9911796707
TMI Blog1991 (9) TMI 160X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant to the asst. yr. 1983-84, only one plot was sold on 15th Nov., 1982. The assessment for the asst. yr. 1983-84 is the first assessment for which the accounting period ended on Diwali, 1982. Apparently, the assessee applied for registration of the firm. The ITO did not choose to deal with the application for registration, but passed one order under s. 143(3) taking the status of the firm as unregistered firm. The reasons for treating the firm as unregistered firm are contained in para 4 of the ITO's order which reads as under: "The two ladies partners, appearing at S. Nos. 8 9 have not made nay contribution towards their capital which is evident from the copy of capital accounts filed by the firm. During the course of assessment proceedings Shri Joshi, the authorised representative of the assessee, has not established that these ladies partners were either working with the firm and attending business of the firm or they have contributed any capital. Since there is no consideration by these two ladies for the partnership business, I hold that no genuine firm has come into existence and as such it is treated as an unregistered firm." It would appear that the three partne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He proceeded to distinguish the various authorities that were cited before him by observing that the facts in those cases were different. He observed that 6 of the partners, including two ladies, had contributed capital. The 7th partner, namely, Shri Ramkumar Ramkrishna Vora was a working partner, remaining two partners are ladies who had neither contributed capital nor were they working partners. The AAC proceeded to consider the import of the term ' consideration' as defined in s. 2(d) of the Contract Act. He observed that the foundation for the partnership is an agreement. This agreement is valid and enforceable and is a contract as defined by s. 10 of the Contract Act. For all agreements, there has to be a proposal and acceptance and consideration for the reciprocal promises. He agreed that it was not necessary that in order to constitute a partnership each partner must bring in some money or property. However, in such a case the consideration for partnership contract should be something else, like skill or labour which a working partner puts in. In the present case, neither of the two ladies had been taken for any of these considerations. Therefore, the basic ingredient of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He also observed that there had been no withdrawal from the capital accounts of these two ladies for any of the years under appeal, though profits are regularly being credited to their accounts. This was a further material before the IT authorities to support the conclusion that the firm was not genuine. On the other hand, the ACC relied on the decision of the Madhya Pradesh High Court in the case of Ramchand Nawal Rai vs. CIT (1981) 19 CTR (MP) 50 : (1981) 131 ITR 492 (All) where the Court held that it was not necessary for all the partners to contribute capital before forming partnership and a person can enter into a partnership only by contributing his skill and labour. The AAC also relied on the decision of the Allahabad High Court in the case of CIT vs. Gupta Bros. (1980) 19 CTR (All) 342 : (1981) 131 ITR 492 (All) where also the Court held that the consideration for the partnership contract may be by way of capital or skill and labour. He, therefore, finally held that the two ladies had not contributed any capital for any of the three years under appeal, that they were not working with the firm nor attending to the business during any period, that they had not withdrawn from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chalsinghji Keshrisinghji Co. on which Shri Sathe placed considerable reliance. Shri Sathe drew our attention to the observations of the Court on page 541 542 when the Court cited the following extract from Mulla's Indian Contract Act on the point of executory consideration: "Consideration is executory when a promise is made by one party in return for a promise made by the other; in such a case, each promise is the consideration for the other. The rule that consideration could consist in mutual promises was established by the end of the Sixteenth Century and it was stated by Holt. C.J. as follows: 'A promise without a consideration is void, but where there is a promise against a promise, one promise is consideration for the other because each may have his action against the other for non-performance.' Where the consideration is executory, the contract is binding as soon as the promises are exchanged. Thus, if there is a contract for the sale of goods, delivery and payment to be made at some future date, the consideration consists in the promise to sell and to deliver on the one hand and in the promise to pay on the other; the contract becomes binding as soon as the promis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ujarat High Court in Laxmichand Hirjibhai vs. CIT (1981) 128 ITR 747 (Guj) and the decision of the Bombay High Court in CIT vs. V.H. Sheth Ors. (1984) 41 CTR (Bom) 380 : (1984) 148 ITR 169 (Bom). Finally, he concluded by observing that there was no specific order regarding registration, no opportunity was given to the appellant in this regard and that the profits debited to the account of the partners were accumulated and constituted the partners' capital which they had promised to contribute. He, therefore, pleaded that the order of the AAC be vacated. 7. In reply. Shri A.K. Khaladkar, the learned departmental representative, pointed out that the basic ingredients of partnership were not fulfilled. Therefore, there was no need to give further opportunity to the assessee. He relied on the decision of the Rajasthan High Court in Hemandass Dhanrajmal vs. CIT (1981) 132 ITR 369 (Raj) and particularly the observation of the Court at pages 371 376 in support of the argument of the Department that if there was non-contribution of capital, registration could be refused and the actual conduct and intent of the partners could be taken into account. He also relied on the decision of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of, etc., etc. This letter was received by the appellant firm on 5th March, 1986, on which day the firm sent its reply. Regarding the enquiry into the capacity of the partners, it was clarified that Shri Murlidhar Mohanlal Joshi was a partner on behalf of its HUF and regarding the source of capital introduced, reference was made to the particulars furnished in an earlier letter dt. 14th Sept., 1983, copy whereof was attached the letter dt. 14th Sept., 1983 addressed to the ITO, Wardha, gave details of the capital contribution of the six members of the Joshi group and the source from which amounts were obtained. These three letters constitute the only evidence available on record of any enquiry having been carried out by the ITO into the genuineness of the firm. Apparently, there was no query about non-contribution of capital by the two lady partners of the Vora group nor was any question put about whether these partners were working partners. At least in the letters filed before us, there is no evidence of such enquiry having been made. Even then, the ITO in para 4 of his order chose to come to the conclusion that the two lady partners had not made any contribution towards capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that they were in fact not effective partners he should have confronted the appellant firm with these misgivings that he entertained about the genuineness of the firm, hear them and should have arrived at conclusion that he did. All this the Assessing Officer has not done. In fact he has not passed as we have observed earlier, an order refusing registration as is required under s. 185(2) of the Act and in effect has not disposed of the application for registration in form No. 11 which is said to have been filed before him. The AAC has distinguished the decision of the Patna High Court in the case of Shashikant Kothari Co. vs. CIT (1985) 49 CTR (Pat) 143 : (1986) 158 ITR 60 (Pat) which was relied upon before him and which has been cited by Shri Sathe before us. The Patna High Court clearly observed that an assessment order can be passed only after the application for registration of the firm has been disposed of. Without disposing of the application for registration, there is no power or justification to pass an order of assessment. We fail to understand how the AAC could ignore this finding of the Patna High Court. He has rather peremptorily observed that the application for regi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the provisions of the partnership deed in that case, the Court found that under cl. 7 of the partnership deed it was provided that every partner was to invest capital as per his convenience, but partner No. 4, namely, Manjulaben, had to invest the amount of Rs. 5,000. She was to remain as a dormant partner and her responsibility was only to the extent of Rs. 5,000. The Court observed that as the fourth partner, Smt. Manjulaben, was taken into partnership on her investing the capital and as she was to remain a dormant partner, she will have no responsibility relating to the work of the partnership. For the purpose of finding out as to whether there was lawful consideration for the agreement of Manjulaben joining the partnership, one has to read cl. 7, which provided that she had given a promise to invest an amount of Rs. 5,000. The Court observed that as per the definition of 'consideration' even the promise for investing the amount of Rs. 5,000 is a consideration for entry into the partnership. In the present case, there is no promise to invest a specific amount on the part of the lady partners, but cl. 4 of the partnership deed reproduced above can be interpreted to spell such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he losses which arise to the firm subsequent to his introduction as a partner. It was probably these observations of the Court in Karnaji Lumbaji's case which the Gujarat High Court had in mind while observing that the liability to bear losses was also a consideration which had to been taken into account. The Gujarat High Court went further and held that even non-fulfilment of promise to contribute capital by itself cannot be held as sufficient reason to hold that the partnership is not genuine. In the present case, it was pointed out by Shri Sathe that the accumulated profits in the capital account of the two lady partners was treated at a future date as the capital contribution of these partners. 12. The next judgment on which considerable reliance was placed was the decision of the Supreme Court in K.D. Kamath Co. vs. CIT. The legal requirements under s. 4 of the Partnership Act to constitute a partnership in law, as observed by the Supreme Court, are that there must be an agreement to share the profits or losses of the business and the business must be carried on by all the partners or any of them acting for all. There is implicit in the second requirement of the principle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjudicating on this issue at page 420, their Lordships quoted the following observations from an unreported decision of the Division Bench of the Bombay High Court in CGT vs. Premji Trikamji Jobanputra (GT Ref. No. 1 of 1969 decided on 16th/17th Aug., 1978): "If upon reconstitution of a firm an erstwhile partner or even a minor who has been admitted to the benefits of a partnership, has contributed any capital or a major partnership has agreed to pay something, then it will not be possible to take the view that so far as the goodwill is concerned there has been a gift, because in such a case there has been consideration, if not in money at least in money's worth." Those observations would indicate that even an agreement to pay something was considered as consideration, if not in money, atleast in money's worth. These authorities relied upon by Shri Sathe would seem to support his case that there was adequate consideration in the form of promise to contribute capital and in the form of promise to the bear the losses and that this aspect of the matter had not been considered by the AAC. 14. The learned departmental representative, on the other hand, has placed reliance on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The issue before the Rajasthan High Court was whether the question whether a person is a partner in a firm or whether a partnership is a genuine one is a question of fact to be determined in the circumstances and evidence in each case. This decision is distinguishable on several counts. Firstly, this is not a decision on merits but on deciding whether a given question was a question of law or a question of fact. Secondly, even on facts there was evidence that proper enquiry was made by the ITO and the Tribunal had brought considerable evidence on record in support of the finding that it had given. This decision, in our opinion, is not relevant for deciding the type of issue that is before us. No doubt, it is true that actual conduct and intent of the partners has to be taken into account. In the present case, it has been brought to our notice that the bank has been intimated about the constitution of the firm and it was pointed out that the main person of the Vora group was a working partner who, by virtue of his contacts and social standing, could help the firm in its business of land transactions. The other decision relied upon by the departmental representative is the decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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