{"id":17459,"date":"1971-10-11T00:00:00","date_gmt":"1971-10-10T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/k-d-kamath-co-vs-c-i-t-bangalore-on-11-october-1971"},"modified":"2018-04-21T04:29:21","modified_gmt":"2018-04-20T22:59:21","slug":"k-d-kamath-co-vs-c-i-t-bangalore-on-11-october-1971","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/k-d-kamath-co-vs-c-i-t-bangalore-on-11-october-1971","title":{"rendered":"K. D. Kamath & Co vs C.I.T., Bangalore on 11 October, 1971"},"content":{"rendered":"
Supreme Court of India<\/div>\n
K. D. Kamath & Co vs C.I.T., Bangalore on 11 October, 1971<\/div>\n
           PETITIONER:\nK. D. KAMATH & CO\n\n\tVs.\n\nRESPONDENT:\nC.I.T., BANGALORE\n\nDATE OF JUDGMENT11\/10\/1971\n\nBENCH:\n\n\nACT:\nIndian Income-tax Act, 1922, s. 26A-Indian Partnership\tAct,\n1932, ss. 4, 14, 18-Working partners to work under direction\nand   control  of  managing  partner-Working  Partners\t not\nauthorised  to\tpledge property of firm or  raise  loans  on\nbehalf\tof firm-Whether partnership lacks essential  element\nof  agency of partners--Firm whether to be registered  under\ns.   26A of Income-tax Act.\n\n\n\nHEADNOTE:\nThe appellant was a firm consisting of six partners and\t the\npartnership  was constituted under a document  dated March\n20,  1959,  the business of the partnership  having  already\ncommenced  from\t October  1,  1958.   The  partnership\t was\nregistered under the Indian Partnership Act 1932 on or about\nAugust\t 11,   1959.   For  the\t assessment   year   1959-60\ncorresponding to the previous year ending March 31, 1959 the\nappellant  filed an application for registration  under s.\n26A  of\t the Indian Income-tax Act,  1922.   The  Income-tax\nOfficer\t by his order dated September 28, 1960\tdeclined  to\ngrant  registration  on\t the  ground that  there  was  no  .\nrelationship   of  partners  inter  se\tcreated\t under\t the\npartnership  deed.   The  Appellate  Assistant\tCommissioner\nupheld\tthe order of the Income-tax Officer.   The  Tribunal\nheld  that  there  was agreement to  share  profits  between\npartners and each of the partners could act as agent of\t all\nand  therefore\tthe requirements of partnership\t were  fully\nsatisfied.   In the reference the High Court held that\tcls.\n8,  9 and 16 of the deed showed that the management as\twell\nas the control of business was entirely left in the hands of\nthe  first  partner and that the other partners were  on  to\nserve under his directions and further they had no authority to ac\ncept any business except with the consent of the first\npartner\t nor could they raise any loan or pledge the  firm's\ninterest.   On\tthis reasoning the High Court  came  to\t the\nconclusion  that  there\t was  no  relationship\tof  partners\ncreated\t under\tthe partnership deed and  as  the  essential\nelement of agency was lacking the appellant was not eligible\nto be granted registration under s. 26A.\nIn appeal to this Court,\nHELD  : (i) The mere nomenclature given to a document is  by\nitself not sufficient to hold that the document in  question\nis  one\t of  partnership.  Two essential  conditions  to  be\nsatisfied are (1).that there should be an agreement to share\nprofits\t as well as. the losses of the business and (2)\t the\nbusiness must he carried on by all or any of them acting for\nall  within  the meaning of the\t definition  of\t partnership\nunder  s.  4  of the partnership Act.\tThe  fact  that\t the\nexclusive  power to control by agreement of the\t parties  is\nvested in one partner or the further circumstance that\tonly\none partner can operate the bank account or borrow on behalf\nof the firm are not destructive of the theory of partnership\nprovided the two essential conditions mentioned earlier\t are\nsatisfied. [1050 F-G]\n(ii)Under the partnership deed in question the relationship\nwhich  had  been  brought into\texistence  between  the\t six\nparties\t was  a relationship of partners who had  agreed  to\nshare profits and losses of the, business carried on by\t all\nor  any of them acting for all and it satisfied the  defini-\ntion  of  partnership  under s. 4 of  the  Partnership\tAct.\nThere was sharing\n1035\nof the profits or losses of the business by the partners  in\nthe ratio of the proportion mentioned in cl. 5. That  clause\nread  with  other  clauses clearly  showed  that  the  first\ncondition namely of all persons agreeing to share profits or\nlosses\twas  satisfied.\t Even on the basis that\t the  entire\ncontrol\t or management of the business was vested  in  Party\nNo. 1 and that parties 2 to 6 were working partners who\t had\nto   work   under  his\tdirections,  from  all\t the   other\n%circumstances it was clear that the conduct of business  by\nParty  No.  1 was done by him acting for all  the  partners.\nThere  was no indication to the contrary in the\t partnership\ndeed.\tTherefore  even without anything more it  was  clear\nthat as the partnership business was carried on by Party No.\n1  acting for all, the second condition of agency  was\talso\nsatisfied.   This idea was further reinforced by cl.  16  of\nthe  deed which provided that the firm's affairs were to  be\ncarried on for mutual benefits. [1051 C-F]\n(iii)The High Court was wrong in holding that cl. 9  of\nthe  deed under which parties 2 to 6 had no right  to  raise\nloans  for  and on behalf of the firm or pledge\t the  firm's\ninterest was destructive of the element of partnership.\t  No\ndoubt  under s. 18 of the Partnership Act a partner  is\t the\nagent  of the firm for the business of the firm.   But\tthat\nsection\t itself\t clearly  says, that it is  subject  to\t the\nprovisions  of the Act.\t It is open to the parties under  s.\n11 to enter into an agreement regarding their mutual  rights\nand duties as partners of the firm.  Further if the ingredi-\nents of partnership referred to in s. 4 of the Act are found\nto  exist  there  is no escape from the\t conclusion  that  a\npartnership has come into existence.  So far as the  outside\nworld was concerned, so long as parties 2 to 6 were held out\nas  partners  of  the  firm, as\t had  been  done  under\t the\npartnership deed their acts would bind the partnership.\t The\nprovision in cl. 9 was only an inter se arrangement  entered\ninto  by the partners in and by which the  working  partners\nhad agreed not to raise loans or pledge the firms  interest.\n[1052 A-E]\n(iv)The\t provisions of s. 14 of the Act could  not  sustain\nthe argument that cl. 9 of the deed negatived the theory of\nagency.\t Section 14 itself clearly shows that the provisions\ncontained  therein are subject to the contract\tbetween\t the\nparties. [1052 G-H]\nIn the result, the appeal must be allowed.\nBabubhai  Gulabdas  Navlakhi v. C.I.T.,\t Bombay,  [1962]  46\nI.T.R. 492, C.I.T., Gujarat v. A. Abdul Rahim & Co.,  [1965]\n55  I.T.R. 651, C.I.T. Kerala v. Pathrose Rice & Oil  Mills,\n[1960] 40 I.T.R. 353, P.G. C. Ratnaswamy Nadar & Sons v.  C.\nI.  T., Madras,<\/a> [1962] 46 I.T.R. 1148, C.I.T. v. R. S.\tShoe\nFactory,  [1963] 47 I.T.R. 917, Murlidhar Kishangopal v.  C.\nI.  T..\t M.P. Nagpur & Bhandara, [1963] 50 I.T.R.,  628\t and\nCity  Tobacco Mart v. C.I.T., Mysore, [1967] 64 I.T.R.\t478,\nreferred to.\nUmarbhai Chandbhai v. C.I.T., Bombay City, [1952] 22  I.T.R.\n27 and M. P. Davis v. Commissioner of Agricultural,  Income-<\/a>\ntax, [1959] 35 I.T.R. 803, distinguished.\nSteel  Brothers\t & Co. v. C.I.T., [1958] 33   I.T.R.  1\t and\nAgarwal &      Co.\nC.I.T., U.P., [1970] 77 I.T.R. 10, relied on.\nC.I.T.,\t Mysore\t V.  K. D. Kamath & Co.,  [1964]  54  I.T.R.\n72, reversed.\n1036\n\n\n\nJUDGMENT:\n<\/pre>\n
CIVIL  APPELLATE  JURISDICTION : Civil Appeal  No.  1242  of
\n1968.\n<\/p>\n
Appeal\tby special leave from the judgment and\torder  dated
\nJanuary\t 21, 1964 of _the Mysore High Court in I.T.R.C.\t No.
\n13 of 1963.\n<\/p>\n
S.K.  Venkataranga  Iyengar and J.  Ramamurthi,\t for  the
\nappellant.\n<\/p>\n
S. K. lyer and R. N.  Sachthey, for the respondent.
\nThe Judgment of the Court was delivered by
\nVaidialingam, J. This appeal, by special leave, raises\tthe.
\nquestion  whether the, deed dated March 20, 1959 and  marked
\nEx. A is an Instrument of Partnership on the basis of  which
\nthe  ,appellant firm is eligible to be granted\tregistration
\nunder S. 26A of the Indian Income-tax Act, 1922 (hereinafter
\nto be referred as the Income-tax Act).\n<\/p>\n
 The appellant is a firm consisting of six, partners and the
\npartnership  was constituted under the document dated  March
\n20,  1959.  The ‘business of the partnership, as recited  in
\nthe  deed. is stated to have been carried on in\t partnership
\nfrom October 1, 1958.  The partnership was registered  under
\nthe  Indian  Partnership  Act,\t1932,  (hereinafter  to\t  be
\nreferred  as  the Partnership Act) on or about\tAugust\tII,,
\n1959.  For the assessment year 1959-60, corresponding to the
\nprevious year ending March 31, 1959, the appellant filed an
\napplication  to the Income-tax Officer, ‘A’  Ward,  Dharawat
\nunder s. 26A for registration of the partnership in the name
\nof  M\/s.  K. D. Kamath and Company.  The Income-tax  Officer
\nby  his\t order dated September 28, 1960\t declined  to  grant
\nregistration  on  the  ground  that  there  was\t no  genuine
\npartnership brought into existence by the deed of March\t 20,
\n1959 and that the claim of the firm having been\t constituted
\nis  not\t genuine.  The said officer further  held  that\t the
\nbusiness  should  be held to be the sole concern  of  K.  D.
\nKamath.\t  For  coming  to this\tconclusion,  the  Income-tax
\nOfficer has mainly relied on clauses 8, 9, 12 and 16 of\t the
\npartnership deed.  Though the Income-tax Officer has used  a
\nloose  expression that there is no genuine partnership,\t the
\nsum.  and  substance  of his finding is\t that  there  is  no
\nrelationship  of  partners inter se created under  the\tsaid
\ndocument.\n<\/p>\n
Mr.  S. k. Iyer, learned counsel for the Revenue,  has\talso
\n,clarified  the\t position  before us  by  stating  that\t the
\nDepartment  is\tnot  challenging  the  genuineness  of\t the
\ndocument.  According to the learned counsel, the stand taken
\nby the Revenue is that no legal relationship of partners has
\nbeen brought about as between
\n1037<\/span>
\nthe  parties to the document.  In short, his  contention  is
\nthat  the  arrangement evidenced by Ex.\t A is  not  that  of
\n“partnership” as understood in law.\n<\/p>\n
On  appeal by the assessee, the Appellate Assistant  Commis-
\nsioner on May 5, 1961 confirmed the order of the  Income-tax
\nOfficer.  According to the Appellate Assistant\tCommissioner
\nno  partnership\t has been brought about by  the\t deed  dated
\nMarch  20,  1959 and that the business continues to  be\t the
\nproprietary  concerti of K. D. Kamath.\tIn coming  to.\tthis
\nconclusion   ‘the  appellate  authority\t has  laid   special
\nemphasis on clause 12 of the deed-.\n<\/p>\n
The assessee carried the matter in further appeal I.T.A. No.
\n3220  of  1961-62  (Assessment\tyear  1959-60)\tbefore\tthe.
\nIncome-,  tax  Appellate Tribunal, Bombay  Bench  ‘B’.\t The
\nAppellate  Tribunal,  after  a\treference  to  the  relevant
\nclauses in the partnership deed, came to the conclusion that
\nthe  two essential requirements as laid down by\t the  courts
\nfor  determining whether there is a partnership, namely,  an
\nagreement between the parties to ;hare profits and each\t of
\nthe  parties acting as agent of all, are fully satisfied  in
\nthis case.  In this connection the Tribunal placed  reliance
\non  the\t decision  of  the Bombay  High\t Court\tin  Balubhai
\nGulabdas  Navlakhi v. Commissioner of Income-Tax,  Bombay(1)
\nand  distinguished  an earlier decision of  the\t same  court
\nreported  in Umarbhai Chandbhai v. Commissioner\t of  Income-
\ntax,  Bombay  City(2).\tUltimately, the\t Appellate  Tribunal
\nheld  that the partnership deed makes it clear that  profits
\nand  losses are to be shared between the parties  and  that,
\nsubject\t to the over-riding authority of K. D.\tKamath,\t the
\nother  partners could act for the firm.\t In this  view,\t the
\nAppellate  Tribunal  held  that\t the  deed  does  create   a
\nrelationship  of  partners  inter  se  between\tthe  parties
\nthereto and directed the Income-tax Officer to register\t the
\nfirm under s. 26A of the Income-tax Act.\n<\/p>\n
herein,\t made  an application on October 4,  1962  under  s.
\n66(1)  of the Income-tax Act praying for a  reference  being
\nmade  by  the Appellate Tribunal to the High  Court  of\t the
\nquestion  of  law mentioned in the  application.   The\tsaid
\napplication  was  numbered  as 66-RA-978  of  1962-63.\t The
\nAppellate   Tribunal   accordingly  submitted an   agreed
\nstatement  of  case and referred to the High Court  for\t its
\nopinion the following question of law :\n<\/p>\n
\t      “Whether,\t  on   the   facts   and   in\t the
\n\t      circumstances of the case, M\/s.  K. D.  Kamath
\n\t      &\t Co.,  could be granted\t registration  under
\n\t      Section  26A of the 1 Act for  the  assessment
\n\t\t\t    year 1959-60 ?”.\n<\/p><\/blockquote>\n
\t       (1) [1962] 46 I.T.R. 492.<\/p><\/blockquote>\n
\t       (2) [1952] 22 I.T.R. 27
\n\t      1038<\/span>
\n The High Court by its judgment and order dated January\t 21,
\n1964  in  I.T.R.  C. No. 13 of 1963  answered  the  question
\n,referred  to  it  against the assessee and  held  that\t the
\nappellant  firm could not be granted registration  under  s.
\n26A  for  the assessment year 1959-60.\tIt is  against\tthis
\ndecision of the, High Court that the assessee has filed\t the
\nabove appeal.\n<\/p>\n
The High Court has generally considered the effect of cls. 5
\nto  9,\t12 and 16 of the partnership deed.  The\t High  Court
\nalso  considered the question whether the  partnership\tdeed
\nsatisfies  the\ttwo essential requisites to  constitute\t the
\npartnership,  namely, (1) whether there is an  agreement  to
\nshare profits as well as the losses of the business, and (2)
\nwhether\t each  of the partners under the deed  can  act as
\nagent  of  all.\t From the discussion in\t the  judgment,\t the
\nlearned Judges. so far as we could see, have not thought  it
\nnecessary to consider elaborately the question whether there
\nis  an.\t agreement  in the partnership\tdeed  to  share\t the
\nprofits\t and  losses of the business.  Obviously,  the\tHigh
\nCourt  must  have been satisfied from the  recitals  in\t the
\npartnership deed that this requirement is amply satisfied in
\nthis case.  That is why we find that the learned Judges have
\nfocused\t their\tattention  as they  themselves\tsay  in\t the
\nJudgment,  on  the question whether it is possible  to\thold
\nfrom the recitals in the partnership deed that each  partner
\nis  entitled to act as agent of all.  In  considering  this
\naspect,\t the  learned Judges have referred  particularly  to
\ncls. 8, 9 and 16 of the partnership deed and have held\tthat
\nit is clear from these clauses that the management, as\twell
\nas  the\t control of the business, is entirely  left  in\t the
\nhands of the alleged first partner K. D. Kamath and that the
\nother  partners\t are only to work under his  directions\t and
\nshare profits and losses in accordance with the\t proportions
\nmentioned in cl. 5. It is the further view of the High Court
\nthat it is not within the power of the other five parties to
\nact  as agent of the other partners as they  cannot accept
\nany business except with the consent of K. D. Kamath nor can
\nthey raise any loan or pledge the firm’s interest.  On\tthis
\nreasoning,  the High Court has come to the  conclusion\tthat
\nthere  is  no  relationship of partners\t created  under\t the
\npartnership  deed and as this essefftial element of  agency
\nis  lacking,  the appellant was not eligible to\t be  granted
\nregistration under S. 26A.  The learned Judges, in coming to
\nthis  conclusion, have placed considerable reliance  on\t the
\ndecision  of the Bombay High Court in Umarbhai\tChanbhai  v.
\nCommissioner  Of Income-tax, Bombay City(1) as well  as\t the
\ndecision  of  this Court in M. P. Davis v.  Commissioner  of
\nAgricultural  Income-tax<\/a>(2).  At this stage we\tmay  mention
\nthat  the judgment of the Mysore High Court, which is  under
\nappeal before us, is reported in Commissioner of Income-tax,
\nMysore v. K. D.\t Kamath & Co.($).\n<\/p>\n
(1) [1952] 22 I.T.R. 27.\n<\/p>\n
(2) [1959] 35 I.T.R. 803.\n<\/p>\n
(3) [1964] 54 I.T.R. 72.\n<\/p>\n
1039<\/span><\/p>\n
Mr.  S.\t K. Venkataranga Iyengar, learned  counsel  for\t the
\nassessee-appellant referred us to the various clauses in the
\npartnership  deed and urged that the view of the High  Court
\nthat the essential element of agency is absent in this case,
\nis   erroneous.\t  The  counsel\tfurther\t urged\t that\tthe,
\npartnership deed, read as a whole, leaves no room for  doubt
\nthat  there is an agreement to share the profits and  losses
\nof  the\t business in the proportion mentioned in  the  deed.
\nTherefore, one of the essential ingredients to constitute  a
\npartnership  is\t satisfied in this case.  He  further  urged
\nthat though a large amount of control regarding the  conduct
\nof  business  may have been left in the hands of  the  first
\npartner K. D. Kamath, that circumstance, by itself, does not
\nmilitate against the view of one partner acting as a of\t the
\nother  partners.  He referred us, in this  connection,\ttip-
\ncertain\t decisions  of the High Courts, as well as  of\tthis
\nCourt, where under circumstances similar to the one exisitng
\nbefore\tus,  it has been held that the mere fact  that\tmore
\ncontrol\t is to be exercised only by one of the partners,  is
\n‘not  a\t circumstance which militates  against\tthe  parties
\nhaving, entered into a partnership arrangement as understood
\nin law,
\nMr.  S. K. Iyer, learned counsel for the Revenue,  supported
\nthe reasoning of the High Court its entirety.  According  to
\nthe  learned  counsel,\tthe question  whether  there  is  an
\nagreement  to  share  the  profits and\tthe  losses  of\t the
\nbusiness  and  the  further question  whether  each  of\t the
\npartners  is  entitled\tto act as agent of  all\t are  to  be
\ndetermined by looking into all the facts as borne out by the
\ndeed  of partnership.  He urged that on a  consideration  of
\nall  such  facts, the High Court ha’ held that\tone  of\t the
\nessential  conditions, namely, the right of one\t partner  to
\nact  as. agent of all, does not exist in the  present  case.
\nIf so, the counsel urged, the opinion expressed by the\tHigh
\nCourt  that the appellant is not eligible  for\tregistration
\nunder  s. 26A is correct.  ‘In support of  his\tcontentions,
\nthe  counsel  also  referred us to certain  clauses  in\t the
\npartnership  deed  as well as to certain provisions  of\t the
\nPartnership Act.\n<\/p>\n
From  what  is stated above, it is clear  that\tthe  various
\nauthorities  as well as the High Court have only  considered
\nsome  of the clauses of the partnership deed for  coming  to
\nthe  conclusion\t one way or the other.\tIn  considering\t the
\nquestion   whether   the  partnership\tdeed   creates\t the
\nrelationship of partners as between the parties thereto,  as
\nunderstood  in\tlaw,  it is desirable  to  have\t a  complete
\npicture\t of  the entire document.  Ex.\tA,  the\t partnership
\ndeed runs as follows
\n“INSTRUMENT OF PARTNERSHIP.\n<\/p>\n
Articles of agreement made at Hubli, this 20th day of March,
\n1959, Among (1) Shri krishnarao Dadasaheb Kamat, hereinafter
\n1040<\/span>
\ncalled\tthe Party hereto of the 1st part, (2)  Shri  Narayan
\nGanesh. kamat hereinafter called the party hereto of the 2nd
\npart, (3) Shri Shripadrao Damodara Kamat, hereinafter called
\nthe party hereto of the 3rd part, (4) Shri Dnyanoba  Jotiram
\nMohite, hereinafter called the party hereto of the 4th part,
\n(5)  Shri  Shankar  Govind Joshi,  hereinafter,\t called\t the
\nparty, hereto of the 5th party, and (6) Shri\t   Yashavant
\nBhawoo Kate, hereinafter called the party of the  6th  part,
\nAll  Hindu inhabitants. residing at Hubli, and\twhereas\t the
\nparteis\t from 2 to 6, who have been serving with  party\t No.
\n1since\ta very long time and in view of the appreciation  of
\ntheir  honest and sincere services which the  above  parties
\nhave  rendered\tin past and with the object that  the  above
\nparties\t should\t also have their  material  and\t economical-
\nprogress,  party No. i.e. Shri K. D. Kamat has been  pleased
\nto  convert his sole proprietary concern, as  a\t partnership
\nconcern,  by  admitting\t the above parties from 2  to  6  as
\nworking\t partners  and\tthe party No. 1 shall  be  the\tmain
\nfinancing  and\tmanaging partner and the,  business  of\t the
\npartnership is agreed and is being carried on accordingly in
\npartnership   as   from\t 1st  Day  of  October,\t  1958,\t  as
\n“Contractors”  or  any other business that the\tparties\t may
\nthink fit under the name and style of “Messrs.\tK. D.  Kamat
\n&  Co., Engineers and Contractors, Hubli” and it is hereby
\nagreed by and among, the parties to this Agreement as under\n<\/p>\n
2.That\tthe business of the partnership is running  under
\nthe name and style of “Messrs K. D. Kamat & Co., Engineers &
\nContractors, Hubli” as from the 1st day of October 1958\t and
\nthis agreement shall take retrospective effect and shall  be
\ndeemed to have come into operation as from the\tcommencement
\nof 1st October, 1958.\n<\/p>\n
3. That the duration   of the partnership shall be at will.\n<\/p>\n
4.That\tthe  business of the partnership  is  running  at
\nHubli  and  shall  run at Hubli or at such  other  place  or
\nplaces,\t as  the case may be under the name  and  style,  of
\n“Messrs.  K. D. Kamat & Co., Engineers & Contractors” or  in
\nsuch  other name or names that the parties may from time  to
\ntime decide and agree upon.\n<\/p>\n
5.That\tthe final accounts of the partnership firm  shall
\nbe  made up on the last day of each year of  account,  which
\nshall  generally  be  on 31st day of  March  every  year  of
\naccount\t and the accounts shall be taken upto that  date  of
\nall  the  stock-in-trade  and after providing  for  all\t the
\nworking expenses, the remaining net profits
\n1041<\/span>
\nor  losses,  as\t the case may be, shall\t as  shared  by\t the
\nparties hereto as under:-\n<\/p>\n
———————————————————–
\nNames of Partners\t\tExtent of Individual Share\n<\/p>\n
————- – — – — – ——————————–<\/p>\n
\n   1.Shri Krishnarao Dadasaheb Kamat\t      5 shars\n   2.Shri Narayan Ganesh Kamat\t\t     2 shares\n   3.Shri Shri Dadarao Damodara Kamat\t      2 shares\n   4.Shri Dayanoba Jotiram Mohite\t      2 shares\n   5.Shri Shankar Govind Joshi\t\t     2 shares\n   6.Shri Yashavant Bhawoo Kate\t\t     2 shares\n\t\t\t\t      -------------------\n     TOTAL\t\t\t\t      15 shares\n\t\t\t\t     ---------------------\n<\/pre>\n
6.   That it is agreed among the partners that the party No.
\n1,  i.e.,  Shri\t K. D. Kamat, shall  be\t the  principal\t and
\nfinancing  partner and the rest of the partners i.e. from  2
\nto  6  are admitted only as  working  partners\tcontributing
\nlabour.\n<\/p>\n
7.   That  the\tGood-will of the firm shall  be\t wholly\t and
\nsolely belong  to party No. 1 i.e. Shri K. D. Kamath.\n<\/p>\n
8.   That the party No. 1, i.e., Shri K. D. Kamat, who\tis
\nthe  principal\tand financing partner and by virtue  of\t his
\nhaving the long standing experience.in the line of  business
\ntogether  with\tthe technical knowledge of  Engineer,  shall
\nhave  full  right of control and management  of\t the  firm’s
\nbusiness and in the best interest of the firm, it is  thus
\ndecided and agreed upon among all the partners that all\t the
\nworking partners from 2 to 6 shall always work according  to
\nthe  instructions and directions given from time to time  by
\nShri  K. D. Kamat, in the actual execution of works and\t in
\nany  other  matter connecting thereof,\tpertaining  to\tthis
\npartnership business.  The decision of the principal partner
\non  the aspect of taking any new business or giving  Lenders
\nfor,  new works, shall always vest with him, whose  decision
\nshall be final and ‘binding upon all the working partners.\n<\/p>\n
9.   That  it,\tis also agreed among the  partners  that  no
\nworking\t partner  or partners is\/are authorised to  raise  a
\nloan  for  and on behalf of the firm or\t pledge\t the  firm’s
\ninterest  directly or indirectly and such an act shall\tnot
\nbe  binding on the firm, except under the written  authority
\nof the principal partner.\n<\/p>\n
10. That it is further expressly agreed, that excepting\t the
\nparties\t No.  1 and 2 i.e. Shri K. D. Kamat and Shri  N.  G.
\nKamat,\tthe other Parties from 3 to 6 shall not do  contract
\nbusiness,  so  long as they are partners in this  firm and
\nthis  clause  is inserted in the betterment  of\t the  firm’s
\nbusiness and with the object that the firm’s business
\n1042<\/span>
\nshould not suffer and the works if taken or standing in\t the
\nname of the said parties from 3 to 6, the same, shall be the
\nbusiness of the firm.\n<\/p>\n
11.  That  it  is  also further\t agreed\t that  the  Managing
\nPartner\t Shri  K.  D. Kamat shall  alone  operate  the\tBank
\naccounts  and  in  case of any\tneed  for  convenience,\t the
\npartner authorised by him in writing and so intimated to the
\nBank or Banks, shall operate, ,the Bank accounts.\n<\/p>\n
12.  That  in  the  course of the  business  or\t during\t the
\nexistence of the firm’s business, the principal partner\t has
\nreason\tto  believe  that any working  partner\tor  partners
\nis\/are\tnot working and conducting to the best\tinterest  of
\nthe firm, the principal partner shall have a right to remove
\nsuch  a working partner or partners from  the  “Partnership
\nconcern\t and  in such an eventuality the out  going  working
\npartner or-partners, shall have only right of the profit, or
\nloss  upto the date of his retirement, as may be decided  by
\nthe  principal\tpartner\t in Jump sum  either  by  paying  or
\nreceiving. regard being had to the progress of the  business
\nor  otherwise  upto  the date of  retirement,  only  on\t the
\ncompleted works..\n<\/p>\n
13.  That proper books of accounts shall be kept by the said
\nparties\t and  entries  made therein  of\t all  such  matters,
\ntransactions and things. as are usually entered in the books
\nof  accounts  kept by the persons engaged in business  of  a
\nsimilar nature; all books of accounts, documents, papers and
\nthings\tshall be kept at the principal place of business  of
\nthe firm and each partner shall at all times, have free\t and
\nequal access to them.\n<\/p>\n
14.  That  each\t partner shall be just and faithful  to\t the
\nother  or others in all matters relating to the business  of
\nthe firm, shall attend deligently to the firm’s business and
\ngive  a true account and shall give information relating  to
\nthe same without fail.\n<\/p>\n
15.  That  each partner shall withdraw such sums as will  be
\nmutually  determined by the partners from time to  time,  in
\nanticipation of the Profit falling to-their individual share
\nand  in\t case of loss, the same shall be made  good  by\t the
\npartners.\n<\/p>\n
16.  Thus  subject  to the provisions herein  mentioned\t and
\nlaid ,down and made thoroughly known by each of the  parties
\nto  this  Agreement  with sound mind and  body,\t the  firm’s
\naffairs be carried on for mutual gain and benefit and if any
\nquestions which may ..arise or occur touching to the conduct
\nor  management or liability of the firm, the same  shall  be
\namicably  settled  among the parties with  the\tconsent\t of
\nprincipal  partner,  whose decision in the matter  shall  be
\nfinal and binding on all partners.\n<\/p>\n
1043<\/span><\/p>\n
In  witness whereof the parties to this agreement  have\t set
\ntheir hands and seals to this Agreement as under:\n<\/p>\n
1.  Signed and Delivered by the within
\n    named Shri K. D. Kamat, himself\t     Sd. K. D. Kamat\n<\/p>\n
2.  Signed & Delivered by the within
\n     named Shri N. G. Kamat, himself\t     Sd. N. G. Kamat\n<\/p>\n
3.   Signed & Delivered by the within\t    Sd.S. D. Kamat
\n     named Shri S. D. Kamat, himself\t   Sd. V. D. Jituri
\n\t  in the presence of\n<\/p>\n
4.   Signed & Delivered by the within
\n      named Shri D. J. Mohite, himself\t  Sd. D. J. Mohite\n<\/p>\n
5.   Signed & Delivered by the within
\n     named Shri S. G. Joshi, himself\t    Sd. S. G. Joshi\n<\/p>\n
6.   Signed & Delivered by the within
\n     named Shri Y. B. Kate, himself\t     Sd. Y. B. Kate.\n<\/p>\n
\t\t      Sd.\/ Certified to be the true copy
\n\t\t\t\t     of the original.\n<\/p>\n
\t\t\t     For K. K. D. KAMAT & CO.”\n<\/p>\n
The  High  Court,  so far as we could see,  has\t rested\t its
\ndecision On five circumstances for holding that there is  no
\nrelationship  of partners as between the parties  inter\t se,
\ncreated\t under\tthe  partnership deed.\tThey  are  based  on
\nconsideration  in  particular  of cls. 8,  9  and  16.\t The
\nfollowing are  the circumstances, which according  to  the
\nlearned\t Judges\t militate against holding in favour  of\t the
\nassessee;  (1) The management as well as the control of\t the
\nbusiness is entirely left in the hands of the alleged  first
\npartner k. D. Kamath; (2) The other partners can merely work
\nunder his directions and share in the profits and losses in
\naccordance with the proportion mentioned in cl. 5; (3).\t  It
\nis not within the power of the parties Nos. 2 to 6 to act as
\nagent of other partners; (4) The said parties cannot  accept
\nany  business except with the consent of K. D.\tKamath;\t and
\n(5)  Those  parties  cannot raise any loan  or\tpledge\tthe,
\nfirm’s\tinterest, directly or indirectly, except  under\t the
\nwritten\t authority  of K. D. Kamath.  In view of  all  these
\ncircumstances,\taccording  to  the High Court,\tone  of\t the
\nessential element to constitute partnership, namely,  agency
\nis lacking.\n<\/p>\n
We  will now refer to some of the provisions of the  Income-
\ntax Act as well as the Partnership Act.\n<\/p>\n
Section\t 2  (6B)  of the Income-tax Act\t provides  that\t the
\nexpressions  “firm”,  “partner” and “Partnership”  have\t the
\nsame meaning
\n1044<\/span>
\nrespectively as in the Partnership Act.\t There is no doubt a
\nproviso with which We are not concerned.  Section 26A of the
\nIncome-tax   Act   lays\t  down\t the   procedure   regarding
\nregistration  of films.\t Section 59 authorises\tthe  Central
\nBoard  of  Revenue, subject to, the control of\tthe  Central
\nGovernment,  to make rules for carrying out the\t purpose  of
\nthe Act.  The relevant Income-tax Rules Jay down the details
\nof the procedure for making an application for\tregistration
\nof  a  firm as contemplated under s. 26A.  As  there  is  no
\ncontroversy that the application has been made by the appel-
\nlant in accordance with s. 26A and the relevant Rules, it is
\n‘unnecessary  for us to quote the section and  the  relevant
\nRules.\n<\/p>\n
Coming to the Partnership Act, s. 4 which defines  “partner-
\nship” runs as follows :\n<\/p>\n
\t       ”   Partnership”\t is  the  relation   between
\n\t      persons  who have agreed to share the  profits
\n\t      of a business carried on by all or any of them
\n\t      acting for all.”\n<\/p><\/blockquote>\n
Section 6 deals with the made of determining the  existence
\nof partnership.\t As per that section in determining  whether
\na  group of persons is or is not a firm or whether a  person
\nis or is not a partner in a firm, regard is to be had to the
\nreal  relation between the parties as shown by all  relevant
\nfacts  taken together.\tSection 11(1) provides that  subject
\nto  the provisions of the Act, the mutual rights and  duties
\nof  the\t partners of a firm may be  determined\tby  contract
\nbetween\t the partners and such contract may be expressed  or
\nmay be implied by a course of dealing.\tIt further  provides
\nthat  such  contract  may be varied by consent\tof  all\t the
\npartners and such consent may be expressed or may be implied
\nby  a course of dealing.  Sub-s. (2) clearly  provides\tthat
\nnotwithstanding\t anything contained in s. 27 of\t the  Indian
\nContract Act, the contract between the partners may  provide
\nthat  a partner shall not carry on any business\t other\tthan
\nthat of the firm while he is a partner.\t Section 12 in\tcls.\n<\/p>\n
(a)  to (d) deals with the rights and duties of\t a  partner,
\nbut that again is subject to contract between the  partners.
\nSection\t 14, on which some reliance has been placed  by\t the
\ncounsel for the Revenue is as follows
\n\t      “Section 14 : The property of the firm :\n<\/p>\n
\t       Subject to contract between the partners, the
\n\t      property of the firm includes all property and
\n\t      rights  and interests in\tproperty  originally
\n\t      brought  into  the  stock\t of  the  firm,\t  or
\n\t      acquired, by purchase or otherwise, by or\t for
\n\t      the  firm,  or  for the purposes\tand  in\t the
\n\t      course  of  the  business\t of  the  firm,\t and
\n\t      includes also the goodwill of the business.\n<\/p>\n
\t      1045<\/span><\/p>\n
\t      Unless   the   contrary\tintention   appears,
\n\t      property and rights and interests in  property
\n\t      acquired With money belonging to the firm\t are
\n\t      deemed to have been acquired for the firm.”
\nSection\t 18 provides that subject to the provisions  of\t the
\nAct, a partner, is the agent of the firm for the Purpose  of
\nthe  business  of  the firm.  Section  19(1)  provides\tthat
\nsubject\t to the provisions of s. 22, the act of a  partner
\nwhich is done to carry on, in the usual way, the business of
\nthe kind carried on by the firm binds the firm.\t It  further
\nstates\tthat the authority of a partner to so bind the\tfirm
\nconferred by the said section is called his “implied  autho-
\nrity.” Sub-section (2) enumerates the various matters, which
\na  partner  cannot do under the implied\t authority,  in\t the
\nabsence\t of  any usage or custom or trade to  the  contrary.
\nSection 20 dealing with\t the  extension and  restriction  of
\npartner’s implied authority runs   as follows
\n\t      “Section\t20.   Extension and  restriction  of
\n\t      partner’s implied authority :\n<\/p>\n
\t      The  partners  in\t a  firm  may,\tby  contract
\n\t      between  the partners, extend or restrict\t the
\n\t      implied authority of any partner.\n<\/p>\n
\t      Notwithstanding any such restriction, any\t act
\n\t      done by a partner on behalf of the firm  which
\n\t      falls within his implied authority binds\tthe
\n\t      firm,  unless,  the  person with\twhom  he  is
\n\t      dealing,\tknows of the restriction or  doesnot
\n\t      know or believe that partner to be a partner.”
\nFrom  a perusal of the partnership deed one thing is  clear,
\nnamely,\t  under\t cl.  (1)  what\t was  originally  the\tsole
\nproprietary  concern of K. D. Kamath has been  converted  as
\npartnership  concern  by admitting parties Nos. 2  to  6  as
\nworking partners, along with party No. 1, and party No. 1 is
\nthe  main  financing and managing partner of  the  business.
\nThat  clause has to be read a-long with cl.  (6)  whereunder
\nthe  partners  have agreed that K. D. Kamath  shall  be\t the
\nprincipal  and\tfinancing  partner  and\t the  rest  of\t the
\npartners, namely, parties Nos. 2 to 6 are admitted only\t as
\nworking partners contributing labour.  Clause (4) deals with
\nthe  running  of the partnership business at Hubli  as\talso
\nother place or places or with such other name or names\tthat
\nthe  parties  (which means partners Nos.  1 to 6)  may\tfrom
\ntime  to time decide and agree upon.  From clauses (1),\t (2) and
\n(3), it is clear that the business of the  partnership
\nis that of Engineers and Con-tractors.\tWe are referring  to
\nthis  aspect  because it will have a bearing  regarding\t the
\ncontrol of the business agreed to be vested in K. D. Kamath.
\nThere does
\n1046<\/span>
\nnot appear to be any controversy that party No. 1 has  been
\ncarrying  on  such business as a proprietary concern  for  a
\nlong  time before the partnership was formed and as such  he
\nis  considerably experienced in the said technical  type  of
\nbusiness.  Clause” (5) provides that final accounting is  to
\nbe  taken as on March 31 of every year and the\tnet  profits
\nand  losses are to be shared by the parties thereto  in\t the
\nproportion of the shares specified in the said clause.
\nUnder  clause  11, apart from the managing  partner,  K.  D.
\nKamath\toperating  the\tbank  accounts,\t any  other  partner
\nauthorised  by\thim  isalsoeligibletooperatethebankaccounts.
\nClause,(12)  entitles  a  partner, when he ceases  to  be  a
\npartner\t to  be paid his share of profit or loss,  upto\t the
\ndate  of  his  so  ceasing to be  a  partner.\tClause\t(13)
\nprovides   that\t books\tof  accounts  are  to  be   properly
\nmaintained  and\t each partner has a right at all  times\t to
\nhave free and equal access to them.  Clause (14) enjoins  on
\neach  part-;  ner  to  be just and  faithful  to  the  other
\npartners in all matters relating to the business of the firm
\nand each of them has got a duty to diligently attend to\t the
\nbusiness  of the firm.\tEach of them has also an  obligation
\nto  give  a  true account and  information  regarding  the
\nbusiness  of the firm.\tClause (15) enables the partners  to
\nwithdraw  the amounts in anticipation of profits falling  to
\ntheir  individual share; and in case of loss, each of  them
\nis  also liable to make good the same in proportion  to\t his
\nshare  in  the\tpartnership.  Clause  (16)  enjoins  on\t the
\npartners to carry on the affairs of the firm for mutual gain
\nand benefit.\n<\/p>\n
All  the  above clauses clearly, in our\t opinion,  establish
\nthat  the  sole\t proprietary concern of\t K.  D.\t Kamath\t has
\nvanished.   The\t above clauses also establish the  right  of
\neach  of the partners to share the profits and also to\tbear
\nthe losses in ‘the proportion of their shares mentioned\t in
\ncl.  (5).   Therefore, one of the essential  ingredients  to
\nconstitute  partnership,  namely, that there  should  be  an
\nagreement  to  share  the  profits and\tthe  losses  of\t the
\nbusiness is more than amply satisfied in this case.
\nThen  the question is whether the circumstances pointed\t out
\nby the High Court and referred to by us earlier, necessarily
\nlead to the conclusion that no relationship of partners,  as
\nunderstood  in law, has been created as between the  parties
\nunder  the  partnership\t deed.\t For  this  purpose  it\t  is
\nnecessary  to  refer to certain decisions of this  Court  as
\nwell as of the High Courts, which may have a bearing on this
\naspect.\t  In Steel Brothers & Co. Ltd. vs.  Commissioner  of
\nIncome-tax<\/a>(1)  one  of\tthe  questions\tthis  Court  had  to
\nconsider was whether the fact that the control and  manage’-
\nment of a business was in the hands of one person when there
\nwere
\n(1)  [1958] 33 I.T.R. 1.\n<\/p>\n
\t\t\t    1047<\/span><\/p>\n
three partners is destructive of the element of partnership.
\nThe facts were that A and B, two companies were carrying  on
\ntrade  in  Burma rice.\tLater on, an agreement\twas  entered
\ninto  between  A B and C for the working of the\t Burma\trice
\nbusiness.   It was, provided that the entire  management  of
\nthe  business and the conduct of its affairs was to be\tdone
\nby  A in its absolute discretion.  The profit and  loss\t was
\nprovided to be shared in the proportion mentioned under\t the
\nagreement.   There  was\t a restriction on B  and  C  against
\nhiring the properties of the firm without the consent of  At
\nwas  held by this Court that notwithstanding the  fact\tthat
\nthe  management\t and  conduct  or the business\tin  its\t own
\ndiscretion was vested  with  A,\t that  circumstance  is\t not
\ndestructive  of\t the partnership  relationship\tthat  exists
\nbetween the parties to the agreement.  In this decision\t two
\nconditions have been laid down as essential to constitute  a
\npartnership  in\t law: (1) sharing of profit or loss  of\t the
\nbusiness;  and\t(2)  business being carried on\tby  all\t the
\nparties or any of them acting for all, in which is  implicit
\nthe theory of agency.\n<\/p>\n
In  M.\tP.  Davis v. Commissioner  of  Agricultural  Income-<\/a>
\ntax(1), this Court had to consider whether the\trelationship
\nas   partners.\thad  been  created  by\tthe   agreement\t  of
\npartnership  relied  on by the parties.\t From  the  relevant
\nfacts  it  is  seen that it was an extreme  case  where\t two
\nbrothers ostensibly entered into a partnership\tarrangement.
\nBut  the  recitals in the document, as pointed out  by\tthis
\nCourt,\tclearly showed that the entire management  was\twith
\none  brother  A\t and that B had no right to  make  any\tcon-
\ntribution towards capital.  There was no provision as to how
\nlosses are to be dealt with and there was a very complicated
\nmanner\tfor ascertaining the so called profits.\t Having\t due
\nregard\tto  the\t tenor\tof  the\t document  and\tthe  clauses
\ncontained  therein,  this  Court  held\tthat  there  was  no
\nintention  to  bring  about the,  relationship\tof  partners
\nbetween the two brothers.  On the other hand, it is the view
\nof  this  Court\t that  the document  had  been\texecuted  to
\ncontinue  under the cloak of a partnership the\tpre-existing
\nand  real relationship, namely, that of master and  servant.
\nIt  is to be noted that this Court did not hold\t that  there
\nwas  no relationship of partners created under the  document
\nonly on the basis that the exclusive control and  management
\nwas  left in the hands of A. Such a conclusion\twas  reached
\nhaving due, regard to the various other clauses in the deed.
\nlo fact this Court, has already held in the earlier decision
\nreferred  to  above. that the mere  circumstance  that\tthe
\ncontrol\t and  management are vested in One  partner  is\t not
\ndestructive of the existence of partnership.  No doubt.\t the
\nHigh  Court  in the case on hand, has placed  some  reliance
\nupon  the  decision  in\t M.  P.\t Davis\tv.  Commissioner  of
\nAgricultural  Income-tax<\/a>(1),  in support of  its  conclusion
\nthat no partnership
\n(1)  [1959] 35 I.T. 803.\n<\/p>\n
1048<\/span><\/p>\n
arrangement can be spelled out from the document before us.
\nIn our opinion, there has not been a proper appreciation  by
\nthe  High Court of the reasons which led to this  Court\t for
\nholding. in the said decision that there was no relationship
\nof  partners between the two brothers A and B. That  was  an
\nextreme case where the clauses in the partnership deed\twere
\nentirely different.\n<\/p>\n
 In  Commissioner of Income-tax, Gujarat v. A.\tAbdul  Rahim<\/a>
\n,and  Co.(1) this Court has held that it is the settled\t law
\nthat if a partnership is _genuine and valid one, the Income-
\ntax Officer has no power to reject its registration, if\t the
\nother  provisions of s. 26A and the Rules  made\t thereunder
\nare complied with.\n<\/p>\n
In  Agarwal and Co. v. Commissioner of\tIncome-tax,  U.P.<\/a>(2)
\nthis  Court  dealing  with the\tconditions  of\tregistration
\nprescribed  in\tS. 26A and the relevant\t Rules\tobserved  as
\nfollows :\n<\/p>\n
\t      “The conditions of registration prescribed  in
\n\t      this  section and the relevant rules are:\t (1)
\n\t      on  behalf of the firm, an application  should
\n\t      be  made\tto the Income-tax  Officer  by\tsuch
\n\t      person  and at such time and  containing\tsuch
\n\t      particulars,  being is such form and  verified
\n\t      in such manner as are prescribed by the rules:
\n\t      (2)  ;the firm should be constituted under  an
\n\t      instrument of partner,ship. (3) the instrument
\n\t      must  specify  the individual  snares  of\t the
\n\t      partners,\t and  (4) the  partnership  must  be
\n\t      valid  and genuine and must actually exist  in
\n\t      the terms specified in the instrument.  If all
\n\t      the   above  conditions  are  fulfilled,\t the
\n\t      Income-tax  Officer is bound to  register\t the
\n\t      firm  unless  the\t assessee  has\t contravened
\n\t      section 23 (4) of the Act.”\n<\/p><\/blockquote>\n
In  certain decisions of the High Courts the  two  essential
\nconditions  necessary  to form the relation  of\t partnership
\nhave,  been  stated  to\t be: (1) that  there  should  be  an
\nagreement  to share the profits and losses of the  business,
\nand (2) that each of the partners should,be acting as  agent
\nof all.\t Though, these two conditions, by and large, have to
\nbe  satisfied when the, relationship of partners is  created
\nbetween\t the  parties,\twe would emphasise  that  the  legal
\nrequirements under s. 4 of the Partnership Act to constitute
\na partnership in law are: (1) there must be an agreement  to
\nshare  the profits or losses of the business; and  (2)\tthe,
\nbusiness  must be carried on by all the partners or  any  of
\nthem  acting  for  all.\t There is  implicit  in\t the  second
\nrequirement the principle of agency.\n<\/p>\n
The  tests  laid  down by the High Courts  have\t again\tbeen appli
\ned  by\tthe  Bombay High Court\tin  Balubhai  Gulabdas
\nNavlakhi
\n(1) [1965] 55 I.T. R. 651.\n<\/p>\n
(2) [1970] 77 I.T.R. 10.\n<\/p>\n
\t\t\t    1049<\/span><\/p>\n
v.   Commissioner  of Income-tax(1) to consider whether\t the
\ndocument  before  them created a  relationship\tof  partners
\nbetween\t the  parties thereto.\tOne of the  main  contention
\nthat was urged, as militating against theory of\t partnership
\nwas  that  very wide powers of control and  management\twere
\ngiven  to  one of the partners so much so that he is  to  be
\nconsidered  to\tbe the owner or proprietor of  the  concern.
\nThis  contention  was rejected by the High Court.   After  a
\nreference to the various clauses in the document, the Bombay
\nHigh  Court  came to the conclusion that the  two  essential
\nconditions necessary to form a relation of partnership,\t re-
\nferred to above-, were present in the document\tconstituting
\nthe partnership.  The High Court further held that the\tfact
\nthat some of the terms of the document gave enlarged  powers
\nof  management and control to one of the partners,  who\t has
\nbrought in all the finances, is not by itself sufficient  to
\nhold,  having due regard to the other clauses that the\treal agree
\nment between the parties is not that of partners,  but
\nthat  of master and servant.  We may also observe that\tmost
\nof the clauses in the document before the Bombay High  Court
\nwere more or less similar to the clauses in the\t partnership
\ndeed before us.\n<\/p>\n
In  similar  cases,  where the control\tand  management\t was
\nvested\tin  the hands of one partner and where it  was\talso
\nprovided  that\tonly  one partner can operate  on  the\tbank
\naccount and the others can do so, only if authorised by him,
\nand that only one party can borrow on behalf of the firm for
\nall,  have  been  held not to  militate\t against  holding  a
\nparticular  document as creating the relationship of  master
\nand  servant.  Those decisions are of Kerala High Courts  in
\nCommissioner  of Income-tax, Kerala v. Pathrose Rice  &\t Oil
\nMillS<\/a>(2);  by  the Madras High Court in\t P.A  C.  Ratnaswamy
\nNadar  & Sons v. Commissioner of Income-tax,  Madras<\/a>(3);  by
\nthe Allahabad High Court in Commissioner of Income-tax V. R.
\nS.  Shoe Factory (4) ; by the Madhya Pradesh High  Court  in
\nMurlidhar  Kishangopal v. Commissioner of  Income-tax,\tM.P.
\nNagpur and Bhandara(5) and by the Mysore High Court in\tCity
\nTobacco Mart v. Commissioner Of Income-tax Mysore<\/a>(,).
\nWe  have already referred to the fact that the\tBombay\tHigh
\nCourt in Balubhai Gulabdas Navlakhi vs.\t Commissioner of In-
\ncome-tax(1),  has also taken the same view.  In addition  to
\nthe  existence\tof  clauses  to\t the  above  effect  in\t the
\npartnership  deed,  we\tmay mention that  in  the  Allahabad
\ndecision.  referred to above, in a partnership between A,  B
\nand C, there was a clause that C
\n(1) [1962] 46 I.T.R. 492.\t    (2)\t [1960] 40  I.T.  R.\n<\/p>\n
353.
\n(3) [1962] 46 I.T.R. 1148.    (4) [1963] 471.T.R.917.
\n(5) [1963] 50 I.T.R. 628.     (6) [1967] 64 I.T.R. 478.
\n119Sup CI\/72
\n1050<\/span>
\nwas not entitled to invest any capital and that the,business
\nis to be carried on only by A and B and that C has no  power
\nto  interfere  with  the management of\tthe  business.\t The
\nAllahabad.   High Court, in spite of all these clauses\theld
\nthat the document created a relationship of partners as\t the
\ntwo essential conditions, referred to by us earlier, existed
\nin that case.\n<\/p>\n
We  have already referred to the decision of this  Court  in
\nAgarwal\t and Company v. Commissioner of Income-tax,  U.P.<\/a>(1)
\nlaying\tdown  the conditions, which if\tfulfilled  makes  it
\nobligatory  on the Income-tax Officer to register the  firm,
\nunless\tthe assessee has contravened s. 23 (4) of  the\tAct.
\nIt  is not the case of the Revenue that the assessee  before
\nus  has-contravened  section  23  (4).\t There\tis  also  no
\ncontroversy that the application has been made in accordance
\nwith  S.  26A as well as the relevant Rules.  The  firm\t has
\nbeen  constituted under an instrument of  partnership  dated
\nMarch  20, 1959.  From the clauses of the partnership  deed,
\nextracted  above,  particularly cl. (5), the shares  of\t the
\npartners  regarding  the  profit and  loss  have  also\tbeen
\nspecified.  Therefore, it follows that conditions Nos. 1,  2
\nand  3 specified in the above decision are fully  satisfied.
\nRegarding Condition No. 4 also there is no controversy\tthat
\nthe  partnership  is genuine in the sense that it is  not  a
\nfictitious  document.\tThen  the  only\t other\t requirement
\nreferred  to in condition No. 4 to be satisfied\t is  whether
\nthe  partnership  is  valid in the  sense  that\t it  creates
\nrelationship of partners between the parties thereto.\tFrom
\nour  discussion\t in  this judgment,  according\tto  us,\t the
\nrelationship of partners inter se has been created under the
\npartnership  deed  and that such relationship  had  actually
\nexisted\t in accordance with the terms specified in the\tsaid
\ndocument
\nFrom  a review of the above decisions, it is clear that\t the
\nmere  nomenclature  given  to a document is  by\t itself\t not
\nsufficient  to hold that the document in question is one  of
\npartnership.  Two essential conditions to be satisfied are :
\n(1)  that there should be an agreement to share the  profits
\nas well as the losses of the business, and (2) the  business
\nmust  be  carried on by all or any of them acting  for\tall,
\nwithin the meaning of the definition of ” partnership” under
\ns.  4 of the Partnership Act.  The fact that  the  exclusive
\npower and control, by agreement of the parties is vested  in
\none  partner  or  the further  circumstance  that  only\t one
\npartner can operate the bank accounts or borrow on behalf of
\nthe  firm are not destructive of the theory  of\t partnership
\nprovided the two essential conditions, mentioned earlier are
\nsatisfied.\n<\/p>\n
In  the light of the principles laid down by this  Court  in
\nSteel Brothers & Co. Ltd. v. Commissioner of Income-tax<\/a> (2 )
\nand in the decisions of the High Courts, referred to  above,
\nthe reasons
\n(1) [1970] 77 I.T.R. 10.\n<\/p>\n
(2) [1958] 33 I.T.R. 1.\n<\/p>\n
1051<\/span><\/p>\n
given by the High Court for holding that the relationship of
\npartners has not been created under the deed of\t partnership
\nbefore\tus,  cannot  be\t sustained.   As  the  control\t and
\nmanagement of business can be left by agreement in the hands
\nof  one\t partner  to  be exercised  on\tbehalf\tof  all\t the
\npartners, the other consequence by way of restriction on the
\nrights of the other partners lose all significance.  In fact
\nthe clauses providing that the working partners are to\twork
\nunder  the  directions\tof the managing\t partner and  the
\nfurther\t clause restricting their right to accept  ‘business
\nor raise any loans or pledge the firm’s interest except with
\nthe  consent of the managing partner K. D. Kamath, have\t all
\nto  be\trelated\t with  the agreement  entered  into  by\t the
\npartners  regarding  the  management and control  by  K.  D.
\nKamath.\t  We are of the opinion that under  the\t partnership
\ndeed the relationship which has been brought into  existence
\nbetween\t the six parties is a relationship of  partners\t who
\nhave  agreed  to share the profits and\tlosses\tof  business
\ncarried\t on  by\t all or any of them acting for\tall  and  it
\nsatisfies  the definition of “Partnership under s. 4 of\t the
\nPartnership  Act.  W.-. have already pointed out that  there
\nis a sharing of the profits or losses of the business by the
\npartners  in  the ratio of the proportion mentioned  in\t Cl.
\n(5).  That clause read with other clauses already  discussed
\nby  us, clearly shows that the first condition, namely,\t all
\npersons\t agreeing to share profits or losses  is  satisfied.
\nEven on the basis that the entire control and management  of
\nthe business is vested in K. D. Kamath, party No. 1 and that
\nparties\t Nos. 2 to 6 as working partners have to work  under
\nhis direction, from all the other circumstances it is  clear
\nthat  the conduct of business by party No. 1 is done by\t him
\nacting for all the partners.  There is no indication to\t the
\ncontrary  in the partnership deed.  Therefore, even  without
\nanything more, it is clear that as the partnership  business
\nis  carried  on by party No. 1, acting for all,\t the  second
\ncondition of agency is also satisfied.\tThis idea reinforced
\nby cl.(16) which provides that the firm’s affairs are to  be
\ncarried\t on  for  mutual benefits.  That clause\t is  to\t the
\neffect\tthat the firm’s affairs which are managed  by  party
\nNo. 1 is really for the mutual gain and benefits of all\t the
\npartners.\n<\/p>\n
It  is no doubt, true that the second essential test of\t the
\nbusiness  being\t carried on by all or any  of  the  partners
\nacting\tfor  all must be satisfied.  The provisions  in\t the
\npartnership  deed clearly establish that K. D.\tKamath,\t the
\nmanaging  partner, carries on the business, acting  for\t all
\nthe partners.\n<\/p>\n
Much stress has been laid by the High Court on the fact that
\nunder  Cl.  (9) parties Nos. 2 to 6 have no Tight  to  raise
\nloans  for  and on behalf of the firm or pledge\t the  firm’s
\ninterest.   This circumstance, according to the High  Court,
\nis destructive of the
\n1052<\/span>
\nelement\t of  partnership.   We have already  held  that\t the
\nmanagement and control of the business done by party go.  1,
\nis  carrying  on  of  the business  on\tbehalf\tof  all\t the
\npartners.   No doubt under s. 18 of the Partnership  Act,  a
\npartner\t is  the agent of the firm for the  purpose  of\t the
\nbusiness of the firm.  But that section itself clearly\tsays
\nthat it is subject to the provisions of the Act.  It is open
\nto  ,the- parties, under s. 11, to enter  into_an  agreement
\nregarding their mutual rights and duties as partners of\t the
\nfirm and that can be done by contract, which in this case is
\nevidenced  by the deed of partnership.\tFurther s.  18\twill
\nhave  to  be read along with s. 4. If  the  relationship  of
\npartners is established as a “partnership” as defined in  s.
\n4,  and\t if the necessary ingredients referred\tto  in\tthat
\nsection\t are  found to exist,’ there is no escape  from\t the
\nconclusion  that in law a partnership has come\tinto  exist-
\nence.  lit is in the light of these provisions that  s.\t 18,
\nwill have to be appreciated.  Section 18 only emphasises the
\nprinciple  of  agency which is already incorporated  in\t the
\ndefinition of “partnership” under s. 4.\n<\/p>\n
It should be remembered that so far as the outside world  is
\nconcerned, so long as the parties Nos. 2 to 6 are held\tout,
\nas  partners  of  this\tfirm, as has  been  done  under\t the
\npartnership  deed. their acts would bind the whole  partner-
\nship.\tThe provision in cl. (9) in our opinion, is only  an
\ninter se arrangement enter, into by the partners, in and  by
\nwhich the-working partners have agreed not to raise loans or
\npledge the firm’s interest.\n<\/p>\n
Mr. S. K. lyer, learned counsel for the Revenue placed\tsome
\nreliance on s. 14 of the Partnership Act.  According to\t the
\ncounsel,  there\t is  no contract to  the contrary  in  the
\npartnership deed that the assets brought in by party No.  1,
\ndo  not\t belong\t to  the partnership.\tIt  is\this  further
\ncontention that under s. 14, those assets will belong to the
\npartnership, in which case, it will be open to any  partner,
\nas agent of the other partners to pledge the firm’s interest
\nor raise loan for partnership purposes.\t This right,  accor-
\nding to the counsel is restricted by cl. (9) and that clause
\nnegatives  the\ttheory\tof agency.   In\t our  opinion,\tthis
\ncontention  of\tthe  learned  counsel  cannot  be  accepted.
\nSection 14 of the Partnership Act itself clearly shows- that
\nthe provisions contained therein are subject to the contract
\nbetween\t the  parties.\t We have  already  held\t that  the
\nprovision  regarding the control and management\t vesting  in
\nparty  No.1  is\t not itself destructive\t of  the  theory  of
\npartnership.   Clause (9) in our opinion, itself shows\tthat
\nthe  theory  of agency is recognised.  But the\tparties,  by
\nmutual\tagreement, have placed a restriction on the  working
\npartners’  right to borrow on behalf of the firm  or  pledge
\nthe  firm’s  interest without the written authority  of\t the
\nprincipal partner.\n<\/p>\n
1053<\/span><\/p>\n
Mr. Iyer placed considerable reliance as the High Court\t has
\nalso done, on the earlier decision of the Bombay High  Court
\nin Umarbhai Chandbhai v. Commissioner of Income-tax,  Bombay
\nCity(1).   That\t again,\t in our opinion, was a\tcase  of  an
\nextreme nature where, under a partnership deed, between\t the
\nfather\tand his two sons, the former had a right to  exclude
\neither\tor  born his sons from the management of  the  firm,
\nwholly or in part.  There was also a provision to the effect
\nthat  the father was entitled to entrust the  management  to
\nany other person and also determine what quantum of  profits
\nshould be distributed and what ,is to be done regarding\t the
\nremaining  profits.   There were further provisions  to\t the
\neffect that the father could terminate the partnership\tand-
\non such termination, the share of the partner was to  revert
\nto the father.\tThe Bombay High Court, having due regard  to
\nthe clauses, referred to above, as well as other clauses  of
\nthe  partnership  deed,\t held  that  the  document  offended
\nagainst\t  the  two  principles\twhich  were   essential\t  to
\nconstitute  a  partnership, namely, agreement to  share\t the
\nprofits and losses and the business being carried on by\t all
\nor  any\t of them for all of them.  The learned\tJudges\theld
\nthat  there was no agreement to share the profits and  loses
\nof  the\t business and even the business carried\t on  by\t the
\nfather\twas  not, on behalf of all the\tpartners.   In\tsuch
\ncircumstances,\tit was held, that the arrangement  evidenced
\nby the deed cannot be considered in law to be a partnership.
\nIn  our opinion, reliance placed upon this decision  by\t the
\nHigh  Court as well as by Mr. Iyer is misplaced.   In  fact,
\nfrom  a\t perusal of the clauses in the document\t which-\t the
\nBombay\tHigh  Court had to consider, it is  clear  that\t the
\nbusiness  continued  to be the proprietary  concern  of\t one
\nsingle\tindividual namely, the father.\tExcepting  that\t the
\ntwo  sons  were\t styled as partners  in\t the  document,\t the
\nessential  requisites for constituting the  relationship  of
\npartners  inter se between the father and the two sons\twere
\n‘totally  absent.   The\t clause in the case  before  us\t are
\ntotally different.  We have already indicated that there  is
\nan  agreement  for sharing the profits and losses  and\tthat
\neven though vast powers of control and management have\tbeen
\ngiven  to K. D. Kamath, the managing partner,  the  business
\nwas being carried on by the said managing partner, on behalf
\nof  all\t the partners.\tThese conditions fully\tsatisfy\t the
\nrequirements  of the definition of “partnership” under s.  4
\nof the Partnership Act.\n<\/p>\n
To  conclude we are of the opinion that all the\t ingredients
\nof  partnership\t are satisfied under  the  partnership\tdeed
\ndated  March  20, 1959 and that the view of the\t High  Court
\nthat the appellant firm cannot be granted registration under
\ns. 26A of the Incometax Act for the assessment year 1959-60,
\ncannot be sustained.\n<\/p>\n
(1)  [1952] 22 I.T.R. 27.\n<\/p>\n
1054<\/span><\/p>\n
In,  the  result,  we  answer the question  of\tlaw  in\t the
\naffirmative  in favour of the assessee.\t This  answer  given
\nby,  us\t to the question referred to the High Court  by\t the
\nIncome-tax  Appellate  Tribunal will be substituted  in\t the
\nplace  of  that\t given by the High  Court.   We\t accordingly
\nreverse\t the Judgment and order of the High Court  and-allow
\nthe appeal with costs.\n<\/p>\n
G. C.\t\t      Appeal allowed.\n1055<\/span>\n\n\n\n<\/pre>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India K. D. Kamath & Co vs C.I.T., Bangalore on 11 October, 1971 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 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-17459","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nK. D. Kamath & Co vs C.I.T., Bangalore on 11 October, 1971 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/k-d-kamath-co-vs-c-i-t-bangalore-on-11-october-1971\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"K. D. 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