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Mushtaque and Co. Vs. Commissioner of Income-tax, Mysore - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKarnataka High Court
Decided On
Case NumberI.T.R.C. No. 39 of 1968
Judge
Reported in[1972]84ITR561(KAR); [1972]84ITR561(Karn)
ActsIncome Tax Act, 1922 - Sections 26A; Partnership Act, 1932 - Sections 33; Income Tax Act, 1961 - Sections 184 and 185(1)
AppellantMushtaque and Co.
RespondentCommissioner of Income-tax, Mysore
Appellant AdvocateH.L. Narasimhasastri, Adv.
Respondent AdvocateS.R. Rajashekharamurthy, Adv.
Excerpt:
- companies act, 1956 [c.a. no. 1/1956]. sections 529 & 529a & state financial corporation act 1951, section 29: [s.r. bannurmath & a.n. venugopala gowda, jj] proceedings under taking over of assets of the industrial concern in realisation of dues sale of assets - applicability of provisions of section 529 and 529a held, the corporation cannot exercise its rights if the assets of the industrial concern, has already vested in the company court or if the official liquidator had been put in charge of the assets of the industrial concern. if the winding up proceedings are not set in motion, then, there is no legal impediment to the corporation to take action under section 29 of the s.f.c. act, 1951 and permission of company court is not required to be obtained. in the absence of..........of the partnership in terms of the aforesaid deed was as under : 1. sri c. r. sayyad hafeez saheb,managing partner 1/2 share.2. sri abdul warris saheb, 1/6th share from 1-4-61 to10-6-61;1/4 share from 11-6-61 to31-1-62;1/6th share from 1-2-62.3. sri sayyad abdulla saheb, 1/6th share from 1-4-61 to10-6-61;1/4th share from 11-6-61 to31-1-62;1/6th share from 1-2-62.4. smt. fatimbhai (died on 10-6-61) from 1-4-61 to 10-6-611/6th share.5. sri sayyad yousuff saheb with effect from 1-2-621/6th share. 2. an application for registration of the firm under section 26a of the income-tax act, 1922, was made to the income-tax officer on march 30, 1962, followed by a fresh application for registration made on september 29, 1962, under the form prescribed as contemplated under section 184 of the.....
Judgment:

1. The assessee in this case, M/s. Mushtaque and Company. Davangere, had been refused registration under section 185(1)(b) of the Income-tax Act, 1961, on the ground that the element of agency which is an essential ingredient to constitute a valid partnership was absent in this case. The assessment year involved is 1962-62. The corresponding accounting period was the year ended March 31, 1962. The instrument of partnership produced before the authorities was dated March 30, 1962, and the partnership was deemed to have come into operation with effect from April 1, 1961. The Constitution of the partnership in terms of the aforesaid deed was as under :

1. Sri C. R. Sayyad Hafeez Saheb,managing partner 1/2 share.2. Sri Abdul Warris Saheb, 1/6th share from 1-4-61 to10-6-61;1/4 share from 11-6-61 to31-1-62;1/6th share from 1-2-62.3. Sri Sayyad Abdulla Saheb, 1/6th share from 1-4-61 to10-6-61;1/4th share from 11-6-61 to31-1-62;1/6th share from 1-2-62.4. Smt. Fatimbhai (died on 10-6-61) From 1-4-61 to 10-6-611/6th share.5. Sri Sayyad Yousuff Saheb With effect from 1-2-621/6th share.

2. An application for registration of the firm under section 26A of the Income-tax Act, 1922, was made to the Income-tax Officer on March 30, 1962, followed by a fresh application for registration made on September 29, 1962, under the form prescribed as contemplated under section 184 of the Income-tax Act, 1961. The Income-tax Officer held that the assessee was not entitled to registration for two reasons : firstly, on the ground that the partnership deed was weighted overwhelmingly in favour of the managing partner, Shri Sayyad Hafeex Saheb, who had the power to dismiss the other partners, and, secondly, on the ground that the distribution of profits had not been made in accordance with what had been stated in the partnership deed. In support of his case, the Income-tax Officer had relied on clause 5 of the partnership deed which read as under :

'5. That the first party shall be the managing partner, the second the financing partner and the third and fourth are admitted as working partners, respectively. The managing partner shall have full rights of either admitting new partners, raising additional funds and loans, etc., for the business and in case it is found that the activities of the working partners are found detrimental to the interest of the firm, he has powers expel them or to restrict their powers in the interest of the fiirm. In all important matters the working partners shall have to seek advice from the managing partner and act accordingly.'

3. The Income-tax Officer, accordingly, made an order on August 12, 1963, under section 185(1)(b) of the Income-tax Act, 1961, refusing registration to the assessee. A copy of the Income-tax Act, 1961, refusing registration to the assessee. A copy of the Income-tax Officers order dated August 12, 1963, under section 185(1)(b) of the Income-tax Act, 1961, is annexed herewith, marked 'A', and forms part of the statement of the case. A copy of the instrument of partnership dated March 30, 1962, is annexed herewith, marked 'B', and forms part of the statement of the case.

4. The Appellate Assistant Commissioner held that clause 5 of the partnership deed was destructive of the element of agency which was an essential ingredient to constitute valid partnership. He observed that the managing partner, Sayyad Hafeez Shaeb, could not merely expel the working partners in the event of their conduct being found detrimental to the interest of the firm, but he could even in the normal course of business restrict their powers in the interest of the firm. Such a position was not consistent with the principle of agency in the relationship among the partners. The Appellate Assistant Commissioner disposed of the matter on this ground and observed that there was no need to consider the additional ground mentioned by the Income-tax Officer. A copy of the Appellate Assistant Commissioner's order dated November 28, 1964, is annexed herewith, marked 'C', and forms part of the statement of the case.

5. On second appeal, the Tribunal took the view that this case was covered by the ratio of the decision of the Mysore High Court in the case of K.D. Kamath & Co. In the present case, the agreement stipulated that the managing partner shall have full rights to admit new partners and raising additional funds and loans for the business, and in case it was found that the activities of the working partners were detrimental to the interest of the firm, the managing partner has power to expel ot restrict their powers. Moreover, in all important matters the working partners had to seek advice from the managing partner and act accordingly. The Tribunal, accordingly, observed on a true reading of the document that it was clear that no relation of partnership was created by the document in question since the working partners could not represent the firm on their own. The decision of the Mysore High Court in the case of City Tobacco Mart cited by the learned representative for the assessee was also considered by the Tribunal. The Tribunal observed that the present case went a step further, inasmuch as powers were given to the managing partner to expel the other working partners by restricting their sphere of activities and in all important matters the working were required to seek advice from the managing partner and act accordingly. These restrictions, according to the Tribunal, struck at the root of the partnership by taking away the element of agency which was an essential ingredient of a partnership. The assessee's representative also relied on the decision of the Madras High Court in the case of Subbu and Company and A.M. Palaniappa Chettiar. The Tribunal found that the facts in the present case were quite different from the facts in the above cases and observed that the analogy drawn by the representative for the assessee was not appropriate. Having regard to these considerations, the Tribunal took the view that the assessee's case fell squarely within the ratio of the Mysore High Court's decision in the case of K.D.Kamath & Co. The Tribunal accordingly held that no valid partnership was constituted by the document dated March 30, 1962, and the authorities below were, therefore, right in refusing to grant the benefit of registration to the assessee. The Tribunal dismissed the assessee's appeal accordingly. A copy of the Tribunal's order dated October 6, 1967, in I.T.A. No. 1696 of 1965-66 is annexed herewith, marked 'D', and forms part of the statement of the case.

6. On these facts, the question of law that arises is :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to the benefit of registration for the assessment year 1962-63 ?'


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