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PETITIONER: MESSRS.  R. C. MITTER & SONS

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX,WEST BENGAL, CALCUTTA

DATE OF JUDGMENT: 15/04/1959

BENCH: SINHA, BHUVNESHWAR P. BENCH: SINHA, BHUVNESHWAR P. KAPUR, J.L. HIDAYATULLAH, M.

CITATION:  1959 AIR  868            1959 SCR  Supl. (2) 641  CITATOR INFO :  RF         1961 SC 680  (5)  R          1961 SC1356  (4)  RF         1965 SC1703  (5)  F          1985 SC1572  (7)  F          1986 SC 123  (3)

ACT: Income-tax-Registration   of  firm-Procedure-"   Constituted under  an  instrument of Partnership  ",  Meaning  of-lndian Income-tax Act, 1922 (XI Of 1922), S. 26A, Rules 2 to 6B.

HEADNOTE: The  question  for determination in these  two  appeals  was whether  the appellant firms were entitled  to  registration under  S.  26A of the Indian Income-tax Act and  the  common point of law involved was the interpretation of the words  " constituted  under an instrument of partnership "  occurring in  that  section.  In Appeal No. 85 the assessee  firm  was said  to  have  been constituted by a  verbal  agreement  in April,  1948, and the- deed of partnership was drawn  up  in September, 1949.  The application for registration under  s. 26A  of the Act for the assessment year 1949-1950  was  made thereafter to the Income-tax Officer.  In Appeal NO. 389 the assessee firm was verbally constituted in 81 642 June, 1944, and a memorandum of partnership was executed  in June  1948.  The application for registration under  S.  26A for  the  assessment years 1945-46 and 1946-47 was  made  on August 24, 1949. The  applications  were rejected by the  Income-tax  Officer and  the  appeals  preferred  by  the  assessees  were  also dismissed  by the Income-tax Appellate Tribunal.   The  High Court took the view that S. 26A of the Indian Income-tax Act contemplated a firm created or brought into existence by  an instrument of partnership and answered the questions against the assessees.  It was contended on their behalf that solong as  the  assessment  was not made,  they  were  entitled  to registration   irrespective  of  the  year  in   which   the instrument  of  partnership came into existence.   This  was controverted  on  behalf of the Revenue and their  case  was

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that  a  firm seeking registration under S. 26A of  the  Act should be created by an instrument of partnership, or at any rate,  such  instrument should be in  existence  during  the relevant  accounting  year, i. e. the year previous  to  the year  of assessment in respect of which the application  for registration was made. Held,  that the words " Constituted under an  instrument  of partnership occurring in S. 26A of the Indian Income-tax Act included not only firms that were created by instruments  of partnership  but  also those that were subsequent  to  their creation,  clothed in legal form by reducing the  terms  and conditions of the partnership in writing. Dwarkadas Khetan & Co. v. Commissioner of Income-tax, Bombay City, Bombay, [1956] 29 I.T.R. 903, approved. Kalsi  Mechanical Woyks, Nandpur v. Commissioner of  Income- tax, Simla, [1953] 24 I.T.R. 353, Padam Parshad Rattan Chand v. Commissioner of Income-tax, Delhi, [1954] 25 I.T.R.  335, Bery  Engineering Co., Delhi v. Commissioner of  Income-tax, Delhi, [1955] 28 I.T.R. 227, Income-tax Commissioner,  Delhi v. Messrs.  Birdhi Chand Girdhari Lal, [1955] 28 I.T.R.  28o and Khimji Walji & Co. v. Commissioner of Income-tax,  Bihar and Orissa, [1954] 25 I.T.R. 462, dissented from. Section  26A, read with SS. 26, 28 and Rules 2 to  6B,  laid down  the  following essential conditions that a  firm  must fulfil  before it could claim registration under S.  26A  of the Act (1)  that  it  must be constituted under  an  Instrument  of Partnership,   specifying  the  individual  shares  of   the partners; (2)  that an application on behalf of and signed by, all the partners,  containing all the particulars as set out in  the Rules, must be made; (3)  that the application must be made before the assessment of  the income of the firm was made under S. 23 Of  the  Act for that particular year; (4)  that  the  profits (or loss, if any)  of  the  business relating 643 to  the previous year, i. e., the relevant accounting  year, must  be  divided  or  credited, as  the  case  may  be,  in accordance with the terms of the Instrument ; and lastly, (5)  that  the  partnership must be genuine  and  in  actual existence in conformity with the terms and conditions of the Instrument. Where,  therefore, as in the instant cases, the  partnership did  not  admittedly function in terms of an  instrument  of partnership which was operative during the accounting  year, it  could not be registered during the following  assessment year. Commissioner  of  Income-tax,  Bombay  North  v.   Shantilal Vrajlal & Chandulal Dayalal & CO. [1957] 3I I.T.R. 903, dis- approved. Per M. HIDAYATULLAH, J.-While it was clearly not possible to read " constituted by " for the words " constituted under  " occurring in S. 26A of the Act, it was doubtful whether  the instrument of partnership sought to be registered must be in existence  in the accounting year in order to entitle it  to registration. Dwarkadas Khetan & Co. v. Commissioner of Income-tax, Bombay City, Bombay, [1956] 29 I.T.R. 903, referred to.

JUDGMENT: CIVIL APPELLATE, JURISDICTION:       Civil Appeals Nos. 85 &

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389 of 1957. Appeal from the judgment and order dated August 26, 1955, of the Calcutta High Court in Income-tax References Nos. 44  of 1954 and 17 of 1953. S.   Mitra and P. K. Mukherjee, for the appellant (in C.   A. No. 85/57.) N.   C. Chatterjee and P. K. Ghosh, for the appellant (in C. A. No. 389/57). R.   Ganapathy  Iyer,  R. H. Dhebar and D.  Gupta,  for  the respondent. 1959.  April 15.  The judgment of Sinha and Kapur, JJ.,  was delivered  by  Sinha,  J.  Hidayatullah,  J.,  delivered   a separate judgment. SINHA,  J.-The common question of law arising in  these  two appeals on certificates of fitness granted by the High Court of  Calcutta under s. 66A(2) of the Indian  Income-tax  Act, 1922,  is  the effect and scope of the words  "  constituted under an instrument of partnership" in s. 26A of the Income- tax  Act,  which, in the course of this  judgment,  will  be referred to as the Act. 644 The  facts  of the two cases, leading  upto  these  appeals, though  not  dissimilar,  are  not  identical.   They   are, therefore, set out separately. In Civil Appeal No. 85 of 1957, Messrs.  R. C. Mitter    and Sons,  54, Rani Kanto Bose Street, Calcutta, claim to  be  a firm said to have been constituted in April 1948, with  four persons  whose names and shares in the nett profits  of  the partnership business, are stated to be as under (a) Ramesh Chandra Mitter-40 per cent. of the nett     profits. (b) Sudhir Chandra Mitter-30 per cent. of the nett     profits. (c) Sukumar Mitter-20 per cent. of the nett profits. (d)Sushil Chandra Mitter-10 per cent. of the nett profits. The  firm  intimated  its  bank, the  Bengal  Central  Bank, Limited,  (as it then was), of the constitution of the  firm as  set out above, by its letter dated April 15, 1948.   The letter  also stated that a partnership deed Was going to  be drawn  up and executed by the partners aforesaid,  and  that the  deed so drawn up, will be forwarded to the bank in  due course.  Though the firm is said to have come into existence in  April 1948, the deed of partnership which is set out  as annexure " A " at P. 5 of the paper book, was drawn up  only on September 27, 1949.  This deed of partnership appears  to have  been  registered under the provisions  of  the  Indian Partnership  Act,  on  October  1,2,  1949.   It  was   also forwarded  to the Bengal Central Bank, Ltd., Head Office  at Calcutta,  as it appears from the seal of the bank  and  the signature  dated  December  7,  1949.   An  application   to register  the  firm under s. 26A, for  the  assessment  year 1949-50,  was made to the Income-tax Authorities.  The  date of  the  said application does not appear  from  the  record before  us.  The application was rejected by the  Income-tax Authorities.  The firm preferred an appeal to the Income-tax Appellate Tribunal, which was also dismissed by the Tribunal by  its  order dated September 7, 1953.  The ground  of  the order of the Tribunal was that as the firm admittedly 645 was  formed by a verbal agreement in April 1948, and not  by or under an instrument in writing dated September 27,  1949, and  as the assessment was for the year 1949-50,  for  which registration of the firm was sought, the registration  could not  be ordered.  The Tribunal also referred to  the  letter aforesaid to the Bengal Central Bank, and observed that  the letter  merely contained information as to the formation  of the partnership and of the personnel thereof, but it did not

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contain the terms on which the partnership had been  formed. It  also showed that a partnership had been created but  not by  deed.  Hence, the Tribunal further observed, the  letter might  be  useful for consideration on the question  of  the genuineness  of  the  firm,  but it  could  not  fulfil  the requirements  of  s. 26A, namely, that the  firm  should  be constituted under an instrument of partnership.   Therefore, the  Tribunal held that assuming the firm to be genuine,  it was  not entitled to be registered under s. 26A of the  Act. Thereupon, the assessee moved the Tribunal under s. 66(1) of the  Act.  That application was granted by the  order  dated February 2, 1954, and the case stated to the High Court  for its decision on the following question :- "  Whether the assessee firm which is alleged to  have  come into  existence  by a verbal agreement in  April,  1948,  is entitled to be registered under section 26A for the  purpose of   assessment  for  1949-50,  where  the   Instrument   of Partnership was drawn up only in September, 1949, after  the expiry of the relevant previous year ". The High’ Court Bench, presided over by Chakravarti, C.  J., by its judgment dated August 26, 1955, answered the question in  the negative.  The learned Chief Justice considered  the matter from all possible view-points, including grammatical, etymological and textual matters, and came to the conclusion that  "  constituted " meant created ". He  also  considered that the preposition under " is " obviously inappropriate after having convinced himself that " constituted could   be equated with "created".  He also found  no   difficulty   in observing that " some of the 646 paragraphs  of  the Form appear to be  ill-adjusted  to  the provisions  of  the  Act  and  the  Rules  ".  In  the  end, therefore, he concluded with the remarks: " It appears to me to  be desirable that the language of the section,  as  also that of the Rules should receive legislative attention ". In  Civil  Appeal No. 389 of 1957, Messrs.  D.  C.  Auddy  & Brothers, Calcutta, claim to be a partnership consisting  of Dulal  Chand Auddy, Prem Chand Auddy, Gora Chand  Auddy  and Kalipada  Nandy.  The partnership business is said  to  have begun  in  June, 1944.  An application was  made  on  August 24,1949,  for  the  registration of  the  partnership.   The Income-tax Officer and the Appellate Assistant  Commissioner were  of the opinion that the partnership was not a  genuine one,  and could not be registered.  Another reason  for  not ordering registration was that the partnership deed,  having been executed on June 2, 1948, could not be operative during the two years under consideration, namely, 1945-46 and 1946- 47.   On appeal, the Income. tax Appellate  Tribunal  rested its decision on the finding that the alleged partnership had not  been  constituted under an  instrument  of  partnership within the meaning of those words in s. 26A of the Act.   At the  instance of the assessee, the Tribunal framed the  fol- lowing question for determination by the High Court: "  Whether  the assessee firm constituted  orally  in  June, 1944,  can  validly be registered in  the  assessment  years 1945-46  and 1946-47 under Section 26A of the Indian  Income Tax Act on the basis of a Memorandum of Partnership executed in June 1948." The  other  parts  of  the statement  of  the  case  by  the Tribunal, refer to the merits of the assessment, with  which we  are  not  concerned in this appeal.  Hence,  it  is  not necessary  to  set  out those facts.  On this  part  of  the statement  of the case, the High Court gave the same  answer as  in the other appeal.  In this case also, the High  Court granted the necessary certificate under s. 66A(2), read with

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art.  135 of the Constitution.  As both the cases raise  the same  question  of law, they have been heard  together,  and will be governed by this judgment. 647 It  is  convenient  at this stage to set  out  the  relevant provisions  of  the Act.  Section 26A is in these  terms  :" 26A.   Procedure in registration of  firms.-(I)  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 super tax. (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 verified in such  manner,  as may be prescribed and it shall be dealt with ’by the Income- tax Officer in such manner as may be prescribed." The  section contemplates the framing of rules  laying  down the  details of the Form in which the application has to  be made  and  the  particulars which should be  stated  in  the application,  and other cognate matters.  Section 59 of  the Act, authorizes the Central Board of Revenue, subject to the control  of  the  Central  Government,  to  make  rules  for carrying  out the purposes of the Act, and sub-s. (5) of  s. 59  provides  that rules made under the  section,  shall  be published  in  the Official Gazette, and "  shall  thereupon have effect as if enacted in this Act".  Income-tax Rules  2 to  6B lay down the details of the procedure for  making  an application for the registration of a firm, as  contemplated under  s. 26A, quoted above.  These rules have been  amended extensively in 1952, but we are concerned in this case  with the rules before those amendments.  Rule 2 requires such  an application to be signed by all the partners personally, and to be made before the income of the firm is assessed for the year,  under  s. 23 of the Act.  Rule 3  requires  that  the application  be  made in the Form annexed to the  rule,  and that  the application shall be accompanied by  the  original Instrument   of,  Partnership  under  which  the   firm   is constituted.........  The Form appearing in r.  3,  requires the assessment year to be specified.  Thus, the registration is  for a particular year of assessment, and not for  future years also, and therefore, the application for  registration has 648 to  be made every year, which in fact means  an  application for  renewal of the registration.  Paragraph 3 of  the  Form requires  a certificate to be signed by the  applicants  for registration,  to the effect that the profits (or  loss,  if any) of the previous year were divided or credited as  shown in  Section  B  of  the Schedule.   The  Form  contains  the Schedule  in  7  columns which require  the  names  of  the- partners,  their  addresses,  the  date  of  admittance   to partnership,  their shares in the profits or loss, etc.,  to be  filled in.  Under the Schedule, there are Section A  and Section B. Section A has to contain particulars of the  firm as constituted at the date of the application, and Section B has  to contain the particulars of the apportionment of  the income,  profits or gains (or loss) of the business  in  the previous year between the partners who in that previous year were entitled to share therein.  Rule 4 provides that if the Income-tax Officer. is satisfied that there is or was a firm in  existence  constituted  as shown in  the  instrument  of partnership,  and  that the application  has  been  properly made,  he  has  to enter a certificate at the  foot  of  the Instrument of Partnership that the firm has been  registered

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under  s.  26A  of  the Act, and  that  the  certificate  of registration  shall have effect for the assessment  for  the year  specified  therein.   Rule 5 is as  follows:"  5.  The  certificate of registration granted under  Rule  4 shall have effect only for the assessment to be made for the year  mentioned therein."And Rule 6 makes provision for  the certificate  of registration to be renewed for a  subsequent year,  on  an  application  being made  in  that  behalf  in accordance with the preceding Rules. It  is manifest that for a true and proper  construction  of the relevant provisions of the Act, relating to registration of  firms,  ss.  26, 26A and 28, and  the  Rules  summarized above, have to be read together.  So read, it is  reasonably clear  that  the’  following essential  conditions  must  be fulfilled  in  order  that a firm may be  held  entitled  to registration:- (1)  That the firm should be constituted under an Instrument of  Partnership,  specifying the individual  shares  of  the partners. 649 (2)  That  an application on behalf of, and signed  by,  all the  partners, containing all the particulars as set out  in the Rules, has been made; (3)  That   the  application  has  been  made   before   the assessment  of the income of the firm, made under s.  23  of the  Act (omitting the words not necessary for  our  present purpose), for that particular year; (4)  That  the  profits (or loss, if any)  of  the  business relating to the previous year, that is to say, the  relevant accounting  year, should have been divided or  credited,  as the  case  may  be,  in accordance with  the  terms  of  the Instrument; and lastly, (5)  That  the partnership must have been genuine, and  must actually  have  existed  in conformity with  the  terms  and conditions of the Instrument. It is clear from what has been said above with reference  to the relevant provisions of the Act, that the certificate  of registration has reference to a particular assessment  year, and  has  effect  for the assessment to  be  made  for  that particular   year.   In  other  words,  the  terms  of   the partnership  should appear in the Instrument of  Partnership in  respect of the relevant accounting year.  It is  equally clear  that the firm to be registered, should have  been  in existence during the accounting year, " constituted as shown in  the  Instrument  of  Partnership  ".  The  Rules,  thus, contemplate a document operative during the accounting year. We are not here concerned with the further question  whether the document should be in existence at the very inception of the accounting year, or before the year is out. The provisions of the Act, set out above, do not present any serious difficulty except for the words it constituted under an  Instrument of Partnership " occurring in s. 26A and  the relevant Rules.  On the interpretation of these words, there has  been a conflict of judicial opinion, as will  presently appear.   On behalf of the assessee-appellants, it has  been contended that so long as the assessment has not been  made, the assessees are entitled to have their firms registered in accordance with the terms of the Instrument of 82 650 Partnership,   irrespective  of  the  year  in   which   the Instrument  may have come into existence.   Strong  reliance was  placed  upon  the decision of  the  Bombay  High  Court (Chagla, C. J., and Tendolkar, J.) in the case of  Dwarkadas Khetan  &  Co. v. Commissioner of Income-tax,  Bombay  City,

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Bombay(1),  wherein,  the following observations  have  been made:- "  Any  firm can make an application under section  26A  for registration  and  the  two conditions that it  has  got  to comply  with  are  that  it must  be  constituted  under  an instrument  of partnership and the second condition is  that the  instrument of partnership must specify  the  individual shares  of  the  partners.   If  these  two  conditions  are satisfied it would be entitled to registration.  The section does  not  say  that the firm 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 partnership, 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. In the case decided by the Bombay High Court, the Instrument of  Partnership  had been executed on March 27,  1946,  with effect from January 1, 1946.  On an application made to  the Department  to register the firm, the matter was  determined by the Income-tax Appellate Tribunal against the assessee on the ground that the partnership was in existence before  the deed  was  executed, and that, therefore, it  could  not  be registered.  Before the Bombay High Court, reliance had been placed  on behalf of the Department on the decision  of  the Calcutta  High Court, now before us in appeal, as also on  a decision  of  the Punjab High Court.  The  decision  of  the Calcutta High Court now under examination, in the case of R. C.  Mitter & Sons v. Commissioner of Income-tax  (2),  takes the view that s. 26A of the Act contemplates a firm  created or  brought into existence by an Instrument of  Partnership, which  governs  the distribution of shares in  the  relevant accounting period.  Such a deed should have (1)  [1956) 29 I.T.R. 903, 907.  (2) [1955] 28  I.T.R.  698, 704, 705. 651 come  into existence on or, before the commencement  of  the relevant accounting period.  The other decision relied  upon in the Bombay High Court, had been given by a Division Bench of  the Punjab High Court, reported in Padam Parshad  Rattan Chand v. Commissioner of Income-tax, Delhi (1). On  the other hand, it has been contended on behalf  of  the Revenue  that in order to entitle a firm to  be  registered, the  firm  should  have been created  by  an  Instrument  of Partnership, or at any rate, such an Instrument should be in existence during the relevant accounting year, that is,  the year previous to the year of assessment in respect of  which the  application  for registration has been made.   For  the first  part of the submission on behalf of  the  respondent, there is ample authority in the decision under appeal, which bad been relied upon before the Bombay High Court.  In  that case,  (R.  C. Mitter & Sons v. Commissioner  of  Income-tax (supra) (2) ), Chakravarti, C. J., who delivered the opinion of  the  Court  under  s. 66(1) of the  Act,  after  a  very elaborate discussion, came to the conclusion which may  best be expressed in his own words, as follows:- " If by the expression I constituted under an instrument  of partnership’  is meant a firm which originated in  a  verbal agreement  but  with  respect to which  a  formal  deed  was subsequently executed, there would be no room in the section for partnerships actually created by an instrument and  such partnerships,   although   most   obviously   entitled    to registration,  would  be excluded from the  purview  of  the section.   Even etymologically or textually, I do Dot  think that the word constituted’, when used in relation to a  firm or such other body, can mean anything but I created when the

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reference  is  to  some  deed or  instrument  to  which  the inception of the firm or other body is to be traced.  " After  having,  thus, held that s.  26A  contemplated  firms created  or brought into existence by a deed in writing,  he had  no  difficulty in substituting " by " for  "  under  ", thus, making the crucial words " constituted (I) [1954] 25 I.T.R. 335. (2) [1955] 28 I.T.R. 698, 704, 705. 652 by  " instead of " constituted under ". In our opinion,  the learned Chief Justice fell into the error of re-constructing the  provisions of the statute, instead of construing  them. The word " by " could be substituted for the word " under  " in  s. 26A only if the words, as they stand in the  section, were  not capable of making sense, and it would, thus,  have been necessary to amend the wording of the section.  Turning his attention from the wording of the section to that of the Rules and the Form appearing under the Rules, he again  came to the conclusion that " some of the paragraphs of the  Form appear  to be ill-adjusted to the provisions of the  Act  ". Referring to other parts of the Rules, he was constrained to observe that they"  would  lend strong support to  the  view that  what  is  meant  by ’any  firm  constituted  under  an instrument of partnership’ in section 26A is no more than  a fir of which the constitution appears from an instrument  in writing.   It is obvious that if such be the meaning of  the expression ’constituted under an instrument of partnership’, the instrument need not be one by which the partnership  was created ". But then he attempted to get over that difficulty by  observing  that the language of the Rules and  the  Form could not supersede a provision contained in the Act itself. He  further opined that the language in para. 4(1) is "  un- doubtedly  unsatisfactory ". In our opinion, any attempt  to reconstruct  the provisions of the relevant section and  the Rules,   on  the  assumption  that  the  intention  of   the legislature  was to limit the registration of firms to  only those   which  have  been  created  by  an   Instrument   of Partnership,  is, with all respect, erroneous.   The  proper way  to  construe the provisions of the statute is  to  give full effect to all the words of the relevant provisions,  to try  to  read  them harmoniously, and then to  give  them  a sensible  meaning.   Hence,  we have  to  consider,  at  the threshold,  the  question whether the  words  "  constituted under an Instrument of Partnership " have some meaning which can be attributed to them harmoniously with the rest of  the relevant provisions.  A partnership may be created or set up by a contract in writing, 653 setting out all the terms and conditions of the partnership, but  there  may be many cases, and perhaps, such  cases  are more numerous than the other class, where a partnership  has been brought into existence by an oral agreement between the parties   on  certain    terms  and   conditions   which may subsequently  be  reduced to writing which will  answer  the description  of  an  Instrument  of  Partnership.   Such  an instrument  would,  naturally,  record  all  the  terms  and conditions  of the contract between the parties  which,.  at the  initial  stages, had not been reduced to  writing.   In such  a case, though the partnership had been  brought  into existence by an oral agreement amongst the partners, if  the terms and conditions of the partnership have been reduced to the  form of a document, it would be right to say  that  the partnership has been constituted under that instrument.  The word  " constituted " does not necessarily mean " created  " or  "  set  up ", though it may mean  that  also.   It  also

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includes the idea of clothing the agreement in a legal form. In  the  Oxford English Dictionary, Vol.  II, at pp.  875  & 876, the word " constitute " is said to mean, inter alia,  " to  set  up, establish, found (an institution, etc.)  "  and also  "  to  give legal or official form  or  shape  to  (an assembly, etc.) ". Thus, the word in its wider significance, would  include both, the idea of creating  or  establishing, and the idea of giving a legal form to, a partnership.   The Bench of the Calcutta High Court in the case of R. C. Mitter and Sons v. Commissioner of Income-tax(1), under examination now,  was  not, therefore, right in restricting the  word  " constitute  "  to mean only " to create ", when  clearly  it could  also  mean  putting a thing in a  legal  shape.   The Bombay  High  Court,  therefore, in the  case  of  Dwarkadas Khetan  and Co. v. Commissioner of Income-tax, Bombay  City, Bombay (2), was right in holding that the section could  not be  restricted in its application only to a firm  which  had been  created by an instrument of partnership, and  that  it could reasonably and in conformity with commercial practice, be  held  to  apply  to a firm  which  may  have  come  into existence earlier by an (1) [1955] 28 I.T.R. 698, 704, 705. (2) [1956] 29 I.T.R. 903, 907. 654 oral  agreement,  but  the  terms  and  conditions  of   the partnership have subsequently been reduced to the form of  a document.   If  we construe the word " constitute "  in  the larger  sense, as indicated above, the difficulty  in  which the  learned Chief Justice of the Calcutta High Court  found himself,  would  be obviated inasmuch as the  section  would take in cases both of firms coming into existence by  virtue of written documents as also those which may have  initially come  into existence by oral agreements, but which had  sub. sequently been constituted under written deeds.  The purpose of  the  provision  of the Income-tax Acts.  26A-is  not  to compel  the firms which had been brought into  existence  by oral  agreements, to dissolve themselves and to  go  through the  formality of constituting themselves by Instruments  of Partnership.  If we construe the words " constituted under " in that wider sense, we give effect to the intention of  the legislature  of  compelling a firm which bad  existed  as  a result  of  an  oral agreement, to  enter  into  a  document defining the terms and conditions of the partnership, so  as to  bind the partners to those terms, before they could  get the benefit of the provisions of s. 23 (5) (a).  Section  23 (5)  (a) confers a privilege upon partners who may  find  it more worth their while to be assessed upon their  individual total income than upon the total income of the  partnership. It  is, therefore, very important from the point of view  of the  Revenue that the Department should be apprised in  time of  the true constitution of the partnership, the  names  of the  true partners and the precise share of each of them  in the partnership profits (or loss, if any).  The very  object of  this provision will be defeated if the alleged  partner- ship  is  not genuine, or if the true  constitution  of  the partnership  and the respective shares of the partners,  are not  fully  and  correctly  placed  on  record  as  soon  as possible,   for  the  purpose  of  ’assessment.    In   this connection, the provisions of s. 28(2) of the Act, are  also worth  noticing.   That  sub-section provides  that  if  the Income-tax  Officer or the Appellate Authorities  under  the Act,  are  satisfied that the profits of a  registered  firm have been distributed otherwise than 655 in  accordance with the shares of the partners, as shown  in

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the Instrument of Partnership registered under the Act,  and governing  such  distribution,  and  that  any  partner  has concealed  any part of his profits, the  penalty  prescribed therein  may  be imposed upon such a  partner.   Unless  the Instrument of Partnership has been registered in respect  of the accounting year and before the assessment has been done, the  penal provisions aforesaid cannot be enforced.  It  is, therefore,   essential,   in   the   interest   of    proper administration  and enforcement of the  relevant  provisions relating to the registration of firms, that the firms should strictly comply with the requirements of the law, and it  is incumbent  upon  the Income-tax Authorities to  insist  upon full  compliance with the requirements of the law.  But,  in our  opinion,  there  is  no warrant in  the  words  of  the relevant   provisions   of  the  statute   for   restricting registration  under  s. 26A of the Act to those  firms  only which  have  been created or brought into  existence  by  an Instrument  of Partnership.  In our opinion, it is  more  in consonance with the terms of the relevant provisions of  the Act, referred to above, to hold that the words " constituted under an instrument of partnership " include not only  firms which have been created by an Instrument of Partnership  but also those which may have been created by word of mouth  but have been subsequently clothed in legal form by reducing the terms and conditions of the partnership to writing. We have already indicated that there has been a conflict  of judicial  opinion in the different High Courts in  India  on the  question now before us.  But on a consideration of  the facts  in  each  case, it will be found  that  the  decision arrived  at  in most of the cases, was correct,  though  the reasons given appear to have gone beyond the requirements of the  case.   The  decision  of  the  Bombay  High  Court  in Dwarkadas Khetan & Co. v.     Commissioner  of   Income-tax, Bombay City, Bombay (1), discloses that the partnership then in question had     come into existence with effect from the beginning of 1946, though the Instrument of Partnership (1)  [1956) 29 I.T.R. 903, 907. 656 was  executed  on March 27, 1946.  Thus, the  Instrument  of Partnership came into existence during the accounting  year, whatever that year may have been, because the year 1946  was the  starting year of the partner    Ship.   Hence, even the earliest assessment year, presumably the year 1947-48, would be  governed  by  the terms and conditions  of  the  written Instrument  of Partnership aforesaid.  The decision  of  the Bombay  High  Court was followed by the same Bench  of  that Court  in  the case of Commissioner  of  Income-tax,  Bombay North  v. Shantilal Vrajlal & Chandulal Dayalal &  Co.  (1). In the second case, the learned Judges ruled that the second partnership  deed of September 12, 1951, which set  out  the names  and  shares of all the partners who  constituted  the partnership,   could  be  registered  in  respect   of   the accounting  year  November,  1948 to  October,  1949.   This conclusion was arrived at without even a mention, far less a discussion,   of  the  relevant  provisions  of   the   Act. Apparently, the matter was not critically placed before  the learned Judges, when they decided the second case.  The con- clusion in this case is, with all respect, apparently  wrong in view of our conclusion that the Instrument of Partnership should have been in existence in the accounting year. In  the  High  Court  of  Punjab,  the  question  was  fully discussed in a judgment of a Division Bench, given by one of us  (Kapur,  J.,  as  he then was), in  the  case  of  Kalsi Mechanical  Works,  Nandpur v. Commissioner  of  Income-tax, Simla  (2).  In that case, the firm had come into  existence

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by   a  verbal  agreement  in  June,  1944.   The  deed   of partnership  was  drawn  up as late as  May  9,  1949.   The application  for registration of the firm under S.  26A  for the assessment year 1949-50, was dismissed by the lncome-tax Authorities as also by the Tribunal.  The High Court,  after an  elaborate examination of the relevant provisions of  the Act, including the Rules and the Forms, upheld the orders of the  Department.  The conclusion of the Bench was  in  these terms:- " The sections of the Income-tax Act show that (1) [1957] 3I I.T.R. 903. (2) [1953] 24 I.T.R. 353, 361. 657 for  the  purpose of registration it is necessary  that  the firm  should be constituted by an instrument of  partnership and in my opinion the Rules read with Sections 26 and 28  of the Act indicate that such a firm as is constituted under an instrument  of  partnership should have  been  in  existence during the account period and should not come into existence during  the assessment year, and if it was not in  existence during  the account period it cannot be registered so as  to affect  the  liabilities  of  the  partners  for  income-tax accruing during the account period." The conclusion reached is correct, except, with all respect, for the observation that under s. 26A, it is necessary  that the  firm  should  be constituted " by "  an  instrument  of partnership.  That is the leading judgment in the High Court of  Punjab.   It was followed by another Division  Bench  of that Court in the   case of Padam ParshadRattan Chand v. Commissioner   of Income-tax, Delhito  the effect  that constituted    under an instrument in    s.    26A,    meant created or     formed by a formal deed". In this case, the business of the firm had started from April 1, 1947, but the Instrument  of Partnership was executed on April  10,  1950. The application for registration was made in respect of  the assessment  year  1948-49.  It is clear  with  reference  to these  dates that the Instrument of Partnership was  not  in existence  either during the accounting year or even  during the assessment year, and the Court, therefore, rightly  held that  the partnership could not be registered in respect  of the  assessment year; but they proceeded further to  observe that  there  was no objection to the firm being  treated  as having  been  constituted under the Instrument as  from  the date  of the Instrument itself.  The answer of the Court  to the  question posed, was that the firm could  be  registered not  in  respect  of  the  assessment  year  for  which  the application had been made, but with effect from the date  of the Instrument.  Apparently, the attention of the Court  was not drawn to the Rules aforesaid, particularly, Rules 2  and 3, which require (1)  [1954] 25 I.T.R. 335. 83 658 that the application has to be made before the assessment is completed  and  for a particular assessment year.   More  or less  to  the  same effect, are  two  other  Division  Bench rulings  Of that High Court in Bery  Engineering  Co., Delhi v.  Commissioner  of Income-tax, Delhi  (1)  and  Income-tax Commissioner,  Delhi v. Messrs.  Birdhi Chand  Girdhari  Lal (2).  In all these cases in the Punjab High Court, the deeds came  into existence later than the accounting year  or  the assessment   year,  and  therefore,  could  not  have   been registered.   The  actual  decisions  in  these  cases  were correct,  though there are orbiter dicta to the effect  that s.  26A requires that the firm should have been  created  or

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set up by an Instrument of Partnership. In  the  Patna  High  Court,  the  very  same  question  was discussed at great length by a Division Bench of that Court, presided  over  by Ramaswami, C. J., in the case  of  Khimji Walji & Co. v. Commissioner of Income-tax, Bihar and  Orissa (3).    The  learned  Chief  Justice,  after  an   elaborate examination  of the relevant provisions of the Act, came  to the conclusion in these terms "  It  is necessary for the purpose  of  registration  under Section 26A that the partnership should be constituted by an instrument of partnership and that such a partnership as  is constituted  under an instrument of partnership should  have been in existence during the accounting year ". It  is  on  the same lines as the leading  judgment  of  the Punjab High Court, supra.  With reference to the dates given in the judgment, the decision is right, though, in this case also, the words " constituted under " have been construed as " constituted by ", without discussing the necessity for  so amending  the  words of the statute, even as in  the  Punjab High Court decisions. As  a  result  of the above discussion,  the  conclusion  is reasonably  clear that unless the partnership  business  was carried on in accordance with the terms of an Instrument  of Partnership which was operative during (1) [1955] 28 I.T.R. 227.        (2) [1955] 28 I.T.R. 28o. (3) [1954] 25 I.T.R. 462, 470. 659 the  accounting year, it cannot be registered in respect  of the  following  assessment  year.  As in  these  cases,  the partnership did not admittedly function under such a deed of partnership, the Department and the High Court were right in refusing  registration.  We would, therefore, dismiss  these appeals,  but  for different reasons to those  given  below. The  respondent is entitled to his costs-one set of  hearing fees to be paid half and half by the appellants. HIDAYATULLAH,  J.-I  have had the advantage of  reading  the judgment  just  delivered by my brother, Sinha, J.  I  agree that s. 26A of the Indian Income-tax Act must be read as  it is.   The  words  of the section, as  they  stand,  are  not meaningless,  and in view of the decision  in  Commissioners for   special Purpose of the Income-tax v. Pemsel (1) it  is not possible to read for the expression " constituted  under " the words constituted by ". I   entertain,  however,  some  doubt  as  to  whether   the instrument  sought to be registered, should be in  existence in the accounting year, before registration can be  claimed. There  is nothing in the Act which says  this  specifically. My brother has reasoned from the contents of the Act and the Rules  that such a condition is implied.  While I  entertain some doubts, I am not prepared to record a dissent, more  so as  the  Board of Revenue has issued instructions  that  all firms  should  be registered, whether  the  documents  under which  they were constituted existed in the accounting  year or not, provided the Income-tax Officer was satisfied  about the genuineness of the firms. In  the  result,  I agree that the appeals  should  be  dis. missed with costs.                               Appeals dismissed. (1) [1891] A.C. 531. 542. 660