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1986 Supreme(AP) 413
Andhra Pradesh High Court
Judges : B.P.JEEVAN REDDY, Y.V.ANJANEYULU
Commissioner of Income Tax - Appellant
Versus
Ravi Constructions - Respondent
Decided On : 10-17-86
In order to determine whether a firm is a genuine partnership, regard must be had to the real relation between the parties as shown by all relevant facts taken together.
Headnote:
INCOME TAX - Registration of firm - Whether assessee was entitled to registration - Partnership Act, 1932, Sections 4, 6, 9, 11, 12, 13 - Income-tax Act, 1961, Section 256(1).
Fact of the Case:
The assessee, a partnership firm, applied for registration under the Income-tax Act, 1961. The Income-tax Officer refused registration on the ground that there was no genuine partnership and that the assessee was an unregistered firm. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal allowed the appeal and held that the assessee was entitled to registration.
Finding of the Court:
The court held that the appellate authorities had erred in their approach to the issue and had failed to consider the cumulative effect of all the facts and circumstances taken together. The court found that the assessee was not a genuine partnership and that the real nature of the relationship between the partners was that of an assignment of contract by one partner to the other partners.
Issues: Whether the assessee was entitled to registration under the Income-tax Act, 1961.
Ratio Decidendi: The court held that in order to determine whether a firm is a genuine partnership, regard must be had to the real relation between the parties as shown by all relevant facts taken together. The court found that the assessee was not a genuine partnership because there was no agreement to share the profits of the business, there was no mutual agency among the partners, and the assessee was not responsible for carrying on the business of the firm.
Final Decision: The court answered the question referred to it in the negative, i.e., in favor of the Revenue and against the assessee.
( 1 ) AN identical question is referred for the opinion of this court under section 256 (1) of the Income-tax Act, 1961, in both these referred cases. The assessee in R. C. No. 50 of 1981, is "ravi Constructions, Visakhapatnam", while "uma Constructions, Visakhapatnam", is the assessee in R. C. No. 51 of 1981. The assessment year concerned is 1973-74. The question referred in both the referred cases is"whether, on the facts and in the circumstances of the case, the assessee was entitled to registratio ?". For the sake of convenience, we shall refer to the facts in R. C. No 50 of 1981 (Ravi Constructions, Visakhapatnam), since all the relevant facts are identical in both the cases.
( 2 ) A partnership firm, "m/s. Y. Seetayya and P. R. Rao", constituted on 1/10/1971, had obtained and was engaged in executing certain contracts for the construction of port-monoliths for the dry dock and for the supply of building material at Visakhapatnam. The partnership consisted of two partners, namely, Sri Y. Seetayya and P R. Rao, each having a 50% share. After the contracts were executed in part, Sri. P. R. Rao got himself released from the partnership with the result that only Y. Seetayya remained in charge and responsible for the contracts.
( 3 ) A new partnership, called "ravi Constructions, Visakhapatnam", was constituted on 2/05/1972. This partnership, according to the partnership deed, consisted of 9 partners. The names of the partners and their shares in profits and losses are mentioned in clause 8. Indeed, for a proper appreciation of the question at issue, it is necessary to set out clauses 7 and 8 in full, and refer to some other clauses of the partnership. Clauses 7 and 8 read as follows : "7. The first partner, Sri Y. Seetayya, shall act and function as consultant and shall be paid 1% (one per cent.) of the payments received from the Department or persons awarding the contracts for his advice and guidance and the said 1% shall be deposited in the bank account of Sri Y. Seetayya and he shall not be liable for any losses of this firm and partners Nos. 2 to 9 shall jointly and severally indemnify the 1st partner, Sri Y. Seetayya, in the event of any loss arising to him by reason of the Department or any person proceeding against him to enforce any liability or action or claim or whatsoever relating to this firm including any liability or action or claim that might have accrued or arisen or may accrue or arise in the execution of the works for which this partnership is formed. 8. The accrued profits or losses shall be shared by the second, third, fourth, fifth, sixth, seventh, eighth and ninth partners in the following ratio : Profit Loss Partner 1 Y. Seetayya nil nil Partner 2 A. Shankar Rao 5% 5% Partner 3 A. Yesodha 5% 5% Partner 4 K. Srinivasa Rao 15% 15% Partner 5 K. S. Shanti 15% 15% Partner 6 K. S. Yamuna Devi 15% 15% Partner 7 K. S. Prabhakar Rao 15% 15% Partner 8 P. Jayaratnam 15% 15% Partner 9 Dr. M. R. Gandhi 15% 15% Clause 9 provided that Sri Y. Seetayya (first partner) should continue to remain in the firm till the work of the subsisting contracts was completed; thereafter, he had no concern with or claim upon the firm. Clause 10 provided that apart from the Mercantile Bank and the Bank of India, which were the bankers of the firm, any other bank may be chosen by the partners. Clause 12 stipulated that no partner shall be entitled to alienate his or her interest in the firm so as to make the transferee a partner. Clause 17 provided that the partners, by majority, may take in a new partner on such terms as they thought fit. Clause 18 contemplated the firm being converted into a private limited company, if the majority of the partners so decided. The accounting year of the firm was to be the financial year.
( 4 ) FOR the assessment year 1973-74, the assessee-firm, M/s. Ravi Constructions, filed Form No. 11, along with the partnership deed, requesting grant of registration for the said assessment year. In F
