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Petitioner: THE COMMISSIONER OF INCOME-TAX, EAST PAKISTAN, DACCA VS Respondent: NOOR HUSSAINHonorable Justice A. R. CorneliusA. F. M. Mesbahuddin,Siddique Ahmed Chowdhury
1964 P T D 629
1964 P T D 629
[Supreme Court Pakistan]
Present: A. R. Cornelius, C. J., Fazle‑Akbar and Hamoodur Rahman, JJ
THE COMMISSIONER OF INCOME‑TAX, EAST PAKISTAN, DACCA‑Appellant
Versus
NOOR HUSSAIN‑Respondent
Civil Appeal No. 54‑D of 1963, decided on 22nd June 1964.
(On appeal from the judgment and order of the High Court of East Pakistan, Dacca, dated the 6th July 1962, in Reference Case No. 17 of 1960.)
Income‑tax Act (XI of 1922)-----S. 26‑A‑Registration of firm Words and phrases‑"Constituted by"‑Expression means, firm must have been "set up" or "established" "by" deed‑Such "setting up" must be in the relevant accounting year‑Registration effective from date of deed‑Registration to be refused for period antecedent to date of deed in the accounting year‑No question of liberal interpretation of S. 26‑A (by Fazle‑Akbar and Hamoodur Rahman, JJ., Cornelius, C. J., being of the view that registration should be extended to such antecedent period if firm was genuinely in existence during such period, determining date of commencement of firm being a binding duty of Income‑tax Officer)‑Circular of Central Board of Revenue, departing from provisions of statute‑"Course pursued by Board seems to be correct" (Fazle‑Akbar and Hamoodur Rahman, JJ., Cornelius, C. J., contra)‑Income‑tax Act (XI of 1922), Ss. 23 (5) (b) & 28‑Income‑tax Rules, 1922, rr. 2 to 6‑B.
The questions for determination in this appeal were (i) should the partnership be constituted by an instrument during the relevant accounting year; and (ii) if so, should it be constituted at or before the commencement of the relevant accounting year:
Held (per Fazle‑Akbar, J., Hamoodur Rahman, J., agreeing), that according to section 26 (1), Income‑tax Act, 1922, a firm applying for registration must be constituted by an instrument.
The word `constituted' must be read in its ordinary and popular acceptation to mean `set up' or `established' and therefore only such firm as is established or set up by an instru ment of partnership during the relevant accounting year will be entitled to the grant of registration.
In the Oxford English Dictionary, Volume II, at pages 875 and 876 the word `constitute' is said to mean inter alia `to set up' `establish', `found' (an institution etc. and also `to give legal or official form or shape to (an assembly etc.). Thus the word includes both the idea of creating and establishing and also the idea of giving a legal form to a partnership. The question then is which of these meanings should be adopted in this case.
To decide which meaning of the word `constituted' should be adopted it is necessary not only to consider the language of the section, but also the subject‑matter of the enactment and the object which the Legislature had in view. For this reason it becomes necessary to consider how subsection (1) of section 26‑A stood before the amendment and also the object which the Legislature had in view in making the said amendment. The expression in subsection (1) before amendment was `constituted under an instrument of partnership'.
This view (words "constituted by" as interpreted above) also finds support from the Act and the rules made thereunder.
(Sections 3, 23 (5) (a), 26 and various subsections of section 26‑A, as well as rules 2 to 6 referred to.)
The provisions of sections 26, 26‑A and the rules clearly indicate that the firm to be registered must be in existence during the accounting year. Further the expression `constituted as shown in the instrument of partnership' in the section as well as in the rules contemplates an instrument by which parties there to are agreeing in the present as to a course of business to be followed by them in future.
It will therefore, be difficult to hold that expression `constituted as shown in the instrument of partnership' contem plates instrument which does not bring into existence a partner ship, but which merely records the fact of its formation in the past by verbal agreement.
The expressions "as shown in the instrument of partnership" and "governing such distribution" [section 28 (2)] are indicative of the intention of the Legislature that the deed of partnership must be brought into existence in the accounting year.
If there was any doubt that was removed by substitution of the word `by' for the word `under' in subsection (1) of section 26‑A. For the above reasons the deed which creates the partnership must be executed during the relevant accounting year.
The rule (of strict construction of fiscal statute) has really no application here. Section 26‑A confers a privilege on the assessee‑firm. It provides that the firm seeking benefit under section 23 (5) (a) of the Act must conform to the provisions of section 26‑A of the Act.
Therefore, no question of liberal interpretation of section 26‑A which merely provides procedure for registration of an assessee‑firm arises.
Dwarkadas Khetan & Co. v. Commissioner of Income‑tax, Bombay (1956) 29 I T R 903; Padam Parshad Rattan Chand of Delhi v. Commissioner of Income‑tax, Delhi (1954) 25 I T R 335; R. C. Mitter & Sons v. Commissioner of Income‑tax 1955‑28 I T R 698; Commissioner of Income‑tax, East Bengal v. Messrs Rashid Motors, Chittagong P L D 1957 Dacca 45g and Commissioner of Income‑tax, South Zone v. Radio Hotel, Karachi P L h 1959 Kar. 539 considered.
Abdul Rahim and others v. Syed Abu Muhammad Barkat Ali Shah and others A I R 1928 P C 16; Messrs Mitter & Sons v. Commissioner of Income‑tax A 1 R 1949 S C 868 and Lt. Col. Nawabzada Muhammad Amir Khan v. The Controller of Estate Duty and others P L D 1961 S C 119 ref.
As regards the question whether the document should be in existence at or before the commencement of the accounting year, section 26‑A and the rules however, do not say that the deed of partnership must be in existence at the inception of the accounting year.
The Act and the rules do not impose any bar on the registration of a firm with effect from the date on which the deed of partnership is executed.
Section 26‑A confers the privileges on the firm to have it registered with a view to get the benefit of paying tax at a lower scale. I fail to see why it should be deprived of tile benefit of registration from the date of execution of the deed of partnership.
Considering the question with reference to the character of the legislation, scheme of the Act and the nature of the right conferred by section 26‑A, there was no reason to hold that regis tration could not be granted for part of the accounting year.
Regarding the Circular dated 26‑4‑1957 of the Central Board of Revenue recommending retrospective effect to be given to a partnership deed for more than six months, it was observed that the course pursued by the Board seems to be correct.
Per Cornelius, C. J.‑-----The expression "constituted by" is more specific and has a more direct connotation than the expression "constituted under." Section 26‑A requires the existence of an instrument by which the alleged partnership was constituted, and giving the words in subsection (1) their full value, it may indeed appear that a mere record of the earlier formation of a partnership will not meet the requirement.
In my view, if there is a departure from the law involved in the provision for relaxation contained in the Circular, then that Circular is to the extent of the deviation, invalid and ineffective, and power thereunder is illegally exercised. The impression of such a departure is conveyed by the following passage in the Circular, viz:
"On a strict interpretation of the law, a firm can be registered only from the date on which the partnership decd has been executor. Since this would create hardship, the Board is disposed to agree to the benefit of registration being allowed for the full previous year, provided of course the other conditions laid down for tile registration of the firms under section 26‑A are fulfilled."
The Board's views as to the interpretation of law do not have the force of law, and the expectation would be, particularly where a fiscal statute is involved which should be implemented with strict impartiality, that references to inclination towards relaxation or otherwise would have been avoided.
The question of law is clear, namely, whether section 26‑A (1) contemplates the recognition of the existence of a firm, for tax purposes, from a date earlier than that of the instrument by which it is constituted. For the purposes of the tax, the question of substance is the period of the existence of the firm, and I feel no doubt that the requirement of an instrument is in the nature of an evidentiary requisite, to exclude or minimise the possibility of sharp practice.
Where the partnership is to be construed out of two or more instruments, possibly of different date, the Income‑tax Officer is under a duty to determine the date of commencement not only by reference to these documents themselves, but also by examination of such other evidence as he may be able to secure. For the commencing date .may, in fact, be different from the date of any one of the instruments out of which the partnership is to be construed. Conceivably, it may be a date anterior to that of any of these instruments. At any rate, it becomes clear that the section does not have the effect of making the date of any instrument of the relevant kind, binding upon the' Income‑tax Officer, as the date of commencement of the partnership, and his duty remains fundamentally that of finding when in fact, the partnership came effectively into existence.
I am unable to draw support for this conclusion from anything contained in section 23 (5) (b) of the Act, which I construe as a provision to enable an Income‑tax Officer to assess tax, as on a registered firm, even though the firm to be assessed be unregistered, if the consequence would be to bring a larger return of tax to the exchequer. The discretion allowed to the Income‑tax Officer is controlled by this condition, and does not relate to the grant or otherwise of registration, for the procedure as for a registered firm may be applied even though, for good and sufficient reasons, registration may have been refused.
But the determination of the date of commencement of a partnership, to which registration has been accorded, is not, in my opinion, a matter of discretion with the Income‑tax Officer. In the view I take, the necessary conditions having been established, as in this case, the Income‑tax Officer was obliged, under the law to grant registration, that being a mode of relief provided to the subject.
As to what the date of commencement of the partnership was, the Income‑tax Officer was not bound to accept the date of the instrument for the purpose, but his duty would be to determine such date by reference also to evidence aliunde, viz., the date of commencement of joint working, the date on which a joint account was opened, the date or dates on which the separate accounts of the members were opened, and other such relevant circumstances.
A. F. M. Mesbahuddin Advocate Supreme Court instructed by Abdul Matin Khan Chowdhury Attorney for Appellant.
Siddique Ahmed Chowdhury Advocate High Court (Sirajul Haq Advocate Supreme Court with him) instructed by Zinnur Ahmad Attorney for Respondent.
Dates of hearing: 25th and 26th March 1964.
JUDGMENT
CORNELIUS, C. J.‑----I have had the advantage of reading the judgment proposed to be delivered by my learned brother, Fazle‑Akbar, J. I agree generally with his examination and analysis of the relevant law and the authorities. I am clear in my mind that the expression "constituted by" is more specific. and has a more direct connotation than the expression "constituted under." Section 26‑A requires the existence of a instrument by which the alleged partnership was constituted, and giving the words in subsection (1) their full value, it may indeed appear that a mere record of the earlier formation of partnership will not meet the requirement. Here, the instrument is of date the 10th May 1957, and clause (4) recites that the partnership "shall commence from the 1st April 1957." The business of the partnership was to operate a certain contract which had been secured on the 27th March 1957 by one of the partners, the appellant Noor Hussain, who had signed the agree ment of contract on the 30th March 1957. The term of the contract was from the 1st April 1957 to the 31st March 1958. The question at issue is whether registration of the firm, which had been claimed for the previous year 1957‑58 was rightly refused for the tax year 1958‑59. This was referred to the High Court, and was answered by three learned Judges in the following manners :‑
Chowdhury, C. J.
"the firm in question is a firm constituted by an instrument within the meaning of section 26‑A (1) of the Act, and registration should have been granted under the law, and under the Circular if not otherwise."
By "the Circular" is meant Central Board of Revenue Circular No. 8 of 1957 which has been reproduced in the judgment of my learned brother. Reference to its terms was made by the learned Chief Justice, for aid in interpreting the provisions of section 26‑A (1), and the following conclusion was reached, viz :‑
"The position now comes to this‑whether `constituted by an instrument' means only. the firm brought into existence by the document itself or the firm, in existence from before, the constitution of which has been subsequently embodied in the document, if other conditions are fulfilled, the firm is to get registration under the Circular as "the Board is disposed to agree to the benefit of registration being allowed for the full previous year in which the instrument of partnership is executed, etc." The question of benefit of registration for the full previous year, does not arise, if the existence of a firm front before the date of the document is not recognised. It will be in consonance with my reading of the section. If the section is read in the way I have interpreted, there will be no need of the Circular as the firms will be entitled to get registration independently of the circular. The circular has been issued because of hardship that will be created on strict interpretation of the section which means that the authority also is not in favour of strict, interpretation of the section against the assessee. The firm should have been registered under the circular if not otherwise."
Siddiky, J.
"In the present case, there would be no difficulty in my opinion for the Income‑tax Authority to assess this partnership firm with effect from 10th May 1957, after giving it registration from that date up to the end of the account period, that is, the 31st of March 1958 and to apportion the profit and loss to the partners according to their share and then to add up their other income with their income of partnership business, as the firm is not taxable but its partners are, in their individual status. The profits of the business from 1st April 1957 up to 9‑5‑57 will be that of Noor Hussain alone.
The Appellate Tribunal did not or could not say that by the deed of partnership of the 10th May 1957, the partnership did not come into existence at least on that date. Therefore, to the absence of any provision that a partnership cannot come into existence in the middle of account period or that it cannot be taxed for a part of the account period, I am of the view that '' the partnership firm can be registered for the period from 10th May 1957, to 31st March 1958, as a partnership firm if it fulfils all other conditions as laid down by section 26‑A and the Rules framed thereunder."
With reference to the Circular, Siddiky, J., observed as fol lows:‑
"Since the letter of reference and the question formulated by the Income‑tax Appellate Tribunal do not contain any reference to the above quoted Circular and also because the answer to the question does not depend on the Circular but on the interpretation of the Act, I refrain from commenting on the contents of the Circular. It is for the assessee to raise the issue of the Circular before the income‑tax Authorities and claim benefit thereunder."
The learned Judge's view clearly was that the law permitted registration only with effect from the date of the instrument, but it was open to the Income‑tax Authorities to enlarge the benefit, so as to put back the commencing date.
There being a slight difference between the views thus expressed, the case was referred to a third learned Judge, Murshed, J., (as he then was) who agreed with the Chief Justice. expressing himself in the following terms:‑
(i) "I will answer this question in the negative, that is, the registration has been wrongly refused,"
(ii) "The next question is: What should be the accounting year for which the firm can claim advantage of the benefit of registration under section 26‑A of the Act?
I will answer this question by saying that, this will depend on a finding as to the factual existence of the firm on an appraisal of the evidence produced in the case. It is not the "technical" but the "genuine" existence of the firm which is the crucial question. In this connection, reference may also be made to the terms of section 23 (5)(b) and the Circular No. 8 of 1957, issued by the Central Board of Revenue."
The plain intention is that the benefit is not restricted to the period commencing with the date of the instrument, but is to be granted from the date on which the firm in fact came into existence, and reliance was placed on the terms of the aforesaid Circular, as well as on section 23 (5)(b).
In the view of my learned brother Fazle‑Akbar, the benefit in law cannot commence from any earlier date than that of the instrument by which the firm is constituted. He has at the same time observed that "the course pursued by the Board" as appearing from Circular No. 8, "seems to be correct". In my view, if there is a departure from the law involved in the provision for relaxation contained in the Circular, then that Circular is to the extent of the deviation, invalid and ineffective, and power thereunder is illegally exercised. The impression of such a departure conveyed by the following passage in the Circular, viz :‑
"On a strict interpretation of the law, a firm can be registered only from the date on which the partnership deed has been executed. Since this would create hardship, the Board is A disposed to agree to the benefit of registration being allowed for the full previous year, provided of course, the other conditions laid down for the, registration of the firms under section 26‑A are fulfilled."
The Board's views as to the interpretation of law 7do not have the force of law, and the expectation would be, particularly where z fiscal statute is involved which should be implemented with strict impartiality, that references to inclination towards relaxation of otherwise would have been avoided. There having been a change made in the law, so that the creation of a firm was required to be by written instrument of known date, and it was no longer possible to refer such creation to some parent instrument, under which firms might claim to have been constituted on dates which might well become the subject of controversy, the question whether the law did not have room to accommodate instruments creating a firm or recording the creation of a firm, from a date anterior to that of the instrument itself, was one on which two views might well be held. To retain, in this respect, the less strict interpretation available from the earlier use of the words "constituted under", until corrected by some authoritative pronouncement by a Court, would therefore have been un exceptionable. On the other hand, to refer expressly to inclination or disposition as the guiding factor, while admitting the compulsive effect, ex facie, of the words newly used, is calculated to give an unfortunate impression, as to the extent of the Board's conception of its own power to evade the obligations of the law. There is, of course, no such power.
The question of law is clear, namely, whether section 26‑A (1) contemplates the recognition of the existence of a firm, for tax purposes, from a date earlier than that of the instrument by which it is constituted. For the purposes of the tax, the question of substance is the period of the existence of the firm, and I feel no doubt that the requirement of an instrument is in the nature of an evidentiary requisite, to exclude or minimise the possibility or sharp practice. There is, in section 26‑A itself, a provision which envisages a determination by the Income‑tax Officer of the date of commencement of a firm, where this is not at once apparent. I refer to subsection (3), reading as follows:‑
"Where the Income‑tax Officer is satisfied that the appli cation is complete and that there is, or was, as the case may be, a genuine firm in existence constituted as shown in the instrument, or instruments, of partnership executed in writing and in force in the relevant previous years, he may register the firm for the purposes of this Act, or where the firm has already been registered for the immediately preceding year, renew the registration."
Where the partnership is to be construed out of two or more instruments, possibly of different date, the Income‑tax Officer is under a duty to determine the date of commencement not only by reference to these documents themselves, but also by examination of such other evidence as he may be able to secure. For the commencing date may, in fact, be different from the date of any one of the instruments out of which the partnership is to be construed. Conceivably, it may be a date anterior to that of any of these instruments. At any rate, it becomes clear that the section does not have the effect of making the date of any instrument of the relevant kind, binding upon the Income‑tax# Officer, as the date of commencement of the partnership, and his duty remains fundamentally that of finding when in fact, the partnership came effectively into existence.
This is the view which has been expressed on the reference by Murshed, J., and I would express my agreement with it, while observing at the same time, with respect, that I am unable to draw support for this conclusion from anything contained in section 23 (5) (b) of the Act, which I construe as a provision to enable an Income‑tax Officer to assess tax, as on a registered firm, even though the firm to be assessed be unregistered, if the consequence would be to bring a larger return of tax to the exchequer. The discretion allowed to the Income‑tax Officer is controlled by this condition, and does not relate to the grant or otherwise of registration, for the procedure as for a registered firm may be applied even though, for good and sufficient reasons, registration may have been refused. But the determination of the date of commencement of a partnership, to which registration has been accorded, is not, in my opinion, a matter of discretion with the Income‑tax Officer. In the view I take, the necessary conditions having been established, as in this case, the Income‑tax Officer was obliged, under the law to grant registration, that being a mode of relief provided to the subject. As to what the date of commencement of the partnership was, the Income‑tax Officer was not bound to accept the date of the instrument for the purpose, but his duty would be to determine such date by reference also to evidence aliunde, viz., the date of commencement of joint working, the date on which a joint account was opened, the date or dates on which the separate accounts of the members were opened, and other such relevant circumstances.
With this clarification, I would dismiss the appeal, but I agree with my learned brother, Fazle‑Akbar that the parties should be left to bear their own costs.
FAZLE‑AKBAR, J.‑--This is an appeal from the judgment of the High Court of East Pakistan pronounced on a reference made to it by the Income‑tax Appellate Tribunal under section 66(1) of the Income‑tax Act (hereinafter referred to as `the Act').
The relevant facts are these:
On 30th March 1957, one Noor Hussain obtained a contract for supply of food and medicines to the Medical College Hospital and Mitford Hospital, Dacca. In order to execute this contract he took three partners namely, Abdul Malek, Abdul Hakim and Shahazada Mia. Though the said partnership firm known as Messrs Noor Hussain is said to have come into existence by verbal agreement on 10th April 1957, the deed of partnership was executed by the aforesaid four partners on 10th May 1957. On 30th October 1957 an application to register the firm under section 26‑A of the Income‑tax Act for the assessment year 1958‑59 was made to the Income‑tax Officer, but he rejected the application. Against his order an appeal was taken to the Appellate Assistant Commissioner of Income‑tax who reversed the order of the Income‑tax…
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