Vummitti Subramaniam Chetty vs Commissioner of Income Tax

Ramanujam, J.—One V. Subramaniam Chetty was carrying on business in yarn in his individual capacity from April, 1956. On March 31,

1961, a sum of Rs. 50,000 was transferred from his account to the account of his son, V. Pandurangan, in the accounts of the business. Later, on

April 4, 1961, a deed of partnership came to be executed between himself and his son. At that stage, the son, Pandurangan was aged 19 years.

An application was filed for registration of the said firm for the year ending with March 31, 1962. The Income Tax Officer, taking into account

Clauses 9 and 10 of the partnership deed, held that there was no relationship of partners between the said Subramaniam Chetty and his son,

Pandurangan, inasmuch as Panduragan derived his right and power only by consent of his father. In that view, the Income Tax Officer rejected the

application for registration. There was an appeal to the Appellate Assistant Commissioner, who, however, held that the two conditions for bringing

into effect a partnership, namely, (1) an agreement to share the profits as well as the losses of the business, and (2) each of the partners acting as

agent of the other, had been duly fulfilled in this case and that the mere fact of the power to manage the business having been exclusively given to

the father would not invalidate the partnership. In that view the Appellate Assistant Commissioner ordered the registration of the firm. The revenue

appealed to the Tribunal. It was submitted before the Tribunal by the revenue that the entire control and management of the business was in the

hands of the father, that, as such, the principle of agency was completely absent in this case, that the son who was the second partner had no

power to bind the other partner and that, in view of the decisions of the Supreme Court in M.P. Davis Vs. Commissioner of Agricultural Income

Tax, . and that of the Mysore High Court in Commissioner of Income Tax, Mysore Vs. K.D. Kamat and Co., ., the order directing the registration

of the firm cannot be justified. At the instance of the assessee the following question has been referred to us for decision :

Whether, on the facts and in the circumstances of the case, the assessee was not entitled to registration u/s 184 of the Income Tax Act, 1961 ?

The learned counsel for the assessee has taken us through the various clauses in the partnership deed in support of his submission that the

partnership deed clearly brings into existence the relationship of the partners between Subramaniam Chetty, the father, and his son, Pandurangan.

The learned counsel also submits that the interpretation placed on Clauses 8, 9, 10 and 16 by the Income Tax Officer as well as by the Tribunal

cannot be sustained in law, and the view of the Tribunal that Clauses 8 and 9 of the partnership deed clearly abrogate altogether the agency

principle is not tenable at all in view of the decision of the Supreme Court in K.D. Kamath and Co. Vs. Commissioner of Income Tax, Mysore, ..

On a due consideration of the matter, we are of the opinion that the learned counsel for the assessee is right in his submission. The decision of

the Supreme Court mentioned above is of considerable assistance to the assessee in this case. Clauses 8, 9, 10 and 16, on which reliance has been

placed by the Tribunal for holding that the relationship of partners between Subramaniam Chetty and his son, Pandurangan, has not come into

existence on the terms of the partnership deed, are extracted below :

The management of the partnership firm shall be in the hands of the party of the first part (i. e., V. Subramaniam Chetty).

The party of the second part shall attend to the business and do all the acts in accordance with the instructions of the party of the first part (V.

Pandurangan is the 2nd party)

Bank accounts shall be operated by the party of the first part only,

The party of the second part shall also sign the documents and other records on behalf of the firm along with the party of the first part as a

partner either solely or jointly as per the instructions of the party of the first part.

The Tribunal has taken the view that, as the entire control and management of the business has been left in the hands of the father under Clauses

8 and 9 and the bank accounts are to be operated only by the father under Clause 10 there cannot in fact be a legal partnership. With reference to

Clause 16 the Tribunal has said that the son has to sign documents and other records on behalf of the firm only on the instructions of the father and

this showed that the son had no right or power to represent the firm in his own right. But we are of the view that the Tribunal is not right in holding

that the circumstances set out above are decisive factors in finding out the existence or otherwise of the relationship of partners as per the terms of

the partnership.

The Tribunal has purported to follow the decision of the Mysore High Court in Commissioner of Income Tax v. K. D. Kamath & Co. in

support of its view that the control and management of the business by one partner is decisive of the question of the existence of the relationship of

the partners. But we find that the said decision of the Mysore High Court in Commissioner of Income Tax v. K. D. Kamath & Co. has now been

reversed by the decision of the Supreme Court in K. D. Kamath & Co. v. Commissioner of Income Tax. In that case also the exclusive power and

control of the partnership business was vested in one of the partners by agreement of parties. In has also been provided in the partnership deed in

that case that only one partner could operate bank accounts or borrow on behalf of the firm. But these circumstances were held to be not

destructive of the theory of partnership, if two essential conditions are satisfied, namely, (1) that there is an agreement to share profits and losses of

the business of the firm, and (2) that the business is carried on by alt the partners or any one of them acting for all. In view of the said decision of

the Supreme Court, the fact that the management of the partnership business was entrusted to one partner, namely, Subramaniam Chetty, and the

bank accounts are to be operated exclusively by that partner, cannot be destructive of the theory of the partnership, if really the partnership

actually had come into existence as a result of the partnership deed. Clause 15 of the partnership deed specifically provides that the profits or

losses as ascertained for each year up to 31st March shall be divided and credited in the ratio of 2 : 1 between the two partners. This clause shows

that there is a clear agreement between the partners to share the profit and loss of the business of the firm. Clause 17 reinforces the existence of the

partnership by making the goodwill the common property of the firm and divisible among the partners in the profit sharing ratio at the time of

dissolution. Clause 6 of the partnership deed states that the capital of the partnership shall be one lakh of rupees, each partner contributing a

moiety. The terms of the partnership deed, read as a whole, clearly show that all the ingredients of the partnership were satisfied. It is, therefore,

not possible, from the mere fact that the management of the business has been entrusted to one of the partners, to hold that there is no firm in

existence. We are, therefore, of the view that the partnership in question is entitled to get registration, and the order of the Tribunal refusing

registration cannot be sustained. The question referred to us has, therefore, to be answered in the affirmative and against the revenue. The assessee

is entitled to get his costs from the revenue. Counsel''s fee Rs. 250.