1957 (5) TMI 3 - SC - Income Tax

Whether on a proper construction of the agreement dated 29th November, 1928, and having regard to the facts and circumstances of the case the applications by the assessee for the registration of the partnership showing Steels and Ellermans as the only partners thereof (with their specific shares set out as against each of them and signed only by them) were rightly refused by the Income-tax Officer? Held that - There is no justification whatever for contending that the agreement dated 29th November, 1928, was a composite agreement which could be divided into two parts, viz., (1) a tripartite agreement between the members of the Combination and (2) an agreement of partnership between Steels and Ellermans only, Burma being merely a confirming party to it in so far as a part of its assets were thrown into the Combination. The answer given by the High Court to the referred question in the negative was accordingly correct and this appeal will be dismissed.

Issues Involved:
1. Whether the partnership was constituted of Steels and Ellermans only or included Burma as a third partner.
2. Whether the partnership deed specified the shares of all partners.
3. Whether the applications for registration of the partnership were in accordance with Section 26A of the Indian Income-tax Act and Rule 2 of the Indian Income-tax Rules, 1922.

Issue-wise Detailed Analysis:

1. Constitution of the Partnership:
The primary issue was whether the partnership was constituted solely of Steels and Ellermans or if Burma was also a partner. The agreement dated November 29, 1928, indicated that Steels, Burma, and Ellermans were to provide for the amalgamated working of their Burma rice business under the management of Steels. The High Court and Supreme Court both concluded that Burma was indeed a partner along with Steels and Ellermans in the Combination. The agreement clearly referred to the combined business as "the Combination" and specified the sharing of profits and losses between Steels and Ellermans, with Steels and Burma bracketed together, indicating a joint share. The Supreme Court emphasized that the relationship brought into existence was one of partnership, with all three parties combining their property, labor, and skill in the business.

2. Specification of Shares:
The partnership deed did not specify the individual shares of Burma, which was a point of contention. The Supreme Court noted that the agreement provided for the distribution of profits and losses in specific ratios between Steels and Ellermans, with Steels and Burma treated as a single entity. This joint share was indicative of a partnership between three parties. The Court clarified that the lack of a separate specification for Burma's share did not negate its status as a partner, as the profits ultimately flowed to Steels, who owned all shares of Burma.

3. Compliance with Section 26A and Rule 2:
Section 26A of the Indian Income-tax Act and Rule 2 of the Indian Income-tax Rules, 1922, require that the application for registration of a partnership must be signed by all partners and specify their individual shares. The applications for registration were signed only by Steels and Ellermans and did not include Burma's signature or specify its share. The Supreme Court held that since Burma was a partner, its absence from the application and the lack of specification of its share rendered the applications non-compliant with the statutory requirements. Consequently, the Income-tax Officer was correct in refusing registration.

Conclusion:
The Supreme Court affirmed the High Court's judgment that the partnership included three partners-Steels, Burma, and Ellermans. The applications for registration were rightly refused due to non-compliance with Section 26A and Rule 2, as they were not signed by all partners and did not specify the shares of each partner. The appeal was dismissed with costs, upholding the High Court's decision.

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