1961 (9) TMI 94 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement of the assessee firm to registration under section 26A of the Income Tax Act.
2. Nature of the relationship between the assessee and other partners under the partnership deed.
3. Validity of the Commissioner of Income Tax's cancellation of the firm's registration.

Detailed Analysis:

Entitlement of the Assessee Firm to Registration under Section 26A of the Income Tax Act:
The primary issue is whether the assessee firm was entitled to registration under section 26A of the Income Tax Act. The assessee firm had been granted registration from the assessment year 1928-29 up to 1954-55. However, in the assessment year 1955-56, the Commissioner of Income Tax canceled the registration granted by the Income Tax Officer, asserting that the relationship between the assessee and the other partners was not that of partners under the Partnership Act but rather that of an employer and employees.

Nature of the Relationship Between the Assessee and Other Partners:
The court examined whether the relationship between the assessee and the other partners was that of partners or an employer-employee relationship. The partnership deed of 1st January 1953, which had been in existence since 1933, was scrutinized. The deed contained clauses that provided for the sharing of profits and losses, mutual agency, and other terms typical of a partnership agreement. Despite some clauses granting significant control to the assessee, such as the power to introduce or remove partners and control over the firm's assets, the court found that these did not negate the essential conditions of a partnership.

Validity of the Commissioner of Income Tax's Cancellation of the Firm's Registration:
The court held that the essential conditions necessary to form a partnership-agreement to share profits and mutual agency-were present in the partnership deed. The Commissioner and the Tribunal had given undue emphasis to certain terms of the agreement that granted extensive powers to the assessee, overlooking the overall nature of the relationship as one of partnership. The court concluded that the agreement was indeed a partnership agreement and not an employer-employee relationship. Consequently, the cancellation of the registration by the Commissioner was deemed erroneous and unjustified.

Conclusion:
The court answered the reference in the affirmative, stating that the assessee firm was entitled to registration under section 26A of the Act for the assessment year in question. The order passed by the Commissioner canceling the registration was erroneous. The assessee was entitled to costs from the department.