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Petitioner: COMMISSIONER OF INCOME-TAX, CALCUTTA VS Respondent: KEJRIWAL TRADERS
Court Name: Calcutta High Court Judge(s): K. L. Roy, P. B. Mukharji Title: COMMISSIONER OF INCOME-TAX, CALCUTTA vs KEJRIWAL TRADERS Case No.: Income-tax Reference No. 124 of 1964 Date of Judgment:1968-03-07 Reported As: 1971 PTD 1006 Result: order made
JUDGMENT
JUDGMENT P. B. MUKHARJI, J.-The Commissioner of Income-tax called for this reference from the Tribunal. The question arising for an answer by this Court on this reference under section 66(1) of the Income-tax Act is as follows:- "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that registration under section 26-A of the Indian Income-tax Act should be granted to the assessee with reference to the portion of the relevant accounting year commencing from the 1st February 1957, and ending on the 30th September 1957?" The facts giving rise to this question are as follows: The assessment year in this case is 1958-59 and the relevant previous year is from February 1, 1957 to December 31, 1957. The assessee claims to be a firm constituted under a partnership deed dated the 18th April 1957, and applied for registration of that instrument of partnership under section 26-A. For the relevant assessment year. There were four partners to this deed of partnership dated the 18th April 1957, with equal shares in the profits and losses, namely, (1) Kanhaiyalal, (2) Banwarilal, (3) Nathmal, and (4) Iyer. Nathmal retired from the partnership from the 30th September 1957, by another deed. That deed is dated the 31st January 1958. The controversy and the confusion in this reference arise in respect of these two deeds, one dated the 18th April 1957, and the other dated the 31st January 1958. It is necessary to keep these two deeds clearly and separately in mind while trying to approach this question. The Income-tax Officer held that the deed dated 31st January 1958, recorded merely the dissolution of the firm of four partners with effect from 30th September 1957, but did not bring into existence any new partnership. The Income-tax Officer, therefore, refused to allow registration to the assessee-firm by his order dated the 20th August 1960. His finding is, "there is no instru--ment of
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partnership governing the firm after the 30th September 1957, nor are the sharing of the profits and losses specifically laid down. The two main conditions for grant of registration under section 26-A are thus not fulfilled, viz., (i) the firm should be constituted by a regular instrument of partnership, effective at the time of the assessme nt, (ii) the share of profits and losses should be specified in the instrument. As those conditions are not satisfied, the registration applied for is refused." It is needless to point out here that the application for registration on the basis of the partnership deed dated the 18th April 1957, was made on the 5th September 1957. It is also needless to point out, but necessary to bear in mind, that the second deed dated the 31st January 1958, was coming after the relevant previous year which in this case was between February 1, 1957 to December 31, 1957. The assessee appealed to the Appellate Assistant Commis--sioner. There again the assessee contended that there was no dissolution but only a change in the constitution by the deed of the 31st January 1958. The Appellate Assistant Commissioner accepted the assessee's contention and held, on an interpretation of the provisions of the deed dated the 31st January 1958, that it was not a case of dissolution but a change in the constitution of the firm. The reasons and finding of the Appellate Assistant Commissioner can be stated in his own words as follows:- "A partner may retire by various means and one of the ways under which he could retire is when the firm stands dissolved. In view of the various clauses of the indenture discussed above, it cannot be stated that the agreement stipulated only dissolution of the firm and nothing else. Unfortunately, the appellant-firm has not used the word `dissolved' in a proper manner but the real intention of the document considering all the provisions is that the partnership consisting of four partners stood dissolved on September 30, 1957, and thereafter the three continuing partners carried on the business under the same name and under the same terms and conditions and hence, in fact, there was only a change in the. Constitution of the firm. Taking into consideration these facts, I do not agree with the Income --tax Officer." He, therefore, allowed the appeal. Now, it was the Department's turn to appeal. The Depart--ment appealed to the Tribunal. The statement of the case points out that the question before the Tribunal was whether the firm was entitled to registration under section 26-A for the whole of the relevant previous year commencing from February 1, 1957 to December 31, 1957. The Tribunal's order has raised many arguments and controversies. What the Tribunal does is as follows. The Tribunal agrees with the Appellate Assistant Commissioner that by the deed dated January 31, 1958, there was ex post facto declaration relating to the retirement of the partner, Nathmull, with effect from September 30, 1957, while the remaining three partners continued to carry on the business of the firm. In fact, the Tribunal says: "There was no dissolution of the partnership strictly so called but there was only a change in the constitution of the firm on the said date (September 30, 1957)." The Tribunal, however, did not stop with that part of the order but proceeded to discuss the question of registration of the instrument of partnership dated April 18, 1957 under section 26-A of the Income-tax Act. The Tribunal raises the question by saying that the point for decision is whether the firm was entitled to registration under section 26-A for the whole of the previous year commencing from February 1,1957 to December 31, 1957. The Tribunal's operative part of the order is as follows :- "We hold, therefore, that the assessee-firm was not entitled to registration after September 30, 1957. So far as the period from February 1, 1957 to September 30, 1957, the application filed by the assessee under section 26-A conforms to all the statutory requirements and there is no reason why registration should be refused for the said period. In the result, the Department's appeal
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succeeds in part. The registration allowed by the Appellate Assistant Commissioner to the assessee-firm is cancelled only in respect of the period from October 1, 1957 to December 31, 1957." It is difficult to see why the Tribunal was considering the registration of the second deed of partnership dated January 31, 1958, when that was not the subject-matter for registration. The partnership instrument which was for registration before the taxing authority was the one dated April 18, 1957. What the Tribunal should have considered was to find out whether that was registrable or not. By attempting to consider this subsequent deed of January 31, 1958, it confused the issues. That is where the present confusion arises. The Tribunal's order is plainly self-contradictory. If the Tribunal was agreeing with the Appellate Assistant Commis--sioner's conclusion that the deed of January 31, 1958, did not mean dissolution but was only a continuation of the old firm, then there was no point in the Tribunal's discussing and holding that the deed of January 31, 1958, was not registrable and giving the ground that it was beyond the relevant previous year and that it did not specify the shares. All that was plainly unnecessary. If the firm had not been dissolved, then the existing firm under the instrument of April B, 1957, which was the only instrument, was to be registered, and there could not be, without dissolution, any further question of whole or part of the previous year. In other words, the Tribunal's order is vitiated by a dichotomy of attitude and facts created by the Tribunal, which resulted in splitting up and truncating the accounting year and holding that there should be really a registration for 8 months, from February 1, 1957 to September 30, 1957, in respect of the instrument of partnership dated April 18, 1957, and at the same time holding that there was no dissolution but only a change in the constitution of the firm. It is necessary in this context not to confuse the purposes of the provision of section 26-A of the Income-tax Act with those of section 26. Section 26-A, with which we are directly concerned fn answering this question, is only a procedure for the registration of firms for the purpose of the Income-tax Act. Assessm ent of firms, registered or unregistered, has for its substantive section, section 23(5) of the Income-tax Act and section 26 of the Income --tax Act deals with what is called the change in the constitution of a firm. But neither section 23(5) nor section 26 of the Income-tax Act lays down or deal with the procedure for registra--petition of firms for the purpose of the Income-tax Act which is done only by section 26-A of the statute. That is why Mr. P.I, appearing for the revenue, graphically described the position by saying that while assessment may be possible under section 26, and certainly under section 23(5), no registration on the facts of this case is possible under section 26-A of the Income-tax Act. On behalf of the revenue, it is contended that the instrument of partnership dated April 18, 1957, which was sought to be registered under the Income-tax Act by the assessee in this case, does not specify the requirements of section 26-A. In the first place, it is said that this deed or instrument of partnership dated April 18, 1957 is not a current partnership which lasted for the whole of the accounting year or rather the previous year. It is argued that this old instrument of April 18, 1957, has been scrapped altogether and there was and could be no point in registering it. It was then argued that the new instrument dated January 30, 1958, did not specify the shares and it could not be a complete instrument of partnership, because it cannot be properly understood without reference to the old deed of April 18, 1957, which has been scrapped. Lastly, of course, for the revenue it has been repeatedly said that the application for registration in this case was not in respect of the new partnership which came into existence on January 31, 1958, but was in respect of the older one under the date, April 18, 1957. Running through all these arguments and contentions made on behalf of the revenue, the main contention, of course, is that the instrument of partnership of April 18, 1957, has been completely scrapped and the partnership actually dissolved in fact and in law in the light of the deed of January 31, 1958.
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On behalf of the assessee, Mr. Sen contends that, notwith--standing the fact that the word "dissolved" is used in the deed of January 31, 1958, what happened thereunder was not dissolution in fact or in law but only retirement of one partner, Nathmull, with the continuance of the old firm of 3 partners with augmented shares. The registration under section 26-A of the Income-tax 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 Income-tax 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 Income-tax 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 section 26-A of the Income-tax 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 registra-- petition. 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. The relevant clauses in the deed of partnership dated 18th April 1957, are clauses 1, 5, 12, 14, 16, 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 clause 12 declares that the profits and losses of the partnership shall be divided and borne by and between the partners in equal proportion3. There were four partners under this instrument of partnership so that each partner had one-fourth share. By clause 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 not 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. Sea, 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 condi--tions hereinafter appearing." Mr. Sen on this recital contends that it was "determination" of the partnership and not "dissolu--petition". Thirdly, the recital also states:-
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"And further the retiring partner should withdraw from the said business leaving the same to be carried on by the continu--ing partners under the said name and style and firm of Kejriwal Traders for the benefit of the continuing partners or otherwise as the continuing partners might think proper." Therefore, Mr. Sen, for the assessee, contends that it was only a case of retiring partner withdrawing, leaving it to the continuing partners to continue the old firm. Fourthly, in clause 1 of the operative part of this deed, while speaking of the notice, the clause mentions "of the intended continuance of the said business by the continuing partners shall be forthwith advertised in newspapers." On this, Mr. Sen, for the assessee, contends that this was not dissolution but continuance of the old partnership business. Fifthly, in the third clause of the operative part of the deed of January 31, 1958, the words which occur are:. . Hold the same unto the continuing partners absolutely and in proportion to their existing shares." On this, Mr. Sea contends that the partnership continued. There is a good deal of force behind the argument so advanced by Mr. Sen for the assessee on the basis of these clauses and expressions. But that is not the whole story of interpretation of this deed of January 31, 1958. Mr. P.I, for the revenue, has equally relied on this deed of January 31, 1958, to show that it contains words and clauses which unmistakably and unequivocally declare that the partnership created by the instrument of partnership deed dated April 18, 1957, way in fact and in law dissolved. In support of this argument Mr. P.I relies first on the recital where it is said:- "Whereas on the last mentioned date (October 30, 1957) it was further expressly agreed that all the debts and liabilities of the said firm of Kejriwal Traders to persons other than the retiring partners shall subject to the proviso contained in clause 5 hereunder be paid by the continuing partners who shall indemnify the retiring partner against the same." Mr. P.I contends that all the debts and liabilities were, there--fore, taken over by the new firm of three partners and not the old firm of four partners. Secondly, Mr. P.I, for the revenue, contends that the operative clauses in the deed of January 31, 1958, leave no room for doubt that there was dissolution of the firm as constituted by the instrument of partnership dated April 18, 1957. In support of that argument, he relies, secondly, on clause 1 of the deed of January 31, 1958, where it is solemnly, clearly and unequivocally declared: "In pursuance of the said agreement and in consideration of the promises they made the parties hereto declare that they dissolved on the 30th day of September 1957, and hereby dissolve as from the said 30th day of September 1957, the partnership theretofore subsisting between them in the said business of Kejriwal Traders as aforesaid and notice of such dissolution . . . Shall forthwith be advertised in newspapers." Mr. P.I, for the revenue, contends with a good deal of force that there can be no doubt after the use of the words "dissolved" and "dissolution", not once but repeatedly, and not equivocally but clearly stating that the partnership under the deed of April 18, 1957, is dissolved, the use of the expression "intended continuance" cannot override the clear words and convert the dissolution into a continuance or a change in the constitution of a firm. Again, Mr. P.I, for the revenue, relies on clause 3 of the operative part of this deed of January 31, 1958, pointing out the statement:.- " All that the undivided 1/4th share and interest of the retiring partner of and in the said business of the partnership hereby dissolved. . . " He argues that this again is clear statement that the parties -intended to dissolve the partnership under the deed dated April 18, 1957. This is not the end of the matter. Even clause 4 of the deed of January 31, 1958, used the expression "said partnership hereby dissolved." This is again repeated in clause 5 of this deed of January 18, 1958, whereby it is stated: "The said firm hereby dissolved."
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Lastly, Mr. P.I, for the revenue, relies on the proviso to clause 5 of this deed of January 31, 1958, where it is said :----- "Provided always and it is hereby agreed and declared by and between parties that the obligation to pay his share of income --tax, if any, in respect of the partnership business as also any other unforeseen liability in respect thereof shall remain with the retiring partners and the indemnity hereby given by the continuing partners will not apply thereof,"- On this, Mr. P.I argues that the retiring partner took the obligation to pay his share of the income- tax, thereby concluding that no question of registration of this firm could arise under section 26-A any more. No doubt, the Court in interpreting documents in this context has to do so reasonably. The fact is that the parties clearly used the word "dissolution", not once but repeatedly, in this document of January 31, 1958. The context appears to exclude the construction that it was a mere change in the constitu--petition or that it was only the retirement of one partner while the others continued the old firm. Sections 39 and 40 of the Partnership Act clearly provide that the dissolution of the partnership between all the partners of a firm is called a dissolu--petition of the firm and that a firm may be dissolved with the consent of all the partners. All the partners in this case by this deed of January 31, 1958, do clearly state that the firm of 1957 is dissolved. Under the Partnership Act, the dissolution is, there--fore, a dissolution of the firm of April 1957, and there is no escape from it. Mr. Sen, for the assessee, relied on the decision- of the Madras High Court in Tyresoles (India), Calcutta v. Commissioner of Income-tax ((1963) 49 I T R 515). The Madras High Court there expressed the view that to determining whether there was a dissolution or reconstitution of a firm, the terms used by the parties to describle the change is not important and the real intention of the parties 9s to be ascertained. As a principle of general application, no one can quarrel with that concept. Words used, however, in formal deeds, duly registered, have an importance in documents which should not be lightly brushed aside as meaningless, even though they may not be technically over-emphasized specially when such words appear in formal documents prepared by or in the presence of solicitors and pleaders, as they are in the present case before us. No doubt, the word "dissolution" was used in the Tyresoles (India) case and yet it was held there that there was not a dissolution in law or in fact but a change in the constitution of the firm. But then again the clauses in the partnership deed on which the decision in Tyresoles case turned are significantly and radically different from the clauses that we have to construe in the present reference before us. Two significant clauses in the partnership deed in Tyresoles (India) case are now to be noticed which distinguish completely that decision from the present case before us. In Tyresoles (India) case, clause 1 of the document in question was noticed by the Madras High Court as decisive because it recited that "the partnership is dissolved so far as the retiring partners are concerned." Therefore, Jagadisan, J., at page 521 of the report of the Tyresoles (India) case, observed as follows:-- "A full and complete dissolution of the partnership between all the partners would certainly have not been described in this manner if, in fact, such a dissolution was intended by the parties." This is exactly the difference between the Tyresoles case and the present case before us. In the present case, the firm under the instrument of partnership deed dated April 18, 1957, was unreservedly dissolved without using the expression that "it was only a dissolution in respect of the retiring partners". The second distinguishing clause in Tyresoles case was the provision "for the continuance of the business of the surviving partners and which enables the outgoing partners to a share of profits for as long a period of 8 years". Therefore, Jagadisan, J., at page 531, noticed this distinctive feature and observed as follows:-
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"No member of a dissolved firm can insist as a term of dissolution that the quondam partnership business should be carried on by the other members for his benefit also. Such a stipulation is wholly repugnant to dissolution." This again is a crucial difference between the partnership deed of Tyresoles's case and the present reference before us. Here it is only those called the continuing partners who form into a new partnership with augmented shares of 1/3rd each and with no benefit whatever to the retiring partner for the profits that would accrue after this new firm came into existence. Indeed, as pointed out by us, the clause in the deed of January 31, 1958, expressly made it clear that the business thereafter was to con--tinue only for the benefit of the continuing partners and not for the retiring partner. We are, therefore, unable to hold, on the interpretation of the specific clauses in the deeds dated April 18, 1957 and January 31, 1958, in the present reference before us that what has happened is only a retirement or a change in the constitution and not a dissolution. We hold that there has been on the specific and express terms and clauses in the deed a dissolution both in fact and in law. That is the only…
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