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1984 Supreme(Cal) 300
High Court Of Calcutta
Dipak Kumar Sen, Suhas Chandra Sen
COMMISSIONER OF INCOME-TAX - Appellant
Versus
JANATA MEDICAL STORES - Respondent
Income-Tax Reference 504 Of 1974
Decided On : 08/21/1984
M.K.BHATTACHARJI, R.N.BAJORIA, S.K.BAGARIA
A partnership deed that exempts one partner from sharing losses is not a valid partnership under Indian law, as sharing of losses is an essential condition for a valid partnership.
Headnote:
INCOME TAX - REGISTRATION OF FIRM - VALIDITY OF PARTNERSHIP DEED - SHARING OF LOSSES - EXEMPTION OF ONE PARTNER FROM LOSS - EFFECT ON VALIDITY OF PARTNERSHIP - INTERPRETATION OF PARTNERSHIP DEED - RELEVANCE OF CONTROL EXERCISED BY ONE PARTNER OVER THE OTHER.
Fact of the Case:
The assessee, Janata Medical Stores, sought registration as a firm under Section 185 of the Income Tax Act, 1961. The ITO refused registration, finding that the partnership deed did not reflect a genuine partnership. The AAC and the Tribunal, on appeal, held that the partnership was genuine and directed registration.
Finding of the Court:
The court held that the partnership deed contained all the essential ingredients of a partnership, except that one partner was exempted from sharing losses. The court found that this provision did not vitiate the partnership, as it was permissible under English law and had been recognized by Indian High Courts prior to the decision in K. D. Kamath and Co.
Issues: Whether the partnership deed, which exempted one partner from sharing losses, resulted in a valid partnership.
Ratio Decidendi: The court held that the categoric observations of the Supreme Court in K. D. Kamath and Co., which held that sharing of losses is an essential condition for a valid partnership, were binding on it and impliedly overruled the earlier decisions of the High Courts on the point. Therefore, the court answered the question in the negative, holding that the partnership deed did not result in a valid partnership.
Final Decision: The court answered the question in the negative, holding that the partnership deed did not result in a valid partnership. The court also granted a certificate under Section 261 of the Income Tax Act, 1961, for leave to appeal to the Supreme Court.
( 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
