Umamaheswar Cotton Ginning And Pressing Factory v. Commissioner Of Income-Tax, Mysore.

1. The learned judge set out the statement of case which ran as follows:

“By this application, the assessee requires the Appellate Tribunal to refer to the High Court a question of law, which is said to arise out of the Tribunal's order dated 21st March, 1962, in I.T.A No. 7984 of 1960-61. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid order, we hereby draw up an agreed statement of the case and refer it to the High Court of Mysore at Bangalore under section 66(1) of the Indian Income-tax Act.”

2. The assessee carries on business under the name and style of “Umamaheswar Cotton Ginning and Pressing Factory” at Raichur. For the assessment year 1959-60, it, claimed registration under section 26A. Copy of the application is annexure “A” and forms part of the case. K. Venkatrao, son of Dharmaji Rao, and his four sons Govindrao, Shivajirao, Dasaratharao and Markandarao carried on business under the name and style of “V.D Kadam & Sons” from August 1, 1952, under a deed which was to enure for six years. This deed is annexure “B” and forms part of the case. On 18th April, 1958, these five and another Janardhana Rao entered into a partnership. The first five under the name and style of “V.D Kadam & Sons” represented by its partners had a twelve annas share which, according to clause 6 of the deed of partnership, which is annexure “C” and forms part of the case, was to be divided between the partners as under:

“1. M/s. V.D Kadam & Sons represented by its partners, Messrs. K. Venkatrao, K. Govindrao, K. Shivajirao, K. Dasaratharao and K. Markandarao, who divide the profit and/or loss amongst themselves equally.

… … 0-12-0 2. Janardhana Rao Shroff … … 0-4-0”

3. The Income-tax Officer found that the partnership was between two parties consisting of a firm and an individual; that no individual capital accounts were kept by the partners; that the drawings were in the name of V.D Kadam & Sons; that in Part 2 of the return, partners were shown as (i) V.D Kadam & Sons and (ii) Janardhana Rao (expired on March 6, 1959), and also that in part 3 of the return, by the individual partners of Kadam & Sons, it was stated that the firm of Kadam & Sons was a partner in the firm of Umamaheswar Cotton Ginning and Pressing Factory, Raichur (the assessee); that the profits from this firm were not entered in the individual accounts of the five partners of V.D Kadam & Sons, but pooled with the other partners and all of it divided equally. He, therefore, held that the instrument of partnership had not specified the individual shares of the partners and having regard to the other defects mentioned above, that the firm was not entitled to registration.

4. The Appellate Assistant Commissioner on appeal, held:

(i) that even though the share of the partners in the present partnership is collectively mentioned as twelve annas, their individual shares were ascertainable as it has been specifically mentioned that they were to share the profits equally;

(ii) that all the partners of V.D Kadam & Sons had signed the instrument of partnership as also the application for registration;

(iii) that M/s. V.D Kadam & Sons were by themselves a registered firm and so following the decisions of the Bombay High Court in the case of Commissioner of Income-tax v. Shantilal Vrajlal & Chandulal Dayalal & Co. [1957] 31 I.T.R 903. and Chhotalal Devchand v. Commissioner of Income-tax [1958] 34 I.T.R 351. registration must be granted.

5. The department appealed against that decision and contended that it was the deed of partnership that was granted registration and as that deed had not shown the shares of the partners ex facie, the rule in Dulichand Laxminarayan v. Commissioner of Income-tax [1956] 29 I.T.R 535. must be applied and registration refused.

6. The counsel for the assessee contended that clause 6 of the partnership deed definitely mentioned that the partners of Kadam & Sons must share the profits equally and that was enough and so the rule in Chhotalal Devchand v. Commissioner of Income-tax applied and registration had been rightly granted.

7. The Tribunal held that the deed started by saying that a firm was a partner and this was enough for refusal of registration as laid down by the Supreme Court in Dulichand Laxminarayan v. Commissioner of Income-tax. But it also found that the deed of partnership did not conform to the requirements of section 26A and set aside the Appellate Assistant Commissioner's order and upheld the refusal of the grant of registration.

8. On these facts, the question of law that arises is:

“Whether the assessee firm is entitled to registration for the assessment year 1959-60 under the provisions of section 26A of the Income-tax Act of 1922?”

[After setting out the statement of the case as above Hegde, J. continued:]

Registration under section 26A of the Indian Income-tax Act, 1922, has been refused on the ground that: (i) the partnership put forward is not a valid partnership, and (ii) that the shares of the individual partners in the profits and loss of the firm are not specifically mentioned in the deed of partnership. We have now to see whether either of these two reasons that appealed to the Tribunal are correct in law. For deciding those questions, it is necessary to refer to the terms of the partnership deed marked as annexure “C” in this case. It reads as follows:

“Deed of Partnership

The deed of partnership executed by and between (i) V.D Kadam & Sons, Raichur, represented by its partners Messrs. K. Venkatrao, son of Dharmajirao, K. Govindrao, son of K. Venkatrao, K. Shivajirao, son of K. Venkatrao, K. Dasaratharao, son of K. Venkatrao and K. Markandarao, son of K. Venkatrao and (2) Janardhana Rao Shroff, son of Srinivasarao Shroff, all the partners residing at Raichur. Whereas the above parties have been carrying on business in partnership under the name and style of Messrs. Umamaheswar Cotton Ginning and Pressing Factory at Raichur and whereas it has become necessary to reduce the terms and conditions into writing, this indenture witnesseth:

1. The name of the firm shall be M/s. Umamaheswar Cotton Ginning and Pressing Factory.

2. The place of business shall be at Raichur.

3. The firm which is deemed to have commenced on August 1, 1952, shall be one at will.

4. The objects shall be to carry on the business in ginning and pressing of cotton. The partners by mutual consent may extend the business activities of the firm in the best interests of the firm.

5. Regular books of account shall be maintained, once every year to adjust profit and loss account after taking into account all the necessary expenses and provisions as has been the practice heretofore.

6. The net profit and/or loss shall be divided between the partners as under:

1. M/s. V.D Kadam & Sons represented by its partners Messrs. K. Venkatrao, K. Govindrao, K. Dasaratharao and K. Markandarao who divide the profit and/or loss amongst themselves equally. … 0—12—0 2. Janardhana Rao Shroff … 0—4—0 Total … 1—0—0 …

7. Any partner who desires to retire from the firm shall give three months' notice in writing to the other partners.

8. Any dispute that may arise out of this shall be referred to arbitration according to the law then in force. Executed this 18th day of April, 1958, in the presence of witnesses.

Sd/- Witnesses Sd/- K. Venkatrao Sd/- K. Govindrao Sd/- do. Sd/- K. Shivajirao Sd/- K. Dasaratharao Sd/- do. Sd/- K. Markandarao Sd/- Janardhana Rao”

9. We shall take up first, the second ground, viz., that the shares in the profits and loss of the partners in the firm have not been specifically mentioned in the deed of partnership. This conclusion of the Tribunal does not appear to be correct. Clause 6 in the deed of partnership specifically says:

“The net profit and/or loss shall be divided between the partners as under:

1. M/s. V.D Kadam & Sons represented by its partners Messrs. K. Venkatrao, K. Govindrao, K. Dasaratharao and K. Markandarao who divide the profit and/or loss amongst themselves equally

…. 0—12—0 2. Janardhana Rao Shroff … 0— 4—0 Total 1—0—0”

10. From this clause it is very clear that the shares of each one of the partners in the partnership is specifically mentioned in the deed of partnership. Janardhana Rao Shroff would get four annas share whereas Venkatrao, Govindrao, Dasaratharao and Markandarao, each, are entitled to a three annas share. In this view, the Tribunal's conclusion that the share of the individual partners in the partnership is not specifically mentioned has to be negatived.

11. This takes us to the more important question whether the partnership put forward is valid in law. The Tribunal has come to the conclusion that it is a partnership between Kadam & Sons and Janardhana Rao Shroff and that such a partnership is not valid in law. In support of that conclusion, the Tribunal has relied upon the decision of the Supreme Court in Dulichand Laxminarayan v. Commissioner of Income-tax. In that case, an individual, a joint Hindu family and three firms purported to enter into a partnership. The deed was signed by five individuals, viz., by the individual partner, by the karta of the joint family and by one partner each of the three firms. That deed of partnership was sought to be registered under section 26A of the Income-tax Act. The application made in that connection was signed by the same individuals who had signed the partnership deed. The Supreme Court held that the partnership put forward was invalid in law.

12. In the present case, it may be noticed that all the five persons who have shares in the partnership firm have joined the partnership deed, the share of each one of them is stipulated in the deed and all five of them have joined in the application made under section 26A. It is no doubt true that four out of the five persons who joined the partnership deed were also the partners of another firm known as V.D Kadam & Sons. It is further true that in the primary allocation of profits and loss, a twelve annas share was shown to belong to the firm V.D Kadam & Sons. But in our judgment the true effect of the partnership is that there was a partnership between the five persons mentioned in the deed. It was only for the sake of convenience, four out of the five persons were shown to be the partners of another firm. We are of the opinion that the present case falls within the rule laid down by the Bombay High Court in Chhotalal Devchand v. Commissioner of Income-lax. In that case the Bombay High Court was called upon to consider the true effect of the decision of the Supreme Court in Dulichand's case. Dealing with that case, this is what Chagla C.J, who spoke for the Bench, observed at pages 357 and 358:

“The first ground on which the Tribunal has refused registration is that the firm is constituted of the two firms and one individual and hence it is not a valid partnership in the eye of the law. Obviously, in coming to this conclusion, the Tribunal had in mind the decision of the Supreme Court reported in Dulichand Laxminarayan v. Commissioner of Income-tax. The view taken by the Supreme Court on the facts of the case it was considering was that a partnership could not be constituted between three firms, a Hindu undivided family and an individual and that such a partnership could not be registered under section 26A. Now, an important and significant feature of that case was that the partnership deed was not signed by the individuals who constituted the three firms or the individuals who constituted the Hindu undivided family. Therefore, on the face of the partnership deed, an attempt was made to constitute a partnership of three types of entities—a firm, a Hindu undivided family and an individual. Now it is clear law that you may have a partnership between a firm and an individual in the sense that the real partnership is not constituted between the individual and the firm, but between the individual and the aggregate of persons who constitute the firm. In other words, a partnership deed, instead of setting put the names of the individual and the partners of the firm, may compendiously use the name of the firm by making it clear that what was intended was a partnership constituted between the individual and the constituent members of the firm, and this intention can be made absolutely clear if the partnership deed itself is signed, not only in the name of the firm, but by all the partners who constitute the firm. In the learned commentary on the Law of Partnership by Mr. Justice Desai, the principle of law is very succinctly set out at page 18 as follows:

‘It is true that a firm is not a legal person, but it does not follow that a partnership which purports to exist between a firm and some other person is rendered impossible or becomes illegal on that ground. The view which the court takes in such a case is that the firm is nothing but an association of individuals, and that when such an association under a firm name enters into partnership with another individual it is not the aggregate that combines with the individual but the individuals composing that aggregate. The same consideration applies to the case of a firm which purports to enter into partnership with another firm. What in fact and in law takes place is that the partners composing one firm join with partners composing another firm as individuals and thereafter all of them carry on business in some collective name’.”

13. In R.C Mitter & Sons v. Commissioner of Income-tax the Supreme Court has analysed the requirements of a valid application for registration under section 26A of the Act. These requirements are set out at page 198. They are:

“1. That the firm should be constituted under an instrument of partnership, specifying the individual shares of the partners;

2. That an application on behalf of, and signed by, all the partners, containing all the particulars as set out in the Rules, has been made;

3. That the application has been made before the assessment of the income of the firm, made under section 23 of the Act (omitting the words not necessary for our present purpose) for that particular year;

4. That the profits (or loss, if any) of the business relating to the previous year, that is to say, the relevant accounting year, should have been divided or credited, as the case may be, in accordance with the terms of the instrument; and lastly

5. That the partnership must have been genuine, and must actually have existed in conformity with the terms and conditions of the instrument.”

14. It is not the case of the revenue that any one of the requisites has not been fulfilled in the present case. It is true that in the statement of case submitted to this court, some doubts are cast as to whether the profits realised in the relevant accounting year had been distributed between the partners or not. There is no basis for this doubt in the order of the Tribunal. The order of the Tribunal makes it clear that the profits in question have been distributed as per the terms of the deed of partnership.

15. For the reasons mentioned above, our answer to the question referred to is that the assessee firm is entitled to registration for the assessment year 1959-60 under the provisions of section 26A of the Act. The Revenue to pay the costs of the assessee. Advocate's fee Rs. 250.

16. Question answered in favour of the assessee.