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Report No. 12

Chapter XVI

Special Provisions Applicable to firms

Notes to clause 189

Provisions relating to firms have been brought together in this Chapter under the following groups:-

(1) Assessment.

(2) Registration.

(3) Other provisions.

Sub-clause (1).- Existing section 23(5)(a) provides that the total income of each partner, "including therein his share" etc., shall be assessed and the sum payable by him on the basis of such assessment determined. Since the scheme of assessment in the case of a registered firm is, that the partner is himself assessed on his share, these words have been replaced in the draft by the words "the share shall be included in his total income" etc., which seem to be more appropriate.

Sub-clause (2).- Does not need any comments. Though this provision is in a sense repetition of existing section 16(1)(b) Proviso, it has been allowed to stay for the sake of convenience of reference.

Sub-clause (3).- The existing words "his share shall be assessed on the firm" have been replaced in the draft by the words "tax on his share shall be assessed on the firm", which are more appropriate.

Section 23(5)(a)(i) has been retained in the draft in the existing form; but it is recommended that it may be deleted.

The Finance Act, 1956, introduced this new provision making a firm liable to income-tax on its income at a special rate provided by it. The provision for including the shares of the profits of the firm within the total income of a partner in his individual assessment and levying tax upon it was also retained. This implies, that the share of the partners in the profits of the firm suffers tax twice-once in the hands of the firm and again in his own hands. This is really a double taxation of the same income though at different rates. [The same Finance Act, 1956, introduced a new provision [section 14(2) (aa)] under which the proportionate income-tax paid by the firm on the share of income included in the partners' share is deducted. It means that the partner is not liable to pay income-tax on the proportionate tax; but it does not obviate the difficulty of double taxation].

Note.- It is understood that in the year 1957-58, there were 6651 registered firms which were assessed to a tax of 1 crore 57 lakhs on a total income of about 51 crores.)

Section 23(5)(a), 3rd Proviso, has been omitted, as it is in substance the same as the second proviso. It was introduced for the purpose of enabling persons going to Pakistan to be treated as non-residents. The necessity for any such special provision does not remain now.

Notes to clause 190

Paragraph (a).-Existing section 23(5)(b) does not directly state the position that in the case of an unregistered firm the tax payable by the firm itself on the basis of his total income is to be determined. This is the primary mode of assessment of an unregistered firm, and has, therefore, in the draft, been stated at the opening of the clause in paragraph a). (The existing words "instead of determining " are thus covered by this paragraph).

Paragraph (b).-The drafting changes that have been made are intended to state the position in more simple manner.

Notes to clause 191


The provisions relating to procedure for registration of firms, as contained in existing section 26A, are sketchy, because many of the important provisions are at present contained in the rules. It seems desirable to collect together some of the provisions at present contained in the rules, and the draft clause has therefore, been made more elaborate.

Sub-clause (1).- The existing words "constituted under" an instrument of partnership are found in practice to lead to unnecessary controversy based on sharp distinctions.1 They have, therefore, been replaced by the words "evidenced by".

1. See the Case cited in Kanga and Palkhiwala's Commentary, 1958 Edn., p. 650.

The existing words "specifying the individual shares of the partners" have been construed too technically sometimes, so that applications for registration are refused if the shares are not given in the partnership deed specifically in so many words, or if the partnership deed is not self-contained and has to be read with the deeds relating to subsidiary firms in which the partners are interested. It is felt that registration should not be refused in such cases merely on the ground of the existence of such flaws in the partnership deed. Necessary drafting changes have been made to achieve this object.

Sub-clause (2).- It has been made clear that the application for registration may be made even after the dissolution of the firm.

Sub-clause (3).- The persons who should join in an application for registration have been mentioned exhaustively in this sub-clause, which incorporates the second paragraph of rule 5 of the Income-tax Rules.

Sub-clause (4).- Under the existing provisions (rule 2 of the Income-tax Rules), the first application for registration has to be made within 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. Where a firm is already registered under the Partnership Act or the deed is registered under the Indian Registration Act, the application has to be made before the end of the previous year.

It has been suggested that the 30th day of June of the assessment year should be adopted as the last date by which an application for first registration should be made. But the adoption of this time-limit would enable the assessee to get registered an antedated partnership. It seems desirable that, irrespective of the fact whether the deed is or is not registered under one or other of the laws referred to above, the application should in all cases be made before the expiry of the previous year. The reason is, that the assessee is claiming an advantage under the Act in respect of profits earned in the previous year on the basis that during that year the firm came into existence.

If that is so, he must be able to make good that plea by a proper application made before the end of the previous year. If any more time is given, there will be ample scope for the assessee to make up his mind whether to get the firm registered or not and for that end to invent a partnership antedating the constitution for the entire period and bringing into existence a document evidencing such partnership.

The draft sub-clause under discussion gives effect to this proposal. A proviso has been added authorising the Income-tax Officer to entertain an application made after the end of the previous year in proper cases.

Sub-clause (5).- The provision contained at present in the rules, requiring the application to be accompanied by the instrument evidencing the partnership, has been incorporated in this sub-clause, and it has also been made clear that in fit cases a certified copy of the instrument may be accepted in lieu of the original.

Sub-clause (6).- The provisions contained in existing rule 3 of the Income-tax Rules and Form I below that rule, relating to particulars to be given in an application for registration, have been incorporated here, with changes intended to secure precision.

Sub-clause (7).- Under existing section 26A(2) an application for registration has to be made "at such times" as may be prescribed. The use of the word "times" suggests a necessity of renewal of registration every year, and under rule 6 of the Income-tax Rules, a fresh application has to be made for any subsequent year. This requirement seems to be .rather too hard, particularly in cases where there were no changes in the constitution of the firm after its first registration. So far as renewal is concerned it should suffice1 if a declaration is made by the firm (along with the return of income for the assessment year concerned) to the effect that no change in the constitution of the firm or the shares of its partners has taken place in the previous year; where such a change has taken placer the firm will, of course, be required to apply for fresh registration vide sub-clause (8).

1. Cf. Report of the Taxation Enquiry Commission, (1953-54), Vol. II. Ch. VII, para. 65, p. 209.

Sub-clause (8).- See notes above under sub-clause (7).

Notes to clause 192

Sub-clause (1).- The procedure to be followed by the Income-tax Officer in the enquiry for registration has been elaborately laid down. The ground on which application can be refused has been narrowed down so that if the existence of a genuine firm with the constitution shown in the instrument is established, registration has to be granted. It has also been made clear that a specific order granting or refusing registration should be passed by the Income-tax Officer.

Sub-clause (2).- This is intended to prevent the rejection of an application for registration on technical.grounds. Where the formalities prescribed by the Act or rules are not complied with, the firm must be given an opportunity of rectifying the defect, so that the application may be considered on the merits.

Sub-clause (3).- See notes under sub-clause (2) above.

Sub-clause (4).- This is intended to expedite the disposal of applications for registration.

Sub-clause (5).- Existing rule 4(1) of the Income-tax Rules provides that the Income-tax Officer shall record a certificate of registration on the instrument of partnership. This practice is sought to be codified in this sub-clause.

Sub-clause (6).- Does not exceed any comment.

Notes to clause 193

Sub-clause (1).- The power to cancel registration, at present dealt with in the Rules, has been dealt with here as it is a matter of substance. This clause is new, but does not depart in substance from the provisions at present contained in the Rules. It has been made clear that registration can be cancelled only on the ground of misrepresentation. It has also been made clear that the firm must have an opportunity of being heard before the registration is cancelled; it has also been provided that registration can be cancelled only with the previous approval of the Inspecting Assistant Commissioner.

Sub-clause (2).- Does not need any comments.

Sub-clauses (3) and (4).- These are new, but embody provisions which are hardly objectionable.

Sub-clause (5).- This is new and is intended to prescribe a time limit after which the registration cannot be cancelled.

Notes to clause 194

The words in existing section 26(1) "or a firm has been newly constituted" do not exactly indicate what is intended. The preceding words "change in the constitution of a firm" would cover cases where the old firm continues, in the sense that some but not all the members of the firm are changed. In other words, where the firm consists of partners A, B and C, the dropping out of A and B and coming in of new partners D and E would merely be a case of change in the constitution of the firm1. The words "a firm has been newly constituted" would, therefore, appear to be redundant. They have, therefore, been omitted in the draft, at the same time giving a definition of "change in constitution" so as to indicate its exact scope.

1. Cf. Gregory and Co. (in re:), (1937) 5 ITR 12 (Cal).

It may be added that where a firm is dissolved and a new firm is formed, the case can be left to be governed by existing section 26(2).

Notes to clause 195

This is new in form, but merely provides that in the case of succession to business etc., of one firm by another, the provisions in existing section 26(2) will apply, unless it is a case of a change in the constitution of the firm. It has been inserted in this Chapter for the sake of comprehensiveness.

Notes to clause 196

Sub-clause (1).- Existing section 44, in so far as it relates to firms, has been incorporated here. A reference to the legal representative of a deceased partner has been added for the sake of comprehensiveness.1

1. Cf. Draft clause 186 and notes thereto.

Sub-clause (2).- Is new and is intended to maintain continuity in proceedings in cases where an assessment has already commenced before discontinuance or dissolution.1

1. Cf. Drat Clause 186 and notes thereto.

Sub-clause (3).- Needs no comments.1

1. Cf. Draft Clause 186 and notes thereto.

Notes to clause 197

This is new and is intended to give list of provisions specially applicable to firms, for the sake of convenience of reference.

Income-Tax Act, 1922 Back

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