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Petitioner: MESSRS NOOR HOSSAIN-Applicant VS Respondent: COMMISSIONER OF INCOME-TAX, DACCA-----RespondentHonorable Justice CHOWDHURYS. A. Chowdhury,A. F. M. Mesbahuddin
1964 P T D 161
1964 P T D 161
[Dacca (Pakistan)]
Before Z H. Chowdhury, C. J., Siddiky and
Murshed, JJ
MESSRS NOOR HOSSAIN‑Applicant
Versus
COMMISSIONER OF INCOME‑TAX, DACCA-----Respondent
Income‑tax Reference No. 17 of 1960, decided on 28th August 1962.
(a) Income‑tax Act (XI of 1922), S. 26‑A (1) [as amended by Finance Act (I of 1957), read with C. B. R. Circular No. 8, dated 24th April 1957]‑Words "constituted" and "created"; "by" and "under"‑Meaning‑Asseasee firm coming into existence by oral agreement‑Instrument of partnership executed after expiry of relevant "previous year"‑Firm, held, entitled to registration for whole account year‑[Per Chowdhury, C. J., Murshed, J. and Siddiky, J. contra].
Per Chowdhury, C. J.‑The word `constitute' is derivative from the word `constitution' which means composition, the way fn which anything is given legal shape or official shape or form and the word `create' is derivative from 'creation'. Though the word `constitute' with different context may also mean `to set up', establish, found (an institution etc.) has got a reference more to the 'constitution' than to the 'creation.'
If a firm is constituted by an instrument, it is entitled to get registration for whole of the previous year, if it is not a firm so constituted in the sense that it is not created by the document (and that too from the date of the document), then also that question does not arise because the firm is not entitled to get registration at all as the creation by the document itself is sine qua non. The conclusion that reasonably follows, and it is more sensible, reasonable and more in consonance with the terms of the relevant provisions of the Income‑tax Act, 1922, that the words "constituted by an instrument" mean firm, the constitution of which has been reduced into writing, whether in existence from before or giving effect to the firm from the date of the document or some date earlier to or later than the date of the document. Whether created from the date of the document or from a date earlier to that date, constitution of the firm is there in the document within the meaning "by an instrument" in its plain and natural meaning.
Per Siddiky, J.‑---- The term 'constituted' has no doubt a wider meaning. But the use of it, in relation to a firm or such other body meant creation of it. The word 'by' connotes a different meaning than the word 'under'. The grammatical meaning of the word `under' is quite different from the grammatical meaning of the word `by'. The phrase 'constituted by' as used in section 26‑A (1), Income‑tax Act, 1922, in reference to firm must mean `created' by the partnership deed. The section, as it stands, therefore, means that a partnership firm that has been brought into being by a partnership deed only can claim registration under section 26‑A of the Act from the date of the deed, and a partnership firm that originated from verbal agree ment, the terms of which are incorporated in a deed at a subsequent date, cannot claim registration with retrospective effect. Therefore, in 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, the partnership can be registered from the date of the execu tion of the partnership deed.
Per Murshed, J.‑---- The words "constitute" and "create" are Interchangeable terminologies. It is thus clear that, if legal shape and definition are given to an existing partnership firm by a document, the said partnership firm is "created" with reference to that said document, in the sense that a previously non‑existent documentary form has been given to such a firm, for the first time. Therefore, if a documentary form or shape is given to a firm which had existed by oral agreement, it will be correct to say that the said firm was created by the document, meaning thereby that a documentary form or shape was given, for the first time, to the said firm.
All that section 26‑A, Income‑tax Act, 1922, requires for the purpose of registration is, that the Income‑tax Officer will, on an application for registration, look into the document and its terms and conditions and see whether from the terms and conditions of the said document a partnership can be spelt out. He will further see that the particulars as required by the said section as well as the rules governing the same have been complied with. Thereupon it would be incumbent upon him to register the firm and he cannot refuse such registration. The accounting period will have to be computed, apart from section 26‑A, in accordance with section 23 (5) and the other provisions of the Act, read along with the rules framed there-under.
Section 26‑A ‑would not rule out from its purview such partnership which had a prior existence by oral agreement, but the terms and conditions of which have been subsequently incorporated in documents. The section is concerned with the registration of a partnership which can be traced from a document. The accounting period will have to be determined with reference to the factual existence of the firm, having regard to the various provisions of the Act. Section 26‑A does not say that the instrument itself upon which the firm is sought to be registered must be in existence in the accounting year, notwithstanding the substitution of "by" for "under" in sub section (1) of section 26‑A.
R. C. Mitter & Sons v. Commissioner of Income‑tax, West Bengal A I R 1956 Cal. 303 ; R. v. Registrar of Joint Stock Companies (1891) 2 Q B 598 ; In re: Smith Davidson v. Myrtle (1896) 2 C D 590 ; R. C. Mitter & Sons v. Commissioner of Income‑tax Calcutta (1959) 36 I T R 194: Dwarkadas Khetan & Co. v. Commissioner of Income‑tax, Bombay A 1 R 1956 Bom. 321 ; Niadar Mal Jagadish Prashad v; Commissioner of Income‑tax, Simla (1959) 37 I T R 349; Commissioner of Income‑tux, PunJab N. W. F. P. Bc Bahawaipur v Maula Dad Muhammad Saeed P L D 1956 S C (Pak.) 3116; Commissioner of Income‑tax, E. Bengal v. Messrs Rashid Motors, Chittagong P L D 1957 Dacca 459; Commissioner of Income‑tax, South Zone v. Radio Hotel, Karachi and others P L D 1959 Kar. 539; Queen v. The Registrar of Joint Stock Companies, Ex parte Johnstone (1891) 2 Q B 598; Nokes v. Doncaster Amalgamated Collieries Ltd. 1940 A C 1014 and Mateson v. Hart (1854) 25 L J C P108 ref.
(b) Interpretation of Statutes‑Interpretation of one statute by analogy to interpretation of another‑Unsafe, particularly when two statutes not pari materia‑Proper way of construction is to give effect to all words of relevant provisions dispassionately‑Fiscal statute must be strictly construed in favour of assessee‑Golden rule : Statute must prima facie be given its ordinary meaning.
(c) Partnership Act (IX of 1932), S. 5‑Relation of partner ship arises from contract and not from status.
(d) Income‑tax Act (XI of 1922), S. 26‑A‑Registration of firm under S. 26‑A is for purpose of income‑tax‑Firm seeking registration must conform to provisions of Act.
(e) Income‑tax Act (XI of 1922), S. 26‑A‑Purpose.
The purpose of section 26‑A, Income‑tax Act, 1922, is not to compel the firms which had been brought into existence oral agreement and then reduced into writing to dissolve themselves and to go through the formality of creating themselves again by instruments of partnership. If the words are construed in that wider sense to mean `created by' we give effect to the intention of the Legislature of compelling a firm which had existed as a result of an oral agreement which was subsequently reduced into writing, to enter into document afresh to create it a new, before they, the partners, could get the benefit of section 23 (5) (a) which confers a privilege upon partners.
(f) Income‑tax Act (XI of 1922), Ss. 26‑A (3) & 28 Sections 26‑A (3) & 28 provides sufficient safeguards against fraud and evasion of tax.
S. A. Chowdhury for Applicant.
A. F. M. Mesbahuddin and A. M. Khan Chowdhury for Respondent.
S. R. Pal: Amicus Curiae.
JUDGMENT
CHOWDHURY, C. J.‑---- This reference under section 66 (1) of the Income‑tax Act, is at the instance of the assessee firm. The point of law formulated in the letter of reference is as follows:
Whether on the basis of the deed of partnership executed on the 10th May 1957, registration claimed for the previous year from 1st of April 1957 to 31st of March 1958, was rightly refused for the tax year 1958‑59?
2. A contract for supply of food, medicine, etc., to the Medical College Hospital and Mitford Hospital, Dacca, was secured on 27th March 1957, by one Noor Hossain. The agree ment was entered into with the Medical College, by him, on the 30th of March 1957. A deed of partnership consisting of four partners including Noor Hossain was executed on the 10th May 1957, stating that the partnership "shall commence from the 1st of April 1957". Besides the capitalist partner A. Malek, there are two other partners named, A. Hakim, brother of A. Malek and Shahzada.
3. The Appellate Tribunal, Dacca Bench, Dacca, held that the partnership is a genuine firm, "the partnership as a matter of fact cannot be questioned when it was actually brought into being, by execution of the instrument". But the Appellate Tribunal refused registration under section 26‑A (1) of the Income‑tax Act, on the ground that there was technically no genuine firm created by a deed "co‑extensive with the financial year from the 1st of April 1957 to 31st of March 1958" and observed:
As no firm can come into existence without a deed, the firm did not exist under the law not only during that part of the financial year from 1st April 1957 to 9th May 1957, but that the firm cannot be said to be co‑extensive with the financial year of the contract of the Medical College and Mitford Hospital which were to run from 1st April 1957 to 31st March 1958. In that view of the matter, there was technically no genuine firm existing during the whole of the year under assessment. It may be said that if a part of the period cannot be covered that part may be excluded and the part which is covered by the instrument should be given effect to. The form of certificate in rule 4 indicates that registration for a part of the year is not contemplated.
Hence the reference.
4. In coming to this conclusion, the Tribunal read "constituted by" in section 26‑A (1), substituted for "constituted under" by the Finance Act of 1957, with retrospective effect, as to mean created by or brought into being by an instrument, in contradistinction to a firm created by oral agreement, the terms and conditions of which subsequently reduced to writing i.e., the constitution of which has been reduced to writing subsequently and observed at page 11 of the Paper‑Book as follows:
The material question hinges upon the problem as to whether there was a partnership during the year of account co‑extensive with the contract from 1st April 1957 to 31st March 1958. Application for registration requires to be made under section 26‑A (1) on behalf of any firm constituted by an instrument of any partnership. Originally the words `constituted by' was not there. The word `constituted under' by the Finance Act of 1957, the words `constituted by' were substituted in place of `constituted under' with retrospective effect from April 1955. According to the changed words, there is no more scope for saying that a firm may come into being even without any instrument. In the present case the firm purports to have come into existence from 1st April 1957, which is one month 9 days before the execution of the deed partnership.
So, according to the Tribunal, no firm came into existence from the 1st April 1957.
5. Before the amendment introduced in the Pakistan Act, the section 26‑A of the Indian Act which was same as in Pakistan Act, came into consideration before the Calcutta High Court, where the words `constituted under' were interpreted to have been intended `created by' and the preposition `under' was held to be inappropriate to bring about that supposed intention. The amendment in the Pakistan Act in 1957 may or may not be, in consequence of that reading of the words `constituted under' in section 26‑A (1) of the Indian Income‑tax Act to mean `constituted by which again to mean `created by'. But can we interpret the section as it stands now in Pakistan Act, in the light of what has been said there while interpreting that section us it stood then
particularly when that interpretation was deprecated and disapproved by the Supreme Court of India?
6. The learned Chakravartty, C. J., of the Calcutta High Court in the case of R. C. Mitter & Sons v. Commissioner of Income‑tax, West Bengal (A I R 1956 Cal. 303), took the view that, that section 26‑A (1) contemplated firms `created by' or brought into existence by a deed in writing which governs the distribution of shares in the relevant accounting period, and, therefore, a deed executed at or before the commencement of such period ana remaining operative from the date of its execution up to the end of the period. In coming to this conclusion the learned Chief justice is of opinion that by the words `constituted under', what the authority really contemplated was a firm created by an instrument of partnership, and the preposition `under', therefore, was very inappropriate and observed:
The preposition `under' is obviously inappropriate if what is intended to be expressed is the idea that the deed or act concerned brought into existence a certain result by its own force.
It appears from above that the learned Chief Justice first pre supposed an intention of the authority and then to bring out that intention, he not only tried to read `by' for `under' in the section but also read `constituted' to mean `created' or brought into existence.
7. In support of his such reading of `by' for `under' in the section to bring about the supposed intention of the framer of the section, the learned Chief Justice referred, in his judgment, to two English cases, one is that of R. v. Registrar of Joint Stock Companies ((1891) 2 Q B 598), where section 180, English Companies Act, 1862, fell to be construed. Under that section, companies "constituted by law" were entitled to recognition for certain purposes, and the question was whether a company formed by mere agreement of parties under the provisions of certain Act could be a company constituted by law within the meaning of that section. The Court of appeal in that case held that a company formed by the mere consensus of private parties would be a company formed in accordance with law, but would not be a company constituted by law, because towards the constitution of such company no force of any law directly operated. According to their Lordships, what the expression `constituted by law' meant was that a company, truly described by that phrase, would be a company brought into existence by some legislative enactment, so that it would be the law itself which would constitute the company directly and by its own force.
8. The other case is that of In re: Smith Davidson v. Myrtle ((1896) 2 C D 590), which was concerned with a provision under which certain trustees had power to invest funds in companies "incorporated by Act of Parliament'". The trustees invested their funds in a company properly constituted under the Companies Act, and it was contended that since the Companies Act was an Act of Parliament and the company was constituted under or in accordance with the provisions of that Act, it was a company incorporated by an Act of Parliament. Once again, the Court held that such a company could not come under the description `incorporated by Act of Parliament', because of, the expression contemplated was a company directly incorporated under the provisions of some legislative enactment.
9. Section 180 of the English Companies Act that was under consideration in the English case referred to above provides (the section provides with certain exception which I need not refer and then it provides)
Every company existing at the time of the commencement of this Act, including any company registered under the Companies Act, consisting of seven or more members, and any company hereafter formed in pursuance of any Act of Parlia ment other than this Act, or of Letters Patent, or being a company engaged in working in mines within and subject to stannarise, or being otherwise duly constituted by law." (Vide pages 611‑612 of the report.)
Fry, L. J., [at page 612 of the report (1891) 2 Q B D 598] observed:
I am not prepared to hold that these words do include a mere private partnership, the shares in which are transferable without the consent of all the partners. I am inclined to think that the true meaning of these words is confined to a company which is constituted in some manner analogous to those with which section beings, namely, constituted by registration under some Act of Parliament, or in pursuance of an Act of Parlia ment, or under Letters Patent. I am inclined to think it must be some constitution ejus dem generis with those‑that those words refer to cases in which the constitution of the company does not arise merely from the consensual agreement of the parties, but in which that constitution is either determined or modified, or affected in some way by something other than mere consent‑by something which the law imposes. I say, like an Act of Parliament or Letters Patent ; and that the probable reason for introducing these words is that the Legislature contemplated that other modes of constituting companies might come into existence besides the modes then known . . . That is the inclination of my opinion with regard to the meaning of these words. But even if they have a larger significance, I am clearly of opinion that they are subject to one exception which is enough to determine this case; and that exception is this, that where a body is constituted merely for the purpose of obtaining incorporation of a company under the Act of 1862 it is not a company duly `constituted by law' within the meaning of these words.
I arrive at that conclusion for the same reasons which have been given by the Lord Justice.
10. Here it may be stated that Lindlay, L. J. in giving reasons to his conclusion referred to above, alluded to the general object of that Act 'in section 4 of that Act' as well as to the different part of the Act (see pp. 608‑609).
11. I have quoted the above quotation from the judgment of that English decision reported in (1891) 2 Q B D 598 to show under what significant provisions of that English Act and circum stances their Lordships had to come to the conclusion they have arrived at. Similar are the considerations in the other case also.
12. After observing the significance attached to the words `constituted by law or by an Act of Parliament' in the two English cases, the learned Chief Justice Chakravartty read not only the preposition 'by' in the section 26‑A for `under', which according to him is inappropriate, but also read `constituted' to mean `created' 'brought into existence' to bring about a supposed intention of the Legislature to mean that the section contemplates a partnership firm created by an instrument just as 'constituted by law or incorporated by an Act of Parliament' in the law of England was interpreted in the two English cases to mean ; as if there is no difference between the two expressions 'constituted by an instrument' and 'constituted by an Act of Parliament' read with reference to the context of the two expressions in the two Acts and observed (at page 305 of the report);
Even etymologically or textually, I do not think that the word 'constituted' when used in relation to a firm or such other body can mean anything but 'created' when the reference is to some deed or instrument to which the inception of the firm or other body is to be traced. Apart from the textual meaning, I consider it impossible to adopt a construction which would have no room for firms really created by an instrument as distinguished from firms created by verbal agreement which is subsequently embodied in a formal deed;
as if it was necessary under the section to trace out the inception of a firm to a document, as it was necessary in the two English cases or as if the word 'constituted' with reference to the context 'by an instrument' does not and cannot mean a firm, the constitution of which is embodied in a written document or by which a legal form is given to a firm.
13. This mode of reading something, namely, 'by', which is not in the section has been depricated and disapproved by some other High Courts of India also. In the case of R. C. Mitter & Sons v. Commissioner of Income‑tax, Calcutta ((1959) 36 I T R 194), the Supreme Court of India, while hearing the appeal from a decision of the Chief Justice Chakravartty, not only characterised it as reconstruction of the provisions of the statute and not construing them‑
In our opinion any attempt to reconstruct the provisions of the relevant section and the rules on the assumption that the intention of the Legislature was to limit the registration of firms to only those which have been created by an instrument of partnership is, with all respect, erroneous ;"
but also specifically pointed out at page 201 of the report that the word `constitute' also clearly means putting a thing in a legal shape, and observed (at page 201 of the report)
The Bench of Calcutta High Court in the case of R. C. Mittet & Sons v. Commissioner of Income‑tax, Calcutta, under examination now, was not, therefore, right in restricting the word `constitute' to mean only `to create' when clearly it could also mean putting a thing in a legal shape . . . . If we construe the word `constitute' in the larger sense, as indicated above, the difficulty in which the learned Chief Justice of the Calcutta High Court found himself, would be obviated, inas much as the section would take in cases both of firms coming into existence by virtue of written documents as also those which may have initially come into existence by oral agreement, but which had subsequently been constituted under written deed. The purpose of the Income‑tax Act, section 26‑A, is not to compel the firms which had been brought into existence by oral agreement to dissolve themselves and to go through the formality of constituting themselves by instrument of partner ship.
14. In the case of Dwarkadas Khetan & Co. v. Commissioner of Income‑tax, Bombay (A I R 1956 Bom. 321), Chagla, C. J., disapproved the construction of section 26‑A (1) by the Calcutta High Court in the case of R. C. Mitter & Sons. We get the following observations in his judgment.
It would be totally opposed to any plain construction of section 26‑A to suggest that only that firm can be registered which has come into existence by reason of the instrument of partnership.
What must not be overlooked is that what is sought to be registered under section 26‑A, is not the instrument of part nership, but the firm and the firm is seeking registration for the purpose of certain indulgence which is shown to a registered firm, and if the firm can satisfy the authorities that it was carrying on business during the accounting period then the fact that the partnership deed was executed subsequently can have no bearing on the question of registration.
The law does not require that a partnership deed should be in writing. The agreement of partnership may be oral, and the oral partnership agreement is as effective as a written partnership agreement. It is only for the purpose of section 26‑A and for the purpose of registration that an instru ment of partnership is necessary.
15. The same view has been taken by the Full Bench of the Punjab High Court in the case of Niadar Mal Jagadish Prashad v. Commissioner of Income‑tax, Simla ((1959) 37 I T R 349).
16. The Supreme Court of India in the case of R. C. Mitter & Sons, mentioned before (at page 201 of the report) observed;
The word `constituted' does not necessarily mean `created' or `set up' though it may mean that also. It also includes the idea of c10thing the agreement in a legal form. In the Oxford English Dictionary, Volume II at pages 875 and 876 the word `constitute' is said to mean inter alia `to set up' established, found (an institution, etc.), and also `to give legal or official form or shape to (an assembly etc.)'. Thus the ward in its wider significance would include both the idea of creating or establishing and the idea of giving a legal form to, a partner ship. The Bench of the Calcutta High Court in the case of R. C. Mitter & Sons v. Commissioner of Income‑tax under examination now, was not, therefore, right in restricting the word `constitute' to mean only `to create' when clearly it could also mean putting a thing in a legal shape.
17. I have quoted, even at the risk of repetition, the above quotation from the judgment of the Supreme Court of India not only…
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