TMI Blog1971 (10) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... October 1, 1958. The partnership was registered under the Indian Partnership Act, 1932 (hereinafter to be referred as "the Partnership Act"), on or about August 11, 1959. For the assessment year 1959-60, corresponding to the previous year ending March 31, 1959, the appellant filed an application to the Income-tax Officer, " A " Ward, Dharwar, under section 26A for registration of the partnership in the name of M/s. K. D. Kamath and Co. The Income-tax Officer, by his, order dated September 28, 1960 declined to grant registration on the ground that there was no genuine partnership brought into existence by the deed of March 20, 1959, and that the claim of the firm having been constituted is not genuine. The said officer further held that the business should be held to be the sole concern of K. D. Kamath. For coming to this conclusion, the Income-tax Officer has mainly relied on clauses 8, 9, 12 and 16 of the partnership deed. Though the Income-tax Officer has used a loose expression that there is no genuine partnership, the sum and substance of his finding is that there is no relationship of partners inter se created under the said document. Mr. S. K. Aiyar, learned counsel for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the application. The said application was numbered as 66/RA-978 of 1962-63. The Appellate Tribunal, accordingly, submitted an agreed statement of case and referred to the High Court for its opinion the following question of law: " Whether on the facts and in the circumstances of the case, M/s. K. D. Kamath Co. could be granted registration under section 26A of the Act for the assessment year 1959-60 ? " The High Court by its judgment and order dated January 21, 1964, in I.T.R. C. No. 13 of 1963 answered the question referred to it against the assessee and held that the appellant firm could not be granted registration under section 26A for the assessment year 1959-60. it is against this decision of the High Court that the assessee has filed the above appeal. The High Court has generally considered the effect of clauses 5 to 9, 12 and 16 of the partnership deed. The High Court also considered the question whether the partnership deed satisfies the two essential requisites to constitute the partnership, namely: (1) whether there is an agreement to share profits as well as the losses of the business, and (2) whether each of the partners under the deed can act as agent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ip deed, read as a whole, leaves no room for doubt that there is an agreement to share the profits and losses of the business in the proportion mentioned in the deed. Therefore, one of the essential ingredients to constitute a partnership is satisfied in this case. He further urged that, though a larger amount of control regarding the conduct of business may have been left in the hands of the first partner, K. D. Kamath, that circumstance, by itself, does not militate against the view of one partner acting as agent of the other partners. He referred us in this connection to certain decisions of the High Courts as well as of this court where, under circumstances similar to the one existing before us, it has been held that the mere fact that more control is to be exercised only by one of the partners is not a circumstance which militates against the parties having entered into a partnership arrangement as understood in law. Mr. S. K. Iyer, learned counsel for the revenue, supported the reasoning of the High Court in its entirety. According to the learned counsel, the question whether there is an agreement to share the profits and the losses of the business and the further question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness of the partnership is agreed and is being carried on accordingly in partnership as from 1st day of October, 1958, as 'Contractors' or any other business that the parties may think fit under the name and style of 'Messrs. K. D. Kamat Co., Engineers and Contractors, Hubli' and it is hereby agreed by and among the parties to this Agreement as under:-- 2. That the business of the partnership is running under the name and style of 'Messrs. K. D. Kamat Co., Engineers Contractors, Hubli, as from the list day of October 1958, and this agreement shall take retrospective effect and shall be deemed to have come into operation as from the commencement of 1st October, 1958. 3. That the duration of the partnership shall be at will. 4. That the business of the partnership is running at Hubli and shall run at Hubli or at such other place or places, as the case may be, under the name and style of 'Messrs. K, D. Kamat Co., Engineers Contractors' or in such other name or names that the parties may from time to time decide and agree upon. 5. That the final accounts of the partnership firm shall be made up on the last day of each year of account, which shall generally be on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not do contract business, so long as they are partners in this firm and this clause is inserted in the betterment of the firm's business and with the object that the firm's business should not suffer and the works if taken or standing in the name of the said parties from 3 to 6, the same shall be the business of the firm. 11. That it is also further agreed that the managing partner, Shri K. D. Kamat, shall alone operate the bank accounts and in case of any need for convenience, the partner authorised by him in writing and so intimated to the bank or banks, shall operate the bank accounts. 12. That in the course of the business or during the existence of the firm's business, the principal partner has reason to believe that any working partner or partners is/are not working and conducting to the best interest of the firm, the principal partner shall have a right to remove such a working partner or partners from the partnership concern and in such an eventuality the outgoing working partner or partners shall have only right of the profit or loss up to the date of his retirement, as may be decided by the principal partner in lump sum either by paying or receiving, regard being ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stances for holding that there is no relationship of partners as between the parties, inter se, created under the partnership deed. They are based on consideration in particular of clauses 8, 9 and 16. The following are the circumstances, which according to the learned judges militate against holding in favour of the assessee: (1) The management as well as the control of the business is entirely left in the hands of the alleged first partner, K. D. Kamath; (2) The other partners can merely work under his directions and share in the profits and losses in accordance with the proportion mentioned in clause 5; (3) It is not within the power of the parties Nos. 2 to 6 to act as agent of other partners; (4) The said parties cannot accept any business except with the consent of K. D. Kamath; and (5)Those parties cannot raise any loan or pledege the firm's interest, directly or indirectly, except under the written authority of K. D. Kamath. In view of all these circumstances, according to the High Court, one of the essential elements to constitute partnership, namely, agency, is lacking. We will now refer to some of the provisions of the Income-tax Act as well as the Partnership Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business. Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm. Section 18 provides that, subject to the provisions of the Act, a partner is, the agent of the firm for the purpose of the business of the firm. Section 19(1) provides that, subject to the provisions of section 22, the act of a partner which is done to carry on, in the usual way, the business of the kind carried on by the firm binds the firm. It further states that the authority of a partner to so bind the firm conferred by the said section is called his "implied authority". Sub-section (2) enumerates the various matters, which a partner cannot do under the implied authority, in the absence of any usage or custom of trade to the contrary. Section 20 dealing with the extension and restriction of partner's implied authority runs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that books of accounts are to be properly maintained and each partner has a right at all times to have free and equal access to them. Clause (14) enjoins on each partner to be just and faithful to the other partners in all matters relating to the business of the firm and each of them has got a duty to diligently attend to the business of the firm. Each of them has also an obligation to give a true account and information regarding the business of the firm. Clause (15) enables the partners to withdraw the amounts in anticipation of profits falling to their individual share; and in case of loss, each of them is also liable to make good the same in proportion to his share in the partnership. Clause (16)enjoins on the partners to carry on the affairs of the firm for mutual gain and benefit. All the above clauses clearly, in our opinion, establish that the sole proprietary concern of K. D. Kamath has vanished. The above clauses also establish the right of each of the partners to share the profits and also to bear the losses in the proportion of their shares mentioned in clause (5). Therefore, one of the essential ingredients to constitute partnership, namely, that there should be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al. There was no provision as to how losses are to be dealt with and there was a very complicated manner for ascertaining the so-called profits. Having due regard to the tenor of the document and the clauses contained therein, this court held that there was no intention to bring about the relationship of partners between the two brothers. On the other hand, it is the view of this court that the document had been executed to continue under the cloak of a partnership the pre-existing and real relationship, namely, that of master and servant. It is to be noted that this court did not hold that there was no relationship of partners created under the document only on the basis that the exclusive control and management was left in the hands of A. Such a conclusion was reached having due regard to the various other clauses in the deed. In fact this court has already held in the earlier decision referred to above, that the mere circumstance that the control and management are vested in one partner is not destructive of the existence of partnership. No doubt, the High Court in the case on hand has placed some reliance upon the decision in M. P. Davis v. Commissioner of Agricultural Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requirement the principle of agency. The tests laid down by the High Courts have again been applied by the Bombay High Court in Balubhai Gulabdas Navlakhi v. Commissioner of Income-tax to consider whether the document before them created a relationship of partners between the parties thereto. One of the main contentions that as urged, as militating against the theory of partnership, was that very wide powers of control and management were given to one of the partners so much so that he is to be considered to be the owner or proprietor of the concern. This contention was rejected by the High Court. After a reference to the various clauses in the document, the Bombay High Court came to the conclusion that the two essential conditions necessary to form a relation of partnership, referred to above, were present in the document constituting the partnership. The High Court further held that the fact that some of the terms of the document gave enlarged powers of management and control to one of the partners, who has brought in all the finances, is not by itself sufficient to hold, having due regard to the other clauses, that the real agreement between the parties is not that of partne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the clauses of the partnership deed, extracted above, particularly clause (5), the shares of the partners regarding the profit and loss have also been specified. Therefore, it follows that conditions Nos. 1, 2 and 3 specified in the above decision are fully satisfied. Regarding condition No. 4 also, there is no controversy that the partnership is genuine in the sense that it is not a fictitious document. Then the only other requirement referred to in condition No. 4 to be satisfied is whether the partnership is valid in the sense that it creates relationship of partners between the parties thereto. From our discussion in this judgment, according to us, the relationship of partners inter se has been created under the partnership deed and that such relationship had actually existed in accordance with the terms specified in the said document. From a review of the above decisions, it is clear that the mere nomenclature given to a document is by itself not sufficient to hold that the document in question is one of partnership. Two essential conditions to be satisfied are: (1) that there should be an agreement to share the profits as well as the losses of the business; and (2) the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other circumstances it is clear that the conduct of business by party No. 1 is done by him acting for all the partners. There is no indication to the contrary in the partnership deed. Therefore, even without anything more, it is clear that as the partnership business is carried on by party No. 1, acting for all, the second condition of agency is also satisfied. This idea is reinforced by clause (16) which provides that the firm's affairs are to be carried on for mutual benefit. That clause is to the effect that the firm's affairs which are managed by party No. 1 are really for the mutual gain and benefit of all the partners. It is, no doubt, true that the second essential test of the business being carried on by all or any of the partners acting for all must be satisfied. The provisions in the partnership deed clearly establish that K.D. Kamath, the managing partner, carries on the business acting for all the partners. Much stress has been laid by the High Court on the fact that under clause (9) parties Nos. 2 to 6 have no right to raise loans for and on behalf of the firm or pledge the firm's interest. This circumstance, according to the High Court, is destructive of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s contained therein are subject to the contract between the parties. We have already held that the provisions regarding the control and management vesting in party No. 1 is not by itself destructive of the theory of partnership. Clause (9), in our opinion, itself shows that the theory of agency is recognised. But the parties, by mutual agreement, have placed a restriction on the working partners' right to borrow on behalf of the firm or pledge the firm's interest without the written authority of the principal partner. Mr. Aiyar placed considerable reliance as the High Court has also done on the earlier decision of the Bombay High Court in Umarbhai Chandbhai v. Commissioner of Income-tax. That again, in our opinion, was a case of an extreme nature where, under a partnership deed, between the father and his two sons, the former had a right to exclude either or both his sons from the management of the firm, wholly or in part. There was also a provision to the effect that the father was entitled to entrust the management to any other person and also determine what quantum of profits should be distributed and what is to be done regarding the remaining profits. There were further prov ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
