JUDGMENT
1. This is a Reference by the Commissioner of Income-Tax, under Section 66 (2) of the Indian Income-Tax Act, XI of 1922. The assessees, at whose instance the Reference has been made, are a firm carrying on business at Hathras, in the Aligarh District, under the style of the "Lalla Mal Hardeo Das Cotton Spinning Company" they may be conveniently referred to hereafter as "the objectors."
2. In the petition which led to the Reference, they sought to raise sundry questions of detail in respect of which no reference had been made. The Commissioner's action in this respect has been perfectly correct. The Commissioner is required to refer to the High Court any question of law arising out of any order made by him under Section 32 of the Act. The objectors are seeking to raise questions not referred to in their petition of appeal to the Commissioner; obviously no reference can be made to the High Court on any such question.
3. There remain two points set forth in the Reference. One of these is of no great practical co sequence and may be disposed of at once. The objectors were being assesed to Income-Tax for the financial year 1922-23 on the basis of the profits disclosed by their accounts for the calendar year 1921. In those accounts a total sum of Rs. 42,882 was shown as interest paid on account of money advanced during the year by partners in the firm for the purpose of carrying on the business. The objectors claim that this interest should be treated as an "allowance" admissible under Section 10(2) (III) of the Indian Income Tax Act, and should, therefore, be deducted from the net profits of the year before these art assessed to Incomt-Tax, The Assistant Commissioner, who examined the books of the firm, reports that the money in respect of which chis interest is charged in the account was not really "capital borrowed for the purposes of the business," but represented, "Only an advance of capital by the partners." This is so nearly a pure question of fact that It is not easy to formulate any question of law arising thereon in respect of which we can give an opinion. In the Order of Reference itself the question is stated thus:
Is the sum paid as interest to partners for capital put into a firm an allowance admissible under Section No. (2)(III)?
4. To the question, as thus stated, our answer is:--"No: such interest represents merely an assignment of a part of the not profits for the year in favour of partners who are regarded as entitled to such assignment by reason of special advances of capital made by them in the course of the year."
5. The question whether there has been an advance of capital by particular partners, or a bona fide borrowing of money by the firm, in which the lender happens to be a partner in the firm, must be treated as one of fact in each case. We are not called upon to enter into questions of fact; but we feel bound to add that the facts laid before us in the course of arguments on both sides have not left us under the impression that the objectors have suffered injustice in this matter.
6. The other question raised by this Order of Reference is one of great importance to the objectors. They have been required to pay no less a sum than Rs. 81,641-9-0 as super-tax on account of the year underassessment. They contend that they are not liable to super-tax, because they were, during the financial year 1922-23, A."registered firm", within the meaning of that expression as defined in Section 2 (14) of the Indian Income-Tax Act. The Commissioner, affirming the order of the Assistant Commissioner, has held that they were not; and the question has been referred to us in the following form:
Whether, when the firm did not apply for registration as prescribed by statutory rules prior to the last day by which its return of income for the year was due, it can be held to be a registered firm for the year in question by filing the application prior to the assessment.
7. Here, again, the question of law has been stated to us in a form which only admits of one answer, and that answer a negative.
8. By definition, a "registered firm" is one "constituted under an instrument of partnership specifying the individual shares of the partners of which the prescribed particulars have been registered with the Income-Tax Officer in the prescribed manner."
9. By Clause (10) of the same Section 2 the word "prescribed" means "prescribed by rules made under this Act." It is not denied that certain rules have been made by competent authority, and duly published so as to "have effect as if enacted in this Act" (vide Section 59 (4) of the same) which "prescribe" the manner in which a firm entitled to do so can get itself "registered". Those rules have been laid before us. In rule 2 it is laid down that the application to the Income Tax Officer must be made "on or before the date on which a return is due under Sub-section (2) of Section 22 of the Indian Income Tax Act." In rule 3 it is laid down that the application must be in a prescribed form and be accompanied by the original instrument of partnership under which the firm is constituted, together with a copy thereof. The Income-Tax Officer is empowered in special cases to dispense with the production of the original instrument, but a properly authenticated copy must always be produced.
10. Now, in the present instance, it is not denied that the very latest date on which a return was due from the objectors under Sub-section (2) of Section 22 of the Indian Income Tax Act was the 5th of July 1922. On this date there was not even in existence "an instrument of partnership specifying the individual shares of the partners" in the Lalla Mal-Hardeo Dass Cotton Spinning Company: such an instrument only came into existence on July 20th 1922. Not only, therefore, is it a fact that the objectors did not apply to the Income-Tax Officer within the period limited by Rule 2; but that period actually expired before they had put themselves in a position to make such an application by executing the., "instrument of partnership" necessary to entitle them to do so. It follows inevitably that the objectors never brought themselves within the definition of a "registered firm" by getting the "prescribed particulars registered with the Income-Tax Officer in the prescribed manner."
11. These considerations are sufficient to dispose of the Reference; but it is perhaps expedient that we should go into certain points a little further. In the course of an exceedingly able, and indeed exhaustive, statement of the case on behalf of his clients, Dr. Sen, who represented the objectors, raised two points which are not exactly covered by the remarks hitherto made.
12. First, he contended that, even though his clients may not have presented their application to the Income Tax Officer within the prescribed period, that Officer had condoned the irregularity by accepting an application presented to him, in the first instance, on January 2nd 1923, and once more presented after amendment on January 5th 1923; that the said Officer did actually register their firm by an order which purports to effect registration from January 30th to March 31st 1923; that such registration, once effected, necessarily operates from the commencement of the financial year 1922-23, and that, in any event, the effect of this certificate is to entitle the objectors to immunity from the super-tax for two months of the financial year.
13. Secondly, Dr. Sen represented, in various forms and in connection with different parts of his argument, the contention that his clients were entitled to a generous interpretation in their favour of a fiscal enactment; that they were the victims of chicanery on the part of the officials of the Income-Tax Department; and, generally, that the equities of the case were entirely in their favour.
14. To the first point it would be almost a sufficient answer to say that the mere blunder of an Income-Tax Officer could not make the objectors a "registered firm" for the purposes of assessment during the financial year 1922-23, if they were not such within the meaning of the definition. Indeed, the exigencies of Dr. Sen's argument brought him perilously near the position that a formal certificate of registration, dishonestly or corruptly issued by an Income-Tax Officer in flat defianex of the rules, would bind the Income-Tax Authorities and carry with it a right of exemption from super-tax. In the present instance, of course, there is no suggestion of intentional misconduct on the part of the Income-Tax Officer. Indeed, it is obvious that he did not himself regard the certificate granted by him as of any effect prior to the 30th of January 1923. Nor could it have any such effect, supposing it to be otherwise valid; for in rule 5 of the rules on the subject it is expressly laid down that such a certificate of registration "shall have effect from the date of registration." Obviously, this certificate was never intended to affect the liability of the objectors to payment of super-tax which was being levied in respect of the earnings of their firm during the calendar year 1921. That liability could not be split up so as to be enforced for part only of the financial year 1922-23; the objectors had finally lost their right to the privileges of a "registered firm" for that year, when the 5th of July 1922 went by without their even having executed an instrument of partnership. The certificate issued by the Income-Tax Officer on January 30th 1923 may have been intended to save the objectors trouble by enabling them, during the next financial year, to apply for a renewal of the certificate, instead of having to take out a new one: it could have no other possible effect.
15. We can make these matters even clearer by dealing briefly with Dr. Sen's next point
16. On April 5th 1922 the objectors were served with a formal notice calling on them to put in a return of their income for the calendar year 1921, and giving them a month in which to do so. On May 4th 1922 the objectors obtained a month's extension of time.
17. On June 3rd 1922 they put in two applications. One of these asked for another month's time in which to prepare and submit the return of income; it was on this application that they were given till the 5th of July 1922. The other was an intimation that the firm intended to apply for registration; but it contained an admission that no instrument of partnership had yet been executed, and asked for information on points of procedure, which information was duly furnished. 15. The 5th of July 1922 passed without any return having been furnished, and on July 17th, 1922 the Assistant Commissioner wrote to the firm and told them plainly that their chance of obtaining registration was over for that year.
18. On July 20th 1922 the objectors at last got their instrument of partnership executed; but at the time they seemed inclined to accept the intimation that it was now too late to be of any use for that year.
19. On October 27th 1922 the objectors were at last compelled to submit their books for examination; and on December 82nd, 1922 the Income-Tax Officer was able to report the result of his examination. The Assistant Commissioner, whose duty it was to make the assessment, by reason of a general order lawfully issued under Section 5(4) of the Indian Income-Tax Act, completed his work on January 26th 1923. One would have assumed that the same general order would have transferred to the Assistant Commissioner from the Income-Tax Officer the duty of dealing with any application for registration which the firm might make. We do not know whether this was the case or not; the point is one which the Commissioner might do well to note, so that no such complication may again arise as was permitted in this case. It appears that, while the question of their assessment was before the Assistant Commissioner, the objectors went, behind his back to the Income-Tax Officer with an application for registration, first presented on January 2nd 1923 and again on January 5th. 1922 after the instrument of partnership had been returned for certain amendments. It was on this application that the Income-Tax Officer's certificate of registration was obtained on January 30th 1923, The Assistant Commissioner was in complete ignorance of these proceedings when he made his assessment on January 26th 1923. On that date the objectors were beyond all question an "unregistered firm" and very properly assessed as such.
20. From this statement of the facts it is clear that the objectors were to blame for not making any return of their income,and also for the delay in the production of their books of account. There are no merits whatever in their case. They had lost the right to be dealt with as a ''registered firm" for the financial year 1922-23, for the simple reason that they had failed even to provide themselves with an instrument of partnership within the extended period allowed them for the presentation of their return of income. The obvious intention of the rules, as shown by the wording of the prescribed form of certificate, is that such applications should ordinarily be presented in the month of April the first month of the financial year. Where, as in the present case, the period for making a return of income has been extended, there can be no objection to a certificate being issued bearing the correct date of some other month. It will take effect from the date specified therein. When the assessment comes to be made, the Officer charged with that duty will have to determine simply whether the firm with whose return, or with whose accounts, he is dealing, is or is not a "registered firm" within the meaning of the definition. The objectors had been plainly told that they would be dealt with, for the year 1922-23, as an "unregistered firm" their attempt to escape from this position by going to the Income-Tax Officer at the beginning of January 1923 was wholly futile. It is they who are attempting to evade a just liability by raising technical pleas and pressing for a strained, and indeed impossible, interpretation of one or two details in the rules.
21. Our answer, therefore, to the principal question referred to us is, as we have already intimated, in the negative.
22. Under Clause (6) of Section 66 of the Indian Income-Tax Act (XI of 1922) we order the assessees to bear the costs of this Reference, including the fee certified by the Government Advocate who has appeared to support the assessment.