Dipak Kumar Sen, J.
1. This reference arises out of an order of the ITO under Section 184 of the I.T. Act, 1961, refusing to register Janata Medical Stores, the assessee, as a firm under Section 185 of the said Act for the assessment year 1969-70, the corresponding previous year being that ending on October 21, 1968. On consideration of the provisions of the deed of partnership dated January 25, 1968, under which the firm was constituted, the ITO came to the conclusion that the firm was not genuine.
2. On appeal by the assessee, the AAC noted that all the partners of the assessee were shown as partners in the bank. They were also authorised to operate the account of the partnership. He also took into account that the partnership was registered with the Registrar of Firms and the Registrar of Assurances and came to the conclusion that the partnership was genuine and directed the ITO to grant registration.
3. On a further appeal by the Revenue, the Income-tax Appellate Tribunal on a consideration of the deed of partnership in its entirety held that there was a genuine partnership and dismissed the appeal of the Revenue.
4. At the instance of the Revenue, the Tribunal under Section 256(1) of the I.T. Act has referred the following question of law as arising out of its order for our determination :
'Whether, on the facts and in the circumstances of the case, and on a correct interpretation of the terms of the partnership deed dated January 25, 1968, the Tribunal was right in holding that registration could not be refused under Section 185 of the I.T. Act, 1961, on the ground that the terms of the partnership detracted from there being a genuine partnership between the executants of the deed ?'
5. To appreciate the dispute involved, it is necessary to consider the terms of the deed of partnership :
(a) The partners named in the said deed are Bhagwati Devi Agarwal and Kaku Jayantilal Kamani. The deed provides that the business of the partnership in medicines, drugs and allied products would be carried on by the firm as commission agents, importers, exporters, distributors and wholesale and retail dealers.
(b) The partnership would continue for an initial period of five years subject to the terms as stated hereafter.
(c) Capital of the partnership would be contributed or advanced by Bhagwati Devi and the other partner would not be called upon at any time to contribute any money towards the capital.
(d) The entire control and supervision of the finance of the partnership would be in the hands of Bhagwati Devi subject to which Kamani would carry on the general business of the firm as a working partner,
(e) Bhagwati Devi would have 75% share in the profits of the partnership and Kamani, the balance 25%. In the event of any loss including loss of capital in any year, the same would be borne fully by Bhagwati Devi.
(f) Kamani would be entitled to draw Rs. 300 per month from the partnership for his expenses which would be debited to his account and adjusted against his share of profit.
(g) The bank account of the partnership would be operated by Bhagwati Devi alone or by her duly constituted attorney.
(h) If Kamani committed breach of any of the terms of the deed or misconducted himself in respect of the affairs of the partnership, he would be liable to be expelled by Bhagwati Devi at her discretion.
(i) In the event the working of the partnership was not found profitable or satisfactory to Bhagwati Devi or if she did not wish to continue the partnership, she might at her discretion determine the partnership at any time on three months' notice to Kamani.
(j) Kamani would not be entitled to dissolve the partnership but would be at liberty to retire from it on three months' notice, upon which the partnership would stand dissolved and its business would be carried on by Bhagwati Devi as the sole proprietrix thereof.
6. At the hearing, learned advocate for the Revenue drew our attention to the relevant clauses of the deed and submitted that no genuine partnership had come into existence inasmuch as the relationship of the partners was that of master and servant or principal and agent and not that of partners. He submitted in particular that the clause in the deed which permitted Bhagwati Devi to expel Kamani without a corresponding right in favour of Kamani indicated that the relationship between the two was not that of partners.
7. Learned advocate for the assessee contended to the contrary and submitted that the deed fulfilled all the tests of a genuine partnership.
8. In support of their respective contentions, learned advocates cited several decisions, one of which was Kamalh & Co. v. CIT : [1971]82ITR680(SC) . Here, the dispute before the Supreme Court was in respect of registration of a firm under Section 26A of the Indian I.T. Act, 1922. The sole proprietor in that case converted his business into a partnership by admitting five of his employees as working partners along with him. The deed provided that the profits and losses would be shared in specified proportions. The erstwhile proprietor was designated as the principal and the financing partner, the goodwill of the firm was wholly retained by him and he also retained the absolute right of control and management of the business and the operation of the bank accounts of the firm. The other partners contributed labour and pledged to work under the instructions and directions of the principal partner which was to be treated as final and binding. The working partners were not authorised to raise loans or pledge the interest of the firm without the written authority of the principal partner. The principal partner could remove any of the working partners in the best interests of the firm if he so decided.
9. Oil the facts and taking into account the provisions in the deed, the Supreme Court held that a valid partnership had been constituted and observed as follows (at p. 695 of 82 ITR):
'...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) that 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.'
10. From the observations in the said judgment, a question arose whether the provision in the deed in the instant case which exempted Kamani from all losses in the venture vitiated the partnership. This aspect of the question referred to us appears to have been overlooked at all stages below but was agitated before us at some length.
11. Learned advocate for the assessee brought to our attention the relevant sections of the Indian Partnership Act as follows:
Section 4 : ''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.'
Section 13 : 'Subject to contract between the partners ...
(b) the partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm.'
12. Learned advocate also cited a passage from Lindley on the Law of Partnership, 13th edition, as follows :
'It often happens that persons agree that all profits shall be shared rateably, and nevertheless, that all losses shall be borne by some or one of them exclusively. Such an agreement is not necessarily invalid as a nudum pactum; for it is nothing more than an agreement, providing, amongst other things, that some or one of the partners shall indemnify the others against losses ; and the very fact that these latter become, or agree to become, partners is quite sufficient consideration to give validity to a contract that they shall be indemnified. Such agreements appear, moreover, to be reasonable, where the partners indemnified leave the whole management of the concern to their co-partners. A salaried partner too is often given such an indemnity either expressly or impliedly by provisions which make the partners entitled to the residual profits exclusively liable for losses.'
13. Learned advocate for the assessee contended that in Kamath & Co. case : [1971]82ITR680(SC) , the question whether sharing of loss was an essential ingredient of a partnership was not directly or specifically before the Supreme Court and the said decision should not be read as having finally laid down that sharing of loss is an essential condition, in view of the clear law which preceded the said decision.
14. The other decisions cited at the hearing may now be considered;
(a) Raghunandan Nanu Kothare v. Hormasji Bezonji Bamji, AIR 1927 Bom 187. This decision of a Division Bench of the Bombay High Court was cited for the following observations (p. 189):
'......it is perfectly open to partner A to say that as between himself and his partner B, the partner A shall bear all the losses of the business. In other words, it is not essential to constitute a partnership that the partners should agree to share the losses. In any event, this only applies as between themselves, for whatever their agreement may be, they would both be liable to outside parties.' (b) Mirza Mal Bhagwan Das v. Rameshar : AIR1929All536 . This decision of a Division Bench of the Allahabad High Court is cited for the following observations made in the context of Section 239 of the Indian Contract Act defining a partnership (p. 540):
'An agreement to share the loss is not a necessary ingredient of a partnership under the Indian Contract Act.' (c) B.C.G.A. (Punjab) Ltd. v. CIT . This decision of a Full Bench of the Lahore High Court was in a reference under Section 66(2) of the Indian I.T. Act, 1922. It was observed by the Bench after construing Section 4 of the Indian Partnership Act, 1932, that the mere circumstance that a person is to share profits only and not losses did not, by itself, militate against the presumption of partnership.
(d) Daivs v. Commr. of Agrl. I.T. : [1959]35ITR803(SC) . In this case, the dispute before the Supreme Court was in respect of registration of a firm under Section 26 of the Coorg Agricultural Income-tax Act. The partnership was between two brothers. The capital of the firm was found to belong to one with the express provision that the other partner would not be entitled to contribute anything towards capital and would have no power to charge or encumber or deal with such capital which, on dissolution, would go back to the contributing partner. It was provided further that the non-contributing partner would employ himself diligently in the business and submit annual estimates of expenditure to be incurred to be passed by the contributing partner.
15. The Supreme Court noted that the powers of the contributing partner over the other were those of a master over his servant or a principal over his agent. The Supreme Court noted further that it was not possible to ascertain from the deed as to how losses, if any, would be shared. On such facts and taking into account, the conduct of the parties in the venture, the Supreme Court held that the deed did not result in a partnership and observed as follows (p. 807):
'If it was intended to create a real partnership, one would have thought that some provision would been made for the sharing of the loss, especially as the share of the profit going to the appellant is immensely large compared with the share going to his brother.'
16. Construing the provisions of the deed of partnership before us, it appears to us that the control exercised by Bhagwati Devi over her partner, Kamani, is of little relevance. In K. D. Kamath & Co. : [1971]82ITR680(SC) , the control exercised by the principal partner over the other partners was similar, if any, more than in the instant case.
17. The deed in K. D. Kamath & Co. : [1971]82ITR680(SC) excluded the working partners from the operation of the bank account and the partners were liable to be expelled from the firm or from contribution of capital at the instance of the principal partner. In spite of the aforesaid, the Supreme Court came to the conclusion that a valid partnership had been constituted in that case inasmuch as all the essential conditions were present.
18. The contention of the learned advocate for the Revenue that a valid partnership was not constituted for the reason advanced by him cannot be accepted and we find that the partnership in the instant case contains all the essential ingredients of a partnership except that loss is not shared by all the partners.
19. The question which, therefore, remains to be determined is whether the partnership in the instant case is vitiated by the provision in the deed that one of the partners has been made immune from loss.
20. In English law as cited, it appears that it is recognised that by agreement, a partner or partners can be excluded from loss. It also appears that till the decision in K. D. Kamath & Co. : [1971]82ITR680(SC) , the law in India as laid down by the different High Courts recognised that a partnership could be validly constituted in which a partner, or partners by agreement would be exempted from all losses. To the extent as above, we accept the submissions of the learned advocate for the asses-see which in our view are of substance.
21. But the categoric observations of the Supreme Court in K. D. Kamath & Co. : [1971]82ITR680(SC) which are binding on us, whether obiter or not, appear to have laid down the law further in India which departs from the English law and impliedly overrules the earlier decisions of the High Courts on the point.
22. After anxious consideration, we answer the question in the negative and in favour of the Revenue. In the facts and circumstances, there will be no order as to costs.
23. Learned advocate for the assessee prated for a certificate under Section 261 of the I.T. Act, 1961, for leave to appeal to the Supreme Court. In our view, a question of law of considerable general importance arises in the case. There is no direct authority of the Supreme Court on the point. A certificate as prayed for is directed to be issued.
Suhas Chandra Sen, J.
24. I agree.