S.T. Desai, J.
1. The question that arises for our determination on this reference is :
'Whether on the facts and circumstances of the case, Wadia, Dadachanji and Vakil constituted a partnership and were rightly assessed as an unregistered firm within the meaning of section 2(16) of the Act ?'
2. A situation somewhat incongruous if not grotesque has arisen in the matter of the assessment of the assessee before us and it is primarily due to the attitude taken up by the Income-tax Department and of that attitude consistency is not a merit. We are, however, not particularly concerned with the attitude of the Department and what we have to determine is whether in law there was constituted a partnership between these three persons. Though the point we shall be deciding lies in a reasonable compass, it will be necessary to set out the relevant and material facts in some detail.
3. Wadia, Dadachanji and Vakil are three architects and surveyors by profession. Wadia and Dadachanji were carrying on business in partnership as architects, engineers and surveyors in the name of 'N. R. Wadia & Co.' on terms and conditions which were recorded in 1935 in an agreement of partnership. Later on they agreed 'to admit into partnership with them' Vakil and the three persons reduced the terms and conditions of their arrangement to writting in an agreement executed on November 6, 1952. In that agreement they stated in terms that the therd partner Vakil was being admitted into partnership with them. The material terms of that agreement are as under :
'1. The partnership shall commence from January 1, 1953 (subsequently changed to April 1, 1953).
2. The partnership business shall be that of Architects, Civil Engineers and Surveyors.
3. The business shall be carried on in the firm name and style of 'N. R. Wadia & Co.'
4. Each partner shall attend to and carry out the work secured by him and in respect of such work shall keep and maintain a separate work-book, bill-book and other necessary books.
5. Each partner shall recover bills in respect of work done for his own clients.
6. As soon as after March 31 as convenient in each year during the continuance of the partnership, partnership accounts shall be made up in the manner following that is to say an account shall be taken of the bills recovered by each partner from his client. The office expenses including office rent, establishment and other charges and expenses including travelling and motor expenses shall be deducted out of the total of the bills recovered by the three partners in the proportion of the gross recoveries of each partner and the bal ance shall be divided between the partners in the proportion of their own respective gross recoveries....'
4. It will be seen that a peculiar method of conducting their business was adopted by these three persons. They described themselves as partners. They agreed that each of them was only to attend to and carry out the work secured by him and in resp ect of that work he had to keep and maintain a separate work-book, bill-book and other necessary books. Each of them had to recover the bills in respect of the work done by him for his own client and it is of some importance to notice that there was no sharing of profits between them in the ordinary way and the arrangement was more akin to an arrangment of sha ring expenses between persons carrying on business in the same premises under one common name. The expenses were to be shared by them not in the proportion of any fixed share but in the proportion of the work done by them for their client. Of course, the fact remained that in the agreement they described themselves as partners carrying on business under the firm name of N. R. Wadia & Co. There is no dispute that they themselves were at the time of the opinion that the legal relation between them would be that of partners.
5. Now, partnership is not a matter of intention and agreement. It is well-settled law - and the provisions of the Indian Partnership Act give recognition to that law - that to constitute a partnership in law, there must be three elements : (i) there must be an agreement entered into by all the persons concerned; (ii) the agreement must be to share the profits of a business; and (iii) the business must be carried on by all or any of the persons concerned acting for all. all these three elements must be present before a group of per sons can be held to be partners. This can be gathered from the definition of 'partnership' in the Indian Partnership Act. Section 6 of that Act gives a comprehensive statement of the rule as to the nature of a partnership. In determining whether a person is or is not a partner in a firm, the court must have regard to the real relation between the parties. Whether the relation of partnership does or does not exist must depend on the real intention and contract of the parties as appearing from the whole facts of the case and not merely on their expressed intention. A and B may in a written agreement have stated expressly that they are not partners, yet they have been held to be partners; or they may have stated that they are partners and have been held not to be partners. These principles are so firmly established that it is not necessary to elaborate them and we have merely recapitulated here what one of us had occasion to say in another place.
6. The Tribunal has observed that this matter had a chequered history but it is not necessary to go into the whole history of the case and we shall be referring to what happened in the matter of the assessee in the assessment year 1954-55 and 1955-56 only in so far as it seems necessary to do so for the purpose of appreciating the case of the assessee as also the contention urged on behalf of the revenue.
7. The first return submitted by the assessee was for the year 19 54-55. It was made in the name of 'Messrs. N. R. Wadia & Co.' In that return, it mentioned its status as 'firm' and the retu rn was signed by Wadia for N. R. Wadia & Co., as a partner. The total income declared in that return was arrived at after deducting office expeses from the total gross receipts of the three persons, Wadia, Dadachanji and Vakil, which were respectively Rs. 5,314, Rs. 18,460 and Rs. 9,950. The total ex penses of Rs. 9,624 were devided in the proportion of the receipts of the three persons and the net income of each of the three persons was arrived at after setting off the pro-rata expenses against the gross professional receipts of each of them. The firm in that year made two applications, one for registration and the other for renewal of registration on the basis of the deed of partnership executed on November 6, 1952. The Income-tax Officer rejected the claim for registration made under section 26A. In doing so, he observed :
'The three partners are engineers and architects. They have common expenses but their professional receipts are noted separately. At the end of the year they divide the expenses in proportion to the gross receipts of each partner. Thus alth ough for any particular year the shares of the partners are defined according to the gross receipts but their shares are not fixed from year to year. Thus there is no regular partnership and the question of registration does not arise. The business will be treated as carried on by an association of persons.'
8. After determining the status of the entity to be an association of persons, he determined the total income of the association at Rs. 24,100 and he did not assess the entity as an unregistered firm but taxed the income in the hands of the three partners.
9. In the assessment year 1955-56, his approach and decision were on the same lines, though the grounds given by him were slightly different. In making his order, he observed :
'Strictly the assessee is not carrying on the business as a firm but it is sharing only expenses. Each member of the association has been doing his own business independently of the other member. Registration of the firm is refused.'
10. After determining the total income at Rs. 30,393 he raised no demand against the firm or the entity but directed that each of the said three persons should be assessed directly on his income from the profession.
11. In the assessment year 1956-57, which is the relevant year for the purpose of this reference, the Income-tax Officer refused to grant renewal of registration on two grounds :(1) 'There is no fixed sharing proportions of the partners' and (2) 'no question of renewal of registration arose as the firm has not been registered in the past'. In respect of this assessment year, his approach and conclusion were materially different. He took the view that since the assessee itself had declared its status in the return as that of a 'firm' and had done also in the application under section 26A and since no registration had been granted, he should make the assessment in the status of an unregistered firm. He determined the total income of the unregistered firm at Rs. 35,274 and raised the appropriate demand not on the three individual persons but on the entity treated as the unregistered firm. Against that order of assessment and the order under section 26A, the assessee went in appeal to the Appellate Assistant Commissioner.
12. The appellate authority took the view that the principle of agency which is the characteristic feature of a partnership was lacking in the case of these architects and surveyors inasmuch as each of them was really carrying on his own work by himself. He took the view that the agreement of partnership which was on a stamp paper of Rs. 30 was in reality to share the expenses and not to carry on joint business. He held that there was no firm in existence and also recorded his finding that there was not even an association of person 'as no joint activity had been carried out by the three persons concerned'. In view of his conclusions, he directed the Income-tax Officer 'to assess each person on his own individual income.'
13. The Department carried the matter in appeal to the Tribunal. Two further facts were brought out before the Tribunal; one was urged in favour of the assessee and another against the assessee, Viz., (1) there was no banking account of N. R. Wadia & Co., with any bank and (2) an application for registration had been made by N. R. Wadia & Co., as provided in the Indian Partnership Act, 1932, and the Registrar of Firms had made an entry of the statement in the Register of Firms. A number of other facts relating to the mode and manner of carrying on their business employed by the three persons were relied on by the contesting parties before the Tribunal and we shall refer to the material facts a little later in our judgment. The Tribunal held that the three persons formed a firm for the purpose of carrying on the business of architects, civil engineers and surveyors and it had been correctly assessed in the status of an unregistered firm as defined in section 2(16) of the Income-tax Act. The reference came up for hearing before Mr. Justice J. C. Shah (as he then was) and myself on July 3, 1959. After the matter had been argued before us for some time, we felt that the element of agency which is one of the very material indicate of the existence of partnership in law did not appear to have been considered by the Tribunal and we felt it necessary to call for a supplemental statement of the case from the Tribunal on the point whether any business was done by N. R. Wadia & Co., meaning thereby the partners carrying on business in the name of N. R. Wadia & Co., on behalf of all of them and, if so, whether the business was done for the constituents under contracts entered into with N. R. Wadia & Co., or with the individual members of that entity acting for all. The supplemental statement of the case has been filed and the reference is now before us for disposal.
14. It will be convenient to set out here certain relevant and material facts which have to be taken into consideration before we can answer this mixed question of fact and law. The three architects had got letter-heads printed under the style of N. R. Wadia & Co. and below and names of the three persons their technical qualifications were mentioned. Expenses such as salary staff, conveyance, electricity, office rent, printing, surveyors' licence fees, telephone, municipal form and inspection fees etc., were incurred jointly by them. The professional fees received by each of them were, however, entered separately. Each of them maintained a serially numbered bill-book and receipt-book for himself. The bills were made out in the name of N. R. Wadia & Co. On the top of each bill, however, the name of the particular person who secured and carried out the work of the particular client appeared in rubber stamp. At the end of the year all expenses jointly incurred were totalled up, provision was made for depreciable assets such as typewriters and the admissible expenses are thereafter apportioned in accordance with the gross receipts of the three persons. On remand, some additional facts have been found as appear from the supplemental statement of the case. No formal written contracts were entered into either in the name of N. R. Wadia & Co., or in the name of any of the three persons Wadia Dadachanji and Vakil. The correspondence files and other documents of N. R. Wadia & Co., were examined and specimen letters have been taken out from the same. That material shows that some of them in the name of Wadia, Dadachanji and Vakil personally and some of them in the name of N. R. Wadia & Co. Similarly some letters addressed by the clients and other parties are addressed to Wadia, Dadachanji and Vakil personally and some to N. R. Wadia & Co. Mr. G. N. Joshi, learned counsel for the Revenue, has pointed out to us that the material now stated in the supplemental statement of the case leads one 'neither here nor there'.
15. It has been argued before us by Mr. N. A. Palkhivala, learned counsel for the assessee, that there is no material whatever to be gathered from the supplemental statement of the case from which the Revenue can point out that the element of agency subsisted between the three persons when they carried on their business in the name of N. R. Wadia & Co. It is urged that the onus of establishing partnership lies on the Revenue and that onus has not been discharged. Considerable reliance has been placed by learned counsel on the peculiar mode or method of carrying on business adopted by the three persons. It is argued that an arrangement of sharing expenses arrived at obviously for the purpose of convenience by three architects should not result in a partnership in the context of tax law simply because the three persons execuated what was described by them as a deed of partnership and they were under the erroneous belief that the legal relation subsisting between them was that of partners. There is in our opinion considerable force in this argument. However much A and B may believe and honestly believe that they are partners, there may not yet subsisting between them the relationship of partners as a matter of law and it is that legal relationship with which alone we are concerned on this reference. Therefore, we must turn to see whether on the established facts and circumstances of this case, a partnership in law has been proved to exist between the three architects. The Department, as we felt constrained to observe at the very outset of our judgment, adopted one attitude in the earlier years and in the relevant assessment year it took up a different attitude. Of course, if in law it can be held that there subsisted the relationship of partners between the three persons, then the attitude of the Department in the previous years would not make any difference to the conclusion that would be reached by the court.
16. To turn to the argument of Mr. Joshi. Mr. Joshi has relied primarily on the agreement of partnership between the three persons. Indubitably, the fact of that agreement is an element which must weigh in favour of the Revenue. But, there is nothing in the terms and conditions of that agreement, which can be said to advance the case of the Revenue. If anything, clause (6) of the agreement discloses a mode or method which is very peculiar and not one which is normally adopted by persons interested in a business carried on by all of them or by any one of them acting for all. Then, Mr. Joshi has strongly relied on the fact that the return for the relevant assessment year 1957-58 was made in the name of the firm. This factor cannot be permitted to be in any manner determinative of the question before us in view of the contentions raised by the parties and the question which arises for our determination. That is a question which requires us to view the matter as one of substance and not of form and in the ultimate analysis, the existence of partnership is not a matter of form but of substance.
17. Yet another factor very strongly relied on by Mr. Joshi is that the assessee N. R. Wadia & Co., got itself registered as a partnership firm under the Indian Partnership Act. The greatest stress has been laid by learned counsel on this element of registration and he has relied on section 68(1) of the Partnership Act which rules that any statement, intimation or notice recorded or noted in the Register of Firms is, as against any person by whom or on whose behalf such statement, intimation or notice was signed, conclusive proof of any fact therein stated. It is argued that the three persons signed that necessary statement and gave the necessary intimation to the Registrar of the fact of their being partners and, therefore, the registration of their firm is conclusive proof of the existence of the relationship of partners between them, both as a matter of fact and as a matter of law. Mr. Joshi has drawn our attention to a number of sections in Chapter VII of the Partnership Act which deal with registration of firms as also section 2(6B) and 2(16) of the Income-tax Act. The argument has proceeded that section 2(6B) of the Income-tax Act inter alia lays done that the expressions 'firm', 'partner' and 'partnership' have the same meaning respectively as in the Indian Partnership Act and the law of partnership as laid down in the Partnership Act is also applicable to cases under the Income-tax Act. We agree that regard must be had to the law of partnership under the partnership Act when dealing with cases arising under the Income-tax Act. It does not, however, follow that the provisions relating to registration of firms must be pitchforked into case arising under the Indian Income-tax Act. Those provisions, in our opinion, are not determinative of any question as to the existence of a partnership which may arise under the Income-tax Act and certainly not conclusive of the existence of a partnership as a matter of law in any matter to be dealt with under this fiscal enactment. Section 68 of the Partnership Act lays down a rule of evidence and the rule about conclusive proof. Section 69 deals with the effect of non-registration. The importance of the provisions relating to registration in the Partnership Act cannot be appreciated without having a complete idea of the provisions of section 69 of the Partnership Act and we are unable to accede to the argument of Mr. Joshi when he rules out the importance of section 69 by saying that it does no more than impose some penalties. In our opinion, section 69 contains the most vital clause in the chapter relating to registration of firms under the Partnership Act. The Act does not in so many words make the registration of firms compulsory nor does it impose penalties such as are imposed under the corresponding English enactment, yet the effect of the rules stated in that section is such as practically necessitate registration of a firm at one time or other. The section forbids the bringing of certain suits in respect of partnerships and by partnership firms which have not been registered under the Act. The scheme of the Act as to registration is to give any firm a right to register, disclosing the particulars required by the Act, and section 69 is designed to encourage registration by imposing a disability in the case of firms which are not registered. It is unnecessary in the present context to examine the provisions of section 69, and it will suffice to point out that the section lays down rules of considerable importance and consequence. Be it noted, however, that the strict requirements of that section and the provisions in which they are contained and the conclusive nature of entries in a Register of Firms are in their application to be confined to matters arising under the Partnership Act. We agree that entries in the Register. But we put to ourselves the question : 'For what purpose are those entries to be regarded as conclusive proof ?' and the answer seems inescapable that the conclusiveness of those entries is only for the purposes to be gathered from section 69. It is when any suit to enforce a right arising from a contract or conferred by the Act is instituted by a partner against another partner or the firm that the presence or absence of registration can have bearing and meaning. It is when a suits is filed to enforce a right arising from a contract by or on behalf of a firm against any therd party that the presence or absence of registration can have bearing and meaning. But we fail to see how registration of a firm or the names of the partners in that firm under the provisions of the Partnership Act can attain the magnitude of clothing those entries with conclusiveness in the context of the Indian Income-tax Act. These considerations are, in our judgment, sufficient to repel the contention of the Revenue that the registration of the firm under the Partnership Act is conclusive proof of the fact of partnership in the matter before us. The entries would no doubt afford evidence in favour of the existence of partnership in any such case but cannot be regarded as terminative of the matter.
18. The crucial question is and must be whether the element of agency which is a prime requirement of the existence of partnership has been established in this case. Of the three elements already mentioned by us, it is true that in the case before us there is an agreement entered into by the three persons concerned and described as an agreement of partnership. It is difficult to see from the facts set out in the two statements of the case that there was an agreement to share the profits of a business and even if we were persuaded to hold that there was an agreement to share the profits of a business, we would have found it impossible to accede to the further submission that the requirement of agency is satisfied in this case. Tha third element in the definition of partnership shows that the business must be carried on by the partners or some of them acting for all. It is this element of agency which distinguishes partnership from various other legal relations and it is this element which brings of the firm are agents as well as principals. It also indicates that if the essential element of agency is lacking, the relation of partnership cannot be said to exist. Section 6 of the Partnership Act recites the rules for determining the existence of partnership. In determining whether in a particular case partnership does or does not exist - which is at times a matter of some difficulty - the court will examine all the incidents of the relation between the parties and will have regard to the real relation between them. The court will consider all the relevant facts separately and together and then draw conclusion without attaching undue importance to any of the evidentiary facts or any particular aspect of the matter. I have said on more occasions than one that even complicated cases become less difficult of solution if the elements of carrying on a business and of mutual agency are clearly kept in view. It is true that a rather in congruous situation has arisen in this case but the assessee is not primarily responsible for that. There can be no question here of any acquiescence or holding our or estoppel and registration of the firm under the Partnership Act, as we have already observed, is not terminative of the matter. There are no cogent facts and no circumstances to be gathered from the two statements of the case from which existence of mutual agency between the three persons can be said to be inferable. Treating this even as a case of some difficulty we do not see how we would be justified in saying that the element of agency has been established. The true test for determining whether a person deriving income from a business in the form of profits is or is not a partner is to examine whether the business was carried on by the others acting for him; whether there relation of principal and agent subsisted between them, i.e., whether one was authorized to work on behalf of another and not merely whether there was any arrangement of sharing the profits. The question is always one of agency and authority.
19. We have considered all the relevant material which requires to be weighed in the determination of the question before us and considered the same in the light of the observations which we have made and we are of the opinion that the question arising on this reference must be answered in the negative.
20. The question is in two parts. The latter part of the question postulates the non-existence of a partnership firm and the answer which we have given is, in our opinion, sufficient to answer the entire question.
21. Commissioner to pay the costs.
22. Reference answered accordingly.