V. P. Gopalan Nambiyar, C.J. - The ITAT, Cochin Bench has sent up the following question of law u/s 256(1) of the I.T. Act, 1961, for our opinion, namely :
'Whether there was during the year (commencing from 1-7-1970 and ending with 30-6-1971) relevant to asst. yr. 1972-73, a genuine firm in existence as registered ?'
2. The assessment year with which we are concerned is 1972-73, and the previous year in relation to the same is the year commencing from 1-7-1970 and ending with 30-6-1971. The assessee firm originally consisted of six partners, namely : (1) K. K. Sudevan (2) K. S. Krishnadas (3) K. A. Jayapalan (4) K. A. Haridas (5) K. A. Mohandas and (6) K. A. Haridas. The partnership was constituted by a deed dated 13-9-1966 and was granted registration for purposes of Income-tax. Cl. 13 of the deed provided that the death or retirement of any of the partners would not operate to dissolve the firm, but that the firm may be continued by the surviving or remaining partners on such terms and conditions as may be agreed upon in writing between the partners. On 9-2-1970 Sudevan, No. 1 among the partners, died. By his registered will dated 28-1-1970 he bequeathed all his properties to his three adult sons, namely : K. S. Krishnadas (No. 2 of the partners), K. S. Haridas (No. 4 of the partners), and K. S. Bhagavandan (who was not one of the partners under the deed of 1966). On 20-2-1970 a further deed of partnership was executed. The excutants are (1) K. S. Krishnadas (No. 2 in the original deed and an heir under he will of Sudevan), (2) K. A. Jayapalan (No. 4 in the original deed and an heir under the will of Sudevan), (4) K. A. Mohandas (No. 5 in the original deed), (5) K. A. Haridas (No. 6 in the original deed), (6) K. S. Krishnadas (No. 2 in the original deed, and as power of Attorney of the heirs of the late Shri K. K. Sudevan as per his registered will). All the above six partners signed the Partnership deed, K. S. Krishnadas twice, in his individual capacity as a partner, and as representing the three heirs, under he will of Sudevan. Registration was granted to the newly constituted firm under this partnership for the asst. yr. 1971-72. But for the next asst. yr. 1972-73 (accounting year ending 30-6-1971) the ITO acting u/s 186(1) of the Act cancelled the registration on the only ground that K. S. Krishnadas had joined the partnership deed in two capacities and signed the deed twice which was not permissible in law. On this ground he came to the conclusion that there was no genuine firm in existence as registered. On appeal, the AAC concurred. On further appeal, the Tribunal differed, and held that there was no valid ground to cancel the registration and the reasons stated by the ITO and the AAC were not sustainable in law. The Tribunal was of the view that the surviving or continuing partners could carry on the business of the firm with the estate of the deceased partner; so that s. 37 of the Partnership Act would have been attracted if this fresh partnership had not been executed; and that the position was directly covered by the decision of the Bombay High Court in CIT Bombay City II v. Raghavji Anandji and Co., the principle of which decision it followed.
3. We may refer to the provisions of ss. 184, 185, 186 of the I.T. Act, 1961. U/s 184, an application for registration has to be made on behalf of the firm if two conditions are satisfied, namely; (1) that the partnership the individual shares of the partners are specified in that instrument. U/s 185, the ITO is to enquire into the genuineness of the firm and its constitution. If satisfied that there was during the previous year, in existence, a genuine firm with the constitution specified in the instrument of partnership, he shall grant registration to the firm; and refuse the same if he was not so satisfied. S. 186 authorises cancellation of registration if the Officer is of opinion that during the previous year there was no genuine firm in existence as registered. R. 22 of the rules framed under I.T. Act provides for application for registration of firms and the particulars to be contained therein. We need not refer in detail to the content of the Rule.
4. On the facts stated by the Tribunal and set out earlier we do not see any vitiating circumstance to justify the cancellation of the registration of the firm. That Shri K. S. Krishnadas had joined the execution of the partnership deed twice appears to us to be a circumstance which is quite easily understandable. He was a partner himself in the original deed of 13-9-1966. It was thereafter that one of the partners K. K. Sudevan died, having constituted by his will his three sons as representatives of his estate, who were to carry on the partnership in his place along with the other partners in the original deed. This was quite permissible and quite consistent with the provisions of cl. 13 of the Partnership deed as well as s. 37 of the Indian Partnership Act. In accordance with the devolution of interest, the three heirs had constituted Shri K. S. Krishnadas as their representative to carry on the business of partnership by their power of attorney. Shri K. S. Krishnadas joined the document of 20-2-1970 in a dual capacity, namely, as a partner himself, and as representating the three heirs of the deceased partner K. K. Sudevan. This cannot, in the circumstances, be regarded as an invalidating factor affecting the genuineness or the validity of the partnership.
5. Counsel for the Revenue challenged the validity of the partnership on the ground that the instrument of Partership had not specified the shares of the heirs of Sudevan. Counsel for the assessee countered that this is an aspect which had neither been raised before, nor found by, the Tribunal and that the question would not therefore arise out of the order of the Tribunal and cannot be answered by this Court. It appears to us that the objection raised by counsel for the assessee is well-founded. The question that the partnership was invalid as the shares of the partners had not been specified in the instrument of partnership as required by s. 184 of the Act was not specifically agitated before the Tribunal, or for that matter, before any of the ower authorities. In the circumstances the assessee is right in his contention that this aspect of the matter cannot be said to arise out of the order of the Tribunal and cannot be considered or decided by us in this reference.
6. Alternatively, counsel for the assessee also contended that there was no substance in the objection that the shares had not been specified in the instrument of partnership. He referred us to page 4 of the statement of the case, where, a copy of the partnership deed has been appended as Annexure B. Cl. 6 of the said annexure is as follows :
'(6) The profits or losses of the firm shall be divided or suffered by the partners in the following proportions viz. :-
13 ps in the rupee
14 ps in the rupee
13 ps in the rupee
13 ps in the rupee
13 ps in the rupee
34 ps in the rupee
Counsel for the assessee maintained that this would constitute a sufficient specification of shares. The partners were the original five partners, and the estate of the deceased Sudevan represented by his three heirs under the will. There was a specification of shares among them and a sub-specification among the three heirs was unnecessary. He referred us to the decision in Parekh Wadilal v. I. T. Commr. Nagpur. In CIT v. Best Automobiles, a Division Bench of this Court consisting of both of us had also occasion to examine this aspect of the question. This Court noticed the ruling view of this Court as reflected in the decisions noticed. We noticed the decision of the Supreme Court in Mandyala Govindu & Co. v. CIT, AP, where, the Supreme Court pointed out that it was necessary for the ITO to be satisfied that there was a specification of shares. After noticing the decision, the Division Bench pointed out that whether on the liberal view expounded by the Supreme Court, or on the ruling view of this Court there was no ground, on the actual facts disclosed, to interfere with refusal of registration. In this case, there is nothing to show that the Officer was not satisfied regarding the specification of shares in the partnership deed.
7. Counsel for the Revenue placed reliance on the decision in Firm Bhagat Ram Mohanlal v. Commr. of Excess Profits Tax, Nagpur and Dulichand Laxminarayan v. CIT, Nagpur. We do not think these decisions actually have application. The question of a partner signing different capacities actually did not arise or consideration in any of these decisions. What was pointed out in the earlier of these cases was that when a karta of a joint Hindu family enters into a partnership with stranges the members of the family do no ipso facto become partners of the firm and they have no right to take part in its management or to sue for its dissolution. Reference was made to the decision of the Privy Council in Lachhman Dass v. CIT, Punjab that the karta of a joint Hindu family could enter into partnership with an individual member of the coparcenary regarding his separate property. The principle of this decision has no application. In the next case, namely : 29ITR535(SC) , the principle stated is that a firm is not a person and as such is not entitled to enter into partnership with another firm or a Hindu undivided family or individual. Reliance was placed on the observations at page 543 as follows :
'The deed specifies that each of the five constituent parties is entitled to an equal, i.e., 1/5 share but it does not specify the individual shares of each of the partners of each of the three smaller constituent firms. Further all the members of those three firms have not signed the application for registration personally. It is said that each of the three persons who executed the deed for the three smaller firm must be regarded as having the authority of their co-partners in their respective firms to sign the application for registration just as they had their authority to execute the deed itself for them. Even if they had such authority as to which there is no evidence at all on the record the section and r. 2 require that each partner (not being minors) must sign personally. That admittedly has not been done, and, therefore, the application was not in proper form. In our judgment the answer given by the High Court to the question is correct. This appeal must, therefore, be dismissed with costs.'
The above observations again deal with an altogether different situation and have no application to the facts on hand.
8. Counsel for the assessee on the other hand drew our attention to certain decisions which appear to us be quite in point. Attention was called to two decisions in CIT, Gujarat v. A. Abdual Rahim and Co. and CIT, Madras v. Bagyalakshmi & Co. In the earlier of these decisions, it was pointed out by the Supreme Court after examining the relevant provisions of the Income-tax Act and the Rules that if a partnership is genuine and valid, the Income-tax Officer has no power to reject its registration provided the provisions of s. 26-A of the 1922 Act and the Rules made thereunder are complied with. It was pointed out that the benami character of one of the partners does not affect the benamidars capacity as partner or his relation ship with the other members of the partnership. If a partner is only a benamidar for another, that can only mean that he is accountable to the real owner for the profits earned by him from and out of the partnership. Therefore, he is only a trustee of the real owner. But, in law, he is also capable of entering into a partnership with others. While discussing the question, the Supreme Court observed :
'When a firm makes an application u/s 26-A of the Act for registration, the ITO can reject the same if he comes to the conclusion that the partnership is not genuine or the instrument of partnership does not specify correctly the individual shares of the partners. But once he comes to the conclusion that the partnership is genuine and a valid one, he cannot refuse registration on the ground that one of the partners is a benamidar of another. If the partnership is genuine and legal, the share given to the benamidar will be the correct specification of his individual share in the partnership. The beneficial interest in the income pertaining to the share of the said benamidar may have relevance to the matter of assessment, but none in regard to the question of registration.' (p.659).
One aspect of the question was left open by the Supreme Court thus :
'It is true that different considerations may arise, if the partnership is only between two persons of whom one is a benamidar of the other. In that event the partnership may be bad not because the benamidar has no power to enter into the partnership but because the partnership in law is the relationship between at least two persons and in the case of a benamidar and the real owner in fact there is only one person. It may also be that in a case where a benamidar is taken as a partner with the consent of the other partners, he will only be a dummy. We do not propose to express any final opinion on the said two questions, as they do not arise in this appeal'. (p. 658)
But this question does not arise for consideration here also.
9. In the next decision, in Bagyalakshmi & Co.s case, the observations made are more pertinent. It was observed :
'A partner may be the karta of a joint Hindu family; he may be a trustee; he may enter into a sub-partnership with others; he may, under an agreement, express or implied, be the representative of a group of person; he may be a benambidar for another. In all such cases he occupies a dual position. Qua the partnership, he functions in his personal capacity; qua the third parties, in his representative capacity. The third parties, whom one of the partners represents, cannot enforce their right against the other partners nor the other partners can do so against the said third parties. Their right is only to a share in the profit of their partner-representative in accordance with law or in accordance with the terms of the agreement, as the case may be. If that be so, Guruswamy Naidu could have validly entered into a genuine partnership with others taking a 10 annas share in the business, though in fact as between the members of the family he has only a 2 annas share therein. He would have been answerable for the profits pertaining to his share to the divided members of the family, but it would not have affected the validity or genuineness of the partnership. So much is conceded by the learned Attorney-General. If so, we do not see why a different result should flow if instead of one member of the divided family two members thereof under some arrangement between the said members of the family took 10 annas share in the partnership. If the contention of the revenue was of no avail in the case of representation by a single member, it could not also have any validity in the case where two members of the family in the partnership. As the partnership deed was genuine, it must be held that the shares given to Guruswamy Naidu and Venkatasubba Naidu in the said partnership are correct in accordance with the terms of the partnership deed.' (pp. 664 & 665)
10. Counsel for the assessee called attention to the decision of the Bombay High Court in CIT Bombay City II v. Raghavji Anandji & Co. which has been referred to also by the Tribunal. There, the Bombay High Court referred to the contention raised that there could not be valid contract or partnership between one Purshottam in one capacity and the same person in another capacity and that this is a good ground on which the registration could be cancelled by the Commissioner. Dealing with this contention, the Court stated thus :
'In my view there can be two answers to the submission made by Mr. Hajarnavis. In the first place, it is possible to regard the agreement of partnership placed for our consideration not as a contract between Vendravan Purshottam in one capacity and Vandravan Purshottam in a different capacity, as Mr. Hajarnavis wants us to hold, but between Vandravan Purshottam in his two capacities and nine other persons. Again, it does not appear to me to be the correct position in law to state that all contracts between a person A, and A and others would be invalid. Reference may be made in this connection to the provisions of s. 46 of the Indian Partnership Act, 1932, where a partner may enforce as against the firm of which he is a partner certain contractual rights by means of a suit (without dissolution), whereas others can only be enforced by filing a suit for dissolution of the firm and having accounts taken. A firm is no more than a compendious name or expression indicating the totality of its partners, and such a contract between a partner and the firm would be a contract between A, and A and others, which contract per se cannot be regarded as invalid.
As far as we are concerned, however, the matter is concluded in my opinion by the unreported decision of Chagla, C.J. and Tendolkar, J. in Income-tax Reference No. 2 of 1950 (decided on 5th October, 1950). The Division Bench was concerned in that reference with the firm of Messrs C. K. Vora & Co. which prior to 1943 consisted of three partners, viz., Nemchand Popatlal, Jagatchandra Nemchand and Dholidas Doongersi. Nemchand died in April, 1943, leaving a will in which the residue of his estate was left to his grandson, Bhupendra, and he had appointed his son, Jagatchandra, as his executor. Dholidas Doongersi also died in July, 1945, and on 10th October, 1945, a new deed of partnership was executed and it was sought to be registered u/s 26A. The department refused to register it, holding that the partnership deed was not validly executed in as much as Jagatchandra had signed the agreement in two capacities, one as representing the joint Hindu family and the other as the executor of the will of Nemchand. The Tribunal took the view that the partnership deed was valid, and this view was confirmed by the Division Bench, Chagla, C.J., observing :
'On the question submitted to us the only thing we have to consider is whether there is anything in law which precludes a person signing a partnership deed in two different capacities. Jagatchandra had a seven annas share as representing the joint family. He was also the executor and represented the estate of his father and under the will, as I have stated above, his minor son, Bhupendra was entitled to seven-annas share of his grandfather; so Jagatchandra signed the partnership deed also as the executor and as representing the estated of his father. It is difficult to understand why one individual cannot execute the partnership deed in two capacities. Indeed, the Advocated General has not seriously attempted to support this contention of the department ....'
Mr. Hajarnavis urged that the two capacities under consideration before consideration before the said Division Bench were different from the two capacities of Vendravan Purshottam under consideration before us. It is to be remembered, however, that in law an estate vests in the executor and, therefore, the alleged distinction sought to be made by Mr. Hajarnavis is not one that commends itself. In my view, the question that has arisen before us directly arose before the above Division Bench holding that the partnership deed was not invalid by reason of the fact that it was signed by Jagatchandra in two capacities. In that case also, it may be mentioned, there were other persons as partners and, therefore, the objection as to validity earlier indicated at the end of my discussion of Dhandhanias case : 8ITR369(Patna) would not come into play ......' (pp. 251 and 252)
As we stated, the decision is directly in point and even if the question of the validity of the partnership deed by reason of Krishnadas having signed twice in the document were to arise for consideration, we would have been prepared to hold that this circumstance by itself, on the facts and circumstances disclosed, would not invalidate the partnership document or disclose a sufficient ground for cancellation of registration.
11. In the result, we answer the question referred in the affirmative, that is, in favour of the assessee and against the Revenue. There will be no order as to costs.
A copy of this judgment under the signature of the Registrar and the seal of this Court will be communicated to ITAT, Cochin Bench, as required by law.