Case: K.D. Kamath and Company Vs. Commissioner of Income Tax, Mysore

he appellant is a firm consisting of six partners and the partnership was constituted under the document dated March 20, 1959. The business of the partnership, as recited in the deed, is stated to have been carried on in partnership from October 1, 1958. The partnership was registered under the Indian Partnership Act, 1932 (hereinafter to be referred as "the Partnership Act"), on or about August 11, 1959. For the assessment year 1959-60, corresponding to the previous year ending March 31, 1959, the appellant filed an application to the Income-tax Officer, " A " Ward, Dharwar, under section 26A for registration of the partnership in the name of M/s. K. D. Kamath and Co. The Income-tax Officer, by his, order dated September 28, 1960 declined to grant registration on the ground that there was no genuine partnership brought into existence by the deed of March 20, 1959, and that the claim of the firm having been constituted is not genuine. The said officer further held that the business should be held to be the sole concern of K. D. Kamath. For coming to this conclusion, the Income-tax Officer has mainly relied on clauses 8, 9, 12 and 16 of the partnership deed. Though the Income-tax Officer has used a loose expression that there is no genuine partnership, the sum and substance of his finding is that there is no relationship of partners inter se created under the said documentThe assessee carried the matter in further appeal I.T.A. No. 3220 of 1961-62 (assessment year 1959-60) before the Income-tax Appellate Tribunal, Bombay Bench "B". The Appellate Tribunal, after a reference to the relevant clauses in the partnership deed, came to the conclusion that the two essential requirements as laid down by the courts for determining whether there is a partnership, namely, an agreement between the parties to share profits and each of the parties acting as agent of all, are fully satisfied in this case. In this connection the Tribunal placed reliance on the decision of the Bombay High Court in Balubhai Gulabdas Navlakhi v. Commissioner of Income-tax and distinguished an earlier decision of the same court reported in Umarbhai Chandbhai v. Commissioner of Income-tax. Ultimately, the Appellate Tribunal held that the partnership deed makes it clear that profits and losses are to be shared between the parties and that, subject to the over-riding authority of K. D. Kamath, the other partners could act for the firm. In this view, the Appellate Tribunal held that the deed does create a relationship of partners inter se between the parties thereto and directed the Income-tax Officer to register the firm under section 26A of the Income-tax ActThe Commissioner of Income-tax, Bangalore, respondent herein made an application on October 4, 1962, under section 66(1) of the Income-tax Act praying for a reference being made by the Appellate Tribunal to the High Court of the question of law mentioned in the application. The said application was numbered as 66/RA-978 of 1962-63. The Appellate Tribunal, accordingly, submitted an agreed statement of case and referred to the High Court for its opinion the following question of law" Whether on the facts and in the circumstances of the case, M/s. K. D. Kamath & Co. could be granted registration under section 26A of the Act for the assessment year 1959-60 ? "The High Court by its judgment and order dated January 21, 1964, in I.T.R. C. No. 13 of 1963 answered the question referred to it against the assessee and held that the appellant firm could not be granted registration under section 26A for the assessment year 1959-60. it is against this decision of the High Court that the assessee has filed the above appealThe High Court has generally considered the effect of clauses 5 to 9, 12 and 16 of the partnership deed. The High Court also considered the question whether the partnership deed satisfies the two essential requisites to constitute the partnership, namely: (1) whether there is an agreement to share profits as well as the losses of the business, and (2) whether each of the partners under the deed can act as agent of all.

Reasoning:
15. In similar cases, where the control and management was vested in the hands of one partner and where it was also provided that only one partner can operate on the bank account and the others can do so, only if authorised by him, and that only one party can borrow on behalf of the firm for all have been held not to militate against holding a particular document as creating the relationship of master and servant. Those decisions are of the Kerala High Court in Commissioner ofx v. Pathrose Rice & Oil Mills, by the Madras High Court in P. A. C. Ratnaswamy Nadar & Sons v. Commissioner of, by the Allahabad High Court in Commissioner ofx v. R. S. Shoe Factory, by the Madhya Pradesh High Court in Marlidhar Kishangopal v. Commissioner ofx and by the Mysore High Court in City Tobacco Mart v. Commissioner ofe have already referred to the fact that the Bombay High Court in Balubhai Gulabdas Navlakhi v. Commissioner ofx has also taken the same view. In addition to the existence of clauses to the above affect in the partnership deed, we may mention that in the Allahabad decision, referred to above, in a partnership between A, B and C, there was a clause that C was not entitled to invest any capital and that the business is to be carried on only by A and B and that C has no power to interfere with the management of the business. The Allahabad High Court, in spite of all these clauses, held that the document created a relationship of partners as the two essential conditions, referred to by us earlier, existed in that case16. We have already referred to the decision of this court in Agarwal and Co. v. Commissioner of, laying down the conditions, which, if fulfilled, makes it obligatory on thex Officer to register the firm, unless the assessee has contravened section 23(4) of the Act. It is not the case of the revenue that the assessee before us has contravened section 23(4). There is also no controversy that the application has been made in accordance with section 26A as well as the relevant rules. The firm has been constituted under an instrument of partnership dated March 20, 1959. From the clauses of the partnership deed, extracted above, particularly clause (5), the shares of the partners regarding the profit and loss have also been specified. Therefore, it follows that conditions Nos. 1, 2 and 3 specified in the above decision are fully satisfied. Regarding condition No. 4 also, there is no controversy that the partnership is genuine in the sense that it is not a fictitious document. Then the only other requirement referred to in condition No. 4 to be satisfied is whether the partnership is valid in the sense that it creates relationship of partners between the parties thereto. From our discussion in this judgment, according to us, the relationship of partners inter se has been created under the partnership deed and that such relationship had actually existed in accordance with the terms specified in the said documentFrom a review of the above decisions, it is clear that the mere nomenclature given to a document is by itself not sufficient to hold that the document in question is one of partnership. Two essential conditions to be satisfied are: (1) that there should be an agreement to share the profits as well as the 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 circumstance that only one partner can operate the bank accounts or borrow on behalf of the firm are not destructive of the theory of partnership provided the two essential conditions, mentioned earlier, are satisfied17. In the light of the principles laid down by this court in Steel Brothers & Co. Ltd. v. Commissioner ofx and in the decisions of the High Courts, referred to above, the reasons given by the High Court for holding that the relationship of partners has not been created under the deed of partnership before us, cannot be sustained. As the control and management of business can be left by agreement in the hands of one partner to be exercised on behalf of all the partners, the other consequence by way of restriction on the rights of the other partners loses all significance. In fact the clauses providing that the working partners are to work under the directions of the managing partner and the further clause restricting their right to accept business or raise any loans or pledge the firms interest except with the consent of the managing partner, K. D. Kamath, have all to be related with the agreement entered into by the partners regarding the management and control by K. D. Kamath. We are of the opinion that under the partnership deed the relationship which has been brought into existence between the six parties is a relationship of partners who have agreed to share the profits and losses of business carried on by all or any of them acting for all and it satisfies the definition of "partnership" under section 4 of the Partnership Act. We have already pointed out that there is a sharing of the profits or losses of the business by the partners in the ratio of the proportion mentioned in clause (5). That clause read with other clauses already discussed by us clearly shows that the first condition, namely, all persons agreeing to share profits or losses is satisfied. Even on the basis that the entire control and management of the business is vested in K. D. Kamath, party No. 1, and that parties Nos. 2 to 6 as working partners have to work under his direction, from all the other circumstances it is clear that the conduct of business by party No. 1 is done by him acting for all the partners. There is no indication to the contrary in the partnership deed. Therefore, even without anything more, it is clear that as the partnership business is carried on by party No. 1, acting for all, the second condition of agency is also satisfied. This idea is reinforced by clause (16) which provides that the firms affairs are to be carried on for mutual benefit. That clause is to the effect that the firms affairs which are managed by party No. 1 are really for the mutual gain and benefit of all the partnersIt is, no doubt, true that the second essential test of the business being carried on by all or any of the partners acting for all must be satisfied. The provisions in the partnership deed clearly establish that K.D. Kamath, the managing partner, carries on the business acting for all the partners.18. Much stress has been laid by the High Court on the fact that under clause (9) parties Nos. 2 to 6 have no right to raise loans for and on behalf of the firm or pledge the firms interest. This circumstance, according to the High Court, is destructive of the element of partnership. We have already held that the management and control of the business done by party No. 1 is the carrying on of the business on behalf of all the partners. No doubt, under section 18 of the Partnership Act, a partner is the agent of the firm for the purpose of the business of the firm. But, that section itself clearly says that it is subject to the provisions of the Act. It is open to the parties under section 11 to enter into an agreement regarding their mutual rights and duties as partners of the firm and that can be done by contract, which in this case is evidenced by the deed of partnership. Further, section 18 will have to be read along with section 4. If the relationship of partners is established as a " partnership " as defined in section 4, and if the necessary ingredients referred to in that section are found to exist, there is no escape from the conclusion that, in law, a partnership has come into existence. It is in the light of these provisions that section 18 will have to be appreciated. Section 18 only emphasises the principle of agency which is already incorporated in the definition of "partnership" under section 4.19. It should be remembered that, so far as the outside world is concerned, so long as the parties Nos. 2 to 6 are held out as partners of this firm, as has been done under the partnership deed, their acts would bind the whole partnership. The provision in clause (9), in our opinion, is only an inter se arrangement entered into by the partners in and by which the working partners have agreed not to raise loans or pledge the firms interestMr. S. K. Aiyar, learned counsel for the revenue, placed some reliance on section 14 of the Partnership Act. According to the counsel, there is no contract to the contrary in the partnership deed that the assets brought in by party No. 1 do not belong to the partnership. It is his further contention that under section 14, those assets will belong to the partnership, in which case, it will be open to any partner, as agent of the other partners to pledge the firms interest or raise loan for partnership purposes. This right, according to the counsel, is restricted by clause (9) and that clause negatives the theory of agency. In our opinion, this contention of the learned counsel cannot be accepted. Section 14 of the Partnership Act itself clearly shows that the provisions contained therein are subject to the contract between the parties. We have already held that the provisions regarding the control and management vesting in party No. 1 is not by itself destructive of the theory of partnership. Clause (9), in our opinion, itself shows that the theory of agency is recognised. But the parties, by mutual agreement, have placed a restriction on the working partners right to borrow on behalf of the firm or pledge the firms interest without the written authority of the principal partner.20. Mr. Aiyar placed considerable reliance as the High Court has also done on the earlier decision of the Bombay High Court in Umarbhai Chandbhai v. Commissioner of. That again, in our opinion, was a case of an extreme nature where, under a partnership deed, between the father and his two sons, the former had a right to exclude either or both his sons from the management of the firm, wholly or in part. There was also a provision to the effect that the father was entitled to entrust the management to any other person and also determine what quantum of profits should be distributed and what is to be done regarding the remaining profits. There were further provisions to the effect that the father could terminate the partnership and, on such termination, the share of the partner was to revert to the father. The Bombay High Court, having due regard to the clauses, referred to above, as well as other clauses of the partnership deed, held that the document offended against the two principles which were essential to constitute a partnership namely, agreement to share the profits and losses and the business being carried on by all or any of them for all of them. The learned judges held that there was no agreement to share the profits and losses of the business and even the business carried on by the father was not on behalf of all the partners. In such circumstances it was held that the arrangement evidenced by the deed cannot be considered in law to be a partnership. In our opinion, the reliance placed upon this decision by the High Court as well as by Mr. Aiyar is misplaced. In fact, from a perusal of the clauses in the document which the Bombay High Court had to consider, it is clear that the business continued to be the proprietary concern of one single individual, namely, the father. Excepting that the two sons were styled as partners in the document, the essential requisites for constituting the relationship of partners inter se between the father and the two sons were totally absent. The clauses in the case before us are totally different. We have already indicated that there is an agreement for sharing the profits and losses and that even though vast powers of control and management have been given to K. D. Kamath, the managing partner, the business was being carried on by the said managing partner, on behalf of all the partners. These conditions fully satisfy the requirements of the definition of "partnership" under section 4 of the Partnership ActTo conclude, we are of the opinion that all the ingredients of partnership are satisfied under the partnership deed dated March 20, 1959, and that the view of the High Court that them cannot be granted registration under section 26A of thex Act for the assessment year, cannot be sustained.