Case: M.P. Davis Vs. Commissioner of Agricultural Income Tax

Now it appears that before, the deed was executed the appellants estate was being managed by his brothers as his agent; and this was on the basis of principal and agent or master and servant. In the assessment proceedings under the Coorg AgriculturalAct for the yearP. W. Davis appeared as the agent of the appellant. Similarly, for the assessment yeara claim for change of status was made by P. W. Davis who produced the partnership deed. That is why the question which the tax authorities considered was whether the execution of the document really brought about any change in the relationship between the two brothers. They held that despite the document the relations between the two brothers continued the same as before and the High Court has agreed with this view. This view receives some support from two other facts which have been found by the tax authorities. Even after change of status was pleaded for the assessment year"the appellant claimed loss of the previous year and full expenses of the accounting year against what he actually received during the accounting yearand so far as the books of accounts were concerned "they did not show change in the management of the estate in spite of the agreement. These are findings of fact and though, in the absence of the account books and the other relevant material, it would be difficult for us to assess precisely the full significance of these findings, it cannot be denied that they are relevant for the purpose of ascertaining the real intention of the parties and their effect would be to a large extent against the appellants case and in favour of the view taken by the High Court.

Court's reasoning:
3. In the light of the facts stated in the preceding paragraph we proceed to examine the document. It is naturally desccribed as an agreement of partnership, but it does not in our opinion contain any decisive term to show that the relationship created by it was one of partnership. The capital of the firm has been stated to be the Kaimbetta Estate, the property of the appellant.But express provision has been made in it that the appellants brother, the other purported partner, would not be entitled to contribute anything towards capital and that he would have no power to charge or encumber or in any other manner, deal with, that Estate. It has been provided that on dissolution, the capital, that is, the Estate, would go back to the appellant.This would indicate that it was not intended that the appellants brother would have any interest in the Estate, and the use of the word capital is not, in our opinion, enough on the facts of this case to create an interest in the Estate in the appellants brother.Then again the document provides that the appellants brother would employ himself diligently in carrying on the business. No provision has been made whether the appellant himself would be bound to do any work for the firm, and it would appear that the intention was that he was free to work or not to work, as he liked.This would indicate that the appellant was the master and his brother, the servant.The same inference follows from another term in the deed which requires the appellants brother to maintain the accounts and expressly gives the appellant a privilege to look into them and ask questions relating thereto. The appellants brother is specifically prevented from advancing any moneys to the partnership though a partner would normally have the right to advance moneys to the partnership if the situation required it. Another very important term is that which provides that the appellants brother would submit the annual estimates of expenditure to be incurred in the business and that the appellant would pass it.This would show that the control was in the appellant and the brother had no real hand in the management of the business. We think that these provisions taken along with the conduct of the parties to the instrument earlier mentioned, clearly indicate that it was not the intention of the parties to bring about the relationship of partners but only to continue under the cloak of a partnership theand real relationship, namely, that between a master and his servant. The powers that are given by the document to the appellants brother are such as a master would give to his servant in connection with his business or a principal to his agent. The remuneration provided for the appellants brother was out of the profits and none was payable if there was a loss and the High Court was wrong in thinking that the appellants brother was entitled to his remuneration whether there was profit or not. But as stated in section 6 of the Act earlier mentioned, the sharing of profits or the provision for payment of remuneration contingent upon the making of profits or varying with the profits, does not itself create a partnership. It is possible to provide for remuneration of a servant contingent upon the making of and varying with, profits. Then again the instrument makes no provision as to how losses are to be dealt with, and the complicated manner in which the profits are to be shared under its terms would seem to make it impossible for the losses to be shared in the same manner. If it was intended to create a real partnership, one would have thought that some provision would have been made for the sharing of the loss, especially as the share of the profit going to the appellant is immensely large compared with the share going to his brother.In our view, taking all the circumstances of the case, especially the conduct of the parties, together with the important terms of the document, it cannot be said that it was intended to bring about the relation of partnership.e of the reasons given by the High Court in support of its conclusion is that the junior partner had no proprietary interest in the estate which has been contributed by the senior partner as capital of the firm. Mr. Rajagopala Sastri challenges the correctness of this view. He contends that the estate belonging to the senior partner has become the capital of the firm and whatever liabilities can be enforced against the capital of a firm would be enforceable in law against the asset in question. In support of this contention, reference has been made to the decision of Robinson v. Ashton, (1875) 20 Eq 25 where it has been held that in the absence of any special agreement the mill which belonged to R., one of the partners, and the value of which was credited in the books of partnership as capital of the firm was an asset of the partnership.But the main point which impressed the High Court was the distinctly inferior position assigned to the junior partner in the management of the estate which has been contributed by the senior partner at the capital the firm; and that, in our opinion, lends strong support to the final conclusion of the High Court. We would also point out, as we have earlier stated, that the Kaimabetta Estate never became the capital of the partnership.6. We have carefully considered all the relevant clauses in the agreement and we are unable to hold that the High Court was in error in holding that the two brothers did not become partners in the true legal sense of the term.