TMI Blog1962 (5) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... s. A.P. 1. Roshan Lal 0-6-6 2. Satya Prasad 0-6-6 3. Manohar Lai 0-3-0 For the assessment year 1955-56 the assessee applied for registration under section 26A and relied on an instrument of partnership dated June 21, 1953. On a consideration of the terms of that document the Income-tax Officer took the view that the status of Manohar Lal was not that of a partner but merely that of an employee and as such the partnership constituted under the instrument was not a genuine partnership. Accordingly, he refused registration to the firm. An appeal to the Appellate Assistant Commissioner against the order refusing registration failed, but on further appeal the Income-tax Appellate Tribunal took the view that the restrictions and limitations imposed by the instrument on Manohar Lal were within the purview of the provisions of the Indian Partnership Act and held that the firm was genuine and entitled to registration. Thereafter, the Commissioner of Income-tax made an application under section 66(1) for a statement of the case to this court and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resist or interfere in the account books at any stage. 4.Manohar Lal shall be entitled only to draw up to ₹ 100 per month for his expenses liable to be adjusted at the settlement of accounts. His share in profits and losses is to be 0-3-0 in the rupee as a working partner for his consolation and so that he should work honestly and carry out the directions of the first two partners. The first feature relied on by Sri Gopal Behari in support of his argument that there was no valid partnership between the three persons was that all the three persons did not jointly own the property and the assets of the partnership. Indeed Manohar Lal was specifically forbidden from investing anything in the partnership and was to remain only a working partner. It is not possible to assent to this argument. There may be a partnership where the property and the assets of the partnership may not be the subject of joint ownership between all the partners but may belong only to some or one of them. In Halsbury's Laws of England, third edition, volume 28, page 487, paragraph 933, it is laid down as follows: ...Persons may be partners either generally or in some particular business or i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partners shall be the first two and Manohar Lal was only to be a working partner. The third feature was emphasised a good deal. This only points to the right of the first two partners to inspect and examine the accounts at any time. It does not exclude the inspection and examination of accounts by Manohar Lal. The utmost that can be said is that accounts may have to be recorded according to the directions of the first two partners and Manohar Lal may not be entitled to override that direction. This, however, does not mean that Manohar Lal would have no access to the account books. If there was anything in the agreement excluding Manohar Lal altogether from inspection or examination of the accounts or anything disentitling him to the taking of accounts the position might have been different but that is clearly not so. It was then emphasised that Manohar Lal was entitled to draw only up to ₹ 100 per month for his expenses subject to adjustment at the settlement of accounts. There does not appear to be anything in this condition also destructive of the relationship of partners. It has been noticed that only the first two partners were to invest all the money needed for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad-note it will be clear that the case is wholly distinguishable from the present case. There the two sons, who along with the father were alleged to form the partnership, did not have a specific share and their share was to depend upon the will of the father alone. In those circumstances, clearly, there could be no partner-ship between the father and the sons. The other case was a decision of the Supreme Court in M.P. Davis v. Commissioner of Agricultural Income-tax [1959] 35 ITR 803 (SC). In this case the partnership was between two brothers. Prior to the partnership the relation between the two brothers was that of a master and a servant. One of the brothers who alone was entitled to invest capital to the total exclusion of the other brother and who alone was entitled to get back the assets on dissolution was not bound to do any work at all. The other brother was entitled to a remuneration only if there were profits but to no remuneration at all if there was a loss. The mode of sharing of profits was complicated and this made it impossible for the sharing of the losses in the same manner. Having regard to these facts and to the conduct of the parties the Supreme Court held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company C of which A was also the managing director. An agreement was entered into between the three companies A, B and C for the amalgamated working of the Burma rice business of all the three companies under the management of A, whereby the entire business of the three companies was to be taken over and conducted by A in its absolute discretion. At the end of each accounting year the profit and loss of the combination at each place of business, namely, Rangoon, Bassein, Akyab and Moulmein, was to be shared in certain proportions, the shares of A and C being joint and the share of B, a separate share. A restriction was imposed on A, B and C against hiring out their properties, without the consent of A. Certain specific rights were conferred on B none of which obtained so far as C was concerned: the right, for example, to information regarding the progress of business, the right to have accounts made up in Burma and audited there and the right to inspection of accounts and to receive a copy thereof; the right of the company's engineers to check whether its property was in efficient working order; the right to utilisation of finance provided by them. On these facts the Supreme C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation different from the relation of partners between the three persons constituting the partnership. Reference may also be made to Commissioner of Income-tax v. Pathrose Rice Oil Mills [1960] 40 ITR 353 . The partnership in this case consisted of eight persons. The material portion of the deed was as follows: If at any time partner No. 1 wishes to send out partners Nos. 2 and 3 jointly or severally, partner No. 1 has independent and absolute right and power to immediately exclude or discharge them ...All activities connected with the business, etc., are to be conducted at the sole discretion of partner No. 1 and all his actions are binding on all the partners equally . On the question being raised whether such an agreement constituted a valid partnership it was held that the absolute right given to partner No. 1 to expel partners Nos. 2 and 3 or to conduct business in his sole discretion did not militate against the validity of the partnership. Reliance was placed on the decision of the Bombay High Court in B.R. Naik v. Commissioner of Income-tax [1945] 13 ITR 124 . It may also be pointed out that whereas under section 239 of the Contract Act the definition of p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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