Orders of the Court was made by Hegde, J.:—
This is a reference under section 66(1) of the Indian Income-tax Act, 1922 (to be hereinafter referred to as the “Act”). The question of law referred to us is:
‘Whether on the facts and in the circumstances of the case’ K.D Kamath & Co., could be granted registration under section 26 A of the Act for the assessment year 1959-1960?”
STATEMENT OF CASE
The assessee is a firm consisting of six partners, namely, (1) K.D Kamath, (2) N.G Kamath, (3) S.D Kamath, (4) D.J Mohite, (5) S.G Joshi, and (6) Y.B Kate. The assessment year is 1959-1960 and the corresponding previous year is the year ended 31-3-1959. The partnership is constituted under a deed dated 20th March 1959, and it is recorded in the deed that the business of the partnership was being carried on in partnership from 1st October 1958. The partnership was registered under the Partnership Act on or about 11th August 1959. Clauses 8, 9, 12 and 16 of the partnership deed are reproduced below for facility of reference:—
8. That the party No. 1 i.e, Sri K.D Kamath, who is the principal and financing partner and by virtue of his having the long standing experience and the line of business together with the technical knowledge of engineer, shall have the full right of control and management of the firm's business and in the best interest of the firm, it is thus decided and agreed upon among all partners that all the working partners from 2 to 6 shall always work according to the instructions and directions given from time to time by Shri K.D Kamath, in the actual execution of works and in any other matter connecting thereof pertaining to this partnership business. The decision of the principal pertner on the aspect of taking any new business or giving tenders for new works, shall always vest with him, whose decision shall be final and binding upon all the working partners.
9. That it is also agreed among the partners that no working partner or partners is/are authorised to raise loan for and on behalf of the firm or pledge the firm's interest directly or indirectly and such act shall not be binding on the firm, except under the written consent of the principal partner.
12. That in the course of the business or during the existence of the firm's business, the principal partner has reason to believe that any working partner or partners is/are not working conducting to the best interest of the firm, the principal partners shall have right to remove such a working partner or partners from the partnership concern and in such an eventuality, the outgoing working partner or partners shall have only right of the profit or loss upto the date of his retirement, as may be decided by the principal partner in lumpsum either by paying or receiving regard being had to the progress of the business or otherwise upto the date of retirement, only on the completed works.
16. Thus subject to the provision herein mentioned and laid down and made thoroughly known by each of the parties to this agreement with sound mind and body, the firm's affairs be carried on for mutual gain and benefit and if any questions which may arise or occur touching to the conduct or management or liability of the firm, the same shall be amicably settled among the parties with the consent of principal partner, whose decision in the matter shall be final and binding on all partners”.
A copy of the partnership deed is made aunexure “A” and forms part of the case.
The Income-tax Officer refused to grant registration to the firm under sec. 26-A of the Income-tax Act for the assessment year 1959-1960. He placed reliance on the provisions of clauses 8, 9, 12 and 16 of the partnership dead and held that the partnership did not bring about any relationship of partners inter se, that the partners were not in enjoyment of the full share of profits and that the government departments and the municipality were not aware of the constitution of the firm. His order is made annexure “B” and forms part of the case.
The assessee thereafter appealed to the Appellate Assistant Commissioner who confirmed the order of the Income-tax Officer. He placed great reliance on clause 12 in agreeing with the conclusion of the Income-tax Officer. His order is made annexure “C” and forms part of the case.
The assessee thereafter appealed to the Tribunal and it was contended on its behalf that the ratio of the decision of the Bombay High Court in Income-tax Reference No. 14 of 1959 dated 1st September 1961 (Balubhai Gulabdas Navlakhi v. Commissioner Of Income-Tax, Bombay., Bombay City II) since reported in 1, clearly applied to the facts of the case and that the detailed control of business by and concentration of power in the hands of Shri K.D Kamath did not militate against the basic agreement of the persons concerned to share the profits and to accept the principle of mutual agency. The earlier decision of the Bombay High Court in the case of Umarbhai Chandbhai v. Commissioner of Income-tax, Bombay City was distinguished on the ground that in that case the two alleged partners were not allowed to do business of the firm at the discretion of the major partner and the important condition of mutual agency was, therefore, not satisfied. On behalf of the Department, reliance was placed on the decision of the Supreme Court in the case of M.P Davis v. Commissioner Of Agricultural Income Tax 2 and reference was made to clauses 12 and 16 of the partnership deed. The Tribunal for reasons given in detail in paragraph 6 of its order upheld the contention of the assessee and directed that the firm should be registered under sec. 26-A. Its order is made annexure “D” and forms part of the case.
The question for decision in this case is whether the deed marked as Ex. A in this case can be considered as an instrument of partnership as contemplated in section 4 of the Indian Partnership Act, 1932. That section provides:
“Partnership” is 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.”
The two essential conditions of this provision are that: (i) there should be an agreement to share the profits as well as the losses of the business, and (ii) each of the partners should be acting as agent of all. Section 6 of the Partnership Act stipulates that in determining whether a group of persons is on is not a firm or whether a person is or is not a partner in a firm, regard should be had to the real relation between the parties as shown by all relevant facts taken together. The only other relevant section in the Partnership Act which we need notice is section 20 which says:
“The Partners in a firm may, by contract between the partners, extend or restrict implied authority of any partners.
Notwithstanding any such restriction, any act done by a partner on behalf of the firm which falls within his implied authority binds the firm, unless the person with whom he is dealing knows of the restriction or does not know or believe that partner to be a partner.”
It may be noticed that sec. 20 does not in any manner impinge on Sec. 4 of the Partnership Act. Sec. 4 prescrbies the essential conditions while sec. 20 deals with “implied authority”. Hence we have to see whether on a true reading of the instrument produced, we can come to the conclusion that the instrument in question evidences a deed of partnership.
The material classes in the deed produced are clauses 6 to 9, 12 and 16. They read as follows:—
5. That the final accounts of the partnership firm shall be made up on the last day of each year of account, which shall generally be on 31st day of March of every year of account and the accounts shall be taken upto that date of all the stock in trade and after providing for all the working expenses, the remaining net profits or losses as the case may be, shall be shared by the parties hereto as under:—
Names of partners.
Extent of individual share.
1. Shri Krishna Rao Dadasaheb Kamat
5 shares.
2. Narayan Ganesh Kamat
2 shares
3. Shripadarao Domodara Kamat
2 shares
4. Dayanoba Jotiram Mohite
2 shares
5. Shankar Govind Joshi
2 shares
6. Yashavant Bhawoo Kate
2 shares
Total …
15 shares
6. That it is agreed among the partners that the party No. 1, i.e, Shri K.D Kamath, shall be the principal and financing partner and the rest of the partners, i.e, from 2 to 6 are admitted only as working partners contributing labour.
7. That the Good-will of the firm shall wholly and solely belongs to party No. 1 i.e, Shri K.D Kamath.
8. That the party No. 1 i.e, Shri K.D Kamat, who is the principal and financing partner and by virtue of his having the long standing experience in the line of business together with the technical knowledge of Engineer, shall have the full right of control and management of the firm's business and in the best interest of the firm, it is thus decided and agreed upon among all the partners that all the working partners from 2 to 6 shall always work according to the instructions and directions given from time to time by Shri K.D Kamat, in the actual execution of works and in any other matter connecting thereof, pertaining to this partnership business. The decision of the principal partner on the aspect of taking any new business or giving tenders for new works, shall always vest with him, whose decision shall be final and binding upon all the working partners
9. That it is also agreed among the partners that no working partner or partners is/are authorised to raise a loan for and on behalf of the firm or pledge the firm's interest directly or indirectly and such an act shall not be binding on the firm, except under the written on the principal partner.
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12. That in the course of the business or doing the existence of the firm's business, the principal partner has reason to believe that any working partner or partners is/are not working conductive to the best interest of the firm, the principal partner shall have a right to remove such a working partner or partners from the partnership concern and in such an eventuality, the outgoing working partner or partners shall have only right of the profit or loss up to the date of his retirement, as may be decided by the principal partner in lumpsum either by paying or receiving regard being had to the progress of the business or otherwise upto the date of retirement, only on the completed works.
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16. That subject to the provisions herein mentioned and laid down and made thoroughly known by each of the parties to this agreement with sound mind and body, the firm's affairs be carried on for mutual gain and benefit and if any questions which may arise or occur touching to the conduct or management of liability of the firm, the same shall be amicably settled among the parties with the consent of principal partner, whose decision in the matter shall be final and binding on all partners.”
In this case, it is not necessary to consider whether on the terms of the deed in question, the relationship between the parties is that of master and servant. It is sufficient, if we focus our attention on the question, whether on the facts of this case, we could come to the conclusion that each of the partners is entitled to act as agent of all. “Clause 8 of the deed stipulates that the first partner K.D Kamath “shall have the full right of control and management of the firm's business and in the best interest of the firm, it is thus decided and agreed upon among all the partners that all the working partners from 2 to 6 shall always work according to the instructions and directions given from time to time by Shri K.D Kamath, in the actual execution of works and in any other matter connecting thereof, pertaining to this partnership business. The decision of the principal partner on the aspect of taking any new business or giving tenders for new works, shall always vest with him, whose decision shall be final and binding upon all the working partners.” Clause 9 lays down that” it is also agreed among the partners that no working partner or partners is/are authorised to arise a loan for and on behalf of the firm or pledge the firm's interest directly or indirectly and such an act shall not be binding on the firm, except under the written authority of the principal partner”.
Clause 16 stipulates that “if any question which may arise or occur touching to the conduct or management or liability of the firm, the same shall be amicably settled among the parties with the consent of principal partner, whose decision in the matter shall be final and binding on all partners.”
It was urged by the learned Counsel for the Revenue that if all these clauses are taken into consideration, it would be clear that the alleged partners 2 to 6 mentioned in the deed cannot be considered as partners, in law.
In the course of the hearing of this petition, several decisions have been read to us, but the question of law presented for our opinion must depend necessarily on the facts of the present case. As observed by the Bombay High Court in Balubhai Gulabdas Navlakhi v. Commissioner Of Income-Tax, Bombay., Bombay , whether the relation of partnership exists in a given case must be determined on the facts of each case, bearing in mind the fact that two essential ingredients of a partnership are that there should be an agreement to share the profits as well as the losses of the business and each of the partners should be aoting as agent of all.
As observed by Gajendragadkar J. in M.P Davis v. Commissioner Of Agricultural Income Tax , the fact that the document is styled as an instrument of partnership is not decisive in the matter of determining the relationship created by the instrument in question. In deciding that relationship, the name given to the document is by no means conclusive.
From the clauses above referred to, it is obvious that the management as well as the control of the business is entirely left in the hands of the alleged first partner. The other partners can merely work under his directions and share in the profits and losses in accordance with the proportions mentioned in clause 5 of the deed. It is not within their power to act as agent of the other partners. They cannot accept any business except with the consent of K.D Kamath. They cannot raise any loan or pledge the firm's interest directly or indirectly except under the written authority of K.D Kamath. On a true reading of the several clauses in the deed, it is difficult to accept the contention of Sri S.K Venkataranga Iyengar, the learned Counsel for the assessee, a relation of partnership is created by the deed in question. As observed by Beaumont C.J, in Chimanrammotilal v. Jayantilal Chhaganlal 3, one essential element of partnership is that there should be agency; one partner can always bind another partner in any matter which falls within the scope of the partnership business, subject to any limitation under Sec. 20 and if the relationship constituted between parties in respect of a particular matter does not expressly or by necessary implication involve the right of one party to pledge the other as an agent, then there is no partnership. That is exactly the position in the present case.
The decision of the Bombay High Court in Umarbhai Chandbhai v. Commissioner of Income-Tax, Bombay City , bears on the point under consideration. Therein, 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; the Court held that there was no partnership in law and the Income-Tax authorities were therefore right in refusing to register the deed under Sec. 26-A of the “Act”.
Dealing with the deed in question, this is what Chagla C.J who spoke for the Court observed in the course of the judgment:
“Now in this case the partnership is between Mahomed Umar and his two sons, and the question is whether on the terms of the document itself it can be stated that in law there was a partnership. Now there are two essential conditions before it could be stated that by contract a relationship has been brought about between persons which is the relationship of a partnership; and the two conditions are that the partners must agree to share the profits of the business and the business must be carried on by all or any of them for all of them. Therefore, not only must there be a sharing of profits but there must be also the principle of agency.”
As in that case the document before us does not fulfil the latter requirement.
The requirements of a valid partnership was considered by the Supreme Court in the earlier referred Davis's Case . Therein, in the deed the capital of the firm was stated to be the coffee estate, which was the property of M.P Davis, and it was expressly provided that his brother was not entitled to contribute anything towards capital, had no power to charge or encumber or in any way deal with the estate and was prohibited from advancing moneys to the partnership; the estate was to go back to the appellant on dissolution of the partnership; the document required the brother to employ himself diligently in carrying on the business.
Similar are the conditions found in the deed before us. It is no doubt true that in the document before the Supreme Court, there were other clauses, the most important of them being that Davis's brother was not to share in the losses. That undoubtedly is an important distinguishing feature. But the decision of the Supreme Court that the deed produced before it is not a deed of partnership not only rested on the circumstances that Davis's brother was not to share in the losses incurred, but also on the other circumstances set out hereinbefore. In our Judgment, this decision undoubtedly supports the contention of the Revenue.
On behalf of the Assessee, strong reliance was placed on the decision in Balubhai's case referred to earlier. In that case a deed of partnership produced satisfied the two essential conditions laid down in Sec. 4 of the Partnership Act, while it also laid down that the entire goodwill as well as the stock-in-trade, furniture and other assets of the firm were to be in the sole ownership of a particular partner, that he had absolute power to deal with and dispose of them by sale or otherwise, that he was at liberty to admit additional partners on such terms as he thought fit in his absolute discretion, that he may increase or decrease the share of the existing partners, that he may also dissolve the partnership with regard to such of the partners who do not work deligently and that he may dissolve the partnership with regard to any partner by giving him three months' notice. Despite those powers conferred on one of the partners, the Court still held that it was a partnership because of the fact that the deed in question satisfied the requirements of Sec. 4 of the Partnership Act. In this connection, the following observations of the Court in the course of its judgment are apposite:
“In our opinion, the fact that some of the terms of the deed give enlarged powers of management and control of one of the partners, who has brought in all the finances and holds the entire capital of the firm, may resemble the powers of an employer. Still, however, they will not be sufficient to conclude that the real agreement between the parties is not that of partners, but that of master and servant, if the two essential conditions required to constitute a partnership have been satisfied.”
In the present case, our conclusion is that as per the terms of the partnership deed, partners 2 to 6 cannot act as agent of all.
The last decision read to us in the decision of the Kerala High Court in Commissioner of Income-Tax, Kerala v. Pathrose Rice and Oil Mills . On the terms of the deed produced before it, the High Court came to the conclusion that the deed in question is a partnership deed. Therein, on the basis of clause 8 of the deed produced, the Revenue had contended that no partner had power to act as the agent of other partners. This contention was negatived by the Court. Clause 8 in that deed read:
“All activities connected with business, etc., is to be conducted at the sola discretion of partner No. 1 and all his actions are binding on all three partners equally.”
While this clause gave power to partner No. 1 to conduct all business activities of the partnership firm at his sole discretion, it did not limit the agency powers of the other partners. That is the crux of the matter. Hence, this decision is of no assistance to the assessee.
For the reasons mentioned above, our answer to the question referred to us is that on the facts and circumstances of the case, K.D Kamath and Co., could not be granted registration under Section 26-A of the “Act” for the assement year 1959-1960.
Assessee to pay the costs of the Revenue. Advocate's fee Rs. 260.