JUDGMENT
1. In this case the assessee firm, Messrs. Biharilal Kejriwal and Company, applied for registration under Section 26A of the Income-tax Act for the assessment year 1952-53. According to the contract of partnership dated the 11th January, 1951, the partners were Biharilal Kejriwal with 10 annas share Kanhaiya Prasad with 3 annas share and Madhusudan Tiwari with 3 annas share. Clause 5 of this contract is important and must be reproduced in full-
“5. That profit or loss in the business shall be shared by the parties in the following proportion-
(1) Biharilal Kejriwal ..... Ten annas (2) Kanhaiya Prasad ..... Three annas (3) Madhusudan Tiwari ..... Three annas. That capital of the party of the second and third parts shall stand in their own name whereas capital of Biharilal Kejriwal of the first part shall stand in the name of Benarsilal Ramgopal to which the profit and loss as the case may be shall be credited or debited.
The Income-tax Officer refused registration of the firm on the ground that the capital of Biharilal Kejriwal stood in the name of the firm Benarsilal Ramgopal and that profit and loss to the extent of that share of Biharilal Kejriwal was also credited or debited, as the case may be, to the account of the firm Benarsilal Ramgopal. The Income-tax Officer took the view that the certificate given in the application was wrong and registration could not be allowed.
The matter was taken in appeal and the Appellate Assistant Commissioner affirmed the order of the Income-tax Officer, holding that the profit of Biharilal Kejriwal was not credited to him but credited to the firm Benarsilal Ramgopal of which Biharilal was only a partner. He, therefore, held that the partners disclosed in the deed of partnership were not the real partners and that the recitals in the deed were not properly made. The matter was then taken to the Tribunal in appeal on behalf of the assessee.
The Tribunal interpreted clause 5 of the deed of partnership and on the assumption that there was sub-partnership between Biharilal Kejriwal and the firm Benarsilal Ramgopal the Tribunal held that the firm was entitled to seek registration under Section 26A of the Indian Income-tax Act. In reaching this conclusion the Tribunal relied upon the decision of a Division Bench of this High Court in Commissioner of Income-tax, B & O v. Agardih Colliery Co., (1955) 27 ITR 540: (AIR 1955 Pat 225) (A).
It was held in that case that there could be no partnership in the eye of law unless there was privity of contract between the parties; and if several persons were partners and one of them agreed to share the profits derived with a stranger, this did not make the stranger a partner in the original firm. The result of such an agreement was merely to constitute what was called sub-partnership, but it in no way affected the other members of the principal firm. At the instance of the Commissioner of Income-tax the Tribunal has stated a case on the following question of law under Section 66 (1) of the Indian Income-tax Act:
“Whether on a true construction of the partnership deed dated 11-1-1951 and having regard to the application for registration made on 25-2-1953 and particularly to paragraph 3 thereof, the firm constituted under the said deed can be granted registration under Section 26A of the Act for the assessment” year 1952-53?”
2. On behalf of the Income-tax Department learned Counsel made the submission that the Tribunal was wrong in making the assumption that “there was a sub-partnership between the partners of Benarsilal Ramgopal by which the profit earned by Biharilal Kejriwal would be shared by this sub-partnership”. It was not the case of the assessee either before the Income-tax Officer or before the Appellate Assistant Commissioner that there was a sub-partnership between the partners of Benarsilal Ramgopal.
It was, therefore, contended on behalf of the Income-tax Department that the principle laid down by this Court in (1955) 27 ITR 540: (AIR 1955 Pat 225) (A), has no application to this case and the Tribunal has misdirected itself in law in holding that the assessee firm could be legally registered under the provisions of Section 26A of the Indian Income-tax Act. The contention on behalf of the assessee is that upon the construction of the partnership deed, dated the 11th January, 1951, it should be held that there was a sub-partnership between Biharilal Kejriwal and the other partners of the firm Benarsilal Ramgopal.
It was conceded by learned Counsel for the assessee that the firm as such is not a legal entity in the eye of law and, therefore, not entitled to enter into a partnership with another firm. That is a well-settled proposition of law; see, for instance, the decision of this Court in Khimji Walji and Co. v Commissioner of Income-tax, B. and O., (1954) 25 ITR 462: (AIR 1954 Pat 396) (B), and also a decision of the Supreme Court to the same effect in Dulichand Laximinarayan v. Commissioner of Income-tax, Nagpur, (S) AIR 1956 SC 354 (C).
The argument on behalf of the assessee, however, is that the firm Benarsilal Ramgopal is not one of the partners in the deed of partnership dated the 11th January, 1951 and that Biharilal Kejriwal entered into the partnership in his own individual capacity. We do not agree with the argument of learned Counsel for the assessee on this point. In our opinion, the deed of partnership dated the 11th January, 1951, must be properly construed to mean that the firm Benarsilal Ramgopal is one of the partners to the extent of 10 annas share and not Biharilal Kejriwal in his individual capacity.
The reason is that the aforesaid document clearly stipulates that the capital of 10 annas share allotted to Biharilal Kejriwal shall stand in the name of Benarsilal Ramgopal, There is also a further provision that the profit and loss incurred for the share of Biharilal Kejriwal should also be credited or debited, as the case may be, in the name of Benarsilal Ramgopal. Now it is the admitted position between the parties that Benarsilal Ramgopal is a partnership firm of which Biharilal Kejriwal is one of the partners. That is the statement made by the Tribunal in Paragraph 2 and also in paragraph 3 of the statement of the case.
It is true that Biharilal Kejriwal has been described as a “partner” in the deed of partnership, but we do not understand how in the eye of law Biharilal Kejriwal can be a partner if he does not provide capital for the partnership and is not allotted profit for his share and further if he does not incur liability for his share of the partnership. In this connection reference should be made to Section 4 of the Partnership Act which states as follows:
“4. ‘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’.”
Applying this definition in the Partnership Act to the document of the 11th January, 1951, we are satisfied that Biharilal Kejriwal was not a partner of the firm for which registration was sought under Section 26A and that the other parties to the document intended that the firm Banarsilal Ramgopal would hold 10 annas share of the profit or loss in the business of the partnership. It follows, therefore, that the assumption made by the Income-tax Tribunal of a sub-partnership between Biharilal Kejriwal and the other partners of the firm Benarsilal Ramgopal has no foundation.
In this connection we should mention that no case of sub-partnership was set up by the assessee between Biharilal Kejriwal and the other partners of the firm Benarsilal Ramgopal when the case was heard before the Income-tax Officer and the Appellate Assistant Commissioner, nor was such a case put forward before the Income-tax Tribunal at the time when it heard the appeal. The assessee did not also produce any written contract or other evidence of sub-partnership at any stage before the Income-tax authorities or before the Tribunal.
As we have already stated, the Tribunal was wrong in holding that as a matter of construction of the deed of partnership dated the 11th of January, 1951, there was contract of sub-partnership between Biharilal Kejriwal and the firm Benarsilal Ramgopal. It must be held on the contrary for the reasons we have given, that the deed of partnership must be properly construed to mean that the parties intended that Benarsilal Ramgopal should itself be a partner in the firm Biharilal Kejriwal and Company and that Biharilal Kejriwal was not a real partner of the firm to the extent of 10 annas share as mentioned in the deed of partnership.
3. For these reasons we hold that upon the true construction of the partnership deed dated the 11th January, 1951, and having regard to the application for registration made on the 25th February, 1953, the firm constituted under that deed cannot be granted registration under Section 26A of the Act for the assessment year 1952-53. We accordingly answer the question of law referred by the Income-tax Appellate Tribunal in favour of the Income-tax Department and against the assessee. The assessee must pay the cost of this reference. Hearing fee Rs. 250/-.