Banaras Cloth Dealers Syndicate vs. Income Tax Officer matter is related to section 26, 26 (A) of the Income-tax Act,1922 and section 4 of the companies act 1913. Under it, a Question of the registration of the firm and its tax- assessment was involved. Section 26. Change in constitution of a firm under Indian Income-tax 1922-(1) Where, at the time of making an assessment under section 23, it is found that a change has occurred within the constitution of a firm or that a firm has been freshly brought about, the assessment shall be created on the firm as constituted at the time of constructing.
Provided that the income, profits and gains of the previous year shall, for the purpose of inclusion in the total incomes of the partners, be apportioned between the partners who in such previous year were entitled to receive the same: Provided further that when the tax assessed upon a partner cannot be recovered from him it shall be recovered from the firm as constituted at the time of making the assessment.
Where a person carrying on any business, profession or vocation has been succeeded in such capacity by another person, such person and such other person shall, subject to the provisions of sub-section (4) of section 25, each be assessed in respect of his actual share, if any, of the income, profits and gains of the previous year:
Provided that, once the person succeeded within the business, profession or vocation can’t be found, the assessment of the profits of the year during which the succession transpire up to the date of succession, and for the year preceding that year shall be made on the person succeeding him in like manner and to the same amount as it would are created on the person succeeded or once the tax in respect of the assessment created for either of such years assessed on the person succeeded can’t be recovered from him, it shall be payable by and recoverable from the person succeeding, and such person shall be entitled to recover from the person succeeded the amount of any tax so paid.
Section 26A. Procedure in the registration of firm under Indian income tax 1922-.—(1) The 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 needs of this Act and of the other enactment for the nonce good about income-tax or super-tax.
The appliance shall be created by such person or persons, and at such times and shall contain such particulars and shall be in such kind, and be verified in such manner, as is also prescribed; and it shall be forbidden by the Income-tax Officer in such manner as is also prescribed.
SECTION 4: Prohibition partnerships exceeding a certain number Under Companies act 1913:
- No company, association or partnership consisting of additional of than 10 persons shall be fashioned for the aim of carrying on the business of banking unless it’s registered as a corporation underneath this Act, or is formed in pursuance of an Act of Parliament or some other Indian law or of Royal Charter or Letters Patent.
- No company, association or partnership consisting of quite twenty persons shall be fashioned for the aim of carrying on the other business that has for its objects the acquisition of gain by the company, association or partnership, or by the individual members thence, unless it’s registered as a corporation beneath this Act, or is created in pursuance of an Act of Parliament or some other Indian law or of Royal Charter or Letters Patent.
- This section shall not apply to a joint family carrying on joint family trade or business and wherever 2 or additional such joint families kind a partnership, in computing the number of persons for the needs of this section, minor members of such families shall be excluded.
- Every member of an organization, association or partnership carrying on business in resistance of this section shall be in person chargeable for all liabilities incurred in such business.
- Someone WHO could be a member of a corporation, association or partnership shaped in resistance of this section shall be punishable with fine not prodigious one thousand rupees.
The facts of the Banaras Cloth Dealers Syndicate vs. Income Tax Officer, in brief, are as given hereafter. In pursuance of a scheme sponsored by the government for the distribution of cloth to the public, the appellate firm was formed. An instrument of partnership was drawn up incorporating the terms and conditions of the partnership consisting of 17 partners. In clause 18 of the partnership deed, it was laid down that all the parties on behalf of their firm are partners in this partnership deed, therefore, the partnership firm or the family firm of each party is and shall be entitled to take and liable to pay the dues ad outstanding of the syndicate.
Also Read: Kedar Nath Singh v/s State Of Bihar
Out of 17 partners of the above firm, 3 were individuals, 5 represented their Hindu undivided families and the remaining 9 represented other firms in which they were partners. Actually, the total number of partners in this firm was 30 as, 3 individuals and 7 adults members of the 5 Hindu undivided families and 20 partners of the 9 firms. Later on, a new partnership deed was prepared according to which there were only 21 members in the firm. An application on behalf of the firm for its registration under section 4 of the Income-tax Act 1922 was made, but the Registrar refused for registration. Thus an application for firm registration under section 26A of the companies act, 1913 was made, but that application was also cancelled due to the reasons that the number of members of firm was more than 20.
The appellate filed an appeal before the Income-tax Tribunal against the above order. Following plea was placed by the appellate before the tribunal:
- Signatures on partnership deed were of less than 20 members thus it was entertainable for registration.
- Where an adult member being representative of Hindu undivided family becomes the partner and due to it, the number of members becomes more than 20 then there will be no effect on registration.
- For the purpose of section 26 of the Income-tax Act, 1922 only those persons should be considered partners who had signed on partnership deed.
- For the purpose of registration of the firm, all those members of Hindu undivided family should not be included in calculation who are as representative in the firm.
But the Tribunal not accepted this plea and rejected the appeal considering that there were more than 20 members in the firm. The Banaras Cloth Dealers Syndicate vs. Income Tax Officer was referred to as the Allahabad high court.
The main considerable question before the high court was that whether in view of the provisions of section 4 of the Indian companies act, 1913 and section 26 of the Income-tax act, 1922, the Tribunal was justified in refusing registration of the firm?. There was one more question for consideration before the court that whether upon the proper construction of the instruments of partnership the real partners in the assessee syndicate were the individuals mentioned in the instructions or the partners included the members of the Hindu undivided families whom some of them represented as well as the partners of the firms whom some of the others represented.
The court considered the pleas of both parties and studied the legal arrangements in this regard. It was clarified by the court that according to section 4 of the company act, 1913 where a Hindu undivided family is a partner in a firm it will not be treated as a unit but all the adult members of the Hindu undivided family shall be considered to be the partners in the firm.
Similarly, a clear provision has also been laid down in the income tax act that neither Hindu undivided families nor firms can be partners in a partnership firm, and if it is so then all the members of the Hindu undivided family shall be treated partners of the partnership firm. In Banaras Cloth Dealers Syndicate vs. Income Tax Officer, the court has observed that those persons of Hindu undivided family included in the partnership firm, all members of that family will be treated as members of the partnership firm. According to it, the number of members of the firm exceeds 20 numbers. Under these circumstances, the refusal of registration of the firms was justified. Resultantly, the appeal of the appellants was dismissed by the high court with the cost.
Principles of law
The following principles of law have been propounded by the high courts:
- For the purpose of registration of a firm, the number of members of that firm should not more than 20.
- A member of the Hindu undivided family may be a member of the partnership firm but not the Hindu undivided family.
- According to section 26 of the Income-tax Act, 1922 registration of a deed can be refused if the signatures of all the members are thereupon and the share of them has not been mentioned.
- A firm cannot be a partner in other firms.
- If a firm becomes partners in other firms then all the members of that firm will be treated partners.