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Commissioner of Income-tax, Mysore Vs. K.D. Kamat and Co. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKarnataka High Court
Decided On
Case NumberIncome-tax Referred Case No. 13 of 1963
Judge
Reported in[1964]54ITR72(KAR); [1964]54ITR72(Karn)
ActsIncome Tax Act, 1922 - Sections 26A; Partnership Act, 1932 - Sections 4
AppellantCommissioner of Income-tax, Mysore
RespondentK.D. Kamat and Co.
Appellant AdvocateG.R. Ethirajulu Naidu, Adv.
Respondent AdvocateS.K. Venkataranga Iyengar, Adv.
Excerpt:
.....the technical knowledge of engineer, shall have the full right of control and management of the firm's business and in the best interests of the firm, it is thus decided and agreed upon among all partners that all the working partners from nos. 12. that in the course of the business or during the existence of the firm's business, the principal partner has reason to believe that any working partner or partners is/are not working conductive to the best interests of the firm, the principal partners shall have a right to remove such a working partner or partners from the partnership concern and in such an eventuality, the outgoing working partner or partners shall have only the right to the profit or loss up to the date of his retirement, as may be decided by the principal partner in lump..........satisfied.' 23. in the present case, our conclusion is that as per the terms of the partnership deed, partners nos. 2 to 6 cannot act as the agent of all. 24. the last decision read to us is the decision of the kerala high court in commissioner of income-tax v. pathrose rice and oil mills. on the terms of the deed produced before it, the high court came to the conclusion that the deed in question is a partnership deed. therein, on the basis of clause 8 of the deed produced, the revenue had contended that no partner had power to act as the agent of the other partners. this contention was negatived by the court. clause 8 in that deed read : 'all activities connected with the business, etc., is to be conducted at the sole discretion of partner no. 1 and all his actions are binding on all.....
Judgment:

Hegde, J.

1. This is reference under section 66(1) of the Indian Income-tax Act, 1922 (to be hereinafter referred to as the 'Act'). The question of law referred to us is :

'Whether, on the facts and in the circumstances of the case, Messrs. K. D. Kamath & Co. could be granted registration under section 26A of the Act for the assessment year 1959-60 ?'

2. The learned judge set out the statement of case which ran as follows :

3. The assessee is a firm consisting of six partners, (1) K. D. Kamath, (2) N. G. Kamath, (3) S. D. Kamath, (4) D. J. Mohite, (5) S. G. Joshi and (6) Y. B. Kate. The assessment year is 1959-60 and the corresponding previous year is the year ended March 31, 1959. The partnership is constituted under a deed dated 20th March, 1959, and it is recorded in the deed that the business of the partnership was being carried on in partnership form 1st October, 1958. The partnership was registered under the partnership Act on or about 11th August, 1959. Clauses 8, 9, 12 and 16 of the partnership deed are reproduced below for facility of reference.

'8. That the party No. 1, i.e., Shri K. D. Kamath, who is the principal and financing partner and by virtue of his having the long-standing experience in the line of business together with the technical knowledge of engineer, shall have the full right of control and management of the firm's business and in the best interests of the firm, it is thus decided and agreed upon among all partners that all the working partners from Nos. 2 to 6 shall always work according to the instructions and directions given from time to time by Shri K. D. Kamath, in the actual execution of works and in any other matter connecting thereof, pertaining to this partnership business. The decision of the principal partner on the aspect of taking any new business or giving tenders for new works, shall always vest with him whose decision shall be final and binding upon all the working partners.

9. That it is also agreed among the partners that no working partner or partners is/are authorised to raise loan for and on behalf of the firm or pledge the firm's interest directly or indirectly and such act shall not be binding on the firm, except under the written consent of the principal partner.

12. That in the course of the business or during the existence of the firm's business, the principal partner has reason to believe that any working partner or partners is/are not working conductive to the best interests of the firm, the principal partners shall have a right to remove such a working partner or partners from the partnership concern and in such an eventuality, the outgoing working partner or partners shall have only the right to the profit or loss up to the date of his retirement, as may be decided by the principal partner in lump sum either by paying or receiving regard being had to the progress of the business or otherwise up to the date of retirement, only on the completed works.

16. Thus subject to the provisions herein mentioned and laid down and made thoroughly known by each of the parties to this agreement with sound mind and body, the firm's affairs be carried on for mutual gain and benefit and if any questions which may arise or occur touching to the conduct or management or liability of the firm, the same shall be amicably settled among the parties with the consent of the principal partner, whose decision in the matter shall be final and binding on all partners.'

4. A copy of the partnership deed is made annexure 'A' and forms part of the case.

5. The Income-tax Officer refused to grant registration to the firm under section 26A of the Income-tax Act for the assessment year 1959-60. He placed reliance on the provisions of clauses 8, 9, 12 and 16 of the partnership deed and held that the partners were not in enjoyment of the full share of profits and that the Government department and them municipality were not aware of the constitution of the firm. His order is made annexure 'B' and forms part of the case.

6. The assessee thereafter appealed to the Appellate Assistant Commissioner who confirmed the order of the Income-tax Officer. He placed great reliance on clause 12 in agreeing with the conclusion of the Income-tax Officer. His order is made annexure 'C' and forms part of the case.

7. The assessee thereafter appealed to the Tribunal and it was contended on its behalf that the ratio of the decision of the Bombay High Court in Income-tax Reference No. 14 of 1959, dated 1st September, 1961, Balubhai Gulabdas Navlakhi v. Commissioner of Income-tax, clearly applied to the facts of the case and that the detailed control of business by and concentration of power in the hands of Shri K. D. Kamath did not militate against the basic agreement of the persons concerned to share the profits and to accept the principle of mutual agency. The earlier decision of the Bombay High Court in the case of the grounds in that case the two alleged partners were not allowed to do the business of the firm at the discretion of the major partner and the important conditions of mutual agency was, therefore, no satisfied. On behalf of the department, reliance was laced on the decision of the Supreme Court in the case of M. P. Davis v. Commissioner of Agricultural Income-tax, and reference was made to clauses 12 and 16 of the partnership deed. The Tribunal for reasons given in detail in paragraph of 6 of its order upheld the contention of the assessee and directed that the firm should be registered under section 26A. Its order is made annexure 'D' and forms part of the case.

8. The question for decision in this case is whether the deed marked as exhibit A in this case can be considered as an instrument of partnerships as contemplated in section 4 of the Indian partnership Act, 1932. That section provides :

'4. Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.'

9. The two essential conditions of this provisions are that : (1) there should be an agreement to share the profits as well as the losses of the business, and (2) each of the partners should be acting as the agent of all. Section 6 of the partnership Act stipulates that in determining whether a group of persons is or is not a firm, or whether a person is or not a partner in a firm, regard should be had to the real relation between the parties as shown by all relevant facts taken together. The only other relevant section in the partnerships Act which we need notice is section 20, which says :

'The partners in a firm may, by contract between the partners, extend or restrict the implies authority of any partner.

Notwithstanding any such restrictions, any act done by a partner on behalf of the firm which falls within his implies authority binds the firm, unless the person with whom he is dealing knows of the restriction or does not known or believe the partner to be a partner.'

10. It may be noticed that section 20 does in any manner impinge on section 4 of the Partnership Act. Section 4 prescribes the essential conditions while section 20 deals with the 'implied authority'. Hence, we have to see whether on a true reading of the instrument produced, we can come to the conclusion that the instrument in question evidences a deed of partnership.

11. The materiel clauses in the deed produced are clauses 5 to 9, 12 and 16. They read as follows :

'5. That the final accounts of the partnership firm shall be made up on the last day of each year of account, which shall generally be on the 31st day of March of every year of account and the accounts shall be taken up to that date of all the stock-in-trade and after providing for all the working expenses, the remaining of profits or losses, as the case may be, shall be shared by the parties hereto as under :

________________________________________________________________________Name of the partners Extent of individual share________________________________________________________________________1. Shri Krishna Rao Dadasaheb Kamath 5 shares2. Shri Narayana Ganesh Kamath 2 shares3. Shri Shripadarao Damodara Kamath 2 shares4. Shri Doyanoba Jotiram Mohite 2 shares5. Shri Shankar Govind Joshi 2 shares6. Shri Yashavant Bhawoo Kate 2 shares________________________________________________________________________ 6. That it is agreed among the partners that the party No. 1, i.e., Shri. K. D. Kamath, shall be the principal and financing partner and the rest of the partners, i.e., from Nos. 2 to 6, are admitted only as working partners contributing labour.

7. That the goodwill of the firms shall wholly and solely belong to party No. I i.e., Shri. K. D. Kamath.

8. That the party No. I, i.e, Shri. K. D. Kamath, who is the principal and financing partner and by virtue of his having the long-standing experience in the line of business together with the technical knowledge of engineer, shall have the full right of control and management of the firm's business and, in the best interests of the firm, it is thus decided and agreed upon among all the partners that all the working partners from Nos. 2 to 6 shall always work according to the instructions and directions given form time to time by Shri. K. D. Kamath, in the actual execution of works and in any other matter connecting thereof, pertaining to this partnership business. The decision of the principal partner on the aspect of taking any new business or giving tenders for new works, shall always vest with him, whose decision shall be final and binding upon all the working partners.

9. That it is also agreed among the partners that no working partner or partners is/are authorised to raise a loan for and on behalf of the firm or pledge the firm's interest directly or indirectly and such an act shall not be binding of the firm, except under the written authority of the principal partner.

12. That in the course of the business or during the existence of the firm's business, the principal partner has reason to believe that any working partner or partners is/are not working conductive to the best interests of the firm, the principal partner shall have a right to remove such a working partner or partners from the partnership concern and in such an eventuality, the outgoing working partner or partners shall have only the right to the profit or loss up to the date of his retirement, as may be decided by the principal partner in lump sum either by paying or receiving, regard being had to the progress of the business or otherwise up to the date of retirement, only on the completed works.

16. That subject to the provisions herein mentioned and laid down and made thoroughly known by each of the parties to this agreement with sound mind and body, the firm's affairs be carried on for mutual gain and benefit and if any questions which may arise or occur touching to the conduct or management or liability of the firm, the same shall be amicably settled among the parties with the consent of the principle partner, whose decision in the matter shall be final and binding on all partners.'

12. In this case, it s not necessary to consider whether, on the terms of the deed in question, the relationships between the parties is that of master and servant. It is sufficient, if we focus our attention on the question, whether on the facts of this case, we could come to the conclusion that each of the partners is entitled to act as the agent of all. Clause 8 of the deed stipulates that the first partner, K. D. Kamath, 'shall have the full right of control and management of the firm's business and, in the best interests of the firm, it is thus decided and agreed upon among all the partners that all the working partners from Nos. 2 to 6 shall always work according to the instructions and directions given from time to time by Shri K. D. Kamath, in the actual execution of works and in any other matter connecting thereof, pertaining to this partnership business. The decision of the principal partner on the aspect of taking any new business or giving tenders for new works, shall always vest with him, whose decision shall be final and binding upon all the working partners.' Clause 9 lays down that 'It is also agreed among the partners that no working partner or partners is/are authorised to raise a loan for and on behalf of the firm or pledge the firm's interest directly or indirectly and such an act shall not be binding on the firm, except under the written authority of the principal partner.'

13. Clause 16 stipulates that 'if any question which may arise or occur touching to the conduct or management or liability of the firm, the same shall be amicably settled among the parties with the consent of the principal partners, whose decision in the matter shall be final and binding on all partners.'

14. It was urged by the learned counsel for the revenue that if all these clauses are taken into consideration, it would be clear that the alleged partners No. 2 to 6 mentioned in the deed cannot be considered as partners in law.

15. In the course of the hearing of this petition, several decisions have been read to us, but the question of law presented for our opinion must depend necessarily on the facts of the present case. As observed by the Bombay High Court in Balubhai Gulabdas Navlakhi v. Commissioner of Income-tax, whether the relation of partnership exists in a given case must be determined on the facts of each case, bearing in mind the fact that two essential ingredients of a partnerships are that there should be an agreement to share the profits as well as the losses of the business and each of the partners should be acting as the agent of all.

16. As observed by Gajendragadkar J. in M. P. Davis v. Commissioner of Agricultural Income-tax, the fact that the document is styled as an instrument of partnership is not decisive in the matter of determining the relationship created by the instrument in question. In deciding the relationships, the name given to the document is by no means conclusive.

17. From the cases above referred to, it is obvious that the management as well as the control of the business is entirely left in the hands of the alleged first partner. The other partners can merely work under his directions and share in the profits and losses in accordance with the proportions mentioned in clause 5 of the deed. It is not within their power to act as agent of the other partners. They cannot accept any business except with the consent of K. D. Kamath. They cannot arise any loan or pledge the firm's interest directly or indirectly except under the written authority of K. D. Kamath. On a true reading of several clauses in the deed, it is difficult to accept the contention of the SRI. S. K. Venkataranga Iyengar, the learned counsel for the assessee, that a relation of partnership is created by the deed in question. As observed by Beaumont C.J. in Chimanram Motilal v. Jayantilal Chhaganlal, one essential element of partnership is that there should be an agency; one partner can always bind another partner in any matter which, within the scope of the partnership business, subject to any limitation under section 20 and if the relationships constituted between the parties in respect of a particular matter does not expressly or by necessary implication involve the right of one party to pledge the other as an agent, then there is no partnerships. That is exactly the position in the present case.

18. The decision of the Bombay High Court in Umarbhai Chandbhai v. Commissioner of Income-tax bears on the point under consideration. Therein, under a partnership deed between a father and his two sons, the father had the right to exclude either or both the sons from the management of the firm wholly or in part, or to entrust the management to any other person and to determine what quantum of any profits should be distributed and what should be done with the remaining profits; the court held that there was no partnership in law and the income-tax authorities were therefore right in refusing to register the deed under section 26A of the 'Act'.

19. Dealing with the deed in question, this is what Chagla C.J. who spoke for the court, observed in the course of the judgment :

'Now, in this case the partnership is between Mohomed Umar and his two sons, and the question is whether on the terms of the document itself it can be stated that in law there was a partnership. Now there was are two essential conditions before it could be stated that by contract a relationships has been brought about between persons which is the relationships of partnership; and two conditions are that the partners must agree to share the profits of the business and the business must be carried by the any of them for all of them, Therefore, not only must there be a sharing of profits but there must be also the principle of agency.'

20. As in that case the document before us does not fulfil the later requirement.

21. The requirements of a valid partnerships was considered by the Supreme Court in the case earlier referred to viz, Davis's case. Therein, in the deed the capital of the firm was stated to be the coffee estate, which was the property of M. P. Davis, and it was expressly provided that his brother was not entitled to contribute anything towards capital, had no power to charge or encumber or in way deal with the estate and was prohibited from advancing moneys to the partnership; the estate was to go back to the appellant on dissolution of the partnership; the document require the brother to employ himself diligently in carrying on the business.

Similar are the conditions found in the deed before us. It is no doubt true that, in the document before the Supreme Court, there were other clauses, the most important of them being that Devis's brother was not to share in the losses. That undoubtedly is an important distinguishing feature. But the decision of the Supreme Court that the deed produced before it is not a deed of partnership not only rested on the circumstances that Davis's brother was not to share in the losses incurred, but also on the other circumstances set out hereinbefore. In our judgment, this decision undoubtedly supports the contention of the revenue.

22. On behalf of the assessee, strong reliance was placed on the decision in Balubhai's case referred to earlier. In that case a deed of partnership produced satisfied the two essential conditions laid down in section 4 of the partnership Act, while it also laid down 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 deal 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 partnerships with regard to such of the partners who do not work diligently and that he may dissolve the partners with regard to any partner by giving him three months notice. Despite those powers conferred on one of the partners, the court still held that it was a partnership because of fact that the deed in question satisfied the requirements of section 4 of the partnership Act. In this connection, the following observations of the court in the course of its judgment are apposite :

'In our opinion, the fact that some of the terms of the deed give enlarged powers of management and control to one of the partners, who has brought in all the finances and holds the entire capital of the firm, may resemble the powers of an employer. Still, however, they will not be sufficient to conclude that the real agreement between the parties is not that of partners, but that of master and servant, if the two essential conditions required to constitute a partnership have been satisfied.'

23. In the present case, our conclusion is that as per the terms of the partnership deed, partners Nos. 2 to 6 cannot act as the agent of all.

24. The last decision read to us is the decision of the Kerala High Court in Commissioner of Income-tax v. Pathrose Rice and Oil Mills. On the terms of the deed produced before it, the High Court came to the conclusion that the deed in question is a partnership deed. Therein, on the basis of clause 8 of the deed produced, the revenue had contended that no partner had power to act as the agent of the other partners. This contention was negatived by the court. Clause 8 in that deed read :

'All activities connected with the business, etc., is to be conducted at the sole discretion of partner No. 1 and all his actions are binding on all the three partners equally.'

While this clause gave power to partner No. 1 to conduct all business activities of the partnership firm at his sole discretion, it did not limit the agency power of the partners. That is the crux of the matter. Hence, this decision is of no assistance to the assessee.

25. For the reasons mentioned above, our answer to the question referred to us is that, on the facts and circumstances of the case, Messrs. K. D. Kamath and Co. could not be granted registration under section 26A of the 'Act' for the assessment year 1959-60.

26. Assessee to pay the costs of the revenue. Advocate's fee Rs. 250.


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