Dulichand Lakshminarayan Vs. The
Commissioner of Income-Tax, Nagpur [1956] INSC 14 (17 February 1956)
DAS, SUDHI RANJAN BHAGWATI, NATWARLAL H.
AIYYAR, T.L. VENKATARAMA
CITATION: 1956 AIR 354 1956 SCR 154
ACT:
Indian income Tax Act,1922(Act XI of 1922),
s. 26-A and 2(6- B)-Indian Partnership Act, 1932 (Act IX of 1932), s. 4-
Registration of an unregistered firm constituted under a deed of
partnership-Five constituent parties-Three separate firms constituted under
three separate deeds of partnership- Signatures on deed by three different
persons on behalf of three firms respectively-Fourth party a Hindu undivided
family of which karta put the signature on deed-Fifth party an
individual-'Whether registration of such a firm competent under a.26-Aof Indian
Income Tax Act, 1922-Firm and partnership-Definitions of-Indian Partnership
Act, 1932, s. 4-Firm-Firm name-Partnership Partner-Meanings of-Partnership,
general concept of-Word "persons" ins. 4-Meaning of-Firm- Whether a
person and whether entitled to enter into partnership with another firm or
Hindu undivided family or individuals.
HEADNOTE:
In connection with the assessment for the
assessment year 1949-1950 of Dulichand Lakshminarayan an unregistered firm, an
application was made under s. 26-A of the Indian Income- Tax Act, 1922 before
Income-Tax Officer, Raigarh, for its registration as a firm constituted under a
Deed of Partnership dated 17th February, 1947. In the opening paragraph of the
deed the names and descriptions of the five parties thereto were set out. The
signatures of five per- sons were appended on behalf of five parties
respectively at the foot of the deed.
It was common ground that out of the five
constituent parties, D.L., J.H., and L.C., were separate firms constituted
under three separate deeds of partnership. The three different persons who
signed the deed on behalf of those three firms respectively were partners in
their respective firms. The fourth party M.B. was the name of a business
carried on by a Hindu undivided family of which the person who signed it was
the karta. The fifth party M.G. was an individual.
The Income-Tax Officer rejected the
application on the ground that Dulichand Lakshminarayan, constituted under the
deed dated 17th February 1947, consisted of three firms, one Hindu undivided
family business and one individual and that a firm or a Hindu undivided family
could not as such enter into a partnership with other firms or individual, 155
The assessee's appeal to the Appellate Assistant Commissioner was dismissed but
it succeeded before the Income Tax Appellate Tribunal who directed registration
of the firm. On the application of the Commissioner of Income Tax under s.
66(1) of the Income Tax Act the High Court held that on the facts of the case
the assessee was not entitled to registration under s. 26-A of the Income Tax
Act. On appeal to the Supreme Court:
Held that a perusal of the deed would
indicate beyond any doubt that the intention of the parties quite clearly was
that each of the three constituent firms and not the particular member of each
of the said three firms who had signed the deed for his respective firm was to
be the partner in the bigger firm constituted under this deed.
The contention that only the five individual
executant of the deed were the partners of the newly created firm was against
the tenor of the deed and was therefore without force.
Section 26-A of the Indian Income Tax Act
postulates the existence of a firm. The Act, however, does not indicate what a
firm signifies or how it is to be constituted.
Section 2(6-B) of the Act clearly provides,
inter alia, that "firm" and "partnership" have the same
meaning respectively as they have in the Indian Partnership Act, 1932.
Section 4 of the Indian Partnership Act
(which gives the definitions of "partnership", "partner",
"firm" and "firm name") clearly requires the presence of
three elements namely (1) that there must be an agreement entered into by two
or more persons: (2) that the agreement must be to share the profits of a
business; and (3) that the business must be carried on by all or any of those
persons acting for all.
The general concept of partnership according
to both systems of law, English as well as Indian, is that a firm is not an
entity or "person" in law but is merely an association of individuals
and a firm name is only a collective name of those individuals who constitute
the firm. In other words a firm name is merely an expression, only a
compendious mode of designating the persons who have agreed to carry on
business in partnership.
The word "persons" in s. 4 of the Indian
Partnership Act, which has replaced s. 239 of the Indian Contract Act,
contemplates only natural or artificial, i.e., legal persons and therefore a
firm is not a person and as such is not entitled to enter into a partnership
with another firm or Hindu undivided family or individual and there is no question
of registration of a partnership purporting to be one between three firms, a
Hindu undivided family business and an individual as a firm unders. 26-A of the
Act, as in the present case.
Jabalpur Ice Manufacturing Association v.
Commissioner of Income Tax, Madhya Pradesh and Bhopal ([1965] 27 I.T.R. 88),
Exparte Oorbett, In re Shad, ([1880] L.R. 14 Cb. 122, 126), Bhag- 156 wanji
Morarji Goculdas v. Alembic Chemical Works Co. Ltd.
and others (A.I.R. 1948 P.C. 100),
Commissioner of Income Tax, West Bengal v. A. W. Figgies & Co. and others
([1954] S.C.R. 171), and In re Jai Dayal Madan Gopal, ([1933] I.T.R.
186), referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 195 of 1955.
Appeal from the judgment and order dated the
30th day of December 1953 of the Nagpur High Court in Miscellaneous Civil Case
No. 35 of 1952.
Kirpa Ram Bajaj, Hardyal Hardy, with him) for
the appellant.
C. K. Daphtary, Solicitor-General of India
(G. N. Jo8hi and R. H. Dhebar, with him) for the respondent.
1956. February 17. The Judgment of the Court
was delivered by DAS C.J.-This is an appeal from the judgment and order passed
by a Bench of the Nagpur High Court on the 30th December, 1953 in Miscellaneous
Civil Case No. 35 of 1952, whereby the Bench answered in the negative the
question that had been referred to them by the Income Tax Appellate Tribunal,
Bombay under section 66(1) of the Indian Income Tax Act, 1922 (hereinafter
referred to as the Act).
In connection with the assessment for the
assessment year 1949/1950 of Dulichand Laxminarayan, an unregistered firm, an
application was made under section 26-A of the Act before the Income Tax
Officer, Raigarh for its registration as a firm constituted under a Deed of
Partnership dated the 17th February 1947. In the opening paragraph of that deed
the names and descriptions of the parties thereto were set out in the following
words:-- "We, Dulichand Laxminarayan Firm, through Malik (partner) Laxmi
Narayan son of Laljimal, Laxmi Narayan Chandulal Firm through Malik (partner)
Chandulal son of Nanakchand, Mulkhram Bholaram Firm through Malik (partner)
Tekchand son of Bholaram, Jeramdas Hiralal Firm through 157 Malik (partner)
Beharilal son of Asharam and Mangatrai Ganpatram through Malik (partner)
Ganpatram son of Mangatrai, Agarwar Bani, aged 50, 40, 28, 25, 45 residing at
Raigarh are partners in equal shares - with effect from 5-1- 1946 -in the firm
Dulichand Laxminarayan in whose name Importers' Licence of cloth is issued for
Raigarh State group Raigarh, Jaipur Saraigarh, Udeypur and Sakti State, on the
following terms and conditions........................
Then follow 15 clauses containing the terms
on which the partnership business was agreed to be done. At the foot of the
deed signatures were appended in the following order one below the other:-
Laxminarayan for Dulichand Laxmi Narayan.
Beharilal for Jairam Das Hiralal.
Ganpatram for Mangatrai Ganpatram.
Tekchand for Mukhram Bholaram.
Chandulal for Laxminarayan Chandulal.
It is common ground that out of the five
constituent parties Dulichand Laxminarayan, Jairamdas Hiralal and Laxminarayan
Chandulal are separate firms constituted under three separate deeds of
partnership and that Laxminarayan, Beharilal and Chandulal, who signed the deed
on behalf of those firms are partners in their respective firms. There is also
no dispute that Mukbram Bholaram is the name of a business carried on by a
Hindu undivided family of which Tekchand, who has signed for it, is the Karta.
It is also conceded that Mangatrai Ganpatrai is an individual. The application
for registration was signed by the same five individuals who bad signed the
deed of partnership.
Finding that Dulichand Laxminarayan
constituted under the aforesaid Deed of Partnership dated the 17th February
1947 consisted of three firms, one Hindu undivided family business and one
individual and taking the view that a firm or a Hindu undivided family could
not as such enter into a partnership with other firms or individuals, the
Income-Tax Officer held that the said Dulichand Laxminarayan could not be
registered as a firm under section 26-A and 21 158 accordingly on the 26th
February 1950 he rejected the application.
On appeal the Appellate Assistant
Commissioner held that when a firm entered into a partnership with another firm
the result in law was that all the partners of each of the smaller firms became
partners of the bigger firm and, therefore, there was no legal flaw in the
constitution of the bigger firm of Dulichand Laxminarayan. He, however, took
the view that, as the application for registration had not also been signed
personally by all the partners of those three smaller firms as required by
section 26-A of the Act and rule 2 of the Rules framed under section 59 of the
Act, there was no valid application for registration and consequently the firm
could not be registered. The result was that on the 5th August 1950 the
Appellate Assistant Commissioner dismissed the appeal.
The assessee appealed to the Income Tax
Appellate Tribunal.
The Tribunal agreed with the Appellate Assistant
Commissioner that a valid partnership had been brought into existence but
reversed the decision of the Appellate Assistant Commissioner on the ground
that as all the five executants of the deed had signed the application for
registration, the requirements of law had been satisfied.
Accordingly on the 12th June 1951 the
Tribunal directed registration of the firm.
On the application of the Commissioner of
Income Tax, Madhya Pradesh the Tribunal under section 66(1) of the Act drew up
a Statement of Case and submitted to the High Court of Nagpur the following
question of law, namely:- Whether on the facts of the Case the assessee is
entitled to registration under section 26-A of the Income Tax Act? The
reference came up for hearing before a Bench of the Nagpur High Court on the
30th December 1953. Following their own judgment delivered earlier in the day
in Miscellaneous Civil Case No. 189 of 1951, Jabalpur Ice Manufacturing
Association v. Commissioner of Income Tax, Madhya Pradesh and Bhopal(1), (1) [1955]
27 I.T.R. 88.
159 the High Court answered the referred
question in the negative. In view, however, of the importance of the question
involved in the reference the High Court, under section 66-A(2) of the Act,
gave a certificate of fitness for appeal to this Court. Hence the present
appeal.
Section 26-A of the Act under which the
application for registration was made provides as follows:- (1) Application may
be made to the Income-tax Officer on behalf of any firm, constituted under an
instrument of partnership 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 particulars and
shall be in such form, and be varied 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.
The relevant portion of rule 2 of the Rules
made under section 59 of 'the Act runs thus: - "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..............
At the hearing before us it was at one time
suggested that the partners of the firm consisted of the five individuals who
had signed the deed and each of them had an' equal share as specified therein
and that as all the said five partners had signed the application for
registration the requirements of section 26-A of the Act and rule 2 had been
fully complied with -and the assessee should have been registered as a firm for
the purposes of the Act. A perusal of the deed and par- 160 ticularly the
portions hereinbefore set out indicate beyond any doubt that the intention of
the parties quite clearly was that each of the three constituent firms and not
the particular member of each of the said three firms who had signed the deed
for his respective firm was to be the partner in the bigger firm constituted
under this deed. The contention that only the five individual executants of the
deed were the partners of the newly created firm runs counter to the apparent
tenor of the deed and cannot be entertained. Indeed learned counsel appearing
in support of this appeal did not press this point. The main argument before us
has centered round the larger question as to whether a firm as such can be a
partner in another firm.
Section 26-A of the Act quoted above
postulates the existence of a firm, for otherwise no question of its
registration can possibly arise. The Act, however, does not indicate what a
firm signifies or how it is to be constituted. Indeed section 2(6B) of the Act
clearly provides, inter alia, that "firm" and "partnership"
have the same meanings respectively as they have in the Indian Partnership
Act, 1932. We have, therefore,, to go to the last mentioned Act to ascertain
what a firm is and how it can be created.
Turning, then, to the Indian Partnership Act,
1932 we come to section 4 which defines 'partnership",
"partner", "firm" and "firm name" in the words
following:-
4. Definition of "Partnership",
"Partner", "firm" and "firm
name:-"Partnersbip" is the relation between persons who have agreed
to share the profits of a business carried on by all or any of them acting for
all.
Persons who have entered into partnership
with one another are called individually "partners" and collectively
"a firm", and the name under which their business is carried on is
called the "firm name".
This section clearly requires the presence of
three elements, namely (1) that there must be an agreement entered into by two
or more persons; (2) that the agreement must be to share the profits of a
business;
161 and (3) that the business must be carried
on by all or any of those persons acting for all. According to this definition
"persons" who have entered into partnership with one another are
collectively called a "firm" and the name under which their business
is carried on is called the "firm name". The first question that
arises is as to whether a firm as such can enter into an agreement with another
firm or individual. The answer to the question would depend on whether a firm
can be called a "person".
There is no definition of the word
"person" in the Partnership Act. The General Clauses
Act, 1897, however, by section 3 (42) provides that "person shall
include any company or association or body of individuals whether incorporated
or not". The firm is not a company but is certainly an association or body
of individuals. The argument is that applying that definition to the word
"persons" occurring in section 4, one can at once say that an
unincorporated association or body of persons, like a firm, can enter into a
partnership just as by the application of that definition to section 4 of the Indian Partnership Act
a company can become a partner in a firm.
The definitions given in section 3 of the General Clauses
Act, 1897,
however, apply when there is nothing repugnant in the subject or context. It is
difficult to say that there is anything repugnant in the context of section 4
itself which will exclude the application of that definition to the word
"Persons" occurring in section 4. Is there, however, anything
repugnant in the subject of partnership law, which will exclude the application
of that definition to section 4? As pointed out in Lindley on Partnership, llth
Edition, at page 153, merchants and lawyers have different notions respecting
the nature of a firm. Commercial men and accountants are apt to look upon a
firm in the light in which lawyers look upon a corporation, i.e., as a body
distinct from the members composing it. In other words merchants are used to
regard a firm, for purposes of business, as having a separate and independent
existence apart from its partners. In some systems of law this separate per-
162 sonality of a firm apart from its members has received full and formal
recognition, as, for instance, in Scotland. That is, however, not the English
Common Law conception of a firm. English Lawyers do not recognize a firm as an
entity, distinct from the members composing it. Our partnership law is based on
English Law and we have also adopted the notions of English lawyers as regards
a partnership firm.
Some of the mercantile usages relating to a
firm have, however, found their way into the law of partnership. Thus in
keeping accounts, merchants habitually show a firm as a debtor to each partner
for what he brings into the common stock and each partner is shown as a debtor
to the firm for all that he takes out of that stock. But under the English
Common Law, a firm, not being a legal entity, could not sue or be sued in the
firm name or sue or be sued by its own partner, for one cannot sue oneself.
Later on this rigid law of procedure, however, gave way to considerations of
commercial convenience and permitted a firm to sue or be sued in the firm name,
as if it were a corporate body (see Code of Civil Procedure, Order XXX
corresponding to rules of the English Supreme Court Order XLVIII-A). The law of
procedure has gone to the length of allowing a firm to sue or be sued by
another firm having some common partners or even to sue or be sued by one or
more of its own partners (see Order XXX, rule 9 of the Code of Civil
Procedure), as if the firm is an entity distinct from its partners. Again in
taking partnership accounts and in administering partnership assets, the law
has, to some extent, adopted the mercantile view and the liabilities of the
firm are regarded as the liabilities of the partners only in case they cannot
be met and discharged by the firm out of its assets. The creditors of the firm
are, in the first place, paid out of the partnership assets and if there is any
surplus then the share of each partner in such surplus is applied in payment of
his separate debts, if any, or paid to him. Conversely, separate property of a
partner is applied first in the payment of his separate debts and the surplus,
if any is utilised in meeting the 163 debts of the firm (see section 49 of the Indian Partnership
Act, 1932).
In the Indian Income Tax Act itself a firm is, by section 3, which is the
charging section, made a unit of assessment.
It is clear from the foregoing discussion
that the law, English as well as Indian, has, for some specific purposes, some
of which are referred to above, relaxed its rigid notions and extended a
limited per,personality of a firm.
Nvertheless, the general concept of
partnership, firmly established in both systems of Law, still is that a firm is
not an entity or "person" in law but is merely an association of
individuals and a firm name is only a collective name of those individuals who
constitute the firm. In other words, a firm name is merely an expression, only
a compendious mode of designating the persons who have agreed to carry on
business in partnership. According to the -principles of English jurisprudence,
which we have adopted for the purposes of determining legal rights "there
is no such thing as a firm known to the law" as was said by James, L. J.
in Ex parte Corbett, In re Shand(1) In these circumstances to import the
definition of the word "person" occurring in section 3(42) of the General Clauses
Act, 1897
into section 4 of the Indian Partnership
Act will, according to lawyers, English or Indian,, be totally repugnant to
the subject of partnership law as they know and understand it to be. It is in
this view of the matter that it has been consistently held in this country that
a firm as such is not entitled to enter into partnership with another firm or
individuals. It is not necessary to refer in detail to those decisions many of
which will be found cited in Jabalpur Ice Manufacturing Association v.
Commissioner of Income-tax, Madhya Pradesh(2) to which a reference has already
been made. We need only refer to the case of Bhagwanji Morarji Goculdas v.
Alembic Chemical Works Co. Ltd and others(3), where it has been laid down by
the Privy Council that Indian Law has not given legal personality to a firm
apart from the partners. This (1) [1880] L.R. 14 Ch. 122, 126. (2) [1955] 27
I.T.R. 88.
(3) A.I.R. 1948 P.C. 100.
164 view finds support from and is implicit
in the observations made by this Court in the Commissioner of Income-Tax, West
Bengal v. A. W. Figgies & Co. and others(1).
In Jai Dayal Madan Gopal(2), Sulaiman C. J.
followed the Calcutta decisions and was not prepared to dissent from the view
that the word "person" in section 239 of the Indian Contract Act, 1872
should not be interpreted so as to include a firm. The learned Chief Justice,
however, expressed the view that it was difficult to say that there was
anything in section 239 itself which made the application to that section of
the definition of "person" as given in General Clauses
Act in any way repugnant. The learned Chief Justice, however, does not
appear to have con- sidered whether there was anything repugnant in the subject
of partnership law, as it prevails in this country, which operates to exclude
the application of that deanition to the word "person" occurring in
section 239 of the Indian Contract Act.
In our opinion, the word "Persons" in section 4 of the Indian Partnership
Act, which has replaced section 239 of the Indian Contract
Act, contemplates only natural or artificial, i.e., legal persons and for
the reasons stated above, a firm is not a "person" and as such is not
entitled to enter into a partnership with another firm or Hindu undivided family
or individual. In this view of the matter there can arise no question of
registration of a partnership purporting to be one between three firms, a Hindu
undivided family business and an individual as a firm under section 26-A of the
Act.
The learned Advocate for the appellant then
urges that at any rate the partnership was not illegal, for there was no legal
impediment in the way of all the members of all the three constituent firms and
the karta of the Hindu undivided family and the individual entering into an
agreement and that, therefore, a valid partnership was constituted by the deed
of partnership under consideration. Assuming that this contention is possible
in view of the language which (1) [1954] S.C.R. 171; 1953 I.T.R. 405.
(2) [1983] I.T.R. 186.
165 has been used in this deed for describing
the parties, the position of the appellant will not improve, for in order to be
entitled to the benefit of registration under the Act, it will have to be shown
that the shares of all individual partners are specified in the deed and that
all the partners have personally signed the application for registration as
required by section 26-A of the Act read with Rule 2. The deed specifies that
each of the five constituent parties is entitled to an equal, i.e., 1/5 share
but it does not specify the individual shares of each of the partners of each
of the three smaller constituent firms. Further all the members of those three
firms have not signed the application for registration personally. It is said
that each of the three persons who executed the deed for the three smaller
firms must be regarded as having the authority of their co-partners in their
respective firms to sign the application for registration just as they had
their authority to execute the deed itself for them. Even if they had such
authority-as to which there is no evidence at all on the record-the section and
rule 2 require that each partner (not being minors) must sign personally. That
admittedly has not been done, and., therefore, the application was not in
proper form. In our judgment the answer given by the High Court to the question
is correct.
This appeal must, therefore, be dismissed
with costs.
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