Somnath Iyer, J.
1. This reference made by the Income-tax Appellate Tribunal, Bombay bench 'A', under section 66(1) of the Income-tax Act, 1922, has for its source an order made by the Income-tax Officer under section 26A of the Act refusing registration of the assesses firm for the assessment year 1961-62.
2. The firm, it was said, consisted of three partners and was constituted under the instrument of partnership executed on November 27, 1959. Under the partnership deed, they were entitled to share the profits and bear the losses in the proportion of 50 : 37 : 13. The Income-tax Officer, who himself had accepted the status of the assessee as a partnership firm by the application of the provisions of section 23(5) (b) and allocated the profits amongst the partners in proportion to the shares specified in the deed of partnership, thought that clauses 6 and 9 of the partnership deed contained covenants which impel the view that there was no partnership in the eye of law. The Appellate Assistant Commissioner however dissented from that view and directed the Income-tax Officer to register the firm. But that order made by him was reversed by the Appellate Tribunal which concurred in the view taken by the Income-tax Officer. The question of law referred to us reads :
'Whether the firm constituted under the deed of partnership dated November 27, 1959, was registrable under section 26A of the Indian income-tax Act, 1922.'
3. There are ten clauses in the partnership deed. The second clause states that the partnership must be deemed to have commenced on November 11, 1959, and that it shall be a partnership at will. It is clear from this clause that the partnership, if there was one, came into being during the previous year relating to the relevant assessment year. Clause 3 specifies the name and style under which the partnership business has to be carried on and clause 4 provides for the contribution of capital by partners 1 and 2. Clause 5 specifies the shares in the profits and losses and clause 6 provides that no partner shall withdraw, without the consent of other partners, his share of profits during the first ten years. Clauses 7 and 8 contain the usual covenant that each partner shall be just and faithful to the others and that, in the event of the death or retirement of a partner, the partnership shall stand dissolved. Clause 10 provides for arbitration. Clause 9 upon which dependence was placed by the Income-tax Officer and the Appellate Tribunal reads :
'If any partner shall at any time during the subsistence of the partnership be desirous of retiring from the firm, it shall be competent for him so to do, provided always that he shall in such case give at least one calendar month's notice of his intention so to do. However, any partner retiring within the first ten years from the date of its commencement shall not be entitled to any profits.'
4. On thing which emerges very clearly from the orders made by all the three authorities who dealt with the matter is that none of them had any doubt that the firm was a genuine firm.
5. Indeed, in the course of its order, the Tribunal said this :
'In this view of the matter, we think the Income-tax Officer was right in refusing to register the firm and the Appellate Assistant Commissioner fell into an error in thinking that because the firm was genuine and because such profits were designed to secure stability to the partnership business, they did not come in the way of the assessee.'
6. The question formulated by the Appellate Tribunal is not very appropriately worded. What we are asked to decide is whether the firm constituted under the partnership deed dated November 27, 1959, was registrable under section 26A of the Income-tax Act, 1922. If the firm is a genuine firm - and none stated it was not - and it came into being during the previous year to which the assessment relates and an application was made for registration in accordance with law, it is indisputable that its registration cannot be refused. It appears from the question referred to us that the question assumes that the assessee was a firm and that it was constituted under the partnership deed to which the question refers. Since the partnership, if any, constituted under that instrument of partnership came into being during that relevant period and the application was not found defective for any reason, if we should understand the reference made to us too literally, there should be no difficulty in our deciding it in favour of the assessee. But we have no doubt in our mind that the real question referred to us is whether, having regard to clauses 6 and 9 of the instrument of partnership, the assessee is firm and was registrable under section 26A.
7. Now the word 'firm' occurring in section 26A has to be given the same meaning as that which has to be given under the Partnership Act as can be seen from section 2(6B) of the Income-tax Act.
8. Section 4 of the Partnership Act defines 'partnership' as 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. So an agreement to share the profits of a business is prima facie, though not conclusive indication of the existence of a partnership. But the Income-tax Officer did not think that a partnership came into being. He was of the opinion that the agreement to share profits which clause 5 incorporates has to be read with the other clauses in the instrument and that, when the instrument of partnership is read as a whole, it would emerge that no firm was in fact constituted. He depended principally upon clause 6 which incorporates the covenant that the profits derived from the business, which was intended to be carried on and conducted, could not be shared during the first ten years after the constitution of the firm. It was also said that the same conclusion flows from the 9th clause of the instrument of partnership which provides that, if any partner retired from the before the expiry of that period of ten years, he could not claim a share in the profits earned by the business for the period preceding his retirement. The inference drawn by the Appellate Tribunal on the basis of these two provisions in the instrument of partnership was that it could not be said that the partners 'were entitled' to or to 'actually enjoy' any share in the profit.
9. The Appellate Assistant Commissioner came to the conclusion that there were circumstances from which it was fair to draw the inference that a firm came into being under the instrument of partnership. He pointed out that in the implementation of the 5th clause, which specifies the shares of each partner in the profits and losses, there was an ascertainment of the profits of each year and that such profits were credited to the account of the respective partners. He was of the vies that the prohibition against the distribution of the profits for the first ten years was intended to ensure the stability of the firm and the increase of the capital and to constitute some kind of a reserve fund as an insurance against future losses, if any. He did not allude to the provision contained in clause 9 that the partner who retired before the expiry of ten years would not be entitled to claim any profit.
10. On a fair construction of the instrument of partnership, we lean to the view that it constitutes a firm as defined by the Act. The instrument of partnership makes it clear that the partners agreed to share the profits of the business in the proportion specified in the instrument. The fact that no partner would, as of right, be entitled to draw the profits during the first ten years does not mean that there was no agreement to share the profits. All that that clause means is that the profits had to accumulate and should remain to the credit of the partner who was entitled to it. Such a covenant between partners that, for a specified period of time, the profit should not be shared is not inconsistent with the existence of a partnership. The only conclusion flowing from that covenant is that the profits will remain to the credit of the firm without losing their character as profits to which he is entitled under the terms of the instrument of partnership. That that is the correct view to take is clear from In re Bridgewater Navigation Company, in which Lindley L. J. said this :
'Carrying undrawn profits to a suspense account or to reserve account does not necessarily change their character, still less their ownership; they remain the undrawn profits of those persons to whom they belonged, dedicated, no doubt, to certain purposes and applicable to those purposes, but not otherwise altered in their character or ownership. If the purposes for which such profits are set apart fail, or if the profits are not required for such purposes, they become divisible, not as capital, but as undrawn profits.'
11. So, whatever may be the reason for which the profits remain undrawn and, even if the profits are not drawn because of a covenant that they should not be drawn for a specified period, the profits continue to remain in the firm as the profits to which the respective partner is entitled and he is the owner of those profits. That being the true position, for a period of ten years during which profits could not be drawn by the partners, the profits earned by each partner retain their character as profits and those profits earned as profits and the ownership with respect to those profits are of the partner who has earned them.
12. We are also of the opinion that there is something else in clause 6 which precludes the notion that the partners had not, under the partnership deed the right to share the profits which, if they had, would prima facie be a clear indication that they are partners. The 6th clause which places an embargo on the appropriation of profits during the first ten years does provide that if the other partners consent to the profits being drawn, the partner might draw the profits even during that period. This provision in the clause makes it abundantly clear that in order to enable the partner to draw his profits he has to secure the consent of the other partners and, if he does so, he could draw the profits. That, in our opinion, is what is destructive of the contention that there is anything in the sixth clause which does not entitle the partners to a share in the profits although they have agreed to so share them.
13. Turning to the 9th clause, we do not find anything in it which can take away from the firm the attribute of a firm if it is one. All that it provides is that a partner who retires from the firm during the first ten years would not be entitled to claim a share in the profits earned till then. This clause, in our opinion, has to be read with the 6th clause under which with the consent of the other partners he would be entitled to take his profits when he retires.
14. There is, however, something of greater importance in the second clause of the deed of partnership, which, in effect, market it possible for the partner, who wishes to retire, to receive his profits by another process. According to the second clause the partnership is partnership at will as defined by section 7 of the Partnership Act and it is clear from the 43rd section of that Act that a partnership at will is a partnership which can be dissolved at the instance of any one of the partners. So, if a partner who wishes to retire does not secure the consent of the other partners to the payment to his of his share of profits, all that he has to do is to dissolve the partnership in exercise of his right to do so under section 43 of the Partnership Act and, if he does so, his share of the profits would become payable to him.
15. We do not, in this reference, feel called upon to express any opinion upon the enforceable nature of the covenant in the 9th clause but we are however satisfied that, whether it is a good covenant or not, it does not to any extent persuade the vies that the relationship constituted under the instrument of partnership is not one of partners. Our answer to the question referred to us is in favour of the assessee and our answer to the question referred to us is in favour of the assessee and our answer to the question is that a firm was constituted under the deed of partnership dated November 27, 1959, and that that firm was registrable under section 26A of the Indian Income-tax Act, 1922. The Commissioner will pay the costs of the assessee. Advocate's fee Rs. 250.