17 February 1956
Supreme Court
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DULICHAND LAKSHMINARAYAN Vs THE COMMISSIONER OF INCOME-TAX,NAGPUR.

Case number: Appeal (civil) 195 of 1955


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PETITIONER: DULICHAND LAKSHMINARAYAN

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX,NAGPUR.

DATE OF JUDGMENT: 17/02/1956

BENCH: DAS, SUDHI RANJAN BENCH: DAS, SUDHI RANJAN BHAGWATI, NATWARLAL H. AIYYAR, T.L. VENKATARAMA

CITATION:  1956 AIR  354            1956 SCR  154

ACT: Indian lncome 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-PartnershipPartner-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

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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.

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186), referred to.

JUDGMENT: 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

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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 supertax.  (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

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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  centred 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

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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

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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

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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. 22 166