JUDGEMENT: ZAFFAR HUSSAIN MIRZA, J-1. In these two appeals a common question of law arises for determination and the parties are also identical, we propose to dispose of both appeals by this common judgment. Civil Appeal No. K-2/85 arises out of a Civil Reference No.' 174/64, under section 66(1) of the Income Tax Act, 1922, which was disposed of by a Division Bench of the West Pakistan High Court, Karachi Bench, Karachi, by judgement dated 30-4-1968, reported as Commissioner of Income Tax v. M/s. Surridge and Beecheno, PLD 1968 Kar. 778. This appeal was filed on the basis of a certificate issued by the High Court dated 10-11-1970. Civil Appeal No. K-75/72 between the same parties arises out of Income Tax Case No. 22/71 before the High Court of Sind and Baluchistan, Karachi. In this case an application was made by the appellant herein under section 66(1) of the Income Tax Act, 1922, for a direction to the Tribunal to refer the question of law refused to be referred to the High Court by the Tribunal. The High Court dismissed the application by its order dated 5-6-1971, following the judgement in the first mentioned case. Thus Civil Appeal No. K-2/85 is a certificated appeal whereas leave was granted in Civil Appeal No. K-75/72, by this Court on the ground that similar questions were already before this Court in the case earlier decided by the High Court.
2. The facts are that the respondents M/s. Surridge and Beecheno, Karachi (hereinafter called the respondents' firm) are a firm of solicitors consisting of seven members associated since 1951 in the legal profession with their principal place of business at Karachi. The respondents' firm was allowed registration under section 26-A of the Income Tax Act, 1922 on the basis of instrument of partnership dated 26-3-1957. The registration was renewed for the following two years i. e. 1959- 1960 and 1960-1661. In respect of the assessment year 1960-1961 renewal was again claimed by the respondents on the basis of same instrument of partnership but at this time the Income Tax Officer declined their request on the ground that" the allocation of profits not being definite and ascertainable, the document is invalid and there is no firm within the meaning of section 26- A". The respondents preferred two direct appeals to the Income Tax Appellate Tribunal, challenging the refusal of renewal of registration as well as the consequential order of assessment passed by the Assessing Officer. The Tribunal held that the renewal of registration was wrongly refused and in this view of the matter both appeals were allowed. The Income Tax Officer relied on the following provisions in the instrument of partnership dated 26-3-1957:- "The profits of the firm in each year ending on the thirtieth day of September shall be divided as follows:
(1) Mr. Hassan shall receive ten per cent.
(2) Mr. Surridge and Mr. Beecheno shall each receive such sums as before payment by him of taxes thereon in Pakistan would permit the remittance of sterling one thousand seven hundred and fifty pounds ( 1,750) to the United Kingdom.
(3) After deduction of the shares of Mr. Hassan, Mr. Surridge and Mr. Beecheno the balance of the profits of the firm shall be divided between the remaining partners in the following shares.
(i) Mr. Williams and Mr. Gallaher shall each receive twenty seven and one half per cent, with a minimum of rupees fifty five thousand (Rs. 55,000).
(ii) Mr. Spickernel and Mr. Beven Petman shall each receive twenty two and one half per cent".
It was pointed out that Mr. Surridge and Mr. Beecheno had to receive a guaranteed sum which before payment by them of taxes would permit the remittance of specified amount to the United Kingdom. The partnership deed made no provision for the sharing of losses. In view of the aforesaid the Income Tax Officer called upon the assessee to explain how the terms contained in the instrument of partnership could be implemented in the even of the profits not being of a level to allow the two partners to draw these stipulated fixed amounts or even in case profits are not sufficient to such allocation, there may be no balance left for the remaining partners. The respondents (assessees) explained as under:- "If the profits fall short of the guaranteed amounts (the rupee equivalent of sterling of 1,750 each to Mr. Surridge and Mr. Beecheno, and Rs. 55,000 each to Mr. Williams and Mr. Gallaher) Mr. Hassan first takes ten percent; Mr. Surridge and Mr. Beecheno thereafter have equal claims on the balance for their fixed shares; if such balance is insufficient to pay the fixed shares of Mr. Surridge and Mr. Beecheno they each received half the balance and on other partner receives anything; if the balance exceeds the fixed shares of Mr. Surridge and Mr. Beecheno the excess is divisible between Mr. Williams (27-1/2%) Mr. Gallaher (27-1/2%) Mr. Spickernell (22-1/2%) and Mr. Beven Petman (22- 1/2%), with the proviso that if 27-1/2% of excess is less than Rs. 55,000 the shares of Mr. Williams and Mr. Gallaher are to be increased to that figures and those of Mr. Spickernell and Mr. Beven Petman are to be reduced proportionately. If the total excess is less than Rs. 1,10,0 Mr. Williams and Mr. Gallaher each receives half the excess and Mr. Spickernell and Mr. Beven Petman receive nothing.
The partnership deed does not specifically provide for losses and the matter is therefore governed by section 13(b) of the Partnership Act which provides that all partners shall contribute equally to the losses sustained by the firm".
However, this explanation was not found satisfactory by the Income Tax Officer on the ground that "the allocation of profits in contingencies, more than one, were governed more by suppositions rather than contractual provisions." Further he was of the view that the basis of allocation of profits was such as to make it entirely impossible for the relevant clause to apply in the even of loss.
3. The Income Tax Appellate Tribunal disagreed with the conclusion of the Income Tax Officer that the instrument of partnership was invalid. It was further held that the Income Tax Officer was not competent to raise the controversy while he was dealing with an application for renewal of registration, as all these questions would properly be the subject-matter of inquiry when application for registration was made at the first instance.
4. Being dissatisfied with the decision of the Tribunal the Commissioner of Income Tax applied for reference of the Court but finally the tribunal referred the following single question to the High Court:- "Whether, in the facts and circumstances of the case and for the reasons stated in the appellate order, the Tribunal was right in according renewal of registration to the respondent-firm for the charge year 1961-62?"
This reference was registered as Civil Reference No. 174/6-4 and the High Court decided it by judgement dated 30-4-1968, answering the reference in the affirmative (Civil Appeal No. 2-K/85).
5. Civil Appeal No. K-75/72 is in respect of the charge year 1962-63, for which year the respondents' application for renewal of registration was rejected by the Income Tax Officer, on the same ground as done earlier in respect of the year 1961-62. Respondents appealed against the aforesaid order both before the Appellate Tribunal and succeeded in obtaining order for renewal of registration under section 26-A of the Income Tax Act, in respect of the concerned year. The Commissioner of Income Tax, Central, Karachi, being dissatisfied requested the Tribunal to refer the following question of law to the High Court:- "Whether in the circumstances of the case, the Tribunal was justified to grant renewal of registration to the firm for Assessm ent Year 1962-1963?".
The Tribunal, however, by its order dated 24-7-1 970, rejected the aforesaid application and, therefore, the Commissioner moved the High Court under section 66(2) of the Income Tax Act, for a direction to the Tribunal to refer the aforesaid question for the determination of the High Court. This application was registered as Income Tax Case No. 22/71 and disposed of by order dated 3-6-1971, with the result as already stated.
6. Thus the only difference between the two cases is the different assessment years to which the cases pertained. The basic judgement under review in this case is the judgement of the High Court dated 30-4-1968.
7. The contention that in view of the absence of specification of shares of losses in the instrument of partnership although the partnership was valid under the Partnership Act, I 'was nevertheless invalid under section 26-A of the Income Tax Act, for purposes of registration, raised by the Department before the High Court was held not to arise for determination, as such question was not raised before the Tribunal and the genuineness of the firm was not assailed. Additionally even when the Tribunal refused to refer the question, no application was made by the Department under section 66(2) of the Income Tax Act, for a direction to refer the same to the High Court. Accordingly the only question considered by the High Court was the question of renewal of registration. Upon analysis of section 26-A of Income Tax Act, and rules. 3 to 7 framed thereunder, the High Court observed:- "(ii) The main difference revealed by a comparative study of the two application forms prescribed for registration and renewal is, that in the letter, a certificate has to be filed to the effect that the constitution of the firm and individual shares of the partners have remained unchanged. The rest is almost the same.
(iii) Then comes the last provision contained in sub-rule (1) of rule 7 which makes it obligatory for the Income Tax Officer to pass an order of renewal of registration, if he is satisfied that there is or was in existence at the relevant time a firm as set out in the instrument of partnership and on the basis of the instrument the firm was registered in respect of the assessment year specified in the application."
And the conclusion was expressed as under:- "The upshort of the above discussion, therefore, is that there is no conflict between the statutory provision and the one contained in the rules relating to renewal of registration and once the Income Tax Officer is satisfied as to the genuine existence of the firm in accordance with the stipulations contained in the deed of partnership on the basis of which registration was recorded earlier and the application is submitted in the prescribed manner being complete in all respects, registration should not be refused. Such a construction, in our view is also agreeable to justice and good reason for it excludes the possibility of a capricious exercise of power leading to inconsistent orders........................................................ As stated earlier, the genuineness of the firm was never doubted before the learned Tribunal and as such once that position is conceded, the renewal of registration should ordinarily follow as a matter of course, as was rightly held by the learned Tribunal in view of the fulfilment of other legal requirements. Even before us no doubt was expressed by the learned counsel for the Commissioner as to the genuineness of the firm non-specification of shares in the absence of any stipulation regarding sharing of losses."
8. Although in the opening part of the discussion on the point raised, the High Court disallowed the contention that the instrument of partnership was invalid, in the concluding part of the judgement, the learned Judges held that the firm was genuine "based on an instrument of partnership containing specifications of shares notwithstanding the contingencies and uncertainties, including the absence of any provision relating to sharing of losses." The reasons advanced were that despite the omission of any reference to the sharing of the losses, the firm was a duly constituted firm within the definition of the term contained in section 4 of the Partnership Act as also of section 26-A, Income-Tax Act, in view of specification of shares of partners.
9. We have heard Mr. Waheed Farooqi, the learned counsel for the appellant at length. The main contention urged by him is that in view of the provisions contained in the instrument of partnership no valid firm was constituted according to law, in that, in certain contingencies some of the partners may not receive any share in the profits and the instrument was totally silent as to the share of the losses. The argument raised the question which was rightly disallowed by the High Court for the reasons already stated. Be that as it may, it appears well settled that specific provision regarding the sharing of losses, is not an essential requirement for constitution of a valid partnership firm. We agree with the High Court that notwithstanding the specification of shares of the partners in profit being dependent on contingencies and uncertainties, it cannot be said that the shares of the partners were not specified as required by section 26-A of the Income-Tax Act.
The actual mechanics provided for working out quantification of shares in a particular year and the result of such an exercise in certain contingencies, will not constitute a non-compliance with the relevant requirements. It has been stated at the bar that so far no such difficulty has arisen which might hinder the operation of the relevant provisions contained in the instrument for purposes of determining or allocation of profits. Here we might refer to the statement of the case in the reference to the High Court in which the Tribunal has pointed out as under:- "The assessee's case before the Tribunal was that the contingency assumed by the Income Tax Officer had in fact never happened in the past. According to the assessee, the instrument was based on the assumption that there will be enough profits, It was suggested that so long as there were profits sufficient to cover the guaranteed payments in a particular year, there was no question of refusal to register the firm. If, in any year, the contingency does arise the assessee would forgo his right to claim registration and either a different deed may have to be drawn up or the partners might decide to wind up the business."
The view of the Income Tax Officer that the instrument was invalid for vagueness in regard to allocation of profits was, therefore, not justified. Additionally the fact remained that the firm was registered earlier and the registration was renewed before the relevant year in these appeals, and admittedly there was no change in the constitution of the firm or other circumstances indicating that the firm was not genuinely in existence in accordance with the instrument of partnership.
10. As no other argument was raised, We find no force in these appeals and dismiss the same.
There shall, however, be no order as to costs.