RAMJI DAS RIKHIRAM JAGADHARI Vs. COMMISSIONER OF INCOME-TAX PUNJAB PEPSU HIMACHAL PRADESH AND BILASPUR

JUDGEMENT

(1.) THIS is a reference under Section 66 (1) of the Indian Income-tax Act. On 10-4-1948 Rattan lal and his brother Jai Parkash entered into an oral agreement to carry on business in partnership under the name and style of Messrs. Ramji Das Rikhi Ram and on 17-10-1948 they reduced the terms of this agreement into writing. On a later date they made an application to the Income-tax officer to register their firm under the provisions of Section 26a of the Income-tax Act for the assessment for 1949-50 (previous year ending 31-3-1949 ). The Income-tax Officer came to the conclusion that no genuine firm had come into existence in April 1948 and his conclusion in this behalf was confirmed by the Appellate Assistant Commissioner. The Tribunal, however, came to a contrary conclusion. It held that although a genuine firm was constituted in April 19-18, the instrument of partnership was drawn up only on 17-10-1948, and the firm cannot be said to have been "constituted under an instrument of partnership". In this view of the case the Tribunal dismissed the appeal in so far as the firm's registration under section 26a was concerned. At the request of the parties the Tribunal has referred the following question of law to this Court, namely;

(2.) ALTHOUGH it is difficult to give a definition of partnership which is accurate, comprehensive and exclusive, a partnership may be stated broadly to be a relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The indian Income-tax Act does not take notice of any partnerships which come into existence as the result of an oral agreement, for Section 26a provides quite clearly that application can be made only on behalf of any firm "constituted under an instrument of partnership". One of the chief characteristics of the partnership relation is that it is created only by the voluntary agreement of the parties. The agreement may be oral or in writing or it may be express or implied, but an agreement must precede the creation of the relationship. The element of agreement is fundamental. The income-tax Act does not take notice of any partnerships which come into existence as the result of an oral agreement; it recognises only partnerships which are constituted under an instrument of partnership. If therefore any person wish in like advantage of the lower rates of assessment applicable to partnerships, they must constitute the firm under an instrument of partnership. This is clear from the language which the Legislature has chosen to cm-ploy, for Section 26a of the income-tax Art provides :

(3.) ACCORDING to the second view the instrument of partnership by which the firm was constituted, must be an instrument executed at or before the commencement of the relative accounting year and an instrument which governs the distribution of the profits in that year. It should be an instrument which forms part of the transaction which results in the creation of the partnership and should not be an instrument which merely records previous history and declares in the usual phraseology that the parties desire that the terms of the agreement should be placed on record. This view has been propounded by this Court in Ram Gulab-Madan Lal v. Income-tax officer, G Ward, Delhi, (1954) 25 ITR 339n (B) and by the Calcutta High Court in R. C. Mittar and Sons v. Commissioner of Income-tax, (1955) 28 ITR 698 : (AIR 1956 Cal 303) (C ). In the calcutta case Chakravarti, C. J. , observed as follows :