K. C. SEN J. - In this reference under section 66(1) of the Income-tax Act, 1922 (hereinafter called the Act), the following question of law has been referred to this court for its opinion :
'Whether, on the facts and in the circumstances of the case, there was any partnership in the year of account within the meaning of section 4 of the Indian Partnership Act, which is entitled to registration under section 26A of the Indian Income-tax Act ?'
The facts which gave rise to the above question are briefly stated as follows :
Anil Krishna Paul and Jogendra Nath Nandi had acquired a right of receiving commission of 1% on sales from Messrs. Annapurna Cotton Mills. The said Jogendra Nath Nandi died on the 7th June, 1950. Along with Anil Krishna Paul, he entered into an agreement dated 26th January, 1950. The benefits of the agreement were transferred in favour of the applicants, Sunil Krishna Paul and Amar Krishna Poddar, by a deed of assignment dated 10th December, 1951, executed by Anil Krishna Paul and the legal heirs of Jogendra Nath Nandi. On the 9th of August, 1954, the assignees, Sunil Krishna Paul and Amar Krishna Poddar, entered into a partnership to share the commission receipts and the instrument of partnership was executed on the said date. It was alleged by the applicants that they carried on the business of partnership by employing staff in order to verify the correctness of the sales of the company. Such expenses at the time of assessment were allowed as deductions by the department.
The relevant year of assessment is 1956-57. For this assessment year an application was made on behalf of the said partnership to the Income-tax Officer for registration of the firm under section 26A of the Act. The Income-tax Officer found that no business was carried on by the applicant and therefore it did not constitute a partnership which could be registered under section 26A. Accordingly in terms of such a decision the Income-tax Officer treated the applicants as an 'association of persons' and made the assessment in that status. In appeal against the assessment made, the Appellate Assistant Commissioner affirmed the order of the Income-tax Officer. When matter came up before the Appellate Tribunal it held that the agreement for the alleged partnership in this case was nothing but an agreement to share the income and the alleged partners did not carry on any business activity. On this finding the Tribunal came to its decision that the claim of the applicant for registration under section 26A of the Act was not sustainable.
In view of the frame of the question it is necessary to decide whether the instrument of partnership dated the 9th of August, 1954, brought into existence a partnership within the meaning of section 4 of the Indian Partnership Act.
Mr. Subimal Roy, learned counsel appearing for the applicants, raised various points attacking the decision of the Tribunal. Before dealing with the details of his argument, it is necessary to set out the relevant provisions of the instrument of partnership dated the 9th August, 1954. The preamble runs as follows :
'Whereas both the said first and second parties acquired the right to receive commission at the rate of 1% on the gross sales effected by Messrs. Annapurna Cotton Mills Limited, a limited liability company incorporated under the Indian Companies Act, 1913, having its registered office at 214, Cross Street, Calcutta 7, in perpetuity :
And whereas both the first and second parties mutually agreed between themselves to share the said commission in co-partnership in equal half-share each :
And whereas in addition to sharing the commission the said two parties further agreed between themselves to carry on other business as they may from time to time agree upon in co-partnership :
And whereas in pursuance of the said agreement the said two parties have been sharing the said 1% commission between themselves in equal half-share with effect from 10th December, 1951...... Now this memorandum of agreement made this the 9th day of August, 1934, hereby withness the and confirms as follows :'
Of all the clauses set forth therein the following clauses are relevant for the purpose of considering whether a partnership business was actually entered upon : (5) Proper records and accounts of this partnership shall be kept at the principal place of business and shall be open to inspection by both the partners at any time during the working hours. (6) Accounts of this partnership shall be closed and adjusted at the end of every Bengali year. (7) Profits and/or losses of this partnership shall be borne by the said two partners in two equal shares.
It has already been said that the aforesaid applicants employed staff in order to verify the correctness of the sales of the company. Further, it appears from the aforesaid clauses that provision for maintenance of record and the closing of yearly accounts at the end of each Bengali year was made and the principal place of business was also specified.
On the basis of the above intrinsic evidence in the instrument, it has been mainly argued by Mr. Subimal Roy that a business in the true sense of the term was being carried on by the applicants, and, therefore, an actual partnership business was created in order that it may come within the ambit of section 4 of the Indian Partnership Act. He also lays great stress upon the fact that the elements of a business are present in the instant case, as a staff was employed for the purpose of verifying the correctness of the sales of the Annapurna Cotton Mills Ltd. It is said by him that, on a proper construction of Section 4 of the Indian Partnership Act, it appears that some occupation or activity within the meaning of section 4 read with section 2(b) of the Partnership Act is involved and such a business does not necessarily mean an undertaking of an industrial or commercial nature. He has referred us to section 2(b) and section 4 of the Indian Partnership Act, which runs as follows :
'Business includes every trade, occupation and profession.' The corresponding definition in Income-tax Act is to be found in section 2(4) where it has been stated that 'business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.'
The definition of 'business' in both the Acts as argued by Mr. Subimal Roy is inclusive and not exhaustive, it has an extending force and does not limit the meaning of the term. Accordingly, he lays emphasis upon the word 'occupation' as appearing in section 2(b) and urges that in so far as the application was in pursuit of an occupation it was a partnership business within the meaning of section 4 of the Indian Partnership Act. It runs as follows :
'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.'
It may be noticed in this definition that an element of carrying on of a business is present and in section 10 of the Act also it is provided that the tax shall be payable by an assessee under the head 'profits and gains of business, profession or vocation and in respect of the profits and gains of any business, profession or vocation carried on by him.' Both the sections accordingly contemplate that the business must be carried on by the partners or the assessee as the case may be. Before dealing with the question as to what the expression 'business carried on' means, we shall refer to some decisions placed before us by Mr. Subimal Roy in support of his contention. His main contention is that a business does not necessarily mean that income and profit should invariably by derived therefrom and this does not involve any undertaking of an industrial or commercial nature. Mr. Roy has referred us to the observations of this court in the case of Rogers Pyatt Shellac & Co. v. Secretary of State for India. At page 1088 their Lordships observed that the word 'business' is one of large and indefinite import and connotes something which occupies attention and labour of a person for the purpose of profit. The word means almost anything which is an occupation or a duty requiring attention as distinguished from sport or pleasure and is used in the sense of an occupation continuously carried on for the purpose of profits. A concern by reason of which one can be said to have connection with such as occupation is business connection. In making this observation their Lordships of this court referred to the decision of Smith v. Anderson, Rolls v. Miller and Commissioners of Inland Revenue v. Marine Steam Turbine Co. Ltd. These cases were also referred to us by Mr. Subimal Roy. In the case of Rolls v. Miller, it appears that the lease of a house contained a covenant that the lessee should not use, exercise or carry on upon the premises any trade or business of any description whatsoever. As there was a breach of covenant a suit was instituted for injunction and other reliefs. It was held by their Lordships that a charitable institution which was set up on the disputed premises called 'a Home for Working Girls' where the inmates were provided with board or lodging, whether any payment was taken or not, was a business and came within the restrictions of the covenant. It is not essential that there should be payment in order which without payment is not a business. Lindley L. J. at page 88 of the report observed that the word 'business' means almost anything which is an occupation, as distinguished from pleasure, anything which is an occupation this observation and has argued that the finding of the Tribunal that the business did not partake of the nature of a partnership business, as no activity whereby the profits are earned is involved, was wrong. It will appear from the order of the Tribunal that there was no business within the meaning of section 4 of the Indian Partnership Act as from the instrument of agreement it is apparently clear that the agreement was for merely sharing the income in definite proportion and, therefore, the relationship between the two applicants was no better than that of an 'association of persons'. Further it was found that the employment of the staff for verifying the sales was not for earning the profit but it was for ascertaining the income already earned.
Mr. Roy however in the second branch of his argument does not dispute that business connotes organised course of activity or conduct with a set purpose for earning the profit or to exploit the property purchased in order that one should get the highest amount. Accordingly, it is submitted that, in the instant case, unless there was the activity of keeping a watch as to whether Annapurna Cotton Mills Ltd. were not suppressing the quantum of sale, by employment of staff, the income could not have been earned. On a perusal of the instrument of partnership it appears quite clear that the so-called partners were not to bestir themselves in any way for the purpose of earning the income or profits as the amount payable to them was fixed in terms of an agreement with the Annapurna Cotton Mills Ltd. and that the employment was made only for the purpose of keeping a watch as to whether the earned income was properly coming into their coffers. Accordingly, it cannot be said that the applicants were carrying on a business within the meaning of section 4 of the Indian Partnership Act. The expression 'to share the profits of a business carried on' in section 4 really means that there must be some contribution by the partners to the growth or enlargement of business and with this end in view the partners must be pursuing the business in such a manner that it can apparently be seen that they were prosecuting or promoting the business. Such elements are absolutely absent in the instrument of partnership in so far as earning the profits from the Annapurna Cotton Mills Ltd. is concerned and, as such, if we construe the true import of the words used in section 4 of the Indian Partnership Act, it cannot be said that any business was being carried on by the applicants. This being the position, it may very well be said that there is no partnership, as there is absence of combination for carrying on the business. The mere fact that the applicants own in common something which produces returns and divide this return according to respective interest, does not make them partners. As regards sharing the profits within the meaning of section 4 of the Indian Partnership Act, a mere common interest will not make a partnership unless there is a common business. It is indeed true that a right to participate in the profits of trade and business is a strong test of partnership, but in so far as the instant case is concerned, it has already been found that there is no business within the meaning of section 4 of the Indian Partnership Act and accordingly such a test alone does not in any way advance the case of the applicants. The overall position is that the relationship between the applicants must depend upon their intention and conduct in the matter of execution of the business in their capacity as partners. The intention or conduct of the applicants as appearing from the instrument negatives the theory of partnership between them. They appear to be out and out 'association of persons' for sharing profits. They may as such appoint staff for facility of faultless collection of profits but that by itself does not necessarily establish a partnership within the meaning of the Partnership Act, 1932. Accordingly, it seems to us that the principles enunciated in the aforesaid decision do not apply to cases governed by the provisions of section 4 of the Indian Partnership Act. Section 6 of this Act provides that in determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relations between the parties as shown by all relevant facts taken together. Explanation 1 of this section provides that the sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners. The expression 'of itself', within this Explanation 1, connotes that there may be other elements excepting sharing of profits which may constitute partnership. We are, however, of opinion that excepting appointment of staff for the purpose stated before no other element for constitution of partnership has been made out and accordingly the finding of the tribunal in this regard appears to be correct.
The next point for consideration is whether the income-tax authorities were justified in disallowing the application of the applicants under section 26A of the Act. Section 23(5) (a) of the Act provides that in the case of a registered firm the income tax payable by the firm itself shall be determined. In order to invoke this provision a firm need be registered under section 26A of the Act. This section contemplates that certain conditions are essential to the registration of a firm. It is necessary that on behalf of the firm an application should be made to the Income tax Officer by such persons and at such times and containing such particulars and being in such form and verified in such manner as are prescribed by rules 2 to 6B framed under the Act. Another condition, inter alia, is that the partnership must be valid and genuine and must actually exist in the terms specified in the instrument. When an instrument is presented for registration under section 26A, the Income tax Officer is entitled to enquire whether the instrument is intended by the parties to have real effect as governing 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 from tax. So if the Income tax Officer has exercised his judicial discretion in disposing of the application of the applicants according to law, no question can arise for interference. In the instant case it appears that the Tribunal proceeded on the right direction in negativing the assessees plea on the ground that there was no business in terms of section 4 of the Indian partnership Act. It has been observed in a case, N. R. Wadia and Co. v. Commissioner of Income-tax, that it does not follow from the provisions of section 2(6B) of the Income-tax Act which lays down that the expression 'firm', 'partner' and 'partnership' have the same meanings respectively as in the Partnership Act, that the provisions relating to registration of firms must be pitchforked into cases arising under the Income tax Act. Those provisions are not determinative of any question as to the existence of partnership which may arise under the Income tax Act and certainly not conclusive of the existence of a partnership as a matter of law in any matter to be dealt with under this fiscal enactment. The next case to which reference may be made is in Ramniklal Sunderlal v. Commissioner of Income tax. On the facts placed by their Lordships of the Bombay High Court, it was observed that although there was an agreement and the element of agency and authority was also present in the case, the third necessary element, viz., a business which must be carried on by all or one of the partners, was not present; and that as the assessee could not be said to be carrying on business it was not entitled to registration under section 26A of the Act.
In the present case also we have already shown that the primary requirement that there must be an actual carrying on of a business before a partnership can be said to have resulted is absent. The profits were automatically earned and there was no volition or activity on the part of the applicants for the purpose of accelerating the growth of the business and that the fact that earnings were merely watched does not in any was warrant the conclusion that the applicants were promoting or prosecuting the business. In the circumstances it may be said that the petition under section 26A of the Act was rightly dismissed.
1. Having regard to the terms of the instrument of partnership and also the actual facts which came to the notice of the Income tax Officer in the relevant accounting year, it cannot be said that there was any partnership within the meaning of section 4 of the Indian Partnership Act.
2. Applying the provisions of section 6 and Explanation 1 thereto of the Indian Partnership Act, it appears clear that there was no case of partnership but the applicants were merely co-owners.
3. Unless there is a business carried on (prosecuted or promoted by active endeavour for earning profits) by the parties to the instrument, there can be no partnership in law. The provisions in the instrument relating to the maintenance of proper records and accounts or as to profits and losses being borne by the parties equally will not make any difference as to the legal position that no business was carried on a aforesaid.
4. The mere registration under the Partnership Act will not be conclusive on the point that a partnership was really in existence as the principal element as to the carrying on of the business is lacking.
5. The Appellate Tribunal found as a fact that no business was carried on in the relevant accounting year. As such even assuming but not finding that there is a partnership in the instant case within the meaning of section 4 of the Indian Partnership Act, the applicants were not entitled to the benefit of registration under section 26A of the Act.
5. Section 2(6B) of the Indian Income tax Act which attracts the definition from the Partnership Act does not determine any question as to the existence of a partnership which may arise under section 26A read with the statutory rules relating to registration.
In the above premises, our answer to the question must be in the negative. The applicants will pay the costs to the respondents.
MITRA J. - I agree.
Question answered in the negative.