M. C. DESAI C.J. - The Income-tax Appellate Tribunal, Allahabad Bench, has, at the instance of the Commissioner of Income-tax, U.P., submitted this statement of a case inviting this courts answers to the following questions :
'1. Whether, on proper interpretation of the agreements and documents constituting the firm of Musaddilal & Sons, Sri Kishan & Sons, Ramanand Ram Kishan, Radheylal & Sons, Kailash Brothers and Motilal & Sons and also the deed dated November 17, 1952, governing the assessee firm, Musaddilal, Sri Kishan, Ajodhia Prasad, Radhey Lal, Kailash Nath and Amar Nath, Motilal were partners in the assessee-firm in their individual capacities or in their representative capacities of those firms ?
2. Whether, in law, there was a sub-partnership between the partners of the assessee-firm and the partners of the firms mentioned above
3. Whether on the facts and in the circumstances of the case the application signed by the individual partners for renewal of registration of the assessee firm for 1954-55 and 1955-56, complied with the provisions of section 26A of the Income-tax Act. ?'
The assessee is a firm styled M/s. Roopnarain Ramchandra carrying on business in Kanpur. The firm was constituted under a deed of partnership, dated November 17, 1952, and the ostensible partners, i.e., partners according to it, are 8, they being Musaddilal, Sri Kishan, Ajodhia Prasad, Radhey Lal, Kailash Nath, Amar Nath, Moti Chand and Sarwan Lal. A minor, Kishan Chand, has been admitted to the benefits of the partnership.
The firm Roopnarain Ramchandra came into existence for the first time on July 6, 1923, its partners and their shares then being :
Subsequently, Roop Narain died leaving his son Ram Chandra and Ram Nath also died. On March 28, 1945, a new partnership deed was executed for constitution of the firm and its partners and their shares were :
It will be noticed that Jagdish Prasad was replaced by Sarwan Lal and Ram Nath by Ram Kumar. Later Ram Chandra died leaving two minor sons, Moti Chand and Kishan Chand, and the surviving partners orally agreed to admit Moti Chand to the benefits of the partnership to the extent of his fathers share; that oral agreement was replaced by a written partnership deed dated February 3, 1947. According to this deed the partners were Moti Chand minor (admitted to the benefits), Sarwan Lal, Moti Lal, Ajodhya Prasad and Ram Kumar and their shares were 6,3,4,3 and 4 respectively out of 20 shares. The business of the partnership was described as dealing in cloth. Each partner was to invest money in the business and to receive interest at a certain rate. It was stated in the deed that the partners had joined the partnership 'in their individual capacity and not as heads or kartas of their families' and that the death or retirement of any partners was not to dissolve the partnership among the survivors. The partnership was to be dissoluble at will.
The partnership was dissolved on April 30, 1947, and with effect from May 1, 1947, another partnership bearing the same name (M/s. Roopnarain Ramchandra) was constituted under a deed dated March 28, 1947. Its partners and their shares were :
and Sri Kishan
Moti Chand (minor,admitted to the benefits)
The partnership was to carry on business in cloth and yarn as dealers and selling agents. The partners were to invest money in the partnership and to receive interest on the investments. It was stated in the deed that the partners had joined the partnership in their individual capacity and not as heads or kartas of their respective families and the death or retirement of a partner was not to dissolve the partnership among the survivors. It will be noticed that Ram Kumar did not join the partnership and Moti Lals share was reduced to half of what he held previously.
Sri Kishan, Musaddi Lal and Radhey Lal were brothers but presumably separate from one another. Sri Kishan had five sons, Sarju Prasad, Kappor Chand, Rameshwar Prasad, Jageshwar Prasad and Anandeshwar Prasad, with whom he formed a joint family. This joint family was disrupted through an arbitration award dated October 12, 1949, with effect from October 14, 1949. It was stated in the award that Sri Kishan was a partner of Roopnarain Ramchandra holding 3/40 share in it 'in the capacity of karta of the family,' that he and his sons desired to start a firm called Sri Kishan and Sons, which own all the businesses done in the name of Sri Kishan, that they should execute a deed of partnership and that the six members of the partnership would receive the profit, or be responsible for the loss, arising to Sri Kishan in Roopnarain Ramchandra. Accordingly, on October 14, 1949, Sri Kishan and his five sons entered into a deed of partnership called Srikishan and Sons. It was stated in the deed Sri Kishan was a partner in Roopnarain Ramchandra owning 3/40 share as a representative of his family that the share of profit earned by Sri Kishan from Roopnarain Ramchandra would be accountable to the firm are credited to the profit and loss account of it, that the firm would not be dissolved by the death of a partner and that any partner could retire after giving a notice to the others. Jageshwar Prasad and Anandeswar Prasad were minors and were only admitted to the benefits of the partnership. When Jageshwar Prasad became a major on September 21, 1952, and agreed to be a partner a new partnership deed was executed on September 22, 1952. By then the share of Sri Kishan in Roopnarain Ramchandra had increased to 3/32 and this is the share mentioned in the new partnership deed. The main business of the partnership was said to be to finance Sri Kishan who held shares in Roopnarain Ramchandra and other firms 'in his individual capacity'. As regards the shares held by him in Roopnarain Ramchandra and others firms it was agreed among the partners that he would continue to be the partner in the firms 'in his individual capacity', that 'their respective rights, shares and interest in the capital investment in the firms shall continue to stand as hitherto in the name of L. Shri Kishan...', that 'the said L. Shri Kishan shall be deemed to be holding the same for and on behalf of the other parties as well, howsoever may his shares in the various firms vary from time to time,' that he would render to each of the other partners an account of profit and loss arising to him from his shares in the firms, that he would not retire from the partnership of any of the firms without the consent of the other partners, that if he defaulted in performing any of his obligations the other partners would have a right to cancel the partnership deed and to receive compensation from him and that the profit earned by him Roopnarain Ramchandra and other firms would be accountable to the partnership and credited to the profit and loss account of it.
Musaddilal formed a joint family with his five sons, Harikrishna, Ramkrishna, Balkrishna, Pannalal and Jawaharlal. On September 15, 1947, there was a partition of this joint family and on the same day the separated members constituted a partnership called Musaddilal and Sons. The following recitals and terms were contained in the deed of partnership :
'Musaddilal was a partner in Roopnarain Ramchandra, Nihalchand Baldeosahai and other firms as representative of the family though according to the partnership deeds of those firms he was a partner in his personal capacity and the other partners of those firms had no concern with other members of his family. At the time of the partition it was agreed that the shares held by Musaddilal in Roopnarain Ramchandra and other firms would be held by him for and on behalf of himself and his sons and as representative of firm Musaddilal & Sons and they all would be entitled to share the profits that would be gathered by him as partner in the firms in equal shares and thus his sons will become the sub-partners of him in the firms. The partners of Musaddilal in the firms would deal with him only. The share held by Musaddilal in Roopnarain Ramchandra is 3/40. If any loss is incurred by him in the firm it would be shared by him and his sons equally. He is the ostensible partner in the firms and will represent all partners of Musaddilal & Sons in them and all action taken or decisions made by him in the...firms as a partner shall be binding on his sons also. He and his sons would be at liberty to carry on his or their separate business either singly or in partnership with strangers. The partnership is dissoluble at will. The death of a partner would not dissolve it and his legal representatives would automatically become its partners.'
Radhey Lal formed a joint family with his three sons, Vishnu Dayal, Permanand and Mahesh Chandra. There was a partition of this family on September 15, 1947, the same date on which Musaddilal and his sons separated from one another. On the same day the separated members formed a partnership known as Radheylal & Sons by a deed of partnership. The deed of partnership, which bears the date September 25, 1947, contained the following recitals and terms :
'The Hindu undivided family held rights and interest and capital investments in Roopnarain Ramchandra, Nihalchand Baldeosahai and two other firms, its share in Roopnarain Ramchandra being 3/40. On account of the partition each of the four members would have 3/160th share in Roopnarain Ramchandra. But the other partners of the firms are desirous of keeping all the shares standing in the name of Lala Radhey Lal only; so Radhey Lal would continue as a partner in them in his individual capacity from 15th September, 1947. The rights, interests and shares in the capital investments of all the members in the firms would continue to remain as hitherto in the name of Radhey Lal and he 'will be deemed to be holding the same for and on behalf of the other parties' He would render to each of the other parties an account of interest, profit or loss and any other income accruing to him from the firms and pay each of them 1/4th of the total income derived by him every year. If there is any loss it would be borne by all equally.'
Ajodhya Prasad and his four brothers, Ram Kishan, Suraj Narain, Narbada Prasad and Ramji Lal and his father, Ramanand, once formed a joint family, which was disrupted on September 8, 1940. After the disruption Ajodhya Prasad and his brothers and father constituted a partnership known as Ramanand Ram Kishan. Ramanand died in 1946 but the partnership was executed on February 17, 1947, by Ajodhya Prasad and his brothers. It was stated in the deed of partnership that the partnership had 3/20 share in Roopnarain Ramchandra 'in the name, of L. Ajodhya Prasad, one of the partners', 'that the profit and loss arising from Roopnarain Ramchandra would continue to be divided equally among the partners, that the partnership could carry on any other business and that it was dissoluble at will. On May 8, 1947 another partnership deed was executed by Ajodhya Prasad and his brothers in order to clarify further the rights and interests of the partners in respect of Roopnarain Ramchandra and another firm Nihalchand Baldeosahai. The partners apprehended that what was stated in the earlier deed, dated February 17, 1947 was not very clear. It was made clear in this deed that the partnership had been enjoying the profit received from Roopnarain Ramchandra through its representative, Ajodhya Prasad, and from Nihalchand Baldeosahai through its representative, Suraj Narain, and that notwithstanding what was written in the deeds of partnership of Roopnarain Ramchandra dated February 3, 1947 and March 28, 1947.
'Really L. Ajodhya Prasad was and is a partner in the firm as a nominee and representative of the parties to this agreement and the parties to this agreement are sub-partners of L. Ajodhya Prasad in the concern. The parties admit that L. Ajodhya Prasad entered into the said partnership in his own name as the other partners of the firm Roopnarain Ramchandra insisted that the number of the partners must not be too large and, therefore, while so far as parties other than L. Ajodhya Prasad will have no right to arrogate to themselves the right of partners qua their relationship with the partners of the firm Roopnarain Ramchandra and will have no right to demand and insist on scrutiny of account books of the firm Roopnarain Ramchandra or to deal with and manage the affairs of that firm and only L. Ajodhya Prasad will be representing them in the dealings of that firm, all the parties to this agreement will be entitled to equally share the profits that will be derived from the business styled Roopnarain Ramchandra by virtue of the share held by L. Ajodhya Prasad in that firm which is 3/20. Such profit will be distributed as soon as on annual accounting in firm Roopnarain Ramchandra. L. Ajodhya Prasad receives and collects them. The parties further admit that the capital invested in the firm Roopnarain Ramchandra in the name of L. Ajodhya Prasad has been contributed equally by the parties to this agreement though the khata in the above-mentioned firm stands in the name of L. Ajodhya Prasad alone.'
One of the brothers, Ramkishan, died on July 14, 1953, and on September 21, 1953, another deed of partnership of Ramanand Ramkishan was executed by Ajodhya Prasad and his three brothers and Ramkishans son, Sitaram. It was stated in the deed that the share income from Roopnarain Ramchandra derived through Ajodhya Prasad 'shall be deemed to be the income of the firm and shall be shared equally be the partners hereof', that the partnership was dissoluble at will but not by the death of a partner and that the partners were entitled to interest on their investments.
Moti Lal formed a joint family with his sons, Kailash Nath, Amar Nath, Sidh nath and Vishwa Nath. By an award dated October 18, 1949, there was a partition of this family with effect from October 22, 1949. Moti Lal himself had furnished to the arbitrator a list of the joint property, which included 1/10th share in Roopnarain Ramchandra and shares in Nihalchand Baldeosahai and other firms. Under the partnership deed of Roopnarain Ramchandra dated March 28, 1947, Moti Lals share in the firm was 2/20, but it appears that in a subsequent deed of partnership Kailash Nath was taken in as a partner to the extent of 1/20th share and Moti Lals share was reduced to 1/20. In the award it was stated that 'though Lala Moti Lal has been shown as partner in the above firms in his individual capacity, the shares belong to the joint family' and that the separated members desired to start a firm in the name of Motilal & Sons 'wherein they will be doing the business done in the name of Lala Moti Lal till now'. Accordingly the separated members formed a partnership known as Motilal & Sons with effect from October 23, 1949, through a partnership deed dated October 22, 1949. Its recitals and terms are given below :
'The family represented by Moti Lal was a partner in Roopnarain Ramchandra and other firms. The partnership would be at will. The share of profits earned by Moti Lal from the firms in which he was a partner representing the family before the partition would be accountable to the partnership and credited to the profit and loss account of it. On the death of a partner his legal representatives would automatically become the partners.'
Moti Lal died on November 8, 1952.
Kailash Nath, who had become a partner in Roopnarain Ramchandra sometime between March 28, 1947, and March 9, 1950, formed, with effect from March 7, 1950, another partnership, Kailash Brothers, with his three brothers Amar Nath, Sidh Nath and Vishwa Nath through a deed dated March 9, 1950. It was stated in the partnership deed that he had 'become a partner in his individual capacity, but in order to be able to put in his share of minimum capital he has taken in the other three parties'. The partnership deed contained the following terms :
'The business of the partnership is to run the share in the name of L. Kailash Nath in the firm styled as Roopnarain Ramchandra and to finance him to enable him to meet his requirements in respect of his share. In lieu of this consideration the partnership would be entitled to receive all the profits and would bear all the losses, if any, falling to the share of Kailash Nath. He holds 1/20th share which he shall for all intents and purposes be deemed to hold for this firm, howsoever his share may vary from time to time. All the parties agree that the respective rights, shares and interests in the capital investment in Roopnarain Ramchandra would stand in the name of Kailash Nath and he would be deemed to hold it for and on behalf of the other parties as well. He would continue to remain a partner in his individual capacity in the firm but would render to each of the other parties an account of interest, profit or loss and pay to each of them 1/4th of the total income derived from the firm. If there is a loss each party would bear to the extent of 1/4th. The partnership is dissoluble at will.'
On February 27, 1951, there was a reconstitution of Roopnarain Ramchandra and the partners of the reconstituted firm were, Moti Chand, Sarwan Lal, Moti Lal, Kailash Nath, Ajodhya Prasad, Musaddi Lal, Radhey Lal and Srikishan with Kishan Chand, minor, admitted to the benefits of the partnership. On account of the death of Moti Lal the partnership was dissolved on November 8, 1952. It was reconstituted with effect from November 9, 1952, through a partnership deed dated November 17, 1952. The new partners and their shares were as under :
and Amar Nath
Kishan Chand, minor, admitted to the benefits to the extent of
The partnership deed contains the following terms :
'The partnership is at will and governed by the Indian Partnership Act. Its business comprises and consists of dealing in cloth and yarn as dealers and selling agents. The parties would invest at least Rs. 12,500 per 1/160th share and would receive interest. Kailash Nath will be the managing partner. The partners have joined the partnership in their individual capacity and not as a head or karta of their family or in any other capacity and they shall be so liable. The death and retirement of any partner will not dissolve the partnership as between the other partners. Each partner shall be just and faithful to the other partners and shall do such duties as may be entrusted to him and shall give to each of the partners full information and truthful explanation of all matters relating to the affairs of the partnership and offer every assistance in carrying on the business.'
The assessee-firm was registered by the income-tax authorities for the assessment year 1952-53 and 1953-54. It applied for renewal of the registration under section 26A of the Indian Income-tax Act for the assessment year 1954-55 and then again for the assessment year 1955-56. The constitution of the firm was shown in the applications as given in the deed of partnership dated November 17, 1952. The Income-tax Officer rejected both the applications. He held that Musaddilal, Srikishan, Ajodhya Prasad, Radhey Lal, Kailash Nath and Amar Nath partners of the firm represented Musaddilal & Sons, Sri Kishan and Sons, Ramanand Ramkishan, Radheylal & Sons, Kailash Brothers and Motilal & Sons respectively; for this he relied upon the recitals in the deeds of partnership of Musaddilal & Sons etc. and Musaddilals affidavit filed before him on May 11, 1950, to the effect that he had ceased to carry on business as karta of the family and was now carrying it on 'as representative of the firm Musaddilal & Sons, on behalf of partners constituting' it. The total number of the partners Musaddilal and Sons etc. was 29 and the Income-tax Officer held that they were all partners of Roopnarain Ramchandra along with Moti Chand, Sarwan Lal and Kishan chand, minor. The account books showed that the profits of the assessee firm were ultimately divided among the 29 partners and Moti Chand, Kishan Chand and Sarwan Lal. The partnership deed and the application for registration did not represent the correct state of affairs. Section 4(2) of the Indian Companies Act (No. 7 of 1913), which was in force then, laid down that no company, association or partnership of more than 20 persons can be formed for the purpose of carrying on any business that has for its object the acquisition of gain by the company, association or partnership or by the individual members thereof, unless it is registered as a company under the Act. The assessee-firm is not registered as a company under the Companies Act. The assessees contention that the real partners of the assessee were Musaddilal, Sri Kishan, Ajodhya Prasad, Radhey Lal, Kailash Nath and Amar Nath (in addition to Moti Chand, Sarwan Lal and Kishan Chand, minor) and not all the partners of the partnerships Musaddilal and Sons, Srikishan & Sons etc. and that through the partnership deeds of Musaddilal & Sons, Srikishan & Sons etc., Musaddilal, Sri Kishan etc. only entered into sub-partnership with their sons and brothers was rejected by the Income-tax Officer. Since his findings were that the partnership deed dated November 17, 1952 did not specify the real partners and the real shares it did not bring a genuine partnership into existence and that as the assessee firm was a partnership of more than 20 persons it was illegal, he refused renewal. His order was upheld by the Appellate Assistant Commissioner on appeal. The Income-tax Appellate Tribunal on further appeal ordered renewal. It held that the eight men alone were the partners of the assessee, that six of them had only agreed to divide their shares of profit with others and that the deeds of partnership of Musaddilal & Sons, Srikishan & Sons etc. were only deeds of sub-partnership. Then it stated the case for this courts opinion on the three question formulated by it.
The following are the findings of fact and law recorded or confirmed by the Tribunal :
'The capital standing to the credit of Musaddilal, Sri Kishan, Ajodhya Prasad, Radhey Lal, Kailash Nath and Amar Nath in the assessee partnership belongs not to them but to the partnership Musaddilal and Sons, Srikishan and Sons etc. (The six partnerships formed by Musaddilal, Sri Kishan, Ajodhya Prasad, Radhey Lal, Kailash Nath and Amar Nath with their brothers, sons and nephews will be referred to henceforth as smaller partnerships or sub-partnerships to distinguish them from the assessee partnership Roopnarain Ramchandra). Ajodhya Prasad and Musaddilal at least were partners of the assessee partnership as representing the partners of the smaller partnerships. In the account books of some smaller partnerships a separate account of the assessee-partnership was opened and the profit realised from it was credited to it while in the account books of other smaller partnerships the profit was credited in the name of the partner who was common to the assessee-partnership and the smaller partnership. The partnership deed of the assessee-partnership satisfied all legal formalities and did bring the partnership into existence. The assessee-partnership consisted of only the eight partners mentioned in its deed; only they received the profits in accordance with their respective shares as given in the partnership deed. It was open to the partners of the assessee-partnership to keep their number below 20 so as not to infringe the provisions of section 4 of the Companies Act. According to the partnership deed the eight persons were its partners in their individual capacities as against their co-partners and only they were entitled to the rights and the benefits of the partnership and could be saddled with its liabilities; the other partners of the smaller partnerships were neither entitled to the privileges and the benefits of the assessee-partnership nor liable as partners of the partnership. It was possible for a partner of the assessee-partnership to be liable as an individual to his partners and to share his profit and loss from it with the partners of the smaller partnership; there was, therefore, no misrepresentation in the partnerships were neither entitled to the partnership deed of the assessee-partnership with regard to the status of each of the six partners. Moreover registration cannot be refused on the ground of misrepresentation. The recitals and the terms in the deeds of the smaller partnerships entered into long before the (last) partnership deed of the assessee-partnership was executed could not have any effect on its recitals and terms. The smaller partnerships were really sub-partnerships which are legal; it is of no consequence that the deeds of smaller partnerships preceded the deed of the assessee-partnership were to be their representatives. According to the deed of the assessee-partnership the six partners are as individuals and not as as representing the smaller partnerships. The capital invested by the six partners in the assessee-partnership stood in their names and not in the names of the smaller partnership. They received the profits of the assessee-partnership and then distributed them among the partners of the smaller partnership. The fact that the capital contributed by the six partners belonged to the smaller partnerships did not ipso facto make all partners of the smaller partnerships partners of the assessee-partnership. It was open to any of the six partners to retire from the assessee-partnership without the consent of his partners of the sub-partnership and no partner of the assessee-partnership is answerable to the partners of the smaller partnership, who are not partners of the assessee-partnership. The other partners of the smaller partnerships have no relationship whatsoever with the partners of the assessee-partnership who are not their co-partners according to the deeds of their partnerships. There are only eight partners of the assessee-partnership and the partnership is genuine.'
'Partnership' is (vide section 4 of the Indian Partnership Act) 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); the persons who have entered into the agreement are called 'partners' individually, and 'firm' collectively. The essentials of a partnership are (1) an agreement to share the profits of a business and (2) the business being carried on by all or through one of them as their agent. If there is an agreement between two persons but it is not to share the profits of a business or though it is to share the profits of a business the business is not carried on by both (or one of them acting as the agent of both) the persons agreed may be bound by the agreement under the ordinary law of contract but do not become partners and there does not result a partnership between them. The relation of partnership exists between only those persons who have entered into the agreement; only they are the partners. If only A and B have entered into an agreement to share the profits of a business carried on by both, only they two are the partners and a third person is not their partner in any event. If X enters into an agreement with B (but not with A and B jointly) for a share in the profits of the business accruing to him, he is not a partner of the partnership AB (e.g., the partnership resulting from the agreement between A and B). He is called a sub-partner of B, with whom he has entered into the agreement, and may be entitled to a share in Bs share of the profits of the business. No person who is not a party to the agreement resulting in a partnership can ever be a partner of it.
The Partnership Act recognises partnerships and not sub-partnerships. If a sub-partnership has the incidence of a partnership it is governed by the Partnership Act, otherwise not. Even though it is not governed by the Partnership Act it may be governed by the ordinary law of contract. The relation arising out of the agreement between B and X in the above instance is called sub-partnership, but it is doubtful if it is partnership because the agreement, though being to share the profits of a business, the business is not carried on by B and X or one of them acting for both. The business is carried on by A and B and, therefore, only they can be the partners. Who carries on the business of the partnership AB depends upon its terms. If it is carried on by both, the agreement between B and X cannot give rise to a partnership as the business is carried on not by B and X but by B and A who is not a party to the agreement between B and X. Consequently, it can be said that the relation between B and X, though called sub-partnership, is really not partnership governed by the Partnership Act; the agreement may be binding upon B and X as a contract but they do not become partners. It is stated by Lindley in his Treatise on Partnership, 12th edition, page 99 :
'A sub-partnership is, as it were, a partnership within a partnership; it presupposes the existence of a partnership to which it is itself subordinate. An agreement to share profits only constitutes a partnership between the parties to the agreement. If, therefore, several persons are partners and one of them agrees to share the profits derived by him with a stranger, this agreement does not make the stranger a partner in the original firm. The result of such an agreement is to constitute what is called a sub-partnership, that is to say, it makes the parties to it partners inter se; but it in no way affects the other members of the principal firm.'
In Commissioner of Income-tax v. Laxmi Trading Company the Punjab High Court held that a sub-partnership was a partnership capable of being registered. In Commissioner of Income-tax v. Agardih Colliery Co., the Patna High Court held that in the above instance it cannot be said that A, B and X are partners of the partnership constituted by the agreement between A and B and registration of the partnership AB cannot be refused.
In Commissioner of Income-tax v. Sivakasi Match Exporting Co., the Supreme Court allowed registration of a partnership between A and B even though B was a partner of another firm. Subba Rao and Sikri JJ. observed at page 210 :
'There is no prohibition under the Partnership Act against a partner or partners of other firms combining together to form a separate partnership to carry on different business. The fact that such a partner or partners entered into a sub-partnership with others in respect of their share does not detract from the validity of the partnership.'
The Andhra Pradesh High Court held in Sugar Syndicate v. Commissioner of Income-tax that B and X forming a sub-partnership are partners but this does not affect the partnership AB. In Kylasa Sarabhaiah v. Commissioner of Income-tax (Civil Appeal No. 83 of 1954) the Supreme Court laid down that a sub-partnership between B and X] is no bar to the registration of the partnership AB. The Supreme Court has not decided in any case that a sub-partnership is a partnership governed by the Indian Partnership. Act. On the other hand in Dulichand Laxminarayan v. Commissioner of Income-tax, it emphasised that a partnership requires that the business, the profits of which are to be shared, is carried on by all the parties to the agreement or any of them acting for all. The Punjab High Court has held a sub-partnership to be a partnership and the Andhra Pradesh High Court has called sub-partners, but neither of them has discussed how an agreement between B and X to share the profits of a business can bring about a partnership even though the business is not carried on by them or either of them acting as their agent. In the instant case we are not called upon to decide this question; we are not concerned with the question whether a sub-partnership is a partnership and can be registered as such. We are concerned with the question whether a partnership is affected at all by a sub-partnership entered into by one of its partners and whether the sub-partners are automatically partners of the partnership and the answer undisputedly is 'no', regardless of whether a sub-partnership is a partnership or not. In the example, whether B and X are mutually partners or not, X is not a partner of AB and registration of AB cannot be refused on the ground that its partners are A, B and X though according to the deed of partnership they are only A and B.
The effect on a partnership of the fact that a partner is a karta of a Hindu undivided family is the same as that of a sub-partnership entered into by him. If D and E, who is a karta of a Hindu undivided family, enter into an agreement to share the profits of a business carried on by them only D and E are the partners and the Co-parceners of E are not partners. 'Where a managing member of a joint family enters into a partnership with a stranger, the other members of the family do not ipso facto become partners in the business so as to clothe them with all the rights and obligations of a partner as defined by the Indian Partnership Act. In such a case, the family as a unit does not become a partner, but only such of its members as in fact enter into a contractual relation with the stranger; the partnership will be governed by the Act.' (Mayne on Hindu Law and Usage, 11th edition, page 386). The Privy Council approved of this statement in Pichappa Chettiar v. Chockalingam Pillai and observed :
'In the management of the business the other members of the family have no part; they cannot, for example, sue for a dissolution. Their position cannot be higher than that of sub-partners though they will be entitled to call upon their managing member or members who entered into the contract of partnership to account for the profits earned by them from the partnership and to share in such profits.' (p. 387)
It does not matter even if the karta is a partner in his capacity of karta; see Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax in which the Supreme Court held that in a partnership of A, B and C, A being the karta of a Hindu undivided family constituted of himself, D and E, D and E are not partners. To the same effect is the decision of the Andhra Pradesh High Court in the case of Sugar Syndicate. The contrary view expressed by the Calcutta High Court in Shyamlal Roy v. Madhusudan Roy does not lay down the law correctly and must be deemed to have been overruled by Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax.
The relation of partnership exists only between the persons who have agreed, i.e., who have actually or in fact agreed (to share the profits of a business). If a partnership is constituted by an instrument of partnership it is this agreement that is to be incorporated in the instrument but the instrument may incorporate another agreement instead. If the instrument incorporates the agreement the partnership constituted by it is valid and can be registered (subject to other conditions being fulfilled) but if there is variance between the persons actually agreeing and the persons executing the instrument it means that there is no firm in existence constituted as shown in the instrument of partnership within the meaning of rule 4 of the Indian Income-tax Rules, 1922. If F, J and K are really the persons agreeing to share the profit of a business but the instrument of partnership shows that the agreement is between F and J only, or between F, J and L, or between F, J, K and L, no partnership FJ or FJL or FJKL as the case may be comes legally into existence because in the first and the second cases K, though a party to the agreement, is omitted and in the second and the third cases L was not a party to the agreement at all and is included. Since an instrument of partnership is only a piece of evidence and may not correctly state all the persons who are parties to the agreement is cannot be treated as conclusive on the question who are the partners. Under rule 6 of the Income-tax Rules a firm can be registered if it is in existence constituted by an instrument of partnership only if all the actual parties to the agreement (and none else) are stated to be the partners in it. When F, J and K are all the parties to the agreement there is no firm in existence as constituted by the instrument of partnership if according to it only F and J, or F, J and L or F, J, K and L are the partners. Consequently, in order to find whether a firm as constituted by an instrument of partnership is in existence or not it becomes obligatory upon the Income-tax Officer to go behind the instrument and ascertain the facts. What is meant by his going behind the instrument is simply not being bound by it; after treating it as a piece of evidence only he must ascertain the facts and then decide whether the agreement is between the persons named in the instrument or with other persons or more or fewer persons. It is a finding of fact and must be based upon evidence; it is not a matter of mere assumption. There must be material for his finding (in the above instance) that K was also a party to the agreement or that L was not. Without any basis he cannot just assume one or the other. He can ignore the instrument but cannot act without some other evidence. Further, in order to ignore it also he must have a valid reason; he cannot just imagine it to be untrue if it can possibly be true. He must not hold it to be untrue simply because the parties thereto gain an advantage by escaping payment of income-tax or a higher amount of Income-tax. If the law is that if a person does act (a) he gets an advantage whereas if he does act (b) instead he suffers and he does act (a) even though with the intention of avoiding sufferance, he does not evade the law at all; rather he complies with it. It cannot be held that he has really done the act (b) though professing to do the act (a) simply because by doing the act he gains. In the absence of the law that he must suffer and that consequently must do the act (b) he does not evade it by refusing to do it. It is against reason to argue that his claim of doing the act (a) is a mere pretence resorted to gain and that he must have really done the act (b). Of course there is a distinction between doing an act and merely pretending to do it while actually doing another act instead; an Income-tax Officer is concerned only with the former and not with the latter. A person cannot merely pretend to do the act (a) in the above instance and if he really does the act (b) he must suffer. But it is a question of fact whether he has done the act (a) or the act (b) and when he claims to have done the act (a) he must not be disbelieved on imaginary grounds and certainly not on the ground that he must make a false claim in order to gain. If he could really to do act (a) it must not be said that still he did not do it and did the other act, without some evidence in support. An Act is evaded not by actually doing the thing permitted by it but only by pretending to do it while doing the other act attracting a liability or penalty under the Act.
Haji Ghulam Rasul-Khuda Baksh v. Commissioner of Income-tax, Dickenson v. Gross, In re S. C. Mullick & Sons, In re Central Talkies Circuit, Matunga and Sunder Singh Majithia v. Commissioner of Income-tax are the authorities which lay down that it is open to an Income-tax Officer to go behind the instrument of partnership to ascertain the facts. In the case of Dickenson a person professed to enter a deed of partnership with his sons with the admitted intention of reducing income-tax, the circumstances showed that the deed did not embody a genuine transaction and it was held that there was no partnership in fact and that the deed was a fictitious, sham deed. In the case of S. C. Mullick & Sons the instrument of partnership was executed by members of a Hindu undivided family who could not enter into partnership. In the case of Central Talkies Circuit, Matunga, there was circumstantial evidence to show that the instrument of partnership did not recite the facts correctly and it was held that no genuine partnership was brought into existence by it. Beaumont C.J. said at page 51 : '...anyone is entitled so to conduct his affairs within the law as to avoid incidence of taxation, and if a man finds that he will suffer less in taxation by carrying on business in partnership with his mother rather than his wife, he is entitled to select his mother. But the partnership must be a genuine partnership.' And Kania J. said at page 53 : 'The motives of a person in making alterations in the mode of his doing business are no guide for rejecting the registration of a firm if any subject could manage his business affairs as to pay the least tax which he might be liable to, he may do so, provided the whole action is within the law.' In Sir Sunder Singh Majithias case the Privy Council speaking through Sir George Rankin laid down at page 461 :
'When a document purporting to be an instrument of partnership is tendered under section 26A on behalf of a firm and application is made for registration of the firm as constituted under such instrument, a question may arise whether the instrument is intended by the parties to have real effect as governing their rights and liabilities inter se in relation to the business or whether it has been executed by way of pretense in order to escape liability for tax and without intention the its provisions should in truth have effect as defining the rights of the parties as between themselves.'
In Commissioner of Income-tax v. Sivakasi Match Exporting Co. Subba Rao and Sikri JJ. observed that : 'A firm may be said to be not in existence if it is a bogus or not a genuine one, or if in law the constitution...is void.' and that
'If to avoid a legal difficulty 5 individuals, though four of them are members of different firms, enter into a partnership expressly to comply with a provision of law, we do not see any question of fraud or genuineness involved. It is a genuine document and it complies with the requirements of law. It is not an attempt to evade tax, but a legal device to reduce its tax liability.'
The distinction between an arrangement between a stranger and only one of the partners of an ostensible partnership and between an arrangement between a stranger and all the partners of an ostensible partnership was stressed in Commissioner of Income-tax v. Abdul Rahim & Co. and confirmed on appeal by the Supreme Court in  54 I.T.R. 23, Short Notes. The facts in that case were that V was a partner with 9 annas share of a firm in one year; in the next year the partnership was reconstituted and K was taken as one more partner, his share being 2 annas and Vs share being reduced to 7 annas (other shares remaining intact) and, though the arrangement by which K was taken as an additional partner was not genuine, it was held that the partnership. The Supreme Court held that K was only a benamidar for V to the extent of 2 annas, that this fact was relevant only when it was to be considered whether he was to be assessed on the income of V and that his benami character did not affect his capacity as a partner or his relationship with other partners. In the case of K. Sarabhaiah an arrangement between some of the partners binding them to distribute the profits with strangers was held not to affect the validity of the partnership.
Now I come to the questions. Questions No. 1 is on the face of it a question of fact; in what capacity a person entered into a partnership depends upon facts and is not a matter governed by law. A question of law may arise whether there was any material on the basis of which the Tribunal could find that Musaddilal, Sri Kishan, Ajodhya Prasad, Radhey Lal, Kailash Nath and Amar Nath were partners of the assessee-firm in their individual capacity but that is not the question referred to us and we have no jurisdiction to convert a question of fact into a question of law. Further the real question being who are the parties to the agreement to share the profits of the business, the question of their capacity is irrelevant and question No. 1 is of only academic interest. If these six men and Motichand and Sarwan Lal were the only parties to the agreement they were the partners even though they were kartas or or representatives of their undivided families; their coparceners did not automatically become partners of the assessee-firm. The answer to the question is also included in the answer to the question No. 3, which is the only question that arises in this case and it is redundant to answer this question. So it is left unanswered.
Question No. 2 must be answered in the affirmative in view of the law stated above, but it is also of only academic interest because in the assessment of the assessee-firm we are not concerned with the question whether the agreements entered into by the six men with their sons, brothers etc. brought into existence smaller partnership or sub partnership or not; even if the agreements entered into by the six men with their sons, brothers etc. did not bring into existence smaller partnerships and the sons, brothers etc., did not become partners with them it does not follow that they became partners with them in the assessee-firm. The constitution of the assessee-firm is not affected by the arrangements entered into by the six men with their sons, brothers, etc. The answer to this question is also included in the answer to question No. 3.
Question No. 3 is the only question that arises in this case. Having regard to the facts and the law, I have no hesitation in saying that the only partners of the assessee-firm are the eight persons who have executed the instrument of partnership and signed the applications for renewal. The sons, brothers, etc., of the six men Musaddilal, Sri Kishan etc. are not partners of assessee-firm. There is no evidence that they agreed with all the eight ostensible partners to share the profits of the business and that the business was carried on by them along eight eight partners or by someone acting on behalf of all of them. There is no evidence that they are entitled to the rights and subject to the liabilities as partners of the assessee-firm. The deeds of sub-partnership give to the partners of the six men no right other than right to receive a share in the profit received by the six men from the assessee-partnership. On the other hand the deeds of sub partnership of Musaddilal & Sons, Ramanand Ram Kishan and Radhey Lal & Sons clearly lay down that the coparceners of Musaddilal, Ajodhya Prasad and Radhey Lal will have no right as against the partners of Musaddilal, Ajodhya Prasad and Radhey Lal, respectively, in the assessee-firm and the sub partnership deed of Kailash Nath Brothers expressly recites the fact that Kailash Nath is a partner of the assessee-firm in his individual capacity and not as a representative of the coparcenery. The law is that merely because they formed Hindu undivided families with Musaddilal, Sri Kishan etc., they can not be said to be partners of the assessee-firm. The smaller partnerships are genuine and not against law. It is immaterial that some of the smaller partnerships were in existence before the deed of partnership dated November 17, 1952, of the assessee firm. It is irrelevant that the capital invested by the six men came from their Hindu undivided families; who is partner does not depend upon who the owner of the capital invested in business is. The six men alone, out of the members of the six Hindu undivided families, could be partners of the assessee-firm and it was not obligatory for all the members of the families to be partners in order that its business might be carried on; it, therefore, could not be assumed that not the six men but all the members were partners of the assessee-firm.
The conditions required for a right to renewal of registration are that there is a firm in existence constituted as shown in the insrument of partnership, that the application signed by all the partners personally in the prescribed form and that the application is in order and made before the...... 30th of June of the assessment year. Rule 6A of the Income-Tax Rules lays that if the above conditions are fulfilled the Income-tax Officer 'may... grant to the assessee a certificate signed and dated by him' and that are not satisfied 'he shall pass an order in writing refusing to renew the registration'. In order that an application is in proper form it must give certain particulars including name of partners and their shares in the balance of profits. The renewal application is in time and was signed by all the eight partners and all the particulars required were given in it. It was made before the 30th day of June of the assessment year. Still the registration was refused by the Income-tax Officer on the ground that the partnership consist of not only eight ostensible partners but also the coparceners of six of them. This ground justified the refusal in three different ways. One was that it meant that it was not signed by all the partners and that particulars in respect of all were not given in it; it was not signed by the coparceners of six partners and no particulars about them were given in it. The seconds is that the total number of partners exceeded twenty and the partnership became illegal under the Indian Companies Act. The third is that there was no partnership in existence, constituted as shown in the instrument of partnership, there being no partnership of only the eight ostensible partners. Before us also it is this ground that the partnership consist of more than twenty partners that is urged for refusing renewal. The ground has no existence in the eye of law as already explained. The partners are eight partners who have signed the instrument of partnership and coparceners of six of them are not partners at all. Consequently, the only bar that is supposed to exist in the way of renewal does not exist. A controversy was raised at the bar whether an Income-tax Officer is bound to register a partnership or renew the registration of a partnership if the condition of rule 4 or 6A are fulfilled. One view is that if they are fulfilled the partnership must be registered or its registration must be renewed and the Income-tax Officer has no desecration in the matter and the other view is that he still has discretion and can refuse registration or renewal for cogent reasons. It is not necessary for us to enter into this controversy because it is not involved in the question under consideration. The simple question before us is whether the assessee has compiled with the provision of renewal of section 26A. Whether in spite of the compliance registration in renewal of registration can be refused or not is an entirely different question not referred to us. Further, the case of the Commissioner himself is that renewal should be refused on the ground that the application does not fulfill the required conditions not that it should be refused even though it fulfills them. Still I must say that I have not been persuaded that the decision in Hajee Saeed and Sons v. Commissioner of Income-Tax and Khanjan Lal Sewakram, to which I was a party, were incorrectly decided. I respectfully agree with the observations of Yahya Ali J. in P. A. Raju Chettiar and Brothers v. Commissioner of Income-tax at page 62 to the effect that'.... registration of firms under the Income-Tax Act is not a general or common law right, but it is a privilege given to the firms in order to enable them to get the benefit of the lower rates of assessment applicable to the individual partners.' When the Supreme Court laid in the cases of Sivakasi Match Exporting Co., A. Abdul Rahim & Co. and K. Sarabhaih that, if the Income-tax Officer is satisfied that the genuine firm as shown in the instrument is in existence and the application is in order he must register or renew registration, it meant that in the absence of a cogent ground registration or renewal cannot be refused. If the only ground for refusing registration or renewal is that the partnership does not exist in fact it is found to be incorrect registration or renewal can not be refused; obviously it is a case in which there is only one ground for refusing registration or renewal and it is found to be incorrect. What was observed in the case of Abdul Rahim & Co. is that if the required conditions are satisfied registration can not be refused on the ground that one of the partners is a benamidar; this only means that three cases did the Supreme Court have to consider whether there statutory conditions are fulfilled.
My answers to the three question are :
Question No. 1 - Left unanswered.
Question No. 2 - Yes.
Question No. 3 - Yes.
A copy of this judgment should be sent under the seal of the court and the signature if the Registrar to the Income-tax Appellate Tribunal as required by section 66(5) of the Act.
The assessee should get its cost of this references which may be assessed at Rs. 400. Counsels fee may be assessed at Rs. 400.
MANCHANDA J. - I agree