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

2. The relevant facts may briefly be stated. Three persons by name Abdul Rahim Valibhai, Abdulla Rehman and Abdul Rahim Malanghbhai, constituted a partnership having 9 annas, 3 annas and 2 annas share, respectively. The said partnership was carrying on business in goat and sheep skins. From the beginning of Samvat year 2012 (15th November, 1955 to 2nd November 1956) there was a change in the constitution of the said firm. A 4th partner by name Abdul Rehman Kalubhai was inducted into the partnership with 2 annas share carved out of the 9 annas share of Abdul Rahim Valibhai. The said Abdul Rehman Kalubhai is a nephew of Abdul Rahim Valibhai. On March 6, 1956, a partnership deed was executed between the said 4 persons. Under the said partnership, Abdul Rahim Valihhai, Abdulla Rehman, Abdul Rahim Malangbhai and Abdul Rehman Kalubhai had 7 annas, 5 annas, 2 annas and 2 annas share, respectively. On May 8, 1956, the said firm presented an application to the Income-tax Officer for its registration under S.26-A of the Indian Income-tax Act, 1922, hereinafter called the Act. The Income-tax Officer held that the partnership was a bogus one and, on that finding, refused to register it. The assessee took up the matter on appeal to the Appellate Assistant Commissioner, who held that the partnership agreement was valid in law and that the fact that one of the partners was a benamidar of another was not a ground for refusing to register the firm, though it might entitle the Income-tax Officer to consider the income pertaining to the share of the benamidar as part of the income of the real owner in assessing the latters income to tax. The Income-tax Officer questioned the correctness of the decision by preferring an appeal to the Appellate Tribunal Bombay Bench. The Tribunal also held that the partnership was a genuine one and that the fact that one of the partners gave away a small part of his share to his nephew would not disqualify the partnership from being registered under S. 26-A of the Act. At the instance of the Revenue the following question was referred to the High Courta partnership in which one partner is the benamidar of another partner could be registered under S. 26-A of the Indian Income-taxlearned Judges of the High Court thought that the question as framed did not really bring out the true matter in controversy between the parties and, therefore, they reframed the question as followson the facts and in the circumstances of the case, the partnership constituted under the instrument of partnership dated 6th March, 1956 could be registered under S. 26-A of the Indian Income-taxlearned Judges answered the question in the affirmative. They held that as the partnership was a genuine one the fact that one of the partners had no beneficial interest in his share by reason of some arrangement between him and another partner would not disentitle the firm from being registered under the Act. Hence the appeal.

Reasoning: 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.