1. This is an appeal by the assessee, who is aggrieved by the cancellation of the registration granted to the firm on the ground that one of the partners was paid a guaranteed fixed amount instead of a share in the profits of the fir-m and that since that partner was not entitled to any goodwill or the assets on the dissolution of the firm and also that he was not entitled to operate the bank account and also inspect the books of account. On behalf of the assessee Mr. S.E.Dastur, the learned counsel for the assessee, filed a paper book running to 43 pages and also the order of the Bombay High Court in the case of Raghunandan Nanu Kothari v. Hormusjee 20 Bom. LR 207. Referring to the paper book filed, Mr. Dastur submitted that in the partnership deed which is filed at page 19 onwards that Shri Pardawala who was admitted as a partner on 1-1-1976 was to contribute capital of Rs. 7,500 and it is a fact that such capital has been contributed by him.
It is a case of a professional firm of chartered accountants in which the other two partners are Shri V.S. Dastur and Shri D.N. Shukla. In Clause 7 of the partnership deed it has been provided that Shri Pardawala would be entitled to a fixed sum of Rs. 8,400 per annum by way of his share in the profits in the firm and that he will not be liable to contribute to the loss. This particular amount payable to Shri Pardawala was a charge in the profits of the firm after which only the remaining two partners would share the profits or the losses.
Clauses 8 to 10 only provide an inter se arrangement amongst the partners also delineating the entitlements of the partners in regard to the assets, etc., their rights, duties, etc., in the firm's conduct. He then referred to page 37, which is the application made to the Institute of Chartered Accountants of India, wherein it has been mentioned that the firm comprises of three partners, one of whom is Shri Pardawala. In page 38 is the letter from the Institute and in page 39 is the information to the Institute of Chartered Accountants as to who are conducting the profession in the firm's name in which Shri Pardawala is one of the partners. He referred to pages 40 as well as 42 which are copies of balance sheets which have been signed by Shri Pardawala as a partner. He then referred to the application that was made to the ITO, T.P. Circle which is dated 29-3-1976 and receipt by the ITO, T.P.Circle on 5-4-1976. As per this letter the Form No. 11 together with the certified true copy of the deed of partnership was filed. A copy of the Form No. 11 has been filed by him in page 34. Shri Dastur further submitted that as an abundant caution he filed another Form No. 11 with the ITO, A-IV Ward as Mr. Dastur was being assessed in his sole proprietary capacity there. He drew our attention to the order of the ITO dated 24-2-1980, wherein the 5th ITO, Survey Circle-II had categorically observed that the partnership deed and the Form No. 11 have been filed and they were in time and in order and, therefore, registration is granted to the firm. Mr. Dastur submitted that the ITO of the T. P. Circle vide his present order has proposed to cancel the registration granted earlier. For the reason that Shri Pardawala is given a fixed amount as his profits while he is not being entitled to any of the assets of the firm or operate the bank account or to look into the books of accounts, he, therefore, came to the conclusion that Shri Pardawala is not a genuine partner. He further observes that Form No. 11 filed originally on the basis of which registration was granted is also not in order. He had examined Shri Pardawala under Section 131 of the Income-tax Act, 1961 ('the Act') who had categorically stated that he was a partner with effect from 1-1-1976 and remained so till 30-9-1977. The ITO's apprehension was that since Form No. 11 which he has sent did not .bear the signature of all the partners apart from the observations made by him above he came to the conclusion that there was no genuine partnership. He, accordingly, cancelled the registration under Section 186.
2. The learned AAC observes in his order that when a duplicate copy was palled for of Form No. 11, the assessee could file a copy in which all the three partners' signatures were there, but before the ITO only two persons had signed the Form No. 11 and it was not difficult to obtain the signature of the third partner and, therefore, he came to the conclusion that the ITO was justified in holding that Shri Pardawala was not a genuine partner.
3. On facts Mr. Dastur submitted that the Bombay High Court decision, copy of which has been filed by him, is exactly on the same issue in which case the firm of solicitor had formed a partnership and one of the partners was receiving a fixed sum as his share of profit and the Bombay High Court had held that the partnership is valid. He further relied on K.D. Kamath & Co. v. CIT [1971] 82 ITR 680 (SC), R.K. Dhingra & Co. v. CIT [1976] 102 ITR 643 (Bom.) on the issue of bank account operation that it is not necessary that all the partners should operate the bank account. He also relied on Brij Rattan Lal Bhoop Kishore v.CIT [1982] 136 ITR 722 (All.) and also ITO v. Gagrat & Co. [1982] 2 ITD 284 (Delhi). He further submitted that the registration has been withdrawn on the basis of the Form No. 11 which was filed with the ITO, A-IV Ward, the original which was filed with the ITO, T.P. Circle, which contained all the signatures of the partners is apparently missing from the departmental file as otherwise they would have noticed that Form No. 11 has been properly signed by all the partners. Mr.
Dastur submitted that it is not disputed by the department that the partnership deed is in file and, therefore, even the Form No. 11 which was filed on 5-4-1976 should have been there on the file. Therefore, on facts alone, the cancellation of the registration is totally bad.
4. Shri P.L. Roongta, the learned departmental representative, filed a paper book which contain the Form No. 11 dated 15-6-1976 which was filed with the ITO, A-IV ward. He also filed a copy of Form No. 12 dated 30-6-1978 in which the signatures of Mr. Dastur and Mr. Shukla are only there which Form No. 12 is relatable to the assessment year 1978-79. He also filed a copy of the statement of Shri Pardawala recorded under Section 131 on 18-11-1981. Shri Roongta submitted that the Form No. 11 does not bear the signature of Shri Pardawala.
Referring to the statement of Shri Pardawala on question No. 9, he submitted that Shri Pardawala has denied having signed the Form No. 11 which was produced to him, as the name of Shri Pardawala was written on it. He further laid stress on Section 185 of the Act where the ITO is empowered to look into the genuineness of the firm. According to Mr.
Roongta, a partner should be sharing not only the profits but also the losses. In the instant case he is being paid a fixed salary and, therefore, he cannot be said to be a partner, but only an employee and, therefore, no firm existed which could be said to be a genuine firm, and, therefore, registration has been rightly cancelled.
5. We have heard the parties. The short issue in the instant case before us is whether there is a firm which could be said to be by an agreement under the Indian Partnership Act, 1932. 'Partnership' as defined by Section 4 of the Indian Partnership Act, means the relationship between persons who have agreed to share the profits of a business carried by all or any of them acting for all. Therefore, according to the definition, the requirements of a partnership are : (c) the business must be carried on by all or any of the persons concerned for all.
In the instant case there is an agreement, which is entered into by all the three persons, viz., (1) Mr. V. S. Dastur, (2) Mr. D.N. Shukla, and (3) Mr. S. F. Pardawala. It also provides that Shri Pardawala would share the profits in a particular manner. For the sake of convenience, clauses 7 to 10 are reproduced below : 7. The said Pardawala shall be entitled to a fixed sum of Rs. 8,400 per annum, as and by way of his share in the profits of the said partnership and shall not be liable to contribute in the losses. The said Dastur and the said Shukla shall be entitled to share the profits and/or losses of the said partnership after making provision for the fixed share of the said Pardawala as aforesaid in the shares following : 8. The said Dastur and the said Shukla shall be entitled to the goodwill and other assets of the said partnership in equal shares.
The said Pardawala shall not be entitled to have or claim any share or interest in the goodwill or other assets of the said partnership.
9. A banking account or accounts in the name of the said partnership shall be opened with such bank or banks as the parties hereto may mutually agree upon and such account or accounts shall be operated upon by any of the said Dastur or the said Shukla. All moneys or negotiable securities received for or on account of the partnership except for current expenses, shall be paid into such banking account or accounts in the name of the partnership.
10. Proper books of account shall be kept by the parties hereto in which all transactions relating to the partnership shall be entered and such books together with all documents, letters, vouchers of and belonging to the partnership shall be kept at the place of business of the partnership or at such other place as the said Dastur and the said Shukla may from time to time mutually determine and each of the said Dastur and the said Shukla shall have full and free right and liberty to inspect such books of account, documents, letters and vouchers and of making extracts or copies therefrom. The said Pardawala shall not be entitled to inspect such books of account, documents, letters or vouchers or to make extracts or copies therefrom.
A reading of the above clauses indicate the manner of the sharing the profits, between the partners. As regards the business carried on, clauses 1 to 4 are reproduced below : 1. The parties hereto declare and agree that they have become partners and have been carrying on practice and profession in partnership on the terms and conditions hereinafter contained.
2. The practice or profession of the partnership shall be carried on in the name and style of Messrs. D.N. Dastur & Co., and/or in such other name or names as the parties hereto may mutually agree upon.
3. The parties hereto shall carry on practice and profession as chartered accountants, income-lax and sales tax consultants and management advisers.
4. The practice or profession of the partnership shall be carried on in premises Nos. 140 and 144 on the 5th floor of the New Stock Exchange Building at Dalai Street, Bombay-400023 and/or at such other place or places as the parties hereto may mutually agree upon.
Therefore, the requirements of Section 4 are complied with in the above-mentioned partnership deed.
6. The question that arises is whether one of the partners who is receiving a fixed sum as profits but not to share the losses, is he a partner in the real sense of the term. This issue is clearly answered by the Bombay High Court in the case of Raghunandan Nanu Kothari (supra). In this case it was a firm of solicitors comprising of two partners, one of whom was to receive profit on a monthly basis. The partnership was for a year and on the termination the said partner would cease to have any interest in the firm. The clients were informed of the partner being admitted to the firm as a partner and also on completion of one year that he has ceased to be so. There was dispute between the partners and the partner concerned who was receiving his share of profits on a monthly basis made a claim that he was never a partner. Their Lordships of the Bombay High Court were of the view that the manner of arrangement of the affairs between the partners by which one partner receives profits alone when all other conditions such as agreement between them, mutual agency, etc., exist, then it is only a case of partnership firm. In the case of Gagrat & Co. (supra), the Delhi Bench has considered an identical issue in which case there were five lawyers who formed a partnership, one of whom was receiving a fixed monthly remuneration instead of a specific share in the profits of the business and also that he was not to share any losses of the firm. The learned Members had occasion to consider the Supreme Court decision in the case of K.D. Kamath & Co. (supra). In that case the partner, who was receiving on a monthly basis, had filed a return stating that it was a salary income. Their Lordsdips of the Supreme Court had enunciated the requirements of a partnership as under : 8. In K.D. Kamath & Co.'s case (supra), the Supreme Court held 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; (ii) the business must be carried on by all the partners or any of them acting for all; and (iii) there is implicit in the second requirement the principle of agency. There Lordships further held that the control and management of the business of a firm can be left by agreement between the parties in the hands of one partner to be exercised on behalf of all the partners. Their Lordships further held that the provision in Clause 9 of the deed was only an inter se arrangement entered into by the partners in and by which the working partners had agreed not to raise loans or pledge the firm's interest and that not only was the clause not destructive of the theory of partnership but it indicated that the theory of agency was recognised. In this decision, their Lordships have also explained their earlier decision in M.P. Davis' case (supra), relied on by the revenue before us.
When the facts of the case are examined in the light of the Supreme Court decision as well as the decision of the Bombay High Court in Raghunandan Nanu Kothari's case (supra) as also the decision of the Tribunal in Gagrat & Co.'s case (supra) we can come to the one and the only conclusion that the firm is a genuine firm, as all the requirements as are contained in Section 4 have been fully complied with by the firm to constitute a valid partnersnip agreement.
As regards Form No. 11, which Form has been filed before us is the second Form which has been filed by the assessee with the ITO, A-IV Ward. The ITO who had granted the registration, which assessment order is at page 17 of the paper book clearly indicates that he had examined both the Form No 11 as well as the partnership deed which he had found them to be in order. Therefore, the Form on which reliance has been placed by the department for cancellation of the registration granted earlier is not the same Form on the basis of which registration was originally granted and, therefore, on this basis also the action of the department is totally unwarranted. The learned departmental representative has also placed reliance on the decision of the Supreme Court in the case of CIT v. Jagannath Pyarelal [1985] 156 ITR 220. The view expressed by the Supreme Court in Jagannath Pyarelal's case (supra), that filing of Form No. 11 is not a formality but a procedural and mandatory requirement. In that case their Lordships were faced with the situation where one of the partners did neither sign the partnership deed nor the Form No. 11, while in the instant case the partnership deed has been found to have been signed by all the partners and the Form No. 11 on which reliance was placed by the department contained signatures of two of the partners, while as per the copy filed by the assessee on the basis of which registration was originally granted contains all the three partners' signatures. Therefore, on facts the case of the Supreme Court would not apply to the instant case.
7. In view of the observations made earlier, we are of the view that the registration has been wrongly withdrawn and we, therefore, quash the order of the lower authorities.