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TMI Blog1986 (10) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... r the dry dock and for the supply of building material at Visakhapatnam. The partnership consisted of two partners, namely, Sri Y. Seetayya and P. R. Rao, each having a 50% share. After the contracts were executed in part, Sri P. R. Rao got himself released from the partnership with the result that only Y. Seetayya remained in charge and responsible for the contracts. A new partnership, called " Ravi Constructions, Visakhapatnam was constituted on May 2, 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, Sri Y. Seetayya, shall act and function as consultant and shall be paid 1% (one per cent.) of the payments received from the Department or persons awarding the contracts for his advice and guidance and the said 1% shall be deposited in the bank account of Sri Y. Seetayya and he shall not be liable for any losses of this firm and partne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a letter dated April 22, 1976, explaining that the striking off of the words in column No. 5 should be treated as mistake and that the entry originally made should be treated as the correct entry. The Income-tax Officer refused registration to the firm and treated it as an unregistered firm for the following reasons: (i) In this case, there is no agreement to share the profits of the business which is an essential condition of the partnership. A perusal of the deposition of Sri Y. Seetayya recorded on January 27, 1975, clearly proves that he was getting only commission and not profit ; that he was not at ill concerned with the business of the firm, notwithstanding the statement in clause 7; and that Sri Y. Seetayya was shown as a partner in the partnership deed only for the sake of continuity. Inasmuch as the transfer or assignment of the contract was likely to entail its termination, Sri Y. Seetayya was shown as a partner; thus the inclusion of his name in the partnership deed was only a " make-believe " and the 1% of the gross receipts paid to him is nothing but a nominal fee for lending his name in the continuation of the contracts in the hands of the assessee; and (ii) the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry existence of the firm's business (the execution of certain subsisting contracts) owed its origin to the presence of Sri Y. Seetayya as a partner in the firm. But for him, there was no such business. Moreover, he had also acted and functioned as a consultant as shown in clause 7 of the partnership deed. The deposition of Sri Y. Seetayya does not negative this fact. The several clauses in the partnership deed also go to show that there was mutual agency among all the 9 partners. So far as the manner of giving the share to Sri Y. Seetayya is concerned, it was only a mode of describing his share in the profits. True it is that in the previous partnership firm, Y. Seetayya's share was 50%, but nothing prevents him from reducing his share in the reconstituted firm; he did not contribute any capital except his services as a consultant in this new firm. He was insured against losses, so he would have decided that the 1% payment was a good bargain. Be that as it may, the said payment can be treated as representing his share in the profits. Aggrieved by the decision of the Appellate Assistant Commissioner, the Department filed an appeal before the Income-tax Appellate Tribunal. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of the said Act, the mutual rights and duties of the partners of a firm may be determined by contract between the partners, and that such contract may be expressed or may be implied by a course of dealing. Sections 12 and 13 make it clear that the conduct of the business of the firm and mutual rights and liabilities of the partners is a matter of contract between the parties but subject to any such contract, each partner has a right to participate in the conduct of the business and is bound to attend diligently to his duties in the conduct of the business; he has also a right to have access to, and to inspect and take copies of the books of the firm. partner is not entitled to receive any remuneration for taking part in the conduct of the business. From the above provisions of law, it is evident that the following are the three essential elements of a partnership, viz. : (i) there must be an agreement entered into by all the persons concerned; (ii) the agreement must be to share the profits of the business; and (iii) the business must be carried on by all or any of the partners concerned acting for all. Section 6 says that, in determining whether a firm exi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide advice and guidance to the other partners in the conduct of the firm's business. The relevant facts are these: (a) the partnership deed described Y. Seetayya as a partner; (b) the contracts in question were initially awarded to a firm, M/s. Y. Seetayya P. R. Rao, consisting of two partners, Y. Seetayya and P. R. Rao, each of whom had a 50% share; the said partnership executed the contracts to some extent, whereafter the partnership came to an end with the retirement of Sri P. R. Rao; Sri Y. Seetayya was left alone with the contracts. At that stage, the assessee-partnership " M/s. Ravi Constructions " was formed or, May 2, 1972, to carry on and complete the said contracts. As soon as the said contracts were over, Sri Y. Seetayya was to cease to be a partner; (c) Sri Y. Seetayya did not contribute any capital in the new partnership; clause 7 of the partnership deed, no doubt, says that 1% of the payments received from the Department shall be paid to him " for his advice and guidance " but his own deposition shows that he was not taking any interest in the actual business of the firm (d) Sri Y. Seetayya was not liable for any losses, nor was he entitled to profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tendering aid and advice was a mere " make-believe " and, reliance in support of this contention was placed upon his own deposition, the said deposition was explained away in a very unsatisfactory manner. It is this erroneous and compartmentalised approach which has resulted in their coming to the unsustainable conclusion that Sri Y. Seetayya was partner and that there was a genuine partnership comprising him and eight other partners which is entitled to registration. Taking all the above facts and circumstances together, what, in our opinion, has really happened in this case is this: Y. Seetayya and P. R. Rao had formed partnership and had obtained certain contracts ; half way through P. R. Rao, retired from the partnership, leaving Y. Seetayya alone with the contracts; Y. Seetayya was himself in no mood or in no position to execute the contracts; the best way he thought was to assign the contracts for certain consideration and thus practically get rid of the contracts; but it was not possible to assign the contracts since such an assignment would have invited termination. Therefore, the device of partnership was resorted to. The real partners in " Ravi Constructions " were those ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the partnership while the contracts were in progress or when he was a partner in the said firm. We are, therefore, of the opinion that his deposition clearly shows that the recital in clause 7 that he was to be paid 1% of the payments received from the Department " for his advice and guidance " is only " make-believe ", as rightly held by the Income-tax Officer. In the light of what we have said above and in particular the wrong approach adopted by the appellate authorities, we do not think it necessary to examine the decisions relied upon by them in support of their proposition. However, a brief reference would be in order. The first decision relied upon is in Raghunandan v. Hormasji, AIR 1927 Bom 187. Two solicitors entered into a partnership. Partner A was to be paid Rs. 500 per month in lieu of profits, whether profits were earned or not. The Bombay High Court held that A became a salaried partner and justified the same by saying that with a view to avoid the accounting and computation of profits, the partners agreed that partner A shall take Rs. 500 per month towards his share in the profits. The next decision is in Raghumull Khandelwal v. Official Assignee of Calcutta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, it was held that, even if there is no such specification in the deed, if such specification is found in Form No. 11, that is enough to warrant the grant of registration. A Full Bench of this court also has taken the same view in CIT v. Krishna Mining Company [1980] 122 ITR 362. It was held that, if the specification of shares of the partners is evident from the partnership deed, or where it can be inferred from the other material on record, the firm must be granted registration. It was also observed that, whether there is specification of shares of the partners or not in a given case is mixed question of fact and law to be determined on the facts and circumstances of each case. In K. S. Badrinarayana Rao v. CIT [1985] 152 ITR 159 (Kar), it was held by the Karnataka High Court that, where a fixed sum is paid to one person described as a working partner without a right to share in the profits or assets of the firm on dissolution, such person cannot be treated as a partner and registration cannot be granted to the firm. The Kerala High Court has held in United Hardwares v. CIT [1974] 96 ITR 348, that the specification of shares of the partners in the instrument of partners ..... X X X X Extracts X X X X X X X X Extracts X X X X
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