discretion. Sub-rule (1) of rule 5 is more or less a reproduction of the statutory provisions contained in subsection (3) of section 26(1) in so far as the application for registration is concerned, the two points on which the Income-tax Officer has to satisfy himself, namely, the genuine existence of the firm and its constitution in accordance with the instrument of partnership coupled with the submission of a proper and complete application in this regard being the same. Here again, the expression used is that if satisfi ed "he may pass an order registering the firm". But the position in regard to the renewal of registration as dealt with in rules 6 and 7 is slightly different, there being the following' three distinguishing features: (1) The application for renewal has to be made only after the profits of the firm have been divided among or credited to the accounts of the partners, and in the case of losses after the loss had been debited to the accounts of the partners [Rule 6(2)] and not before as permissible in the case of first registration. Then comes the provision laying down the time-limit for mak ing application for renewal which should not be made later than the date fixed in clause (a) or clause (b) as the case may be of subsection l(a) of section 22 for filing the return of total income or total loss. The time-limit can, however, be extended in the discretion of the Income-tax Officer for sufficient cause but this provision is not quite relevant. Under sub-rule (3) of rule 6 the application has to be made and verified in the prescribed form. (ii) The main difference revealed by a comparative study of the two application forms prescribed for registration and renewal is, that in the latter, a certificate has to be filed to the effect that the constitution of the firm and individual shares of the partners have remained unchanged. The rest is almost the same. (iii) Then comes the last provision contained in sub--rule (1) of rule 7 which makes it obligatory for the Income-tax Officer to pass an order of renewal of registration, if he is satisfied that there is or was in existence at the relevant time a firm as set out in the instrument of partnership and on the basis of the instru ment the firm was registered in respect of the assessment year specified in the application. As against the word "may" used in the statutory provision contained in section 26-A of the Income-tax Act, the word "shall" be used here.

10. It appears to us that the substitution of the word "shall" in the rules having a compulsory or imperative force .for the word "may" used in the statutory provision has been at least to some extent responsible for the equivocation created in the interpreta tion of the two provisions when read together. The question arises whether there is genuine conflict between the two and, if so; to what extent is it capable of reconciliation. And on a closer examination we are clear in our mind that the conflict is more apparent than real.

11. It is true that ordinarily the word "may" is used in a permissive or an enabling sense. But this is not universally true. There are cases in which it is used in the imperative sense. Such instances are set out by Maxwell in "Interpretation of Statutes" and Craies in his "Statute Law". In support of the proposition that when statutes authorise persons to do acts for the benefit o others or for public good or the advancement of justice, the us of the expression "may" has a compulsory force, Craies has cited Julius v. Bishop of Oxford ((1880) 5 App. Cas. 214, 225,241), B. v. Bishop of Oxford ((1879) 4 Q B D 245, 258) and R. v. Barlow ((1693) 2 Salk 609) while Maxwell has relied upon R. v. Tithe Com missioners ((1850) 14 Q B 474) and R. D. C. v. Roberts (1950 1 K B 716). It would be advant ageous to reproduce the following paragraph from `Maxwell on Interpretation of Statues', Eleventh Edition, page 235: "The Supreme Court of the United States-similarly laid it down that that which public officers are empowered to do for a third person the law requires shall be done whenever the public interest or individual rights call for the exercise of the power, since latter is given, not for their benefit, but for his, and is placed with the depository to meet the demands of right and to prevent the failure of justice. In all such cases, the Court observed, the intent of the legislature, which is the test, is not to grant a mere discretion, but to impose a positive and absolute duty." Supervisors v. U. S. (1866) 4 Wallace 446: The principle seems to be aptly applicable to the case before us and as such we are clearly of the view that the use of the expression "may" the statutory provision contained in section 26-A both in regard to registration as also renewal of registration though seemingly giving a discretion to the Income-tax Officer, in fact, imposes a duty on him to register the firm, subject, of course, to the fulfilment of the conditions laid down. The proposition is not devoid of authorities either. In The Commis sioner of Income-tax, Punjab, N.-W. F. P. and Bahawalpur v. Messrs Maula Dad-Muhammad Saeed of Sheikhupura (P L D 1956 S C 316) the res pondent-firm had applied for registration under section 26-A of the Income-tax Act, the application was in order except that the statement that the amount of profits had been divided among the partners, was not correct. Registration was refused by the Income-tax Officer on the ground of falsity of statement. The appellate Assistant Commissioner as also the Appellate Tribunal upheld the view taken by the Income-tax Officer. The assessee required the Tribunal to state the case for the opinion of the High Court which held that the application could not be rejected on that ground. On appeal to the Supreme Court by the Income-tax Commissioner, it was held by their Lordships as follows: "It is clear from the statutory provisions and the Rules mentioned above that the Income-tax Officer is bound to register a firm if he is satisfied that the firm as set out in the instrument of partnership exists and that the application has been properly made. It is not the appellant's case that the Income-tax Officer was not satisfied as to the existence of the firm and the shares of the partners therein, but what is contended is that if the application states that the profits of the previous year as per profit and loss account were divided or credited and that statement is false, together with the statement in the schedule regarding the share in the balance of profits and the amount credited to the partner's accounts, the application cannot be said to have been properly made. We cannot accept this reasoning because the words `properly made' in rule 4 must be given their ordinary meaning in the context in which they have been used and that context shows that these words refer back to the particulars which are prescribed by rules 2 and 3, namely, that the application has been made by the per sons who are required to make it; that it has been signed by the persons who are required to sign it; and that it has been made in the prescribed form and is accompanied by the prescribed documents. If these requirements are fulfilled, then the only question that the Income-tax Officer has to decide is whether a firm as set out in the instrument of partnership exists or not. If he is satisfied that the firm exists, he is bound to register the firm." In Commissioner of Income-tax, East Pakistan, Dacca v. Amin Match Works, Dacca (P L D 1964 S C 377) their Lordships of the Supreme Court were called upon to examine the question whether the admission of minors to the benefits of partnership rendered the constitu tion of the firm invalid. Answering the proposition in the negative, it was observed by their Lordships in the penaltimate paragraph of their judgment as follows: "It is no doubt correct that a minor cannot create a partnership but it cannot be said that by being merely admitted to the benefits of a partnership he also becomes a partner. In any event, we fail to appreciate why the inclusion of the minors should have rendered the constitution of the firm itself invalid when there were at least two adult partners, besides the minors, who could lawfully have entered into the partnership. Under section 26-A of the Income-tax Act two con ditions have only to be satisfied, firstly, that the firm has been constituted under an instrument of partnership, and, secondly, that the instrument has specified the shares of the partners. If these conditions are satisfied, the firm is entitled to registration. Both these conditions were fully satisfied in the present case." From the expressions "entitled to registration" employed in this authority and "bound to register" in the earlier authority, the mandatory force of the provision stands fully established. As such the conclusion cannot be avoided that the expression "may" was not used in the statutory provision in a permissive or enabling sense but had an imperative force. Once this position is conceded, there is no question of any conflict between the statutory provision and the one contained in the rules, the latter using the expression "shall". In support of the contrary view that the registration of a firm under section 26-A of the Act is discretionary with the Income-tax Officer, the one important authority relied upon is P. A. Raju Chettiar and Brothers v. Commissioner of Income-tax, Madras (1949 I T R 17). The facts of the case are that the assessees P.A. Raju Chettiar and his brother P. A. Ramaswamy Chettiar constituted a joint Hindu family and carried on business as jewellers. On his death the latter was survived by his widow and two minor sons. The family continued to be assessed as a Hindu undivided family up to the year 1940-41, when by a deed of partition, dated 19th August 1940, the family ceased to be a joint family Thereafter, on 14th August 1941, P. A. Raju Chettiar and Ranganayaki Animal, widow of his deceased brother, executed a fresh deed of partnership and in the course of assessment for 1941-42 made an application under section 26-A for their registration of the firm which was refused by the Income-tax Officer whose order was, upheld in successive appeals to the Appellate Assistant Commis sioner and the Tribunal. The Income-tax Officer, on enquiry, came to the conclusion that there was no genuine partnership between P. A. Raju Chettiar and Ranganayaki Animal and the share shown as belonging to the latter did not, in fact, belong to her, but to her minor sons who were the real partners. Up holding the decision of the Income-tax Officer, their Lordships answered the reference in the negative. What is relevant for the purposes of the present case, however, is an observation made by their Lordships purporting to have been based on the Full Bench authority in Kannappa Naicker & Co. v. Commissioner of Income-tax ((1937) 5 I T R 49). It reads as follows :- "It must be remembered that registration of firms under the Income-tax Act is not a general or common law right, but it is a privilege given to the firms in order to enable them to get the benefit of the lower rates of assessment applicable to the individual partners wherever such rates are lower than the rate applicable to the computed income of the firm as a whole. If a firm desires to have this privilege it must conform strictly and rigidly to the requirements provided by the law." Their Lordships then proceeded to reproduce an observation made by the Full Bench in the aforesaid authority. Undoubtedly, the privilege to have the firm registered can, by no means, be equated with a common law right. The question would, however, arise whether once the Income-tax Officer is satisfied as to the genuineness of a firm which for the purposes of registration has conformed strictly and rigidly to the requirements provided by law, it would be open to him to refuse registration. In view of the Supreme Court authorities discussed earlier, we are firmly of the view that in such an event a duty would be cast on the Income-tax Officer to register the firm.

12. The upshot of the above discussion, therefore, is that here is no conflict between the statutory provision and the one contained in the rules relating to renewal of registration and once the Income-tax Officer is satisfied as to the genuine existence of the firm in accordance with the stipulations contained in the deed of partnership on the basis of which registration was recorded earlier and the application is submitted in the prescribed manner being complete in all respects, registration should not be refused. Such a construction, in our view is also agreeable to justice and good reason for it excludes the possibility of a capricious exercise of power leading to inconsistent orders.

13. It would be pertinent to observe in this context that even if subsequent to the order of registration or of renewal of registration, as the case may be, it comes to the notice of the Income-tax Officer that the order was wrongly passed and there was no genuine firm in existence constituted as shown in the instrument, it would be competent for him to cancel the registration under subsection (4) of section 26-A. Admittedly, in the instant case, there was no such occasion for the Income-tax Officer to invoke this power of cancellation in regard to the respondent-firm, either after the original registration or subsequently when it was twice renewed. As stated earlier, the genuineness of the firm was never doubted before the learned Tribunal and as such once that position is conceded, the renewal of registration should ordinarily follow as a matter of course, as was rightly held by the learned Tribunal in view of the fulfilment of other legal requirements. Even before us no doubt was expressed by the learned counsel for the Commissioner as to the genuineness of the firm non-specification of shares in the absence of any stipulation regarding sharing of losses.

14. It remains to examine yet another argument raised by, the learned counsel for the petitioner. It was argued that the: expression used in rule 7 of the relevant Rules, namely, "if he is satisfied that there exists or was in existence a firm as set out in the instrument of partnership on which the firm was registered in respect of the assessment year specified in the application", clearly indicated that notwithstanding an earlier finding in regard to the genuineness of a firm justifying an order of its registration, a fresh enquiry equally elaborate in scope should still be held on the point. We are in no manner of doubt that this argument is wholly misconceived, inasmuch as in the face of the statutory provision contained in subsection (4) of section 26-A authorising the Income-tax Officer to review his earlier order of registration or of renewal of registration, on being subsequently satisfied that the applicant was not a genuine firm constituted in accordance with the instrument of partnership, there was hardly any necessity to repeat the same thing which would make the rule absolutely redundant and superfluous. In fact, the two expressions "there is (at the relevant time) or was (in the past)" indicating two different points of time, have also been used in, subsection (3) of section 26-A as occurring in rule

7. Obviously, the expression "or was in existence during the relevant assessment year, referred to firms which were subsequently dissolved and were not therefore in existence at the time of actual assessment. As such it would be wholly erroneous to draw an inference of the equality or parallelism of scope of enquiry in the cases of original registration and renewal of registration. We are in full, agreement with the conclusion reached by the Tribunal that the renewal of registration had been improperly refused by the Income-tax Officer on the grounds which were wholly untenable. It may be recalled that renewal of registration was refused on the ground that in view of the unascertainability of profits and losses, the instrument of partnership was an invalid document, and as such there was no firm in existence within the meanings of section 26-A. To this view obviously' we cannot subscribe, inasmuch as it was a case of a genuine firm based on an instrument of partnership containing specifications of shares notwithstanding the contingencies and uncertainties, including the absence of any provision relating to sharing of losses. Thus, according to the Income-tax Officer the challenge to the genuineness of the firm did not proceed on alleged grounds of fictitiousness, but for reasons of want of fulfilment of certain other legal requirements, which appears to us to be based on a mis-appreciation of the correct legal position. Notwithstanding the optimistic omission of any reference to the sharing of losses in the instrument of partnership, it still remains a duly constituted firm within the definition of the expression as contained in section 4 of the Partnership Act as also of section 26-A of the Income-tax Act, there being no doubt to the specification of shares in terms of the latter definition. It was held in B. C. G. A. (Punjab) Ltd. v. Income-tax Commissioner (A I R 1937 Lah. 338) a Full Bench authority, that the mere circumstance that a. person was to share profits only and not losses did not, by itself, militate against the presumption of partnership. Thus the conclusions reached by us are as follows :- (i) that in order to seek registration, there should be in existence at the relevant time a genuine partnership based on an instrument of partnership containing specification of shares, and the mere omission to provide for sharing of losses or the possibilities of certain practical difficulties in their allocations would not be a good ground to refuse renewal of registration ; (ii) that a detailed enquiry as to the validity of the partnership on the basis of the provisions contained in section 26-A of the Income-tax Act may appropriately be held at the time of the initial registration ; and (iii) that at the time of the renewal of registration, the enquiry should be confined only to examine the genuineness of the firm in accordance with the instrument of partnership, and changes if any in its constitution and individual shares, besides compliance of procedural formalities.

15. In the aforesaid conclusions, we are also fortified by autho rities. In a similar case, Commissioner of Income-tax, Burma v. Seth Mangoomal Lunidasingh (1939 I T R 7) in which the Commissioner of income-tax in spite of having found the partnership to be genuine with specified shares refused to register the firm under section 26-A on the ground that the actual amount to, which the partners would be entitled depended on a variable contingency the effect of which could not be determined at any time prior, to the closing of the accounts, it was held by the Full Bench that once the partnership was found to be genuine and the shares specified, the Commissioner was not justified in refusing. registration of the firm on the ground that ultimate receipts were dependent on the time devoted by each partner to the business. It was observed that the law looked to the shares in the partnership business and not the receipts from it. Similarly, in another Full Bench authority of this Court in The B. C. G. A. (Punjab), Ltd. v. The Commissioner of Income-tax, Punjab (1937 I T R 5) it was held that the mere circumstance that a person was to share profits only and not losses did not, by itself, mili tate against the existence of partnership. P. A. Raju Chettiar and Brothers v. Commissioner of Income Tax, Madras and Khimji Walji & Co v. Commissioner of Income-tax, Bihar and Orissa (1954 I T R 5) the authorities relied upon by the lear ned counsel for the Commissioner, are not relevant and can hardly be attracted to the case before us. It was held in the earlier authority that registration of firms under the Income-tax Act is not a general or a common law right but a mere privilege which can be made available only to a genuine firm which specifies the actual shares of each partner. We have already discussed this authority in an earlier part of this judgment. In the second authority, it was held that the Rules prescribed under section 26-A of the Income-tax Act were mandatory in nature of which a strict compliance was necessary without which a firm was not entitled to registration. The orders of the Income-tax Officer and Appellate Commissioner were upheld by their Lordships refus ing registration on the ground that the partnership as constituted under the instrument of partnership was not in existence during the accounting year. Obviously, there can be no dispute with this proposition, but there is hardly any occasion to press it into service in the case before us.

16. No doubt, a possibility, howsoever remote, of the respondent-firm earning profits less than the guaranteed shares or even of sustaining losses, cannot be ruled out for all times to come. In such an event, the shareholders might be confronted with a difficulty in the allocation of profits and losses which would, in all probability, be a disqualification for the renewal of the firm's registration rendering impossible for it a strict compliance of the legal requirements and formalities in this regard. But the existence of the firm as a legal entity does not become assailable merely on the ground of such a remote possibility.

17. Thus we agree with the conclusions reached by the Tribunal that in the facts and circumstances of the case, the respondent-firm was qualified for the renewal of registration for the charge year 1961-62 and therefore answer the reference in the affirmative. But we may not be understood as agreeing with the entire reasoning of the Tribunal in reaching the above conclusion. We are doubtful of the application of the principles of natural justice by the learned Tribunal, inasmuch as the matter has to be decided in the first instance strictly in the legal plane with reference to the statutory provisions whose proper application clinches the issue. Nor have we been able to justify the equation of a subsequent enquiry at the time of renewal of registration with a case of double jeopardy. As stated earlier, ordinarily it would not be competent for an Income-tax Officer to assail the validity of a firm already registered having been found to fulfil all the legal requirements of section 26-A and the relevant Rules, and yet a situation might well arise when it might not remain a firm in existence as set out in the instrument of partnership for which two essential pre-requisite must be satisfied ; firstly, it should not be a bogus or a sham firm but should be a genuine one con sisting of actual and real partners; and secondly, the rights and liabilities of its members should be in accordance with the stipu lations contained in the instrument, there being no inconsistency between the position as it genuinely exists and as it has been shown to exist in the instrument. If, however, at a subsequent stage when renewal of registration is sought, the Income-tax Officer in spite of having been satisfied himself as to the genuineness of the firm comes to the conclusion that its constitution is not in accordance with the stipulations contained in the instrument of partnership, it would still be open to him to refuse registration, and as such we may not be understood to shut the door completely for him to examine that aspect of the matter. However, as stated earlier, normally the scope of enquiry in the case of renewal would be comparatively I limited and once the income-tax Officer has satisfied himself) as to the above twp requirements, renewal of registration would ordinarily follow as a matter of course.

18. In consequence, we answer the reference in the affirmative though for reasons somewhat different which weighed with the Income-tax Appellate Tribunal particularly as to the application of principles of natural justice, which in our opinion cannot be invoked. S. Q. Reference answered in the affirmative.