Income-tax Reference No. 74 of 1961

21st January, 1965.

Petitioner Counsel: S.P. Mehta, Y.P. Trivedi, U.T. Shah, S.J. Mehta
Respondent Counsel: G.N. Joshi, P.G. Gokhale

JUDGMENT

JUDGMENT:- V.S. Desai, J.-On a requisition by the High Court under s. 66(2) of the Indian Income-tax Act, 1922, the Income-tax Appellate Tribunal has drawn up a statement of the case referring the following question which it was directed to refer:

"Whether on the facts and in the circumstances of the case, was the Tribunal justified in holding that the application for registration was rightly rejected by the Income-tax authorities on the ground that there was no instrument of partnership?"

2. The question arises out of the proceedings relating to the assessment of the assessee for the assessment year 1950-51, for which the relevant accounting year was the year ended on December 31, 1949. The business of the assessee was of exporting raw wool procured in Rajasthan to England and America. It also owned a factory for ginning and pressing wool, an ice factory and a flour mill at a place in the erstwhile Indian State of Palanpur. The States in which the assessee was carrying on its business merged in the Indian Union, and from August 1, 1949, the Indian Income-tax Act, 1922, became applicable to the area. For the purpose of the assessment of the assessee for the year 1950-51, it applied for registration under s. 26A of the Indian Income-tax Act, on February 20, 1953. That application was signed by two persons as the partners of the assessee-firm, namely, Mohanbhai Devjibhai Hiraji and R.M. Dave. The partnership was alleged to have come into existence from January 1, 1946. The Income-tax Officer came to the conclusion that Dave was not a partner of the alleged partnership firm, because there was no regular deed of partnership; secondly, the Bank declarations of three banks showed that Dave was not a partner; and there were also certain other documents which showed that Dave was only a manager. The Income-tax Officer, therefore, refused registration. In the appeal to the Appellate Assistant Commissioner, he held that Dave was associated with the partnership and there was evidence showing that he was a working partner. He, however, held that there was no instrument of partnership under which the assessee-firm was constituted within the meaning of s. 26A of the Act, and the Income-tax Officer, therefore, was right in refusing registration. In the second appeal before the Tribunal, the Tribunal confirmed the decision of the Departmental authorities, holding that the partnership was not constituted under an instrument of partnership within the provisions of s. 26A of the Act.

3. Admittedly no properly executed partnership deed was produced before the Income-tax Officer. What was produced before him was an alleged draft of the partnership deed which was said to have been written up late in 1949. The assessee's case was that Mohanbhai Devjibhai, one of the partners, had gone to Pakistan and was unable to return to India for reasons of health. When the Indian Income-tax Act became applicable in August 1949, the partners wanted to have a deed of partnership executed. A draft was accordingly prepared which was taken by the other partner Dave to Pakistan, where it was shown to Mohanbhai Devjibhai, and was approved of by him. It was also agreed to between the partners that the regular deed of partnership should be executed in India on the return to India of Mohanbhai. Mohanbhai, however, could not return to India, and the draft therefore remained un-executed. In addition to this document, the assessee also relied on certain other documents, which were: an order of the Custodian of Evacuee Property, Bombay, passed on September 30, 1950, relating to the right, title and interest of Mohanbhai Devjibhai in the wool ginning and pressing factory, the ice factory and the flour mill, etc. In this order, it was observed by the Custodian that there was evidence to support the view that Dave was accepted as a working partner by Mohanbhai for a period up to 1956 with eight annas share in the profits. The next document was a copy of the writ application made by Dave in the High Court against the order of the Custodian of the Evacuee Property. This application was made on Junuary 2, 1951. The allegations in this application were to the effect that there was a partnership between him and Mohanbhai which had commenced from 1946 and in which each of them had an eight annas share. This application also made reference to the draft deed of partnership which was alleged to have been made late in 1949 and approved of by both the partners. In these writ proceedings, an affidavit was put in by Mohanbhai in February 1951, in which he stated that the draft deed of partnership referred to by Dave in the petition was prepared in the circumstances set out in the writ petition, and it was agreed that he would execute the said deed of partnership on his return to India from Karachi. A copy of the consent terms alleged to have been agreed to by the parties to the writ proceedings was also produced. The date on which these consent terms appear to have been agreed upon was November 21, 1951, and were to the effect that all properties including lands, buildings, structures, machinery and plant, acquired or brought or bought with the capital property by the evacuee for the partnership were to be deemed his exclusive property and all such property bought or acquired with the profits accrued during the partnerhsip was to be deemed the partnership property in which Dave was to have eight annas share. It was contended on behalf of the assessee that the draft deed of partnership along with other documents formed an instrument constituting a partnership and specifying the individual shares of the partners.

4. Now, under s. 26A, in order to obtain registration, the firm must be constituted under an instrument of partnership which specifies the individual shares of the partners. It is now well-settled that the instrument of partnership may be a single document, or may be spelt out of several documents. It is however, necessary that the single document or the several documents, constituting the partnership instrument, must bo in existence in the year of account. Now, in the present case all the other documents excepting the alleged draft of partnership deed were not in existence in the relevant accounting year which is the year ended on December 31, 1949, because all of them have come into existence after that date. The only document, which is said to have been in existence in the relevant accounting year is the draft of the partnership agreement, which is said to have been prepared late in 1949. Now, the said document itself is undated and unsigned, and there is nothing in the document itself to show that it was in existence in 1949. Moreover, it is difficult to see how the said document could qualify to be an instrument. The expression "instrument" imports a document of a formal legal kind. In Stroud's Judicial Dictionary, an "Instrument" is stated to be a writing generally importing a document of a formal legal kind. In the Dictionary of English Law by Earl Jowitt, pages 984-985, it is stated that an "Instrument" is a writing and generally means writing of a formal nature. The Shorter Oxford English Dictionary gives the meaning in law of the word "Instrument" as a formal legal document whereby a right is created or confirmed or a fact recorded; a formal writing of any kind, as an agreement, deed, charter or record, drawn up and executed in technical form. The Indian Stamp Act, s. 2(14) defines an instrument as including every document by which any right or liability is of purported to be created, transferred, limited, extended, extinguished or recorded. The word "instrument" therefore, as used in s. 26A of the Indian Income-tax Act will mean a document of a legal nature, by which any right or liability is or purported to be created, transferred, limited, extended, extinguished or recorded. The alleged draft which has been produced on behalf of the assessee could not be regarded as having created rights or liabilities or even forming a record of the same. A document, in order to create rights or liabilities or even to record rights and liabilities, must be executed by the parties, whose rights or liabilities the document creates, or whose rights and liabilities it records. A mere piece of a paper on which appears a recital of certain rights and liabilities could not by itself be able to fasten the said rights and liabilities to any particular person. Mr. Mehta has argued that although the document by itself would not be sufficient to show that it is the record of the rights and liabilities of certain specified persons, the said document along with further evidence showing that the contents of the documents relate to the rights and liabilities of certain specified individuals, and that the said certain specific individuals have agreed to and accepted the said contents, would make it an instrument recording the said facts. We are afraid, the argument even if it Were sound, does not avail Mr. Mehta in the present case. What is required Under s. 26A is a single document or a number of documents all existing in the relevant account year which will together form an instrument of partnership. If the documents by themselves do not have that effect, then there is ho instrument of partnership as is required under s. 26A. In the present case the only document alleged to have been in existence in the relevant account year is the draft and that by itself cannot show that it is the instrument of partnership of certain specified individuals namely Mohanbhai and Dave. Under s. 26A, the instrument has to be an instrument not of any partnership, but of the partnership of certain specified individuals. A mere record of some terms of partnership will not make the document an instrument of partnership of certain specified individuals. On the argument advanced by Mr. Mehta, what may make it a document relating to the partnership of certain specified individuals is not the document itself but the document coupled with certain other evidence. Under s. 26A, however, it must be the document itself which must constitute the instrument of partnership. In our opinion, therefore, the draft of partnership deed produced on behalf of the assessee will not be sufficient to constitute an instrument of partnership. The other documents, as we have already pointed out, will not avail, because they were not in existence in the year of account, and cannot, therefore, form part of the instrument of partnership.

5. The result, therefore, is that the Tribunal was right in the view it took that there was no instrument under which the partnership was constituted within the meaning of s. 26A of the Indian Income-tax Act, 1922.

6. Therefore, the question must be answered in the affirmative. The assessee will pay the costs of the Department.

Reference answered in the affirmative.