TMI Blog1976 (8) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... ned on behalf of G. S. Dugal Co. Ltd. by its managing director, G. S. Dugal, on behalf of the firm of M/s. Bishan Singh Jaswant Singh by its partner, Tej Singh, and by the third partner as an individual. In the books of account maintained by the assessee, 7 annas share of profit was credited to the account of Messrs. Bishan Singh Jaswant Singh for all the three assessment years and no credit was made in the names of the four individual partners of the firm of Messrs. Bishan Singh Jaswant Singh. In the returns of income filed by the assessee for all the assessment years under consideration the assessee-firm has stated that the firm of Messrs. Bishan Singh Jaswant Singh was one of the partners of the assessee with 7 annas share in the profits and losses. On May 10, 1950, a declaration was signed in the matter of partnership agreement dated April 5, 1950, whereby the individual partners of the firm of Messrs. Bishan Singh Jaswant Singh declared their individual shares in the assessee-partnership as being equal in proportion, i.e., one anna nine pies each. The declaration was signed by the four individual partners of the firm of Messrs. Bishan Singh Jaswant Singh and was attested b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egistration for the assessment years 1953-54 and 1954-55 was considered by the Income-tax Officer and by his order dated December 17, 1958, he refused to grant registration to the assessee and directed that the assessee should be treated as an unregistered firm. Such refusal of registration was by reason of the following grounds : 1. A firm is one of the partners in the bigger firm that is applying for registration. Following the Supreme Court decision in the case of Dulichand Laxminarayan v. Commissioner of Income-tax [1956] 29 ITR 535, the registration cannot be granted. 2. No deed or deeds constituting the partnership in question give the individual shares of the individual partners. 3. Neither the deed of April 5, 1950, nor the agreement of May 10, 1950, has been signed by all the individual partners in their capacity as such partners. 4. The profits are not allocated in the books between the various individual members of the partnership. The books indicate only the share of M/s. Bishan Singh Jaswant Singh and not the shares of the four partners constituting this smaller partnership. On appeals filed by the assessee against the order of the Income-tax Officer, the Appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... declaratory document concerning the firm of Messrs. Bishan Singh Jaswant Singh and had nothing to do with the instrument of partnership constituting the assessee. According to the Tribunal, in the assessee, the firm of Messrs. Bishan Singh Jaswant Singh was alone a partner and the individual partners thereof were not partners therein. The Tribunal also took notice of the fact that the applications for renewal of registration filed by the assessee on June 30, 1953, for the assessment years 1953-54 and 1954-55 were signed on behalf of the firm of Messrs. Bishan Singh Jaswant Singh by its partner, Tej Singh, but the same were not signed by all the four partners constituting the firm. According to the Tribunal, the shares specified in the instrument of partnership dated April 5, 1950, and the recitals in the instrument of partnership dated August 22, 1951, constituting the firm of Messrs. Bishan Singh Jaswant Singh established beyond doubt that one of the partners of the assessee-firm was the smaller firm of M/s. Bishan Singh Jaswant Singh. Such a conclusion got support and corroboration from the finding of fact that the profits in the account books of the firm were credited not to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plied with so far as instrument or instruments of partnership are concerned, they should be reasonably construed. According to his submission, if the instrument of partnership dated April 5, 1950, and the declaration dated May 10, 1950, are reasonably construed, then it is quite evident that the firm of Messrs. Bishan Singh Jaswant Singh is not a partner in the assessee but the four partners of the firm of Messrs. Bishan Singh Jaswant Singh with the limited company and the individual are the partners therein. Such a firm was a genuine firm and was entitled to registration for the assessment year 1952-53 and for renewal of registration for the subsequent two years. He submitted that the mere fact that in the books of account of the assessee profits were credited to the firm of Messrs. Bishan Singh Jaswant Singh was an irrelevant factor and, notwithstanding such a credit being made, the assessee was entitled to registration for the first year and renewal of registration for the subsequent two years. Mr. Joshi, on the other hand, on behalf of the revenue submitted that in the present case on the entire material on record the Tribunal was justified in taking the view that the assessee- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26A and the rules relating to registration, but so far as the instrument or instruments of partnership are concerned, they should be reasonably construed. In order that a firm may be entitled to registration under section 26A of the Act the following essential conditions must be satisfied, namely : (1) the firm should be constituted under an instrument of partnership, specifying the individual shares of the partners ; (2) an application on behalf of, and signed by, all the partners and containing all the particulars as set out in the rules must be made ; (3) the application should be made before the assessment of the firm, under section 23, for that particular year ; (4) the profits or losses, if any, of the business relating to the accounting year should have been divided or credited, as the case may be, in accordance with the terms of the instrument ; and (5) the partnership must be genuine and must actually have existed in conformity with the terms and conditions of the instrument of partnership, in the accounting year. Having regard to the rival contentions on both the sides, the crucial question that arises for determination is whether the assessee-firm is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bishan Singh Jaswant Singh and all transactions in respect of partnership shall be entered into under the name of Messrs. G. S. Dugal Co. Ltd. or Messrs. Bishan Singh Jaswant Singh, as the case may be, for the contracts secured in their respective names. So far as the capital of the firm is concerned, it is to be provided by the party of the first part, namely, Messrs. G. S. Dugal Co. Ltd., and by the party of the second part, namely, the firm of Messrs. Bishan Singh Jaswant Singh, in equal proportion. Clause 4 deals with sharing of profits and bearing the losses and its provisions are as under : " Party of the First Part seven annas in a rupee. Party of the Second Part seven annas in a rupee. Party of the Third Part two annas in a rupee. " Clause 5 provided for remuneration to a working partner and it provides as under : " 5. Every working partner shall be entitled to an allowance of Rs. 1,000 (one thousand) per month which shall be chargeable to the partnership account. " Clause 9 provided when net profits or losses were to be ascertained. Under that clause on completion of each contract a final account shall be drawn up and the net profit or loss thereof ascerta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to be read with the provisions in the instrument of partnership dated April 5, 1950, and if it is so done, then it is quite apparent that in the assessee-firm, the firm of Messrs. Bishan Singh Jaswant Singh is not a partner but the four partners of this smaller firm, viz., Jaswant Singh, Harnam Singh, Tej Singh and Kartar Singh, are partners in the assessee-firm along with the two other partners, S. Lakhinder Singh and Messrs. G.S. Dugal Co. Ltd. He submitted that even though this declaration is made by the four partners of the firm of Messrs. Bishan Singh Jaswant Singh it is in relation to their individual shares in the assessee-firm and he relied upon the expression " our individual shares in the above partnership ". His submission is that the expression " in the above partnership " means the assessee-firm and not the firm of Messrs. Bishan Singh jaswant Singh. He further urged that even though the signatures Lakhinder Singh and G. S. Dugal for G. S. Dugal Co. Ltd., appear under the expression " noted ", they should be treated as parties to this declaration and if it is so done, then there can be no doubt that the assessee-firm consists of six partners as mentioned above. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 'firm name'.--'Partnership' is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually 'partners' and collectively ' a firm ', and the name under which their business is carried on is called the 'firm name'. " This section clearly speaks of three elements constituting a partnership, namely : (1) there must be an agreement entered into by two or more persons ; (2) that the agreement must be to share the profits of a business and (3) that the business must be carried on by all or any of them acting for all. On a fair reading of the instrument of partnership dated April 5, 1950, read with the declaration dated May 10, 1950, it is quite clear that the agreement is entered into by three parties, namely, a limited company by name G.S. Dugal Co. Ltd., the partnership firm of Messrs. Bishan Singh Jaswant Singh and an individual by name S. Lakhinder Singh. It is these three persons who have agreed to share the profits and losses of the partnership as provided in the agreement and the specification of shares is am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses, if any, from this source shall also be borne by the parties to this deed in equal proportions. " Clause 2 provided that no outsider can be admitted into this partnership business without the unanimous consent of the existing parties to the deed and clause 3 provided that so far as the goodwill of the firm of Messrs. Bishan Singh Jaswant Singh is concerned, it will belong to S. Jaswant Singh Dugal. This is in fact the instrument of partnership between the four partners of Messrs. Bishan Singh Jaswant Singh and the recital clearly states that this firm of Messrs. Bishan Singh Jaswant Singh is a partner with seven annas share in the larger firm, i.e., the assessee-firm, which is constituted under the instrument of partnership dated April 5, 1950. The recital further provides that in the larger firm, i.e., the assessee-firm, the profits will only accrue to the firm of Messrs. Bishan Singh Jaswant Singh and the object of this instrument of partnership is to make provision as regards division of such profits or sharing of loss which may be borne by the firm of Messrs. Bishan Singh Jaswant Singh. Further, it is clear from this instrument of partnership that it only relates to divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an application for renewal of registration was made on March 14, 1958, that for the first time it was signed by six partners. Thus, the subsequent conduct indicated above corroborates the conclusion that the assessee-firm consisted of three partners, namely, G. S. Dugal Co. Ltd., the firm of Messrs. Bishan Singh Jaswant Singh and the individual by name, S. Lakhinder Singh. It is a well-settled position in law that a firm as such cannot be a partner in a partnership firm. In Dulichand Laxminarayan v. Commissioner of Income-tax [1956] 29 ITR 535, the Supreme Court held that a firm is not a person and as such is not entitled to enter into a partnership with another firm or Hindu undivided family or individual. In that case, an individual, a joint Hindu family and three firms purported to enter into a partnership. The deed was signed by five individuals, viz., by the individual partner, by the karta of the joint family and by one partner each of the three firms. This deed of partnership was sought to be registered under section 26A of the Act, the application being signed by the same five individuals. The Supreme Court held that no question could arise of the registration under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot think it necessary to consider each one of them. Suffice it for the present purpose if reference is made to the decisions of the Supreme Court, the decisions of this High Court and other decisions directly dealing with the question involved. Reference was made to the decision of the Supreme Court in the case of Kylasa Sarabhaiah v. Commissioner of Income-tax [1965] 56 ITR 219. The facts of the case show that there were three major partners in firm A in which four minors were admitted to the benefits of partnership. Its profits were to be shared equally between the seven persons whereas the losses were to be shared by the three major partners equally. A larger firm, firm B, was constituted, with five partners, under a deed of partnership in which firm A was described as the first partner and its members were collectively shown as having a share of 6 annas 9 pies in the profits of the larger firm. The fact that four minors were admitted to the benefits of the partnership in firm A with equal shares in the profits but losses were to be shared only by its three major partners was, however, recited in the preamble to the deed of partnership of firm B. The deed of partnership of fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore us the firm of Messrs. Bishan Singh Jaswant Singh is a partner in the assessee-firm, the partners of the firm of Messrs. Bishan Singh Jaswant Singh are individually partners of the assessee-firm. The observations made by the Supreme Court quoted above have to be read in the light of the facts of the case and they cannot be understood to lay down all absolute proposition to the effect that in every case where a firm purports to enter into a partnership with an individual or another firm, the partners of that firm become automatically partners of the larger partnership. If the contention of Mr. Dastur has to be accepted, then the decision of the Supreme Court in Dulichand's case [1956] 29 ITR 535 cannot be given effect to. The observations on which reliance is placed by Mr. Dastur are to be understood in the light of the facts which were, before the Supreme Court in Kylasa Sarabhaiah's case [1965] 56 ITR 219. Though in the clause dealing with the shares of the respective partners a collective share of Re. 0-6-9 was given to the firm of Messrs. Kylasa Sarabhaiah, in the recital it was provided that the firm consisted of three major partners and four minors were admitted to the ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation of the individual shares of the partners in the profits within the meaning of section 26A and the firm was entitled to registration for 1953-54. In this judgment, though there was reference made to the provisions of section 13 of the Partnership Act which, inter alia, provides that subject to the contract between the parties the partners are entitled to share equally in the profits earned and shall contribute equally to the losses sustained by the firm, however, the decision that the firm was entitled to registration was based upon consideration of the relevant facts and there is nothing in the judgment to indicate that that conclusion was arrived at relying upon the provisions of section 13. Mr. Dastur has relied upon three decisions of this court, one an unreported decision in the case of Industrial Stores Company v. Commissioner of Income-tax (I. T. Reference No. 32 of 1955, decided on February 23, 1956) and the other two being the decision in the case of Commissioner of Income-tax v. Shantilal Vrajlal and Chandulal Dayalal Co. [1957] 31 ITR 903 (Bom) and the decision in the case of Chhotalal Devchand v. Commissioner of Income-tax [1958] 34 ITR 351 (Bom). These were a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that for ascertainment of the shares of L and S as the partners of I. S. Co. reference can be had to the partnership deed of the firm of I. Co. and if the partnership deed of I. Co. was referred to then the individual shares of each one of the three partners of the assessee-firm could be ascertained. It was on that ground that the application for registration as well as the application for renewal of registration were granted by this court. The second decision is the decision of this court in Shantilal Vrajlal's case [1957] 31 ITR 903 (Bom). Ordinarily, we would have referred to the facts of this case, but having regard to the decision of the Supreme Court in the case of N. T. Patel Co. v. Commissioner of Income-tax [1961] 42 ITR 224, the decision of this High Court in Shantilal Vrajlal's case [1957] 31 ITR 903 (Bom) cannot be regarded as good law. In Shantilal Vrajlal's case [1957] 31 ITR 903 (Bom) registration was granted for the year of account November 2, 1948, to October 21, 1949, inter alia, relying upon the agreement that was executed on September 12, 1951. That agreement was not in existence during the year of account ; still the High Court relied upon the same and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch, an application for registration under section 26A of the Income-tax Act was made for the assessment year 1954-55. Registration was refused for that year on the grounds : (i) that it was not a valid partnership, as it was constituted of two firms and an individual, (ii) that in the books of account of the partnership the profits were credited not to the names of each constituent individual but only to the names of the firms, and (iii) that the deed of partnership did not specify the share of each of the individuals constituting the two firms. On a reference before the High Court, it took the view that it was the constituent members of the two firms and not the two firms as entities that had entered into a partnership with the individual, and, therefore, the partnership so constituted was a valid partnership. It was further held that the fact that the profits were not credited to the individual accounts of the constituent members of the two firms but were credited to the accounts of the two firms was immaterial. It was pointed out that as there were partnership deeds constituting the two firms and those deeds were on the file of the department and for the ascertainment of the sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... name of the firm in the books of account of the assessee-firm has not been relied upon by itself as a sufficient ground for refusing registration. That factor has been relied upon by us as one of the relevant factors which corroborates the earlier conclusion which we have come to upon the instrument of partnership dated April 5, 1950, read with the declaration dated May 10, 1950. Thus these decisions of the Bombay High Court do not assist us in accepting Mr. Dastur's contentions. Reference can be made to the decision of the Madras High Court in the case of Meikole Udayar v. Periasami Konar, AIR 1967 Mad 449, relied upon by Mr. Dastur. This is not a case relating to registration of firms under the provisions of the Act, but it pertains to a suit filed by some of the partners of the firm. In this case the Madras High Court has taken the view that a firm is not a legal entity and cannot be regarded as a person unlike a company which is a corporate body and a person in the eye of the law. A firm is but a compendious expression to indicate the relationship brought about between two or more persons who agree between themselves on a common venture on terms based on mutual consent. A fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y similar to those in Chhotalal Devchand's case [1958] 34 ITR 351 (Bom). The partnership deed or the instrument of partnership of the larger firm was signed by all the partners including the partners of the constituent firms and separate deeds of partnership existed in respect of the constituent firms. When such was the position, the court took the view that the firm was entitled to registration under section 26A of the Act. Such a view undoubtedly is taken by the Bombay High Court in the two cases which we have referred to above. However, Mr. Joshi has pointed out that the Madras High Court has based its decision on the footing that the decision of the Supreme Court in Parekh Wadilal Jivanbhai's case [1967] 63 ITR 485 was based on the provisions of section 13 of the Partnership Act. While discussing the facts of that case we have pointed out earlier that though reference was made to the provisions of section 13 the decision was not based upon the said provisions but upon the relevant circumstances that were existing in that case and the decision was based upon the partnership deed read with the relevant circumstances. The observation of the Madras High Court in A. Asha Co.'s cas ..... X X X X Extracts X X X X X X X X Extracts X X X X
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