PETITIONER: K. D. KAMATH & CO Vs. RESPONDENT: C.I.T., BANGALORE DATE OF JUDGMENT11/10/1971 BENCH: ACT: Indian Income-tax Act, 1922, s. 26A-Indian Partnership Act, 1932, ss. 4, 14, 18-Working partners to work under direction and control of managing partner-Working Partners not authorised to pledge property of firm or raise loans on behalf of firm-Whether partnership lacks essential element of agency of partners--Firm whether to be registered under s. 26A of Income-tax Act. HEADNOTE: The appellant was a firm consisting of six partners and the partnership was constituted under a document dated March 20, 1959, the business of the partnership having already commenced from October 1, 1958. The partnership was registered under the Indian Partnership Act 1932 on or about August 11, 1959. For the assessment year 1959-60 corresponding to the previous year ending March 31, 1959 the appellant filed an application for registration under s. 26A of the Indian Income-tax Act, 1922. The Income-tax Officer by his order dated September 28, 1960 declined to grant registration on the ground that there was no . relationship of partners inter se created under the partnership deed. The Appellate Assistant Commissioner upheld the order of the Income-tax Officer. The Tribunal held that there was agreement to share profits between partners and each of the partners could act as agent of all and therefore the requirements of partnership were fully satisfied. In the reference the High Court held that cls. 8, 9 and 16 of the deed showed that the management as well as the control of business was entirely left in the hands of the first partner and that the other partners were on to serve under his directions and further they had no authority to ac cept any business except with the consent of the first partner nor could they raise any loan or pledge the firm's interest. On this reasoning the High Court came to the conclusion that there was no relationship of partners created under the partnership deed and as the essential element of agency was lacking the appellant was not eligible to be granted registration under s. 26A. In appeal to this Court, HELD : (i) 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 profits as well as. the losses of the business and (2) the business must he carried on by all or any of them acting for all within the meaning of the definition of partnership under s. 4 of the partnership Act. The fact that the exclusive power to control by agreement of the parties is vested in one partner or the further circumstance that only one partner can operate the bank account or borrow on behalf of the firm are not destructive of the theory of partnership provided the two essential conditions mentioned earlier are satisfied. [1050 F-G] (ii)Under the partnership deed in question the relationship which had been brought into existence between the six parties was a relationship of partners who had agreed to share profits and losses of the, business carried on by all or any of them acting for all and it satisfied the defini- tion of partnership under s. 4 of the Partnership Act. There was sharing 1035 of the profits or losses of the business by the partners in the ratio of the proportion mentioned in cl. 5. That clause read with other clauses clearly showed that the first condition namely of all persons agreeing to share profits or losses was satisfied. Even on the basis that the entire control or management of the business was vested in Party No. 1 and that parties 2 to 6 were working partners who had to work under his directions, from all the other %circumstances it was clear that the conduct of business by Party No. 1 was done by him acting for all the partners. There was no indication to the contrary in the partnership deed. Therefore even without anything more it was clear that as the partnership business was carried on by Party No. 1 acting for all, the second condition of agency was also satisfied. This idea was further reinforced by cl. 16 of the deed which provided that the firm's affairs were to be carried on for mutual benefits. [1051 C-F] (iii)The High Court was wrong in holding that cl. 9 of the deed under which parties 2 to 6 had no right to raise loans for and on behalf of the firm or pledge the firm's interest was destructive of the element of partnership. No doubt under s. 18 of the Partnership Act a partner is the agent of the firm for 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 s. 11 to enter into an agreement regarding their mutual rights and duties as partners of the firm. Further if the ingredi- ents of partnership referred to in s. 4 of the Act are found to exist there is no escape from the conclusion that a partnership has come into existence. So far as the outside world was concerned, so long as parties 2 to 6 were held out as partners of the firm, as had been done under the partnership deed their acts would bind the partnership. The provision in cl. 9 was only an inter se arrangement entered into by the partners in and by which the working partners had agreed not to raise loans or pledge the firms interest. [1052 A-E] (iv)The provisions of s. 14 of the Act could not sustain the argument that cl. 9 of the deed negatived the theory of agency. Section 14 itself clearly shows that the provisions contained therein are subject to the contract between the parties. [1052 G-H] In the result, the appeal must be allowed. Babubhai Gulabdas Navlakhi v. C.I.T., Bombay, [1962] 46 I.T.R. 492, C.I.T., Gujarat v. A. Abdul Rahim & Co., [1965] 55 I.T.R. 651, C.I.T. Kerala v. Pathrose Rice & Oil Mills, [1960] 40 I.T.R. 353, P.G. C. Ratnaswamy Nadar & Sons v. C. I. T., Madras, [1962] 46 I.T.R. 1148, C.I.T. v. R. S. Shoe Factory, [1963] 47 I.T.R. 917, Murlidhar Kishangopal v. C. I. T.. M.P. Nagpur & Bhandara, [1963] 50 I.T.R., 628 and City Tobacco Mart v. C.I.T., Mysore, [1967] 64 I.T.R. 478, referred to. Umarbhai Chandbhai v. C.I.T., Bombay City, [1952] 22 I.T.R. 27 and M. P. Davis v. Commissioner of Agricultural, Income- tax, [1959] 35 I.T.R. 803, distinguished. Steel Brothers & Co. v. C.I.T., [1958] 33 I.T.R. 1 and Agarwal & Co. C.I.T., U.P., [1970] 77 I.T.R. 10, relied on. C.I.T., Mysore V. K. D. Kamath & Co., [1964] 54 I.T.R. 72, reversed. 1036 JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1242 of
1968.
Appeal by special leave from the judgment and order dated
January 21, 1964 of _the Mysore High Court in I.T.R.C. No.
13 of 1963.
S.K. Venkataranga Iyengar and J. Ramamurthi, for the
appellant.
S. K. lyer and R. N. Sachthey, for the respondent.
The Judgment of the Court was delivered by
Vaidialingam, J. This appeal, by special leave, raises the.
question whether the, deed dated March 20, 1959 and marked
Ex. A is an Instrument of Partnership on the basis of which
the ,appellant firm is eligible to be granted registration
under S. 26A of the Indian Income-tax Act, 1922 (hereinafter
to be referred as the Income-tax Act).
The appellant is a firm consisting of six, partners and the
partnership was constituted under the document dated March
20, 1959. The ‘business of the partnership, as recited in
the deed. is stated to have been carried on in partnership
from October 1, 1958. The partnership was registered under
the Indian Partnership Act, 1932, (hereinafter to be
referred as the Partnership Act) on or about August II,,
1959. For the assessment year 1959-60, corresponding to the
previous year ending March 31, 1959, the appellant filed an
application to the Income-tax Officer, ‘A’ Ward, Dharawat
under s. 26A for registration of the partnership in the name
of M/s. K. D. Kamath and Company. 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. Iyer, 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
1037
the parties to the document. In short, his contention is
that the arrangement evidenced by Ex. A is not that of
“partnership” as understood in law.
On appeal by the assessee, the Appellate Assistant Commis-
sioner on May 5, 1961 confirmed the order of the Income-tax
Officer. According to the Appellate Assistant Commissioner
no partnership has been brought about by the deed dated
March 20, 1959 and that the business continues to be the
proprietary concerti of K. D. Kamath. In coming to. this
conclusion ‘the appellate authority has laid special
emphasis on clause 12 of the deed-.
The assessee carried the matter in further appeal I.T.A. No.
3220 of 1961-62 (Assessment year 1959-60) before the.
Income-, tax Appellate Tribunal, Bombay Bench ‘B’. The
Appellate Tribunal, after a reference to the relevant
clauses in the partnership deed, came to the conclusion that
the two essential requirements as laid down by the courts
for determining whether there is a partnership, namely, an
agreement between the parties to ;hare profits and each of
the parties acting as agent of all, are fully satisfied in
this case. In this connection the Tribunal placed reliance
on the decision of the Bombay High Court in Balubhai
Gulabdas Navlakhi v. Commissioner of Income-Tax, Bombay(1)
and distinguished an earlier decision of the same court
reported in Umarbhai Chandbhai v. Commissioner of Income-
tax, Bombay City(2). Ultimately, the Appellate Tribunal
held that the partnership deed makes it clear that profits
and losses are to be shared between the parties and that,
subject to the over-riding authority of K. D. Kamath, the
other partners could act for the firm. In this view, the
Appellate Tribunal held that the deed does create a
relationship of partners inter se between the parties
thereto and directed the Income-tax Officer to register the
firm under s. 26A of the Income-tax Act.
herein, made an application on October 4, 1962 under s.
66(1) of the Income-tax Act praying for a reference being
made by the Appellate Tribunal to the High Court of the
question of law mentioned in the application. The said
application was numbered as 66-RA-978 of 1962-63. The
Appellate Tribunal accordingly submitted an agreed
statement of case and referred to the High Court for its
opinion the following question of law :
“Whether, on the facts and in the
circumstances of the case, M/s. K. D. Kamath
& Co., could be granted registration under
Section 26A of the 1 Act for the assessment
year 1959-60 ?”.
(1) [1962] 46 I.T.R. 492.
(2) [1952] 22 I.T.R. 27
1038
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 s.
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 cls. 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 have been satisfied from the recitals in the
partnership deed that this requirement is amply satisfied in
this case. That is why we find that the learned Judges have
focused their attention as they themselves say in the
Judgment, on the question whether it is possible to hold
from the recitals in the partnership deed that each partner
is entitled to act as agent of all. In considering this
aspect, the learned Judges have referred particularly to
cls. 8, 9 and 16 of the partnership deed and have held that
it is clear from these clauses that the management, as well
as the control of the business, is entirely left in the
hands of the alleged first partner K. D. Kamath and that the
other partners are only to work under his directions and
share profits and losses in accordance with the proportions
mentioned in cl. 5. It is the further view of the High Court
that it is not within the power of the other five parties to
act as agent of the other partners as they cannot accept
any business except with the consent of K. D. Kamath nor can
they raise any loan or pledge the firm’s interest. On this
reasoning, the High Court has come to the conclusion that
there is no relationship of partners created under the
partnership deed and as this essefftial element of agency
is lacking, the appellant was not eligible to be granted
registration under S. 26A. The learned Judges, in coming to
this conclusion, have placed considerable reliance on the
decision of the Bombay High Court in Umarbhai Chanbhai v.
Commissioner Of Income-tax, Bombay City(1) as well as the
decision of this Court in M. P. Davis v. Commissioner of
Agricultural Income-tax(2). At this stage we may mention
that the judgment of the Mysore High Court, which is under
appeal before us, is reported in Commissioner of Income-tax,
Mysore v. K. D. Kamath & Co.($).
(1) [1952] 22 I.T.R. 27.
(2) [1959] 35 I.T.R. 803.
(3) [1964] 54 I.T.R. 72.
1039
Mr. S. K. Venkataranga Iyengar, learned counsel for the
assessee-appellant referred us to the various clauses in the
partnership deed and urged that the view of the High Court
that the essential element of agency is absent in this case,
is erroneous. The counsel further urged that the,
partnership deed, read as a whole, leaves no room for doubt
that there is an agreement to share the profits and losses
of the business in the proportion mentioned in the deed.
Therefore, one of the essential ingredients to constitute a
partnership is satisfied in this case. He further urged
that though a large 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 a of the
other partners. He referred us, in this connection, tip-
certain decisions of the High Courts, as well as of this
Court, where under circumstances similar to the one exisitng
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 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 ha’ held that one of the
essential conditions, namely, the right of one partner to
act as. agent of all, does not exist in the present case.
If so, the counsel urged, the opinion expressed by the High
Court that the appellant is not eligible for registration
under s. 26A is correct. ‘In support of his contentions,
the counsel also referred us to certain clauses in the
partnership deed as well as to certain provisions of the
Partnership Act.
From what is stated above, it is clear that the various
authorities as well as the High Court have only considered
some of the clauses of the partnership deed for coming to
the conclusion one way or the other. In considering the
question whether the partnership deed creates the
relationship of partners as between the parties thereto, as
understood in law, it is desirable to have a complete
picture of the entire document. Ex. A, the partnership
deed runs as follows
“INSTRUMENT OF PARTNERSHIP.
Articles of agreement made at Hubli, this 20th day of March,
1959, Among (1) Shri krishnarao Dadasaheb Kamat, hereinafter
1040
called the Party hereto of the 1st part, (2) Shri Narayan
Ganesh. kamat hereinafter called the party hereto of the 2nd
part, (3) Shri Shripadrao Damodara Kamat, hereinafter called
the party hereto of the 3rd part, (4) Shri Dnyanoba Jotiram
Mohite, hereinafter called the party hereto of the 4th part,
(5) Shri Shankar Govind Joshi, hereinafter, called the
party, hereto of the 5th party, and (6) Shri Yashavant
Bhawoo Kate, hereinafter called the party of the 6th part,
All Hindu inhabitants. residing at Hubli, and whereas the
parteis from 2 to 6, who have been serving with party No.
1since a very long time and in view of the appreciation of
their honest and sincere services which the above parties
have rendered in past and with the object that the above
parties should also have their material and economical-
progress, party No. i.e. Shri K. D. Kamat has been pleased
to convert his sole proprietary concern, as a partnership
concern, by admitting the above parties from 2 to 6 as
working partners and the party No. 1 shall be the main
financing and managing partner and the, business of the
partnership is agreed and is being carried on accordingly in
partnership as from 1st Day of October, 1958, as
“Contractors” or any other business that the parties may
think fit under the name and style of “Messrs. K. D. Kamat
& Co., Engineers and Contractors, Hubli” and it is hereby
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 1st 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 upto that date of
all the stock-in-trade and after providing for all the
working expenses, the remaining net profits
1041
or losses, as the case may be, shall as shared by the
parties hereto as under:-
———————————————————–
Names of Partners Extent of Individual Share
————- – — – — – ——————————–
1.Shri Krishnarao Dadasaheb Kamat 5 shars
2.Shri Narayan Ganesh Kamat 2 shares
3.Shri Shri Dadarao Damodara Kamat 2 shares
4.Shri Dayanoba Jotiram Mohite 2 shares
5.Shri Shankar Govind Joshi 2 shares
6.Shri Yashavant Bhawoo Kate 2 shares
-------------------
TOTAL 15 shares
---------------------
6. That it is agreed among the partners that the party No.
1, i.e., Shri K. D. Kamat, shall be the principal and
financing partner and the rest of the partners i.e. from 2
to 6 are admitted only as working partners contributing
labour.
7. That the Good-will of the firm shall be wholly and
solely belong to party No. 1 i.e. Shri K. D. Kamath.
8. That the party No. 1, i.e., Shri K. D. Kamat, who is
the principal and financing partner and by virtue of his
having the long standing experience.in the line of business
together with the technical knowledge of Engineer, shall
have full right of control and management of the firm’s
business and in the best interest of the firm, it is thus
decided and agreed upon among all the partners that all the
working partners from 2 to 6 shall always work according to
the instructions and directions given from time to time by
Shri K. D. Kamat, in the actual execution of works and in
any other matter connecting thereof, pertaining to this
partnership business. The decision of the principal partner
on the aspect of taking any new business or giving Lenders
for, new works, shall always vest with him, whose decision
shall be final and ‘binding upon all the working partners.
9. That it, is also agreed among the partners that no
working partner or partners is/are authorised to raise a
loan for and on behalf of the firm or pledge the firm’s
interest directly or indirectly and such an act shall not
be binding on the firm, except under the written authority
of the principal partner.
10. That it is further expressly agreed, that excepting the
parties No. 1 and 2 i.e. Shri K. D. Kamat and Shri N. G.
Kamat, the other Parties from 3 to 6 shall not do contract
business, so long as they are partners in this firm and
this clause is inserted in the betterment of the firm’s
business and with the object that the firm’s business
1042
should not suffer and the works if taken or standing in the
name of the said parties from 3 to 6, the same, shall be the
business of the firm.
11. That it is also further agreed that the Managing
Partner Shri K. D. Kamat shall 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 out going working
partner or-partners, shall have only right of the profit, or
loss upto the date of his retirement, as may be decided by
the principal partner in Jump sum either by paying or
receiving. regard being had to the progress of the business
or otherwise upto 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 shall be kept at the principal place of business of
the firm and each partner shall at all times, have free and
equal access to them.
14. That each partner shall be just and faithful to the
other or others in all matters relating to the business of
the firm, shall attend deligently to the firm’s business and
give a true account and shall give information relating to
the same without fail.
15. That each partner shall withdraw such sums as will be
mutually determined by the partners from time to time, in
anticipation of the Profit falling to-their individual share
and in case of loss, the same shall be made good by the
partners.
16. Thus subject to the provisions herein mentioned and
laid ,down and made thoroughly known by each of the parties
to this Agreement with sound mind and body, the firm’s
affairs be carried on for mutual gain and benefit and if any
questions which may ..arise or occur touching to the conduct
or management or liability of the firm, the same shall be
amicably settled among the parties with the consent of
principal partner, whose decision in the matter shall be
final and binding on all partners.
1043
In witness whereof the parties to this agreement have set
their hands and seals to this Agreement as under:
1. Signed and Delivered by the within
named Shri K. D. Kamat, himself Sd. K. D. Kamat
2. Signed & Delivered by the within
named Shri N. G. Kamat, himself Sd. N. G. Kamat
3. Signed & Delivered by the within Sd.S. D. Kamat
named Shri S. D. Kamat, himself Sd. V. D. Jituri
in the presence of
4. Signed & Delivered by the within
named Shri D. J. Mohite, himself Sd. D. J. Mohite
5. Signed & Delivered by the within
named Shri S. G. Joshi, himself Sd. S. G. Joshi
6. Signed & Delivered by the within
named Shri Y. B. Kate, himself Sd. Y. B. Kate.
Sd./ Certified to be the true copy
of the original.
For K. K. D. KAMAT & CO.”
The High Court, so far as we could see, has rested its
decision On five circumstances for holding that there is no
relationship of partners as between the parties inter se,
created under the partnership deed. They are based on
consideration in particular of cls. 8, 9 and 16. The
following are the circumstances, which according to the
learned Judges militate against holding in favour of the
assessee; (1) The management as well as the control of the
business is entirely left in the hands of the 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 cl. 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 pledge 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 element 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
1044
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 films. Section 59 authorises the Central
Board of Revenue, subject to, the control of the Central
Government, to make rules for carrying out the purpose of
the Act. The relevant Income-tax Rules Jay down the details
of the procedure for making an application for registration
of a firm as contemplated under s. 26A. As there is no
controversy that the application has been made by the appel-
lant in accordance with s. 26A and the relevant Rules, it is
‘unnecessary for us to quote the section and the relevant
Rules.
Coming to the Partnership Act, s. 4 which defines “partner-
ship” runs as follows :
” 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.”
Section 6 deals with the made of determining the existence
of partnership. As per that section in determining whether
a group of persons is or is not a firm or whether a person
is or is not a partner in a firm, regard is to be had to the
real relation between the parties as shown by all relevant
facts taken together. Section 11(1) provides that subject
to the provisions of the Act, the mutual rights and duties
of the partners of a firm may be determined by contract
between the partners and such contract may be expressed or
may be implied by a course of dealing. It further provides
that such contract may be varied by consent of all the
partners and such consent may be expressed or may be implied
by a course of dealing. Sub-s. (2) clearly provides that
notwithstanding anything contained in s. 27 of the Indian
Contract Act, the contract between the partners may provide
that a partner shall not carry on any business other than
that of the firm while he is a partner. Section 12 in cls.
(a) to (d) deals with the rights and duties of a partner,
but that again is subject to contract between the partners.
Section 14, on which some reliance has been placed by the
counsel for the Revenue is as follows
“Section 14 : The property of the firm :
Subject to contract between the partners, the
property of the firm includes all property and
rights and interests in property originally
brought into the stock of the firm, or
acquired, by purchase or otherwise, by or for
the firm, or for the purposes and in the
course of the business of the firm, and
includes also the goodwill of the business.
1045
Unless the contrary intention appears,
property and rights and interests in property
acquired With money belonging to the firm are
deemed to 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 s. 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 autho-
rity.” Sub-section (2) enumerates the various matters, which
a partner cannot do under the implied authority, in the
absence of any usage or custom or trade to the contrary.
Section 20 dealing with the extension and restriction of
partner’s implied authority runs as follows
“Section 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 doesnot
know or believe that partner to be a partner.”
From a perusal of the partnership deed one thing is clear,
namely, under cl. (1) what was originally the sole
proprietary concern of K. D. Kamath has been converted as
partnership concern by admitting parties Nos. 2 to 6 as
working partners, along with party No. 1, and party No. 1 is
the main financing and managing partner of the business.
That clause has to be read a-long with cl. (6) whereunder
the partners have agreed that K. D. Kamath shall be the
principal and financing partner and the rest of the
partners, namely, parties Nos. 2 to 6 are admitted only as
working partners contributing labour. Clause (4) deals with
the running of the partnership business at Hubli as also
other place or places or with such other name or names that
the parties (which means partners Nos. 1 to 6) may from
time to time decide and agree upon. From clauses (1), (2) and
(3), it is clear that the business of the partnership
is that of Engineers and Con-tractors. We are referring to
this aspect because it will have a bearing regarding the
control of the business agreed to be vested in K. D. Kamath.
There does
1046
not appear to be any controversy that party No. 1 has been
carrying on such business as a proprietary concern for a
long time before the partnership was formed and as such he
is considerably experienced in the said technical type of
business. Clause” (5) provides that final accounting is to
be taken as on March 31 of every year and the net profits
and losses are to be shared by the parties thereto in the
proportion of the shares specified in the said clause.
Under clause 11, apart from the managing partner, K. D.
Kamath operating the bank accounts, any other partner
authorised by him isalsoeligibletooperatethebankaccounts.
Clause,(12) entitles a partner, when he ceases to be a
partner to be paid his share of profit or loss, upto the
date of his so ceasing to be a partner. Clause (13)
provides that books of accounts are to be properly
maintained and each partner has a right at all times to
have free and equal access to them. Clause (14) enjoins on
each part-; ner to be just and faithful to the other
partners in all matters relating to the business of the firm
and each of them has got a duty to diligently attend to the
business of the firm. Each of them has also an obligation
to give a true account and information regarding 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
cl. (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 decisions of this Court as
well as of the High Courts, which may have a bearing on this
aspect. In Steel Brothers & Co. Ltd. vs. Commissioner of
Income-tax(1) one of the questions this Court had to
consider was whether the fact that the control and manage’-
ment of a business was in the hands of one person when there
were
(1) [1958] 33 I.T.R. 1.
1047
three partners is destructive of the element of partnership.
The facts were that A and B, two companies were carrying on
trade in Burma rice. Later on, an agreement was entered
into between A B and C for the working of the Burma rice
business. It was, provided that the entire management of
the business and the conduct of its affairs was to be done
by A in its absolute discretion. The profit and loss was
provided to be shared in the proportion mentioned under the
agreement. There was a restriction on B and C against
hiring the properties of the firm without the consent of At
was held by this Court that notwithstanding the fact that
the management and conduct or the business in its own
discretion was vested with A, that circumstance is not
destructive of the partnership relationship that exists
between the parties to the agreement. In this decision two
conditions have been laid down as essential to constitute a
partnership in law: (1) sharing of profit or loss of the
business; and (2) business being carried on by all the
parties or any of them acting for all, in which is implicit
the theory of agency.
In M. P. Davis v. Commissioner of Agricultural Income-
tax(1), this Court had to consider whether the relationship
as partners. had been created by the agreement of
partnership relied on by the parties. From the relevant
facts it is seen that it was an extreme case where two
brothers ostensibly entered into a partnership arrangement.
But the recitals in the document, as pointed out by this
Court, clearly showed that the entire management was with
one brother A and that B had no right to make any con-
tribution towards capital. There was no provision as to how
losses are to be dealt with and there was a very complicated
manner for ascertaining the so called profits. Having due
regard to the tenor of the document and the clauses
contained therein, this Court held that there was no
intention to bring about the, relationship of partners
between the two brothers. On the other hand, it is the view
of this Court that the document had been executed to
continue 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.
lo 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(1), in support of its conclusion
that no partnership
(1) [1959] 35 I.T. 803.
1048
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 two brothers A and B. That was an
extreme case where the clauses in the partnership deed were
entirely different.
In Commissioner of Income-tax, Gujarat v. A. Abdul Rahim
,and Co.(1) this Court has held that it is the settled law
that if a partnership is _genuine and valid one, the Income-
tax Officer has no power to reject its registration, if the
other provisions of s. 26A and the Rules made thereunder
are complied with.
In Agarwal and Co. v. Commissioner of Income-tax, U.P.(2)
this Court dealing with the conditions of registration
prescribed in S. 26A and the relevant Rules observed as
follows :
“The conditions of registration prescribed in
this section and the relevant rules are: (1)
on behalf of the firm, an application should
be made to the Income-tax Officer by such
person and at such time and containing such
particulars, being is such form and verified
in such manner as are prescribed by the rules:
(2) ;the firm should be constituted under an
instrument of partner,ship. (3) the instrument
must specify the individual snares of the
partners, and (4) the partnership must be
valid and genuine and must actually exist in
the terms specified in the instrument. If all
the above conditions are fulfilled, the
Income-tax Officer is bound to register the
firm unless the assessee has contravened
section 23 (4) of the Act.”
In certain decisions of the High Courts the two essential
conditions necessary to form the relation of partnership
have, been stated to be: (1) that there should be an
agreement to share the profits and losses of the business,
and (2) that each of the partners should,be acting as agent
of all. Though, these two conditions, by and large, have to
be satisfied when the, relationship of partners is created
between the parties, we would emphasise that the legal
requirements under s. 4 of the Partnership Act to constitute
a partnership in law are: (1) there must be an agreement to
share the profits or losses of the business; and (2) the,
business must be carried on by all the partners or any of
them acting for all. There is implicit in the second
requirement the principle of agency.
The tests laid down by the High Courts have again been appli
ed by the Bombay High Court in Balubhai Gulabdas
Navlakhi
(1) [1965] 55 I.T. R. 651.
(2) [1970] 77 I.T.R. 10.
1049
v. Commissioner of Income-tax(1) to consider whether the
document before them created a relationship of partners
between the parties thereto. One of the main contention
that was urged, as militating against theory of partnership
was that very wide powers of control and management 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, re-
ferred 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 agree
ment 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 that only one party can borrow on behalf of the firm for
all, have been held not to militate against holding a
particular document as creating the relationship of master
and servant. Those decisions are of Kerala High Courts in
Commissioner of Income-tax, Kerala v. Pathrose Rice & Oil
MillS(2); by the Madras High Court in P.A C. Ratnaswamy
Nadar & Sons v. Commissioner of Income-tax, Madras(3); by
the Allahabad High Court in Commissioner of Income-tax V. R.
S. Shoe Factory (4) ; by the Madhya Pradesh High Court in
Murlidhar Kishangopal v. Commissioner of Income-tax, M.P.
Nagpur and Bhandara(5) and by the Mysore High Court in City
Tobacco Mart v. Commissioner Of Income-tax Mysore(,).
We have already referred to the fact that the Bombay High
Court in Balubhai Gulabdas Navlakhi vs. Commissioner of In-
come-tax(1), has also taken the same view. In addition to
the existence of clauses to the above effect in the
partnership deed, we may mention that in the Allahabad
decision. referred to above, in a partnership between A, B
and C, there was a clause that C
(1) [1962] 46 I.T.R. 492. (2) [1960] 40 I.T. R.
353.
(3) [1962] 46 I.T.R. 1148. (4) [1963] 471.T.R.917.
(5) [1963] 50 I.T.R. 628. (6) [1967] 64 I.T.R. 478.
119Sup CI/72
1050
was not entitled to invest any capital and that the,business
is to be carried on only by A and B and that C has no power
to interfere with the management of the business. The
Allahabad. High Court, in spite of all these clauses held
that the document created a relationship of partners as the
two essential conditions, referred to by us earlier, existed
in that case.
We have already referred to the decision of this Court in
Agarwal and Company v. Commissioner of Income-tax, U.P.(1)
laying down the conditions, which if fulfilled makes it
obligatory on the Income-tax Officer to register the firm,
unless the assessee has contravened s. 23 (4) of the Act.
It is not the case of the Revenue that the assessee before
us has-contravened section 23 (4). There is also no
controversy that the application has been made in accordance
with S. 26A as well as the relevant Rules. The firm has
been constituted under an instrument of partnership dated
March 20, 1959. From the clauses of the partnership deed,
extracted above, particularly cl. (5), the shares of the
partners regarding the profit and loss have also been
specified. Therefore, it follows that conditions Nos. 1, 2
and 3 specified in the above decision are fully satisfied.
Regarding Condition No. 4 also there is no controversy that
the partnership is genuine in the sense that it is not a
fictitious document. Then the only other requirement
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
s. 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 essential conditions, mentioned earlier are
satisfied.
In the light of the principles laid down by this Court in
Steel Brothers & Co. Ltd. v. Commissioner of Income-tax (2 )
and in the decisions of the High Courts, referred to above,
the reasons
(1) [1970] 77 I.T.R. 10.
(2) [1958] 33 I.T.R. 1.
1051
given by the High Court for holding that the relationship of
partners has not been created under the deed of partnership
before us, cannot be sustained. As the control and
management of business can be left by agreement in the hands
of one partner to be exercised on behalf of all the
partners, the other consequence by way of restriction on the
rights of the other partners lose all significance. In fact
the clauses providing that the working partners are to work
under the directions of the managing partner and the
further clause restricting their right to accept ‘business
or raise any loans or pledge the firm’s interest except with
the consent of the managing partner K. D. Kamath, have all
to be related with the agreement entered into by the
partners regarding the management and control by K. D.
Kamath. We are of the opinion that under the partnership
deed the relationship which has been brought into existence
between the six parties is a relationship of partners who
have agreed to share the profits and losses of business
carried on by all or any of them acting for all and it
satisfies the definition of “Partnership under s. 4 of the
Partnership Act. W.-. have already pointed out that there
is a sharing of the profits or losses of the business by the
partners in the ratio of the proportion mentioned in Cl.
(5). That clause read with other clauses already discussed
by us, clearly shows that the first condition, namely, all
persons agreeing to share profits or losses is satisfied.
Even on the basis that the entire control and management of
the business is vested in K. D. Kamath, party No. 1 and that
parties Nos. 2 to 6 as working partners have to work under
his direction, from all the other circumstances it is clear
that the conduct of business by party No. 1 is done by him
acting for all the partners. There is no indication to the
contrary in the partnership deed. Therefore, even without
anything more, it is clear that as the partnership business
is carried on by party No. 1, acting for all, the second
condition of agency is also satisfied. This idea reinforced
by cl.(16) which provides that the firm’s affairs are to be
carried on for mutual benefits. That clause is to the
effect that the firm’s affairs which are managed by party
No. 1 is really for the mutual gain and benefits 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 Cl. (9) parties Nos. 2 to 6 have no Tight 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
1052
element of partnership. We have already held that the
management and control of the business done by party go. 1,
is carrying on of the business on behalf of all the
partners. No doubt under s. 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 s. 11, to enter into_an agreement
regarding their mutual rights and duties as partners of the
firm and that can be done by contract, which in this case is
evidenced by the deed of partnership. Further s. 18 will
have to be read along with s. 4. If the relationship of
partners is established as a “partnership” as defined in s.
4, and if the necessary ingredients referred to in that
section are found to exist,’ there is no escape from the
conclusion that in law a partnership has come into exist-
ence. lit is in the light of these provisions that s. 18,
will have to be appreciated. Section 18 only emphasises the
principle of agency which is already incorporated in the
definition of “partnership” under s. 4.
It should be remembered that so far as the outside world is
concerned, so long as the parties Nos. 2 to 6 are held out,
as partners of this firm, as has been done under the
partnership deed. their acts would bind the whole partner-
ship. The provision in cl. (9) in our opinion, is only an
inter se arrangement enter, into by the partners, in and by
which the-working partners have agreed not to raise loans or
pledge the firm’s interest.
Mr. S. K. lyer, learned counsel for the Revenue placed some
reliance on s. 14 of the Partnership Act. According to the
counsel, there is no contract to the contrary in the
partnership deed that the assets brought in by party No. 1,
do not belong to the partnership. It is his further
contention that under s. 14, those assets will belong to the
partnership, in which case, it will be open to any partner,
as agent of the other partners to pledge the firm’s interest
or raise loan for partnership purposes. This right, accor-
ding to the counsel is restricted by cl. (9) and that clause
negatives the theory of agency. In our opinion, this
contention of the learned counsel cannot be accepted.
Section 14 of the Partnership Act itself clearly shows- that
the provisions contained therein are subject to the contract
between the parties. We have already held that the
provision regarding the control and management vesting in
party No.1 is not itself destructive of the theory of
partnership. Clause (9) in our opinion, itself shows that
the theory of agency is recognised. But the parties, by
mutual agreement, have placed a restriction on the working
partners’ right to borrow on behalf of the firm or pledge
the firm’s interest without the written authority of the
principal partner.
1053
Mr. Iyer 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, Bombay
City(1). 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 born 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 being carried on by all
or any of them for all of them. The learned Judges held
that there was no agreement to share the profits and loses
of the business and even the business carried on by the
father was not, on behalf of all the partners. In such
circumstances, it was held, that the arrangement evidenced
by the deed cannot be considered in law to be a partnership.
In our opinion, reliance placed upon this decision by the
High Court as well as by Mr. Iyer is misplaced. In fact,
from a perusal of the clauses in the document which- the
Bombay High Court had to consider, it is clear that the
business continued to be the proprietary concern of one
single individual namely, the father. Excepting that the
two sons were styled as partners in the document, the
essential requisites for constituting the relationship of
partners inter se between the father and the two sons were
‘totally absent. The clause in the case before us are
totally different. We have already indicated that there is
an agreement for sharing the profits and losses and that
even though vast powers of control and management have been
given to K. D. Kamath, the managing partner, the business
was being carried on by the said managing partner, on behalf
of all the partners. These conditions fully satisfy the
requirements of the definition of “partnership” under s. 4
of the Partnership Act.
To conclude we are of the opinion that all the ingredients
of partnership are satisfied under the partnership deed
dated March 20, 1959 and that the view of the High Court
that the appellant firm cannot be granted registration under
s. 26A of the Incometax Act for the assessment year 1959-60,
cannot be sustained.
(1) [1952] 22 I.T.R. 27.
1054
In, the result, we answer the question of law in the
affirmative in favour of the assessee. This answer given
by, us to the question referred to the High Court by the
Income-tax Appellate Tribunal will be substituted in the
place of that given by the High Court. We accordingly
reverse the Judgment and order of the High Court and-allow
the appeal with costs.
G. C. Appeal allowed.
1055