1. The ITA Tribunal, Gauhati, has referred the following question which is said to arise out of the order of the Appellate Tribunal, as follows :
' Whether, on the facts and in the circumstances of the case, and on a true construction of the deed of partnership dated January 9, 1969, the Tribunal was justified in upholding the order of the CIT cancelling the order under Section 185 of the I.T. Act, 1961, passed by the ITO and directing the ITO to treat the assessee as AOP (Association of Persons) for the assessment year 1970-71 ?'
2. The statement of the facts appears on pages 24 and 25 of the printed book. The facts out of which the present reference arises are briefly stated : There was a partnership entered into on June 22, 1966, between three persons, Abin Inderjit Singh, Deshulie Haralu and Smt. Lushul Haralu with 50 per cent., 25 per cent., 25 per cent. shares fespectively of the profits of the firm.
3. The partnership, known as M/s. Nagaland Liquor Stores, was reconstituted on January 9, 1969, by another partnership deed which has been printed as annexure D, pages 19-21 of the printed book. In this partnership, in addition to the above said three persons, a fourth partner, Zevalhou Angami, was inducted for the first time. Subsequently, there were four persons (partners), instead of three, with shares as follows : 50 per cent. for the first partner and 16'66 per cent. for each of the other three partner's. Totalling up these shares one would find a deficiency of 0.02 per cent. shares. This was held to be of no consequence by the ITO (vide
annexure A dated June 23, 1973, page 6 of the printed book). This point
is not before us, because this is not one of the points which arises out of
the reference. '
4. Section 184 and Section 185 of the I. T. Act, 1961 (Act 43 of 1961) (hereinafter called ' the Act '), deal with applications for registration of partnership firm ; the applications have to be made to the ITO under Section 184 of the Act; Rules 22-25 of the I. T. Rules of 1962, have been framed, vis-a-vis, the manner of making such applications. That these requirements were duly complied with has not been disputed. As per Section 185 of the Act, the ITO has, on receipt of such application for registration, to inquire into the genuineness of the firm and constitution as specified in the instrument of partnership; he has to be satisfied concerning whether there is or was during the previous year in existence a genuine firm with a constitution so specified. If so satisfied, he shall pass an order in writing registering the firm for the assessment year ; if he is not so satisfied he shall pass an order in writing refusing to register the firm.
5. The concerned ITO having registered the said firm for the assessment year 1970-71, the CIT, Assam, Nagaland, Meghalaya, Manipur and Tripura, considered, while exercising his power of revision under Section 263 of the Act, that the order of registration by the ITO was 'erroneous in so far as it is prejudicial to the interest of revenue '. The possibility of prejudice to revenue arises by reason of there being a lesser rate for a partnership within the meaning of the Indian Partnership Act, than for a mere association of persons (AOP), But this possibility will not justify an approach, seeking to find some loop-hole or other in the partnership, where none exists, merely in an endeavour to collect income-fax at higher rates than permissible. A genuine and legal partnership cannot be treated as AOP.
6. The reasons which weighed with the Commissioner will be briefly indicated presently. But before doing so, it would be convenient not only to read Clauses 8 and 9 of the partnership deed but also notice its other provisions :
'(8) Duties of the managing partner; The managing partner shall be
exclusively responsible for carrying out the business of the partnership
and for taking all 'necessary decisions relating to the business of this
partnership and shall not be restricted in any manner by the second or
third or fourth party. The managing partner alone shall be competent to
operate on all bank accounts on behalf of the partnership and to sign all
documents and give valid discharge on behalf of the partnership. Besides
his share of profit, he will also be entitled to free board, accommodation and
(9) During the absence of the managing partner, Shri Kushhaljit Singb, s/o Shri Amrik Singh, will work in place of the managing partner with the same rights and privileges.'
7. The partnership was to commence from the 9th day of January, 1969, for the purpose of carrying on storing, bottling, blending and selling liquor, which was to continue for 20 years. The business of the partnership was to be carried on at Dimapur, where it is said to be carried on at the present moment. The partnership deed also authorised that business could be conducted at such other places in Nagaland as may be mutually agreed upon. The entire capital of Rs. 10,000 was contributed by the first party, Abin Inderjit Singh; if any further, sum was required for the business, the same was to be advanced to the partnership only by him and would be disclosed in the books of the partnership. Proper and regular accounts of the affairs and transactions of the partnership were to be maintained and kept at the business place of the partnership. The first party was to be the managing partner. The annual balance-sheet of account was to be prepared under the supervision of the managing partner and, thereafter, they were to be confirmed and signed by each of the other three partners, if there was any defect or irregularity it could be pointed out by the other partners and the managing partner had to take steps to rectify it within three months thereafter. One of the four partners, party No. 2, Deshulie Haralu, was styled as chairman of the concern, the licences for import, liquor depot, bottling and blending having been obtained in his name, as a partner of the Nagaland Liquor Stores. These provisions have been set out in Clauses 1-7 of the partnership deed, preceding Clauses 8 and 9 extracted above. For the sake of completeness, the succeeding Clause 10 may also be noticed; it provides that death of any partner would operate to dissolve the partnership; the nominee of the deceased partner had the right to join the partnership on the same terms and conditions, as the deceased partner.
8. The CIT cancelled the registration ordered by the ITO in the view that K. Singh, the brother of Abin Inderjit Singh, who was to ' work ' in place of the managing partner, Abin Inderjit Singh, with the same rights and privileges was a stranger to the partnership and yet he had been given the power to enter into contract on behalf of the firm which was invalid in law. He was also of the view that Clause 9 of the partnership deed militated against the provisions of the Indian Partnership Act, 1932, but did not specify which particular provision had been violated. There was yet another reason given by the CIT which without any further consideration or elaboration was adopted by the Tribunal, that ' privity of contract between the partners as mentioned in the partnership deed was breached.'
It was also stated that the managing partner, Abin Inderjit Singb, himself was conducting the business of the partnership and K. Singh had not at any time worked for the partnership by appearing before the ITO, etc. There is still another statement in the order of the CIT, annexure B (pages 7-13 of the printed book) (at page 12, para. 13) that it was ' never the intention of the deed to vest the powers of the managing partner as described in Clause 8 of the deed in the other partners during the absence of the managing partner and such powers are to be exercised only by the managing partner and, in his absence by K. Singh, who is a stranger '. The CIT was willing to draw the inference that 'cl. 9 of the deed has clearly provided Kushaljit Singh, a stranger, with the powers of a partner and more so of a managing partner '.
10. The assessee appealed to the Appellate Tribunal against the order of the CIT, copy of which is annexure C (pages 14-18 of the printed book). The order which seems to have been written by the Accountant Member and concurred in by the Judicial Member of the Appellate tribunal, shows that a number of decisions were referred to in para. 6 as having been referred to by the assessee's counsel, none of them has been explained in the order. We have, as we shall presently indicate, found no need to go into any decided case because this case appears to be fairly simple and could, therefore, permit the same being disposed of on legal principles which may be regarded as well established. There is an observation in the order, para. 9, that Clause 9 ' is the villain of the piece '. We are unable to find any ' villain ' here or elsewhere in the deed. Without going into any reasoning of the Appellate Tribunal, which we find is substantially one of following what the CIT had said, we may set out the principles pertaining to partnership generally and analyse the relevant portions of the partnership deed in question.
11. As defined under the Indian Partnership Act, 1932, a partnership is a relation between partners who have agreed to share the profit of the business carried on by all or any of them acting for all. This is what is known as the principles of mutual agency. The four partners in this case did agree to share the profit of the business carried on in the name and style of Nagaland Liquor Stores in the proportions indicated already. This was a business which in terms of Section 4 was being carried by all or any of them acting for all (in the latter sense). The managing partner provided the entire capital and was to provide further capital himself if needed. He had the right of carrying on the partnership business, but even more important, he was ' to be exclusively responsible for carrying out the business of the partnership and for taking steps relating to the said partnership in which he was not to be restricted in any manner by the second or third or fourth partner ' (vide Clause 8). The brother, K. Singh, of the managing partner was
only enabled to ' work ' in place of the managing partner during his absence. What was to be done by K. Singh in pursuance of Clause 9 would not diminish in any manner the responsibility of the managing partner to the other three partners. It is also clear from a perusal of relevant clauses of the partnership deed, that K, Singh was only ' to work in place of the managing partner with the same rights and privileges '. He was not to become a partner for this reason, much less a managing partner, he could not be deemed to be a partner either. He was not to get any ' benefit ' for himself by working in the place of the managing partner, and for any action of his, in pursuance of Clause 9 the accountability of the managing partner to the other three partners was unimpaired. It will also appear from Clause 8 that the managing partner alone was ' to be competent to operate on all bank accounts on behalf of the partnership '. Clause 9 does not cut into this and it does not expressly authorise K. Singh to operate bank accounts relating to the partnership. If even de hors the deed the managing partner will (which is not likely) be responsible to the other partners, by being asked and permitted to manage the partnership business during the absence of the managing partner, without impairing the latter's responsibility to the other partners, neither was any provisions of the Partnership Act breached nor was the principle of privity of contract violated.
12. The right to give a valid discharge on behalf of the partnership according to Clause 8 was only with the managing partner, if on the other hand the brother gave a discharge this would not be valid and would not bind the partnership or the other partners.
13. There has been same obvious confusion created by the use in Clause 9 of the words ' the same rights and privileges ' as the managing partner when K. Singh was working in his place. It will be seen from clause 8 of the partnership deed itself that the managing partner in addition to the share of profit, ' would also be entitled to free board, accommodation and transport'. The reference to the same ' rights and privileges' in Clause 9 was obviously to the above said privileges and rights referred to in Clause 8 as extracted above. It is important that K. Singh was not to have the duties of a partner.
14. It is also important that for the work he did no separate remunerations had been provided. By reason of the younger brother working in the place of the managing partner (No. 1 party to the partnership deed) the share, of the profit of the managing partner would not be increased or diminished ; his share of profit would be same whether he worked himself or allowed his brother, K. Singh, to ' work ' for him during his absence.
15. We are surprised that not only the CIT but also the learned Appellate Tribunal made a reference to his brother, K. Singh, not having worked in fact for the managing partner as visualised by Clause 9. The approach completely overlooks the fact that this was only an ' enabling ' provision by which the brother could only ' work ' if need arose on account of the absence of the managing partner. Such a need may or may not arise. The validity of the deed would not be affected by such need not arising. In this connection, it is important to recall that the partnership had functioned from 1966, before the deed dated January 9, 1969 was executed, in the place of the old partnership deed, including a new and additional fourth partner. Obviously some difficulty had been felt earlier in the matter owing to the managing partner's absence, and such a provision was probably made for the first time, for this reason. We would not even be referring to this kind of speculation here but for an argument having been advanced based on the absence of such a provision in the earlier deed.
16. In the light of what we have explained it is apparent that it was rightly accepted as genuine partnership. In fact, there is no finding to the contrary in either the order of the CIT or of the Appellate Tribunal. There is, as we have explained, no inconsistency between Clauses 8 and 9 of the partnership deed. No question, therefore, arises of any need for severing any portion from the rest. There was a valid partnership which came into existence; we have been unable to find any other provision in the Indian Partnership Act or even a general principle of law relating to partnerships which has been violated such as to render the said partnership invalid. None has been specifically pointed out by the Commissioner or the Appellate Tribunal. The ITO could not be directed to treat the status of the assessee as AOP.
17. Shri Manisana Singh, learned counsel for the revenue, attempted to
urge before us that the partnership was not supported by consideration so
far as the other three partners were concerned. We did not permit him
to argue the question because this point does not appear to have been
taken so far ; it does not arise out of the reference. In the circumstances,
the reference is answered in favour of the assessee and against the revenue.
The revenue shall pay costs to the assessee, the hearing fee. is fixed at