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Reference Case No. 4 of 1965, decided on 266h January 1966.

S. 26‑A‑Registration of firm -Firm must be in existence during accounting year‑Agreement of partnership has to be effected by a deed‑Instrument merely recording fact of bringing into existence of partnership at earlier stage‑Does not fulfil requirement of law‑Firm verbally constituted on 1‑4‑1956 and terms of agreement reduced to writing on 25‑4‑1956‑Deed executed on Z5‑4‑1956 cannot bring firm into existence with effect from 1‑4‑1956‑Registration, held, rightly rejected.

Commissioner of Income‑tax v. Noor Hussain P L D 1964 S C 657 rel.

Afzalul Huq for Applicant.

S. M. ‑Abbas for Respondent.

‑The assessee applied for registration of the firm claiming that it was a partnership firm entitled to registration under section 26‑A of the Income‑tax Act.

The Income‑tax Officer rejected the sprayer on the ground "that the partnership was formed as a result of an oral agreement on 1st April 1956 and the deed was executed on the 25th day of April 1956, to put into writings the terms and conditions verbally agreed upon. Section 26‑A does not recognise any partnership which is not constituted by an instrument of partnership. As in the present case the partnership was formed by verbal agreement and the deed was executed to put into writings the terms and conditions verbally entered into the deed neither created the partnership nor re‑created an old one."

The assessee moved the Appellate Assistant Commissioner who confirmed the order of the Income‑tax Officer. On a further appeal the Tribunal reversed the orders of the Income‑tax Officer as well as the Appellate Assistant Commissioner and directed the registration of the firm for the assessment year in question.

The Commissioner thereafter moved the Tribunal for a reference to this Court under section 66 (1)‑ of the Income‑tax Act and the Tribunal being of the view that a question of law arises in this case, has referred the following question for opinion of this Court:

"Whether on the facts and in the circumstances of the case and on the basis of the deed of partnership executed on the 25th of April 1956, registration claimed under section 26‑A of the Income‑tax Act for the whole of the accounting year 1956‑57 was rightly allowed by the Tribunal for the tax year 1957‑58 "

The facts of the case are short and may be briefly stated thus: The assessee prayed for registration of the firm under section 26‑A of the Income‑tax Act, for the accounting year ending on 31‑3‑57, on the basis of a partnership deed executed by the partners on 25‑4‑1956. It was stated in the said deed that the firm had been verbally constituted on 1‑4‑1956 and the terms of the agreement were reduced to writing on 25‑4‑1956.

Mr. Afzalul Huq, learned Advocate for the Commissioner of Income‑tax submits that the assessee is not entitled to registration under section 26‑A and in support of his case relies on the decision of our Supreme Court in the case of Commissioner of Income‑tax v. Noor Hussain (P L.D 1964 S C 657).

Mr. S. M. Abbas strenuously argues that he is entitled to registration with effect from 1‑4‑1956, the date on which the partnership was verbally agreed upon.

In the case of Commissioner of Income‑tax v. Noor Hussain it was held by the Supreme Court that a firm would be entitled to registration with effect from the date of the execution of the deed by which the partnership was brought into existence.

In this case on a perusal of the materials placed before us, it appears that a partnership firm had been verbally constituted on 1‑4‑1956, but the terms were reduced to writing on 25‑4‑1956. Had there been a deed in existence which would have itself created a partnership firm, the' assessee would have been entitled to registration with effect from that date. But in this case, on a reference to the deed of partnership, it appears to us that the firm has not been constituted by this deed. It has merely recorded the terms by which the partnership was verbally constituted at an earlier date. This is not the deed which is contemplated under section 26‑A to enable the assessee to claim registration under the .law. It is clearly stated in the deed that ". . . with a view to allaying future doubts and differences between the aforesaid three parties hereto it is considered expedient to have the terms and the conditions verbally agreed upon, recorded in a deed of partnership" With that .object in view the terms were set out in the deed. Therefore, it is clear, on a reading of this document as a whole that the partnership itself was not created by this deed. It serves as an aide memoire of a thing that has already taken place. It records the terms by which a partnership firm had been verbally brought into existence but in order to successfully claim registration under section 26‑A of the Act, the assesses is required to show that the partnership has been brought into existence by a deed.

In the case of Commissioner of Income‑tax v. Noor Hussain referred to above, Fazle‑Akbar, J. delivering the majority judgment of the Supreme Court observed as follows:

"The above provisions of sections 26, 26‑A and the Rules clearly indicate that the firm to be registered must be in existence during the accounting year. Further the expression constituted as shown in the instrument 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."

It is, therefore, clearly laid down that "the firm to be registered must be in existence during the accounting year". Moreover, the deed must show that the "parties thereto are agreeing in the present" to run the business in a particular way, that is, as a partnership firm. The expression "are agreeing in the present' is indeed significant and clearly indicates that the agreement is to be effected by the deed in question. The Supreme Court has further held that an instrument which merely records the fact of bringing into existence of a partnership firm' at an earlier stage will not fulfil this requirement of law. The following observation of the Supreme Court will make the position clear:

"In view of the above provisions of the rules and the sections it will therefore, be difficult to hold that expression constituted as shown in the instrument of partnership, contemplates instrument which does not bring into existence a partnership, but which merely records the fact of its formation in the past by verbal agreement."

In this case we find that the partnership firm has not been brought into existence by the deed in question executed on the 25th April 1956. That being so, the Income‑tax Officer rightly rejected the prayer for registration and the Income‑tax Appellate Tribunal should not have allowed the prayer for registration.

For the reasons stated above, we answer the question referred to us in the negative. In the facts and circumstances of the case, we leave the parties to bear their own costs.

. ‑I agree.

S. Q. Reference answered in the negative.

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