R.N. Misra, J.
1. At the instance of the assessee, the Income-tax Appellate Tribunal has made this reference and stated a case under Section 256(1) of the Income-tax Act of 1961 (hereafter referred to as 'theAct'), and the following question has been asked to be answered by us :
' Whether, on the facts and in the circumstances of the case, the decision of the Appellate Tribunal upholding refusal of the Income-tax Officer to grant registration to the assessee under Section 185(1)(a) of the Act on the ground that no genuine partnership was brought into existence, is justified in law ?'
2. Jammula Venkataswamy and his four sons constituted a Hindu undivided family of which the father was the karta. This Hindu undivided family carried on business in iron and hardware in the name and style of 'Jammula Venkataswamy & Sons' at Berhampur in the district of Ganjam. On September 19, 1964, there was a partition of the family assets and the claim made under Section 171 of the Act has been duly accepted by the revenue. Five weeks after this partition, the father and two of the divided sons constituted themselves into a partnership firm as per instrument of partnership, dated the 25th October, 1964. This firm was registered with the Registrar of Firms and in due course an application for registration as provided under Section 184 of the Act was made. The relevant features in the partnership deed were ;
' Clause 1. Name and Style :
The firm shall be styled as Jammula Venkataswamy & Sons (as agreed upon on partition by father and four sons to continue the name as it stood before the partition).
Clause 5. Sharing of profits or losses :
Profits or losses shall be shared among the three partners in equal proportions :......
Clause 7 :
All the bank transactions should be operated only by the first party (father). The power of borrowal is vested with the first party and no other party can borrow money.
Clause 8 :
The second and third parties cannot settle claim or dispute pertaining to any business and cannot incur debt binding on the firm without consent of the first party.
Clause 9 :
The second and third parties can draw funds to the extent of Rs. 200 a month for their personal expenses and such drawings shall be adjusted at the year ending in their individual capital accounts.'
3. The Income-tax Officer refused . to grant registration on the following grounds :
(a) Under Clauses 7 & 8 of the deed restrictions had been imposed on the second and third partners on operating the firm's bank account andthey had been prohibited from binding the firm by any of their acts and/or to settle any matter of the firm without the consent of the first partner, i.e., the father;
(b) The bank accounts stood in the name of the erstwhile Hindu undivided family and no intimation had been given to the bank either regarding alleged disruption of the Hindu undivided family or the formation of the partnership and the bank account hitherto in the name of the Hindu undivided family was continued to be operated by the first partner; and
(c) One of the partners (sons) had drawn money in contravention of the restriction imposed under Clause 9.
4. On the aforesaid grounds, the Income-tax Officer came to the conclusion that there was no genuine firm.
5. The Appellate Assistant Commissioner on the assessee's appeal came to hold that the objections raised by the income-tax Officer were not tenable in law and they did not militate against the validity of the partnership or the claim for the registration. He accordingly directed registration.
6. The revenue appealed to the Tribunal. The Tribunal accepted the view of the Appellate Assistant Commissioner so far as the retention by one partner of more power for himself than those given to the others and drawings by one of the partners was beyond the limits set down for him were concerned, but agreed with the Income-tax Officer in regard to the conclusion drawn from the fact that the bank account continued to be in the name of the erstwhile Hindu undivided family and no steps had been taken for notifying the bank about the partition as also the formation of the partnership firm. It was of the view that the bank was a third party and it was the Hindu undivided family and not the firm that continued to deal with the said third party. In the opinion of the Appellate Tribunal, this factor alone was a serious impediment in the assessee's claim for registration as a firm. It accordingly vacated the direction of the Appellate Assistant Commissioner and restored the order of the Income-tax Officer.
7. The question as referred to this court shows that refusal of registration by the Tribunal was on the ground that ' no genuine partnership was brought into existence'. From the statement of the case, we find that the assessee has objected to incorporation of these words in the question, but the Tribunal has overruled the same. This was what the Appellate Tribunal had stated while disposing of the second appeal :
' We have carefully considered the facts and circumstances of the case. It is true that in partnership law, there is nothing to prevent a major or managing partner from retaining for himself more power thanthose given to others under the partnership agreement and that by itself will not make the partnership invalid. Notwithstanding prohibition or restriction on right of some of the partners, the acts of any of the partners will be binding on the firm so far as the third persons are concerned, unless the dealings by the third persons are with the knowledge about the restrictions in the provisions of such partnership. The other objections raised as to the contravention of the provisions of the partnership deed concerning withdrawal by more than his limit is also, in our opinion, not very sound as it is only contravention of any material clause in the partnership that would go against the claim of the partnership for registration and not other minor clauses which may be concerned with day to day affairs of drawing, etc. As regards the bank account, we think, there is some force in the contention of the department. The bank account, admittedly, stood in the name of the erstwhile Hindu undivided family and despite the claim of partition and formation of partnership, no steps were taken for either notifying the partition of the Hindu undivided family or the formation of partnership but the account continued to be operated upon as if they were the dealings of the Hindu undivided family. This, in our opinion, is a serious defect which would militate against the claim of registration in this case. So far as the dealings with the bank, the third party, is concerned, the account continued to be that of the Hindu undivided family and there is no provision in the partnership either to show that the account that originally stood in the name of the Hindu undivided family would be treated as the account of the partnership firm, with the result, none of the partners could be entitled to operate the bank account as such even if there was no prohibition imposed by restrictive clause in the partnership deed, as the bank would not recognise the partnership or any partner. We, therefore, feel that this is a serious lacuna which would nagative the claim of registration of the assessee-firm. In the circumstances, the order of the Appellate Assistant Commissioner is set aside and that of the order of the Income-tax Officer refusing to grant registration is confirmed on the grounds mentioned before.'
8. It is true that the Income-tax Officer had come to hold that, in his opinion, there was no genuine partnership. That conclusion had been drawn from three features which have been already referred to by us. The Tribunal did not agree with two of the contentions and dealt with only one of the objections in a manner differently from the Income-tax Officer. At no place has the Tribunal recorded a finding of fact that no genuine firm had come into existence. We find substantial merit in the contention raised on behalf of the assessee that the Tribunal has never found that no genuine partnership was brought into existence.
9. Learned standing counsel for the revenue has taken the stand that the objections of the Income-tax Officer are tenable in law and merely because the Tribunal has sustained only one objection out of it, he is not precluded from raising the other grounds for sustaining the order of the Income-tax Officer. Even if the contention of the learned standing counsel that he is entitled to raise the other grounds to sustain the order of refusal of registration, we think there is no merit in those grounds as we shall presently show.
10. Mr. Srinivasan for the assessee relies upon the definition of ' partnership ' as given in Section 2(23) of the Act which adopts the definition in Section 4 of the Indian Partnership Act, 1932. The latter 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.Persons who have entered into partnership with one another are called individually ' partners ' and collectively ' a firm ', and the name under which their business is carried on is called the ' firm name'.' Thus, in order that persons may be partners, it is essential that :
(i) There must be an agreement entered into by all the persons concerned ;
(ii) The agreement must be with a view to sharing the profits of a business; and
(iii) The business must be carried on by all or any of the persons concerned acting for all.
11. All these essentials must be present before the persons can become partners. The following are normally accepted as conditions essential to the registration of a firm under Section 185 of the Act :
(i) On behalf of the firm an application should be made to the Income-tax Officer before the end of the accounting year, and the application should comply with the requirements of Section 184 and Rules 22 to 24 of the Income-tax Rules of 1962.
(ii) The partnership should be evidenced by an instrument of partnership.
(iii) The instrument should specify the individual shares of the partners.
(iv) The partnership should be valid and genuine and should actually be constituted as specified in the instrument.
12. As indicated by the Supreme Court in Ravulu Subba Rao v. Commissioner of Income-tax, [1956] 30 I.T.R. 163, 172 (S.C.), Mitter (R.C.) & Sons v. Commissioner of Income-tax, [1959] 36 I.T.R. 194, 202 (S.C.) and Patel (N. T.) & Co. v. Commissioner of Income-tax, [1961] 42 I.T.R. 224 (S.C.) once these require-ments are satisfied, a duty is cast on the Income-tax Officer to accord registration. In the instant case the dispute raised by the revenue is in regard to the fourth element only.
13. In the case of K. D. Kamath & Co. v. Commissioner of Income-tax, [1971] 82 I.T.R. 680, 693, 695, 696 (S.C.) Vaidialingam J., speaking for the Supreme Court, after discussing a series of authorities, summarised the position thus :
' In certain decisions of the High Courts the two essential conditions necessary to form the relation of the partnership have been stated to be :
(1) That there should be an agreement to share the profits and losses of the business, and
(2) That each of the partners should be acting as agent for all. Though those two conditions, by and large, have to be satisfied when the relationship of partners is created between the parties, we would emphasise that the legal requirements under Section 4 of the Partnership Act to constitute a partnership in law are :
(I) There must be an agreement to share the profits or losses of the business; and
(iii) The business must be carried on by all the partners or any of them acting for all. There is implicit in the second requirement the principle of agency...............
14. From a review of the above decisions, it is clear that the mere nomenclature given to a document is by itself not sufficient to hold that the document in question is one of partnership. Two essential conditions to be satisfied are :
(1) that there should be an agreement to share the profits as well as the losses of the business ; and
(2) the business must be carried on by all or any of them acting for all, within the meaning of the definition of ' partnership ' under Section 4 of the Partnership Act. The fact that the exclusive power and control, by agreement of the parties, is vested in one partner or the further circumstance that only one partner can operate the bank accounts or borrow on behalf of the firm are not destructive of the theory of partnership provided the two essential conditions, mentioned earlier, are satisfied. '
15. In Kamath's case, the court noticed that he (Kamath) had large powers in the matter of management and control of the business. He was to operate the account and he alone was entitled to control the borrowing. Notwithstanding such features and the absence of equal share in the matter of management and control and the large role given to Kamath in those matters the court held that Kamath, the managing partner, was carrying on the business acting for all the partners because the other partners had agreed that Kamath would have such powers regarding management and control. The Mysore High Court (out of whose decision the appeal had been carried) had found that as some of the partners had no right to raise loans for arid on behalf of the firm and pledge the firm's interest, an essential element of partnership had been destroyed. The Supreme Court did not agree with that conclusion of the Myso're High Court by saying :
'We have already held that the management and control of the business done by party No. 1 (Kamath) is the carrying on of the business on behalf of all the partners. No doubt, under Section 18 of the Partnership Act, a partner is the agent of the firm for the purpose of the business of the firm. But that section itself clearly says that it is subject to the provisions of the Act. It is open to the parties under Section 11 to enter into an agreement regarding their mutual rights and duties as partners of the firm and that can be done by contract, which in this ease is evidenced by the deed of partnership. Further, Section 18 will have to be read along with Section 4. If the relationship of partners is established as a ' partnership ' as defined in Section 4, and if the necessary ingredients referred to in that section are found to exist, there is no escape from the conclusion that, in law, a partnership has come into existence. It is in the light of these provisions that Section 18 will have to be appreciated. Section 18 only emphasises the principle of agency which is already incorporated in the definition of ' partnership ' under Section 4.'
16. Later, in the case of Mushtaque & Co. v. Commissioner of Income-tax, [1972] 84 I.T.R. 561 (Mys.)the Mysore High Court dealt with a case where the partnership deed conferred power on the managing partner to admit new partners or expel any of the working partners if it was found that their continuance in the firm was detrimental to the interests of the firm and also provided that the working partners had to seek advice from the managing partner and act accordingly in all important matters. The question for consideration before the High Court was as to whether such a partnership deed was repugnant to the provisions of the Partnership Act. The court referred to some authorities and ultimately held that the partnership was not repugnant to law and was entitled to registration.
17. In the instant case, we find that there is a clear agreement for sharing of profits or losses in Clause 5 and the terms show that the first partner (father) had been given a domineering position in the control and management of the business, obviously because he had greater experience in the business and the two sons, though adults were comparatively young and inexperienced.
18. Clause 9 of the partnership deed made provision for drawings by the two junior partners. It has been found that one of the partners had over-drawn. Clause 9 is an enabling provision and does not intend to put a limit and even if it intended to put a limit regarding drawings, an over-drawal is indeed a matter relating to day-to-day running of the business and does not entrench upon the essentials of a partnership. The restrictions contained in Clauses 7 and 8 were the result of the agreement. The two grounds which had been overruled by the Tribunal and were relied upon by learned standing counsel thus have no basis at all. ,
19. We shall now deal with the objection which had been sustained by the Tribunal, that is, in relation to the bank account. Admittedly, the Hindu undivided family had an account with a bank (name not indicated) in the name of Jammula Venkataswamy & Sons. Clause 1 of the partnership agreement shows that the firm was to continue in the self-same name. The karta of the Hindu undivided family, who is the first partner under the deed of partnership and who alone has the power to operate the bank account, was also operating the Hindu undivided family account. Mr. Srinivasan contends that as the name of the firm had not changed and the person entitled to draw continued to be the same, the objection raised is not a material feature. There is no finding that in the bank account after partition, there was any deposit not belonging to the firm but belonging to the remaining two members of the erstwhile Hindu undivided family who had not joined the partnership. If that fact was found, the position might have been somewhat difficult for the partners. If a genuine firm has otherwise come into existence by satisfying the requirements of law, merely because, in the peculiar circumstances indicated above, the bank has not been notified about the partition of the Hindu undivided family and formation of the partnership, the firm cannot cease to be genuine. It is not the case of the revenue that when on behalf of the partnership the bank account was attempted to be operated, the bank objected saying that the partnership was not entitled to operate the same and to meet such an objection, representation had been made to the bank on behalf of the firm that the Hindu undivided family continued. As already noticed, the claim of partition has been accepted by the revenue under Section 171 of the Act. The partnership constituted thereafter has been duly registered under the Partnership Act. The partnership satisfies the requirements of Section 4 of the Partnership Act in the manner indicated by the Supreme Court. There was thus a genuine firm in existence. The objection sustained by the Tribunal seems to be without any foundation and on an unsustainable ground in law. The objection that appealed to the Tribunal to find ' some support ' for the contention raised on behalf of the revenue was not germane in the matter of finding whether the firm was genuine or not but was pointing out a defect in its working which did not disprove its existence. In our view, the Appellate AssistantCommissioner had come to the right conclusion and the Tribunal has fallen into an error in law.
20. We would accordingly answer the question referred to us by holding :
' On the facts and in the circumstances of the case, the decision ofthe Appellate Tribunal upholding refusal of the Income-tax Officer togrant registration to the assessee under Section 185(1)(a) of the Act is notjustified in law and the firm is entitled to registration under the Act.'
21. The assessee shall have its costs. Hearing fee is assessed at rupees one hundred.
B.K. Ray, J.
22. I agree.