Srinivasan, J.
(1) The assessee is a firm of four partners. It was constituted under an instrument dated 2-9-1954. It closed its books for the period ending 30-8-1955. Treating that period as the previous year, it sought registration and applied therefor on 16-11-1955. The registration was sought in respect of the assessment year 1956-57. The Income-tax Officer held that the application was out to time, being beyond the period specified by Rule 2. The registration was accordingly refused. The assessee appealed to the Appellate Assistant Commissioner, contending that the Income-tax Officer had a discretion which he could exercise in favour of the assessee if the application was filed out of time, which discretion he had failed to exercise. It was also claimed that in so far as the relevant rule prescribes different time limits for applications under S. 26-A, it offends the equal protection clause Art. 14 of the Constitution. The Appellate Assistant Commissioner dismissed the appeal; but it appears that the ground raising discrimination was not argued before him.
In the further appeal before the Tribunal, this ground was taken in the grounds of appeal. But again it was not argued. The Tribunal dismissed the appeal upholding the decision of the authorities below. An application under S. 66(1) of the Act was made by the assessee to refer a question relevant to the alleged discrimination. The Tribunal rejected the application holding that since the question was not argued though raised in the grounds of appeal, the question of law did not arise out of the order of the Tribunal. But, on an application under S. 66(2) of the Act, this court directed a reference to be made, and the question that stands referred to us is:
'Whether Rule 2 of the Indian Income-tax Rule offends Article 14 of the Constitution and is, therefore, void?'
The relevant part of Rule 2 is in these terms:
'Such application shall be signed by all the partners (not being minors) personally, or in the case of a dissolved firm, by all persons (not being minors) who were partners in the firm immediately before dissolution, and by the legal representative of any such partner who is deceased, and shall for any year of assessment upto and including the assessment for the year ending on 31st day of March 1953, be made before the 28th February 1953, and for any year of assessment subsequent thereto be made.........
(a) where the firm is not registered under the Indian Partnership Act, 1932, or where the deed of partnership is not registered under the Indian Registration Act, 1908 and the application for registration is being made for the first time under the Act, (1) within a period of six months of the constitution of the firm or before the end of the previous year of the firm whichever is earlier, if the firm was constituted in the previous year; and (2), before the end of the previous year in any other case;
(b) Where the firm is registered under the Indian Partnership Act, 1932, or where the deed of partnership is registered under the Indian Registration Act, 1908 before the end of the previous year of that firm; and
(c) Where the application is for renewal of registration under Rule 6, for any year, before the 30th of June of that year'.
There is a proviso which gives the Income-tax Officer liberty to accept an application, made after the expiry of the time limit specified. But this is not necessary to be extracted.
(2) This rule was amended in the present form in 1952. The first part of the rule specially applies to all existing partnerships and requires that for the assessment year 1953-54, the account year relevant to which would be the period from 1-4-1952 to 31-3-1953, an application should be made before the 28-2-1953. In so far as this part of the rule is concerned, it applied to all partnerships without any distinction. In any event, that has no relevance to the present question. The next part of the rule deals with applications that have been made for the first time and where the firm is not registered under the Partnership Act or the deed of partnership is not registered under the Registration Act; in such a case, the application for registration has to be made within a period of six months or before the end of the previous year.
If this rule is to apply to the present assessee, the application should have been made within six months of the date of commencement of the partnership, that is to say, before 2-3-1955. Since the previous year of assessee was the period ending 30th August 1955, and the application for registration was for the first time under the Act the assessee had to submit the application within six months of its commencement and could not have the extended period upto the end of the previous year, that is, 30-8-1955. In all other cases, if the firm had not been brought into existence during that previous year, that is to say, it had been in existence even in earlier years, but the application for the registration under the Income-tax Act was being made of the first time; the assessee could make the application before the end of the previous year. In the other class of cases where the firm is registered under the Partnership Act or where the deed of partnership is registered under the Indian Registration Act, the application should be made before the end of the previous year.
Looking at the rule closely, it is seen that there are only really two classes. Where the firm had been already in existence in the past, whether it was registered under the Partnership Act or the deed of partnership had been registered under the Registration Act or not, the application could be made up to the end of the previous year of the firm. It was only in the case of firms which came into existence during the account year, that is, the previous year, that the firm is called upon to make its application within six months of its constitution or before the end of the previous year, whichever is earlier. It is this classification that is objected to by Mr. Kesava Aiyangar, learned counsel for the petitioner, as amounting to discrimination. It is alleged that some firms get the benefit of a longer period while others do not and that the rule operates beneficially in respect of some and adversely in respect of others. Is this the effect of the rule? That is the question we have to deal with.
(3) The rule in the present form was introduced on the recommendations of the Income-tax Investigation Commission. It was pressed before the Income-tax Investigation Commission that the distinction between registered firms and unregistered firms should be abolished. But the Commission expressed its awareness of the prevalence of malpractices such as the creation of nominal intermediary concerns with a view to show reduced profits for the principal concern or where non-existent partners were introduced for the purpose of reducing the tax liability and such other features. In paragraph 98 they say:
'In spite of the considerations mentioned in the preceding paragraphs, registration has some advantages and to encourage registration as far as possible, it is necessary to maintain the distinction between registered and unregistered firms. The Ayer Committee though so much of these advantages that they recommended registration to be permitted at any time up to the determination of an appeal against the assessment. They thought that the danger of new partnership deeds being specially drawn up to affect the apportionment of profits should disappear if their recommendation.......were accepted. We are not sure that this expectation has been realised. As already stated, there is at present considerable time lag between the termination of the accounting year and the commencement of the assessment proceedings in respect of the profits of that year. This enables assessees, if so minded, to make it appear that the profits of a good year really belonged not to one person but to a number of partners and in support of this attempt, an antedated partnership deed or a deed reciting the commencement of the partnership at an earlier date is produced. Registration of the deed by the Income-tax Authorities, if it is to be useful, must therefore be registration within a short interval, say, three, or at the highest, six months after the commencement of the partnership. There may be provision for excusing the delay if justifying cause is shown.
(4) It is to give effect to this recommendation that the rule was framed in the manner indicated above.
(5) We are wholly at a loss to see how the rule can be regarded as discriminatory at all. In all cases, in a manner of speaking, the rule states that an application should be made before the end of the previous year. The exception is the case of a partnership which comes into existence during the account year, that is, the previous year. In that case alone, the rule requires that he application should be made within six months form the date of the commencement of the partnership or before the end of this previous year, whichever is earlier. The shorter period, if at all, is only in respect of firms which came into existence during the previous year.
This seems to us to be a reasonable classification intended for the purpose of a dealing with false claims to partnerships. registration of a partnership under the Income-tax law confers certain benefits upon partnerships, for the tax is not levied on the basis of the income of the partnership as a whole, but the proportionate share of the partners is taken into account in the assessment of the income of the partners. Certain benefits accrue to the partners. It is open to a partnership to get itself registered or not. There is no compulsion to register a partnership. If the members of a partnership desire to obtain the benefit of a registration, the benefit being reduced liability to tax, it is open to the rule to lay any condition, a compliance with which alone would ensure the benefits being extended. If the application and the time limit fixed for the making of an application are regarded as conditions, which have to be complied with before the benefits of registration can be obtained, it cannot be said that a condition of that description is discriminatory. Even looked at tin any other light, there is a reasonable classification, effected by this rule, the underlying principle being to deal with cases of false claims to partnership. If the Income-tax Law is competent to provide for measures to deal with the evasion of tax, this rule, which is designed for that purpose, is fully within the competence of the rule making authority.
(6) In Ravula Subba Rao v. Commissioner of Income-tax, : [1956]30ITR163(SC) their Lordships of the Supreme Court observe thus:
Even if a firm is registered, it ceases to be a unit for the purpose of taxation and the profits earned by it are taken in accordance with the general law of partnership to have been earned by the new partners, according to their shares, and they are taxed on their individual income, including their share of profits. The advantages of this provision are obvious. The rate of tax chargeable will not be on the higher scale provided for incomes on the higher levels, individual partner is chargeable. Thus registration confers on the partners a benefit to which they would not have been entitled but for S. 26-A, and such a right being a creature of the statute, can be claimed only in accordance who seeks relief under S. 26-A, must bring himself directly within its terms before he can claim the benefit of it. In other words, the right is regulated solely by the terms of the statute and it would be repugnant to the character of such other laws. The statute must be construed as exhaustive in regard to the conditions under which it can be claimed'.
(7) In that case, the question arose whether the application for the registration of partnership should be signed by the partner himself and whether the agent could not sign the application. It was contended that under S. 2 of the Powers of Attorney Act, the agent was competent to sigh on behalf of the principal and the requirement of the rule that the partner should himself sign was, it was argued, in conflict with S. 2 of the Power of Attorney Act. Their Lordships held that he fields occupied by the two enactments are wholly distinct and that in the light of the observations extracted above, the benefit arising form S. 26-A of the Income-tax Act, could be claimed only if there was a strict compliance with the requirements thereof. Further as we said, the classification being reasonable, the class defined being precise and the object also being within the scope of the legislative authority, we are unable to agree with Mr. Kesava Aiyangar that the rule offends against Article 14.
(8) The question referred to us is answered in the negative and against the assessee, who will pay the costs of the department. Counsel's fee Rs. 250.
(9) Reference answered.