1. MUHAMMAD HALEEM, C J.--These appeals arise from the various judgments of the Lahore High Court, Lahore, involving a common question of law as to the interpretation of section 26-A of the Income-tax Act, 1922 as amended by the Finance Act V of 1965.
2. The question of law for consideration in each case was framed by the appellant in his application filed under section 66(2) of the Income Tax Act for decision by the High Court as under: "Whether on the facts and circumstances of the case the Tribunal was justified in confirming the order of the Appellate Assistant Commissioner allowing registration to the assessee on the strength of a partnership deed executed on 4-7-1960."
3. Except for civil appeal No.119 of 1978, the respondents are ex parte. As only a common question of law is involved, the facts giving rise to the appeals, as stated by the learned counsel for the appellant, are also a common ground on facts in other cases as well.
4. The respondent-assessee constituted itself into a firm on 1-1-1972 and was registered as such with the Registrar of Firms, Sargodha, on 29-6-1972. The assessee filed two returns of income-tax for the assessm ent year 1972-73. The status in the first return from 1-1-1971 to 31-12-1971 was that of association of persons and showed Rs.1,000 as income without any computation for this period. In the second return for the period from 1-1-1972 to 30-6-1972, the status of the assessee was shown to be that of a registered firm. Alongwith the return, an application was filed for its registration under section 26-A of the Income Tax Act. Messrs Muhammad Aslam and Muhammad Ashraf were shown as partners of the firm in the partnership deed having an equal share of Rs.4,000 each. A further statement was also made to the effect that they had been carrying on business even before the execution of the partnership deed as a result of an oral agreement.
5. The Income Tax Officer by order dated 23-6-1973 refused registration of the partnership deed holding as under: "The application is otherwise in order but on going through the partnerthip deed it is revealed that the two partners were already "doing business of dealings in Unani Medicines under the name and style of M/s Bara Dawakhana Rawalpindi," and that the terms and conditions of the Partnership have been reduced into writing much after the oral agreement. As such the partnership deed is hit by the judgment in the case of Qudratullah v. CIT Dacca. The Assessee's claim for registration, therefore, cannot be entertained and the assessment will be completed in the status of AOP."
6. And for holding so, the Income Tax Officer relied on Commissioner of Income Tax v. Mohammad Qudratullah, (PLD 1966 Dacca 454). On appeal by the assessee, the Income Tax Appellate Tribunal, Peshawar Bench, Peshawar, set aside this order for the reasons given as under: "In our opinion the Income Tax Officer's action in refusing to allow registration to the appellant firm is legally incorrect. The same matter had come up before the Lahore High Court in the case of CIT v. Rippon Printing Press reported as PLD 1973 Lah. 849 and in that case the decision taken in Qudratullah's case was not approved, specially, in view of the amendment made in Section 26-A in 1965. In that case reliance was also placed on the Supreme Court Decision in the case CIT Dacca v.
7. Noor Hussain reported as PLD 1964 Supreme Court 657. In substance, the Lahore High Court has held that the instrument of partnership executed in writing would create of valid firm qualifying for registration even if there is a prior verbal agreement. It was also held that in such circumstances the registration cannot be allowed for the whole year. In the instant case also the registration could have been allowed for the whole year corresponding to the assessment year 1972-73; but since the appellant had claimed registration for the period 1-1-1972 to 30-6-1972, only the Income Tax Officer should have allowed the registration for the same period. We, therefore, accept ITA No.1064 of 1973- 74 and direct the Income Tax Officer to allow registration to the appellant for the accounting period 1-1-1972 to 30-6-1972, corresponding for the assessment year 1972-73."
8. By this order the assessee was allowed relief as claimed for the accounting period 1-1-1972 to 30-6- 1972 corresponding to the assessme nt year 1972-73. The appellant thereupon applied to the Income Tax Appellate Tribunal, Peshawar at Rawalpindi for referring the question to the High Court under section 66 (1) of the Income Tax Act for decision, but the prayer was refused by order dated 5-4-1977. The appellant thereafter applied to the High Court under section 66 (2) for a decision on the question as formulated elsewhere in the judgment. On the matter being taken up, the High Court by order dated 25-1-1978 dismissed the application in limine on the short ground as under: "The question of law sought to be raised and referred for adjudication stands decided by a Division Bench decision of this Court in Commissioner of Income Tax v. Rippon Printing Press PLD 1973 Lah.
843. Following the decision, this application is dismissed."
9. The learned counsel for the appellant heavily relied on the case reported as Commissioner of Income Tax East Pakistan, Dacca v. Noor Hussain, PLD 1964 SC 657, to urge that the words "Constituted by" which were substituted for the words "Constituted under" in section 26-A (1) of the Act meant that the firm must have been "set up" or "established" by the deed in the relevant accounting year and that the registration can only be effective from the date of deed, and the period antecedent to it, in the same accounting year should be excluded.
10. It was further contended that the amendment in section 26A (1) introduced by the Finance Act V of 1965 did not alter the meaning of the words "constituted by" as construed by this Court in the case cited above. In effect, therefore, what was contended was that the Income Tax Appellate Tribunal ought not to have relied on the case reported as Commissioner of Income Tax v. Rippon Printing Press, Lahore, PLD 1973 Lah. 849, which gave to the amended section 26A (1) the meaning: "The instrument of partnership, forming the basis of registration of the firm, must be executed at any time before the end of the previous year, for the year for which the assessment is to be made.
11. In other words a firm may be validly registered on the basis of an instrument executed even at the fag end of the previous year and having a retrospective effect. This in itself implies the existence of a proir oral agreement followed by a deed of partnership executed afterwards between the partners incorporating its terms and conditions into writing for the purposes of its registration.
12. Therefore, under this amendment it is no longer necessary now that the partnership should have been created by the instrument of partnership in writing for the purposes of its registration."
13. In may here be recalled that the Income Tax Department did not prefer an appeal to this Court against the decision of the Lahore High Court rendered in the case reported as Commissioner of Income Tax -v. Rippon Printing Press, Lahore, and accepted this decision which is now being challenged in these appeals.
14. The words introduced by section 6 of Act V of 1965 in section 26A (1) with effect from 1-7-1965 are: "executed in writing before the end of the previous year for the year for which the assessment is to be made" after the word "partnership" and before the words "specifying the individual shares of the partners."
15. In Commissioner of Income-Tax v. Noor Hussain, cited above, the questions for consideration were:
(i) should the partnership be constituted by an instrument during the relevant accounting year, and (ii) if so, should it be constituted at or before the commencement of the relevant accounting year. These questions were formulated to resolve the controversy in the judgment under appeal to the effect that even after the substitution of the word "by" for the word "under" in subsection (1) a firm would be entitled to the grant of registration of such a partnership which had a prior existence by oral agreement but the terms and conditions of which were subsequently incorporated in a document. In reaching this conclusion, the expression "constituted by an instrument of partnership" was construed to mean "that a partnership which already existed was given a legal or official shape."
16. After noting the variance in the interpretation of the word "constituted by" by different High Courts in India and Pakistan this Court examined the meaning of the word occurring in the section itself and held as under: "I am therefore, unable to attach to 'constituted by' the comprehensive meaning suggested in the majority decisions of the High Court. For the reasons stated above I am of the opinion that the word 'constituted' must be read in their ordinary and popular acceptation to mean 'set up' or 'established' and therefore only such firm as is established or set up by an instrument of partnership during the relevant accounting year will be entitled to the grant of registration."
17. And further: "The above provisions of sections 26, 26A and the rules clearly indicate that the firm to be registered must be in existence during the accounting year. Further the expression 'constituted as shown in the instrument of partnership' in the section as well as in the rules contemplates an instrument by which parties thereto are agreeing in the present as to a course of business to be followed by them in future."
18. The words introduced in subsection (1) of section 26-A of the Income Tax Act by the legislature cannot be without purpose for the legislature does not act in vain. These words have to be given their ordinary and popular meaning side by side with the words "constituted by" as construed by this Court. The words "before the end of the previous year for the year for which the assessment is to be made" provide a time limit for the execution of the document, and if it is to be executed on the last day of the previous year then it follows that the concept of the part of the accounting year has been completely excluded by the provision of time limit. Therefore, the partnership deed has to be construed with retrospective effect, and, for that matter, there could by an oral agreement as held by the High Court in the case reported as Commissioner of Income Tax v. Rippon Printing Press, PLD 1973 Lah. 849, followed by the execution of the partnership deed before the end of the relevant accounting year.
19. Since the subsection makes the meaning of the words "previous year" abundantly clear in respect of a partnership which is constituted or set up for the first time, clause (ii) of section 2 (11) (c) will not be applicable as in respect of a partner's share of the profits in the firm, the previous year must necessarily be taken to be the previous year as determined for the assessment of the firm in a case where. Firm has been assessed as such. This not being so, it will be covered by clause (c).
20. Reference in this connection may be made to the Law and Practice of Income Tax, Fourth Edition, Volume I, by Kanga andl Palkhivala at page 61.
21. After reviewing the judgment in the case of Commissioner of Income Tax v. Rippon Printing Press, we are of the view that it has correctly interpreted the section without destroying the meaning of the word "constituted by" as construed by this Court in the case reported as Commissioner of Income-tax v. Noor Hussain, (PLD 1964 Supreme Court 657). Besides, the claim of the assessee in these appeals was for a part of the accounting year to which extent, the relief has been granted.
22. For this reason as well the Income Tax Department should have had no grievance. This appeal is also time-barred by 10 days, but having regard to the importance of the question involved, we would condone the delay.
23. In the result, and for the reasons given above, all the appeals are dismissed, but with no order as to costs.