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TMI Blog1986 (10) TMI 329X X X X Extracts X X X X X X X X Extracts X X X X ..... a and P.R. Rao', constituted on 1-10-1971, had obtained and was engaged in executing certain contracts for the construction of port-monoliths for the Dry Dock and for the supply of building material at Visakhapatnam. The partnership consist ed of two partners, namely, Y. Seethayya and P.R. Rao, each having a 50 per cent share. After the contracts were executed in part, Shri P.R. Rao got himself released from the partnership, with the result that only Y. Seethayya remained in charge and responsible for the contracts. 3. A new partnership called 'Ravi Constructions, Visakhapatnam' was constituted on 3-5-1972. This partnership, according to the partnership deed, consisted of 9 partners. The names of the partners and their shares in profits and losses are mentioned in clause 8. Indeed, for a proper appreciation of the question at issue, it is necessary to set out clauses 7 and 8 in full, and refer to some other clauses of the partnership. Clauses 7 and 8 read as follows : 7. The first partner Shri Y. Seethayya shall act and function as consultant and shall be paid 1 per cent (one per cent) of the payments received from the department or persons awarding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat no partner shall be entitled to alienate his or her interest in the firm, so as to make the transferee a partner. Clause 17 provided that the partners, by majority, may take in a new partner on such terms as they thought fit. Clause 18 contemplated the firm being converted into a private limited company, if the majority of the partners so decided. The accounting year of the firm was to be the financial year. 4. For the assessment year 1973-74 the assessee-firm, Ravi Constructions, filed Form No. 11, along with the partnership deed, requesting for grant of registration for the said assessment year. In Form No. 11, in column No. 5, against the name of Shri Y. Seethayya, it was first mentioned that 1 per cent of payment received in lieu of profit thereof was his share. This was however struck off and, by placing an asterisk mark at the bottom, it was stated that his share was 1 per cent of the payments received from the department. When this was pointed out by the ITO to the authorised representative of the assessee, the auditor of the assessee-firm filed a letter dated 22-4-1976, explaining that the striking off of the words in column 5 should be treated as a mistake, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g is to receive commission from Ravi Constructions and Uma Constructions at the rate of 1 per cent and per cent respectively on the gross bills received from the departments to myself since the dissolution of the above two firms. Question - Except for the commission are you responsible for any profit or loss of the said two firms ? Answer - No, I am not responsible for any profit or loss of the said firms. Question - Are you taking an y interest whatsoever in the actual business of the above firms ? Answer - No , . . . . 7. Against the refusal of the ITO to grant registration, the assessee - firm filed an appeal before the AAC. The AAC allowed the appeal on the following reasoning: The two elements necessary to constitute a genuine partnership, viz,. an agreement entered into by all persons concerned and mutual agency among them are present in this case. The partnership deed itself describes Y. Seethayya as a partner, and, thus, the first requirement is satisfied. So far as the second requirement is concerned, it is necessary to remember that the very existence of the firm's business (the execution of certain subsisting contracts) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng from property by persons holding a joint or common interest in that property does not, of itself make such persons partners. Explanation 2 : The receipt by a person of a share of the profits of a business, or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not of itself make him a partner with the persons carrying on the business ; and, in particular, the receipt of such share or payment- (a)by a lender of money to persons engaged or about to engage in any business, (b)by a servant or agent as remuneration, (c)by the widow or child of a deceased partner, as annuity, or (d)by a previous owner or part owner of the business, as consideration for the sale of the goodwill or share thereof, does not of itself make the receiver a partner with the persons carrying on the business. Section 9 provides that partners are bound to carry on the business of the firm to the greatest common advantage, to be just and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner or his legal representatives. Section 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... self does not militate against the existence of a genuine partnership, but they failed to consider the cumulative effect of all the facts and circumstances taken together ; nor did they make any attempt to find out what was the real nature of relationship between Y. Seethayya on the one hand, and the other partners on the other. Now, let us set out all the facts and circumstances relevant upon the said question and then determine the real nature of the relationship between Y. Seethayya and others. We may note that, according to the contention of the learned standing counsel for the revenue, this was a case of a mere assignment of the business, relating to contracts by Y. Seethayya in favour of the eight other persons, for which the consideration was determined at 1 per cent of the payments received from the department and that Shri Y. Seethayya had no concern with the business thereafter, or with its profits or losses whatsoever, on the other hand, the contention of the learned counsel for the assessee is that it was a valid and genuine partnership, and that the stipulation to pay 1 per cent of the payments received from the department towards Seethayya's share was only one mod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oach should not be to take each of the above factors individually and examine whether it by itself militates against the existence of a partnership or otherwise. Taken in this manner, neither fact is conclusive ; it can be explained. The proper approach is to take all the facts and circumstances together and find out what really was the nature of the relationship between Y. Seethayya and others and whether, indeed, Y. Seethayya can be called a 'partner' in the firm 'Ravi Constructions'. In other words, one has to determine, on a cumulative consideration of all the facts and circumstances, whether a genuine partnership, consisting of 9 persons, including Y. Seethayya, had come into existence, in which case alone it would be entitled to registration under the Act. But, unfortunately, both the appellate authorities had adopted the former approach which has completely vitiated their findings and conclusions. They went more by form and not by substance. Merely because the partnership deed describes Shri Y. Seethayya as a partner, they were of the opinion that he is a partner. When it was argued that he had no share in the profits, the appellate authorities referred to ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tners and not a case of a partnership comprising 9 partners. On this aspect, However, we must elaborate our comment with respect to the manner in which the appellate authorities have explained away the deposition of Shri Y. Seethayya that he was not concerned with the business or its profits or losses. We have already set out the relevant portion of his deposition in full. The questions and answers show that the questions were put and the answers given in present tense. No doubt, the deposition was recorded on 27-1-1975 by which date, it is said, the relevant contracts had been completed and came to an end ; but that is no reason to hold that Shri Y. Seethayya was referring to the position, obtaining on the date of his deposition, i.e., after the conclusion of the contract, and not to the situation obtaining, when the contracts were under execution and the partnership was in force. It must be remembered that, according to clause 9 of the partnership deed, Shri Y. Seethayya was to cease to be a partner as soon as the contracts in question came to an end. If, by 27-1-1975, the said contracts had come to an end, it means that he was no longer a partner on that date. If so, there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said conclusion, all the relevant facts and circumstances were taken into account, and the real intention of the partners inferred. 16. The third decision is a Pull Bench decision of the Madras High Court in R.M. Chidambaram Pillai v. CIT [1970] 77 ITR 494 , which has been affirmed by the Supreme Court in CIT v. R.M. Chidambaram Pillai [1977] 106 ITR 292. The question in this case was whether the salaries paid to the partners by a partnership firm constitute 'profits' in their hands, and whether they are taxable. It was held that, since in law a partnership firm is not a distinct legal person, the concept of 'employer' and 'employee' does not exist. It was observed that partners cannot be both employers and employees simultaneously. It was, therefore, held that payment of salary to a partner represents a special share of profits, and that it retains the character of the income of the firm. 17. As against the above, the learned standing counsel brings to our notice the decision of the Calcutta High Court in CIT v. Janata Medical Stores 1985 Tax LR 504. In this decision, it was held that, in view of the decision of the Supreme Court in K. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hayya was specifically exonerated and freed from any sharing of losses. 22. While the above review of the decisions discloses the various angles from which the issue was examined, one thing appears clear from the decisions of the Supreme Court and the Full Bench decision of this Court, viz,. that either from the partnership deed or other material, it should be possible to ascertain the shares of the partners both in the profits as well as losses. In this case, even if it is held that Shri Y. Seethayya's share in profits is ascertainable, his share in the losses is not, indeed he had no share in the losses and this is certainly a strong indication against the assessee's case. Be that as it may, it is not any single aspect or factor that should be taken as conclusive one was or the other, as observed by us hereinbefore but all the relevant facts and circumstances should be taken together and the real intention of the parties and the real nature of the relationship between them determined, as directed in section 6. We have pointed out hereinbefore that the approach of the appellate authorities in this case has been totally different, which has vitiated their findings ..... X X X X Extracts X X X X X X X X Extracts X X X X
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