THE COMMISSIONER OF INCOME-TAX, NORTH ZONE, LAHORE Versus MESSRS RIPPON PRINTING PRESS, LAHORE

MUHAMMAD AKRAM, J.‑ In this case, the Income‑tax Appellate Tribunal (Pakistan), Lahore has referred the following question of law to the High Court at the instance of the Commissioner of Income-tax, North Zone, Lahore, under section 66(1) of the Income‑tax Act, XI of 1922 :‑

"Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the partnership deed dated 23‑7‑1956 created a valid partnership for the purpose of registration under section 26‑A of the Income‑tax Act in respect of the assessment year 1957‑58"

2. Briefly the relevant facts are that the assessee‑firm of Messrs Rippon Printing Press, Lahore was originally constituted in the year 1933‑34 with its two principal partners namely Mirza Muhammad Sadiq and Sh. Muhammad Din Butt since deceased. This firm was duly registered and its registration was renewed from year to year up to 1956‑57 under section 26‑A of the Act. Afterwards the two partners seem to have orally reconstituted the firm. In pursuance to this agreement on the 23rd of July 1956, they executed a deed of partnership whereby the two principal partners made a gift of a part of their capital in the old firm in favour of their would‑be heirs in proportion to their shares under the Shariat Law. In this manner they co‑opted their respective wives and major children as full‑fledged partners with them in the new firm and also admitted their minor children to the benefits of the partnership, with effect from the 1st of July 1956. This agreement was followed by another unstamped memorandum dated the 28th of July 1967, purporting to give a further retrospective effect to the reconstituted firm from 1st of April 1956, instead of 1st July 1956, as at first decided between them, The partnership deed dated the 23rd of July 1956, subsequently modified by the memorandum dated the 28th of July 1956, was afterwards replaced and incorporated into a formal deed of partnership executed between the partners on the 18th of July 1957. In this it was expressly stipulated that the partnership agreement shall take effect from the 1st of April 1956.

3. On the 16th of January 1957, the assessee applied to the Income‑Tax Officer, C‑Ward, Lahore under section 26‑A of the Income‑tax Act for registration of the reconstituted firm for the assessment year 1957‑58. But after the necessary enquiry, he found that no part of the capital was in fact gifted by the two principal partners in favour of the newly‑joined partners as alleged and that actually the profits of the firm were not distributed among the partners in accordance with the terms and conditions of the reconstituted partnership. This led the Income‑tax Officer to hold that no genuine firm was, in fact, reconstituted on the 23rd of July 1956, and the arrangement was merely a sham and fictitious transaction. He, accordingly, rejected the assessee's application for registration of the reconstituted firm. The assessee went up in appeal against the order. The Appellate Assistant Commissioner of Income‑tax, A‑Range, Lahore on the 8th of July 1959, accepted the appeal, reversed the order of the Income‑tax Officer and directed the registration of the newly‑reconstituted firm. But the appellate order was subsequently set aside on further appeal to the Income‑tax Appellate Tribunal (Pakistan), Lahore on the 2nd of October 1962, and the case was remanded to the Appellate Assistant Commissioner of Income‑tax for disposal afresh after bearing the parties.

4. In the meantime the Income‑tax Officer bad refused to grant the renewal of registration to the reconstituted firm for the assessment years 1958‑59, 59‑60, 60‑61 and 61‑62. Against those orders the assessee filed four separate appeals before the Assistant Appellate Commissioner of Income‑tax. In these circumstances the learned Appellate Assistant Commissioner of Income‑tax, A‑Range, Lahore alter hearing the parties disposed of all the five appeals before him together by a consolidated order passed on the 2nd of November 1964. He found that under the arrangement described above a genuine firm was in fact reconstituted and had come into existence. But he observed that the transfer of the share capital was not actually made in the books of the firm in the names of the incoming partners till after the year 1956‑57. On this finding the Appellate Assistant Commissioner agreed with the Income‑tax Officer in his refusal to register the newly reconstituted firm for the assessment year 1957‑58. Nevertheless he was or the opinion that the firm was entitled to registration and renewal under section 26‑A for the subsequent assessment years 1958‑59, 59‑60, 60‑61 and 61‑62. He, therefore, directed the Income‑tax Officer to register and renew the registration of the reconstitut ed firm for those four years only. This led to five separate appeals; the first one by the assessee‑respondent against the refusal to register the firm for the assessment year 1957‑58 and the remaining four by the Income‑tax Officer concerned against the registration of the firm for the subsequent four years. They were disposed of together by the Income‑tax Appellate Tribunal (Pakistan), Lahore on the 21st of February 1967. The Tribunal found that the assessee‑firm, as reconstituted, was genuine and that the two erstwhile partners had made a gift of their respective share‑capital in the firm in favour of their dependants for bona fide reasons. In the opinion of the Tribunal the sine qua non for the registration of the firm under the law was its genuine character. The Tribunal, however, did not rely on the memorandum in question dated the 28th of January 1957, introduced as an afterthought in an attempt to give effect to the reconstituted firm retrospectively from 1st of April 1956. But in the opinion of the Tribunal this did not adversely affect the assessee's stand taken on the basis of the first deed of the reconstituted partnership executed on the 23rd of July 1956. According to the Tribunal, the Appellate Assistant Commissioner was not justified in withholding the registration of the genuinely reconstituted firm for the assessment year 1957‑58. He, therefore, accepted the appeal of the assessee and directed the registration of the firm for the assessment years 1957‑59 as well. At the same time the Tribunal rejected the other four departmental appeals against the registration of the firm for the subsequent assessment years.

5. In these circumstances the Commissioner of Income‑tax, Lahore Zone, Lahore made an application under section 66(1) against the appellate order passed by the Tribunal in allowing the registration to the assessee‑firm for the assessment year 1957‑58 only. After hearing the parties the Tribunal on the 22nd of July 1967 referred the above question of law arising out of its appellate order to the High Court for its opinion.

6. We have heard the learned counsel for the parties in the case before us. In fact the arguments in a number of other cases, relating to the registration of partnership firms arising under section 26‑A of the income‑tax Act, 1922, as amended from time to time, were addressed before us together at the hearing. After bearing all the parties in all these cases, we find it more convenient and helpful to examine and deal with the legal aspect bearing upon the interpretation of this section here at one place.

7. Although under the general law a firm is not a legal entity, but for the purposes of Income‑tax Act it is regarded as an assessable unit. A firm may be charged as a distinct entity. The income of the firm is computed in its hands as that of an entity, irrespective of whether the firm is registered or not. However the advantage in the registration of a firm lies in the fact that under section 23(5) of the Act it does not itself pay the tax but the demand is made on each of the partners individually on the basis of his total income including his share in the profits of the firm. A registered firm is defined under section 2(14) of the Act as mean a firm registered under section 26‑A of the Act. The registration of a firm under the Partnership Act or the Registration Act does not enure for the purposes of Income‑tax Act.

8. In order that a firm is registered for the purpose of this Act it must fully comply with all the requirements of section 26‑A of the Act and the rules made in that connection. A brief history of this section shows that it was inserted in the Act in the year 1930. It has continued in force without any amendment in India even after the Partition of the Indo‑Pakistan sub continent. Subsection (1) of this section is as under :‑

"An 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 the income‑tax or super tax."

In general there are the two main requirements under this subsection for the registration of a firm: (a) that the firm should be "constituted under" an instrument of partnership and (b) that the instrument must specify the shares of the individual partners. There has been a considerable conflict of judicial opinion among the superior Courts in India on the interpretation of the expression "constituted under" in the context of this subsection.

9. In Pakistan, however, section 26‑A was amended more than once presumably in an attempt to obviate this conflict. In this connection by virtue of section 11 of the Finance Act I of 1957 the expression "constituted under" was substituted by the term "constituted" by In subsection (1) of section 26‑A of the Income‑tax Act, 1922, with retrospective effect from the 1st day of April 1955. The amended section 26‑A (1) of the Act was authoritatively interpreted by the Supreme Court of Pakistan in Commissioner of Income‑tax, Dacca v. Noor Hussain (P L D 1964 S C 657). But then this subsection was again amended on the 1st of July 1965, by section 6 of the Finance Act No. V of 1965 by the insertion of the words "executed in writing before the end of the previous year for the year for which the assessment is to be made and" into It. This change gave rise to a fresh controversy in Pakistan as to the true interpretation of this subsection as finally amended.

10. As already pointed out above the term "constituted under" to distinguish it from "constituted by", in the context of subsection (1) of section 26‑A of the Act was differently interpreted by some of the superior Courts in India. This conflict of judicial opinion is noticed by Sir Jamshed Ji B. Kanga in his Law and Practice of Income‑tax, 1959 Edition, on page 650. In Dwarkadas Khetan & Co. v. Commissioner of Income‑tax, Bombay City, Bombay ((1956) 29 I T C 903), according to Chagla, C. J. strictly speaking section 26‑A of the Income‑tax Act does not say that the firm, for the registration of which an application is made, must be "constituted by" the instrument of partnership. It does not require that the firm must come into existence by reason of the instrument of partnerships or that the firm should be the creature of the instrument of partnership, or that the firm must not exist prior to the instrument of partnership being executed. What is sought to be registered is not the instrument of partnership but the firm; it is the firm that seeks registration for the purpose of certain indulgence which is shown to a registered firm. In this connection in R. C. Miller & Sons v. Commissioner of Income‑tax, West Bengal ((1955) 28 I T R 698) a Division Bench of the Calcutta High Court remarked that section 26‑A (1) of the Income‑tax Act speaks of a firm constituted "under" an instrument of partnership and not a firm constituted "by" an instrument and that as a matter of language, if section 26‑A contemplated a firm created by an instrument of partnership, the proposition "under" was a very inappropriate proposition to use. The Punjab High Court was of the opinion that where a firm was constituted verbally and its terms and conditions were subsequently reduced into writing in the form of an Instrument the registration should not be granted for the period prior to the date of the deed but the firm would be entitled to registration as from the date of deed (Kalsi Mechanical Works v. C. I. T. ((1953) 24 I T R 335) ; Padam Parshad Rattan Chand v. C. I. T. ((1954) 25 I T R 335) ; Bery Engineering Co. v. C. I. T. ((1955) 28 I T R 227) and C. I. T. v. Birdhi Chand Ghardarl Gal ((1955) 28 I T R 280). In this connection to a still later case in Ramji Dass Rikhi Ram v. Commissioner of Income‑tax, Punjab ((1958) 34 I T R 483) the Punjab High Court held that "section 26‑A of the Income‑tax Act does not take notice of partnerships which come into existence as a result of an oral agreement; it recognises only partnerships which are constituted under an instrument of partnership. 'Constituted under' and 'constituted by', when used with reference to an Instrument of partnership, convey the same idea, and before a partnership can claim registration it must satisfy the appropriate authority that it was constituted by an instrument of partnership." In the opinion of the Court if the instrument of partnership declares expressly or by necessary implication that the partnership would be created under the instrument, the conditions set out in section 26‑A are satisfied. If, on the other hand, the document is merely a memorandum of an oral transaction and does not by itself constitute or create the partnership, It does not satisfy the requirement of section 26‑A. If, therefore, a partnership which has been established under an oral agreement is anxious to obtain the benefit of section 26‑A all that is necessary is that the partnership would execute an instrument of partnership declaring that henceforth the provisions of the instrument shall regulate the relations of the partners. 1n other case in Niadar Mal Jugdish Parashad v. C. I. T. ((1959) 37 I T R 349) a Full Bench of the Punjab High Court was of the opinion that a firm which came into existence by a verbal agreement was entitled to be registered under section 26‑A if on the date of the Application for registration the terms and conditions of the partnership had been reduced to writing.

11. It seems that this controversy under the Indian jurisdic tion was set at rest by the Supreme Court of India in Mitter & Sons v. Commissioner of Income‑tax, Calcutta ((1959) 36 I T R 194). The Judgment proceeds on a somewhat different ground to the effect that in the context of section 26‑A of the Act "constituted" is not the same thing as created by. So that a firm created by oral agreement, later recorded to writing was eligible for registration, but the agreement should be in existence during the relevant accounting year.

12. But in Pakistan the Courts were more or less consistent in their interpretation of the term "constituted under" in the context of subsection (1) of section 26‑A of the Income‑tax Act prior to its amendment in the year 1957. In the Commissioner of Income‑tax, East Bengal v. Messrs Rashid Motors, Chittagong (P L D 1957 Dacca 459) decided by the High Court of East Pakistan, the facts were that partnership firm came into being by an oral agreement in April 1919, but the partnership deed was drawn up afterwards in August 1950. The Court held that the partnership should be treated for the purposes of section 26‑A of the Act as having come into existence in April 1949 and must be registered with effect from the date it came Into existence in point of fact even though the partnership deed was drawn up at a subsequent date. In another reported case in Commissioner of Income‑tax, South Lone v. Radio Hotel, Karachi and others (P L D 1959 Kar. 539) the High Court of West Pakistan (Karachi Bench) held that the phrase firm "constituted under" an instrument of partnership in section 26‑A(1) did not mean constituted by such an instrument. In the opinion of the Court the instrument deed not be one by which the partnership was created or brought into existence. It was sufficient that there should be a partnership, the constitution of which was set out under an instrument, irrespective of whether the partnership existed previously on the basis of an oral agreement.

13. As already mentioned above, subsection (1) of section 26‑A of the Income‑tax Act as amended by the insertion of the words "constituted by" in place of the term "constituted under" in the context, under section 11 of the Finance Act I of 1957 with effect from 1‑4‑1955. This amended subsection was interpreted by a Special Bench of the High Court of East Pakistan in Messrs Noor Hussain v. Commissioner of Income‑tax, Dacca (P L D 1964 Dacca 373). The case was at first heard by a Division Bench consisting of Chawdhury, C. J. and Siddiky, J., but on a difference of opinion between them it was laid before Murshid, J. for disposal. In Interpreting this subsection Chawdhury, C. J. observed that: "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 of 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." But in the opinion of Siddiky, J. "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 roust mean 'created' by the partnership deed. The section, as it stands, therefore, means that a partnership firm 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 verbel agreement, the terms of which are incorporated fn a deed at a subsequent date, cannot claim registration with retrospective effect." But in this Murshid, J. differed from Siddiky, J., and agreed with Chawdhury, C. J. He held that: "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 nun‑existent documentary farm has been given to such a firm, for the first time. Therefore, if a documentary form or shape is given to a firm which has 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".

14. But on appeal against the judgment the Supreme Court of Pakistan in Commissioner of Income‑tax, East Pakistan, Dacca v. Noor Hussain agreed with the minority view taken by Siddiky, J. In the Supreme Court too there was a difference of opinion between their Lordships constituting the Bench. Late Mr. Justice Fazle‑Akbar, with whom Hamoodur Rahman, J. (as he then was) agreed, in interpreting subsection (1) of section 26‑A of the Income‑tax Act observed that :‑

"In the Oxford English Dictionary, Volume II, at pages 875 and 876 the word 'constitute' is said to mean inter alto 'to set up', 'establish', `found' (apt institution etc) and also 'to give legal or official form or shape to (an assembly etc.). Thus the word includes both the idea of creating and establishing and also the idea of giving a legal form to a partnership. The question then is which of these meanings should be adopted in this case."

In answering the question his Lordship further observed that there was a considerable difference of opinion expressed by the Courts on the interpretation of the term "constituted under" in the context of subsection (1) prior to its amendment, and the Legislature must be presumed to be fully aware that the Courts have differed considerably on the question of interpreta tion of the word 'under' in the context and advisedly substituted the word "by" for the word "under" in order to put an end to this difference of judicial opinion so far as Pakistan was concerned. Therefore, in the opinion of Fazle‑Akbar, J. it could be inferred fairly that the Legislature in amending the section intended fairly that the words constituted, to be understood in their received meanings. Accordingly he refused to attach to the words "constituted by" the comprehensive meanings attributed by the majority opinion in the case in the High Court of East Pakistan. In conclusion he held that the word "constituted" must be read in the ordinary and popular concep tion to mean "set up" or "established" and, therefore, only such firm as is established or set up by an instrument of partnership during the relevant accounting year will be entitled to the grant of registration. On a further discussion of some of the provisions of the Act and the rules he found it difficult to hold that the expression "constituted as shown in the instrument of partnership" in this section contemplated instruments which did not bring into existence a partnership, but which merely recorded the fact of its formation in the past by verbal agree ment. He went on to observe that section 26‑A of the Act did not say that the dead of partnership must be in existence at the inception of the accounting year. In view of the character of this legislation, scheme of the Act and the nature of the right conferred by section 26‑A, Fazle‑Akbar, J., found no reason to hold that the registration of the firm could not be granted for a part of the accounting year. In conclusion he held that the firm should not be deprived of the benefit of registration from the date of the execution of the deed of partnership. In that case the facts were that the instrument of partnership was executed between Noor Hussain and his partners on the 10th of May 1957 after the firm had already commenced its business with effect from the 1st of April 1957, and the application for its registration was made for the assessment year 1958‑59. In these circumstances the Supreme Court In answering the question under reference held :

"That the registration of the partnership firm as evidenced by the partnership deed executed on the 10th of May 1957, for the account period from 1st of April 1957 to 9th of May 1957 was rightly refused by the Income‑tax Tribunal in terms of section 26‑A (1) of the Act, but it could not be so refused for the period from 10th of May 1957 to 31st of March 1958."

15. Thereafter in the Commissioner of Income‑tax, East Pakistan v. Muhammad Qudrutullah (P L D 1966 Dacca 454) A. S. Chawdhury, J. (K. M. Hassan, J. concurring), hold that an instrument merely recording the fact of bringing Into existence of partnership at an earlier stage did not fulfil the requirements of law. In that case the firm was verbally constituted on the 1st of April 1956, and the terms of the partnership were reduced to writing afterwards on the 25th of April 1956. On a construction of the instrument of partnership in that case the Court found that firm was not created by the deed and that it was merely an aide memoire of the oral agreement between the partners. On this finding the Court, in purporting to rely on the majority judgment of the Supreme Court by Fazle‑Akbar, J. In Commissioner of Income‑tax, v. Noor Hussain held that partnership deed was not valid. In the opinion of the learned Judges of the Dacca High Court no partnership could come into existence by virtue of an instrument which was just an "aide memoire" of a verbal agreement already concluded between the partners of the firm. , On this finding the Court held that the Income‑tax Officer was justified in refusing the registration of the firm for the whole of the assessment year 1957‑58 In question.

16. But in this connection we cannot help observing that the ratio In the case of Muhammad Qudrutullah was contrary to the conclusion recorded by the Supreme Court in the Commissioner of Income‑tax, East Pakistan, Dacca v. Noor Hussain already discussed above. In fact, if we may say so this case led to a lot of confusion and misunderstanding among the income‑tax authorities below. At the hearing before us quite a number of decided cases were brought to our notice in which in relying on this case the authorities below had refused to register the firm for a part of the assessment year for the period after the date of the instrument of partnership, contrary to the pronouncement by the Supreme Court. In this connection we find that in the three subsequently reported cases in Commissioner of Income‑tax, East Pakistan v. Karam Ali Industries ((1968) 17 Taxation 60), Commissioner of Income tax, East Pakistan v. Mobarrak Cloth Stores ((1968) 17 Taxation 62) and Income‑tax Commissioner, East Pakistan v. Sree Govinda Bhand ((1968) 17 Taxation 217) the same two learned Judges (A. S. Chawdhury, J. with A. H. Khan. J. concurring) of the Dacca High Court under similar circumstances, held that the registration could be allowed to the firm for a part of the year from the date of execution of the instrument of partnership.

17. There could be little doubt that the law as discussed above and declared, by the highest Court of the realm, by their Lordships of the Supreme Court in the Commissioner of Income‑tax, East Pakistan, Dacca v. Noor Hussain on the interpretation of subsection (1) of section 26‑A of the Income‑tax Act (as amended by section 11 of the Finance Act I of 1957), is binding on all the Courts in this country. But then on behalf of the assessees In the various cases before us it was vehemently argued that ever since the law in this connection has itself undergone a material change by virtue of the further amendment Introduced by section 6 of the Finance Act V of 1965 in subsection (1) of section 26-A of the Income‑tax Act with the insertion of the expression "executed in writing before the end of the previous year for the year for which the assessment, is to be made and". The amended subsection now reads as under :‑

"Application may be made to the Income‑tax Officer on behalf of any firm, constituted by an instrument of partnership executed in writing before the end of the previous year for the year for which the assessment is to be made and' 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."

18. This latest amendment expressly stipulates firstly that the instrument of partnership must be executed in writing, secondly that its execution must take place at any time before the end of the previous year and thirdly that the instrument must be for the year for which assessment is to be made. The instrument of partnership must fulfil all these three requirements for the registration of the firm under the law as it now stands finally amended. This clearly envisages and postulates that the registration of the firm has got to be for the previous year relevant to the assessment year and must coincide with it. It cannot be for a part of the assessment year only. This latest amendment in the law is more in keeping with the rules applicable under section 26‑A of the Act. According to the form prescribed in rule 4 of the income‑tax Rules an application for the registration of the partnership is made for the assessment year relevant to the year ending 30th of June. Similarly according to the form of the certificate issued by the Income‑tax Officer under rule 5(1) the registration is effective for the assessment year relevant to year ending on 30th day of June. The subsequent renewal of registration of firm is also made from year to year under those rules.

It may be seen that according to thin latest amendment in section 26-A of the Act, the instrument of partnership forming the basis of a registration of the firm must be executed at any time before the end of the previous year, for the year for which the assessment is to be made. In other words a firm may be validly registered on the basis of an instrument executed even at the fag and the previous year and having a retrospective, effect. This in Itself implies the existence of a prior oral agreement followed by a deed of partnership executed afterwards between the partners incorporating its terms and condition into writing for the Purposes of its registration. Therefore, under this amendment it is no longer necessary now that the partnership should have been created by the instrument of a partnership writing for the purposes of its registration.

19. In these two important respects the amended law now in force under section 26‑A of the Act has made a clear departure from the previous law declared by the Supreme Courts the Commissioner of Income‑tax, East Pakistan, Dacca v. Noor Hussain. In that case, as already discussed above, according to the majority view in the Oxford English Dictionary the word constitute" means "to set up'", "establish and also to give legal shape or Official to and shape to". Thus, in the opinion of the Supreme Court the word includes bath the ideas of creating and establishing and also the idea of giving a ideas form to a partnership. On this finding the Supreme Court then remarked that: "The question then is which of these meanings should be adopted in this case". It was in these circumstances that after taking into consideration some of the other, factors the Supreme Court preffered to adopt the narrower interpretation placed on the word in the context of section 26‑A of the Act. But with due deference, in all humility and respect to the Supreme Court we find that the latest amendment' now made in this section is more in keeping with the other and wider interpretation of the word which must be adopted under the changed circumstances.

20. In this connection we are unable to agree with the learned counsel for the department that this amendment in section 26‑A of the Act was clarificatory only. In fact by tie pronouncement in the Commissioner of Income tax, East Pakistan, Dacca v. Noor Hussain the Supreme Court of Pakistan had authoritatively declared the law and removed all doubts as to the true interpretation of section 26‑A (1) of the Act. After this judgment there was hardly any room left for the Legislature to have made any further clarification into the section.

Indeed, in our opinion, this amendment in section 26‑A of the Act was not made in vain. We find that on the 26th of April 1957, the Central Board of Revenue, Karachi had issued the following Circular No. 8 of 1957 In connection with the registra tion of firms under section 26‑A of the Act :‑--

"On a strict Interpretation of the law, a firm can be registered only from the date on which the partnership deed has been executed. Since this would create hardships the Board is disposed to agree to the benefit to registration being allowed for the full previous year in which the instrument of partnership is executed provided of course the other conditions laid down for the registration of the firm in section 26‑A are fulfilled."

The Supreme Court in the Commissioner of Income‑tax, East Pakistan, Dacca v. Noor Hussain had upheld this strict interpreta tion of section 26‑A to the effect that a firm could be registered for a part of the year from the date of the instrument of partnership. It seems that after the authoritative pronouncement by the Supreme Court, it became all the more untenable for the Income‑tax authorities to deviate from the declared law on the subject and to adhere to the instructions to the contrary issued by the Central Board of Revenue. It was presumably for this reason the Board of Revenue had to withdraw those instructions and to. alleviate the hardships mentioned by the Board it was decided to remove this lacuna in the law. In these circumstances the Legislature amended the law in the year 1965. We are therefore, inclined to hold that this amendment was remedial and curative in character and must be construed liberally.

21. Needless to mention that under the Partnership Act there is no particular mode prescribed for forming a partnership. It can be established by an oral agreement between the partners and a document in writing is not essential for its creation and validity. In fact in this country quite a large number of firms are formed by verbal agreements between their partners and usually the terms and conditions under which they are established are afterwards reduced into writing, In this connection the Supreme Court of Pakistan in the Commissioner of Income‑tax, East Pakistan, Dacca v. Amin Match Works, Dacca (P L D 1964 S C 377) remarked that a written document is only evidence of the consensus already arrived at between the partners. The agreement must precede the execution of the document and in this sense the partnership comes into existence upon the mutual agreement of the partners at some point of time, however, brief it may be, before the execution of the document evidencing that agreement. Under section 26‑A of the Act the registration is granted to the firm and not to any instrument of partnership. As a result of the above discussion we find that now by virtue of the 1965 amendment introduced in section 26‑A of the Income‑tax Act (and subject to the other provisions of this section), a partnership firm whose constitution was reduced into writing whether in existence from before the date of the document or not is entitled to registration for the relevant year for the purposes of the Act. We cannot fail to mention here that at least In one case brought to our notice, in re: Assessee v. The Department ((1970) 21 Taxation 80), to respect of the assessment of the assesses for the assessment year 1963‑64, the Income‑tax Appellate Tribunal. Karachi Bench, discussed this aspect and examined the effect of the 1965 amendment introduced in section 26‑A of the Income‑tax Act.

22. This amendment in section 26‑A of the Act was introduced by section 6 of the Finance Act, V of 1965 which came into force on the 1st of July 1965. We have already held above that this amendment was purely remedial and curative and must be liberally construed in favour of the subject. There is nothing in the amending Act to show that this amendment was prospective only. In fact section 26‑A of the Act is merely procedural. According to the marginal note to this section it lays down the "procedure in registration of firms." In the Commissioner of Income‑tax, East Pakistan, Dacca v. Noor Hussain the Supreme Court remarked that section 26‑A, provides the procedure for registration of a firm. In the connection in Shahpurji Pailonji v. Commissioner of Income‑tax, Bombay ((1945) 13 I T R 115) the High Court of Bombay held that section 26‑A of the Indian Income‑tax Act has nothing to do with a charge to tax or with the liability to pay the tax and that it is a procedural section only. In Chattu Ram and others v. Commissioner of Income‑tax, Bihar ((1947) 15 I T R 302) the Federal Court held that the liability to pay the tax is founded on sections 3 and 4 of the Income‑tax Act which are the charging sections and that section 22 and others are the machinery sections to determine the amount of the tax.

22. In general there are three stages in the administration of a taxing statute. In this connection Lord Dunedin in Whitney v. Commissioners of Inland Revenue (1926 A C 37) observed that : --

"Now, there are three stages in the imposition of a tax. There is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessment. Liability does not depend on assessment, that ex‑hypothesi has already been fixed. But assessment particularises the exact sum which a person liable has to pay. Lastly, comes the methods of recovery if the person taxed does not voluntarily pay,

He also quoted with approval the following passage from the judgment of Sargant, L . J., in the case of Williams :‑

"The liability is imposed by the charging section, namely, section 38 (of the English Act) the words of which are clear. The subsequent provisions as to assessment and so on are machinery only. They enable the liability to be quantified, and when quantified to be enforced against the subject, but the liability is definitely and finally created by the charging section . . . . . . . . .''

In the Indo‑Pakistan sub‑continent these well‑considered pro nouncements were accepted without reservation as laying down the true principles of taxation under the Income‑tax Act, as held by the Federal Court in Chattu Ram and others v. Commis sioner of Income‑tax, Bihar. In that case the Court observed that : "The liability to pay the tax is founded on sections 3 and 4 of the Income‑tax Act which are the charging sections.

Section 22 and others are the machinery sections to determine the amount of the tax." From this discussion it, therefore, follows that section 26‑A of the Income‑tax Act is procedural and the amendment introduced into it was also procedural in nature.

23. It is an elementary principle that no person can have a vested right In a course of procedure. In general an alteration B in the procedure is retrospective unless there be some good reason against it. In this connection Lord Blackburn in Gardner v. Lucas ((1878) 3 A C 582) observed that :‑

" . It is perfectly settled that if the Legislature intended to frame a new procedure, that instead of proceeding in this form or that, you should proceed in another and a different way ; clearly there by‑gone transactions are to be sued for and enforced according to the new form of procedure. Alterations in the form of procedure are always retrospective, unless there is some good reason or other why they should not be."

In the Commissioner of Income‑tax, West Bengal v. P. M. Baghi & Co. ((1951) 20 I T R 33) the Calcutta High Court held that section 23(5)(a) of the Indian Income‑tax Act, 1922, relating to the assessment of a registered firm, is purely procedural and merely affects the machinery for collecting the tax rather than the tax itself, and, therefore, it was applied retrospectively. Similarly in Greenfields v. Commissioner of Income‑tax, Bihar and Orissa ((1959) 35 I T R 61) the High Court was of the opinion that to apply for registration of a firm under section 26‑A of the Act is not in the nature of a right but a mere privilege and the Court repelled the contention that the alleged right of registration of a firm under the section could not be taken away retrospectively by an amendment in the rules. As a result of this discussion we must hold that the above amendment made in the year 1965 in section 26‑A of the Income‑tax Act was applicable retrospectively.

24. We have, therefore, no hesitation in holding that this amendment was applicable to all applications for the registration of firms under section 26‑A of the Act pending with the Income‑tax Officers, on the date of the amendment on the 1st of July 1965. But it was further argued before us that this amendment was equally applicable to these matters in the pending appeals as well. In this connection it was emphasized before us that, as already held above, this amendment is purely remedial. It was designed to regulate the procedure for the registration of firms. It does not affect any vested rights. It must, therefore, be construed, so far as it reasonably admits, so as to advance the remedy, suppress the mischeif and allow the relief to these contemplated by the Statute. In these circumstances the assessees have insisted on a more beneficial construction of these provisions in question in their favour. In Bigen Singh v. Zaffar Hussain (A I R 1940 Pat. 567) the Court held that if the amending Act was remedial one that should be construed as widely as possible to give effect to the real intention of the Legislature in as many cases as possible !n so far as this can be done without injustice to the parties. In this connection there is no doubt that in general in the absence of any indication to the contrary, an amendment or a change in the law does not affect the past and closed transactions. It is not permissible to reopen the orders passed by the authorities that have already attained finality and are not subject to any appeal pending against them. The ordinary rule is that the rights or the litigants are regulated by the law in force when the action was begun and commenced. It follows from this that a change In the substantive law, as opposed to the adjective law, would not affect pending actions, in the absence of any indication to the contrary, either by express enactment or by necessary implication. But at times, mostly in the application of the adjective laws, it was held that if the Legislature retrospectively affects pending proceedings then it would be the duty of the Court of appeal to apply the law prevailing on the date of the appeal and to take into consideration the change fn the law effected after the passing of the decree. In this connection Lord Wright M. R. in In re : A Debtor ((1936) 1 Ch. D 237) observed that :‑

"Thus while an Appellate Court is able, and bound, to give effect to new remedies which have been introduced by enactments passed after the order appealed from was made by the Court of First Instance, yet with regard to substantive rights it is well established that the Appellate Court must give effect to the same law as that which was in force at the date of the earlier proceedings."

In Quitter v. Mapelson ((1882) 9 Q B D 672) Bowen, L. J. remarked that : "If the law has been altered pending an appeal, it seems to me to be pressing rules of procedure too far to say that the Court of Appeal cannot decide according to the existing state of the law" Hughes, C. J., in Patterson v. State of Alabama ((1934) 294 N S 600) at p. 607 observed that:--

"We have frequently held that in the exercise of our appellate jurisdiction we have power not only to correct error In the judgment under review but to make such disposition of the case as justice requires. And in determining what justice does require, the Court is bound to consider any change, either in fact on in law, which has supervened since the judgment was entered."

In this subcontinent in Lachmeshwar Parshad Shukul and others v. Keshwar Lal Choudhury and others (1940 F C R 84) Yaradachriar, J. on a detailed discussion in his leading judgment observed that on the theory that the appeal Is in the nature of rehearing the Courts in this country have in numerous cases recognised that in moulding the relief to be granted in a case on appeal, the Court of Appeal is entitled to take into account even facts and events which have come into existence after the decree appealed against. This rule is applicable particularly to a case like the present, dealing with matters of procedure or remedies.

25. To sum up the above discussion we hold that a partnership firm is entitled to registration under section 26‑A of the Income‑tax Act, as amended by section 6 of the Finance Act, 1965. Under the amended section it is not necessary for the purposes of the registration that the firm should have been A created by virtue of the instrument of partnership in writing In this connection all that is required is that the instrument off' partnership must have been executed in writing before the end of previous year relevant to the assessment year in question: Subject to this it is immaterial whether the firm came into existence from before the date of the instrument or not. In law the registration is allowed for the whole year and not merely for a part of it. The above amendment in section 26‑A of the Act in this respect was introduced on the 1st of July 1965. But as already discussed above !t was applicable retrospectively to the applications and the appeals for registration of the firms pending on the date of the amendment. Needless to add here that before a firm is registered it must also comply with all the other remaining requirements of the law on the subject.

26. We must now revert to the facts in the instant case before us. In this case the Appellate Assistant Commissioner of Income‑tax, A‑Range, Lahore, in his order dated the 2nd of November 1967, held that the assessee‑firm of Messrs Rippon Printing Press, Lahore was genuine and validly reconstituted between the partners with effect from the ]at of July 1956; as is evidenced by the instrument of partnership executed afterwards on the 23rd of July 1956. This finding was affirmed on further appeal disposed of the Income‑tax Appellate Tribunal (Pakistan), Lahore on the 21st of February 1967. In the opinion of the Tribunal there was no doubt as to the genuineness of the partnership evidenced by the instrument of partnership executed on the 23rd of July 1956. This is a concurrent finding of fact which must be accepted and is final for the purposes of these proceedings before us under section 66 of the Act.

27. In this case on the 16th of January 1957, the assessee applied for registration of the firm to the Income‑tax Officer for the assessement year 1957‑58 on the basis of the instrument of partnership executed on the 23rd of July 1956. According to this deed the partnership in question was established verbally and it came into force with effect from the 1st of July 1956. The agreed terms and conditions of the partnership were after wards reduced into writing on the 23rd of July 1956. In fact, in this case, as already pointed out above this firm was registered and its registration was also renewed for the assessment years 1958‑59, 1959‑60, 1960‑61, 1961‑62 on the basis of the very same instrument of partnership dated the 23rd of July 1956. These orders have become final between the parties. This dispute about the registration of the firm is concerning the, Assessment year 1957‑58 only,

28. In the light of the law and for the reasons discussed above we find that the Tribunal was justified in directing the registration of the respondent‑firm under section 26‑A of the Act for the assessment year 1957‑58 on the basis of the instrument of partnership dated the 23rd of July 1956. Therefore, we must answer the above question referred to us in the affirmative. The parties are left to bear their own costs in the circumstances of the case.

Reference answered in affirmative.