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Achalsinhji Keshrisinhji and Co. Vs. Commissioner of Income-tax, Gujarat-i - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 12 of 1979
Judge
Reported in[1986]157ITR537(Guj)
ActsIncome Tax Act. 1961 - Sections 2(23), 40, 184, 185 and 256(2)
AppellantAchalsinhji Keshrisinhji and Co.
RespondentCommissioner of Income-tax, Gujarat-i
Appellant Advocate J.P. Shah, Adv.
Respondent Advocate S.N. Shelat, Adv.
Excerpt:
.....that the agreement by which she was to be admitted falls to the ground as not supported by consideration and, accordingly, the appeal was dismissed. manjulaben is to be treated as a failure of consideration and, therefore, she was not a partner and, as a result, there was no genuine partnership. for the purpose of finding out as to whether there was lawful consideration for the agreement of manjulaben joining the partnership, one has to read clause 7. it clearly provides that she had given a promise to invest an amount of rs. ' 15. has failed to consider the clause with regard to the share of the partner wherein she has agreed for 10 per cent. cit [1965]57itr762(patna) .17. it may be stated that the tribunal has only considered the ground of failure of consideration for upholding the..........: 'a promise without a consideration is void, but where there is a promise against a promise, one promise is consideration for the other because each may have his action against the other for non-performance.' where the consideration is executory, the contract is binding as soon as the promises are exchanged. thus, if there is a contract for the sale of goods, delivery and payment to be made at some future date, the consideration consists in the promise to sell and to deliver on the one hand and in the promise to pay on the other; the contract becomes binding as soon as the promises are made, and does not depend upon delivery or payment being made.' 13. in that view of the matter, when the promise is given by smt. manjulaben for investing the amount of rs. 5,000, that itself is.....
Judgment:

B.S. Kapadia, J.

1. The present reference is made by the Tribunal under section 256(2) of the Income-tax Act, 1961.

2. The following questions are referred to us by the Tribunal :

' (1) Whether in law the fact that Smt. Manjulaben did not bring capital as stipulated is fatal to the claim of genuineness and validity of partnership

(2) Whether in law a partnership had come into existence and whether it was entitled to registration ?'

3. The facts leading to the present reference, briefly stated, are as under :

4. The concerned assessment year is 1973-74. The firm was constituted to carry on business under the name and style of Messrs Achalsinhji Keshrisinhji and Company. It consists of five partners including one Smt. Manjulaben. The said firm applied to the Income-tax Officer for registration for the said assessment year. The Income-tax Officer refused registration holding that the partnership evidenced by the deed was not a genuine one. He came to that conclusion on the ground that Smt. Manjulaben had not contributed the amount that had been stipulated in the partnership deed as her contribution to enable her to join as a partner. The other ground was that no credit had been given to the other partners for the interest on their investments as stipulated in the said deed.

5. The matter was taken in appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner agreed with the Income-tax Officer that in the absence of contribution by Smt. Manjulaben who was to invest Rs. 5,000 as her share, the partnership attempted to be brought about was not genuine and it had not come into existence. The assessee further went in appeal before the Tribunal. Inter alia, it was contended before the Tribunal that there was no compulsion that every partner should contribute towards capital and that even without all or any one of them making any contribution at all towards capital, there could still be a legally valid partnership. On the basis of that submission, it was also contended that the fact that Smt. Manjulaben did not contribute the amount as stipulated in the partnership deed could not be taken as a ground for condemning the firm as not a genuine one. Certain other authorities were also pointed out to show that the fact that the partners' accounts were not credited with the interest amount that were due to them would also not invalidate the relationship or make the firm anything but genuine. However, the Tribunal, relying on section 4 of the Partnership Act and the decision in R. M. Chidambaram Pillai v. CIT : [1970]77ITR494(Mad) and further relying on clauses 7 and 9 of the partnership deed, came to the conclusion that as Smt. Manjulaben was taken as partner only for the reason that she was to contribute Rs. 5,000 as her share of the capital of the firm and for no other reason and that she has failed to make a contribution and for none else, it was held that the agreement by which she was to be admitted falls to the ground as not supported by consideration and, accordingly, the appeal was dismissed.

6. Mr. J. P. Shah, the learned advocate for the assessee, submits that all the authorities below have erred in holding that non-contribution of the capital by Smt. Manjulaben is to be treated as a failure of consideration and, therefore, she was not a partner and, as a result, there was no genuine partnership. Mr. S. N. Shelat, the learned advocate for the Revenue, submits that apart from the validity of the partnership deed, the Income-tax Officer was entitled to inquire whether the instrument is intended by the parties to have real effect and govern their rights and liabilities inter se in relation to the business or whether it has been executed by way of pretence in order to escape liability for tax and without intention that the provisions in the partnership deed should in truth have the effect as defending the rights of the parties themselves. He further submitted that it is found as a finding of fact that Smt. Manjulaben has not contributed the capital of Rs. 5,000 as required by the partnership deed and, therefore, the terms of the partnership deed were only by way of pretence in order to escape the liability to tax.

7. With a view to appreciating the rival contentions, it would be necessary to see the definition of the term 'partnership' in the Partnership Act, as in section 2(23) of the Income-tax Act, 'firm', 'partner' and 'partnership' have the meanings respectively assigned to them in the Indian Partnership Act, 1932. Section 4 of the Indian Partnership Act, 1932, defines 'partnership' as under :

'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.'

8. It is clear from the above definition of 'partnership' that what is essential is an agreement between persons for sharing the profits of a business and that the business should be carried on by all or any of them acting for all, that is, the element of mutual agency. It is also true that 'partnership' presupposes an agreement that as required under section 10 of the Indian Contract Act, all agreements are contracts if they are made by free consent of the parties competent to contract, for a lawful consideration and with a lawful object, and which are not expressly declared to be void by the parties. Therefore, the lawful consideration is the important ingredient for making an agreement a contract. 'Consideration' has been defined in section 2(d) of the Contract Act as under :

'When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.'

9. It is clear from the definition that even a promise to do something is also a consideration. With this legal background, it would be now proper to look to the relevant clauses of the instrument of partnership dated December 8, 1971.

10. In the said agreement, five persons are mentioned as parties : (1) Yogendrakumar Ranvirsinhji; (2) Pravinkumar Ranvirsinhji; (3) Ranvirsinhji Kesarisinhji; (4) Smt. Manjulaben Ranvirsinhji; and (5) Achalsinhji Kesarisinhji, as karta of undivided Hindu family of Achalsinhji Kesarisinhji. The business of the partnership was the manufacture and sale of salt. It was to begin from October 20, 1971. The shares of the partners were as under :

paise(1) Yogendrakumar Ranvirsinhji 13(2) Pravinkumar Ranvirsinhji 13(3) Ranvirsinhji Kesarisinhji 14(4) Smt. Manjulaben Ranvirsinhji 10(9) Achalsinhji Kesarisinhji 50

11. As per clause 6 thereof, they had kept Samvat year as the accounting year of the partnership and the accounts were to be made at the end of every year. Under clause 7, it was provided that every partner was to invest capital as per his convenience but partner No. 4, Manjulaben, had to invest the amount of Rs. 5,000. She was to remain as a dormant partner and her responsibility was only to the extent of Rs. 5,000. There was also clause 8 for interest to be paid to the partners on the amount of capital invested at the rate of 6 per cent. Clause 9 provided that all the work in connection with the partnership was to be carried on by all partners in co-operation with each other. As the fourth partner, Smt. Manjulaben, was taken into partnership on her investing the capital and as she was to remain a dormant partner, she will have no responsibility relating to the work of the partnership. The other clauses are not material. For the purpose of finding out as to whether there was lawful consideration for the agreement of Manjulaben joining the partnership, one has to read clause 7. It clearly provides that she had given a promise to invest an amount of Rs. 5,000. She had given the promise in view of the fact that the said partnership agreement was executed on December 8, 1971, while it is brought into operation from the earlier date, namely, October 20, 1971, and as per the definition of 'consideration', even the promise for investing the amount of Rs. 5,000 is a consideration for entry into the partnership.

12. In the book on Indian Contract Act by Mulla, on the point of executory consideration, it is observed as under (at p. 52) :

'Consideration is executory when a promise is made by one party in return for a promise made by the other; in such a case, each promise is the consideration for the other. The rule that consideration could consist in mutual promises was established by the end of the sixteenth century and it was stated by Holt C.J. as follows :

'A promise without a consideration is void, but where there is a promise against a promise, one promise is consideration for the other because each may have his action against the other for non-performance.'

Where the consideration is executory, the contract is binding as soon as the promises are exchanged. Thus, if there is a contract for the sale of goods, delivery and payment to be made at some future date, the consideration consists in the promise to sell and to deliver on the one hand and in the promise to pay on the other; the contract becomes binding as soon as the promises are made, and does not depend upon delivery or payment being made.'

13. In that view of the matter, when the promise is given by Smt. Manjulaben for investing the amount of Rs. 5,000, that itself is consideration for the agreement. The Tribunal has, therefore, erred in observing that :

'If, therefore, she does not make an investment, the agreement by which she is to be admitted falls to the ground as not supported by consideration. In other words, without the investment, she is not to be a partner in the firm...'

14. It may be stated that the Tribunal has though rightly observed that :

'The contract must, thus, be founded on a valid consideration in the form of contribution of money or property towards capital or work and skill for common benefit or stipulation to share liability that might be incurred by the firm.'

15. has failed to consider the clause with regard to the share of the partner wherein she has agreed for 10 per cent. share in the profit which would also include loss to her. Thus, in view of this clause regarding her share in the partnership deed, she has also undertaken liability to bear losses. This clause of 10 per cent. share of profit (loss also) is also consideration to other partners on the point of bearing loss. Similar view is taken in CGT v. Karnaji Lumbaji : [1969]74ITR343(Guj) . Hence, it cannot be held that the agreement of partnership is without consideration.

16. The next point to be considered is whether non-fulfilment of promise to contribute capital by itself would be sufficient to hold the partnership as not genuine. The other terms of the partnership are quoted earlier. The clause for debiting interest is not a material one in view of section 40(b) of the Income-tax Act, 1961. But in the absence of other evidence for holding that other material terms are not complied with, it cannot be held that non-contribution of capital by Smt. Manjulaben by itself is sufficient to hold the partnership as not a genuine one. Similar view is taken in Seth Chhogalal Suwalal v. CIT , Sahabuddin Mohammad Raza v. CIT : [1962]46ITR203(Patna) and Himalaya Engineering Co. v. CIT : [1965]57ITR762(Patna) .

17. It may be stated that the Tribunal has only considered the ground of failure of consideration for upholding the order of refusal of registration of the partnership. In our view, the Tribunal has erred in not properly applying the correct position of law and in holding that if she does not make an investment, the agreement by which she is to be admitted falls to the ground as not supported by consideration. This is the only ground which has been held to be fatal.

18. Looking to the facts and circumstances of the case, we are of the opinion that the fact that Smt. Manjulaben did not bring capital as stipulated is not fatal to the claim of genuineness and validity of the partnership. We accordingly answer question No. 1 in the negative. In view of our answer to question No. 1, question No. 2 will have to be answered in the affirmative inasmuch as in law a partnership has come into existence and it was entitled to registration. Accordingly, we answer both the questions in favour of the assessee and against the Revenue. Accordingly, the reference is disposed of. No order as to costs.


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