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1974 Supreme(Ori) 240
IN THE HIGH COURT OF ORISSA
R.N. Misra, B.K. Ray, JJ.
JAMMULA VENKATASWAMY AND SONS - APPELLANT
Versus
COMMISSIONER OF INCOME TAX - RESPONDENT
S.J.C. No. 55 of 1972
Decided On : 22-01-1974
K. Srinivasan, P.V. Ramdas and Y.S.R. Murthy, for the Appellant; Standing Counsel, for the Respondent
A genuine partnership exists when there is a clear agreement for sharing of profits or losses and the restrictions contained in the partnership deed are the result of the agreement.
Headnote:
INCOME TAX - Registration of firm - Genuine partnership - Refusal of registration by Income Tax Officer on the ground that no genuine partnership was brought into existence - Whether justified - Held, no.
Fact of the Case:
The assessee, a partnership firm, applied for registration under Section 185(1)(a) of the Income Tax Act, 1961. The Income Tax Officer refused to grant registration on the ground that no genuine partnership was brought into existence. The Appellate Assistant Commissioner, on appeal, directed registration. The Tribunal, on further appeal, upheld the order of the Income Tax Officer.
Finding of the Court:
The court held that the Tribunal's decision was not justified in law and that the firm was entitled to registration under the Act. The court found that there was a clear agreement for sharing of profits or losses and that the restrictions contained in the partnership deed were the result of the agreement. The court also found that the objection raised by the Tribunal in relation to the bank account was without any foundation and on an unsustainable ground in law.
Issues: Whether the Tribunal's decision upholding the refusal of registration was justified in law.
Ratio Decidendi: The court held that the Tribunal's decision was not justified in law because: * There was a clear agreement for sharing of profits or losses. * The restrictions contained in the partnership deed were the result of the agreement. * The objection raised by the Tribunal in relation to the bank account was without any foundation and on an unsustainable ground in law.
Final Decision: The court answered the question referred to it by holding that the Tribunal's decision was not justified in law and that the firm was entitled to registration under the Act.
JUDGMENT :
R.N. Misra, J. - At the instance of the assessee, the Income Tax Appellate Tribunal has made this reference and stated a case u/s 256(1) of the Income Tax Act of 1961 (hereafter referred to as "the Act"), and the following question has been asked to be answered by us :
" Whether, on the facts and in the circumstances of the case, the decision of the Appellate Tribunal upholding refusal of the Income Tax Officer to grant registration to the assessee u/s 185(1)(a) of the Act on the ground that no genuine partnership was brought into existence, is justified in law ?"
2. Jammula Venkataswamy and his four sons constituted a Hindu undivided family of which the father was the karta. This Hindu undivided family carried on business in iron and hardware in the name and style of "Jammula Venkataswamy & Sons" at Berhampur in the district of Ganjam. On September 19, 1964, there was a partition of the family assets and the claim made u/s 171 of the Act has been duly accepted by the revenue. Five weeks after this partition, the father and two of the divided sons constituted themselves into a partnership firm as per instrument of partnership, dated the 25th October, 1964. This firm was registered with the Registrar of Firms and in due course an application for registration as provided u/s 184 of the Act was made. The relevant features in the partnership deed were ;
" Clause 1. Name and Style :
The firm shall be styled as Jammula Venkataswamy & Sons (as agreed upon on partition by father and four sons to continue the name as it stood before the partition).
Clause 5. Sharing of profits or losses :
Profits or losses shall be shared among the three partners in equal proportions :......
Clause 7 :
All the bank transactions should be operated only by the first party (father). The power of borrowal is vested with the first party and no other party can borrow money.
Clause 8 :
The second and third parties cannot settle claim or dispute pertaining to any business and cannot incur debt binding on the firm without consent of the first party.
Clause 9 :
The second and third parties can draw funds to the extent of Rs. 200 a month for their personal expenses and such drawings shall be adjusted at the year ending in their individual capital accounts."
3. The Income Tax Officer refused . to grant registration on the following grounds :
(a) Under Clauses 7 & 8 of the deed restrictions had been imposed on the second and third partners on operating the firm's bank account and they had been prohibited from binding the firm by any of their acts and/or to settle any matter of the firm without the consent of the first partner, i.e., the father;
(b) The bank accounts stood in the name of the erstwhile Hindu undivided family and no intimation had been given to the bank either regarding alleged disruption of the Hindu undivided family or the formation of the partnership and the bank account hitherto in the name of the Hindu undivided family was continued to be operated by the first partner; and
(c) One of the partners (sons) had drawn money in contravention of the restriction imposed under Clause 9.
4. On the aforesaid grounds, the Income Tax Officer came to the conclusion that there was no genuine firm.
5. The Appellate Assistant Commissioner on the assessee's appeal came to hold that the objections raised by the Income Tax Officer were not tenable in law and they did not militate against the validity of the partnership or the claim for the registration. He accordingly directed registration.
6. The revenue appealed to the Tribunal. The Tribunal accepted the view of the Appellate Assistant Commissioner so far as the retention by one partner of more power for himself than those given to the others and drawings by one of the partners was beyond the limits set down for him were concerned, but agreed with the Income Tax Officer in regard to the conclusion drawn from the fact that the bank account continued to be in the name of the erstwhile Hindu undivided family and no
