JUDGMENT
K.T. Desai, C.J.
1. This is a reference under section 66(1) of the Indian Income-tax Act, 1922, at the instance of the Commissioner of Income-tax, Bombay North, Ahmedabad. The assessee in this case is the firm of Messrs. A. Abdul Rahim and Co., Baroda, the assessment year being 1957-58, the accounting year being Samvat year 2012.
2. Prior to Samvat year 2012, the firm of Messrs. A. Abdul Rahim and Co., consisted of three partners by name Abdul Rahim Valibhai, Abdulla Rahman and Abdul Rahim Malangbhai. These three partners had the respective shares of 9 annas, 5 annas and 2 annas in the profit and loss of the said partnership. This partnership was registered till the end of Samvat year 2011, i.e., November 14, 1955. On March 6, 1956, a deed of partnership was executed by the aforesaid three partners, and by Abdulrehman Kalubhai, a nephew of the partner Abdul Rahim Valibhai. Under the deed of partnership it was provided that the share of Abdul Rahim Valibhai was 7 annas in a rupee, that the Abdulla Rehman was 5 annas in a rupee, that of Abdul Rahim Malangbhai was 2 annas in a rupee and that of the newly added partner, Abdulrehman Kalubhai was 2 annas in a rupee as from Kartak Sud 1st., Samvat year 2012, i.e., November 15, 1955. An application was made on May 8, 1956, to have this firm registered under the provisions of section 26A for the accounting year 2012. The Income-tax Officer came to the conclusion that Abdulrehman Kalubhai, the newly added partner, was not a genuine partner in the firm but was merely a benamidar for Abdul Rahim Valibhai. He took the review that a device had been adopted to divided the taxable income of Abdul Rahim Valibhai and the registration of the partnership was refused. The matter went before the Appellate Assistant Commissioner. In the course of his judgment he observed that it was not the Income-tax officer’s case that under the instrument of partnership, a partnership valid in law had not been brought into existence. He observed that the Income-tax officer, having found that Abdulrehman Kalubhai who was given a two annas share out of the former share of 9 annas of Abdul Rahim Valibhai was a benamidar of Abdul Rahim, ought not to have refused registration of the firm under section 26A of the Income-tax Act but should have “considered the share of Abdulrehman Kalubhai in the income of Abdul Rahim Valibhai.” The matter was carried to the Appellate Tribunal. The Tribunal in the course of its decision observed that for the purposes of the appeal there was no need to go into the genuineness of the arrangement between Abdul Rahim Valibhai, the uncle, and Abdulrehman Kalubhai, the nephew. The Tribunal observed that it had been found by the Appellate Assistant Commissioner to be not genuine. The Tribunal, however, held that without otherwise disturbing the main structure of the firm, one partner had given away a small part of his share to his nephew, that if this was not believed, it could not by any means affect the structure of the firm and that the structure must continue to be good for purposes of section 26A. It could only affect the distribution. The Appellate Tribunal upheld the order of the Appellate Assistant Commissioner. At the instance of the Commissioner of Income-tax, this reference has been made, the question of law raised being :
“Whether a partnership in which one partner is the benamidar of another partner could be registered under section 26A of the Indian Income-tax Act ?”
3. The principles contention urged before us by the learned Advocate-General who appears for the Commissioner of Income-tax is that as Abdulrehman Kalubhai, the nephew, was found to be a benamidar for his uncle, Abdul Rahim Valibhai, the firm was not entitled to be registered. He urged that the deed of partnership did not disclose the true beneficial interest of the partners in the profit and loss of the firm and that the firm was not liable to be registered under the provisions contained in section 26A of the Income-tax Act. Section 26A provides as under :
“(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 in income-tax or super-tax.”
4. This provision requires that the application for registration must be made on behalf of a firm which has been constituted under an instrument of partnership. It is further requisite that the instrument of partnership must specify the individual shares of the partners. In this case it is not disputed that the firm is constituted under an instrument of partnership. What is urged is the the instrument of partnership in question does not specify the correct individual shares of the partners. We shall deal with this argument a little later after considering the further requirements of law in this connection. Sub-section (2) of section 26A lays down that the application in this connection should 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 that it shall be dealt with by the Income-tax officer in such manner as many be prescribed. The term “prescribed” has been defined by section 2(10) to mean “prescribed by rules made under the Act”. That brings us to the rules. Section 59(5) of the Act provides that rules farmed under that section would have effect as it enacted in the Act. By rule 2 of the Indian Income-tax Rules, 1922, it is provided that any firm constituted under an instrument of partnership specifying the individual shares of the partners may, under the provisions of section 26A of the Indian Income-tax Act, 1922, register with the Income-tax Officer, the Particulars contained in the said instrument on application made in this behalf. This rule requires that the instrument of partnership must specify the individual shares of the partners. It further provides that the Income-tax Officer may register the particulars contained in the said instrument. The reference to the particulars contained in the instrument of partnership is a reference to the particulars regarding the partners and the individual shares of the partners as set out in the instrument of partnership. Rule 3 provides that the application should be accompanied by the original instrument of partnership under which the firm was constituted, together with a copy thereof. There is a provision for acceptance of a copy certified in writing by all the partners, if the original instrument could not conveniently be produced. The form of application on which some reliance has been placed by the learned Advocate-General provides as under :
“(1) We……. beg to apply for the registration of our firm under section 26A of the Indian Income-tax Act, 1922, for the assessment for the income-tax year…..
(2) The original/A certified copy of the Instrument of Partnership under which the firm is constituted specifying the individual shares of the partners together with a copy/duplicate copy, is enclosed. The prescribed particulars dare given in the Schedule below.
(3) We do hereby certify that the profits (or loss, if any) of the previous year will be divided or credited as shown in section B of the Schedule and that the information given above and in the attached Schedule is correct.”
5. The form is required to be signed by all the partners. It is an application to be made by all the partners. Not merely the instrument of partnership or a certified copy thereof is required to be enclosed, but in certain circumstances it has further to be certified by all the partners that the profits or loss of the firm would be divided or credited as shown in Section B of the Schedule. From this it appears that it is necessary that the particulars of the partners and their respective shares as shown in the deed of partnership must correctly represent the true position of the partners qua the firm. Our attention has also been drawn to rule 4 which provides that if, on receipt of the application, the Income-tax Officer was satisfied that there was a firm in existence, constituted as shown in the instrument of partnership and that the application had been properly made, he should enter in writing at the foot of the instrument or certified copy, as the case may be, a certificate in the following form :
“This instrument of partnership/certified copy of an instrument of partnership, has this day been registered with me, the Income-tax Officer for…. in the State of…. under section 26A of the Indian Income-tax Act, 1922, and this certificate of registration shall have effect for the assessment for the Year ending on the 31st day of March….”
Sub-clause (2) of rule 4 provides that if the Income-tax Officer was not so satisfied, he should pass an order in writing refusing to recognise the instrument of partnership, or the certified copy thereof, and furnish a copy thereof to the applicants. From this rule it is clear that before granting recognition to the instrument of partnership, the Income-tax Officer has to be satisfied that there was firm in existence constituted as shown in the instrument of partnership. If there was not in existence any firm constituted as shown in the instrument of partnership, then the Income-tax Officer would be justified in refusing to register the firm. The provisions of section 26A and of these rules clearly require that the firm constituted as shown in the instrument of partnership could be registered under rule 4.
6. The firm in the present case has been shown in the Instrument of partnership to have been constituted of four partners, with shares of 7 annas, 5 annas, 2 annas and 2 annas respectively as mentioned by us earlier. If there was no such firm in existence with such partners having such shares, then the firm was not liable to be registered under the provisions contained in the Income-tax Act and the rules made thereunder. The Appellate Tribunal considered that there was a genuine firm in existence. They, however, considered that there was no need to go into the question of the genuineness of the arrangement between Abdul Rahim Valibhai, the uncle, and Abdulrehman Kalubhai, the nephew. The real point for consideration in such case is whether, so far as the firm is concerned, there was a binding agreement amongst the partners whereunder the persons who were brought together as partners as specified in the instrument of partnership were entitled to the shares in the profit and loss of the firm as specified in the instrument of partnership. Under the provisions of section 2(6B) of the Income-tax Act, it is provide that the terms “firm”, “partner” and “partnership” have the same meanings respectively as in the Indian Partnership Act, 1932, provide that the expression “partner” would include any person who being a minor had been admitted to the benefits of partnership. When we turn to the definition of partnership under section 4 of the Indian Partnership Act, 1932, we find that partnership is defined as 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 and that persons who have entered into partnership with one another are called individually “partners” and collectively “a firm”. What is required under the provisions of the Indian Income-tax Act and the Rules is that the instrument of partnership must correctly set out the names of the partners and the individual shares of the partners in the partnership. If the instrument of partnership does not correctly set out the names of the partners or the shares of the individual partners, then that instrument of partnership is not liable to be registered under the provisions of the Act and the Rules.
7. While applying the provisions of law to the facts of the present case, what we have to consider is, whether the deed of partnership in question correctly sets out the names of the partners and correctly sets out the shares of the partners so far as the agreement amongst all the partners is concerned. If the deed does not set out correctly such agreement in this respect amongst the partners, then that deed of partnership is not liable to be registered. If there is an arrangement arrived at between two out of the four partners of the firm binding on those two partners alone and not binding on the partnership, the same cannot be taken into consideration for the purpose of considering whether the instrument of partnership is one which is capable of being registered under the provision of the Act. If there is an arrangement amongst all the partners that the share standing in the name of the partner Abdulrehman Kalubhai was not to belong to him but to the partner Abdul Rahim Valibhai, then the deed of partnership would not represent the true position amongst the partners and their true shares in the firm and the instrument would not be liable to be registered under the Act. In the present case there is no finding given by the Appellate Tribunal to the effect that an agreement was arrived at amongst all the partners that the share of Abdulrehman Kalubhai should be treated as the share of his uncle, Abdul Rahim Valibhai. In the circumstances, it is not possible for us to hold that the firm had not made a true disclosure in the deed of partnership about the names of the partners and their respective shares and was disentitled to have itself registered under the provisions of section 26A of the Income-tax Act.
8. It is next urged by the learned Advocate-General that even though the partners set out in the deed of partnership and in the application made for the registration of the firm may qua the firm represent the true position, yet the firm could not get itself registered as the statement that was submitted for the purpose of getting the firm registered was inaccurate as regards two of the signatories thereto, namely, Abdulrehman Kalubhai and Abdul Rahim Valibhai. What he urges is that the form requires that all the partners should set out the names of the partners together with their respective shares. It is urged that so far as two of the partners were concerned, the particulars set out could not be said to be true. Abdul Rahim Valibhai knew that he had a 9 annas share in the profits of the firm and Abdulrehman Kalubhai knew that he had no beneficial interest in the profits of the firm. It is urged that if these two persons make a statement to the effect that the profits of the firm will be divided so that a 7 annas share only goes to Abdulrehman Kalubhai, that would not represent the true state of affairs amongst these two persons. It is urged that the very object of registration of a firm is to secure that the profits of the firm would be taxed in the hands of the partners in proportion to their respective shares and it is required that there should be an instrument of partnership which would evidence the names of the partners and their individual shares in the partnership and that the object of the Legislature would be defeated if a partnership where one partner hold his share benami for another to any extent is registered.
9. Strong reliance in support of this argument has been placed upon a decision of the Bombay High Court in In re Central Talkies Circuit. It is a decision of a Division Bench of the Bombay High Court consisting of Chief Justice Beaumont and Kania J., as he then was. In that case the assessee was a firm carrying on business in Bombay. Till July, 1937, the partnership was constituted of one V. H. Desai, his wife, his two sons one of whom was a minor and two outsiders. The wife and minor son of V. H. Desai held a 3 annas and a 2 annas share respectively in the partnership. After the amendment of section 16(3) of the Income-tax Act in 1937, the constitution of the firm was changed and instead of the wife and the minor son being shown as being entitled to a 5 annas share, the mother of V. H. Desai was shown as being entitled to a 4 1/2 annas share in the partnership. The remaining half annas share was added to the share of V. H. Desai. An application was made for the registration of the firm constituted as aforesaid after the change made therein as aforesaid. That application was rejected by all the income-tax authorities on the ground that it was not a genuine partnership. When the matter came up before the High Court on a reference being made under section 66(3) of the Income-tax Act, 1922, Chief Justice Beaumont, in dealing with the relevant provisions of the Income-tax Act, expresses himself in terms following :
“Under rule 2 the only person who can apply for registration is a firm constituted under an instrument of partnership specifying the individual shares of the partners, which must, of course, mean specifying correctly the individual shares of the partners. I think it is open, whether under the old rule or the new rule, to the Income-tax Officer to say that the shares, which appear in the deed, are not the true shares of the partners, and, therefore, there is no proper application by the requisite firm.”
10. Thereafter speaking for himself, in view of the fact that a somewhat different view was expressed by Kania J., the learned Chief Justice observes that he should say that if it were shown that one of the partners was only a nominee of share allotted to him or her for another partner, the deed would not then specify correctly the individual shares. He then proceeds to observe as follows :
“I think it must specify correctly the individual and beneficial shares, because that is a matter which is relevant from the point of view of the income-tax authorities.”
11. Kania J., in the course of a separate judgment delivered by him in that case, expresses himself in terms following :
“The question, then, is whether in the present case the Commissioner was right in holding that there was evidence on which he could come to the conclusion that the partnership deed as put forth was not genuine. The contention involves the question whether the statement of shares of the individual partners as mentioned in the deed is also correct. No particular reported case has been cited in which this last mentioned question has been specifically raised. It appears to me that if it is conceded that the Commissioner has the power to inquire whether the partnership deed as put forth by the applicants is genuine or not, it does involve a consideration whether the share of an individual partner as mentioned therein is also correctly stated or not. For example, if the share of a partner were stated to be 5 annas, and on inquiry and taking evidence the Commissioner definitely came to the conclusion that the share was 4 annas, the partnership agreement as put forth by the applicants would not be correct, and there appears to be little doubt that the Commissioner would be entitled to hold that the deed executed by the applicants was not a correct partnership deed.”
12. He, however, was at pains to point out that it was not the case of the applicant firm that the mother was a trustee in respect of the share standing in her name for her son or for any other partner. He proceeds to observe that if such a case had been put forth, it would have been inquired into and that he expressed no opinion as to what the result of the inquiry would have been. For the purpose of that case, in view of the fact that the partnership as represented by the instrument of partnership was not a genuine partnership, no other question really arose for consideration. No doubt Chief Justice Beaumont took the view that if it were shown that a partner was a nominee of a share allotted to him for another partner, the deed would not correctly specify the individual shares. The point which really requires consideration is as to what a deed or an instrument of partnership should specify. The instrument of partnership can specify only that which is agreed upon amongst all the partners, it cannot be said that the deed is in any sense incorrect and if an application for registration of the firm is made which correctly sets forth what is stated in the instrument of partnership, then it cannot be said that any of the particulars given in the application are incorrect and that the firm is not entitled to have itself registered by reason thereof. There might be arrangements secret or otherwise arrived at between some of the partners, as regards the shares held by them in connection with the business of the partnership. A partner might be holding his share as a member of a joint and undivided Hindu family. A partner might be a benamidar for an outsider in connection with the whole or part of his share in the partnership. A partner may have a sub-partner in connection with the share held by him. A partner may not hold the whole beneficial interest in the profits coming to his share. There might be a divergence between the legal ownership and the beneficial ownership in respect of the amount of profit which may come to the share of a partner. Other partners may not in any way be concerned with the same. They may not be aware of the same and even if they are aware of the same, they may not be a party or privy to the agreement whereunder the same arises. It is not possible to refuse registration to a firm merely because a partner may have dealt with the beneficial ownership in respect of his share in any particular manner. If it is a term of an agreement amongst all the partners of the firm that the beneficial interest of a partner should not be held by him wholly or in part and if that is not set out or recorded in the deed of partnership which is presented for registration, then the true position binding on the firm would not be disclosed by the firm and its partners. What is required under the provisions of the Act and the Rules is that when partners of a firm execute an instrument of partnership and when partners of a firm apply for registration of the firm, they must state correctly the true position of affairs qua the firm. Once that position is truly set forth, in our view, there is no impediment to the registration of the firm. If, as contended by the learned Advocate-General, Chief Justice Beaumont has laid down that where it is shown that one of the partners was only a nominee of the share allotted to him for another partner, the deed of partnership would not then of necessity specify correctly the individual shares, we are, with respect, unable to accede to the proposition. If one partner was a nominee of a share allotted to him for another as a result of an arrangement arrived at amongst all the partners, then no doubt the deed would not specify correctly the individual shares. But if that situation arises as a result of an agreement only amongst some of the partners, then it cannot be said that the other partners, who may not be party or privy thereto, were under an obligation to find out the facts and make the same a term or condition of the partnership and record the same in the deed. If such a contention is accepted, a number of firms would not be registered under the provisions of section 26A merely because a partner happened to give away his beneficial interest or merely because a partner was representing a joint Hindu family or any other person or entity in connection with the business of the partnership even without the knowledge of the other partners.
13. There is a reference made by the Tribunal to an unreported decision of the Bombay High Court in Commissioner of Income-tax v. H. Gulamally & Co. It is a decision of a Division Bench consisting of Chief Justice Chagla and Justice Tendolkar given on March 2, 1955. The Tribunal has observed that the aforesaid case could be considered more or less a direct authority on the point that was at issue before them. We have gone through that decision. That decision has not been pressed at the Bar on either side as an authority on the point at issue and in view thereof it is not necessary for us to deal with that case. suffice it to say that the aforesaid case is not decisive of the point that has arisen for consideration before us.
14. The question that has been framed in this case is of an academic character. An abstract proposition of law is sought to be elucidated by the question. By that question we have been asked to consider whether a partnership in which one partner is the benamidar of another partner could be registered under section 26A of the Indian Income-tax Act. We have already dealt with this question in the course of the judgment. This question does not really bring out the true matter in controversy between the parties. It is necessary to reframe the question and the question as reframed by us is the following :
“Whether on the facts and in the circumstances of the case, the partnership constituted under the instrument of partnership dated March 6, 1956, could be registered under section 26A of the Indian Income-tax Act ?”
15. In our view the answer to the question is in the affirmative. The Commissioner will pay to the assessee the sum of Rs. 500 as and by way of the costs of the reference.
16. Question answered in the affirmative.
