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Petitioner: ADDITIONAL COMMISSIONER OF INCOME-TAX VS Respondent: HASSAN CHAND & SONS D.B.
Court Name: Rajasthan High Court Judge(s): V. K. Singhal, M. A. A. Khan Title: ADDITIONAL COMMISSIONER OF INCOME-TAX vs HASSAN CHAND & SONS D.B. Case No.: D.B. Civil Income-tax Reference No,1 of 1975 Date of Judgment:1996-04-22 Reported As: 1998 PTD 1628 Result: Order accordingly
JUDGMENT
JUDGMENT ' M.A.A. KHAN, J.---This joint reference under section 256(1) of the Income Tax Act, 1961 (for short, the Act of 1961"), has been made by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as "the Tribunal"), for the assessment years 1960-61 and 1961-62. The Tribunal has referred to this Court for its opinion of the following questions: ' Assessm ent year 1960-61: "(i) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the Income-tax Officer's order passed under section 184(4) was in fact an order under section 185(5) and was appealable? (ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the application for registration filed on December 31, 1959, for the assessment year 1960-61 was filed within the time allowed? (iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the partnership was valid?" ' Assessm ent year 1961-62: ' "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the payment made to Shri Abdul Razaq was a charge on the profits of the firm?" ' The facts relevant to the questions referred for the aforesaid two years and sufficient to dispose of this joint reference are these: ' During the accounting period relevant to the two assessment years, the assessee-firm was engaged in the business of exhibition of films in Ram Prakash Theatre, Jaipur. Originally, the firm was constituted of three partners, namely, Sarva Shri Noor Muhammad, Abdul Razaq, and Harnid
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Hussain. The accounting year of the firm was 31st December ending of each year. In March, 1953, Shri Muhammad, one of the three partners, died. The remaining two partners continued to carry on the same business under the same business name, but they did not enter into any new partnership nor did they file a registration application with the Income-tax Department. This position continued up to the assessm ent year 1959-60 and for all these years the assessee-firm was assessed in the status of an unregistered firm. ' Shri Noor Muhammad, the deceased partner, is stated to have left a will whereby he had, inter alia, bequeathed that: "(i) After my death out of the share of the movable and immovable properties belonging to me 1/3rd will be owned by Abdul Razaq, who will have full ownership right. (ii) After Abdul Razaq inherits 1/3rd share in my movable and immovable properties, the rest of 2/3rd share will be managed by Abdul Razaq. He will have the right to manage the properties according to the income. In case the income from the properties dwindles down and the sale or mortgage is needed then Abdul Razaq will have the right to sell the properties. (iii) Out of the remaining income of the 2/3rds share of the property Rs,50 per month will be paid to my wife, Musmmat Gulab, Rs,100 to my elder son, Wali Muhammad, for the maintenance of himself and his family, which will be: managed by Abdul Razaq.. My younger son, Abdul Haq., will also be entitled to get Rs,100 per month but since he is a vagabond he will get Rs,30 per month and Rs,70 will be paid to his wife and children." ' On January 1, 1959, Shri Abdul Razaq and Shri Hamid Hussain, the remaining two partners of the assessee-firm, executed a new partnership deed. The salient features of this partnership are as follows: "This deed of partnership is made on the first day of January, 1959, between Abdul Razaq, son of Hassan, aged 55 years, resident of Jaipur of the first part and Hamit Hussain, son of Chand, aged 56 years,. Resident of Jaipur, of the second part. ' Whereas Shri Abdul Razaq, Hamid Hussain and Noor Muhammad have for some time past been carrying on the business of film exhibition in partnership together at Jaipur under the name and Style of Messrs. Hasan Chand & Sons, Jaipur, duly registered with the Registrar of Firms. ' And whereas on the death of the partner Noor Muhammad, Abdul Razaq was appointed as guardian of his share under a will to hold the same on behalf of and for the heirs of the said Noor Muhammad. ' And whereas now it has been decided and agreed upon between the two continuing living partners to continue the business in the sank name and style on terms hereinafter contained. ' And whereas the property of the old partnership has been decided to be transferred as the assets of the partnership hereby constituted. ' And whereas the share capital of the deceased partner has been decided to be kept in the business, it has been decided to pay to the guardian of his property equal share in the profits of the new firm in accordance with section 37 of the Indian Partnership Act, 1932, to which the guardian has agreed by appending his signatures to this deed." ' By clauses (4) and (5) of the partnership deed, the division of profits and losses of the business was agreed to be made in the following manner: "The capital coming to the share of Shri Abdul Razaq as the guardian and representative of Noor Muhammad (deceased partner) shall continue to be in this firm and the guardian shall be entitled to 1/3rd share in profits in this account and shall not bear any losses. ' The profits and losses of the new partnership shall be divided and borne as under: (a) Out of total profits 1/3rd shall be paid to the guardian of Shri Noor Muhammad (deceased). (b) The remainder thereafter shall be divided between Shri Abdul Razaq and Hamid Hussain equally."
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' On December 31, 1959, the assessee-firm applied for registration for the assessment year 1960-61 as per section 26-A of the Indian Income-tax. Act, 1922 (for short, "the Act of 1922"), read with rule 2 of the Rules made thereunder. This application was duly accompanied by the instrument of partnership and copy thereof as well as the copy of the account showing the division of profit and loss of the firm between the partners. The return of income for this year was filed in September, 1962. The Income-tax Officer, however, refused to grant registration to the firm on the ground of limitation and non-genuine character of the firm. According to the Income-tax Officer, as per the provisions of section 26-A of the Act of 1922, the application for registration of the firm should have been made within a period of six months of the constitution of the firm whereas the same was made on the last day of the accounting period. ' Regarding the genuine character of the assessee-firm, the Income-tax Officer held that the firm was in fact constituted of three partners, the third partner being the legal heirs of Shri Noor Muhammad. Since Shri Noor Muhammad was having a debit balance of Rs,46,332 as on December 31, 1958, no profits were attributable to the use of his share in the properties of the firm so as to attract the provisions of section 37 of the Indian Partnership Act, 1932, to the facts of the present case. The Income-tax Officer, therefore, held that neither the application was signed by all the partners nor were the profits and losses distributed amongst the partners according to the shares specified in the instrument of partnership. The Income-tax Officer described the order passed by him as an order under the proviso to section 184(4) of the Income Tax Act, 1961, read with the proviso to the rule 2(c) of the Indian Income Tax Rules, 1922. ' It appears that the Income-tax. Officer had made assessment for this year ex parte under section 144 of the Act of 1961. On appeal, the said ex parte assessment was set aside by the learned Appellate Assistant Commissioner. The order purported to have been made by the Income-tax Officer under section 184(4), as aforesaid, was also set aside by the learned Appellate Assistant Commissioner with a direction to redo the same after allowing an opportunity to the assessee-firm to rectify the mistake, if any, in the application submitted under the old Act of 1922 and allowing him to submit such an application under the provisions of the new Act also. The Income-tax Officer, however, held that in his opinion, the question of giving an opportunity to the assessee-firm as per the direction of the learned Appellate Assistant Commissioner would arise only if the order was to be made under section 185 of the Act of 1961, but since he was making an order under section 184(4) no question of giving such opportunity arose and the Income-tax (Removal of Difficulties) Order, 1962, does not cover the issue. In the order made by the Income-tax Officer in the second round, the same ground for refusal of registration, which had found favour with him in his earlier order, were reiterated. The assessee-firm again approached the first appellate authority who dismissed its appeal as being not maintainable, vide his order, dated September 1, 1970, in Appeal No,16 of 1970-71. ' The application for grant of registration/renewal of registration for the assessment year 1961-62 was also rejected by the Income-tax Officer for almost the same reasons. An appeal against the refusal of grant of registration/renewal of registration was also filed and the learned Appellate Assistant Commissioner agreed with the Income-tax Officer that the firm was in fact constituted of three partners as against two shown in the registration application and the application for renewal of registration. In the opinion of the learned Appellate Assistant Commissioner, the applications did neither depict the real constitution of the firm nor the same had been signed by all the three partners. He held the view that the guardian of the heirs of the deceased partner constituted the third partner in the firm and, therefore, the provisions of section 37 of the Indian Partnership Act, 1932, did not apply to the case. ' Having lost its case before the Income-tax Officer and the Appellate Assistant Commissioner for both the years, the assessee-firm approached the Tribunal in second appeal. The two Members of
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the Tribunal constituting the Bench differed in their views on the issues involved in the appeals. The case was, therefore, referred to the Third Member under section 255(4) of the Act of 1961. The learned Third Member held that the Appellate Assistant Commissioner was not justified in rejecting the appeals of the assessee-firm with regard to the registration. He was of the view that registration being essentially a part of assessment, the provisions of the new Act would apply to the assessm ent proceedings as also to the proceedings pertaining to the registration of the assessee-firm. He held that the application filed by the assessee-firm on December 31, 1959, was required to be filed under the Act of 1961. He, accordingly, directed that the Income-tax Officer should give the assessee an opportunity to file an application in accordance with the requirements of the new rules under the Act of 1961. ' For the assessm ent year 1961-62, the learned Third Member opined that the continuation of the registration will have to be considered under section 184(7) of the Act of 1961 after the registration for the assessm ent year 1960-61 had been considered after giving the assessee-firm an opportunity to furnish a fresh application. ' With regard to the character of the assessee-firm as a genuine firm, the learned Third Member held that the partnership did not cease to be genuine merely because the partnership deed stated that it was decided to pay to the guardian an equal share in the profits of the new firm in accordance with section 37 of the Partnership Act. The learned Third Member pointed out that in order to safeguard the interest of the deceased Shri Noor Muhammad, there was nothing to stop the continuing partners from making a commitment which they considered to be reasonable and in conformity with requirements of section 37. In the opinion of the learned Third Member, the arrangements made by the two partners of the assessee-firm did not become unreal or artificial or invalid merely because the continuing partners and the guardian of the heirs of the deceased Noor Muhammad, made efforts to give effect to the provisions of section 37 of the Indian Partnership Act. ' Regarding the question as to whether payments made to the guardian of the heirs of the deceased Shri Noor Muhammad were deductible as a charge in arriving at the total income of the firm, the learned Third Member held that the guardian of the heirs did not become a partner in the firm and the payments made to him were in fact payments made to a person who was not a partner in the firm. The learned Third Member further pointed out that the deceased had a considerable share in the goodwill of the assessee-firm and that full accounts were never settled between the present two partners of the assessee-firm and the heirs of the deceased partner, Shri Noor Muhammad. However, he directed an enquiry into this aspect of the case and observed that if on enquiry it was found that accounts had been finally settled and the deceased had no positive interest in the assets of the firm, the payment claimed to have been made by the firm to the guardian would not be justified on commercial grounds. The learned Third Member, therefore, proposed to set aside the assessm ent for the assessment year 1961-62 with a direction to the Income-tax Officer to redo the same after considering the question of allowance of the payment after holding an enquiry. ' On receipt of the opinion of the learned Third Member, the Tribunal finally passed its order in the following manner: (i) The partnership could not be held to be not genuine merely because a charge on the profit has been provided for the estate of the late Noor Muhammad. The application for registration filed for the assessm ent year 1960-61 is also within time. The assessee should, however, be given an opportunity of filing a fresh application as prescribed under the Income Tax Act, 1961, and the rules framed thereunder. In order to dispose of the matter in accordance with law the order of the learned Appellate Assistant Commissioner dismissing the assessee's appeal, in liming, is set aside and the matter is restored to his file. Appeal No,3025 of 1970-71 is treated as allowed.
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(ii) The question of the continuation of registration for the assessment year 1961-62 should be considered after disposing of the question of grant of registration for the assessment year 1960-61, as directed in Appeal No, Income Tax Appeal 3025 of 1970-71. The assessee should be given an opportunity of filing the appropriate application, for this purpose, under the provisions of the Income Tax Act, 1961, and the rules framed thereunder. In order to pass an order in accordance with law, on this point, we set aside the orders of the Appellate Assistant Commissioner and restore the matter to his file to be disposed of afresh. Thus, Appeal No,13033 of 1966-67 is also treated as allowed. (iii) Though the provisions of section 37 of the Partnership Act are not strictly applicable to payments made by the assessee-firm to the estate of the deceased Noor Muhammad, such payments, to the extent to which they are made for the purposes of the business, have to be allowed in computing the total income of the firm. In order to find out the extent of such payments which will be justified, it will be necessary to find out whether Noor Muhammad had any interest in the property of the firm at the time of his death and, if so, the extent of such interest. It has to be seen whether such share of property belonging to Noor Muhammad has been used by the continuing partners in the business of the assessee-firm. It is also necessary to determine the proportion which such property bears to , the total property of the firm. Only that proportion of the profits of the firm will represent the reasonable payment to the estate of the late Noor Muhammad towards utilizing its property, for the purpose iii of the business of the assessee-firm. Such share of profits will represent a charge against the profits of the assessee-firm and the assessee will be entitled to deduct the same in determining its total income for purposes of assessment. ' In order to determine the above figures and to arrive at the proper deduction, if any, on that account, it is necessary to set aside the assessment for 1961-62 and to restore it to the file of the Income-tax officer to be redone, in accordance with law and on the basis of the above directions. Accordingly, that assessm ent is set aside. Appeal No,13032 of 1966-67 is also treated as allowed:" ' It is in the above background that this Court is required to answer the questions referred to it for its opinion for the two years under consideration. ' We have heard learned counsel for the parties at length and carefully gone through the material brought on record. ' We propose to answer the referred questions in the following manner: (I) Assessm ent year 1960-61: ' For this year, the Tribunal has referred three questions as reproduced above. We find it convenient to consider questions Nos.1 and 2 together as the relevant facts are interconnected. (2) The first question that arises for consideration is whether the application filed by the assessee- firm on December 31, 1959, for grant of registration for this year was in time. At the relevant time, the Act of 1922 was in force and the question of grant or refusal to grant registration to a firm could have been considered under section 23(4) and/or section 26-A of that Act. Section 22 obliged the Income-tax Officer to give a notice on or before the first day of May, in each year, requiring every person whose, total income during the previous year exceeded the maximum amount which is not chargeable to income-tax to furnish, within such period not being less than 60 days as may be specified in the notice, a return of his income during that year. The assessment proceedings were to be conducted as per the provisions of section 23 and in the course of proceedings under subsection (4), the Income-tax Officer was empowered to refuse to register a firm or cancel its registration if the firm was already registered. The procedure laid down in section 23(4) indicates that the question of grant or refusal of registration to firms could have been considered by the income-tax Officer in regard to the assessment proceedings. However, section 26-A of the Act of 1922 laid down the procedure for registration of firms. Such application was required to be filed in
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accordance with rule 2 of the Rules made under section 59 of the Act of 1922. Rule 2 of such rules provided as under: "2. Any firm constituted under an instrument of partnership specifying the individual shares of the partners may, under the provisions of section 26-A of the Indian Income-tax Act, 1922 (hereinafter in these rules referred to as the Act), register with the Income-tax Officer, the particulars contained in the said instrument on application made in this behalf. ' 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 dissolution and by the legal representative of any such partner who is deceased, and shall, for any year of assessm ent up to and including the assessment for the year ending on the 31st day of March, 1953, be made before the 28th February, 1953, and for any year of assessment subsequent thereto, be made--- (a) where the firm is not registered under the Indian Partnership Act, 1932 (IX of 1932), or where the deed of partnership is not registered under the Indian Registration Act, 1908 (XVI of 1908), and the application for registration is being made for the first time under the Act, (i) within a period of six months of the constitution of the firm or before the end of the 'previous year' of the firm, whichever is earlier, if the firm was constituted in that previous year, (ii) before the end of the previous year in any other case; (b) where the firm is registered under the Indian Partnership Act, 1932 (IX of 1932), or where the deed of partnership is registered under the Indian Registration Act, 1908 (XVI of 1908), before the end of the previous year of the firm, and (c) where the application is for renewal of registration under rule 6 for any year, before the 30th day of June, of that year: ' Provided that the Income-tax Officer may entertain an application made after the expiry of the time-limit specified in this rule, if he is satisfied that the firm was prevented by sufficient cause from making the application within the specified time." ' It may be appreciated that clause (a) of rule 2 provided that where a firm is not registered under the Indian Partnership Act, 1932, or where the deed of partnership is not registered under the Indian Registration Act, 1908, and the application for registration is being made for the first time under the Act, the application required to be filed (1) within a period ()Nix months of the constitution of the firm or before the end of the previous year of the firm whichever was earlier, if the firm was constituted in that previous year, or (2) before the end of the previous year in any other case. It is an undisputed fact that the assessee-firm had been doing its business of exhibition of films since much prior to March, 1953, when Shri Noor Muhammad, partner, had died. As stated by the Tribunal, the remaining two partners had continued to carry on the same business though they had not entered into a new partnership agreement nor had they filed any registration application with the Income-tax Department. That position continued right up to the assessment year 1959-60. It is, thus, clear that the assessee-firm had been in existence prior to the assessment year 1960-61 and, therefore, the provisions of sub-clause (ii) of clause (a) of rule 2 of the Rules, 1922, were applicable to the case of the assessee. The accounting year of the assessee-firm ended on December 31, 1959, and on that day the assessee-firm had filed an application for registration duly accompanied by the instrument of partnership and other relevant papers. ' The difficulty that seems to have arisen appears to have ensued from the fact that the return for this year was filed by the assessee in September, 1962. By that time, the Act of 1961 had already come into force with effect from April 1, 1962, and as per the provisions of section 297(2)(b) of the Act of 1961, the assessm ent was to be completed in accordance with the provisions of the Act of 1961. Section 297, as is relevant for our purpose provided as under:
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"297. (2)...Notwithstanding the repeal of the Indian Income-tax Act, 1922 (11 of 1922) (hereinafter referred to as "the repealed Act).... (b) where a return of income is filed after the commencement of this Act otherwise than in pursuance of a notice under section 34 of the repealed Act by any person for the assessment year ending on the 31st day of March, 1962, or any earlier year, the assessment of that person for that year shall be made in accordance with the procedure pacified in this Act." ' Clause (b) of subsection (2) of section 297 clearly mandates that where a return of income is filed after the commencement of the Act of 1961 otherwise than in pursuance of a notice under section 34 of the repealed Act by any person for the assessment year ending on the 31st day of March, 1962, or earlier year, the assessm ent of that person for that year shall be made in accordance with the procedure specified in the Act of 1961. The difficulty which appears to have arisen before the Income-tax Officer in the case of the assessee for this year seems to be that whereas an application for registration of the firm was filed as per the provisions contained in section 26-A of the Act of 1922 and rule 2 of the Rules framed under that Act, the return was filed after coming into force of the Act of 1961 and such return was to be processed as per the provisions of the Act of 1961. The Income-tax Officer appears to have completed the assessment as per the provisions of the Act of 1961 but dealt with the registration application as per the provisions of the Act of 1922. That was the permissible in law. It seems to us that the Central Government with a view to remove difficulties being faced by the Income-tax Officers in the matter of registration and refund proceedings and completion of assessments during the transitional period made the Income-tax (Removal of Difficulties) Order, 1962. Article 2 of such order provided that for the purposes of clauses (a)…
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