1. This reference relates to a question of registration of a firm under section 26A of the Indian Income-tax Act, 1922 (hereinafter referred to as 'the Act'). Prior to January 1, 1956, one R. K. Dhingra was carrying on business in the name of M/s. R. K. Dhingra & Co. as its sole proprietor. On June 30, 1956, a partnership deed was executed under which R. K. Dhingra took in his two sons, Narendrakumar and Ashok Kumar, a as partners. Clause 2 of the deed of partnership provided that the business of the partnership shall be deemed to have commenced from January 1, 1956. For the assessment years 1957-58, 1958-59 and 1959-60 applications were made for registration of this firm under section 26A of the Act. The Income-tax Officer upon consideration that the various clauses of the partnership deed came to the conclusion that the partnership was not a genuine one and that the business was the proprietary concern of R. K. Dhingra. This finding was confirmed in appeal by the Appellate Assistant Commissioner. On a further appeal to the Tribunal, the Tribunal found that there was no element of mutual agency in the alleged partnership between the various the contracting parties as envisaged under the Partnership Act. The question that has been referred for our determination is as under :
'Whether, on the facts and in the circumstance of the case, the applicant has been rightly refused registration under section 26A of the Indian-tax Act, 1922, for the assessment years 1957-58, 1958-59 and 1959-60 ?'
2. Mr. Mehta on behalf of the assessee contended that to constitute a partnership in law there are only two legal requirements necessary : (1) that there must be an agreement to share the profits and losses of the business, and (2) that the business must be carried on by all the partners or any of them acting for all. He submitted that it is implicit in the second requirement that there is a principle of mutual agency. He urged that once these two legal requirements are fulfilled, it is obligatory upon the taxing authorities to register the firm notwithstanding the fact that wide and enlarged powers are conferred by the deed of partnership upon one of the partners. Strong reliance was placed by him upon the decision of the Supreme Court in K. D. Kamath and v. Commissioner of Income-tax and a decision of this High Court in Balubhai Gulabdas Navlakhi v. Commissioner of Income-tax. Briefly, his submission was that if the tests laid down in these two cases are applied in the present case them, notwithstanding the fact that in the present case wide and extensive powers are conferred by the deed of partnership upon the father, R. K. Dhingra, a genuine deed of partnership subsisted between the partners and the parties are entitled to registration of the firm under section 26A of the Act. On the other hand, Mr. Hajarnavis on behalf of the revenue contended that if regard be had to the various provisions of the deed of partnership in the present case, then the taxing authorities were right in coming to the conclusion that no genuine partnership the two sons, Narendrakumar and Ashok Kumar, were not really partners but were to act as mere servant of their father, R. K. Dhingra. He, therefore, submitted that the taxing authorities were right in refusing to register the assessee-firm.
3. Question whether a genuine partnership subsisted between the partners will depends on the facts of each case. It is not the contention of the taxing authorities that the deed of partnership in the present case is merely entered into by way of cloak and it does not represent the real intention of the parties to act in accordance with the terms thereof inter se. If the terms of the deed of partnership are carefully scrutinised it will be undoubtedly true that very wide and extensive powers are conferred of the business. Even though the new partners, Narendrakumar and Ashok Kumar, are to contribute towards the goodwill of the business a sum of Rs. 25,000 by having a debit entry made in the books of account, still upon dissolution of the firm the entire goodwill is to belong to R. K. Dhingra. Not only the goodwill but even the tenancy rights, furniture, fixtures, quota rights, licences and other properties of the firm are also to belong to him. Clause 4 of the partnership deed gives power to R. K. Dhingra to dissolve the partnership by giving one month's previous notice in writing to the other two partners. In the event of such a dissolution of the partnership, Narendra Kumar and Ashok Kumar are only entitled to their share in the profits up to the date when the partnership is determined and are not entitled to anything else. Normally, during the subsistence of this partnership, R. K. Dhingra is entitled to 7 annas share and Narendrakumar and Ashok Kumar are each entitled to Rs. 0-4-6 share in the profits and losses of the business. Clauses 5 and 13 confer wide powers upon R. K. Dhingra to introduce any other partner or partners either during his lifetime or to leave a direction by his will or otherwise for introducing any partner or partners or to appoint any person or persons to be his successor or successors in the business. The combined effect of these provisions is that R. K. Dhingra is clothed with a power to introduce new partners which may result in diminishing the proportionable share of the other two partners. Even so far as the right to withdraw the share of profit is concerned, Narendra Kumar and Ashok Kumar are permitted to withdraw Rs. 1,200 and the excess amount of their share profit is to be credited for reducing their liability for contribution of Rs. 25,000 towards the capital of the firm. Only minor powers are given to Narendrakumar and Ashok Kumar by clause 11 to sign letters, bills of lading, endorse cheques in favour of the bank in which the partnership has an account so as to credit it to the current account, but neither of them is clothed with a power to withdraw any money from the bank or to draw cheques. By clause 12 both Narendrakumar and Ashok Kumar are directed not to give credit to merchants or any other persons or place orders on account of and at the risk of the firm without the consent in writing of R. K. Dhingra. Clause 15 provides that the entire right of management of office shall be in the hands of R. K. Dhingra and binding and every decision of his in the matter of business or finance shall be final and binding on Narendrakumar and Ashok Kumar. A close scrutiny of these clauses clearly shows that very wide and extensive powers are retained by R. K. Dhingra even though the profits and losses are to be shared in the manner provided in the deed of partnership.
4. Question, however, arises whether the minimum legal requirements under section 4 of the Partnership Act to constitute a partnership in law are fulfilled in the present case. As pointed out by the Supreme Court in K. D. Kamath & Co.'s case, there are two legal requirements under section 4 to constitute a partnership in law. They are : (1) there must be an agreement to share to profits and losses of the business, and (2) the business must be carried on by all the partners or any of them acting for all. So far as the deed of partnership is concerned, both these requirements are share the profits and losses of the business as provided in clause 5. By clause 15, R. K. Dhingra is clothed with a power to carry on the business of the firm on behalf of all the partners. Thus, even the principle of the agency is implicit in the present case. In K. D. Kamath & Co.'s case the Supreme Court has pointed out that control and management of the business of a firm can be left by agreement between the parties in the hands of one partner to be exercised on behalf of all the partners. A reference to the facts of that case will show that very wide and extensive powers were conferred upon one partner almost similar to those in the case before us except the right to introduce a new partner with the result of diminishing the share of other partners. In that case K, who was for a long time the sole proprietor of a concern of engineers and contractors, converted to the business into a partnership by admitting 5 other partners. Under the deed of partnership he was the financing and managing parter of the business, the goodwill belonging to him, and the rest were admitted only as working partners contributing labour. Under clause 8 of the deed, by virtue of his long-standing experience, K was to have full right of control and management of the firm's business and all the working partners were to work according to his instructions and directions. Under clause 9 no working partner was entitled to raise a loan or pledge the firm's interest except under the written authority of K. Under clause 11, K alone was to operate the bank accounts but in case of any need, for convenience, he could authorise any other partner. Under clause 12, if K had reason to believe that any working partner was not working and conduction to the best interest of the firm he had the right to remove him and in such an eventuality the outgoing working partner had only the right to the profit or loss up to the date of the retirement. Clause 5, provided that final accounting was to be taken at the end of every year and the net profits and losses were to be shared by the parties thereto in the proportion specified therein. Clause 13 provided that books of account were to be properly maintained and each partner had a right at all times to have free and equal access to them. Clause 14 enjoined on each partner to be just and faithful to the other partners in all matters relating to the business of the firm and each on of them had to diligently attend to his business and give a true account and information regarding the business. Clause 15 enabled the partners to withdraw the amounts in anticipation of profits falling to their individual shares and in the case of loss each of them was liable to make good the same in proportion to his shares in the partnership. Clause 16 enjoined the partners to carry on the affairs of the firm for mutual gain and benefit. The question arose whether the firm could be granted registration under section 26A of the Act. The High Court held that no relationship of partners, as understood in law, had been created as between the parties under the partnership deed and that, therefore, the firm was not entitled to registration. The High Court rested its decision principally on five circumstances, namely, (1) the management as well as the control of the business is entirely left in that hands of the first partner of the firm; (2) the other partners can merely work under his directions and share in the profits and losses in accordance with the proportion mentioned in clause 5; (3) it is not within the power of the parties No. 2 to 6 to act as agent of other partners; (4) the said parties accept any business except with the consent of K. D. Kamath; and (5) these parties cannot raise any loan or pledge the firm's interest, directly or indirectly, except under the written authority of K. D. Kamath. In view of the existence of these five circumstances the High Court was persuaded to take the view that the element of agency was lacking in that case so as to constitute a partnership. The Supreme Court, however, took a different view reversing the decision of the High Court. The Supreme Court held that the fact that the exclusive power and control, by agreement of parties, was vested in one partner, and the further circumstance that only one partner could operate the bank accounts or borrow on behalf of the firm was not destructive of the theory of partnership provided two essential conditions were satisfied, namely, (i) that there should be an agreement to share profits and losses of the business of the firm; and (ii) that the business must be carried on by all the partners or any of them acting for all. Upon scrutiny of the clauses in the partnership deed before the court the Supreme Court took the view that both the ingredients requisite to constitute a partnership in law were fulfilled in that case. Practically every power which is to be found in the present deed of partnership existed in the case before the Supreme Court except the power in introduce new partners which may result in diminishing the proportionate share of the other two parters. Even the existence of such a circumstance was considered by the Supreme Court in Balubhai Gulabdas Navlakhi v. Commissioner of Income-tax. In this case this court held that the two essential conditions which are necessary to found the relation of partnership are that, (i) there should be an agreement to share to profits as well as the losses of the business; and (ii) each of the partners should be acting as agent for all. If these two conditions exist other conditions which give a larger share to one of the partners in the management or the ownership of the assets would not negative the existence of a partnership. We will like to observe that, so far as the second condition above referred to is concerned, it will be more appropriate to lay down as stating that business must be carried on by all or any of them acting for all. In the case before the Bombay High Court the deed of partnership satisfied both these conditions, but contained clauses to the effect that the entire goodwill as well as, the stock-in-trade, furniture and other assets of the firm were to be in the sole ownership of a particular partner, that he had absolute power to be as with and dispose of them by sale or otherwise, that he was at liberty to admit additional partners on such terms as he thought fit in his absolute discretion that he may increase or decrease the share of the existing partners, that he may also dissolve the partnership with regard to such partners who do not work diligently and that he may dissolve the partnership with regard to any partner by giving him three months' notice. It was sought to be argued before the Bombay High Court that it was really a proprietary concern of a partner and that the other partners were mere employees. That contention was rejected by the High Court and the High Court took the view that the two legal requirements which are essential to constitute a partnership in law existed in that case and the fact that one on the partners was given wide powers would not make the relationship one of master and servant. The High Court took the view that such a firm was entitled to registration under section 26A of the Act. The Supreme Court in K. D. Kamath & Co.'s case has approved of this decision as laying down the correct law and has even gone on to observe that most of the clauses in the partnership deed before the Bombay High Court were more or less similar to the partnership deed before them.
5. If the ratio of the decision of the Supreme Court and that of the Bombay High Court is applied to the facts of the present case, then it is difficult to come to the conclusion that the two essential requirements to constitute a partnership in law as therein laid down are not fulfilled in the present case. Under clause 5 the profits and losses of the business of the firm are to be shared in the proportion therein laid down amongst the three partners. By clause 15, R. K. Dhingra is clothed with a power to carry on the entire management of the business by the mutual consent of all the partners. Thus, the second requirement is also fulfilled in the present case. If that is so, then notwithstanding the fact that wide and extensive powers are otherwise conferred on R. K. Dhingra there will be a genuine partnership in law as required by the partnership Act. No material was put forward before the taxing authorities that this partnership deed was merely a cloak to continue the relationship of master and servant between R. K. Dhingra and his two sons and its provisions were not intended to be carried out in letter and spirit. Thus, in our opinion, as the two essential conditions which are required in law to constitute a partnership as defined in the Partnership Act exist in the present case the firm will be entitled to registration under section 26A of the Act.
In the result, our answer to the question referred is as under :
The assessee-firm is entitled to registration under section 26A of the Act for all the three assessment years 1957-58, 1958-59 and 1959-60.
6. The revenue shall pay the costs of the assessee.