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Commissioner of Income-tax, Kerala Vs. Pathrose Rice and Oil Mills, Irinjalkuda - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Ref. No. 8 of 1958
Judge
Reported inAIR1959Ker246; [1960]40ITR353(Ker)
ActsIncome-tax Act, 1922 - Sections 26A; Partnership Act, 1932 - Sections 4
AppellantCommissioner of Income-tax, Kerala
RespondentPathrose Rice and Oil Mills, Irinjalkuda
Appellant Advocate G. Rama Iyer, Adv.
Respondent Advocate C.T. Peter,; C.T. Joseph and; T.C. Karunakaran, Advs
Cases ReferredIn Bhimji Naik v. Commr
Excerpt:
.....- raghavachariar summarises as follows the essentials to be satisfied under those rules before an application for registration can be allowed by the income-tax officer: but where we have a case where a partner who is willing to work is excluded and where he has no power to work as an agent of the business clearly it is a case where the partner so excluded would not be a partner at all. clearly an arrangement like this cannot be considered in law to be a partnership. ' 9. it was suggested by counsel for the department that clause 7 is not in conformity with section 33(1) of the indian partnership act, 1932: a partner may not be expelled from a firm by any majority of the partners, save in the exercise in good faith of powers conferred by contract between the partners'.according to him a..........partnership act, 1932:''partnership', is 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.'as pointed out by lindley in his treatise on the law of partnership when a statutory definition is provided by the legislature that definition taken in connection with the other sections of the act 'must for the future be the ultimate test applicable to the determination of the question whether in any particular case a partnership does or does not exist.' (llth' edition, page 28)5. a translation of the instrument concerned forms part of the paper book. there are three parties thereto, one pathrose, and his brother and son, kochu deyassy and devassy, respectively. the clauses on which reliance is placed by counsel for the.....
Judgment:
ORDER

1. This is a reference by the Income-tax Appellate Tribunal, Madras 'A' Bench, under Section 66(1) of the Indian Income-tax Act 1922. The question referred is:

'There being no other defects in the application, whether the firm is a valid partnership in law and accordingly registrable under Section 26A for all the aforesaid 4 years of assessment 1952-53 to 1955-56?'

2. Section 26A of the Indian Income-tax Act, 1922, reads as follows:

'(1) Application may be made to the Income-tax Officer on behalf of any firm, constituted under an instrument of partnership specifying the individual shares of the partners, for registration for the purposes of this Act and of any other enactment for the time being in force relating to income-tax or supertax.

(2) The application shall be made by such person or persons, and at such times and shall contain such particulars and shall be in such form, and be verified in such manner, as may be prescribed; and it shall be dealt with by the Income-tax Officer in such manner as may be prescribed.'

Rules 2 to 6B of the Indian Income-tax Rules, 1922, deal with the registration of firms. Raghavachariar summarises as follows the essentials to be satisfied under those rules before an application for registration can be allowed by the Income-tax Officer:

'1. The application should be made on behalf of the firm.

2. The firm should be constituted under an instrument of partnership.

3. The instrument of partnership should specify the individual shares of the partners.

4. The application should be made only for the purpose of this Act and any other enactment relating to income-tax and supertax.

5. The application should be presented by such person or persons and at such time and shall contain such particulars and shall be in such form and verified in such manner as may be prescribed.' (The Indian Income-tax Act, Vol. I, page 821)

3. It is common ground that there are no defects in the application for registration and the question referred is worded on that assumption. In such a case registration can be refused only

(1) when there is no partnership in law; or

(2) when there is a partnership in law but it cannot be considered a genuine partnership.

The genuineness of the arrangement is not disputed. The only contention before us is that the relationship created does not constitute a partnership in law.

4. According to Section 4 of the Indian Partnership Act, 1932:

''Partnership', is 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.'

As pointed out by Lindley in his Treatise on the Law of Partnership when a statutory definition is provided by the legislature that definition taken in connection with the other sections of the Act 'must for the future be the ultimate test applicable to the determination of the question whether in any particular case a partnership does or does not exist.' (llth' Edition, page 28)

5. A translation of the instrument concerned forms part of the paper book. There are three parties thereto, one Pathrose, and his brother and son, Kochu Deyassy and Devassy, respectively. The clauses on which reliance is placed by counsel for the Department for the contention that the instrument does not create a partnership are Clauses 7 and 8. They read as follows:

'7. If at any time partners Nos. 2 and 3 want to withdraw from the partnership either jointly or severally or if at any time partner No. (1) wishes to sendout partners Nos. 2 and 3 jointly or severally, Partner No. 1 has independent and absolute right and power to immediately exclude or discharge them. All amounts due to or from the outgoing partners should be paid in cash, the expenses incidental to such withdrawals being met by the outgoing partners,

8. All activities connected with the business etc., are to be conducted at the sole discretion of partner No. 1 and all his actions are binding on all the three partners equally'.

6. Counsel for the Department also cited Umarbhai Chandbhai v. Commr. of Income-tax : [1952]22ITR27(Bom) . In that case Chagla, C. J. said:

'Now in this case the partnership is between Mahomed Umer and his two sons, and the question is whether on the terms of the document itself it can be stated that in law there was a partnership. Now there are two essential conditions before it could be stated that by contract a relationship has been brought about between persons which is the relationship of a partnership; and the two conditions are that the partners must agree to share the profits of the business and the business must be carried on by all or any of them for all of them. Therefore, not only must there be a sharing of profits but there must be also the principle of agency. This particular document seems to offend against both the principles. Jt is unnecessary to go into the details, but taking the two outstanding points it is clear that whatever contractual relations existed between the father and the sons the result was certainly not a partnership in law. The father has been given the right to exclude either or both the sons from the management of the firm wholly or in part, or to entrust the management to any other person.

Sir Jamshedji relies on cases where there are dormant partners or arrangement is made that a particular partner shall be in the management thereof; but they are all cases where partners agree that a particular partner shall manage and that another person should get a share in the profits without being under an obligation to work for the partnership. But where we have a case where a partner who is willing to work is excluded and where he has no power to work as an agent of the business clearly it is a case where the partner so excluded would not be a partner at all. The other outstanding feature of this case is that even with regard to the sharing of profits it is left to the father to determine what quantum of any profits should be distributed and it is also left to him after such distribution what should be done with the remaining profits. Therefore under this document there is not even sharing of profits contemplated. It is left to the father whether profits should be shared or not, when they should share them and to what extent. Clearly an arrangement like this cannot be considered in law to be a partnership.'

Clause 4 of the instrument before us provides that 'the annual profits in the business after deducting all expenses have to be divided equally among the three partners' and it is not contended that the instrument' suffers from the second of the two infirmities dealt with by Chagla, C. J.

7. The only contention is that clauses 7 and 8 militate against 'the principle of agency'. We cannot agree. By Clause 8 all that the partners did was to consent to Pathrose conducting the business at his sole discretion. Such an agreement is of the type relied on by Sir Jamshedji -- agreements to the effect that a particular partner shall be in management and that the others shall remain dormant -- and accepted by Chagla, C. J., as not militating against the existence of a co-partnery.

8. The contention that the right of exclusion embodied in Clause 7 precludes the creation of a part-nership is equally unsustainable. In Bhimji Naik v. Commr, of Income-tax, Bombay, AIR 1945 Bom 271, an instrument somewhat similar to the one before us came up for consideration. The Head Note states the relevant details and conclusion as follows:

'R carried on business as a general merchant in Sou'h Africa. By a deed of 1937 R admitted his three managers as partners in his business. The managers were not to be disclosed as partners so far as the public was concerned and were to be held out as managers of the business and were to the extent required to be given power of attorney by R. The assets and liabilities of the business were taken over by the new firm and R became the creditor of the firm for the amount. In the profits and losses of the business R retained an eight annas share whilst the others were the owners of the balance. R was given the right to dismiss any of the partners described as managers for misconduct and R was to be the sole judge of whether misconduct was established. R was to retain full control of the business and the managers were to carry out all instructions given to them from time to time by R.

Held, that the deed though it gave R wider powers than were usually found in a partnership deed as being conferred on a senior partner nevertheless created the relationship of partners and not that of employer and employees, profits and losses being borne by all in the proportion stated.'

9. It was suggested by counsel for the Department that Clause 7 is not in conformity with Section 33(1) of the Indian Partnership Act, 1932:

'A partner may not be expelled from a firm by any majority of the partners, save in the exercise in good faith of powers conferred by contract between the partners'.

According to him a deed of partnership can only provide for expulsion by a majority of the partners and the provision for expulsion by Pathrose alone embodied in Clause 7 is not in accordance with the law. It is unnecessary to evaluate this contention. If it is correct any expulsion by Pathrose may have to be considered as void and of no effect. It does not follow that the relationship created by the document is not a partnership between the parties thereto.

10. The Appellate Tribunal dealt with the contentions of the Department as follows:

'We will now go through the reasons given by the Appellate Assistant Commissioner which prompted him to ignore the order of the Tribunal in regard to the preceding year. One is the competency given to one partner to exclude the other two partners from the firm at any time; the second is the conduct of the business being left in the hands of one of the partners and the possession of the cash balance and the books of accounts in the hands of one of the partners. These the Appellate Assistant Commissioner considers as serious defects which warrant rejection of the assessee's claim for registration. We do not see anything wrong in the said clauses of the deed warranting the rejection of the application of the assessee for registration, if we are to take into consideration the deed as a whole. These are only conditions prescribing the manner in which the business has to be conducted. Hence following the aforesaid decisions of the Tribunal, we hold that there is no Justifiable reason to reject the application of the assessee for registration. We, therefore, direct the Income-tax Officer to grant registration to the assessee'.

11. The conclusion readied by the Tribunal appears to be correct and in the light of what we have stated above the question referred has to be answered in the affirmative. We do so, though in the circumstances of the case without any order as to costs.

12. A copy of this judgment under the seal of the Court and the signature of the Registrar will be sent to the Appellate Tribunal as provided in Section 66 (5) of the Indian Income-tax Act, 1922.


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