1. IT Appeal Nos. 1076 and 1077 (Bang.) of 1982 are appeals by the assessee against the order of the Commissioner under Section 263 of the Income-tax Act, 1961 ('the Act') cancelling the registration granted to the assessee by the ITO for the assessment years 1980-81 and 1981-82.
IT Appeal Nos. 1078 and 1079 (Bang.) of 1982 have been filed by the assessee as a precautionary measure against the direction of the Commissioner that the status of the assessee should be taken as an unregistered firm.
2. The facts are as follows. One Shri J. Srinivasan, practising as a chartered accountant, died on 11-5-1975. A partnership deed was executed on 28-12-1975 coming into effect from 12-5-1975 whereby Shri H.V. Gowthama and Shri K.R. Srinivasulu, the erstwhile assistants of Shri J. Srinivasan, became partners of the firm to carry on the profession formerly conducted by the late Shri J. Srinivasan in the name and style of Shri J. Srinivasan. They were each entitled to a profit of 30 per cent. The remaining 40 per cent was allotted to Smt.
Sakkubai Srinivasan, widow of the late Shri J. Srinivasan. In addition, the said lady was entitled to a remuneration of Rs. 500 per month for supervising the accounts, etc., and rent of Rs. 250 per month for the accommodation provided by her for the administrative office in Jayanagar. The bank accounts were to be operated by Smt. Sakkubai and one of the partners jointly. The borrowings were to be made only from Smt. Sakkubai. The partnership was for a duration of five years. A similar agreement was executed on 19-8-1980 and this was for a period of 3 years. Registration had been granted in the normal course but the Commissioner acting under Section 263 held, having regard to the fact that the bank accounts were to be operated by Smt. Sakkubai and borrowings should be made by the firm only from her and further that she was entitled to 40 per cent of the profits, that Smt. Sakkubai was in effect a partner and the partnership deed'having failed to mention her as a partner and the application for registration not having been signed by her, the firm was not entitled to registration in the light of the decision of the Punjab & Haryana High Court in the case of Eastern Commercial Corpn. v. CIT  111 ITR 671. The assessee is in appeal.
3. Shri G. Sarangan, the learned counsel for the assessee, submitted that the Commissioner erroneously presumed that Smt. Sakkubai was a partner by interpreting Clauses 7, 8 and 9 of the partnership deed dated 28-12-1975, to mean that she enjoyed the status of a partner.
Smt. Sakkubai was interested in protecting the goodwill of the firm J.Srinivasan till her sons could carry on the profession in their own right. It was with this view that it was stipulated that the borrowals required by the firm should be made only from her so that the firm would not be burdened with unconscionable debts. It was not denied that Smt. Sakkubai was a competent lady and could look after the general administration of the firm as distinct from the professional activities. The power given to her to sign cheques on behalf of the firm did not make her a partner since any responsible person could have been authorised to sign cheques on behalf of the firm, in the present case, one of the partners had also to sign the cheques. This power of signing the cheques did not make Smt. Sakkubai a partner but, as submitted earlier, this condition was introduced only with a. view to safeguard the interest of the firm, 40 per cent share of the profits given to her was only for the use of the goodwill of the firm. If the firm claims deduction for the amounts paid to her it would have been allowed as a deduction in the light of the decision of the Supreme Court in the case of Devidas Vithaldas & Co. v. CIT  84 ITR 277.
In fact, the revenue had addressed itself to the reasonableness of the amounts paid to Smt. Sakkubai in certain other years. The facts in the case of Eastern Commercial Corpn. (supra) were distinguishable. He submitted that the order of the Commissioner should be set aside.
The learned departmental representative relied on Section 6 of the Indian Partnership Act, 1932, and argued that the cumulative effect of the various provisions in the partnership deed pointed out that the lady had been assigned a dominant role in the affairs of the partnership and should, therefore, have been considered as a partner with all the attendant consequences.
4. We have carefully considered the facts of the case and the submissions made on both the sides. We find that the facts in the case of Eastern Commercial Corpn. (supra) are different. That was a case where there was a difference between two judges. One of the judges held that the partnership was not genuine in view of the extraordinary powers given to Vimla Kapur regarding the financial control to the exclusion of all other partners. The third judge, who agreed with him, held that Rajendranath, the husband of Vimla Kapur, provided the finances and should also have been considered as a partner and as he had not signed the partnership deed, the firm was not entitled to registration. In the present case, Smt. Sakkubai cannot be considered as a financier of the firm. The firm did not require finances. It is a professional firm. As argued by the learned counsel for the assessee, signing of cheques by Smt. Sakkubai did not make her a partner. In fact, the cheques were to be signed jointly by Smt. Sakkubai and another partner. In the case of Devidas Vithaldas & Co. (supra) one of the partners of a chartered accountants firm retired by taking a share of the profits payable every year to him. Later, when he died, his wife was given a share in the profits. Although the agreement to pay the retired partner or his wife a share in the profits was described as towards sale of goodwill, the Court held that the said, payments related to the use of goodwill and were allowable as a deduction from the profits of the firm. Although this case was about the deduction of the share of profits paid to an ex-partner and his wife as an admissible deduction from the profits, it throws considerable light on the question before us. If the portion of the profits paid to Smt.
Sakkubai is to be construed as a revenue payment it follows, as a corollary, that she is not a partner in the firm since 40 per cent of the profits are received by her for use of the goodwill of the business and not in the capacity of a partner. Hence, registration could not have been refused on the ground that she is a partner. It is further to be noticed that the lady is not a chartered accountant and so cannot become a partner in the assessee-firm. If she had, then registration could certainly have been refused by the revenue authorities. It is another matter whether the payment is excessive or unreasonable and thus, attracted the provisions of Section 40A(5) of the Act. But on facts, we have no doubt that Smt. Sakkubai is not a partner. We, accordingly, set aside the orders of the Commissioner and restore the orders of the ITO.