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Commissioner of Income-tax Vs. Rama Transport Co. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 443 of 1977
Judge
Reported in[1982]137ITR11(Cal)
ActsIncome Tax Act, 1961 - Sections 184 and 185
AppellantCommissioner of Income-tax
RespondentRama Transport Co.
Appellant AdvocateB.L. Pal and ;Ajit Sengupta, Advs.
Respondent AdvocateN.K. Poddar, Adv.
Cases ReferredRaghunandan Nanu Kothare v. Hormasji Bezonji Bamji
Excerpt:
- .....relates to the assessment years 1968-69 and 1969-70. the assessee-firm was reconstituted by a deed of partnership dated may 20, 1967, w.e.f. april 1, 1967, by introducing a new partner, sri k. k. nijhewan. prior to the reconstitution, there were two partners, sri basheshar lal and smt. gayanwanti devi, having equal shares and the firm had been allowed registration. the business of the firm was of road transport. material clauses of the reconstituted partnership deed are as follows:' (a) the capital shall be rs. 40,000 or more as would be mutually decided from time to time and the said capital to be contributed by the first and the second party in equal proportions. (b) the partnership firm is the owner of several lorries. the accounts of the said lorries would be kept separately.....
Judgment:

Sudhindra Mohan Guha, J.

1. The present reference under Section 256(1) of the I.T. Act, 1961, relates to the assessment years 1968-69 and 1969-70. The assessee-firm was reconstituted by a deed of partnership dated May 20, 1967, w.e.f. April 1, 1967, by introducing a new partner, Sri K. K. Nijhewan. Prior to the reconstitution, there were two partners, Sri Basheshar Lal and Smt. Gayanwanti Devi, having equal shares and the firm had been allowed registration. The business of the firm was of road transport. Material clauses of the reconstituted partnership deed are as follows:

' (a) The capital shall be Rs. 40,000 or more as would be mutually decided from time to time and the said capital to be contributed by the first and the second party in equal proportions.

(b) The partnership firm is the owner of several lorries. The accounts of the said lorries would be kept separately and any income and/or losses from the business done by the said lorries would be divided between the first and the second party in the following proportions:

1. Sri Basheshar Lal (first party) 50% 2. Smt. Gayanwanti Devi (second party) 50% The third party will not be entitled to share any income and/or loss from the aforesaid lorry business.

(c) The net profit of other transport business shall be divided amongst the partners and the net losses of the partnership shall be borne by them in the following proportions:

1. Sri Basheshar Lal 45%2. Smt. Gayanwanti Devi 35%3. Sri K. K. Nijhewan 20% (d) The first party, Basheshar Lal, shall be the manager of the partnership business and shall devote his whole-time attention to the business. He may be paid a monthly salary as the parties may agree from time to time. Such salary shall be considered an expense of the business and shall bs deducted as such, before arriving at the divisible profit or loss amongst the partners.

(e) The third party shall be in charge of the Durgapur and Asansol branches of this partnership and he shall send the copy of the day to day accounts to head office of this partnership for proper incorporation in the accounts of the firm in the head office.

2. The ITO made the assessments of the assessee-firm under Section 143 of the I.T. Act, with which we have got no concern in the present reference. He, however, passed a separate order for registration for the assessment year 1968-69. He considered the terms of the partnership deed and examined the partners, Sri K. K. Nijhewan and Smt. Gavanwanti Devi, and came to the conclusion that the firm was not a genuine one. The ITO, therefore, rejected the assessee's claim for registration for the assessment year 1968-69. He also refused the continuation of registration for the assessment year 1969-70.

3. The assessee came in appeal before the AAC who held that the conditions for a valid 'partnership and registration thereof were satisfied. He further directed the ITO to allow registration to the assessee for the assessment year 1968-69, and renewal of registration for the assessment year 1969-70.

4. Aggrieved by the consolidated order of the AAC the department came up in appeal before the Appellate Tribunal. It was contended on behalf of the department that Form No. 11 was not valid as the assessee had not disclosed the shares of the partners in one business and as such there was no valid partnership under the Partnership Act. It was specifically pointed out that the partnership had two distinct businesses--one from own lorries and the other from hired lorries, that the shares of the partners in profits were different in the two businesses and Sri Nijhewan was not given any share in the profits of the business from the own lorries and Sri Nijhewan did not contribute any capital to the partnership. It was further pointed out that there was no mutuality among the partners in regard to the business from own lorries and that apportionment of shares in different ratios in the two businesses necessitated the keeping of separate accounts of the two businesses ; and all these facts pointed to the two businesses being independent partnerships by themselves and that it was immaterial that the two partnerships were incorporated in one partnership deed. It was pointed out on behalf of the assessee that non-contribution of capital by any partner was not material and that according to the partnership deed, every partner had the authority to represent all the partners on behalf of the firm and there was mutuality among the partners in the matter of action on behalf of the partners. According to the representative of the assessee, two businesses were inter-linked and there were no distinct partnerships in them and that the apportionment of profits was an internal matter of the partners and that even the ITO had made a single assessment on the assessee. According to him, the partnership was a valid one.

5. It was pointed out by the Tribunal that three conditions must be satisfied for the existence of a valid partnership ; (1) there must be an agreement entered into by all the persons concerned, (2) the agreement must be to share the profits of a business, and (3) the business must be carried on by all or any of the persons concerned, acting for all. Next it was pointed out by the Tribunal that the three persons, viz., Sri Basheshar Lal, Smt. G. Devi and Sri K. K. Nijhewan entered into an agreement of partnership by a deed dated May 20, 1967. Thus, according to the Tribunal, the first condition was satisfied.

6. According to the present partnership deed, the business was to be carried on with the assessee's own lorry and also with hired lorry. With reference to the relevant clauses of the partnership deed, it is pointed out by the Tribunal that there is nothing to show that there are two distinct and separate businesses. Clause 4 of the deed pointed to the common capital and Clause 8(a) to the common management by Sri Basheshar Lal, partner. The third partner, Sri Nijhewan is required to remain in charge of the Durgapur and Asansol branches in respect of the firm's businesses at those places. He is not excluded from the business from own lorries in those branches. Clause 4 does not detract from the right of Sri Nijhewan to represent the other partners or the partnership. But Clause 5 excludes Sri Nijhewan from sharing in the profits arising out of the business from own lorries. According to the Tribunal, the manner of sharing of the profits is only a matter inter se the partners and they are free to divide the profits in the manner they like. The contribution of capital by all the partners is also not necessary. It is specifically pointed out by the Tribunal that from the mere fact that one of the partners is excluded from sharing the profits from one of the activities of the partnership, no inference can be drawn that there are two distinct partnerships incorporated into one deed of partnership. Accordingly, it was held by the Tribunal that a valid partnership was constituted by the partnership agreement dated May 20, 1967, among all the three partners and that the assessee-firm was entitled to registration for the assessment year 1968-69. In the above facts and circumstances, the following question was referred to this court by the Tribunal:

' Whether, on the interpretation of the deed of partnership dated May 20, 1967, the Tribunal was correct in law in holding that a valid partnership came into existence and the assessee was entitled to registration ?'

7. Mr. B. L. Pal, learned advocate for the revenue, only presses the point that the third partner, Sri Nijhewan, having been excluded from sharing the income and/or loss from a portion of the business, viz., the business in the own lorries and having been excluded from the management, the deed of partnership dated May 20, 1967, was not a valid one. In the case of K.D. Kamath & Co. v. CIT : [1971]82ITR680(SC) , the Supreme Court laid down what would be the legal requirements to constitute a valid partnership. Section 4 of the Partnership Act defines partnership as follows (p. 689):

''Partnership' is a relation between persons who have agreed to to share the profits of a business carried on by all or any of them acting for all.'

8. At p. 695 of the report, their Lords-hips made observations to the effect that the mere nomenclature given to a document was by itself not sufficient to hold that the document in question was one of partnership. The two essential conditions to be satisfied are: (1) there should be an agreement to share the profits as well as losses of the business; and (2) the business must be carried on by all or any of them acting for all, within the meaning of the definition of partnership under Section 4 of the Partnership Act, The fact that the exclusive power and control, by agreement of the parties, is vested in one partner or the further circumstances that only one partner can operate the bank accounts or operate on behalf of the firm are not destructive of the theory of partnership provided the two essential conditions mentioned earlier are satisfied. Mr. Pal places before us the deed of partnership which finds place at p. 31 of the paper book. With reference to para. 5 of the deed, he argues that the third partner, Sri Nijhewan, will not be entitled to share any income or loss from the business in lorry owned by partners 1 and 2. He also draws our attention to Clause 8(i) wherein the party, Sri Basheshar Lal, was to be the manager of the partnership business and he was to devote his whole-time attention to the business. Thus, with reference to the decision of the Supreme Court referred to above, Mr. Pal argues that there was no agreement to share the profits or loss of the entire business and the business account was not to be carried on by all the partners.

9. Mr. N. K. Poddar, learned advocate for the assessee, with reference to para. 7 of the partnership, deed, points out that the first and second parties were to be entitled to interest at the rate of 9% on the capital invested in excess of the capital already contributed and such interest was to be considered as the expenses of the business and was to be deducted as such before arriving at the divisible profit and loss amongst the partners. It is also pointed out by him that the first party may be paid a monthly salary as the parties agree from time to time and such salary shall be considered as expenses of the business and shall be deducted as such before arriving at the divisible profit or loss amongst the partners. With reference to para. 15 of the partnership deed, Mr. Poddar points out that the profit and loss account and balance-sheet should be prepared and entered on a separate page and should be signed by each partner. Such statement, when signed, would be binding on them, save that, if any manifest error should be found therein, and, within three months, such error or errors would be rectified.

10. Mr. Poddar next urged that the third party might be excluded from a share in the income or loss of a branch of business but all the partners agreed how the shares of the entire business would be divided amongst the partners. This is a matter which is to be decided by the partners themselves. In the case of Raghunandan Nanu Kothare v. Hormasji Bezonji Bamji, AIR 1927 Bom 187, it was pointed out by a Division Bench of that court at p. 189 of the report that this related to the question, about sharing the profits, and that the partners can agree to share the profits in any way they like. They may agree to share them equally. They may also agree that one partner was to receive a fixed annual and monthly sum in lieu of a share varying in accordance with the profits actually earned.

11. As to the overall management by the first party it was pointed out by Mr. Poddar that all the partners to the partnership agreed to such an agreement. Under such agreement the first party was to be the manager of the partnership business and he was to devote his whole time and attention to the business. Under Section 4 of the Partnership Act the business must be carried on by all the partners or any of them acting for all. As observed by their Lordships of the Supreme Court in the case K. D. Kamath and Co. v. CIT : [1971]82ITR680(SC) there is implirit in the second requirement the principle of agency. Mr. Poddar also makes a reference to Section 8 of the Indian Partnership Act which lays down that a person may become a partner with another person in a particular adventure or undertaking. He also refers to the report of the special committee, particularly Clause 10 thereof, which reads as follows :

'Clause 10 is a new matter and is inserted to meet cases which are probably much more frequent in India than in England. The practice of establishing 'particular partnership' is most favoured by Indian firms with numerous branches, and the practice should not be hampered by doubts regarding the extent of the liabilities of the 'particular partner'.'

12. Thus, according to Mr. Poddar, no exception can be taken by the revenue to the third party being excluded from the profit or loss of a branch of a business by virtue of the agreement by and between all the parties.

13. Mr. Pal also refers to the decision of the Bombay High Court in the case of Umarbhai Chandbhai v. CIT : [1952]22ITR27(Bom) . The facts and circumstances stated therein are quite distinguishable from the facts of the present case. In that case under a partnership deed between a father and his two sons, the father had 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 and to determine what quantum of any profits should be distributed and what should be done with the remaining profits. It was accordingly held that there was no partnership in law and the I.T. authorities were right in refusing to register the deed under Section 26A of the Indian I.T. Act, 1922. This decision has little application to the facts and circumstances of the present case.

14. Thus, in view of the foregoing findings both the points raised by Mr. Pal cannot be entertained.

15. In the result, we answer the question in the affirmative and in favour of the assessee.

16. There will, however, be no order as to costs.

Sabyasachi Mukharji, J.

17. I agree.


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