Find a Lawyer

Civil Petitions for Special Leave to Appeal Nos. 346 to 382 of 1974, decided on 1st April 1975.

(On appeal from the judgment and order of the Lahore High Court, dated 14‑5‑1973 in T. R. No. 95 of 1971).

------S. 26‑A read with Finance Act (I of 1957), S.11(12) and Finance Act (V of 1965) S. 6‑‑Contention that majority decision in case reported as P L D 1964 S C 657 proceeded on Interpretation of crucial words "constituted by" which replaced earlier expression constituted under", and which despite amendment of 1965 still re mained part of statute, and that amendment being merely declaratory will, in absence of express words in amending statute or by necessary implication, not have retrospective effect‑Question raised, held, one of general importance and of first impression‑Leave to appeal granted‑Constitution of Pakistan (1973), Art. 185(3).

M. A. Lone, Advocate Supreme Court instructed by Iftikhar‑ud‑Din Ahmad, Advocate‑ on‑Record for Petitioner.

Nemo for Respondent.

Date of hearing : 15th November 1974.

. There thirty seven petitions from the order of the Lahore High Court made on various elates on references under section 66 (1) of the income‑tax Act 1922 (XI of 1927) raise a common question of law as to the interpretation of section 26‑A of the Act, as amended by Finance Act, 1965 (Act V of 1965).

The respondent in each case is a partnership firm and there is no dispute as to its existence in fact. Nevertheless, the Income‑tax Officer can applications made for their registration under section 26‑A of the 1922 Act, treated each firm as having originated in a verbal agreement, followed by an agreement in writing sometime later, the interregnum between the actual constitution under the oral agreement and the written agreement varying from case to case. Accordingly applications in all these cases were refused. The Income‑tax Officer took the view that the firm in each case having originated in verbal agreement was not brought into existence "by" an instrument in writing which was essential requirement for the relevant purpose under section 26‑A of the Act.

Appeals were taken by the assessees to the Assistant Appellate Commis sioner (A. A. C.). In some cases, he upheld the view taken by the Income‑tax Officer, but only with regard to the initial accounting year during which partnership was created by verbal agreement. He however, reversed the order of the Income‑tax Officer with regard to subsequent years and directed the registration of the firms fur the subsequent years. The Department filed further appeals before the Income‑tax Appellate Tribunal (I. T. A. T.). This appeared to be sufficient reason to the I. T. O. to adhere to his previous view, resulting in multiplicity of appeals in many cases, by the same firm for each subsequent year.

The I. T. A. T. agreed with the view taken by the A. A. C. and dismissed all appeals by the Department. Nevertheless, the Tribunal referred to the High Court under section 66 (1) of the Act, the question of law almost to the same effect in each case namely :‑--

"Whether on the facts and in the circumstances of (each) case, the Tribunal was right in confirming the view of A. A. C. directing the registration of the assesses firm under section 26 (a) of the Act, in each case

There has been considerable divergence of judicial opinion in the sub continent over the interpretation of section 26‑A of the Act. But in Pakistan, the controversy was set at rest by the Income‑tax Act by Finance Act, 1957, to read as follows:‑---

"An application may be made to the Income‑tax Officer on behalf of any firm, constituted by an instrument of partnership specifying the individual shares of the partners, for registration for the purposes of this Act and of any other enactment for the time being in force relating to the income‑tax or super tax."

By the amendment, the pre‑existing words "constituted under" were replaced by the words "constituted by". The amended section also came in for interpretation by this Court in Commissioner of Income‑tax v. Noor Hussain (P L D 1964 S C 657). It was held by majority that :‑--

(i) to qualify a partnership firm for registration under section 26‑A, it is essential that it should have been brought into existence, by means of partnership deed itself ; that is to say the establishment of the firm and the instrument of partnership must be contem poraneous, and the latter must provide for the conduct of the business of partnership in futuro and fortiori, a partnership agreement which is a mere record of previous oral agreement will not do;

(ii) there is nothing in section 26‑A to require that the instrument of partnership must be "in existence at the inception of the accounting year" and that therefore, registration under that section could be granted with respect to a part of the accounting year.

The controversy in these cases has however, arisen by reason of the subsequent amendment in section 26‑A by section 6 of Finance Act, 1965 (Act V of 1965). Subsection (1) of section 26‑A of the 1922 Act, as now amended reads:--‑

"Application may be made to the Income‑tax Officer on behalf of any firm, constituted by an instrument of partnership executed in writing before the end of the previous year for the year for which the assessment is so be made specifying the individual shares of the partners, for registration for the purposes of this Act and of any other enactment, for the time being in force relating to income‑tax and super tax."

By this amendment, the underlined words were inserted in the section.

A Division Bench of the Lahore High Court, hearing references made as aforesaid under section 66 (1) of the 1922 Act, opined that on its ana lysis the amended section prescribes the following three conditions for the registration of firm namely ---

(i) the instrument of partnership must be in writing ;

(ii) the execution must take place at any time before the end of previous year; and

(iii) the instrument must be for the year for which assessment is to be made.

The learned Judges went on to observe that under the amended section "a firm may be validly registered on the basis of an instrument executed even at fag end of the previous year having a retrospective effect". This in the opinion of the learned Judges necessarily implied the "existence of a prior oral agreement followed by a deed of partnership", and consequently it was no longer necessary for the relevant purpose, that the partnership should have been created by an instrument in writing. In other words, in the opinion of the learned Judges, the amendment of 1965 has made the majority decision in, the case of Noor Hussain obsolete.

The learned Judges of the Division Bench further opined that section 26‑A is germane to procedural matters and is curative or remedial in its affect and therefore, would be applicable even to pending cases albiet in respect of the assessment year prior to the coming into force of the amendment.

Mr. M. A. Lone, learned counsel for the Department submitted in support of these petitions, that this Court's decision in the case of Noor Hussain still held the field. It was argued that the majority decision in that case proceeded on the interpretation of the crucial words "constituted by" which had replaced the earlier expression "constituted under" and which despite the amendment of 1965 still remained part of the statute. Learned counsel further submitted that the amendment of 1965 is merely declaratory and was inserted ex abundati cautela, and therefore, will, in the absence of the; express words, in the amending statute or by necessary implication, not have retrospective effect.

The question raised in these petitions is of general importance and is also of first impression. Therefore, I would grant leave in all these cases.

Note:‑---Abdul Kadir Sheikh, J. who also heard these petitions not being available has not signed the order. Nevertheless, this shall be read as order of the majority.

I agree.

Leave granted.

Find a Lawyer Near You

Dealing with a matter like this? Connect with a verified advocate in your city — free on SJP Lawyers Directory.