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Income‑tax Reference No. 68 of 1956, decided on 26th February 1957.

. 26‑A‑Registration of firm-- Partnership between firms and individuals‑Legality‑Execution of new partnership agreement between individual members of the part nership firms and, the other partners‑Names and shares of all indivi dual constituents specified and deed signed by all individuals‑Share of profits of members of smaller partnership not separately credited --Legality of registration.

Though a firm is not a person and it cannot enter into a partnership with an individual, there is nothing in law preventing the constituent members of a firm or firms entering into a partner ship with another individual or individuals. The registration of a firm cannot therefore be refused merely because the firm is composed of some individuals, and other persons who amongst themselves constitute a firm.

An application for registration as a firm was made in August 1951, in respect of the year of account 2nd November 1948, to 21st October 1949, on the basis of a deed of partnership dated 26th October 1950, between four partners A & Co., B & Co., C and D, in which the share of each of the four partners was shown as 4 as. The assessee made a second application on 12th Septem ber 1951, and produced an agreement of that date which recited that the two partners of the earlier partnership namely, A & Co., and B & Co., were firms, and mentioned the names of the indi vidual partners, of these two firms and the shares which the indi vidual partners had in these firms. This agreement was signed by each of the individual partners of A & Co. and B & Co. also:

Held, that, though the partnership deed of 26th October 1950, could not be registered as it was a partnership between individuals and two firms, yet the partnership which existed in the year of account November 1948, to October 1949, could be, registered under the second partnership deed of 12th September 1951, which set out the names and shares of all the partners who constituted the partnership, and was also signed by all of them.

Held also, the second deed did not alter the situation but merely corrected a technical defect in the first partnership deed.

Held further, that the mere fact that in the account books of the partnership the profits were not taken into the accounts of the constituent members but were only taken into the accounts of the two firms A & Co. and B & Co. and the two individual partners C and D, was immaterial as the partnership deed of 1951 clearly showed how the profits were to be divided between the con stituent members of A & Co. and B & Co., and ascertainment of the exact amount due to each of the constituents was merely a matter of arithmetical calculation.

The decision of the Supreme Court in Dulichand Laxmi narayan v. Commissioner ‑of Income‑tax (1956) 29 I T R 535 explained.

By this application the Commissioner of Income‑tax, Bombay North, Kutch and Saurashtra, requires the Appellate Tribunal to refer to the High Court one question of law which is said to arise out of the Tribunal's order in, I. T. A. No. 5859 of 1953‑54. Inas much as, in our opinion, a question of law does arise out of the aforesaid order, we hereby draw up a statement of the case and refer it to the High Court of Saurashtra at Rajkot, under section 66 (1) of the Indian Income‑tax Act. Parties agree that all the material facts are correctly stated and that there is no omis sion of any material fact. The Commissioner of Income‑tax does not approve of the form of question No. 1.

2: The assessee is a firm. It came into existence in S. Y. 2004 (13th November 1947, to 1st November 1948). A partnership deed was executed on 26th October 1950. A copy of the partnership deed dated 26th October 1959, is Annexure A' and forms part of the case. An application for registration of the assessee firm was made on 18th August 1951. According to the partnership deed dated 26th October 1950, there were four partners: (1) Chandulal Dayalal & Co., (2) Messrs Shantilal Vrajlal & Co., (3) Patel Nanalal, and (4) Desai Keshavlal. Chandulal Dayalal was a firm and so also Shantilal Vrajlal & Co. The individual shares of these four partners were 4 annas each. The individual shares of the partners of Chandulal Dayalal and Shantilal Vrajlal and Co., were not specified in the partnership deed. The assessee firm, realising that the partnership deed dated 2tth October 1950, was not a proper partnership deed for the purposes of the Indian Income‑tax Act, executed another, partnership deed on 12th September 1951 and presented a fresh application for registration on 12th September 1951. A copy of the partnership deed dated 12th September 1951, is Annexure B' and forms part of the case. In the partnership deed dated 12th September 1951, the individual shares of the partners of Chandulal Dayalal and Shantilal Vrajlal & Co. were shown.

3. The Income‑tax Officer refused to register the firm for the assessment year 1950‑51, the year of account being S. Y. 2005 (2nd November 1948, to 21st October 1949). Upon this the assessee appealed to the Appellate Assistant Commissioner. A copy of the assessee's letter dated 28th September 1953, to the Appellate Assis tant Commissioner is Annexure C' and forms part of the case. This appeal was dismissed, whereupon the firm appealed to the Appellate Tribunal. A copy of the order of the Appellate Assis tant Commissioner dismissing the appeal is Annexure D' and forms part of the case. The assessee firm is a genuine one. The application for registration made on the 12th September 1951, is in order, except that in the books of the firm, the profits of the partners of Chandulal Dayalal and Shantilal Vrajlal & Co. were not credited to their individual accounts but to the credit of their firms. A copy of the application dated 12th September 1951, is Annexure E' and forms part of the case.

4. Three contentions were raised before the Appellate Tribunal. They have been dealt with by the tribunal in its order allowing the assessee's appeal a copy of the tribunal's order is Annexure F' and forms part of the case. The principal conten tion that was raised before the Tribunal was that the assessee firm cannot be registered by reason of the fact that in the year of account there was no partnership deed in existence.

5. The only question of law that, therefore, arises is whether there is any legal bar to the registration of the firm.

6. The assessee wants a further question to be referred to the High Court. Even though the assessee did not make an applica tion to the Tribunal under section 66(1) of the Income‑tax Act, the assessee is entitled in law to ask the Tribunal to refer certain questions of law arising out of the Tribunal's order. The assessee firm could not apply for a reference for the simple reason that the decision of the Tribunal was in its favour. If, however, the Commissioner applies for a reference it is open to the assessee to suggest questions of law which arise out of the Tribunal's order.

The question of law suggested by the assessee is whether rule 2 of the income‑tax Rules is ultra vires.

7. We therefore refer the following questions to the High Court:

(1) "Whether there is any legal bar to the registration of the firm

(2) Whether rule 2 of the Indian Income‑tax Rules is ultra vires "

G. N. Joshi with Advocate‑General for the Commissioner.

B. A. Palkhivala with R. M. Joshi and J. P. Joshi for the Assessee.

‑This reference arises out of an order of the Income‑tax Officer, which was confirmed by the Appellate Assis tant Commissioner, rejecting the application of the assessee for registration of a firm. The Tribunal reversed the decision of the Appellate Assistant Commissioner and the Commissioner has come on this reference.

The assessment year of the firm is 1950‑51 and the relevant year of account is S. Y. 2005 which corresponds to the period 2nd November 1948, to 21st October 1949. The application for registration was made on the 18th August 1951, and that applica tion was supported by partnership agreement dated 26th October 1950. In that partnership deed four partners were shown, viz., Messrs Chandulal Dayalal & Co., Messrs Shantilal Vrajlal & Co., Patel Nanalal and Desai Keshavlal, and the share of each of these partners was shown as 4 annas. The partnership deed also recited that this partnership was continued in S. Y. 2006 but the share of the partners was altered and the alteration was that Chandulal Dayalal was given a share of 6 annas. Messrs Shantilal Vrajlal & Co. was given 4 annas, Nanalal Mohanlal was given 3 anna6, and Desai Keshavlal was given 3 annas. No order was made by the Income‑tax Officer on this application. The assessee made a second application on the 12th September 1951, and he produced another partnership deed of that date. This partnership deed recited that the two partners who were referred to in the earlier partnership deed, Chandulal Dayalal and Messrs Shantilal Vrajlall & Co., were firms and the share of Chandulal Dayalal of 4 annas and the share .of Messrs Shantilal Vrajlal& Co. of 4 annas was these hare of the firm, and the partnership also recited who the partners of Chandulal Dayalal were and what their shares in the partnership of Chandulal Dayalal were. Similarly, the partners of Messrs Shantilal Vrajlal & Co. were also shown and also their shares in the firm of Messrs Shantilal Vrajlal & Co. Whereas the first partnership deed was signed by Chandulal Dayalal and Jadhavji Chhaganlal on behalf of Shantilal Vrajlal & Co., Nanalal Mohanlal and Keshvalal Revashanker, the second partnership deed was signed by all the partners of Chandulal Dayalal, Shantilal Vrajlal & Co., Nanalal and Keshavlal.

Now, it is to be borne in mind that it is not the Department's contention that the partnership which existed in S. Y. 2004 was not a‑genuine partnership. But the 6bjection taken to registration' is a purely technical one and the first objection is that there can be no partnership between individuals and firms. What is pointed out is that in the first partnership deed the partners shown were two individuals Nanalal and Keshavlal and two firms Chandulal Dayalal and Shantilal Vrajlal & Co., and on the strength of a Supreme Court decision reported in Dulichand Laxminarayan v. Commissioner of Income‑tax ((1956) 29 I T R 535) Mr. Joshi argues that such a part nership cannot be registered under the Indian Income‑tax Act. It is perfectly true that the Supreme Court has pointed out that a firm is not a person and that a firm cannot enter into a partnership with an individual because the Partnership Act requires that the contract of partnership must be constituted by persons deciding to carry on a partnership. Therefore, to the extent that this part nership deed set out as partners two firms and two individuals, the firm constituted under this partnership deed could not be re gistered. But it will be incorrect to suggest that the Supreme Court has laid down that the' constituent members of a firm cannot enter into a partnership with an individual. Therefore, although Messrs Chandulal Dayalal and Messrs Shantilal Vrajlal & Co. could not enter into a partnership with Nanalal and Keshavlal, there was nothing in law to prevent the constituent members of Messrs Chandulal Dayalal and Messrs Shantilal Vrajlal & Co. from entering into a partnership with Nanalal and Keshavlal. This is exactly what is shown to have happened in the second partnership deed of the 12th September 1951, because there we have as partners not the firm of Chandulal Dayalal and the firm of Shantilal Vrajlal & Co., but the constituent members of Messrs Chandulal Dayalal and Messrs Shantilal Vrajlal & Co. Mr. Joshi says that the, first partnership truly re flected the position as it existed in the ear of account, and the second partnership deed does not; and this urges from the fact that in the books of account of the firm the partners shown are Messrs Chandulal Dayalal & Co. and Messrs Shantilal Vrajlal & Co. and the other two individuals, and Mr. Joshi's contention is that a subsequent partnership cannot be permitted to alter the exact situation that prevailed in the year of account. In our opinion, the second partnership deed does not in any way alter the actual situation. It sets right and corrects the infirmity which attached to the first partnership deed. What the first partnership deed set out was the correct position viz., that the partners of the firm were Nanalal, Keshavlal, Messrs Chandulal Dayalal & Co. and Messrs Shantilal Vrajlal & Co. From a commercial point of view the two partners were Messrs Chandulal Dayalal & Co. and Messrs Shantilal Vrajlal & Co. Businessmen still look upon firms as legal persons, but in view of the Supreme Court decision this deed suffered from this infirmity that it did not set out the constituent members of these two firms who were the real partners and not the firms, and this infirmity was removed by the second partner ship deed which set out the constituent members of the two firms.

Therefore, in our opinion, the partnership which existed in the year of account can be registered under the second partnership deed which sets out the names of all the partners which constituted the partnership.

The second contention urged by Mr. Joshi is that in the books of account the profits have not been taken to the accounts of the constituent members, but have only been taken to the account of the two firms Messrs Chandulal Dayalal & Co. and Messrs Shantilal Vrajlal & Co. and the two other individual partners, and our attention is drawn to the form of application which requires that the person making the application has got to certify that the profits or loss, if any, of the previous year were divided or credited as shown in section (B) of the Schedule and that the in formation given above and in the attached Schedule is correct. Now section (B) of the Schedule deals with the particulars of the appor tionment of the income, profits or gains of the business, profession or vocation in the previous year between the partners who in that previous year were entitled to share in such income, profits or gains, and when we turn to the Schedule the shares of the constituent partners of Messrs Chandulal Dayalal and Messrs Shantilal Vrajlal & Co. are shown, and Mr. Joshi says that when we turn to the books of account the profits have not been distributed as shown in section (B) of the Schedule and to that extent the certificate given by the assessee who made the application for registration is not correct. Now, technically Mr. Joshi is right that in the books of account no separate accounts have been opened of the constituent partners of these two firms. But in our opinion it is a pure technicality. On the facts contained in the second partnership deed it is clear that although in the books of account the profits are allocated to the two firms, the profits belong to the Constituent partners of those two firms, and it is also clear how those profits are to be divided between the constituent partners of Messrs Chandulal Dayalal and Messrs Shantilal Vrajlal & Co. Therefore, if the books of account show what share of profit was allocated to the firm of Messrs Chandulal Dayalal and to the firm of Messrs Shantilal Vrajlal & Co., it is merely a matter of arithmetical computation to find out what profits were credited to the constituent partners of the two firms. In our opinion, the Tribunal was right in the view that it took that the partnership constituted by the second partnership deed should have been registered by the Income‑tax Officer.

Therefore, we will answer the first question submitted to us in the negative. The second question does not arise.

The Commissioner to pay the costs.

Reference answered in the negative.

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