COMMISSIONER OF INCOME TAX Vs. KEJRIWAL TRADERS

JUDGEMENT

(1.) THE CIT called for this reference from the Tribunal. THE question arising for an answer by this Court on this reference under s. 66(1) of the IT Act is as follows :

(2.) THE facts giving rise to this question are as follows :

(3.) THE registration under s. 26A of the IT Act is registration of the "instrument of partnership". It is that instrument of partnership, specifying the individual shares of the partners, which has to be registered for the purpose of the IT Act. It is not, therefore to be compared or confused with the registration of the firm under the Partnership Act. Under the Partnership Act, it is the firm which is registered Under the IT Act, it is the instrument which is registered. THE instrument is registered for the taxation of the firm and, therefore, the instrument requires the specification of the shares of the partners. Secondly, such a registration under s. 26A of the IT Act is only effected for the assessment to be made for that particular period. THErefore, it is the assessee-firm for that year which is entitled to registration. THE question is whether this test is satisfied by the assessee in this case. It will be appropriate here to notice some of the relevant decisions touching these points. In Kylasa Sarabhaiah vs. CIT (1965) 56 ITR 219 (SC) the Supreme Court laid down the principle that, although the application for registration of a firm under s. 26A had strictly to be in conformity with the Act and the Rules, in ascertaining whether the application was in conformity with the Rules, the deed of partnership had to be reasonably construed. It was laid down there that the right to registration under s. 26A being conditional upon the specification of the individual shares of the partners, a deed of partnership between a firm and an individual which specified the the collective shares of the firm, without more, could not be registered. It was further laid down by that decision that the word "specifying" used in s. 26A and r. 2 of the Indian IT Rules, 1922, meant "mentioning, describing or defining in detail" but, nevertheless, it did not mean expressly setting out in fractional or other shares. Again in Parekh Wadilal Jivanbhai vs. CIT (1967) 63 ITR 485 (SC) the Supreme Court, reading the partnership deed as a whole in that particular case, came to the conclusion that there was sufficient specification of the individual shares of the partners within the meaning of s. 26A of the IT Act and the firm was entitled to registration. In the light of these observations and the law laid down by the Supreme Court, it will, therefore, be necessary to analyse the different clauses in the deeds of 18th April, 1957, and the 31st January, 1958, to determine the issue whether there has been a dissolution of the firm as embodied in the instrument of partnership of the 18th April, 1957, in the present case. THE relevant clauses in the deed of partnership dated 18th April, 1957, are cls. 1, 5, 12, 14, 17, 21 and 22. Clause 1 provides that the partnership shall be deemed to have commenced as on and from the 1st day of February, 1957, and shall continue until determined as hereinafter provided. Clause 21 of this partnership deed provides that any of the partners may retire from the partnership after giving to the others three calendar months' notice in writing of his intention so to do. Clause 22 expressly declares that the retirement or death of any partner shall not dissolve the partnership. Clause 5 states that the capital of the partnership shall be contributed by the partners in equal proportions and cl. 12 declares that the profits and losses of the partnership shall be divided and borne by and between the partners in equal proportions. THEre were four partners under this instrument of partnership so that each partner had one-fourth share. By cl. 14 of this partnership deed, the accounts of the partnership are to be made and adjusted on the 30th day of June and the 31st day of December in each year or on such other date as the partners may determine. In other words, the year for the accounts was the calendar year adjustable once on 30th June and the other on 31st December every year. Clause 17 of this partnership deed provides for the distribution of the net profits of the partnership after payment of all income-tax, sales tax and other taxes, interest on capital, loans and advances and all other outstandings to be divided between the partners in equal proportions. Reading this deed of partnership dated April 18, 1957, and the different clauses therein, it is clear that retirement of one partner was not to dissolve the partnership in the present case and any partner could retire by giving the others notice of 3 months. Now, although Nathmull retired from this firm on September 30, 1957, and although it was not necessary under this partnership deed to create another partnership deed, for such retirement did not dissolve the partnership, yet in fact that was what was done on January 31, 1958, where a regular indenture of that date was signed by these four persons. Mr. Sen, on behalf of the assessee, contends that this deed dated January 31, 1958, on a proper interpretation, should mean not a deed of dissolution. He relies on five main features of this particular deed dated January 31, 1958, in support of his contention. We shall, therefore, now analyse this deed of January 31, 1958. In the first place, the recital in the deed shows that this was between the "continuing partners", on the one hand, and the "retiring partner", on the other. THErefore, Mr. Sen for the assessee contends that the partnership was continuing in spite of the retirement. Secondly, the recital also states : "Whereas on the said last mentioned date (October 30, 1957), it was agreed that the said partnership should be determined on the terms and conditions hereinafter appearing." Mr. Sen on this recital contends that it was "determination" of the partnership and not "dissolution". Thirdly, the recital also states :