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Petitioner: COMMISSIONER OF INCOME-TAX VS Respondent: MESSRS SURRIDGE & BEECHENOHonorable Justice Muhammad Afzal CheemaS. A. Nusrat,Fazlur Rahman
1968 P T D 626
1968 P T D 626
[Karachi (Pakistan)]
Before Muhammad Gul and Muhammad Afzal Cheema, JJ
COMMISSIONER OF INCOME-TAX-Applicant
Versus
MESSRS SURRIDGE & BEECHENO-Respondents
Civil Reference No. 174 of 1964, decided on 30th April 1968.
(a) Income-tax Act (XI of 1922), S. 26-A-Analysis.
(b) Interpretation of statutes-Word "may"-Senses in which used. Ordinarily the word "may" is used in a permissive or an. enabling sense. But this is not universally true. There are cases in which it is used in the imperative sense. When statutes authorise persons to do acts for the benefit of others or for public good or the advancement of justice, the use of the, expression "may" has a compulsory force.
Maxwell on Interpretation of Statutes, Eleventh Edn., p. 235 and Craies on Statute Law ref.
(c) Income-tax Act (XI of 1922), S. 26-A and rules made thereunder-Word "may"--Imposes a duty on Income-tax Officer to register firm subject to fulfilment of prescribed conditions --Application for renewal of registration-Scope of enquiry limited Income-tax Officer, however, competent to refuse renewal of registra tion if, at such stage, he comes to, conclusion that constitution of firm is not in accordance with stipulation contained in construment of partnership-Renewal of registration ordinarily follows as a matter of course on fulfilment of requirements.
The use of the expression "may", the statutory provision contained in section 26-A both in regard to registration as also renewal of registration though seemingly giving a discretion to the Income-tax Officer, in fact, imposes a duty on him to register the firm, subject of course, to the fulfilment of the conditions laid down.
There is no conflict between the statutory provision and the one contained in the rules relating to renewal of registration and once the Income-tax Officer is satisfied as to the genuine existence of the firm in accordance with the stipulations contained in the deed of partnership on the basis of which registration was recorded earlier and the application is submitted in the prescribed manner being complete in all respects, registration should not be refused. Such a construction, is also agreeable to justice and good reason for it excludes the possibility of a capricious exercise of power leading to inconsistent orders.
Ordinarily it would not be competent for an Income-tax Officer to assail the validity of a firm already registered having been found to fulfil all the legal requirements of section 26-A and the relevant rules, and yet a situation might well arise when it might not remain a firm in existence as set out in the instru ment of partnership for which two essential pre-requisites must be satisfied; firstly, it should not be a bogus or a sham firm but should be a genuine one consisting of actual and real partners; and secondly, the rights and liabilities of its members should be in accordance with the stipulations contained in the instrument, there being no inconsistency between the position as it genuinely exists and as it has been shown to exist in the instrument. If, however, at a subsequent stage when renewal of registration is sought, the Income-tax Officer in spite of having been satisfied himself as to the genuineness of the firm comes to the conclusion that its constitution is not in accordance with the stipulations contained in the instrument of partnership, it would still be open to him to refuse registration. However, normally the scope of enquiry in the case of renewal would be compa ratively limited and once the Income-tax Officer has satisfied himself as to the above two requirements, renewal of registration would ordinarily follow as a matter of course.
Commissioner of Income-tax Punjab, N.W. F. P. and Bahawalpur v. Messrs Maula Dad-Muhammad Saeed of Sheikhu pura P L D 1956 S C 316; Commissioner of Income-tax, East Pakistan, Dacca v. Amin Match Works, Dacca P L D 1964 S C 377; P. A. Raju Chettiar and Bros. v. Commissioner of Income- tax, Madras 1949 I T R 17; Kannappa Naicker & Co. v. Com missioner of Income-tax (1937) 5 I T R 49; B. C. G. A. (Punjab) Ltd. v. Income-tax Commissioner A I R 1937 Lah. 338; Commis sioner of Income-tax, Burma v. Seth Mangoomal Lunidasingh 1939 I T R 7 and B. C. G. A. (Punjab) Ltd. v. Commissioner of Income-tax (Punjab) 1937 I T R 5 ref.
P. A. Raju Chettiar & Bros. v. Commissioner of Income-tax, Madras 1949 I T R 17 and Khimji Walji & Co. v. Commis sioner of Income-tax, Bihar and Orissa 1954 I T R 25 held not relevant.
(d) Natural justice-Application of principles-Matter before Court to be decided in first instance strictly in legal plane with reference to statutory provisions applicable to issue.
S. A. Nusrat for Applicant.
Fazlur Rahman with Ale Athar for Respondents.
Dates of hearing : 1st, 2nd and 3rd November 1967.
JUDGMENT
MUHAMMAD AFZAL CHEEMA, J.-This is a reference under section 66(1) of the Income-tax Act, 1922 (hereinafter called the Act) at the instance of Commissioner of Income-tax, Karachi by the Income-tax Appellate Tribunal, Karachi, in the following circumstances :-
The respondents Messrs Surridge and Beecheno, Karachi (hereinafter called the respondent-firm) are a firm of seven lawyers engaged since 1951 in legal profession with the principle place of business at Karachi. On the basis of an instrument of partnership dated the 26th of March 1957 (Exh. E) the respondent claimed registration under section 26-A of the Act, as assessee for the charge year 1958-59. The application for renewal of registration was allowed and for the subsequent two years 1959-60 and 1960-61 also. The respondents' application for renewal of registration in respect of assessment year 1961-62 on the basis of the same instru ment, however, was rejected by the Income-tax Officer vide order dated the 4th of April 1962. (Exh. A), on the ground that the manner and proportion in which the partners were to share profit and loss being indefinite and unascertainable, the instrument was invalid and therefore, there was no firm in existence within the meaning of section 26-A of the. Act. Clause 5 of the instrument upon which the order of the Income-tax Officer proceeded reads as follows:-
`Clause 5. The profits of the Firm in each year ending on the Thirtieth day of September shall be divided as fol lows:-
(1) Mr. Hassan shall receive ten percent.
(2) Mr. Surridge and Mr. Beecheno shall each receive such sums as before payment by him of taxes thereon in Pakistan would permit the remittance of sterling one thou sand seven hundred and fifty pounds ( 1,750) to the United Kingdom.
(3) After deduction of the share of Mr. Hassan, Mr. Surridge and Mr. Beecheno the balance of the profits of the Firm shall be divided between the remaining partners in the following shares:
(i) Mr. Williams and Mr. Gallaher shall each receive twenty-seven and one-half percent. with a minimum of rupees fifty five thousand (Rs. 55,000):
(ii) Mr. Spickernell and Mr. Bevan Petman shall each receive twenty-two and one-half percent."
In view of the fact that the deed made no provisions regarding allocation of profits in case they fell short of the guaranteed payments 4o Messrs Surridge and Beecheno, or for the allocation of losses, a clarification was sought by the Income-tax Officer from the respondent-firm who vide their letter dated 17th February 1962, submitted the following explanation :
"(1) If the profits fall short of the guaranteed amounts (the rupee equivalent of sterling 1,750 each to Mr. Surridge and to Mr. Beecheno and Rs. 55,000 each to Mr. Williams and Mr., Gallaher) Mr. Hassan first takes ten percent. ; Mr. Surride and Mr. Beecheno thereafter have equal claims on the balance for their fixed shares ; if such balance is insufficient to pay the fixed shares of Mr. Surridge and Mr. Beecheno they each re ceived half the balance and no other partner receives any thing ; if the balance exceeds the fixed shares of Mr. Surridge and Mr. Beecheno the excess is divisible between Mr. Williams (27 %) Mr. Gallaher (27 %), Mr. Spickernell (22 %) and Mr. Bevan Petman (22 %) with the proviso that if 27 % of the excess is less than Rs. 55,000 the shares of Mr. Williams and Mr. Gallaher are to be increased to that figure and those of Mr. Spickernell and Mr. Bevan Petman are to be reduced proportionately. If the total excess is less than Rs. 1,20,000 Mr. Williams and Mr. Gallaher each receive half of the excess and Mr. Spickernell and Mr. Bevan Petman receive nothing.
(2) The partnership deed does not specifically provides for losses and the matter is therefore governed by section 13(b) of the Partnership Act which provides that all partners shall contribute equally to the losses sustained by the firm."
The explanation was not found satisfactory by the Income-tax Officer as would be clear from the following observation in his order (Exh. A).
"The explanation makes it manifest that the allocation of profits in contingencies, more than one, is governed more by suppositions rather than contractual provisions. It is clear that clause 5 operates only if the profits are equalled or more than the guaranteed payments the clause becomes ineffective and for distribution of profits in such contingen cies there is no provision in the document. For a claim under section 26-A to be valid, apart from other things, it is one of the essential requisites that the allocation of profits must be definite and ascertainable and if there is any confusion in the matter of allocation the document and the partnership is not eligible for registration. In the instant case it is abundantly clear, and as a matter of fact it is so admitted by the firm itself that the deed on the face of it does not carry any clause to govern the allocation of profits if they fall short of the guaranteed payment."
Section 13(b) of the Partnership Act, which subject to the contract between the partners, provided for an equitable distribution of profits and share of losses between them was not held to be applicable to the respondent's case who in their aforesaid letter had also sought to press into Service this provision. This plea was also rejected on the ground that the basis of allocation of profits with guaranteed pay ments made the sharing of losses entirely impossible of which the proportion remained unascertainable.
2. Feeling aggrieved by the order of the Income-tax Officer the respondent-firm preferred two direct appeals before the Income-tax Tribunal, one challenging the legality of the order of refusal to renew registration under section 26-A and the other, being consequential in nature, was directed against the assessment itself. On behalf of the respondent-firm three contentions were raised before the Tribunal :-
(i) Firstly, that the provisions relating to sharing of profits as contained in the partnership deed fulfilled the requirement of section 26-A of the Act, qualifying the firm for registration ;
(ii) secondly, that unlike an application for original regis tration, the scope of an inquiry for the purposes of renewal of registration was rather limited and that once the Income-tax Officer was satisfied that there had been no change in the constitution of the firm as originally registered, he was bound to grant renewal of its registration ; and
(iii) thirdly, that even on principles of natural justice the issue of registration and renewal having been decided earlier, could not be re-opened unless fresh facts were revealed justifying a departure from the previous treatment.
3. The learned Tribunal while declining to give a definite finding on the first contention held with regard to the second contention that the existence of terms in the instrument of partnership as to guaranteed payments to some shareholders and the absence of a provision as to the mode of sharing losses did not detract from the validity of the document. In this regard the following lines from Aggarwala's Partner ship Act, Second Edition, were referred to with approval:
"It is not essential to constitute a partnership that the partners should agree to share the losses. The element of sharing losses may be regarded as consequential upon the sharing of profits, as a firm may be created in which losses are not con templated or provided for by the sanguine partners."
The finding given by the learned Tribunal on the second contention, however, clinched the issue. It was held that an Income-tax Officer having once chosen to grant registration to a firm for a particular year, the scope of inquiry for the purposes of grant of renewal of licence for the succeeding year or years became very much limited, and that once the Income-tax Officer was satisfied that there was a genuine firm in existence and its constitution and individual shares of partners had remained unchanged, the Income-tax Officer was not justified in refusing renewal of registration. This finding was sought to be based on construction of section 26-A read with relevant rules 6 and 6-A which were reproduced in the appellate order. Reliance was also placed in this regard on principles of natural justice with a finding in the affirmative an the third contention.
4. Dissatisfied with this order, the learned Income-tax Commissioner made an application before the Tribunal under section 66(1) of the Act praying for a reference to be made to the High Court on the following two questions:
"(1) Whether the Tribunal was justified in holding that the Income-tax Officer is not empowered under section 26-A of the Income-tax Act and the Rules made thereunder to make detailed enquiries at the time of granting renewal of registration to a firm?
(2) Whether there is a proper specification of shares in the instrument of partnership as contemplated by section 26-A of the Income-tax Act?"
On a concession made before the Tribunal that the second question did not strictly speaking arise in the case, the Tribunal made a reference to this Court after reformulating the question of law as below :-
"Whether, in the facts and circumstances of the case and for the reasons stated in the appellate order, the Tribunal was right in according renewal of registration to the respondent-firm for the charge year 1961-62?"
5. Learned counsel for the Commissioner raised the following contentions before us :-
(1) That the reference as framed by the Tribunal was wide enough to cover both the question of validity of the partnership and also of the renewal of the registration ;
(2) that in the absence of any specification of shares of losses in the instrument, the partnership though valid under the Partnership Act, nevertheless remained invalid under section 22-A of the Income-tax Act for the purposes of` registration, and that besides the inapplicability of section 13(b) the requirement of rule 6(3) of the relevant rules could not be satisfied either ;
(3) that' the expression "or was in existence" as occurring in rule 6(a) clearly indicated that the scope of inquiry at the time of fresh renewal was wide enough to warrant a fresh inquiry ; and
(4) that the principles of natural justice could not be so construed as to frustrate an express requirement of law.
6. On the contrary the learned counsel for the respondent firm raised the following contentions :
(1) That the reference as framed by the Tribunal was confined only to the question of the renewal of registration and as such the question of the validity of the partnership for .the relevant purpose being outside the scope of reference, this Court was not competent to go into that ;
(2) that even otherwise, the genuineness of the firm had not been doubted at any stage of the proceedings which; fulfilled all the legal requirements contained in section 4 of the Partnership Act ; and
(3) that the limited scope .of inquiry at the time of re newal of registration being confined only to the ascertainment of changes in its constitution and shares of the partners.; could be clearly spelt out from section 26-A of the Act read with the relevant rules.
7. We now proceed to examine the merits of the respec tive contentions raised by both sides. It was strenuously argued by the learned counsel for the Income-tax Commissioner that the reference as formulated made it competent for this. Court to examine the question of the validity of the partner ship itself. A distinction was sought to be maintained between the validity of a partnership under the Partnership Act which could yet be invalidated for purposes of registration under section 26-A of the Income-tax Act for reasons of non compliance of the provisions contained therein. It was also argued that the latter, provisions laid down different and more rigorous tests to justify registration of a firm, the over-riding condition being the specification of shares, and that the provision contained in section 13(b) of the Partnership Act was not applicable to the case, inasmuch as the liability for contribution towards losses sustained by the firm was made subject to the stipulations contained in the contract and since two of the partners had already retired, they could not be saddled with the liability for the losses and who, in fact were to be paid not out of actual profits but actually were to be remunerated for lending their names to the respondent firm. We are clearly of the view that the contention can not prevail, for more than one reason. In the first instance the point relating to the validity of the partnership was admittedly never raised before the learned Tribunal and a concession was made in this regard before the Tribunal by the learned counsel appearing for the Commissioner .as clearly mentioned in paragraph 9 of the statement of the case which reads as follows :-
"It is conceded by both the parties that the second question does not arise out of the Tribunal's order inasmuch as we specifically refrained from returning an answer to the ques tion raised by the Department. As will appear from the order of the Tribunal, we have decided the issue on different grounds."
The second question as reproduced earlier related to the proper specification of shares in the instrument of Partnership as contemplated by section 26-A of the Income-tax Act. Tire aforesaid concession becomes further clear from paragraph 8 of the Tribunal's order which reads as follows :-
"For the reasons set out above we think that the order refusing renewal of registration in present case cannot be sustained. Since the genuineness, of the firm has not been doubted and inasmuch as the constitution of the firm and the individual shares of the partners have remained unch4ng ed, the Income-tax Officer is directed to accord renewal of registration for the year under review".
Even otherwise it was open to the learned Income-tax Commissioner to apply the High Court under section 66(2) of the Income-tax Act if he were dissatisfied with the Tribunal's statement of the case, which remedy clearly was not invoked Thus even if from the reference as framed, the question of the validity of the firm could be legitimately held to be open to examination, this Court would be reluctant to permit the agitation for the first time at such a late stage. Even otherwise it appears to us that the entire controversy centres round the question of the renewal of registration on which the arguments mainly proceeded before the learned Tribunal, and as such notwithstanding the use of general, terms in which the reference is couched particularly the expression "in the facts and circumstances of the case and for the reasons stated in the Appellate Order" from which the re-opening of the question of the validity of the partner ship might possibly be spelt out, we would decline to go into that question. Thus the precise question which falls for determination is that of the scope of enquiry for the purposes of renewal of registration of a firm under section 26-A of the Income-tax Act. To put it differently, the question is whether the enquiry at the renewal of registration of a firm has got to be as elaborate as initially or whether, once the Income-tax Officer is satisfied as to the genuineness of the firm with no change in its partners' shares and constitution, a renewal of registration must follow 'as a matter of course? In order to appreciate the correct legal position in this regard it would be necessary to, examine the statutory provi sions contained in section 26-A of the Act as well as the relevant rules. Section 26-A reads as follows :-
"26-A. Procedure in registration of firms:-
(1) Application may be made to the Income-tax Officer on behalf of any firm constituted by an instrument of partner ship 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 or super tax.
(2) The application shall be made by such person or persons, and at such times and shall contain such particu lars and shall be in such form and be verified in such manner, as may be prescribed ; and it shall be dealt with by the Income-tax Officer in such manner as may be prescribed.
(3) Where the Income-tax Officer is satisfied that the application 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 in force in the relevant previous year, he may register the firm for the purposes of this Act, or where the firm has already been registered for immediately preceding year, renew the registration.
(4) If after an order has been passed under subsection (3), the Income-tax Officer is satisfied that such order was passed without there being 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 year, he may cancel the registration
Provided that the registration of the firm shall not be cancelled until fourteen days have elapsed from the issue of a notice by the Income-tax Officer to the firm intimat ing his intention to cancel its registration."
Subsections (3) and (4) of section 26-A were added by the Finance Act of 1956. Subsection (4) was incorporated in consequence of the deletion of rule 6-B which empowered the Income-tax Officer to cancel the registration of a firm which was not found to be genuinely constituted.
8. On its analysis, section 26-A of the Income-tax Act, yields the following results :
(1) For the purposes of registration or renewal of regis tration, an application has to be made to the Income-tax Officer ;
(2) Such an application may be made on behalf of any firm, there being no exception or bar against any particular kind of firm;
(3) the firm should be constituted by an instrument of partnership executed in writing ;
(4) the instrument should specify individual shares of the partners;
(5) the application should be made in the prescribed mode and manner containing all the requisite particulars in full;
(6) the Income-tax Officer should be satisfied
(i) that the application is complete in all respects ;
(ii) that the firm is or was at the relevant time a genuine firm in existence and not a bogus and fictitious entity ;
(iii) that its constitution is or was at the relevant time in accordance with the stipulations contained in the instrument ;
(7) if the Income-tax Officer is satisfied on, the above points he may register the firm ;
(8) if the firm has already been registered, the Income-tax officer may renew the registration.
The application has to be submitted in accordance with the manner prescribed in the Rules framed under section 26-A of the Act, rules 3 to 7 which are relevant lay down the procedure for making an application for registration .are reproduced below :-
"3. (1) Any firm constituted by an instrument of part nership specifying the individual shares of the partners may make an application for registration for purposes of section 26-A. Such application shall be signed by all the partners (not being minors) personally, or, in the case of a dissolved firm, by all persons (not being minors), who were partners in the firm immediately before its dissolution and by the legal representative of any partner, who is deceased.
(2) The application referred to in sub-rule (1) shall be made before the end of the previous year:
Provided that where such application is made for the first time and the firm is not registered under the Partnership Act, 1932 (XI of 1932), or where the deed of partnership is not registered under the Registration Act, 1908 (XVI of 1908), it shall be made within a period of six months of the constitution .of the firm, or before the end of the, previous year in which the firm was constituted, whichever is earlier:
Provided further that the Income-tax Officer may entertain an application after the expiry of the time-limit specified in this rule if he is satisfied that…
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