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TMI Blog2006 (7) TMI 131X X X X Extracts X X X X X X X X Extracts X X X X ..... his court issued under section 256(2) of the Income-tax Act, 1961, has made these references to this court to answer the following common question: "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the partnership consisting of the trustees deriving authority under the different trust deeds was genuine and valid, and whether such partnership was entitled to registration under section 185 of the Income-tax Act, 1961 for the assessment year 1975-76, and continuation thereof for the subsequent assessment years?" The facts for proper appreciation of the references, in the nutshell, are that under a partnership deed dated June 26, 1973, as many as seven persons created a partnership, with various objects like entering into business of money-lending, trading etc. The partnership deed provided that each one of the said persons was a representative of a trust which was created by a trust deed duly made in accordance with law. The assessee firm applied for registration for the assessment year 1975-76, the application was granted for the said year but while considering the application for renewal of registratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm or are competent to enter into a contract for creating a partnership. His submission is that section 185 (unamended) does not authorise an illegally constituted firm to make an application for registration. His further submission is that if an Assessing Officer finds that the firm has been illegally constituted or has been constituted for illegal or immoral purposes or the partners entering into the partnership are not authorized or entitled either under the law or under a covenant to enter into a partnership or are not entitled or competent to enter into a contract because of some disqualification or disability a legally constituted partnership would not come into existence and in case the Assessing Officer finds that no legally constituted valid partnership has come into existence, he can always refuse registration. He has referred to the provisions of section 47 of the Trusts Act, clause 3(iv) of the trust deed, section 11 of the Indian Contract Act, and section 4 of the Indian Partnership Act. He submits that if a partnership is created then one must see that a trustee, who joins as a partner, has an authority under the Trusts Act, under any other allied law or under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 4 of the Indian Partnership Act defines "partnership" as a relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called partners and collectively a "firm", and the name under which their business is carried on is called "firm name". Thus, from section 4, it would appear that for coming into existence of a partnership there must be an agreement between two and more persons. Section 10 of the Indian Contract Act, 1872, provides that all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object and are not expressly declared to be void. Once the provisions of the Contract Act are applicable, then the capacity, ability and capability to contract of each person proposing to join the partnership would become material for section 4 of the Partnership Act. The submission of Shri Naik is that if the trust deed does not authorize a trustee to delegate his authority in favour of anybody to handle or invest the property, then no authority can be conferred by a trust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some other securities or so but we cannot hold that creation of the partnership was authorised in favour of the trustees. Up to the date of the order of assessment, the beneficiaries did not come and say to the Assessing Officer that the instrument of the trust did not authorise the trustee to delegate his office or any of his duties but the beneficiary being competent to contract was consenting to such delegation or specifically authorised the trustee to create and enter into a partnership. When section 47 says that a trustee cannot delegate his office or any of his duties unless the instrument of trust so provides or the delegation is in the regular course of business or the delegation is necessary or the beneficiary, being competent to contract, consents to delegation and when none of the conditions enumerated in section 47 of the Indian Trusts Act, 1882 is applicable, then as a sequel to the aforesaid discussion it has to be held that section 47 puts a bar against the trustee to delegate his office or any of his duties in favour of a co-trustee or to a stranger. This also will have to be appreciated that a partner who is not a trustee, qua the trust, would be a stranger and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t available in favour the said trustee/partner because he does not fulfil the condition that he is not disqualified from contracting by any law to which he is subject. The burden to prove, that such trustee/partner is not disqualified, would always be upon the trustee. If a trustee/partner fails to prove his authority to join as a partner, then being under legal disqualification he cannot contract for creation of a legal partnership. Once section 47 of the Trusts Act puts an embargo on the authority of the trustee that he cannot delegate his office or any of his duties either to a co-trustee or to a stranger, then he would be a person disqualified under section 47 of the Trusts Act. If it is not the case of the trustee that the delegation was in the regular course of the business or the delegation became necessary, then, for all practical purposes, he is disqualified under the law to which he is subject. If a person is disqualified from entering into a partnership, no legally constituted partnership would come into existence. Section 11 of the Indian Contract Act would provide foundational capability to enter into an agreement which ultimately would be an enforceable contract. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs since the trust deed did not authorise the concerned trustees to join as partners. It is yet to be seen that, the Tribunal had observed that the trustees have joined the partnership in their individual capacity. This observation made by the learned Members of the Tribunal is contrary to the partnership deed dated June 26, 1973. The partnership deed was made at Ahmedabad on 26th day of June 1973 between seven persons and each of the said persons after describing his name was referring to himself or herself to be a representative of a particular trust. For example, the party of the first part, Smt. Shyama G. Sarabhai represents Saraladevi Sarabhai D. Trust. The other persons who joined as partners were also representing the trust. If they were representing the trust, then the Tribunal could not say that the trustees joined in their personal capacity and for act of misfeasance, malfeasance or misconduct they were answerable to the beneficiaries and irrespective of all other things the partnership was entitled to be registered. In our humble opinion and without meaning any disrespect to the members of the Tribunal, we must observe that they misread the trust deed and the covenan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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