1981 PTD 62

COMMISSIONER OF INCOME-TAX, RAWALPINDI ZONE, RAWALPINDI Versus AHMAD SHAM & BROTHERS

Citation1981 PTD 62

CourtPeshawar High Court

Judge(s)Karimullah Durrani and Usman Ali Shah

1. KARIMULLAH DURRANI, J .‑‑The Commissioner of Income‑tax, Rawalpindi Zone, Rawalpindi, has directly made this reference under section 66 of the Income‑tax Act, 1922 against Messrs Ahmad Shafi & Brothers, Cloth Merchant, Tijarat Ganj, District D. I. Khan, whose appeals being I. T. A. No. 9293 of 1971‑72 and I. T. A. No. 9292 of 1971‑72, filed before the Income‑tax Tribunal, Peshawar Bench, Peshawar, against the income‑tax assessment orders pertaining to the assessment years 1970‑71 and 1971‑72, were accepted The Tribunal's order gave rise to the following question of law :‑

2. "Whether on the facts in the circumstances of the case the Tribunal was right in holding that the partnership deed dated 1‑7‑1970 did not create a new firm and that the firm qualified for registration under section 26‑A of the Income‑tax Act?"

3. This reference arose out of the following briefly stated facts;

4. That the respondent‑firm (assessee) originally comprised of two partners and was brought into existence vide the partnership deed ‑dated) 1‑12‑1967. This firm was registered with the Registrar of Firms on 31‑1‑1968 and was also granted registration and renewal under section 26(a) of the Income‑tax Act 1922, till the assessment year 1970‑71. On 1‑7‑1970 a new partner was brought in and a new partnership deed was executed. This partnership consisted of the two existing partners and a third new comer. The shares of the new partners in the new set up were also reshuffled. On 30-9-1970 the respondent moved the Income-tax Officers concerned for the registration of the firm under section 26 (a) of the Income‑tax Act on the strength of the new partnership deed. An appli cation for the renewal of the firm was also filed alongwith the "Income Return The Income‑tax Officer declined to grant registration to the firm relating to the partnership deed dated 1‑7‑1970 for the reasons that it was not registered with the Registrar of the Firms. The Income‑tax Officer also rejected the application for the renewal of the firm on the ground that even if the renewal application was considered the respon dent had failed to get recorded with the Registrar of Firms the change in the constitution of the firms and that therefore, the renewal could not be granted. Being aggrieved of the refusal of registration or refusal tot renew the firm, the assessee‑respondent filed the above‑referred appeals before the Income‑tax Appellate Tribunal, Peshawar Bench, Peshawar, which were accepted vide the Tribunal's Order dated 19‑3‑1973. The Tribunal held that the partnership deed dated 1‑7‑1970 did not create any new partnership but merely brought about a change in the constitu tion of the firm. It further held that subsection (5) of section 25(a) of the Income‑tax ct did not make incumbent upon an assessee to get recorded the change in the constitution of the firm with the Registrar of the Firms to qualify registration under section 26 (a) of the Act. The Tribunal also observed that the appellant had submitted an application to the Registrar of Firms for re‑registration of the only constituted firm but the registration was refused by the Registrar.

5. It has been urged by the referring authority that the Tribunal was wrong to hold that in the present case the firm had merely been recon stituted and that no new firm was created. It was contended in this be half that the addition of a new partner coupled with the execution of the partnership deed dated 1‑7‑1970 did create a new firm which required registration with the Registrar of Firms before qualifying for registration under section 26 (a) of the Income‑tax Act. In this view of the matter it was urged that the Tribunal was wrong in directing the Income‑tax Officer to register the firm.

6. Mr. Amirzada Khan, Assistant Advocate‑General, N.‑W. F. P., appeared on behalf of the referring authority, while Mr. Abdur Rehman Khan, Advocate represented the assessee‑respondent, and they have argued their respective cases before us at great length. It has been con tended on behalf of the referring authority that by bringing in a new partner and reshuffling of their respective shares, the firm which existed till the execution of the new partnership deed on 1‑7‑1970 dissolved and a new partnership in its stead came into being and the previous one which was registered with the Registrar of Firms as well as with the Income‑tax Authority under section 26 (a) of the Income‑tax Act and was renewed from time to time till the assessment year 1970‑71 ceased to exist. As against this contention the case of the respondent is that it is the reconstitution of the same old firm and not a dissolution thereof. To resolve the controversy reference has to be made to the provisions of the Part nership Act, 1932. By section 39 (ibid) the dissolution of partnership between all the partners of a firm is called the "dissolution of the firm". The firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners (section 40). A com pulsory dissolution of the firm is effected under section 57 of the said Act‑

(a) by the adjudication of all the partners or of all the partners but one as insolvent, or

(b) by the happening of any event which makes it unlawful for the business of the firm to be carried on for the partners to carry it on in partnership.

7. The following proviso has been attached to this general rule;

8. "Provided that, where more than one separate adventure or under taking is carried on by the firm, the illegality of one or more shall not of itself cause the dissolution of the firm in respect of its lawful adventure and undertakings."

9. Under section 42 of the Partnership Act, a firm is dissolved on the happening of the following contingencies‑

(a) if constituted for a fixed term, by the expiry of that term ;

(b) if constituted to carry out one or more adventures or under takings, by the completion thereof ;

(d) by the adjudication of a partner as an insolvent;

10. Apart from the above contingencies, a firm can be dissolved by any of the partners giving notice in writing to the rest of other partners of his intention to dissolve the firm. The firm is also dissolved by the decree of a Court in suit of a partner on any of the grounds. Mentioned under section 4 of the said Act.

11. The facts of the case disclose that the present reconstitution of the firm by bringing in a new partner did not fall within the fold of any of the above‑mentioned provisions of Partnership Act for treating the firm to have been dissolved. The case is, therefore, covered by section 63 of the said Act, which deals with the change in the constitution of a registered firm. . This section reads as under :‑

12. "63.‑(1) When a change occurs in the constitution of a registered firm any incoming, continuing or outgoing partner, and when a registered firm is dissolved any person who was a partner imme diately before the dissolution, or the agent of any such partner or person specially authorised in this behalf, may give notice to the Registrar of such change or dissolution, specifying the date thereof ; and the Registrar shall make a record of the notice in the entry relating to the firm in the Register of Firms, and shall file the notice alongwith the statement relating to the firm filed under section 59.

(2) When a minor who has been admitted to the benefits of partner ship in a firm attains majority and elects to become or not to become a partner, and the firm is then a registered firm, he or his agent specially authorised in this behalf, may give notice to the Registrar that he has or has not become a partner, and the Registrar shall deal with the notice in the manner provided in subsection (I)."

13. As the assessee‑firm had done nothing but brought in a new partner in the partnership, therefore, their case could only be covered by the above‑quoted section. The learned Assistant Advocate‑General pressed into service the execution of a new partnership deed on 1‑7‑1970 by the partners in aid of his contention that a new partnership had come into existence by virtue of this deed. The contention has force, as any change in the constitution of the partnership would have to be reduced in writ ing if the partners so choose and a fresh deed has to be executed and mere execution of a fresh deed of partnership does, therefore, not neces sarily bring into being a new firm. The learned Income‑tax Appellate Tribunal was, therefore, perfectly correct in holding that the assessee by bringing in an additional partner in the firm have only reconstituted the same old firm, which was registered with the Registrar of Firms and also with the Income‑tax Authority and was being renewed from year to year till then. A plain reading of section 63 of the Partnership Act (quoted above) would show that on the reconstitution of the firm by inclusion an additional partner, the firm was only required to notify the Registrar of Firms of the change by giving a notice of the same to him, which admit tedly the assessee had done. After the receipt of the notice it was incumbent upon the Registrar to have taken note of the change and have filed the notice under section 59. From the facts of the case it is obvious that with the execution of a new deed neither the name of the firm was changed nor the business for which it was created. From the above discussion on the relevant provisions of Partnership Act it is also clear that the dissolution of the firm did not take place at any time. The Income‑tax Officer was, therefore, not correct in treating the execution of the new partnership deed as ipso facto having the effect of the dissolu tion of the firm, as no new registration was required of it and the Registrar u>' the Firms was only required to bring on record the change in the constitution of the firm and the notice thereof. Thus we are clear in our mind that the order of the Registrar of Firms in treating the re-constituted firm as a new one and refusing to register the same was bad in law. The registration of the firm baying already been made by the Registrar and existing at the time of the execution of the new deed remained in that for all purposes and intents.

14. The natural consequence of the above‑stated legal position is that the case of the firm was not hit by subsection (5) of section 26 (al of the Income‑tax Act, as was presumed by the Income‑tax Officer in refusing the renewal of the firm. ‑Subsection (5) of section 26 (a) reads as under :‑

15. "(5) No application under this section for registration or renewal of registration in respect of the assessment for the year beginning on the first day of July 1969, or for any year thereafter, shall be made unless the partnership has been registered under the Part nership Act, 1932:

16. Provided that application for registration or renewal of registration may be made by a firm which cannot be registered under the said Act for the reason that the firm name contains any word or name mentioned in subsection (3), (3‑A) or (3‑B) of section 58 of the said Act."

17. The learned Income‑tax Officer in holding that the assessee‑firm was not registered under the Partnership Act was, therefore, labouring under a misconception of law and facts as the firm having only been reconstituted did not require any fresh registration. It was incumbent upon the Income‑tax Officer under subsection (1) of section 26 ...to have made the assessment on the firm as it was constituted at the time of making the assessment. Subsection (1) of section 26 . . . . . . . . . reads as under :‑

18. "26.‑(1) Where, at the time of making an assessment under section 23, it is found that a change has occurred in the constitution of a firm or that a firm has been newly constituted, the assessment shall be made on the firm as constituted at the time of making the assessment:

19. Provided that the income, profits and gains of the previous year shall, for the purpose of inclusion in the total incomes of the partners, be apportioned between the partners who in, such previous year were entitled to receive the same:

20. Provided further that when the tax‑assessed upon a partner cannot be recovered from him it shall be recovered from the firm as constituted at the time of making the assessment."

21. A Division Bench of this Court in an Income‑tax Reference, namely, The Commissioner of Income‑tax, Rawalpindi Zone, Rawalpindi v. Messrs Muhammad Ilyas & Co., D. I. Khan (Reference Application No. 108 of 1972) a case of the reconstitution of the firm the features thereof differed with the instant case only to this extent that in the precedent case a minor was absolved of liability he as a partner by execution of afresh deed, interpreted the requirements of section 26 (a) (ibid) in the following manner :‑

22. "A reading of section 26 (a) of the Income‑tax Act would show that the main purpose of the provisions incorporated therein is to find out whether there exists a genuine firm which is to be extend ed the benefits under it while assessing its income under the Income‑tax Act. It was not contended before us that the firm is not a genuine one. The added subsection (5) to sec tion‑26(a) of the Income‑tax Act only requires that a firm seeking registration under it has to be registered under the Partnership Act which qualification stands fully complied with in the instant case."

23. In view of the reasons, stated above, and of the facts and the circumstances of the case, we hold that the learned Income‑tax Appellate Tribunal was justified in setting aside the orders of the Income‑tax Office and in holding that the partnership deed dated 1‑7‑1970 did not create any firm and the firm as reconstituted was qualified for renewal by the income‑tax Officer, as having already been registered under the Partner ship Act and as such was also qualified for registration under section 26 (a) of the Income‑tax Act. Our answer to the question of law, under reference is, therefore, in the affirmative.

24. Reference answered in affirmative.