High Court Of Delhi
K.B. & Co. vs. CIT
Sections 2(23), 184
Asst. years 1973-74, 1974-75
Arijit Pasayat, C.J. & D.K. Jain, J.
IT Ref. No. 255 of 1979
31st October, 2000
K.R. Manjani, for the Petitioner : R.C. Pandey & Ms. Prem Lata Bansal, for the Respondent
ARIJIT PASAYAT, C.J. :
On being moved by the assessee under s. 256(1) of the IT Act, 1961 (in short the Act), the Tribunal Delhi Bench- C has referred the following question for opinion of this Court.
Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that on a true interpretation of cl. 8 of the partnership deed dt. 19th July, 1971 and cl. 9 of the partnership deed dt. 26th May, 1972, there was no partnership in existence and what was evident was only an employer-employee relationship in the garb of partnership ?
Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the action of the Revenue in refusing registration for the asst. yrs. 1973-74 and 1974-75 ?
2. Factual position as indicated in the statement of case is essentially as follows: One Brij Lal was carrying on business in the name and style of M/s K.B. & Co. on proprietorship basis upto 30th June, 1971. With effect from 1st July, 1971, a partnership was constituted on the basis of a deed of partnership, which was drawn up on 19th July, 1971. Shares in profit and loss were as indicated below : Name of partner Shares in Share in profit losses Shri Brij Lal 1/6th 1/3rd Smt. Asha Rani wife of Shri Brij Lal 1/6th 1/3rd Shri. Shrinder Kumar son of Shri Brij Lal 1/6th 1/3rd Moti Sagar minor son of Shri Brij Lal 1/6th -Prem Sagar minor son of Shri Brij Lal 1/6th -Vijay Sagar minor son of Shri Brij Lal 1/6th Clause 3 of the deed of partnership provided that it was not necessary for any of the partners or for the minors to invest any amount towards the capital of the firm. Clause 6 provided that the bank account of the firm shall be operated by Brij Lal alone and by others only on the authority of Brij Lal. Clause 7 stated that the goodwill of the partnership was to be the sole property of Brij Lal and that the other partners had no right in the same. Clauses 8 and 9 which have substantial effect on the dispute at hand read as follows : “8. The first party may, at any time or from time to time, require any of the other partners to quit the firm on one monthâs notice. The party/parties to whom such notice has been given shall and shall be deemed to have quit the partnership and shall have no concern with the firm after expiry of the notice period except receiving any amount lying at his credit. Such party shall be liable to pay any debit balance in his account ?” “9. The first party may, at any time or from time to time, require the other partner to quit the firm on one monthâs notice. The partner to whom such notice had been given shall and shall be deemed to have quit the partnership and shall have no concern with the firm after expiry of the notice period except that of receiving any amount lying at his credit. Such party shall be liable to pay any debit balance in his account.” On 3rd Oct., 1971, Asha Rani died. With effect from 4th Oct., 1971, there was consequential change in the constitution of the partnership. A deed of partnership to record this change was drawn up on 26th May, 1972. As per the said deed, Brij Lal and Surinder Kumar became entitled to 1/5th share each in the profits of the firm and were to share the losses equally. Three minor sons became entitled to 1/5th share each in the profits. Other terms of the deed remained the same as regards operation of bank account and goodwill. No capital was required to be contributed by any of the partners under this deed also. The firm closed its account for the first time on 30th June, 1972, and applied for registration on Forms 11 and 11A for the asst. yr. 1973-74. The ITO refused registration by an order under s. 185. He noted that only Brij Lal had invested capital. The goodwill belonged to him exclusively and he could ask any other partner to quit. Additionally, he could decide whether any amount was required as loan and was authorised to execute necessary documents for that purpose. No intimation was sent to the bank or the Registrar of Firms regarding constitution of the firm or the change therein. Profits of the firm had not been distributed amongst the alleged partners or credited to their capital accounts. In these circumstances, it was held that the business actually belonged to Brij Lal as proprietor. The entire income of the alleged partnership was assessed in the hands of Brij Lal as an individual. Assessee preferred an appeal before the AAC, who confirmed the ITOâs views. As regards asst. yrs. 1974-75, ITO following its earlier order refused registration. Only factual change was that Moti Sagar, one of the minor sons, had attained majority and a new partnership deed was executed. Moti Sagar attained majority on 7th July, 1972, and he elected to continue in the partnership. In the new deed of partnership dt. 26th July, 1972, operating from 7th July, 1972, Moti Sagar became entitled to 1/5th share in profits and was also liable for 1/3rd share in losses. Clause 7 of the deed was in pari materia with cls. 8 and 9 of the deed of partnership deeds dt. 19th July, 1971, and 26th May, 1972, respectively. The AAC confirmed refusal for this year following the order passed in the previous year. Assessee preferred appeals before the Tribunal. It was urged that essential ingredients constituting partnership existed and the authorities below were not justified in refusing registration. Tribunal upheld the action of the authorities below. Though it was accepted that partnership cannot be said to be genuine because of one of the partners retained the right to operate the bank account or reserved exclusive rights in the goodwill of the firm or that only one of the partners had made investments, yet in view of cl. 8 of the deed of partnership dt. 19th July, 1971 and cl. 9 of the deed dt. 26th May, 1972, there was no genuine partnership in existence. It was, inter alia, observed that absolute power reserved by Brij Lal to himself to dismiss any of the partners regardless of any consideration whatsoever does not show the existence of a partnership but reveals more of an employer and employee relationship in the garb of partnership. As position for 1974-75 was same as that of the year 1973-74, for that year also registration was refused. Though it was noticed by the Tribunal that registration could be refused on the ground of non-distribution of profits, that was not considered as on other grounds refusal of registration was being upheld.
On being moved for reference, as stated above, questions quoted have been referred for opinion of this Court. In support of the application it has been submitted that true essence of the agreement was not appreciated by the Revenue authorities as well as the Tribunal. Merely because one of the partners had the right to ask others to quit, that did not per se bring in the concept of employer-employee relationship. Learned counsel for Revenue, on the other hand, submitted that a bare reading of the relevant clauses makes it abundantly clear that there was no element of partnership and what was tell-tale was employer-employee relationship. To appreciate rival submissions, the principles laid down by the apex Court in the matter of grant of registration need to be noticed. In K.D. Kamath & Co. vs. CIT (1971) 82 ITR 680 (SC) : TC 33R.1459, it was observed that legal requirements under s. 5 of the Indian Partnership Act, 1932 (in short the Partnership Act) to constitute a partnership in law are: (i) there must be an agreement to share the profits or losses of the business; and (ii) the business must be carried on by all the partners or any of them acting for all. There is implicit in the second requirement of the principle of agency.
6. We will now refer to some of the provisions of the Act as well as the Partnership Act. Sec. 2(23) of the Act provides that the expressions “firm”, “partner” and “partnership” have the same meaning respectively as in the Partnership Act. Chapter XVI deals with “Special provisions applicable to firms”. Sec. 184 of the IT Act lays down the procedure regarding registration of firms. Sec. 59 (sic-295) authorises the Central Board of Revenue, subject to control of the Central Government to make rules for carrying out the purpose of the Act. The relevant IT Rules lay down the details of the procedure for making an application for registration of a firm as contemplated under s. 184. As there is no controversy that the application has been made by the appellant in accordance with s. 184 and the relevant rules, it is unnecessary for us to quote the section and the relevant rules i.e., IT Rules, 1962 (in short, Rules). Part V thereof deals with “registration of firms”. Coming to the Partnership Act, s. 4, which defines “partnership”, 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.” Sec. 6 deals with the mode of determining the existence of partnership. As per that section, 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 is to be had to the real relation between the parties as shown by all relevant facts taken together. Sec. 11(1) provides that subject to the provisions of the Act, the mutual rights and duties of the partners of a firm may be determined by contract between the partners and such contract may be expressed or may be implied by a course of dealing. It further provides that such contract may be varied by consent of all the partners and such consent may be expressed or may be implied by a course of dealing. Sub-s. (2) dearly provides that, notwithstanding anything contained in s. 27 of the Indian Contract Act, the contract between the partners may provide that a partner shall not carry on any business other than that of the firm while he is a partner. Sec. 12 in cls. (a) to (d) deal with the rights and duties of a partner, but that again is subject to contract between the partners. Sec. 14 deals with property of the firms. Sec. 18 provides that, subject to the provisions of the Act, a partner is the agent of the firm for the purpose of the business of the firm, s. 18(1) provides that, subject to the provisions of s. 22, the act of a partner which is done to carry on, in the usual way, the business of the kind carried on by the firm binds the firm. It further states that the authority of a partner to so bind the firm conferred by the said section is called his “implied authority”. Sub-s. (2) enumerates the various matters, which a partner cannot do under the implied authority, in the absence of any usage or custom of trade to the contrary. Sec. 20 dealing with the extension and restriction of partnerâs implied authority runs as follows : “20. Extension and restriction of partnerâs implied authorityâthe partners in a firm may, by contract between the partners, extend or restrict the implied authority of any partner. Notwithstanding any such restriction, any act done by a partner on behalf of the firm which falls within his implied authority binds the firm, unless the person whom he is dealing, knows of the restriction or does not know or believe that partner to be a partner.”
7. It was, inter alia, submitted on behalf of the assessee with reference to the conferment of various clauses of the deed of partnership that the fact that exclusive power and control of the business is in one person and further circumstances that only one person can operate bank account are not destructive of the theory of partnership provided two essential conditions are satisfied. At this juncture, it is to be noted that the Tribunal relied on s. 33 of the Partnership Act to conclude that element of partnership was absent. Said s. 33 provided that a partner may not be expelled from the partnership by any majority of the partners except in exercise of powers in good faith conferred by contract between the partners. In other words, the power of expulsion can be conferred provided such an action is taken in good faith. Whether the relationship of partnership exists in a given case must be determined on the fats of each case, bearing in mind the fact that two essential ingredients of the partnership that (a) there should be an agreement to share the profits and losses of the business, and (b) each of the partners should be acting as the agent of all. In that case cl. 5 of the deed of partnership which was relied upon by the Revenue to refuse registration read as follows : “That the first party shall be the managing partner, the second the financing partner and the third and fourth are admitted as working partners, respectively. The managing partner shall have full rights of either admitting new partners, raising additional funds and loans, etc. for the business and in case it is found that the activities of the working partners are found detrimental to the interest of the firm, he has powers to expel them or to restrict their powers in the interest of the firm. In all important matters the working partners shall have to seek advice from the managing partner and act accordingly.” There also, power of expulsion was given and working partners were to seek advice from the managing partner and act accordingly in all important matters. It was held that cl. 5 of the deed was not repugnant to the provisions of the Partnership Act and it cannot be said that in view of the provisions of cl. 5 element of agency is lacking Mr. R.C. Pandey, learned counsel for the Revenue submitted that power of expulsion was not absolute power and it was only where the activities of the working partners were found detrimental to the interest of the firm, the power is given for expulsion.
8. In CIT vs. Pathrose Rice and Oil Mills (1960) 40 ITR 353 (Ker) : TC 33R.1474 cls. 7 and 8 of the deed of partnership were held to be not militating against the provisions of the agency. The said clauses read as under : “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 send out partners No. 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.” The said case seems to be standing on a similar footing as the case at hand. Learned counsel for the Revenue wanted to bring distinction by submitting that partners 2 and 3 had the powers to withdraw from the partnership joint or severally and such a stipulation is not there in the present case. We do not think that such a distinction is of any relevance. For withdrawing there is no legal necessity for a specific mention in the deed of partnership if the partnership is at will. We do not think that specific mention relating to power of the partners 2 and 3 to withdraw from partnership jointly and severally made the case distinguishable from the present case. Above being the position, Tribunal was not justified in upholding the order of the Revenue authority i.e., in refusing registration. But that brings us to the question as to whether was assessee per se entitled to be granted registration. One of the grounds on which registration was refused by Revenue was non-distribution of profits. Tribunal will consider this aspect afresh as it had not done so, as on the other aspects it had upheld refusal of registration. In the circumstances, we direct the Tribunal to rehear the appeals on the question of granting registration. The effect of nondistribution of profit on the question of registration is to decided afresh by the Tribunal. Reference is accordingly disposed of.
[Citation : 248 ITR 706]