Case: Commissioner Of Income-Tax, Ahmedabad Vs. A. Abdul Rahim &amp; Co., Baroda

is a mere trustee of the real owner and he has no beneficial interest in the property or the business of the real owner. But in law, just as in the case of a trustee, he can also enter into a partnership with others.10. If so, what is the principle of law which prohibits the benamidar of a partner from being also a partner along with the said partner with others? Qua the other partners, he has separate and real existence; he is governed by the terms of the partnership deed; his rights and liabilities are governed by the terms of the contract and by the provisions of the Partnership Act; his liability to third parties for the acts of the partnership is co-equal with that of the other partners; the other partners have no concern with the real owner; they can only look to him for enforcing their rights or discharging their obligations under the partnership deed. Any internal arrangement between him and another partner is not governed by the terms of the partnership; that arrangement operates only on the profits accruing to the benamidar; it is outside the partnership arrangement. If a benamidar possesses the legal character to enter into a partnership with another, the fact that he is accountable for his profits to, and has the right to be indemnified for his losses by, a third party or even by one of the partners does not disgorge him of the said character.11. It is true that different considerations may arise, if the partnership is only between two persons of whom one is a benamidar of the other. In that event the partnership may be bad not because the benamidar has no power to enter into the partnership but because the partnership in law is the relationship between at least two persons and in the case of a benamidar and the real owner in fact there is only one person. It may also be that in a case where a benamidar is taken as a partner with the consent of the other partners, he will only be a "dummy". We do not propose to express any final opinion on the said two questions, as they do not arise in this appeal.12. A Division Bench of the Bombay High Court in In re Central Talkies Circuit, Matunga, (1941) 9 ITR 44 at p. 52 : (AIR 1941 Bom 205 at p. 207) held that there was evidence to justify the finding of the Income-tax authorities that the alleged partnership was not a genuine partnership and that they acted rightly in refusing to register the firm. That finding was sufficient to dispose of the reference before the Court. But Beaumont, C. J., in the course of the judgment made some observations which lend support to the contention of the appellant. The learned Chief Justice said :"Speaking for myself, I should say that if it were shown that one of the partners was only a nominee of a share allotted to him or her for another partner, the deed would not then specify correctly the individual shares, I think it must specify correctly the individual and beneficial shares, because that is a matter which is relevant from the point of view of the Income-tax authorities. If the Assistant Commissioner had any evidence before him to lead to the conclusion that the mother in the case was not really entitled to a beneficial interest of 4 1/2 annas share, I think he was justified in refusing to register the deed."With great respect, we cannot agree with the said observations. If a benamidar has the character of a trustee and, therefore, can enter into partnership with another in his own name, the share allotted to him in the partnership must be held to specify correctly his individual share therein. Kania, J., as he then was, did not express any opinion on this aspect of the case. A Division Bench of the Andhra Pradesh High Court in Hiranand Ramsukh v. Commr. of Income-tax, Hyderabad (1963) 47 ITR 598 (Andh Pra), held that a person shown as a partner in a partnership deed was not a genuine partner and, therefore, the Income-tax Officer was perfectly justified in refusing to register the firm. There the assessee-firm originally consisted of 2 partners with equal share, namely, Ramprasad an Bhagwandas. After the death of Bhagwandas, Ramprasad took his aunt, Mrs. Chandrabai, and his minor son as partners. The Income-tax Officer held that both Mrs. Chandrabai and Ramprasads minor son were not genuine partners but were dummies, and they were shown merely as partners to reduce the incidence of tax. As two of the three partners were not genuine partners, the partnership itself was not genuine. Though Some of the observations in the judgment are wide, that decision does not touch the present case. The decision of the Madras High Court in P. A. Raju Chettiar v. Commr. of Income-tax, Madras (1949) 17 ITR 51 : (Al R 1949 Mad 516) , is also one where the finding was that the partnership was not a genuine one. That decision also is besides the point.13. The legal position may be stated thus : When a firm makes an application under S. 26-A of the Act for registration, the Income-tax Officer can reject the same if he comes to the conclusion that the partnership is not genuine or the instrument of partnership does not specify correctly the individual shares of the partners. But once he comes to the conclusion that the partnership is genuine and a valid one he cannot refuse registration on the ground that one of the partners is a benamidar of another. If the partnership is genuine and legal, the share given to the benamidar will be the correct specification of his individual share in the partnership. The beneficial interest in the income pertaining to the share of the said benamidar may have relevance to the matter of assessment, but none in regard to the question of registration.

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

Explanation:
1[ds]6. In the present case the partnership was found to be a genuine one. All the formalities prescribed by the rules have been complied with. The individual shares of the partners as shown in the Instrument of Partnership have been specified in the application. Therefore, unless there is some legal impediment in the way of a benamidar of one of the partners being a partner of the firm, the Income-tax Officer would not be exercising his jurisdiction if he rejected the application forS. 2 (68) of the Act, "firm" "partner" and "partnership" have the same meanings, respectively, as in the Indian Partnership Act, 1932 (IX of 1932) : provided that the expressions "partner" includes any person who being a minor has been admitted to the benefits of partnership. Under S. 4 of the Indian Partnership Act. "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. If the partnership is genuine, as it is held in the present case, it follows that the 4 partners mentioned in the partnership deed must be held to have Agreed to share the profits of the business carried on by them in the manner specified in the document. Indeed, in the present case the Instrument of Partnership and the application for registration contain clear recitals that the 4 partners have clear and definite shares in the profits of theview of the finding given by the Tribunal that the Instrument of Partnership was genuine, it follows that it was not executed as a pretence in order to escape liability for tax, but in truth it defined the rights and liabilities of the parties between themselves.It is true that different considerations may arise, if the partnership is only between two persons of whom one is a benamidar of the other. In that event the partnership may be bad not because the benamidar has no power to enter into the partnership but because the partnership in law is the relationship between at least two persons and in the case of a benamidar and the real owner in fact there is only one person. It may also be that in a case where a benamidar is taken as a partner with the consent of the other partners, he will only be a "dummy". We do not propose to express any final opinion on the said two questions, as they do not arise in thisgreat respect, we cannot agree with the said observations. If a benamidar has the character of a trustee and, therefore, can enter into partnership with another in his own name, the share allotted to him in the partnership must be held to specify correctly his individual share therein. Kania, J., as he then was, did not express any opinion on this aspect of the case.The legal position may be stated thus : When a firm makes an application under S. 26-A of the Act for registration, the Income-tax Officer can reject the same if he comes to the conclusion that the partnership is not genuine or the instrument of partnership does not specify correctly the individual shares of the partners. But once he comes to the conclusion that the partnership is genuine and a valid one he cannot refuse registration on the ground that one of the partners is a benamidar of another. If the partnership is genuine and legal, the share given to the benamidar will be the correct specification of his individual share in the partnership. The beneficial interest in the income pertaining to the share of the said benamidar may have relevance to the matter of assessment, but none in regard to the question ofis, therefore, settled law that if a partnership is a genuine and valid one, theOfficer has no power to reject its registration if the other provisions of S.of the Act and the rules made thereunder are complieda benamidar is a mere trustee of the real owner and he has no beneficial interest in the property or the business of the real owner. But in law, just as in the case of a trustee, he can also enter into a partnership with others.10. If so, what is the principle of law which prohibits the benamidar of a partner from being also a partner along with the said partner with others? Qua the other partners, he has separate and real existence; he is governed by the terms of the partnership deed; his rights and liabilities are governed by the terms of the contract and by the provisions of the Partnership Act; his liability to third parties for the acts of the partnership iswith that of the other partners; the other partners have no concern with the real owner; they can only look to him for enforcing their rights or discharging their obligations under the partnership deed. Any internal arrangement between him and another partner is not governed by the terms of the partnership; that arrangement operates only on the profits accruing to the benamidar; it is outside the partnership arrangement. If a benamidar possesses the legal character to enter into a partnership with another, the fact that he is accountable for his profits to, and has the right to be indemnified for his losses by, a third party or even by one of the partners does not disgorge him of the said character.