The main legal point established in the judgment is that the absence of the element of agency in a partnership deed is crucial in determining the validity of a partnership under the Income Tax Act.

1. The assessee in this case, M/s. Mushtaque and Company. Davangere, had been refused registration under section 185(1)(b) of the Income Tax Act, 1961, on the ground that the element of agency which is an essential ingredient to constitute a valid partnership was absent in this case. The assessment year involved is 1962-62. The corresponding accounting period was the year ended March 31, 1962. The instrument of partnership produced before the authorities was dated March 30, 1962, and the partnership was deemed to have come into operation with effect from April 1, 1961. The Constitution of the partnership in terms of the aforesaid deed was as under :

1. Sri C. R. Sayyad Hafeez Saheb,

managing partner 1/2 share.

2. Sri Abdul Warris Saheb, 1/6th share from 1-4-61 to

10-6-61;

1/4 share from 11-6-61 to

31-1-62;

1/6th share from 1-2-62.

3. Sri Sayyad Abdulla Saheb, 1/6th share from 1-4-61 to

10-6-61;

1/4th share from 11-6-61 to

31-1-62;

1/6th share from 1-2-62.

4. Smt. Fatimbhai (died on 10-6-61) From 1-4-61 to 10-6-61

1/6th share.

5. Sri Sayyad Yousuff Saheb With effect from 1-2-62

1/6th share.

2. An application for registration of the firm under section 26A of the Income Tax Act, 1922, was made to the Income Tax Officer on March 30, 1962, followed by a fresh application for registration made on September 29, 1962, under the form prescribed as contemplated under section 184 of the Income Tax Act, 1961. The Income Tax Officer held that the assessee was not entitled to registration for two reasons : firstly, on the ground that the partnership deed was weighted overwhelmingly in favour of the managing partner, Shri Sayyad Hafeex Saheb, who had the power to dismiss the other partners, and, secondly, on the ground that the distribution of profits had not been made in accordance with what had been stated in the partnership deed. In support of his case, the Income Tax Officer had relied on clause 5 of the partnership deed which read as under :

"5. That the first party shall be the managing partner, the second the financing partner and the third and fourth are admitted as working partners, respectively. The managing partner shall have full rights of either admitting new partners, raising additional funds and loans, etc., for the business and in case it is found that the activities of the working partners are found detrimental to the interest of the firm, he has powers expel them or to restrict their powers in the interest of the fiirm. In all important matters the working partners shall have to seek advice from the managing partner and act accordingly."

3. The Income Tax Officer, accordingly, made an order on August 12, 1963, under section 185(1)(b) of the Income Tax Act, 1961, refusing registration to the assessee. A copy of the Income Tax Act, 1961, refusing registration to the assessee. A copy of the Income Tax Officers order dated August 12, 1963, under section 185(1)(b) of the Income Tax Act, 1961, is annexed herewith, marked "A", and forms part of the statement of the case. A copy of the instrument of partnership dated March 30, 1962, is annexed herewith, marked "B", and forms part of the statement of the case.

4. The Appellate Assistant Commissioner held that clause 5 of the partnership deed was destructive of the element of agency which was an essential ingredient to constitute valid partnership. He observed that the managing partner, Sayyad Hafeez Shaeb, could not merely expel the working partners in the event of their conduct being found detrimental to the interest of the firm, but he could even in the normal course of business restrict their powers in the interest of the firm. Such a position was not consistent with the principle of agency in the relationship among the partners. The Appellate Assistant Commissioner disposed of the matte