1. These two appeals by the assessee for the assessment years 1979-80 and 1980-81 are directed against the orders of the Commissioner (Appeals), confirming the orders of the ITO refusing to grant registration to the assessee-firm L.M.S. Tool Room, Bombay. The assessee-firm was formed by a deed of partnership dated 4-10-1978. The firm consisted of three partners. Two of these partners are private limited companies and the third partner (who is mentioned as a party of the first part in the deed of partnership) is described in the opening portion of the said partnership deed as follows : Shri Narendra L. Shah (acting as partner) for and on behalf of Indian Textile Accessories Co., the existing partnership concern registered under the Indian Partnership Act, 1932.
Shri Niranjan B. Shah and Shri Surendra L. Shah are the persons who have signed the partnership deed for and on behalf of these two companies, respectively. Clause 7 which deals with profit and loss sharing ratio is as follows : 7. The profit and loss of the partnership shall be divided between the partners as under : The application for registration of the firm in Form No. 29 was signed by (I) Shri Narendra L. Shah for and on behalf of the Indian Textile Accessories Co., (2) Shri Niranjan B. Shah for and on behalf of Laxmi Wire Industries (P.) Ltd., and (3) Shri Surendra L. Shah for and on behalf of Narendra Machine Works (P.) Ltd. 2. The ITO refused the registration. In the appeals filed by the assessee, the Commissioner (Appeals) observed that the firm of Indian Textile Accessories Co. was a partner of the assessee-firm and that a firm could not be a partner of another partnership firm and there can be no registration of a partnership purporting to be between a firm and other individuals. According to him, the ratio of the decision of the Bombay High Court in G.S. Dugal & Co. (P.) Ltd. v. CIT [1978] 111 ITR 757 applied as the facts were identical. On the basis of the said decision, the learned Commissioner (Appeals) held that the assessee-firm was not eligible for registration. He, accordingly, dismissed the appeals. The assessee has now come in appeal before us.
3. The submission of Shri Dastur, the learned counsel for the assessee, before us was that the learned Commissioner (Appeals) had erred in holding that the firm of Indian Textile Accessories Co. was partner of the assessee-firm. According to him, on a fair construction of the deed of partnership, it must be held that Shri Narendra L. Shah was partner of the assessee-firm as representative of Indian Textile Accessories Co. and that the said firm itself was not the partner of the assessee-firm. We are unable to accept this contention. We have already quoted the words in which Shri Narendra L. Shah has been described in the beginning of the deed of partnership. We have also quoted Clause 7 of the deed of partnership. The deed of partnership is to be read as a whole. The question to be determined is as to who is the partner of the assessee-firm -- whether Shri Narendra L. Shah in his representative capacity or whether the firm of Indian Textile Accessories Co. itself.
If it is Shri Narendra L. Shah, who is the real partner, the fact that he is accountable for the profit and loss allotted to him to the other partners of the firm of Indian Textile Accessories Co. would be irrelevant as far as the assessee-firm was concerned. The legal position is well settled. The contract of partnership has no concern with the obligation of the partners to others in respect of their shares of profits in the partnership. It only regulates the rights and liabilities of the partners. Consequently, a partner may enter into sub-partnership with others or he may under an agreement, be the representative of a group of persons or he may be a benamidar for another. In all such cases, he occupies a dual position. Qua the partnership, he functions in his personal capacity ; qua the third parties, whom he represents, he functions in his representative capacity. The third parties, whom he represents cannot enforce their rights against the other partners nor the other partners can do so against the said third parties. The above legal position is well established by the decision of the Supreme Court in CIT v. Bagyalakshmi & Co. [1965] 55 ITR 660.
4. In the present case, reading the partnership deed as a whole, it cannot be said that Shri Narendra L. Shah occupies a dual position and that qua the partnership he functions in his personal capacity and qua the partners of Indian Textile Accessories Co., he functions in representative capacity. It also cannot be said that the other partners of Indian Textile Accessories Co. cannot enforce their rights against the other partners of the assessee-firm and that the other partners of the assessee-firm cannot enforce their rights against the other partners of Indian Textile Accessories Co. This is because Indian Textile Accessories Co. has been treated in Clause 7 of the partnership deed as a partner having 25 per cent share in the profit and loss of the business of the assessee-firm. If Shri Narendra L. Shah had functioned in his personal capacity qua the assessee partnership-firm the partnership deed would have mentioned that Shri Narendra L. Shah would be entitled to 25 per cent share in the profits and liable to contribute 25 per cent in the loss. Instead of this, what has actually been mentioned in Clause 7 is that it is the firm of Indian Textile Accessories Co. which is entitled to share of 25 per cent in the profits and was liable to contribute 25 per cent to the loss. When Clause 7 is read along with the opening words of the partnership deed the irresistible conclusion is that in substance it is the firm of Indian Textile Accessories Co., which is the partner of the assessee-firm and that Shri Narendra L. Shah is the person who has signed the partnership deed for and on behalf of the said firm. On the facts of this case, therefore, the principle laid down by the Supreme Court in Dulichand Laxminarayan v. CIT [1956] 29 ITR 535 would apply.
In the Supreme Court case an individual, a joint Hindu family and three firms had purported to enter into a partnership and the deed had been signed by five individuals, viz., by the individual partner, the karta of the joint family, and by one partner each of the three firms. This deed of partnership was sought to be registered under Section 26A of the Indian Income-tax Act, 1922, the application being signed by the same five individuals. The Supreme Court held that no question could arise of the registration under Section 26A of a partnership purporting to be one between three firms, a Hindu undivided family business and an individual and that even assuming that a valid partnership had been constituted as all the members of the three firms had not personally signed the application for registration, it was not in proper form under Rule 2 of the Income-tax Rules, 1962. The Supreme Court, therefore, confirmed the order of the refusal of registration. In the present case also one of the partners is a firm and the deed of partnership has been signed by a partner of the said firm and the application for registration has not been signed by all the partners of the firm, which is a partner. In fact, the assessee does not admit even at this stage that the firm of Indian Textile Accessories Co. was the partner of the assessee-firm although as we have held, the deed of partnership clearly shows that it is the said firm which under the contract of the partnership has to share the profit and loss of the assessee-firm. In the circumstances, the ratio of the said decision of the Supreme Court would apply.
5. The facts of the decision of the Bombay High Court were also identical. In that case the partnership deed indicated that the partnership was to consist of three partners of whom one was a company, another was a firm and the third an individual. The number of partners of the firm which was partner in the assessee-firm and their names were not disclosed in the partnership deed of the assessee-firm.
According to the partnership deed the said firm was entitled to a share of seven anas in a rupee and was liable to bear the same share in the losses of the firm. In the account books of the assessee-firm the share of profits was credited to the account of the firm which was a partner.
The partnership deed was signed by one of the partners of the firm, who was a partner. The application for registration had also been signed by one of the partners of the firm which was the partner of the assessee-firm. On these facts, following the decision of the Supreme Court in the case of Dulichand Laxminarayan (supra) the Bombay High Court held that the assessee-firm was not entitled to registration. The reason given was that no part of instrument of partnership of the assessee-firm suggested that the individual partners of the firm which was one of the partners had become partners of the assessee-firm. There was also nothing in the instrument to indicate that the other partners of the assessee-firm regarded the other individual partners of the firm which was partner of the assessee-firm as their partners or that there was mutuality amongst them. The ratio of the decision of the Bombay High Court would be applicable on the facts of this case and the learned Commissioner (Appeals) was justified in confirming the refusal to grant registration.
6. Before parting we may mention that the learned counsel for the assessee produced before us a copy of document which purported to be a deed of understanding alleged to have been executed on 4-10-1978. This deed had not been produced before the lower authorities. There are no justifiable reasons for non-production. Consequently, normally we would not have been inclined to admit this deed as an additional evidence.
However, we do not reject the prayer for admission of this document on the above technical ground. This document, in our opinion, does not change the legal position, as far as the refusal of the registration is concerned. What all that has been laid down in this document of understanding is that all the parties including the other partner of Indian Textile Accessories Co. had agreed that Shri Narendra L. Shah would share 25 per cent of profit and loss on behalf of Indian Textile Accessories Co. After this deed was executed, the partnership deed with which we are concerned came into effect. That partnership deed is explicit in its terms. As already stated Clause 7 of the partnership deed clearly mentions that the firm of Indian Textile Accessories Co.
would be one of the parties who would share the profit and loss of the business of the assessee-firm. This clause clearly indicates that the firm of Indian Textile Accessories Co. was itself the partner of the assessee-firm and, as such, the consequences as described above would follow with the result that the registration cannot be granted. We, accordingly, confirm the order of the learned Commissioner (Appeals).