1984 (8) TMI 37 - HC - Income Tax

Summary

Issues Involved:
1. Refusal to register Janata Medical Stores as a firm under Section 185 of the I.T. Act, 1961.
2. Determination of the genuineness of the partnership based on the terms of the partnership deed.
3. Interpretation of whether the exemption of a partner from losses invalidates the partnership.

Detailed Analysis:

1. Refusal to Register Janata Medical Stores as a Firm:
The Income Tax Officer (ITO) refused to register Janata Medical Stores as a firm under Section 185 of the Income Tax Act, 1961, for the assessment year 1969-70. The ITO concluded that the firm was not genuine based on the provisions of the partnership deed dated January 25, 1968.

2. Determination of the Genuineness of the Partnership:
On appeal by the assessee, the Appellate Assistant Commissioner (AAC) noted that all partners were shown as partners in the bank and were authorized to operate the partnership account. The partnership was also registered with the Registrar of Firms and the Registrar of Assurances. The AAC concluded that the partnership was genuine and directed the ITO to grant registration. The Income-tax Appellate Tribunal upheld this decision, confirming the genuineness of the partnership and dismissing the Revenue's appeal.

3. Interpretation of the Partnership Deed:
The Revenue questioned the genuineness of the partnership, arguing that the relationship between the partners was that of master and servant or principal and agent, not partners. The Revenue particularly pointed to the clause allowing Bhagwati Devi to expel Kamani without a corresponding right for Kamani.

The assessee argued that the partnership deed met all the requirements of a genuine partnership. The court examined the terms of the partnership deed, noting that:
- Bhagwati Devi and Kaku Jayantilal Kamani were named partners.
- The business was to be carried on as commission agents, importers, exporters, distributors, and wholesale and retail dealers.
- Bhagwati Devi would contribute the capital and bear all losses, while Kamani would manage the business and receive a monthly draw for expenses.
- Bhagwati Devi had control over the finances and could operate the bank account alone.
- Kamani could be expelled by Bhagwati Devi for breach of terms or misconduct.

The court referenced the Supreme Court decision in Kamath & Co. v. CIT, which held that a partnership could be valid even if one partner had exclusive control, provided the two essential conditions of sharing profits and carrying on business together were met.

4. Exemption from Losses:
The court considered whether the exemption of Kamani from losses invalidated the partnership. Various precedents, including decisions from the Bombay High Court, Allahabad High Court, and Lahore High Court, indicated that an agreement where one partner bears all losses does not necessarily invalidate a partnership. However, the court acknowledged the binding nature of the Supreme Court's observations in Kamath & Co., which suggested that sharing losses is a necessary condition for a valid partnership.

Conclusion:
After thorough consideration, the court concluded that the partnership in question did not meet the essential conditions laid down by the Supreme Court, specifically the sharing of losses. Therefore, the court answered the question in the negative and in favor of the Revenue, stating that registration could be refused under Section 185 of the I.T. Act, 1961. The court also directed the issuance of a certificate under Section 261 of the I.T. Act, 1961, for leave to appeal to the Supreme Court, acknowledging the considerable general importance of the legal question involved.