Jagannatha Shetty, J.
1. The following question has been referred by the income-tax Appellate Tribunal, Bangalore Bench, under s. 256(1) of the I.T. Act, 1961, at the instance of the assessee :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding refusal of registration to the assessee for the assessment years 1974-75 and 1975-76 ?'
2. I.T.R.C. No. 96 of 1980 is concerned with the assessment year 1974-75 and I.T.R.C. No. 97 of 1980 is concerned with the assessment year 1975-76.
3. The facts behind the legal formulation are as follows :
Originally the assesses firm called 'M/s. K. S. Badrinarayana Rao' came in to existence under a deed of partnership deed of partnership deed March 10, 1971. It consisted of six partners. On November 15, 1972, one of the partners died. On December 14, 1972, a new partnership deed was drawn up with the addition of two more partners including one Sri. T. Raghavendra Rao. He was called the 8th partner. Under the deed, the 8th partner was entitled to a salary of Rs. 400 per month and he was not entitled to any share in the profit or loss of the firm. He was also not entitled to any share in the assets and liabilities upon the dissolution of the firm.
3. The request for registration of the firm was rejected by the ITO for the years 1974-75 and 1975-76 on the ground that Sri. T. Raghavendra Rao was not a partner, and that order was upheld by the AAC and also by the Tribunal.
4. In these references, the only question to be considered is whether Sri Raghavendra Rao could be considered as a partner of the firm. If he was a partner, the rejection of the registration of the firm cannot be sustained and if he was not a partner, the view taken by the authorities must be upheld.
5. The question as to whether Sri. T. Raghavendra Rao was taken as a partner can be judged only by reference to the terms in the deed of partnership. Under the deed dated December 14, 1973, no doubt, Sri. T. Raghavendra Rao has been described as the 8th partner. The preamble to the deed states that the partners are to carry on the business of hoteliers in partnership, a canteen at M.S.R.T.C. Bus, stand, Bangalore. Clause(5) of the deed provides for contribution of the capital by the partners. Thereunder, it is seen that each of the seven partners has contributed Rs. 5,000 or Rs. 10,000, but no capital was contributed by the 8th partner.
6. Clause (6) of the deed states that the 8th partner was taken as working partner and he shall look after the day to day business of the firm. It is further stated that he should conduct the business of the firm as per the instruction and direction of other partners.
7. It also provides that he should be paid a monthly salary of Rs. 400 which has to be treated as expenses of the firm for the purpose of ascertainment of profit or loss, but he is not entitled any share therein.
8. The said clause (6) was submitted by an agreement dated February 14, 1974. The Submitted clause reads :
'6. Profit or loss of the firm shall be divided or borne by the partners as follows : (a) The Eighth partner shall be paid a fixed amount of Rs. 4,800 per year as his share of profit in the firm irrespective of the fact the working of the firm results in loss or profit.'
9. This amendments shall be deemed to have come into effect from the date of the partnership, namely, November 15, 1972. Even under this substituted clause, the 8th partner is not entitled to any share in the profit or loss.
10. Section 4 of the Partnership Act provides that partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have so agreed with one another are called individually 'Partners' and collectively a 'firm'. It is generally accepted that the sharing of profits is an evidence of partnership, but that by itself is not conclusive. In addition to that, there must be a direct and principal interest in the business or the business must be carried on on behalf of the person who shares the profits.
11. It is true that Rs. 4,800 payable to the 8th partner has been described in the instrument as profit, but we fail to understand how it could be regarded as profit when it is compulsorily payable even in a year where the firm incurs loss in the business. Mere use of the word 'Profit' as against the fixed sum of Rs. 4,800 payable irrespective of the profit or loss cannot be termed as profit. Secondly, the 8th partner is also not entitled to share the assets and liabilities upon dissolution of the firm.
12. Section 184 of the I.T. Act requires that the partnership should evidenced by an instrument and the individual shares of the partners should be specified in the instrument. The instrument in this case does not specify the share of the 8th partner except the payment liable to be made to him by way of salary at the rate of Rs. 400 per month.
13. By reading the original instrument along with the deed of rectification, it seems to us that there is no relationship of partners as between Sri T. Raghavendra Rao and the other seven partners.
14. In the view that we have taken, it is unnecessary to refer to the decisions cited by Sri. Bhat, counsel for the assessee.
15. In the result, we answer the question in the affirmative and against the assessee. In the circumstances of the case, we make no order as to costs.