Meaning of “Constituted under an instrument of partnership”

The meaning of constituted under an instrument of partnership under section 184 to 187 of the Income Tax Act is not defined in the act itself. But we can take guidance from decisions by various high courts. Here are excerpts of courts orders in which the Hon’ble High Court tried to explain the meaning of constituted under an instrument of partnership.

Meaning of constituted under an instrument of partnership defined by court

The phrase ‘constituted under an instrument of partnership’ used in section 184 to 187 of the Income Tax Act came up before various high courts as detailed under :

1. Hon’ble Supreme Court explained the meaning of ‘constituted under an instrument of partnership’ while delivering judgment in D.C. Auddy & Bros. vs. CIT [1959] 36 ITR 194 (SC) as under :

Meaning : Constituted under an instrument of partnership’ in section 26a of the 1922 act includes not only firms which have been created by an instrument of partnership but also those which may have been created by word of mouth but have been subsequently clothed in legal form by reducing the terms and conditions of the partnership to writing. Firms which were created by word of mouth but the constitution of which has subsequently been reduced to writing can also, therefore, be registered under section 26a. It is, however, necessary that the instrument of partnership should have been in existence in the accounting year in respect of which assessment is being made.

2. Hon’ble Punjab High Court explained the meaning of ‘constituted under an instrument of partnership’ while delivering judgment in Padam Parshad Rattan Chand vs. CIT [1954] 25 ITR 335 (Punj.) as under :

Meaning : The words ‘constituted under an instrument’ mean ‘created or formed by a formal deed’.

Section 184 to 187 of the Income Tax Act

Assessment as a firm.

184. (1) A firm shall be assessed as a firm for the purposes of this Act, if— (i) the partnership is evidenced by an instrument ; and

(ii) the individual shares of the partners are specified in that instrument.

(2) A certified copy of the instrument of partnership referred to in sub-section (1) shall accompany the return of income of the firm of the previous year relevant to the assessment year commencing on or after the 1st day of April, 1993 in respect of which assessment as a firm is first sought.

Explanation.—For the purposes of this sub-section, the copy of the instrument of partnership shall be certified in writing by all the partners (not being minors) or, where the return is made after the dissolution of the firm, by all persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such partner who is deceased.

(3) Where a firm is assessed as such for any assessment year, it shall be assessed in the same capacity for every subsequent year if there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the assessment as a firm was first sought.

(4) Where any such change had taken place in the previous year, the firm shall furnish a certified copy of the revised instrument of partnership along with the return of income47 for the assessment year relevant to such previous year and all the provisions of this section shall apply accordingly.

(5) Notwithstanding anything contained in any other provision of this Act, where, in respect of any assessment year, there is on the part of a firm any such failure as is mentioned in section 144, the firm shall be so assessed that no deduction by way of any payment of interest, salary, bonus, commission or remuneration, by whatever name called, made by such firm to any partner of such firm shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession” and such interest, salary, bonus, commission or remuneration shall not be chargeable to income-tax under clause (v) of section 28.

In this article, you can get guidance from high courts on the meaning of constituted under an instrument of partnership under section 184 to 187 of the Income Tax Act.

Updated up to Finance Act 2021