TMI Blog1974 (8) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... of R. K. Dhingra. This finding was confirmed in appeal by the Appellate Assistant Commissioner. On a further appeal to the Tribunal, the Tribunal found that there was no clement of mutual agency in the alleged partnership between the various partners ; that it was clear that whatever contractual relationship existed between the father and the two sons, the result certainly was not a partnership in law and that there was no genuine firm in existence and further that the partnership deed did not create the relationship of partners between the contracting parties as envisaged under the Partnership Act. The question that has been referred for our determination is as under : "Whether, on the facts and in the circumstances of the case, the applicant has been rightly refused registration under section 26A of the Indian Income-tax Act, 1922, for the assessment years 1957-58, 1958-59 and 1959-60 ?" Mr. Mehta on behalf of the assessee contended that to constitute a partnership in law there are only two legal requirements necessary : (1) that there must be an agreement to share the profits and losses of the business, and (2) that the business must be carried on by all the partners or an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire goodwill is to belong to R. K. Dhingra. Not only the goodwill but even the tenancy rights, furniture, fixtures, quota rights, licences and other properties of the firm are also to belong to him. Clause 4 of the partnership deed gives power to R. K. Dhingra to dissolve the partnership by giving one month's previous notice in writing to the other two partners. In the event of such a dissolution of the partnership, Narendrakumar and Ashok Kumar are only entitled to their share in the profits up to the date when the partnership is determined and are not entitled to anything else, Normally, during the subsistence of this partnership, R. K. Dhingra is entitled to 7 annas share and Narendrakumar and Ashok Kumar are each entitled to Rs. 0-4-6 share in the profits and losses of the business. Clauses 5 and 13 confer wide powers upon R. K. Dhingra to introduce any other partner or partners either during his lifetime or to leave a direction by his will or otherwise for introducing any partner or partners or to appoint any person or persons to be his successor or successors in the business. The combined effect of these provisions is that R. K. Dhingra is clothed with a power to intro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agement of the business of a firm can be left by agreement between the parties in the hands of one partner to be exercised on behalf of all the partners. A reference to the facts of that case will show that very wide and extensive powers were conferred upon one partner almost similar to those in the case before us except the right to introduce a new partner with the result of diminishing the share of other partners. In that case K, who was for a long time the sole proprietor of a concern of engineers and contractors, converted the business into a partnership by admitting 5 other partners. Under the deed of partnership he was the financing and managing partner of the business, the goodwill belonging to him, and the rest were admitted only as working partners contributing labour. Under clause 8 of the deed, by virtue of his long-standing experience, K was to have full right of control and management of the firm's business and all the working partners were to work according to his instructions and directions. Under clause 9 no working partner was entitled to raise a loan or pledge the firm's interest except under the written authority of K. Under clause 11, K alone was to operate the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke the view that the element of agency was lacking in that case so as to constitute a partnership. The Supreme Court, however, took a different view reversing the decision of the High Court. The Supreme Court held that the fact that the exclusive power and control, by agreement of parties, was vested in one partner, and the further circumstance that only one partner could operate the bank accounts or borrow on behalf of the firm was not destructive of the theory of partnership provided two essential conditions were satisfied, namely, (i) that there should be an agreement to share profits and losses of the business of the firm ; and (ii) that the business must be carried on by all the partners or any of them acting for all. Upon scrutiny of the clauses in the partnership deed before the court the Supreme Court took the view that both the ingredients requisite to constitute a partnership in law were fulfilled in that case. Practically every power which is to be found in the present deed of partnership existed in the case before the Supreme Court except the power to introduce new partners which may result in diminishing the proportionate share of the other two partners. Even the exist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rship deed before the Bombay High Court were more or less similar to the partnership deed before them. If the ratio of the decision of the Supreme Court and that of the Bombay High Court is applied to the facts of the present case, then it is difficult to come to the conclusion that the two essential requirements to constitute a partnership in law as therein laid down are not fulfilled in the present case. Under clause 5 the profits and losses of the business of the firm are to be shared in the proportion therein laid down amongst the three partners. By clause 15, R. K. Dhingra is clothed with a power to carry on the entire management of the business by the mutual consent of all the partners. Thus, the second requirement is also fulfilled in the present case. If that is so, then notwithstanding the fact that wide and extensive powers are otherwise conferred on R. K. Dhingra there will be a genuine partnership in law as required by the Partnership Act. No material was put forward before the taxing authorities that this partnership deed was merely a cloak to continue the relationship of master and servant between R. K. Dhingra and his two sons and its provisions were not intended ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
