Case: Steel Brothers &amp; Company Limited Vs. Commissioner of Income Tax

2. The facts leading up to this appeal may be shortly stated as under :Prior to November 29, 1928, Steel Bros. and Co., Ltd. (hereinafter referred to as "Steels") and Ellermans Arracan Rice and Trading Co., Ltd. (hereinafter referred to as "Ellermans") carried on trade in Burma rice and/or itsin Burma, in London and elsewhere inter alia through Burma and London Bullenger Rice Pool and the New General Rice Company Limited. Apart from the selling of rice, both these Companies had rice milling machines and produced rice from paddy. There was another Company known as the Burma Co. Ltd., (hereinafter referred to as "Burma"). This Company also had a few rice mills. It never purchased paddy or sold rice. All the shares of this Company were held by Steels, who were also its Managing Agents.3. On or about November 29, 1928, an agreement was entered into between the Steels Burma and Ellermans to provide for the amalgamated working of the Burma Rice business in Burma and London of all the three Companies under the management of Steels. The combined business of Steels, Burma and Ellermans was referred to therein as "the Combination". All stocks of Burma rice andin hand at 30th November, 1928, were excluded from this Agreement and remained the property of the individual owners to be disposed of by them as they thought fit and the entire business in Burma hitherto carried on by Ellermans was to be taken over and managed by Steels as from 1st December, 1928, and conducted from Steels officers in London, Rangoon and other Burma Branches in Steels name solely and in conjunction with the whole of the rice business of all descriptions of Steels and Burma and Steels were to conduct the said business in such manner as they in their absolute discretion should think fit. The profit or loss of the business of the Combination carried on at theplaces was to be shared by and divided between Steels and Ellermans in the following ratios :RangoonBasseinAkyabMoulmeinSteels and Burma68%68%32%72%Ellermans : 32%32%32%28%The rice mills belonging to Burma viz., Burma. Uppar Kanungtoe Mill in Rangoon, Burma Mill in Bassein and Burmas Martaban Mill in Moulmein were to be worked by the Steels for the purpose of the Combination. (Cl. 4a). The agreement was to take effect as from 1st December, 1928, and could be terminated on 30th November, 1930, or on any subsequent 30th November by any party giving notice to that effect to others not later than the preceeding 1st August. Cl. (12). The agreement was signed and the common seals of Steels and Ellermans were affixed thereto and it was also signed by one James Kilgour Michie for and on behalf of Burma.4. In connection with the assessments for the assessments years45 the Combination (which is hereinafter referred to as "the assessee") made applications to the Income Tax Officer under S.of the Act for registration of their partnership said to be constituted of Steels and Ellermans. These applications were signed by the Steels and Ellermans only and were supported by a copy of the Agreement dated November 29, 1928, which was relied upon as the instrument of partnership of which registration was sought.5. By two separate orders dated March 19, 1948, and March 31, 1949, the Income Tax Officer, District V. Calcutta, refused registration of the partnership on the ground (i) that the partnership was not constituted of Steels and Ellermans only but was constituted of those two parties and a third party, viz., Burma and that the partnership deed did not specify the shares of the said three partners and (ii) that the loss arising during the previous year had not been properly allocated proportionately to the said three partners the whole of the loss falling to the shares of Steels and Burma having been borne by Steels only.6. The assessee carried an appeal before the Second Additional Appellate Assistant Commissioner of"A" Range, Calcutta who upheld the orders of Income Tax Officer on the grounds that the application for registration was signed by two partners, Steels and Ellermans, whereas the partnerships deed showed that it was a partnership of three partners and that the individual shares of Steels and Burma were not shown separately.7. The assessee preferred an appeal to the Income Tax Appellate Tribunal (Calcutta Bench) and by its order dated the 20th February, 1951, the Tribunal held that although the agreement entered into on November 29, 1928, showed that the three companies would carry on the whole of their Burma rice business on amalgamation, on an examination of the agreement it would appear that the companies which formed the partnership were really Steels and Ellermans; and Burma which was a hundred per cent, subsidiary of Steels had hardly anything to do with the Combination. In its order the Tribunal observed :In order to determine whether there was a partnership we have to look into the surrounding circumstances also under S. 6 of the Partnership Act and reading the document as a whole and considering the fact that it was drawn up in 1928, and also taking into account the profit and loss account of the Burma Co., for the years ending November 1941, Nov. 42 and Nov. 43 we think that the partnership was really between Steels and Ellermans. Burma is bracketted with Steels in paragraph 3 (a) in a broad sense as Steels were holding all the shares of Burma. We are therefore, of opinion that the deed is a proper deed and should be registered."Upon the application of the Commissioner of Income Tax, West Bengal (the respondent herein) the Tribunal stated a case and referred the following question of law to the High Court for its decision under S. 66 (1) of theon a proper construction of the deed of agreement dated November 29, 1928, and having regard to the relevant facts and circumstances of the case, the Tribunal was right in holding that the partnership was really between Steels and Ellermans and that therefore registration should have been allowed under S.of the Indian Income TaxReference was heard by the High Court and the High Court answered the referred question in the negative. The High Court was of the opinion that on a true construction and effect of the agreement and particularly having regard to the recital in the Agreement and the provisions contained in Cls. 1, 3 (a), 12 and 14, thereof, the partnership was a partnership of the three Companies and as the applications were not made by the said three Companies and the deed of partnership did not specify their respective shares, the registration of the partnership was rightly refused.8. The assessee applied for a certificate of fifness under S.(2) of the Act which was however refused by the High Court with the result that the assessee applied for and obtained from this Court special leave to appeal under Art. 136 of the Constitution.

Court's reasoning:
20. On a true construction of the Agreement dated November, 29, 1928, we have, therefore, come to the conclusion that Burma was a partner along with Steels and Ellermans in the Combination and had a joint share with the Steels in the profit or loss of the Combination. It was entitled to terminate the partnership by giving notice to the other partners as specified in Cl. 12 of the Agreement.It had also a right to refer all the disputes arising between the partners to be decided by arbitration in accordance with the provisions of the Arbitration Act, 1889. There was a sharing of the profit or loss of the business of the Combination and there was also an agency in so far as Steels were to manage and carry on the business on behalf of all the partners of the Combination.Thus all the ingredients of partnership were satisfied and it is futile to urge that the agreement was hybrid document which was a tripartite agreement so far as the business of the Combination was concerned and was a partnership agreement only between two partners, viz., Steels and Ellermans.There is not the slightest doubt whatever that Burma was a partner with Steels and Ellermans in the business of the Combination and the partnership which was entered into under the terms of agreement was a partnership between three partners, viz., Steels, Burma and Ellermans.21. Having regard to the above, it would be unnecessary for us to consider whether there were facts and circumstances in the case which would go to detract from this position and show that even though ostensibly there was a partnership of three parties, viz, Steels, Burma and Ellermans, in reality the Combination consisted of only two partners, viz., Steels and Ellermans and Burma was merely a confirming party thereto. We shall however consider the facts and circumstances on which particular reliance has been placed on behalf of the Appellate in view of the facts that the referred question has been framed in a manner which requires the consideration of such facts and circumstances of the case.22. Adverting to these facts and circumstances, we find that there is nothing in them which runs counter to the conclusion which we have reached above. The fact that all the shares of Burma were owned by the Steels really explains why Burma was not given any specific rights like Ellermans in the Agreement dated November 29, 1928, for the protection of its interests, inasmuch as the interests of Burma was absolutely safe in the hands of the Steels and no provision was required to be made for the protection of Burmas interests as such. The fact that Burma never purchased paddy or sold rice is also devoid of significance because Burma had contributed its properties to the Combination and there could not be any independent purchase of paddy or sale of rice by Burma after the Steels assumed and carried on the management of the business of the Combination. The circumstance that no share of the profits of the Combination had ever been paid to or received by Burma has been already explained above. The Steels and Burma had a joint share amongst themselves which was roughlyof the total profit or loss of the Combination. All the hundred per cent. shares of the Burma were owned by Steels and if as a result of internal arrangement between themselves the Steels appropriated to themselves all the profits which came to the Steels and Burma jointly in the Combination, that was certainly not a circumstance which would go to show that Burma was in fact no partner in the Combination. The further circumstance that in the carrying on of the Agreement, the only earnings of Burma had been by way of milling hire paid by Steels to Burma, again is of no consequence. So far as the books of account of the Combination were concerned it does not appear that there was any payment by the Combination to Burma at all of the milling charges and if by some arrangement between Steels and Burma, Steels actually did pay to Burma a sum of money out of the profits earned in the joint share of the Steels and Burma, that again was a matter of internal arrangement between Steels and Burma and such payment by the Steels could not detract from the position of Burma as a partner in the Combination if the terms and conditions of the Agreement dated November 29, 1928 did not spell out anything to that effect. These facts and circumstances are of no significance whatever and do not help the appellant in the contention which has been urged on its behalf that the real position of Burma was that of a party to the Combine but not that of a partner in the Combination. There is no justification whatever, in our opinion, for contending that the Agreement dated November 29, 1928, was a composite agreement which could be divided into two parts, viz., (1) a tripartite agreement between the members of the Combination and (2) an agreement of partnership between Steels and Ellermans only, Burma being merely a confirming party to it in so far as a part of its assets were thrown into the Combination.