1996 Supreme(Raj) 983

RAJASTHAN HIGH COURT AT JAIPUR BENCH
V.K.Singhal, M.A.A.Khan, JJ.
Addl. Commissioner of Income - Appellant
Versus
Hassan Chand and Sons - Respondent
D.B. Civil Income-tax Reference No. 1 of 1975.
Decided On : 22-04-1996

The provisions of section 37 of the Indian Partnership Act, 1932, can apply only if the following three conditions are fulfilled: (1) Any member of the partnership firm has died or otherwise ceased to be a partner, (2) The surviving or continuing partners continue to carry on the business of the firm with the property of the firm, and (3) There has been no final settlement of accounts as between the outgoing partner or his estate and the surviving or continuing partners.

Headnote:

INCOME TAX - Registration of firm - Application for registration - Time limit - Genuine character of firm - Payment to guardian of heirs of deceased partner - Whether deductible as charge in arriving at total income of firm.

Fact of the Case:

The assessee-firm was engaged in the business of exhibition of films. Originally, the firm was constituted of three partners, namely, Sarva Shri Noor Mohammed, Adbul Razaq and Hamid Hussain. In March, 1953, Shri Mohd., 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 assessment year 1959-60 and for all these years the assessee-firm was assessed in the status of an unregistered firm. On January 1, 1959, Shri Abdul Razaq and Shri Hamid Hussain, the remaining two partners of the assessee-firm, executed a new partnership 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 Mohd. (deceased partner) shall continue to be in this firm and the guardian shall be entitled to ⅓rd 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 ⅓rd shall be paid to the guardian of Shri Noor Mohd. (deceased). (b) The remainder thereafter shall be divided between Shri Abdul Razaq and Hamid Hussain equally. On December 31, 1959, the assessee-firm applied for registration for the assessment year 1960-61 as per section 26A of the Indian Income-tax Act, 1922 (for short, "the Act of 1922"), read with rule 2 of the Rules made thereunder. The Income-tax Officer, however, refused to grant registration to the firm on the ground of limitation and non-genuine character of the firm. 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 rule 2(c) of the Indian Income-tax Rules, 1922. 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. The assessee-firm approached the Tribunal in second appeal. The two Members of 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 assessment 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. 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. Regarding the question as to whether payments made to the guardian of the heirs of the deceased Shri Noor Mohammed 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.

Finding of the Court:

1. The application filed by the assessee-firm on December 31, 1959, for grant of registration for the assessment year 1960-61 was well within time. 2. The Tribunal was justified in holding that the Income-tax Officer's order purported to have been passed under section 184(4) was, in fact, an order under section 185(5) and as such was an appealable order. 3. The partnership was valid. 4. The payment made to Shri Abdul Razaq in his capacity as guardian of the estate of the deceased partner Shri Noor Mohammed, was a charge on the profits of the firm.

Issues: 1. 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 ? 2. 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 ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the partnership was valid ? 4. 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 ?

Ratio Decidendi: 1. The matter of registration of a firm was to be regarded as part of the process of assessment and in that sense of the matter was to be dealt with as per the provisions of sections 185 and 187 to 189 of the Act of 1961. 2. The application filed by the assessee-firm on December 31, 1959, for grant of registration to it for the assessment year 1960-61 was well within time. 3. Section 37 of the Indian Partnership Act, 1932, can apply provided the following three conditions are fulfilled: (1) Any member of the partnership firm has died or otherwise ceased to be a partner, (2) The surviving or continuing partners continue to carry on the business of the firm with the property of the firm, and (3) There has been no final settlement of accounts as between the outgoing partner or his estate and the surviving or continuing partners. 4. The guardian of the estate of the deceased or the legal representative does not become a partner in the firm.

Final Decision: 1. Question No. 2 for the assessment year 1960-61 is answered in the affirmative, i.e., for the assessee and against the Revenue. 2. Question No. 1 for the assessment year 1960-61 is answered in the affirmative, i.e., for the assessee and against the Revenue. 3. Question No. 3 for the assessment year 1960-61 is answered in the affirmative, i.e., for the assessee and against the Revenue. 4. The Tribunal was right in holding that the payment made to Shri Abdul Razaq in his capacity as guardian of the estate of the deceased partner Shri Noor Mohammed, was a charge on the profits of the firm.