1980 (5) TMI 72 - AT - Income Tax

Summary

Issues:
1. Whether the partnership was genuine and entitled to registration.
2. Whether the partnership agreement had valid consideration without capital contribution.
3. Whether the ITO's refusal to grant registration was justified based on the change of constitution.

Analysis:
1. The appeal involved a dispute regarding the genuineness of a partnership for the assessment year 1975-76, where the Revenue challenged the order of the AAC directing the ITO to grant registration to the partnership. The partnership was constituted with two partners, one existing and one new partner, on 1st July 1974. The ITO had refused registration, deeming the partnership as non-genuine due to the new partner's alleged lack of capital contribution and knowledge of profits. However, the AAC held that capital contribution was not a prerequisite for a genuine partnership and directed the ITO to grant registration, which the Revenue appealed against.

2. The Revenue contended that a genuine partnership required a partner to contribute capital, skill, or labor, and as no such contribution was made, the partnership was not genuine. However, the Tribunal rejected this argument, stating that under the general law of contracts, two or more major partners could form a partnership without a specific requirement of capital contribution. The Tribunal emphasized that consideration in a contract need not always be in the form of capital and cited legal commentary to support that any burden or detriment could constitute consideration. In this case, the new partner agreed to share 40% of the losses, demonstrating valid consideration for the partnership agreement.

3. The Tribunal further addressed the ITO's inconsistency in claiming a change of constitution in the partnership while also asserting that the partnership was not genuine after the new partner's admission. The Tribunal reasoned that if the firm continued with a change of constitution before and after the new partner's admission, it could not be deemed non-genuine post-admission. Therefore, the AAC's decision to grant registration to the partnership was upheld, and the Tribunal dismissed the Revenue's appeal, affirming the genuineness of the partnership and the validity of the partnership agreement without explicit capital contribution requirements.