1971 (10) TMI 1 - SC - Income Tax

When one partner is entitled to full right of control and management of the business to operate bank accounts and remove other partners, whether the partnership is legally constituted and whether the firm is entitled to registration - we answer the question of law in the affirmative and in favour of the assessee

Issues Involved:
1. Whether the deed dated March 20, 1959, constitutes an instrument of partnership.
2. Whether the appellant firm is eligible for registration under section 26A of the Indian Income-tax Act, 1922.
3. Whether the essential elements of partnership, particularly the element of agency, are satisfied under the partnership deed.

Issue-wise Detailed Analysis:

1. Instrument of Partnership:
The primary issue is whether the deed dated March 20, 1959, marked as exhibit A, constitutes an instrument of partnership. The appellant firm, consisting of six partners, was constituted under this document. The business of the partnership, as recited in the deed, was carried on in partnership from October 1, 1958. The partnership was registered under the Indian Partnership Act, 1932, on August 11, 1959. The Income-tax Officer declined to grant registration on the ground that there was no genuine partnership created by the deed of March 20, 1959, and that the business should be considered the sole concern of K. D. Kamath. The officer relied on clauses 8, 9, 12, and 16 of the partnership deed, concluding that there was no relationship of partners inter se created under the document.

2. Eligibility for Registration under Section 26A:
The appellant filed an application for registration under section 26A for the assessment year 1959-60. The Income-tax Officer's decision was confirmed by the Appellate Assistant Commissioner, who emphasized clause 12 of the deed. The Income-tax Appellate Tribunal, however, concluded that the essential requirements for determining a partnership, namely, an agreement to share profits and each party acting as an agent of all, were satisfied. The Tribunal held that the partnership deed created a relationship of partners inter se and directed the Income-tax Officer to register the firm under section 26A.

The Commissioner of Income-tax, Bangalore, made an application under section 66(1) for a reference to the High Court, which answered against the assessee, holding that the appellant firm could not be granted registration under section 26A for the assessment year 1959-60. The High Court focused on clauses 5 to 9, 12, and 16, particularly on whether each partner could act as an agent of all. The High Court concluded that the management and control of the business were entirely in the hands of K. D. Kamath, and the other partners could not act as agents, thus lacking the essential element of agency.

3. Essential Elements of Partnership:
The Supreme Court examined whether the partnership deed satisfied the two essential requisites to constitute a partnership: (1) an agreement to share profits and losses, and (2) each partner acting as an agent of all. The Court found that the partnership deed clearly established the sharing of profits and losses among the partners, satisfying the first condition.

Regarding the second condition, the Court noted that the business was carried on by K. D. Kamath acting for all partners, fulfilling the principle of agency. The Court emphasized that the control and management vested in one partner did not negate the partnership if the two essential conditions were met. The Court referred to several decisions, including Steel Brothers & Co. Ltd. v. Commissioner of Income-tax, which held that control and management by one partner are not destructive of partnership.

The Court also distinguished the present case from M. P. Davis v. Commissioner of Agricultural Income-tax and Umarbhai Chandbhai v. Commissioner of Income-tax, where the clauses in the deeds indicated a master-servant relationship rather than a partnership. The Court found that the clauses in the present partnership deed, particularly clause 16, indicated that the firm's affairs were carried on for mutual gain and benefit, reinforcing the agency principle.

Conclusion:
The Supreme Court concluded that all the ingredients of partnership were satisfied under the partnership deed dated March 20, 1959. The Court held that the appellant firm was eligible for registration under section 26A of the Income-tax Act for the assessment year 1959-60. The judgment of the High Court was reversed, and the appeal was allowed with costs. The question of law was answered in the affirmative and in favor of the assessee.

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