Govinda Bhat, J.:— [After setting out the statement of case as above, Govinda Bhat J. continued.]
2. The question of law referred under section 256(1) of the Income-tax Act, 1961, for our opinion is:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee was not entitled to the benefit of registration for the assessment year 1962-63?”
3. The reference relates to the assessment year 1962-63, the corresponding accounting period being the financial year April 1, 1961, to March 31, 1962. The instrument of partnership is dated March 30, 1962. The partnership consisted of four partners of whom No. 1, Sayyad Hafeez Saheb, was the managing partner; No. 2, Abdul Warris Saheb, was the financing partner and Nos. 3 and 4 were the working partners. The deed of partnership provided for the sharing of profits and losses in accordance with the shares of the partners as defined under the deed. The Income-tax Officer refused registration of the firm on the ground that, in view of the provisions of clause 5 of the deed of partnership, the element of agency required to constitute a partnership was lacking. That view of the Income-tax Officer was upheld by the Appellate Assistant Commissioner of Income-tax and the. Tribunal. The question is whether, in view of the provisions of clause 5 of the deed of partnership, the element of agency can be said to be lacking.
4. Clause 5 of the deed of partnership reads:
“That the first party shall be the managing partner, the second the financing partner and the third and fourth are admitted as working partners, respectively. The managing partner shall have full rights o??? either admitting new partners, raising additional funds and loans, etc., for the business and in case it is found that the activities of the working partners are found detrimental to the interest of the firm, he has powers to expel them or to restrict their powers in the interest of the firm. In all important matters the working partners shall have to seek advice from the managing partner and act accordingly.”
5. Whether the relationship of partnership exists in a given case must b??? determined on the facts of each case, bearing in mind the fact that tw??? essential ingredients of the partnership are that there should be an agreement to share the profits and losses of the business and each of the partners should be acting as the agent of all. It is not the case of the department that the partnership in question is not a genuine one. Their contention is that, in view of the provisions of clause 5 aforesaid, no valid partnership came into existence. Under the said clause, the managing partner has been conferred with the power to admit new partners, raising additional funds and loans, etc., for the business and the power to expel any of the working partners if it is found that their continuance in the firm is detrimental to the interest of the firm and further that the working partners have to seek advice from the managing partner and act accordingly in all important matters.
6. Section 20 of the Partnership Act, 1932, hereinafter called “the Act”, provides that the partners in a firm may by contract between them extend or restrict the implied authority of any partner. Section 31 provides that subject to contract between the partners and to the provisions of section 30 no person shall be introduced as a partner into a firm without the consent of all the existing partners.
7. Pollock and Mulla in their Commentary on the Sale of Goods Act and Partnership Act, 3rd edition, by D.N Pritt, at page 338, state as follows:
“Introduction of partners by agreement.—Express power for a senior or principal member of a firm to introduce one or more new partners, named or not named, under agreed conditions, is in fact constantly given by partnership articles.”
8. Section 33 of the Act provides that a partner may not be expelled from a firm by any majority of the partners, save in the exercise, in good faith, of powers conferred by contract between the partners. In other words, the power of expulsion can be conferred by contract between the partners, provided such an action is taken in good faith in exercise of the powers conferred by contract. Section 33 of the Act corresponds to section 25 of the English Partnership Act, 1890 (53 and 54 Vic. c. 39). With reference to the said provision Halsbury's Laws of England, 3rd edition, volume 28, at pages 564 and 565, states:
“Dissolution on expulsion.—No majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners. A power of expulsion conferred by articles of partnership cannot be exercised to determine a partnership at will arising after the expiration of the term. The power must be exercised in the utmost good faith by all the partners whose concurrence may be necessary under the partnership contract.”
9. In Carmichael v. Evans [1904] 1 Ch. 486., a provision in the articles of partnership conferred power of expelling a junior partner on a senior partner and that power was held to have been validly exercised.
10. In Balubhai Gulabdas Navlakhi v. Commissioner Of Income-Tax, Bombay. [1942] 46 I.T.R 492 Bom.., the instrument of partnership conferred power on a partner to introduce a new partner or to dismiss an existing partner by giving notice. In the said case, it was held that if the two essential conditions which are necessary to found the relation of partnership, viz., (1) that there should be an agreement to share the profits as well as the losses of the business, and (2) that each of the partners should be acting as an agent of all, exist then the other conditions which confer a larger share to one of the partners in the management or the ownership of the assets would not negative the existence of the partnership.
11. In Commissioner of Income-tax v. Pathrose Rice and Oil Mills [1960] 40 I.T.R 353 Kar.., clause 7 of the partnership in question provided that if at any time partner No. 1 wished to send out partners Nos. 2 and 3 jointly or severally, he has independent and absolute right and power to immediately exclude or discharge them. Clause 8 provided that all activities connected with the business, etc., were to be conducted at the sole direction of partner No. 1 and all his actions were binding on all the three partners equally. It was held that the said provisions did not render the partnership invalid.
12. In Commissioner Of Income-Tax, U.P v. R.S Shoe Factory. [1963] 47 I.T.R 917 All.., three persons agreed to form a partnership. The business of the firm was to be carried on by two or three partners and the third partner was to have no right to interfere with the conduct of the business and he was liable to be dismissed by the other partners. Despite such a provision, it was held that the agreement satisfied all the essentials of a valid partnership and as such entitled to registration.
13. In City Tobacco Mart v. Commissioner Of Income-Tax, Mysore* [1967] 64 I.T.R 478 Mys.., this court held that the overriding powers given to the first two partners under clauses 2 and 4 of the deed of partnership were not such as to destroy the character of partnership. It was held that under the provisions of the Partnership Act, the partners could contract for the introduction of new partners without the consent of all the original partners.
14. In Commissioner of Income-tax v. K.D Kamath & Co. [1964] 54 I.T.R 72 Mys,.—on appeal [1971] 82 I.T.R 680., relied on by the Tribunal on the facts of the particular case, it was held that the element of agency was lacking. The terms of the deed of partnership in the said case are not similar to the terms of the deed in the instant case. The said decision is under appeal before the Supreme Court.
15. In the instant case, clause 5 of the deed of partnership is not repugnant to the provisions of the Act and it cannot be said that, in view of the provisions of clause 5, the element of agency is lacking. Therefore, the Tribunal was not right in the view it has taken that no valid partnership has been constituted under the instrument of partnership.
16. For the above reasons, we answer the question referred to us in favour of the assessee as follows:
On the facts and in the circumstances of the case, the Tribunal was not right in law in holding that the assessee was not entitled to the benefit of registration for the assessment year 1962-63.
17. The assessee will be entitled to the costs of this reference. Advocate's fee Rs. 250.