Brijlal Gupta, J.:— These are two references under section 66(1) of the Income-tax Act. They relate to two years, 1955-56 and 1956-57, but raise a common question arising out of the assessment of the same assessee and can be disposed of conveniently by a common judgment. The question referred to this court for opinion is: “Whether, on the facts and in the circumstances of the case, the several restrictions contained in the instrument of partnership dated June 21, 1953, rendered the partneship void in law so as not to entitle the firm to registration under section 26A of the Income-tax Act?”

2. The facts giving rise to the references are that on June 15, 1953; the assessee firm came into existence with the following constitution:

Name of Partner Share in profit and loss I Roshan Lal Rs. A.P 0—6—6 2. Satya Prasad 0—6—6 3— Manohar Lal o—3—o

3. For the assessment year 1955-56 the assessee applied for registration under section 26A and relied on an instrument of partnership dated June 21, 1953. On a consideration of the terms of that document the Income-tax Officer took the view that the status of Manohar Lai was not that of a partner but merely that of an employee and as such the partnership constituted under the instrument was not a genuine partnership. Accordingly, he refused registration to the firm. An appeal to the Appellate Assistant Commissioner against the order refusing registration failed, but on further appeal the Income-tax Appellate Tribunal took the view that the restrictions and limitations imposed by the instrument on Manohar Lai were within the purview of the provisions of the Indian Partnership Act and held that the firm was genuine and entitled to registration. Thereafter, the Commissioner of Income-tax made an application under section 66(1) for a statement of the case to this court and the Tribunal has accordingly stated a case.

4. For the succeeding assessment year 1956-57, the Income-tax Officer again refused registration on the same ground on which registration was refused to the firm in the earlier year but in appeal the Appellate Assistant Commissioner allowed registration, as by the time the order came to be made by him, the order of the Income-tax Appellate Tribunal in the appeal for the preceding year had already come into existence and the Appellate Assistant Commissioner gave effect to that order for the succeeding year, namely, 1956-57 also. Thereupon, the Income-tax Officer was directed by the Commissioner to file an appeal to the Income-tax Appellate Tribunal but the Tribunal dismissed the appeal and followed its view expressed in, the order for the preceding year 1955-56 but at the instance of the Commissioner of Income-tax made a statement of the case for this year also. This is how, as already stated above, the two connected references have come to be made to this court and the same question of law has to be answered in both the references.

5. It may be stated that the assessee remained unrepresented by counsel in these references before this court. Sri Gopal Behari, learned counsel for the department, invited our attention to the following features of the instrument of partnership, some of which had been commented on by the Income-tax Officer and the Appellate Assistant Commissioner in the earlier year for refusing registration to the firm:

1. The business of the firm shall be started with an investment of Rs. 30,000 by the first two partners to be shared by them in equal proportion. They alone shall be the proprietors of the business. If they separate at any time the assets and outstandings shall be distributed between the two of them alone. Manohar Lai will not be entitled to invest anything in the partnership but will only be a working partner.

2. The business will be carried on by the first two partners with their mutual consent and Manohar Lai shall have no right of “self determination or interference, obstruction or resistence in the conduct of business”. He will act according to the directions of the first two partners. If he acted otherwise he would be liable to be turned out.

3. The first two partners will be entitled to inspect and examine the accounts at any time. Manohar Lai shall not be entitled to resist or interfere in the account books at any stage.

4. Manohar Lai shall be entitled only to draw up to Rs. 100 per month for his expenses liable to be adjusted at the settlement of accounts. His share in profits and losses is to be 0-3-0 in the rupee as a working partner for his consolation and so that he should work honestly and carry out the directions of the first two partners.

6. The first feature relied on by Sri Gopal Behari in support of his argument that there was no valid partnership between the three persons was that all the three persons did not jointly own the property and the assets of the partnership. Indeed Manohar Lai was specifically forbidden from investing anything in the partnership and was to remain only a working partner. It is not possible to assent to this argument. There may be a partnership where the property and the assets of the partnership may not be the subject of joint ownership between all the partners but may belong only to some or one of them. In Halsbury's Laws of England, third edition, volume 28, page 487, paragraph 933, it is laid down as follows:

“… Persons may be partners either generally or in some particular business or isolated transaction, although all or part of the property used for the purpose of such business transaction may not be the subject of joint ownership, but may belong to some or one of them individually.”

7. The second feature emphasised by Sri Gopal Behari was that the first two partners alone were entitled to carry on the business by mutual consent and so far as Manohar Lal was concerned he was merely to carry out the directions of the first two partners and could not take part in the determination of business policy or in the taking of decisions in regard to business matters. It was argued that thus the position of Manohar Lal was more like that of an employee than that of a partner. In this connection he relied on the definition of partnership contained in section 4 of the Indian Partnership Act. There “partnership” is defined as 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”. It was argued that only the first two partners carried on the business and Manohar Lal was not entitled to act for all. It is true that the position of Manohar Lal in regard to the power to conduct business on behalf of the partnership was not the same as the power of the other two partners. It may also be admitted that in a sense the position of Manohar Lal was akin to the position of an employee or a servant, but this does not necessarily mean that was destructive of the relationship of partners./Under the definition of “partnership” in section 4 it is possible that any one of the partners may carry on the partnership business on behalf of all. Here, if the partners agreed that the first two persons will carry on that business and Manohar Lal will carry out the directions of the first two, there is nothing in that agreement destructive of the concept of partnership. It should also not be forgotten that, so far as the outside world was concerned and so long as the first two persons held out the association between them and Manohar feci to be a partnership, the acts of Manohar Lal would bind the whole partnership and it would be no answer to the claims of third persons against the partnership that Manohar Lal did not have the same authority to carry on the business of the partnership as the other two had. It is a different matter that inter se for their own purposes they may have agreed that the major partners shall be the first two and Manohar Lal was only to be a working partner.

8. The third feature was emphasised a good deal. This only points to the right of the first two partners to inspect and examine the accounts at any time. It does not exclude the inspection and examination of accounts by Manohar Lai. The utmost that can be said is thajmccounts may have to be recorded according to the directions of the first two partners and Manohar Lai may not be entitled to override that direction. This, however, (does not mean that Manohar Lal would have no access to the account books. If there was anything in the agreement excluding Manohar Lal altogether from inspection or examination of the accounts or anything disentitling him to the taking of accounts the position might have been different but that is clearly not so.

9. It was then emphasised that Manohar Lal was entitled to draw only up to Rs. Ioo per month for his expenses subject to adjustment at the settlement of accounts. There does not appear to be anything in this condition also destructive of the relationship of partners It has been noticed that only the first two partners were to invest all the money needed for the business of the partnership. Their shares in the partnership were also more than double the share of Manohar Lal. It is natural, therefore, that he should not be entitled to draw more than a limited amount subject to adjustment at the final settlement of accounts. It may be added that the stipulation with regard to the adjustment at the settlement of accounts itself shows that he had as much right to the understanding of the accounts as the other two persons.

10. That Manohar Lal was liable to be “turned out” at the instance of the other two persons also does not derogate from his position as a partner. Only the expression regarding the termination of his connection with the partnership is crude. It is always open to any partner to withdraw his consent at any time to any other person remaining a partner and thus to put an end to the partnership. Similarly there is no significance in the fact that Manohar Lal was to be given a 0-3-0 share in the profits and the losses “for his consolation” or “so that, he could work honestly”. The fact remains that he was entitled both to a share in the profits and the losses. One may usefully turn again to Halsbury where it is stated at page 488, paragraph 935, that the receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in a business… and in paragraph 936, that if losses as well as profits are shared, the presumption of partnership is stronger. Here as both profits and losses were to be shared there was a strong presumption that the relationship between the parties was that of partners.

11. Two cases were referred to by Sri Gopal Behari in arguments before us. The earlier of these was a decision of the Bombay High Court in Umarbhai Chandbhai v. Commissioner of Income-tax [1952] 22 I.T.R 27.. The head-note of that case runs as follows:

“Under a partnership deed between a father and his two sons, the father had the right to exclude either or both the sons from the management of the firm wholly or in part, or to entrust the management to any other person and to determine what quantum of any profits should be distributed and what should be done with the remaining profits: Held, that there was no partnership in law and the income-tax authorities were therefore right in refusing to register the deed under section 26A of the Income-tax Act.”

12. From a bare reading of the head-note it will be clear that the case is wholly distinguishable from the present case. There the two sons, who along with the father were alleged to form the partnership, did not have a specific share and their share was to depend upon the will of the father alone. In those circumstances, clearly, there could be no partnership between the father and the sons.

13. The other case was a decision of the Supreme Court in M.P Davis v. Commissioner Of Agricultural Income Tax . In this case the partnership was between two brothers. Prior to the partnership the relation between the two brothers was that of a master and a servant. One of the brothers who alone was entitled to invest capital to the total exclusion of the other brother and who alone was entitled to get back the assets on dissolution was not bound to do any work at all. The other brother was entitled to a remuneration only if there were profits but to no remuneration at all if there was a loss. The mode of sharing of profits was complicated and this made it impossible for the sharing of the losses in the same manner. Having regard to these facts and to the conduct of the parties the Supreme Court held that the relationship between the parties was not of partners but that the partnership was merely a cloak for disguising the real relationship which was that of a master and a servant. This case also is distinguishable on facts from the present case. In the present case not only Manohar Lai but also the other two partners have all to work to carry on the business of the partnership. It is a different matter that policy decisions may be made by the first two partners and Manohar Lal may only carry out their directions. Profits and losses are both to be shared in a pre-determined proportion. There is no evidence of any conduct prior or subsequent or of any pre-existing relationship between the parties.

14. The Tribunal relied on the provisions of section 20 of the Partnership Act under which it is provided that the partners may by contract extend or restrict the implied authority of a partner. It follows that under the contract of partnership it was perfectly permissible for the first two partners to cut down and restrict the powers of Manohar Lal and there was nothing illegal in it. The Tribunal also relied on a decision of this court in Lalli Ram Sunderlal Jhansi, In re2. In this case the assets of the partnership vested only in one of the partners. The other partner had no right to borrow money for partnership business without the consent of the first partner. The first partner Was also entitled to dissolve the firm for the dishonesty or other action of the other partner, The other partner was entitled to withdraw his share of profits only if the profits had accumulated to such an; extent that they exceeded the amount of money invested in the business by the first partner. It appears that this case is much nearer to the facts of the present case and in this case it was held that there was a legal and valid partnership. It was also pointed out in this case that where parties to an agreement are entitled to share profits and losses a strong presumption arises that a partnership has come into existence. There is nothing in the terms of the present partnership to rebut this presumption.

15. A few cases may now be examined. In Steel Brothers & Co. Ltd. v. Commissioner Of Income Tax , a decision by the Supreme Court, the facts were that A and B, two companies, were carrying on trade in Burma rice. A held all the shares of another company C of which A was also the managing director. An agreement was entered into between the three companies A, B and C for the amalgamated working of the Burma rice business of all the three companies under the management of A, whereby the entire business of the three companies was to be taken over and conducted by A in its absolute discretion. At the end of each accounting year the profit and loss of the combination at each place of business, namely, Rangoon, Bassein, Akyab and Moulmein, was to be shared in certain proportions, the shares of A and C being joint and the share of B, a separate share. A restriction was imposed on A, B and C against hiring out their properties, without the consent of A. Certain specific rights were conferred on B none of which obtained so far as C was concerned: the right, for example, to information regarding the progress of business, the right to have accounts made up in Burma and audited there and the right to inspection of accounts and to receive a copy thereof; the right of the company's engineers to check whether its property was in efficient working order; the right to utilisation of finance provided by them. On these facts the Supreme Court held that the relationship between A, B and C was that of partners and the fact that no special rights were provided to C of the nature of those conferred on B did not lead to the conclusion that C was not a partner along with A and B in the combination. It will also be observed that the fact that the business of the partnership was to be conducted by A alone in its absolute discretion was not destructive of the existence of partnership.

16. In Messrs Bhimji R. Naik…Applicants (Assessees); v. Commissioner Of Income-Tax, Bombay….*, the facts were that one B.R Naik, who carried on business in South Africa, returned to India leaving his business in the hands of three managers. In 1937 he executed a deed styled as a partnership deed by which he admitted the three managers as partners having share in profits and losses, retained to himself the full control of the business and even the right to dismiss any of the three partners. On those facts it was held by the Bombay High Court at page 126 of the Report that the deed, though it gave B.R Naik wider powers than are usually found in a partnership deed as being conferred on a senior partner, nevertheless created the relationship of partnership and not that of employer and employees. Profits and losses were to be borne by all in a stated proportion. It must be noted that the emphasis is on the sharing of profits and losses and not on the manner in which the business is carried out or on the inequality in the power or capacity to control or manage the business.

17. In N.R Wadia & Co. v. Commissioner of Income-tax, it was pointed out by the Bombay High Court at page 766 that in order to constitute a partnership in'law there must be three elements:

(i) An agreement entered into by all the persons concerned,

(ii) the agreement must be to share the profits of a business,

(iii) the business must be carried on by all or any of the persons concerned acting for all. In determining whether a person is or is not a partner the court must have regard to the real relation between the parties which depends on the real intention as may appear from all the facts of the case and not merely as that intention is expressed in the written agreement.

18. Here it has been endeavoured to be shown that there is no single feature in the present partnership which may be destructive of the legal concept of partnership and constitute a relation different from the relation of partners between the three persons constituting the partnership.

19. Reference may also be made to Commissioner of Income-tax v. Pathrose Rice & Oil Mills [1960] 40 I.T.R 353.. The partnership in this case consisted of eight persons. The material portion of the deed was as follows:

“If at any time partner No. 1 wishes to send out partners Nos. 2 and 3 jointly or severally, partner No. 1 has independent and absolute right and power to immediately exclude or discharge them… All activities connected with the business, etc., are to be conducted at the sole discretion of partner No. 1 and all his actions are binding on all the partners equally.”

20. On the question being raised whether such an agreement constituted a valid partnership it was held that the absolute right given to partner No. 1 to expel partners Nos. 2 and 3 or to conduct business in his sole discretion did not militate against the validity of the partnership. Reliance was placed on the decision of the Bombay High Court in Messrs Bhimji R. Naik…Applicants (Assessees); v. Commissioner Of Income-Tax, Bombay….*.

21. It may also be pointed out that whereas under section 239 of the Contract Act the definition of “partnership” required not merely the agreement to share profits but also the agreement to combine “property, labour and skill”, the definition in section 4 of the Partnership Act widened the scope of the agreement by removing the words “property, labour and skill” from the definition and thus doing away with the limitation effected by those words.

22. The Tribunal has already pointed out that under section 20 of the Partnership Act the power of a partner may be extended or restricted. For all these reasons the answer to the question referred to us should be in the negative and against the department.

23. The reference should be returned to the Income-tax Appellate Tribunal with, this answer.

24. The fee of the counsel for the department is fixed at Rs. 100 in each case.

25. Question answered in the negative.