1969 (9) TMI 6 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement of the firm to registration under the Income-tax Act.
2. Legality of the firm's constitution under Section 4 of the Indian Companies Act, 1913.
3. Determination of the actual number of partners in the firm.
4. Consideration of individual versus representative capacity of partners.
5. Impact of sub-partnerships and profit-sharing on the firm's registration.

Detailed Analysis:

1. Entitlement of the firm to registration under the Income-tax Act:
The primary issue was whether the firm, Messrs. Agrawal Brothers & Co., was entitled to registration for the assessment years 1954-55 to 1958-59. The firm had previously been granted registration, but the Income-tax Officer refused renewal on the ground that the number of partners exceeded 20, making the firm's constitution illegal under Section 4 of the Indian Companies Act, 1913. The Appellate Assistant Commissioner upheld this decision, but the Appellate Tribunal reversed it, directing the firm to be registered for the said assessment years.

2. Legality of the firm's constitution under Section 4 of the Indian Companies Act, 1913:
Section 4(2) of the Indian Companies Act, 1913, prohibits the formation of a partnership consisting of more than 20 persons unless registered as a company. The department argued that the firm's number of partners exceeded 20, making its constitution illegal. However, the firm contended that the number of partners never exceeded 20. The Tribunal found that the number of partners was consistently 20 or less, and thus there was no infringement of Section 4. The court agreed with the Tribunal's finding.

3. Determination of the actual number of partners in the firm:
The department argued that the firm had more than 20 partners by considering the heirs of deceased partners and representatives of undivided Hindu families. The court examined the partnership deeds and found that the new partners, Ganpatrai and Chhedilal, were nominated by the heirs of deceased partners but became partners in their individual capacity. The court also noted that the partnership deeds did not indicate any partner entering into the partnership on behalf of an undivided Hindu family. Therefore, the number of partners never exceeded 20.

4. Consideration of individual versus representative capacity of partners:
The court examined whether certain partners represented their undivided Hindu families or entered into the partnership in their individual capacity. Citing precedents, the court held that even if a partner was a karta of a Hindu undivided family, the partnership was between the individual and the other partners, not the family. The court found that the partners in the firm entered into the partnership in their individual capacity, and there was no indication of representation of undivided Hindu families in the partnership deeds.

5. Impact of sub-partnerships and profit-sharing on the firm's registration:
The department argued that some partners shared their profits with sub-partners or family members, implying a larger number of partners. The court rejected this argument, stating that sharing profits with sub-partners or family members did not alter the fact that the original partners were partners in their individual capacity. The court cited precedents to support this view, concluding that sub-partnerships and profit-sharing arrangements did not affect the firm's registration eligibility.

Conclusion:
The court concluded that the firm was entitled to registration for the assessment years in question. The number of partners never exceeded 20, and the partners entered into the partnership in their individual capacity. The Tribunal's decision to direct the registration of the firm was upheld. The court answered the referred question in the affirmative, in favor of the assessee firm, and directed the Commissioner of Income-tax, U.P., to pay the firm Rs. 200 as costs of the reference.