Case: Kylasa Sarabhiah, Bombay Cloth Shop,Secunderabad Vs. Commissioner Of Income-Tax, Andhra Pradesh

business carried on by all or any of them acting for all. A firm is strictly not a person, it is an association of persons, and an agreement by which a firm purports to enter into a partnership with an individual or another firm merely makes the partners of that firm individually partners of the larger partnership. The problem posed by such a partnership agreement is under the general law academic but the right to registration under S. 26-A being conditional upon specification of the individual shares of the partners, a deed of partnership between a firm and an individual, which specifies the collective share of the firm, without more cannot be registered. It has been held by this Court in Dulichand Laxminarayan v. Commr. of Income-tax Nagpur (1956) 29 ITR 535 : ((S) AIR 1956 SC 354 ), that a partnership constituted between an individual a joint Hindu family and three firms could not be registered under S. 26-A of the Act. In Dulichands case (195) 29 ITR 535 : ((S) AIR 1956 SC 354 ), the partnership deed was signed by five individuals, viz., the karta of the joint Hindu family, one partner each of the three firms and the individual. It was held that the partnership could not be admitted to registration, because a firm as such cannot enter into an agreement as partner with another firm or individual, and also because all the members of the three firms had not personally signed the application as required by R. 2 of the Income-tax Rules. 6. The application in the present case was rejected by the Tribunal, because in its view the benefits to which the minors were admitted and the shares of the major partners who were members of the Yarn Shop were not specified, and that the Yarn Shop was introduced as a partner in the firm. But the Tribunal, in our judgment, erred in holding that the benefits to which the minors were admitted and the shares of the major members of the Yarn Shop were not specified in the deed of partnership. It is clearly recited in the preamble that K. Rajeshwarao, K. Harnath Babu, K. Ramesh Babu and K. Shivakumar - the four minors - were admitted to the benefit of the partnership with equal shares in the profits falling to the share of the yarn Shop, and losses were to be shared in equal shares only by the major partner K Veeresalingam, K. Nagendrarao and K. Madhusudhanarao. The scheme of the deed, therefore, was that the Yarn Shop collectively had a share of 0-6-9 in the profits and was liable in the same proportion in the losses in the appellant firm. Out of this 0-6-9 share, seven persons who constituted the Yarn Shop were entitled to share the profits equally, whereas losses were to be shared by the three major members of the Yarn Shop equally. It is true that in the deed of partnership, the first partner is described as Kyalasa Sarabhaiah Yarn firm -- the Yarn Shop constituted under an instrument of partnership dated May 12, 1955 and in paragraphs 3 and 8 this Yarn Shop is also described as the first partner. But the substance of the agreement cannot be permitted to be overshadowed merely by the use of the collective description of some of the persons who agreed to be partners. The agreement was between K. Veeresalingam, K. Nagendrarao K. Madhusudhanarao, Mahendrakar Narayana Rao, Noone Vittayya, Pottipalli Chandrayya and Gande Ramayya to enter into a partnership with the covenant that the profits and losses shall be divided in the shares specified in the instrument. The partnership agreement was signed by the major partners; the application for registration was in conformity with the rules framed under the Act, the certificate regarding the distribution of the profits in the previous year was given the original instrument of partnership was produced and the instrument specified the individual shares of the partners. Merely because the deed of partnership set out in paragraph 8 the collective of the Yarn Shop, registration could not be refused, for in the preamble the division of the shares of profits and losses among the three members of the Yarn Shop and those admitted to the benefit of the partnership is clearly indicated. The word specify is used in S. 26-A and R. 2 as meaning, mentioning, describing or defining in detail; it does not mean expressly setting out in fractional or other shares. In the deed of partnership, the shares are clearly defined, though they are not worked out in precise fractions. Nor is it true to say that the Yarn Shop is introduced as a partner. The agreement is in truth between three major members out of those who constitute the Yarn Shop and four outsiders. Each of them has signed the application and the covenants of the partnership agreement bind the covenants of the partnership agreement bind the partners individually. Indication in the deed of partnership that three of them held qua the Yarn Shop a certain relation did not affect their status as partners of the appellant firm individually. 7. It was urged that in the deed Sated February 20, 1952, constituting the Yarn Shop, as amended by the deed dated May 12, 1955, no profit sharing ratio was mentioned. But we are not concerned with the registration of the Yarn Shop. We are unable to appropriate how a defect (even if there be one in the agreement constituting the Yarn firm) affects the right of the appellant firm to be registered. If the statutory conditions which qualify the appellants for registration are fulfilled, an arrangement between some of the partners of the appellants which binds them to distribute the profits under a stipulation which is not a part of the partnership agreement does not affect the right to claim registration of the partnership agreement. 8. The answer recorded by the High Court must, therefore, be discharged, and an affirmative answer must be recorded.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]4. Registration of the firm may be obtained on an application to thex Officer on behalf of any firm, if the firm be lawfully constituted under an instrument of partnership which specifies, the individual shares of partners and thex Officer is satisfied that there is or was a genuine firm in existence as shown in the instrument. If the conditions are fulfilled, thex Officer has no power to reject the application. Undoubtedly, the application must strictly be in conformity with the Act and the Rules but in ascertaining whether the application is in conformity with the Rules, the deed of partnership must be reasonably construed5. Under the Indian Partnership act, 1932, 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. A firm is strictly not a person, it is an association of persons, and an agreement by which a firm purports to enter into a partnership with an individual or another firm merely makes the partners of that firm individually partners of the larger partnership. The problem posed by such a partnership agreement is under the general law academic but the right to registration under S.A being conditional upon specification of the individual shares of the partners, a deed of partnership between a firm and an individual, which specifies the collective share of the firm, without more cannot be registered. It has been held by this Court in Dulichand Laxminarayan v. Commr. ofx Nagpur (1956) 29 ITR 535  : ((S) AIR 1956 SC 354 ), that a partnership constituted between an individual a joint Hindu family and three firms could not be registered under S.A of the Act. In Dulichands case (195) 29 ITR 535  : ((S) AIR 1956 SC 354 ), the partnership deed was signed by five individuals, viz., the karta of the joint Hindu family, one partner each of the three firms and the individual. It was held that the partnership could not be admitted to registration, because a firm as such cannot enter into an agreement as partner with another firm or individual, and also because all the members of the three firms had not personally signed the application as required by R. 2 of the6. The application in the present case was rejected by the  Tribunal, because in its view the benefits to which the minors were admitted and the shares of the major partners who were members of the Yarn Shop were not specified, and that the Yarn Shop was introduced as a partner in the firm. But the Tribunal, in our judgment, erred in holding that the benefits to which the minors were admitted and the shares of the major members of the Yarn Shop were not specified in the deed of partnership. It is clearly recited in the preamble that K. Rajeshwarao, K. Harnath Babu, K. Ramesh Babu and K. Shivakumarwere admitted to the benefit of the partnership with equal shares in the profits falling to the share of the yarn Shop, and losses were to be shared in equal shares only by the major partner K Veeresalingam, K. Nagendrarao and K. Madhusudhanarao. The scheme of the deed, therefore, was that the Yarn Shop collectively had a share of9 in the profits and was liable in the same proportion in the losses in the appellant firm. Out of this9 share, seven persons who constituted the Yarn Shop were entitled to share the profits equally, whereas losses were to be shared by the three major members of the Yarn Shop equally. It is true that in the deed of partnership, the first partner is described as Kyalasa Sarabhaiah Yarn firmthe Yarn Shop constituted under an instrument of partnership dated May 12, 1955 and in paragraphs 3 and 8 this Yarn Shop is also described as the first partner. But the substance of the agreement cannot be permitted to be overshadowed merely by the use of the collective description of some of the persons who agreed to be partners. The agreement was between K. Veeresalingam, K. Nagendrarao K. Madhusudhanarao, Mahendrakar Narayana Rao, Noone Vittayya, Pottipalli Chandrayya and Gande Ramayya to enter into a partnership with the covenant that the profits and losses shall be divided in the shares specified in the instrument. The partnership agreement was signed by the major partners; the application for registration was in conformity with the rules framed under the Act, the certificate regarding the distribution of the profits in the previous year was given the original instrument of partnership was produced and the instrument specified the individual shares of the partners. Merely because the deed of partnership set out in paragraph 8 the collective of the Yarn Shop, registration could not be refused, for in the preamble the division of the shares of profits and losses among the three members of the Yarn Shop and those admitted to the benefit of the partnership is clearly indicated. The word specify is used in S.A and R. 2 as meaning, mentioning, describing or defining in detail; it does not mean expressly setting out in fractional or other shares. In the deed of partnership, the shares are clearly defined, though they are not worked out in precise fractions. Nor is it true to say that the Yarn Shop is introduced as a partner. The agreement is in truth between three major members out of those who constitute the Yarn Shop and four outsiders. Each of them has signed the application and the covenants of the partnership agreement bind the covenants of the partnership agreement bind the partners individually. Indication in the deed of partnership that three of them held qua the Yarn Shop a certain relation did not affect their status as partners of the appellant firm individually7. It was urged that in the deed Sated February 20, 1952, constituting the Yarn Shop, as amended by the deed dated May 12, 1955, no profit sharing ratio was mentioned. But we are not concerned with the registration of the Yarn Shop. We are unable to appropriate how a defect (even if there be one in the agreement constituting the Yarn firm) affects the right of the appellant firm to be registered. If the statutory conditions which qualify the appellants for registration are fulfilled, an arrangement between some of the partners of the appellants which binds them to distribute the profits under a stipulation which is not a part of the partnership agreement does not affect the right to claim registration of the partnership agreement8. The answer recorded by the High Court must, therefore, be discharged, and an affirmative answer must be recorded.