Case: Agarwal And Co Vs. Commissioner Of Income-Tax, U.P

2. The authorities under the Act as well as the High Court of Allahabad have answered that question in the affirmative. The assessee challenges that conclusion.3. The above appeals relate to different assessment year of the same assessee, the relevant assessment years being 1952-53, 1953-54 and 1954-55. In all these years the Income Tax Officer had refused to register the appellant firm under Section 26A.4. All the partnership deeds are, we are told, similar in terms. We have before us the deed executed on July 7, 1950. It shows that firm consists of 18 partners. Ex facie that deed does not show that any of the partners had joined the deed as representatives of their Hindu Undivided Families. From the tenor of the document, they appear to be partners in their own right. The Income Tax Officer, the Appellate Assistant Commissioner and the Tribunal have come to the conclusion that some of them had joined the partnership as Kartas of their respective Hindu Undivided Families. All the authorities under the Act as well as the High Court have opined that the partnership in question is not lawful in view of Section 4 (2) of the Indian Companies Act, 1913. The material portion of that provision(1) ......(2) No company, association or partnership consisting of more than twenty persons shall be formed for the purpose of carrying on any other business that has for its object the acquisition of gain by the company, association or partnership or by the individual members thereof, unless it is registered as a company under this Act, or is formed in pursuance of an Act of Parliament of the United Kingdom or some other Indian Law or Royal Charter or Letters Patent.(3) This section shall not apply to a joint family carrying on joint family trade or business and where two or more such joint families form a partnership, in computing the number of persons for the purpose of this section, minor members of such families shall be excluded.(4) Every member of a company, association or partnership carrying on business in contravention of this section shall be personally liable for all liabilities incurred in such business.(5) ...............The Income Tax Officer, the Appellate Assistant Commissioner as well as the Tribunal were of the opinion that some partners of the assessee firm having entered into the partnership as representatives of their respective Hindu Undivided Families, the adult members of those families should be taken into consideration for determining whether or not the total number of partners exceeded twenty. On that basis they have arrived at the conclusion that the firm has more than twenty partners and the same having not been registered as a company under the Companies Act, nor having formed in pursuance of an Act of Parliament of the United Kingdom or some other Indian Law or Royal Charter or Letters Patent, it must be held to be an unlawful partnership. When the question formulated earlier was referred to the High Court under section 66 (1) of the Act, it was heard by Jagdish Sahai and Beg, JJ. Jagdish Sahai J. was of the opinion that the partnership in question was not lawful. Beg, J. differed from him and answered the question in favour of the assessee. In view of this difference of opinion, the matter was referred to Takru, J. He agreed with Jagdish Sahai, J. By a majority the question referred to the High Court was answered in favour of the Revenue. Hence these appeals

Court's reasoning:
18. From these decisions it follows that for the purpose of finding out as to who are all partners of a firm, one has only to look to the partnership deed and not to go behind it.In Commr. of Income Tax, Gujarat v. A. Abdul Rahim and Co., (1965) 55 ITR 651   = (AIR 1965 SC 1703  ) this court ruled that registration of a partnership deed under Section 26A of the Act could not be refused on the ground that one of the partners was a benamidar for someone else. Therein this Court observed that it is a settled law that if a partnership is a genuine and valid one, the Income-tax Officer has no power to reject its registration if the other provisions of Section 26A and the rules framed thereunder are complied with. When a firm makes an application under Section 26A 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 or 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. His benami character does not affect the benamidars capacity as partner or his relationship with the other members of the partnership. If a partner is only a benamidar for another, it can only mean that he is accountable to the real owner for the profits earned by him from and out of the partnership. Therefore a 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. The benamidar of a partner, qua the other partners, 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 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 discharge him of the said character.23. As mentioned earlier, the persons who are shown in the partnership deed with which we are concerned in these appeals as partners, appeared to have joined the same in their individual capacity. There is nothing in the partnership deed to indicate that they have joined the partnership as kartas of their respective families.It was not open to the Income-tax Officer to go behind the deed and find out, for the purposes of registration under Section 26A whether the partners mentioned in the deed have joined the partnership in their own right or as representing others. Hence the partnership ship must be held to have been validly formed as law did not at the relevant time prohibit any one, otherwise competent to contract, from entering into a contract of partnership even though, the beneficial interest in his share may vest in others. The application made for registration complies with the requirements of Section 26A and the rules framed thereunder. Therefore the Income-tax Officer was bound to register the partnership.