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TMI Blog1971 (10) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 the revenue, has also clarified the position before us by stating that the department is not challenging the genuineness of the document. According to the learned counsel, the stand taken by the revenue is that no legal relationship of partners has been brought about as between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 all. From the discussion in the judgment, the learned judges, so far as we could see, have not thought it necessary to consider elaborately the question whether there is an agreement in the partnership deed to share the profits and losses of the business. Obviously the High Court must ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 whether each of the partners is entitled to act as agent of all are to be determined by looking into all the facts as borne out by the deed of partnership. He urged that, on a consideration of all such facts, the High Court has held that one of the essential conditions, namely, the right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 31st day of March every year of account and the accounts shall be taken up to that date of all the stock-in-trade and after providing for all the working expenses, the remaining net profits or losses, as the case may be, shall be shared by the parties hereto as under: Names of Partners Extent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall 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 had to the progress of the business or otherwise up to the date of retirement, only on the completed works. 13. That proper books of accounts shall be kept by the said parties and entries made therein of all such matters, transactions and things as are usually entered in the books of accounts kept by the persons engaged in business of a similar nature; all books of accounts, documents, papers and things sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. Section 2(6B) of the Income-tax Act provides that the expressions "firm", "partner" and "partnership" have the same meaning respectively as in the Partnership Act. There is no doubt a proviso with which we are not concerned. Section 26A of the Income-tax Act lays down the procedure regarding registration of firms. Section 59 authorises the Central Board of Revenue, subject to the control of the Central Government, to m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 as follows : "20. Extension and restriction of partner's implied authority.--The partners in a firm may, by contract between the partners, extend or restrict the implied authority of any partner. Notwithstanding any such restriction, any act done by a partner on behalf of the firm which falls within his implied authority binds the firm, unless the person with whom he is dealing, knows of the restriction or does not know ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rding 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 an agreement to share the profits and the losses of the business, is more than amply satisfied in this case. Then the question is whether the circumstances pointed out by the High Court and referred to by us earlier, necessarily lead to the conclusion that no relationship of partners, as understood in law, has been created as between the parties under the partnership deed. For this purpose it is necessary to refer to certain de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue 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-tax, in support of its conclusion that no partnership arrangement can be spelled out from the document before us. In our opinion, there has not been a proper appreciation by the High Court of the reasons which led to this court for holding in the said decision that there was no relationship of partners between the brothers, A and B. That was an extreme case where the clauses in the partnership deed were entirely different. In Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 partners, but that of master and servant. We may also observe that most of the clauses in the document before the Bombay High Court were more or less similar to the clauses in the partnership deed before us. In similar cases, where the control and management was vested in the hands of one partner and where it was also provided that only one partner can operate on the bank account and the others can do so, only if authorised by him, and tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 business must be carried on by all or any of them acting for all, within the meaning of the definition of " partnership " under section 4 of the Partnership Act. The fact that the exclusive power and control, by agreement of the parties, is vested in one partner or the further circumstance that only one partner can operate the bank accounts or borrow on behalf of the firm are not destructive of the theory of partnership provided the two es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs 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 the element of partnership. We have already held that the management and control of the business done by party No. 1 is the carrying on of the business on behalf of all the partners. No doubt, under section 18 of the Partnership Act, a partner is the agent of the firm for the purpose of the business of the firm. But, that section itself clearly says that it is subject to the provisions of the Act. It is open to the parties under section 11 to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provisions to the effect that the father could terminate the partnership and, on such termination, the share of the partner was to revert to the father. The Bombay High Court, having due regard to the clauses, referred to above, as well as other clauses of the partnership deed, held that the document offended against the two principles which were essential to constitute a partnership namely, agreement to share the profits and losses and the business ..... X X X X Extracts X X X X X X X X Extracts X X X X
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