1964 (2) TMI 86 - HC - Income Tax

Summary

Issues Involved:
1. Whether the instrument dated 9th August 1954 brought into existence any partnership within the meaning of section 4 of the Indian Partnership Act.
2. Whether the applicants were entitled to registration under section 26A of the Indian Income-tax Act.

Issue-wise Detailed Analysis:

1. Existence of Partnership under Section 4 of the Indian Partnership Act:

The primary issue was whether the instrument dated 9th August 1954 constituted a partnership within the meaning of section 4 of the Indian Partnership Act. The applicants, Sunil Krishna Paul and Amar Krishna Poddar, entered into a partnership to share the commission receipts from Annapurna Cotton Mills Ltd. The Income-tax Officer, Appellate Assistant Commissioner, and the Tribunal concluded that no business was carried on by the applicants, and thus, the agreement was merely for sharing income, not constituting a partnership. The court examined the instrument's clauses, including provisions for maintaining records, closing accounts, and sharing profits and losses. Despite these provisions, the court found that the applicants did not carry on any business activity, as the employment of staff was solely to verify the correctness of sales, not to earn profits. The court emphasized that a partnership requires active endeavor for earning profits, which was absent in this case. Therefore, the court held that there was no partnership within the meaning of section 4 of the Indian Partnership Act.

2. Entitlement to Registration under Section 26A of the Indian Income-tax Act:

The second issue was whether the applicants were entitled to registration under section 26A of the Indian Income-tax Act. The court noted that registration under section 26A requires a valid and genuine partnership that actually exists as specified in the instrument. The Income-tax Officer is entitled to inquire whether the instrument is intended to govern the rights and liabilities of the parties or is merely a pretence to escape tax liability. The court found that the Tribunal correctly denied registration, as there was no business carried on by the applicants. The profits were automatically earned without any active endeavor or contribution to the growth of the business. The court also referred to previous cases, emphasizing that mere sharing of profits does not constitute a partnership unless there is a common business actively carried on by the partners. Therefore, the court concluded that the applicants were not entitled to registration under section 26A of the Act.

Conclusion:

1. The court held that there was no partnership within the meaning of section 4 of the Indian Partnership Act, as the applicants did not carry on any business activity.
2. The court concluded that the applicants were not entitled to registration under section 26A of the Indian Income-tax Act, as there was no genuine partnership actively carrying on business.

Judgment:
The court answered the question in the negative, indicating that there was no partnership entitled to registration under section 26A of the Indian Income-tax Act. The applicants were ordered to pay the costs to the respondents.