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TMI Blog1982 (5) TMI 102X X X X Extracts X X X X X X X X Extracts X X X X ..... be brought about among the five partners and that, therefore, the assessee-firm was not entitled to registration. He was further of the view that the profits of the firm were also not distributed as specified in the deed of partnership. In support of these conclusions the ITO relied on the various clauses of the deed of partnership and the decision of the Supreme Court in M. P. Davis v. CAIT [1959] 35 ITR 803. 3. The assessee preferred an appeal objecting to this order of the ITO. The Commissioner (Appeals) disagreed with the reasonings and conclusions of the ITO and held that the assessee-firm had been held to be a genuine firm and granted registration throughout in all the earlier assessment years and that the mere fact that a new deed was drawn up in the year under appeal with some adjustments in the various clauses which did not detract from the relevant provisions of the Partnership Act or the Income-tax Act, could not entitle the ITO to refuse registration to the assessee in the year under appeal. He rejected the ITO's conclusion that the share of profit of each partner being variable from year to year, the percentage of losses to be shared by them was not clear. He pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd later to his son, Shri J.R. Gagrat ; (iii) that according to clause 6, Mr. J. Lal had no right to contribute to the capital of the firm ; (iv) that clause 7 clearly indicated that J. Lal had no say in classification of expenditure as capital or revenue ; and (v) that he had also no say in respect of the expenses and allowances specified in the said clause. Shri Tiwari pointed out that according to clause 8, Mr. Lal was entitled to one month's leave subject to the approval of his partner, Mr. B.R. Agarwala. He emphasised with reference to clause 11 that share of J. Lal was fixed and determined and it sounds like an annual salary to an employee. He pointed out that J. Lal had nothing to do with the sharing of the fortunes made by the firm or in the losses of the firm, He further pointed out that in clause 13, J. Lal was conspicuous by his absence since he would not have any share. He also pointed out that according to clause 16, J. Lal could not operate any bank account or any other account of the firm. Shri Tiwari heavily relied on clause 18 of the partnership deed to emphasise that Mr. Lal had to act under the direction and supervision of Mr. B.R. Agarwala which clearly establis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igned the deed of partnership. He pointed out that there was no standard form of partnership. He further submitted that Gagrat Co., Delhi, was established with five partners in the year 1955 and that right from its inception up to and inclusive of the assessment year 1976-77, it had been accepted and held to be a genuine firm and granted registration by the ITO and that there was absolutely no justification for the department to refuse registration to the assessee-firm on mere suspicion, more so when the very same five partners had been carrying on their profession in a partnership under a deed dated 3-7-1971, from 2-7-1971 to 31-3-1976, and which firm had been granted registration as a genuine partnership from the assessment years 1972-73 to 1976-77. Shri Sharma relied on the decision in Stekel v. Ellice [1973] 1 All. ER 465, wherein it was held that the fact that a person was described as a salaried partner was not conclusive one way or the other of the question whether he was a partner in the true sense and that the question whether there was a partnership depended on the true nature of the relationship and not on the label attached to it. Although the provisions for salary an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, therefore, submitted that the order of the Commissioner (Appeals), following the decision of the Supreme Court in K.D. Kamath's case, was perfectly right and that the same should be upheld. 7. We have carefully considered the submissions urged on both sides in the light of the authorities relied on by them and the recitals in the deed of partnership dated22-11-1976. In our view, the findings and the reasoning of the Commissioner (Appeals) are perfectly right and have to be upheld. 8. In K.D. Kamath Co., the Supreme Court held that the legal requirements, under section 4 of the Partnership Act to constitute a partnership in law, are: (i) there must be an agreement to share the profits or losses of the business ; (ii) the business must be carried on by all the partners or any of them acting for all ; and (iii) there is implicit in the second requirement the principle of agency. Their Lordships further held that the control and management of the business of a firm can be left by agreement between the parties in the hands of one partner to be exercised on behalf of all the partners. Their Lordships further held that the provision in clause 9 of the deed was only an inter se ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut was an agent of the plaintiff, and came to the conclusion that the agreement made the defendant a partner of the plaintiff. Under this agreement, in lieu of his share of profits the defendant was entitled to receive Rs. 500 per month and was not to be responsible for any losses or liabilities of the firm. The main reason which appears to have weighed with the High Court in upholding the plea of partnership was that it was 'almost absurd to think that two experienced solicitor's of our High Court should enter into a formal agreement to become partners, and then so far as the outside world goes and so far as the correspondence between them goes, act as partners for some six years and give the usual notices of dissolution and yet be told at the end that they were entirely mistaken as to their true legal position and that they did not know the elementary principles which go to constitute a partnership, although that was a matter on which they would be presumably advising their clients frequently'. It was thus an extreme case where the status and profession of the parties and their conduct spread over a long period were wholly inconsistent with the plea raised by the defendant that h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... junior in the profession. These restrictions would in no way militate against the genuineness of the firm nor would they justify the inference that J. Lal was only an employee and not a partner. It is well settled that a partnership deed must be construed reasonably as held by the Supreme Court in CIT v. Shah Mohandas Sadhuram [1965] 57 ITR 415. We are, therefore, of the view that the department is not justified in reading the various clauses of the deed of partnership in isolation to draw an inference that J. Lal is an employee and not a partner. It is not disputed by the revenue that Shri J. Lal has been acting as a partner of the firm of Gagrat Co. and that the outside world recognised and dealt with him as a partner of the assessee-firm. This circumstance would certainly negative the inference of the department that Shri J. Lal is an employee and not a partner in the assessee-firm. The history of the firm of Gagrat Co. Delhi from 1955 shows that there have been a number of changes in the constitution of the firm since its inception. It will be opposed to all facts to say that a firm of lawyers, who advise their clients about formation of partnerships, did not understand th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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