Punjab-Haryana High Court
Eastern Commercial Corporation vs Commissioner Of Income-Tax on 18 March, 1975
JUDGMENT Prem Chand Pandit, J.
1. The following question of law has been referred to us for our opinion by the Income-tax Appellate Tribunal, Chandigarh :
"Whether, on the facts and circumstances of the case, the firm was entitled to registration ?"
2. The facts giving rise to this question are these. Messrs Eastern Commercial Corporation was a firm, which was registered under the Income-tax Act and assessed as such up to the assessment year 1961-62. This firm originally consisted of four partners, namely, Teja Singh, his son, Mohinder Singh, Bhag Singh and his brother, Deva Singh. On 1st April, 1961, however, another partner, Jeevinder Singh, son of Teja Singh, was also brought in this partnership and thus there was a change in the constitution of the firm. The share ratio in the profits and losses in the new firm was as under :
Teja Singh 45 Paise Mohinder Singh 25 Paise Jeevinder Singh 20 Paise Bhag Singh 5 Paise Deva Singh 5 Paise
3. This new partnership continued functioning up to 25th September, 1961. The Income-tax Officer granted registration of this firm for the assessment year 1962-63 for the period April 1, 1961, to September 25, 1961. The financial position of the firm was not sound and it was felt that it had not got sufficient funds to run the business. It then approached D. N. Kapur, who was the manager of the Oriental Bank of Commerce, Patiala, and his wife, Shrimati Vimla Kapur, for helping them in this connection. Both of them arranged a loan of Rs. 50,000 from Dr. Rajinder Nath, brother of Vimla Kapur. In consideration thereof, she was alleged to have been taken as a partner and given a share of 5 paise in the profits of the firm. She contributed a sum of Rs. 5,000 also towards the capital of the firm. On 26th September, 1961, a new deed of partnership was written and the shares of the partners in the same were as follows :
Teja Singh 38.25 Mohinder Singh 21.25 Jeevinder Singh 17.00 Bhag Singh 4.25 Deva Singh 4.25 Vimla Kapur 5.00
4. In the partnership deed, it was mentioned as to how much interest had to be paid to Dr. Rajinder Nath on the amount of loan advanced by him and also the manner and the time by which the said amount had to be repaid. The financial control of the affairs of the firm was given to Vimla Kapur. On 7th May, 1962, the new firm applied to the Income-tax Officer for registration for the assessment year 1962-63, for the period commencing from September 26, 1961, to March 31, 1962. The said officer, however, rejected the application on the ground of delay. The firm then made another application on 13th September, 1962, for the same purpose. This application was also dismissed by the Income-tax Officer on 24th March, 1967, on the ground of delay as well as merits. On the latter ground, the reasons given were :
"(i) The powers given under Clause 16 of the deed to Shrimati Vimla Kapur in respect of financial control in matters of policy and the operation thereof violate the principle of agency which is the essence of partnership.
(ii) Although Shrimati Vimla Kapur has made an investment of Rs. 5,000 she has been given wide powers and is entitled to damages of Rs. 10,000 in case of violation of any Clause of the agreement. This along with the fact that Dr. Rajinder Nath has been given wide powers which are interlinked with those of Shrimati Vimla Kapur shows that she is only a dummy for Dr. Rajinder Nath and not a genuine partner.
(iii) Shrimati Vimla Kapur was not produced for examination.
(iv) The wide powers given to an outsider, Dr. Rajinder Nath, violate the principle of agency.
(v) The provision regarding transfer of assets through mortgage as ' required by Clause 6 of the deed has not been acted upon which shows that the deed was not acted upon.
(vi) The partner "Shrimati Kapur" is to be paid profit even when there is no profit and this provision violates the principle of partnership which is defined as a relationship between persons carrying on business who have agreed to share their profits."
5. Against this order, the assessee filed an appeal before the Appellate Assistant Commissioner on April 10, 1967. The said appeal was dismissed on May 13, 1968, and the appellate authority also held that the application for registration was belated and liable to be rejected on that score. On merits, the Appellate Assistant Commissioner did not agree with the first two grounds given by the Income-tax Officer. As regards the third ground, he held that Vimla Kapur had contributed only Rs. 5,000, but still she had been given extraordinary powers. This had violated the principle of agency and thus rendered the partnership invalid. It was also held that Vimla Kapur was a benamidar for Rajinder Nath and further that she was unable to answer some pertinent questions relating to the partnership. Both these facts proved that she was not a genuine partner. It may be mentioned that the Appellate Assistant Commissioner had examined Vimla Kapur.
6. Thereafter, the assessee filed a second appeal before the Appellate Tribunal. The Tribunal condoned the delay in filing the application for registration. As regards merits, the assessee's contentions before the Tribunal were that the partnership was registered with the Registrar of Firms and Vimla Kapur was one of the partners therein. As she arranged the finances for the firm, she enjoyed greater powers than the other partners. A certificate from the bank showing that Vimla Kapur was operating the bank account of the firm was produced and on its basis, it was submitted that there was no scope for holding that Vimla Kapur was not a partner in the firm. The firm with five partners had already been registered and the introduction of the sixth partner, namely, Vimla Kapur, with 5 paise share therein would not make the firm a bogus one. She was made a partner because she was helpful in arranging the loan for the partnership. All these contentions did not prevail with the Tribunal and it observed : "The facts behind the facade of the terms recorded in the partnership seem to be that Dr. Rajinder Nath of New Delhi, who arranged the finances, wanted to retain the control through Shrimati Vimla Kapur, who was shown as a partner." It further observed that the fact by itself was not sufficient to reject the claim for registration. However, after referring to the undermentioned observations of the Appellate Assistant Commissioner, the Tribunal was of the view that Vimla Kapur was not a genuine partner and, consequently, the firm was not entitled to registration :
"Although, she has admitted that she is a partner in the firm, her statement shows that she is ignorant of vital matters pertaining to the partnership which is surprising for any genuine partner having the wide powers given to her under the instrument of partnership. She has stated that in the firm three sons of Shri Teja Singh are partners while actually only two of his sons are partners. According to her statement, she does not know the names of two of the sons of Teja Singh, who are, according to her, partners in the firm or of the other two partners. According to her statement, she has not received any share of profit so far for many years. She does not know the capital investment of the other partners. She does not know anything about the rights or obligations under the instrument of partnership except that she was to sign cheques and money was to be deposited in the bank. She has stated that she signed cheques for the firm for some time (about 4 to 6 months) but does not know who is signing them since then. She has not signed any profit and loss account or balance-sheet of the firm ever since she became a partner nor does she know what were the profits or losses made by the firm in any of the years since she became a partner. She has stated that her share in the profits or losses of the firm is 10 paise while actually her share is only 5 paise according to the partnership deed and that too only in profits. She does not know the shares of the other partners in the firm. The ignorance of this partner, who has the most extensive and unusual powers in the conduct of the business under the partnership deed, about the most elementary facts relating to the partnership and the fact that her powers were not exercised shows that she was not a genuine partner and there was no genuine firm in existence as constituted under the instrument of partnership."
7. The appeal was, thus, dismissed by the Tribunal on 20th February, 1970, and the order of the income-tax authorities refusing registration of the firm was affirmed.
8. Learned counsel for the assessee contended before us that the partnership in question had been in existence for the last so many years. Subsequently, one more partner was also added and the new partnership continued thereafter. This partnership needed money, which was provided by D. N. Kapur, the manager of the bank, on the condition that his wife should be taken as a partner and it was assured that she was taken as such. She contributed a sum of Rs. 5,000 also towards the capital of the firm and was then given a share of only 5 paise in the profits of the partnership. It was provided in the deed that the amount of Rs. 5,000 had to be returned in a particular manner. The amount of Rs. 5,000 was actually paid by Vimla Kapur and Rs. 50,000 were taken from Dr. Rajinder Nath on loan. It was proved that Vimla Kapur was a genuine person and she had actually signed the deed. She gave the statement that she was a partner in the firm and it was further established that she had in fact signed the various cheques for about six months. She stated that it was Teja Singh alone who was known to her husband. It is pertinent to mention that she was not related to the other partners in the firm and she was a stranger. Her statement was recorded by the Appellate Assistant Commissioner on 6th March, 1968, i.e., after about seven years of her being introduced as a partner and after she had ceased to be such. If in the said statement she had mentioned that she was to get 10 paise instead of 5 paise share or that three, instead of two, sons of Teja Singh were the partners in the firm, it was no ground to hold that she was not a genuine partner. It had not been established that the partnership had been formed in breach of any rule of law. On these facts, according to the learned counsel, it could not be held that the partnership was not a genuine one.
9. It has been found by the Tribunal that Vimla Kapur was not a partner in the partnership in question, although she was shown as such. The partnership was held not to be genuine. This is, undoubtedly, a finding of fact. It cannot be disputed that the duty to find facts is on the Tribunal. This court has no jurisdiction to go behind that finding, unless, of course, there is no evidence in support thereof or the court conies to the conclusion that the Tribunal has misdirected itself in law. Even on those grounds, the finding of fact recorded by the Tribunal cannot be reversed by this court, unless that finding had been expressly challenged by a question raised in the reference application to the Tribunal. In this connection, attention is invited to the Supreme Court decision in Commissioner of Income-tax v. Imperial Chemical Industries (India) (P.) Ltd. [1969] 74 ITR 17, 19, where it was observed :
"The High Court is not a court of appeal in a reference under Section 66(1) (section 256 of the present Act) of the Act and it is not open to the High Court in such a reference to embark upon a reappraisal of the evidence and to arrive at findings of fact contrary to those of the Appellate Tribunal. While hearing the reference the High Court ought to confine itself to the facts as found by the Appellate Tribunal and to answer the question of law in the context of those facts. The finding of fact will be defective in law, if there is no evidence to support it or if the finding is perverse, but it is not open to the assessee to challenge such a finding of fact unless he has applied for a reference of the specific question."
10. We have, therefore, to accept the above-mentioned findings of fact recorded by the Tribunal while answering the question referred to us for our opinion. If we cannot go behind these two findings, as I have already held, then the assessee-firm was not entitled to registration and the answer to the question has to be in the negative. The reason for coming to this conclusion is simple. It has been held in a number of authorities that when an application is made for the registration of the firm to the income-tax authorities, it is the duty of the Income-tax Officer to find out if the partnership is a genuine and a valid one or not, and if he is satisfied that the partnership answers that description, he cannot refuse its registration. Reference in this connection may be made to the Supreme Court decision in Commissioner of Income-tax v. A. Abdul Rahim & Co. [1965] 55 ITR 651, where it was held that it was settled law that if a partnership was a genuine and valid one, the Income-tax Officer had no power to reject its registration if the other provisions of Section 26A of the Indian Income-tax Act, 1922 (sections 184 and 186 of the present Act) and the rules made thereunder are complied with.
11. Learned counsel for the assessee strenuously urged that if the finding of the Tribunal that Vimla Kapur was not a partner and the partnership . was not a genuine one, could not be assailed in these proceedings, then there was no point in the Tribunal's making the present reference to this court, because in view of those findings, the question referred had to be answered in the negative. His submission was that when the Tribunal referred the above-mentioned question, it was implicit that the findings of fact mentioned above would also be gone into by this court and it would decide whether they were warranted by the facts and circumstances of this case. He further argued that the said findings were not based on any evidence, but, in any case, they were perverse and should be set aside by this court.
12. In view of the decision in Imperial Chemical Industries' case [1969] 74 ITR 17 (SC) and similar other rulings of the Supreme Court on this point, e.g., India, Cements Ltd. v. Commissioner of Income-tax [1966] 60 ITR 52, Commissioner of Income-tax v. Sri Meenakshi Mills Ltd. [1967] 63 ITR 609, Hazrat Pirmahomed Shah Saheb Roza Committee v. Commissioner of Income-tax [1967] 63 ITR 490 and Commissioner of Income-tax v. Greaves Cotton and Co. Ltd. [1968] 68 ITR 200, it is not possible to accept the contention of the learned counsel that this court can go behind these findings of fact recorded by the Tribunal, unless the assessee had applied for a reference of the specific question on this point. If in this view of the matter, the answer to the question referred to us by the Tribunal has to be in the negative, that would be no ground for holding that the Tribunal never intended that this court should not go behind the said two findings. If the position of law is clear, as is apparent from the number of decisions given by the Supreme Court on this point, then it is no argument to say that the question referred to us was meaningless. If the assessee was not properly advised at the time when the reference application was made to the Tribunal, then it has to suffer for that. It is clear that the position in law cannot be changed, because of the mistaken view of the law taken by the assessee.
13. Assuming that the view I have taken above is not correct in law, let us examine the submission of the learned counsel for the assessee that the two findings of fact given by the Tribunal are vitiated, because they were not based on the proper appreciation of all the facts and circumstances of the case, or in any case the said findings were perverse.
14. After perusing the order of the Tribunal, one thing is clear that it cannot be said that these findings were based on no evidence. The Tribunal had gone through the partnership deed and also examined the statement made by Vimla Kapur before the Appellate Assistant Commissioner and then recorded the said two findings. The present is, therefore, not a case where it could be said that there was no evidence in support of the findings of fact arrived at by the Tribunal.
15. Now, the question is whether the Tribunal had misdirected itself in law in arriving at these findings or it could be said that these findings were perverse and no reasonable person could have recorded them in the facts and circumstances of this case.
16. Before coming to this question, I may refer to one argument of the learned counsel for the assessee. He submitted that if the partnership deed did not infringe any provisions of the Indian Partnership Act, the shares of the various partners were specified therein and that the partners had genuinely affixed, their signatures thereto, the Income-tax Officer could not refuse its registration.
17. This submission of the learned counsel, in my opinion, has no substance. Learned counsel seems to be under the impression that the Income-tax Officer cannot go behind the partnership deed and find out whether what was stated therein really represented the true state of affairs and whether the persons mentioned in the deed had been genuinely taken as partners. If that was the position in law, any assessee could go to a competent counsel, get a partnership deed drafted in accordance with law without, of course, allowing any legal flaw to creep therein and then get the same signed by some living persons, who would be termed as partners. Their shares in the business would be mentioned in the deed, which would be presented before the Income-tax Officer for registration, who would then, according to the learned counsel, be bound to register the same. That obviously would not be the correct position in law. As aptly put by Rankin C.J. in Bisseswarlal Brijlal v. Commissioner of Income-tax [1930] 4 ITC 365 (Cal) [FB], an instrument of partnership is not a magical talisman protecting its executants from the imposition of higher tax. The same learned judge, when he was a Member of the Privy Council, in Sundar Singh Majithia v. Commissioner of Income-tax [1942] 10 ITR 457, 461, observed :
"When a document purporting to be an instrument of partnership is tendered under Section 26A on behalf of a firm and application is made for registration of the firm as constituted under such instrument, a question may arise whether the instrument is intended by the parties to have real effect as governing their rights and liabilities inter se in relation to the business or whether it has been executed by way of pretence in order to escape liability for tax and without intention that its provisions should in truth have effect as defining the rights of the parties as between themselves."
18. We have, therefore, to go behind the partnership deed and find out whether the partnership in question was a genuine one and whether Vimla Kapur had in reality been taken as a partner in the business of the firm.
19. It is true that before the present alleged partnership came into being, Messrs. Eastern Commercial Corporation consisted of four partners, namely, Teja Singh, his son, Mohinder Singh, Bhag Singh and his brother, Deva Singh. This firm was registered under the Income-tax Act and was assessed as such up to the assessment year 1961-62. Later, another partner Jeevinder Singh was included in the said partnership and the new partnership continued functioning up to 25th September, 1961. It is further true that the old partnership needed funds to the tune of Rs. 55,000 to complete the contract which it had entered into with the Punjab State Electricity Board and for that purpose it approached D. N. Kapur, the manager of the Oriental Bank of Commerce at Patiala, for assistance in that respect. He and his wife, Vimla Kapur, agreed to help the partnership in arranging a loan of Rs. 50,000 from Dr. Rajinder Nath of Delhi, who was the brother of Vimla Kapur, and the balance of Rs. 5,000 was to be subscribed by Vimla Kapur herself. In consideration thereof, it was said that the partners of the old firm agreed to take Vimla Kapur as a partner and give her a share of 5 paise in the profits of the firm. A new partnership deed was then executed on 26th September, 1961. The point for decision is whether this new partnership was a genuine one or the deed had been written only to safeguard the interests of the two creditors of the partnership, namely, Dr. Rajinder Nath and Vimla Kapur, and the latter was in reality not taken as a partner in the business of the partnership. It is for finding out this matter that the various clauses of the partnership deed have to be carefully scanned, as was done by the Income-tax Officer and the Appellate Assistant Commissioner before they both came to the conclusion that the alleged partnership was not a genuine one and which finding was, subsequently, confirmed by the Tribunal.
20. Before analysing the various clauses of the partnership deed, I may mention that from the preamble of the deed itself, it appears that Vimla Kapur was not being taken as a partner in the entire business, which was being carried on by the said partnership. As a matter of fact, she was made partner only with reference to the the contract, which the partnership had with the Punjab State Electricity Board and that would be apparent from the following passage occurring in the preamble of the partnership deed :
"And whereas it had been mutually agreed between all the parties Nos. 1 to 6 hereto, that said Smt. Vimla Kapur, party No. 6, shall enter business in this new partnership, with reference to the said contract with the said Punjab State Electricity Board, upon the terms and conditions hereinafter contained."
21. It had further been made clear in this very preamble that she had been brought as a partner, because she had successfully arranged for a loan of Rs. 50,000 from Dr. Rajinder Nath. That means this was alleged to be a "particular partnership" within the meaning of Section 8 of the Indian Partnership Act, 1932.
22. Let us now examine the clauses of the deed and see whether Vimla Kapur was really taken as partner in the business and whether the alleged partnership was a genuine one or not.
23. According to Clause 2, the new partnership had to continue up to
(a) the termination or cancellation of the contract with the Board, or
(b) repayment, of recovery from parties 1 to 5 (partners of the original partnership), whichever was earlier, of the debt due to Dr. Rajinder Nath and Rs. 5,000 contributed by Vimla Kapur along with their guaranteed profits. From this, it would be seen that the partnership would end either when the debts along with the guaranteed profits were repaid or recovered from parties 1 to 5 or when the contract with the Punjab State Electricity Board was either terminated or cancelled. It is, therefore, clear that it was not even a "particular partnership" which would have continued till the contract with the board subsisted, because if parties 1 to 5 managed to return the money borrowed from the two creditors along with the guaranteed profits or else the two creditors themselves recovered their debts from the said parties, the partnership would have come to an end, even though the contract with the Board had still subsisted. If seems that Vimla Kapur had got her name introduced in the partnership deed with the sole object of safeguarding her own interest and that of her brother, Rajinder Nath, so that the loan that both of them had given to the old partners was repaid along with the guaranteed profits. According to this very clause, the guaranteed profits payable to Dr. Rajinder Nath were Rs. 9,500 subject to a minimum of Rs. 4,500 and, similarly, Vimla Kapur was to receive a guaranteed profit of Rs. 1,500 subject to a sliding scale with a minimum of Rs. 500.
24. According to Clause 6, the various assets of the earlier partnership and parties 1 to 5 mentioned in that Clause had to be mortgaged to Dr. Rajinder Nath by the said parties. The residential house referred to in the said clause had to be transferred by way of mortgage by party No. 1, namely, Teja Singh Bahiya only, as it belonged to him exclusively. These mortgages had to be effected by the dates mentioned in the clause. This clause again showed that the predominant idea was to get the repayment of the debt fully secured,
25. In Clause 9, the shares of parties 1 to 5 in the profit and loss had been mentioned. Their total came to 85 paise, though it should have come to 100 paise. It might bo stated that Vimla Kapur's name was also mentioned at No. 6 and she was given a share of 5 paise. It ought not to have been there, because it was agreed that she had not to share the losses of the partnership. She was to get a share in the profits only. Adding her share also, the total came to 90 paise only. Further, according to this clause, the share of Vimla Kapur in the profits was to be 5 paise in a rupee. In addition, she had to get a guaranteed profit of Rs. 1,500 subject to a sliding scale with a minimum of Rs. 500 as mentioned in Clause 12, irrespective of the fact whether the partnership earned any profit or went into a loss. In other words, in addition to the guaranteed profit, she was to receive 5 paise share in the profits of the partnership, but she was not to share the losses under any circumstances. She was not liable for any debts or liabilities of the previous partnership or any of the parties 1 to 5 in any manner whatsoever. According to this clause, therefore, even if the partnership went into a loss, both she and Dr. Rajinder Nath were to get their guaranteed profits. She was not to share any losses, but if the partnership earned a profit, she was entitled to a 5 paise share therein in addition to her guaranteed profit. Learned counsed for the assessee could not refer to any partnership deed of such a kind in any of the decided cases cited by him.
26. According to another clause (it might be mentioned that in the paper-book, the clauses have not been correctly numbered), the manner in which the guaranteed profit had to be paid to Dr. Rajinder Nath had been stated. It was said that he would not be liable for any loss of the partnership and his guaranteed profit would not be affected by the absence of any profit earned by the partnership. Even though he was not a partner, his share in the profit had been fixed at 10 paise in a rupee, in addition to the guaranteed profit that he would get.
27. Then again, it was agreed that Dr. Rajinder Nath and Vimla Kapur would recoup, recover and be paid back their loans, contributions and investments along with the guaranteed least profit and further profits from out of all payments received or to be received by the new and the old partnership, in addition to the repayment, recovery and realisation from the movable and immovable assets of the partnership and parties 1 to 5, including those, which were not covered by the mortgages, irrespective of the fact whether there was any profit earned by the partnership.
28. It was also stated in this deed that Dr. Rajinder Nath was to be paid Rs. 59,500 on the expiry of 12 months from the date the new partnership came into being. The guaranteed profit would, however, be reduced by a scale mentioned in the agreement, if the principal loan and the agreed profits were paid earlier than the period of one year.
29. Vimla Kapur would be returned her Rs. 5,000 in addition to the agreed profit of Rs. 1,500, i.e., Rs. 6,500 in all, on the expiry of 12 months from the date of the new partnership. The guaranteed profits would, however, be reduced by a scale mentioned in the agreement, if the principal loan and the agreed profits were paid earlier than the period of one year.
30. The repayment of Rs. 59,500 to Dr. Rajinder Nath would be secured by mortgaging the properties as already mentioned above and in addition to that, it would further be secured by a pronote for the said amount, which would be executed by parties 1 to 5, with party No. I executing as managing partner of the new partnership and parties Nos. 2 to 5 as managers of their respective families. Interest at 12 per cent, per annum was payable by the new partnership and parties 1 to 5 to Dr. Rajinder Nath, if Rs. 59,500 were not paid to him on the expiry of one year from the date of the new partnership. In the event of the breach of any clause of the agreement, parties 1 to 5 further agreed to pay Rs. 10,000 as damages and compensation to Vimla Kapur. This amount however, would be open to reduction by such amount as the sole arbitrator might consider reasonable. Party No. 1, namely, Teja Singh, would be the managing partner of the new partnership, but he would have no power over the accounts, their operations, financial and other arrangements, making of advances, investments and allowing credit, etc. On the other hand, Vimla Kapur shall have her own way and full control over the whole financial policy and operation thereof to the total exclusion of all other partners."It was also agreed that the nature, manner and limit of expenses would not depart from the statement of expenditure as made to Vimla Kapur". The accounts would be operated only by Vimla Kapur and no other partner and this clause in the agreement wa's made irrevocable. Parties 1 to 5 would be entitled to withdraw out of the new partnership account through Vimla Kapur a sum of Rs. 1,500 only per month for their individual use, but the exact amount to be so withdrawn by any partner would be fixed, controlled, reduced or allowed within the said limit by Vimla Kapur in her discretion as she might consider fit. AH objections to her exercise of discretion in that matter were waived by parties 1 to 5. The balance-sheet of the accounts of the new partnership and the previous partnership would be prepared every three months and furnished to Dr. Rajinder Nath. The deed of partnership was signed and executed at Delhi. It was agreed that the money due to Dr. Rajinder Nath and Vimla Kapur was to be paid at Delhi and the Delhi courts would have jurisdiction in the matter. All disputes arising from or in relation to the new partnership between the parties and Dr. Rajinder Nath or any one of them would be referred to the sole arbitration of Dev Narain Kapur, husband of Vimla Kapur, and in the event of his death, to his son, Satish Kapur. The said relationship was known to parties 1 to 5 and they would not raise any objection on that account. The said arbitrator was also given the power to give his award even on an enquiry or enquiries that he might make behind the back of the parties.
31. The various clauses of the deed would show that this document was more of an agreement regarding the taking of a loan of Rs. 55,000 than a deed of partnership. Therein, there was no provision regarding the division of total losses of the partnership. The shares in that behalf when totalled came to 85 paise and not 100 paise. It might be mentioned that Vimla Kapur's name also appeared as party No. 6 in that connection, but later it was made clear that she had not to share the losses. About this matter, the Income-tax Officer had observed that this waa a self-contradictory provision. Vimla Kapur had to share the profits alone to the extent of 5 paise in a rupee. The balance of 10 paise in a rupee in the profit was to be given to Dr. Rajinder Nath, although, admittedly, he was not a partner in the partnership and he had not signed the deed as such. It is also noteworthy that if Vimla Kapur was given a guaranteed minimum profit, then there was no point in her being entitled to a 5 paise share in the profits of the partnership. The deed gave full powers to Vimla Kapur regarding the financial control of the partnership to the exclusion of all other partners. It cannot be forgotten that she had invested only Rs. 5,000. All this extraordinary authority, which is not by any chance reasonable, is not given to a partner in a genuine partnership, especially when that partner had contributed a very small amount towards the capital. All this goes counter to the principle of agency, which is the very basis of a partnership. She was also to get Rs. 10,000 as damages, if any clause of the agreement was violated. Further, she was to be paid a guaranteed profit even though the partnership itself did not make any profit. This too was against the principle of partnership. This apart, the number of concessions given to Dr. Rajinder Nath in the various clauses of the agreement also violated the principle of agency. The mortgages, which had to be executed by the other partners in favour of Dr. Rajinder Nath to secure his loan, had, admittedly, not been made by them, which fact showed that the partnership deed was not acted upon.
32. Vimla Kapur's statement was recorded by the Appellate Assistant Commissioner, whose assessment of the same has already been given above. According to him, the ignorance of the elementary things and other essential terms of the partnership on the part of a partner, who has overriding powers in the matter of the day to day conduct of the business, showed that she was not a genuine partner. A perusal of that statement also lends support to the finding given by the Tribunal that she was not really a partner in the partnership in question, which was not genuine. It is significant to mention that the giving of a share of 10 paise in a rupee in the profits of the firm to Dr. Rajinder Nath, who was, admittedly, not a partner, makes the partnership deed defective in law. Further, the giving of a guaranteed profit to the alleged partner, Vimla Kapur, even though the partnership did not make any profits, also showed that the partnership deed contravened the principle of partnership. The Appellate Assistant Commissioner was, in my opinion, right in holding that, in the present case, the instrument of partnership was legally defective, because, firstly, it gave a guaranteed profit to a partner, even if the firm did not earn any profit and, secondly, a person, who was not a partner, was allocated a share in the profits. These provisions, according to the Appellate Assistant Commissioner, went against the very definition of partnership, which meant the relationship between persons who had agreed to share the profits of a business carried on by all or any of them acting for all. The said officer also observed ; "Under section 185(1) of the Income-tax Act, the Income-tax Officer has to enquire into the genuineness of the firm and its constitution as specified in the instrument of partnership and then to register the firm, 'if he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified'. It follows that registration can be allowed only if the instrument of partnership is legally valid and there is a genuine firm in existence as constituted in accordance with the instrument. The overriding and extraordinary powers given to a partner with a small share of 5 paise only to the exclusion of all other partners shows that all tfic other partners had practically no power in the conduct of the business and, further, could thus not act on behalf of the firm in any material matter. It is also seen that there is ample material to show that there was no genuine firm in existence as per the terms laid down in the instrument of partnership. A partner, who has overriding powers in the conduct of the business, does not know even the names of three of her five partners, their shares, and even her own share in the profits and is ignorant of the other fundamental points in regard to the terms of the partnership arrangement. This shows that she is not a genuine partner. Besides, the powers entrusted to this partner in the matter of conduct of business, signing of cheques and financial matters have not in fact been exercised (except for signing of cheques for a short period). This coupled with the fact that other major terms of the deed, such as payment of minimum guaranteed profit of a partner, transfer of assets through mortgages, etc., have not been acted upon, shows that the arrangement described in the partnership deed is not a genuine factual relationship. It is, thus, clear that there was not in existence a genuine firm in accordance with the constitution or terms specified in the partnership deed". Then again, according to this officer, what is relevant for the purpose of registration is whether there was a genuine firm in existence, as constituted under the instrument of partnership, which operated for the relevant year and the fact that there was a genuine firm in the past with a different constitution under a different deed was not relevant in that connection. According to him, there was ample material to show that there was no genuine firm in existence in accordance with the instrument of partnership.
33. Under these circumstances, it cannot, therefore, be said that the findings of fact given by the Tribunal that Vimla Kapur was not a partner and the partnership in question was not genuine, were perverse or that no reasonable person could have recorded them in the facts and circumstances of this case. It cannot also be said that in arriving at these findings, the Tribunal had in any way misdirected itself in law. On the other hand, these findings were well based.
34. In view of what I have said above, I would answer the question referred to us in the negative. In the circumstances of this case, however, there would be no order as to costs.
B.S. Dhillon, J.
35. With due respect to my learned brother Pandit J., I have not been able to persuade myself to agree with the view taken by him in this case. The brief facts, which culminated into a reference made to this court by the Income-tax Tribunal, Chandigarh, have already been mentioned in the judgment of my learned brother, Pandit J., and I need not repeat the same in detail. However, where necessary, I will be mentioning the relevant facts.
36. I am not inclined to uphold the contention raised on behalf of the revenue that this reference must be answered in the negative, without going into the question whether the firm is genuine or not. The contention of the revenue is that the question whether the firm is genuine or not, has been answered by the Tribunal when the. Tribunal held on the basis of the statement of Srnt. Vimla Kapur that the firm was not genuine and that being a finding of fact, this court will not go into this question, and keeping in view the provisions of Section 185 of the Income-tax Act, this court is bound tq answer the question referred in the negative. The contention that the finding of fact, that the firm was not genuine, was not assailed before the Tribunal, in my opinion, is not correct. No doubt the question whether a particular firm is a genuine one or not is essentially a question of fact, but it is open to the assessee to contend before the Tribunal after the said finding has been recorded, that the said finding of fact is vitiated and if the Tribunal, on the grounds pressed before it, comes to the conclusion that the question of law arises from the finding, whether the firm is genuine or not, it is open to the Tribunal to refer the said question of law to be answered by this court. In my view, it is not correct to contend in this case that the assessee accepted the finding of fact recorded by the Tribunal that the firm was not genuine and still made an application to the Tribunal that a question of law arises and the assessee having succeeded to satisfy the Tribunal that a question of law does arise, yet it be held that the assessee never challenged the Tribunal for making a reference to this court. If it were so, by merely reading the provisions of Section 185, one has to record a finding that the firm is not entitled to be registered and, in that case, no question of law at all arises which need be referred to this court under the provisions of Section 256(1) of the Income-tax Act, 1961. After going through the reference order passed by the Tribunal, I have no doubt in my mind that the assessee contended that the finding of the Tribunal that the firm was not genuine is vitiated and it is on this basis that the Tribunal was satisfied that a question of law does arise, and, therefore, this reference before us. If the Tribunal failed to frame a question, in a particular manner, the assessee is not to be penalised for that. Nobody can be allowed to suffer for the mistake of a court or Tribunal. After the Income-tax Tribunal came to the conclusion that the firm was not genuine and was not entitled to get itself registered under Section 185 of the Income-tax Act, an application was made by the assessee requiring the Tribunal to refer to the High Court the question of law arising out of the Tribunal's order in Income-tax Assessment No. 7635 of 1968-69. This is clear from the opening "paragraph of the reference order as recorded by the Tribunal. It was on this reference-application that the Tribunal formed the opinion that a question of law does arise out of the said order and, therefore, a statement of the case for reference to this court was drawn up by the Tribunal. If the Tribunal had framed a question in the manner which could have clearly shown that it was being challenged by the assessee that the finding of fact, that the firm was not genuine, recorded by the Tribunal was vitiated, no objection could possibly have been raised on behalf of the revenue. But the Tribunal framed the question in a general way in the following terms :
"Whether, on the facts and in the circumstances of the case, the assessee-firm was entitled to registration ?"
37. If the contention, that the finding of fact that the firm was not genuine was not assailed and sought to be referred to this court, by the asscssee, is accepted, it is difficult to understand as to why in the opinion of the Tribunal a question of law did arise for reference to this court, because by a mere reading of Section 185 of the Income-tax Act, it is bound to be held that since the firm was not genuine the same was, therefore, not entitled to be registered. It was also idle for the assessee to have got referred this case to this court, if the finding that the firm was not genuine was not assailed by him, on the ground that -the same was vitiated, before the Tribunal. After going through the reference order, I have no doubt left in my mind that the reference application made before the Tribunal did assail the finding that the firm was not genuine and the said finding was vitiated and it was on this ground alone that the question of law as has been enumerated above has been referred to this court. In Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589, 612 (SC), their Lordships of the Supreme Court were considering the scope of the powers of the court under Section 66(1) of the Income-tax Act. It was held that the power of the court to direct a reference under Section 66(2) is subject to two limitations, that is, the question must be one which the Tribunal was bound to refer under Section 66(1) and the applicant must have required the Tribunal to refer it. It was further held by their Lordships as follows :
"A question of law might be a simple one, having its impact at one point, or it may be a complex one, trenching over an area with approaches leading to different points therein. Such a question might involve more than one aspect, requiring to be tackled from different standpoints. All that Section 66(1) requires is that the question of law which is referred to the court for decision and which the court is to decide must be the question which was in issue before the Tribunal. Where the question itself was under issue, there is no further limitation imposed by the section that the reference should be limited to those aspects of the question which had been argued before the Tribunal, and it will be an over-refinement of the position to hold that each aspect of a question is itself a distinct question for the purpose of Section 66(1) of the Act.....Sometimes the questions are framed in such general terms that, construed literally they might take in questions which were never in issue. In such cases, the true scope of the reference will have to be ascertained and limited by what appears on the statement of the case."
38. This dictum was followed by the Supreme Court in Bhanji Bagawandas v. Commissioner of Income-tax [1968] 67 ITR 18, and the objection raised on behalf of the appellant that since the respondent had not taken the plea regarding the effect of the provisions of the Income-tax (Amendment) Act (1 of 1959) before the Tribunal or before the High Court, and, therefore, the respondents could not be allowed to raise the plea before the Supreme Court. Following the observations made in Commissioner of Income-tax v. Scindia Steam Navigation Co. Ltd. [1961] 42 ITR 589 (SC), their Lordships of the Supreme Court held that the question framed was in wide terms and this question could be raised by the respondent before the Supreme Court.
39. From the above statement of law, it is apparent that where the question itself was under issue and the same was raised in the reference application, merely because the Tribunal failed to frame the question in proper and distinct manner, the assessee will not be debarred from raising the plea that the finding that the firm was not genuine, was vitiated. It is a different matter whether it succeeds in showing that the said finding of fact was vitiated or not. Keeping in view the facts and circumstances of this case, it is difficult for me to come to the conclusion that the Tribunal formed the opinion that a question of law does arise in this case even though the finding that the firm was not genuine was not assailed before it. The statement of the case clearly goes to show that it was this finding alone which was being assailed before the Tribunal in the reference application and it was on this ground alone that the Tribunal formed the opinion that a question of law does arise. While framing the question the Tribunal framed a composite question rather than splitting it and framing it in a precise and clear manner. The question as framed is essentially in wide terms and the question whether the firm is genuine or not is inherently contained in this question. . Therefore, I overrule this objection raised on behalf of the revenue and would like to examine whether the finding that the firm was not genuine is vitiated or not. The authority relied upon by the learned counsel for the revenue in Commissioner of Income-tax v. Imperial Chemical Industries (India) (P.) Ltd. [1969] 74 ITR 17 (SC) is of no assistance to him. In that case, it was held by their Lordships of the Supreme Court that it was not open to the assessee to challenge the finding of fact, unless he has applied in the reference application for the specific question. There is no dispute with this proposition, but, on the facts of this case, I have come to the conclusion that the finding that the firm was not genuine, was specifically assailed before the Tribunal in the reference application and that that was the only question which was agitated before the Tribunal and it was on the basis of this that the Tribunal came to the conclusion that a question of law does arise and referred the same for the opinion of this court and, therefore, the authority relied upon by the revenue is of no consequence.
40. As regards the scope of the powers of this court in an income-tax reference on the question whether the firm is genuine or not, it was laid down by their Lordships of the Supreme Court in the case of Krishna Flour Mills v. Commissioner of Income-tax [1962] 44 ITR 501 as under :
"Whether a firm is genuine or not is normally a question of fact. But, whether in the facts and circumstances found by the Tribunal there was material to come to the conclusion that the partnership firm constituted by a certain deed of partnership was not genuine is a question of law."
41. In that case a person entered into a partnership deed with his wife and brother-in-law. The evidence showed that the wife and the brother-in-law had contributed their own share in the capital. It was not suggested" that there were no good reasons for taking the wife and brother-in-law as partners and the books of accounts were not shown to be false. There was also nothing in the conduct of the parties inter se to indicate that the partnership was not genuine. The Tribunal, however, assuming that a partnership consisting of wife and brother-in-law must be necessarily suspect, held that the firm was not genuine. It was held by their Lordships of the Supreme Court that on the material on record the inference of the Tribunal was unreasonable and not justified either by partnership law or common human experience. It was also held that whether, on the facts and circumstances found by the Tribunal, there was material to come to the conclusion that the firm was not genuine, was a question of law which must be referred by the Tribunal to the High Court. No doubt it was a case where an application was made to the High Court for directing the Tribunal to refer the question of law arising from the finding of fact that the firm was not genuine, and the application was dismissed by the High Court and it was in appeal that the Supreme Court asked the Tribunal to refer the question of law but the fact remains that the Supreme Court enunciated the law holding that whether in the facts and circumstances found by the Tribunal there was-material to come to the conclusion that the partnership firm constituted by a certain deed of partnership was not genuine, is a question of law.
42. It is, therefore, clear that the question whether, on the facts and circumstances, as found by the Tribunal, there was material to come to the conclusion that the firm was not genuine, is a question of law. Similarly, in a case, Commissioner of Income-tax v. Sivakasi Match Exporting Co. [1964] 53 ITR 204, their Lordships of the Supreme Court held that where the Tribunal misconstrued the provisions of the partnership deed and relying upon irrelevant considerations, holds that the partnership is not genuine, the High Court had the juridiction under Section 66(1) of the Income-tax Act to entertain the reference. In the case of Agarwal and. Co. v. Commissioner of Income-tax [1970] 77 ITR 10 (SC) it was held by their Lordships of the Supreme Court that the conditions of registration prescribed by Section 26A of the Income-tax Act and relevant rules framed thereunder are as follows:
"(i) On behalf of the firm, an application should be made to the Income-tax Officer by such person and at such times and containing such particulars, being in such form and verified in such manner as are prescribed by the rules ;.....
(iv) the partnership must be valid and genuine and must actually exist in the terms specified in the instrument. If all the above conditions are fulfilled the Income-tax Officer is bound to register the firm unless the assessee has contravened Section 23(4) of the Indian Income-tax Act, 1922."
43. Keeping in view the above statement of law, the present case has to be examined and it has to be found whether the finding, that the firm was not genuine, is vitiated or not. It 'may be pointed out that the Income-tax Officer refused to register the firm on a number of grounds, which have already been referred to in the judgment written by my learned brother, Pandit J., and the finding was based on the interpretation of the partnership deed itself. When the matter went up before the Appellate Assistant Commissioner, he recorded the statement of Shrimati Vimla Kapur and did not agree with some of the findings recorded by the Income-tax Officer. He came to the conclusion that the registration of the firm can only be allowed if the instrument of partnership is legally valid and there is a genuine firm in existence as constituted in accordance with the said instrument. He recorded the finding that the instrument of partnership is legally defective as it gives the share of profit to a partner even though the firm does not earn a profit and gives a share of profit to a person who is not a partner. He further found that the overriding and extraordinary power given to Smt. Vimla Kapur in the partnership deed was again against the provisions of law regarding partnership. He further took into consideration the statement of Smt. Vimla Kapur and came to the conclusion that the instrument of partnership was not legal and valid and that the firm was not genuine. It is apparent from the order of the Tribunal that the Tribunal came to the conclusion that the partnership deed was drafted in a complicated manner. It was further held by the Tribunal that the fact behind the facade of the terms regarding the partnership deed seems to be that Dr. Rajinder Nath of Delhi, who arranged the finances, wanted to retain the control through Smt. Vimla Kapur, who was shown as a partner. The Tribunal specifically recorded the finding that, of course, this by itself was not sufficient to throw out the claim of the partnership and was of the opinion that the fact to be found was to see whether Smt. Vimla Kapur was a partner at all as claimed and according to the Tribunal it is here that the defect in the partnership arises. The Tribunal then relied on the finding recorded by the Appellate Assistant Commissioner based on the appreciation of statement of Smt. Vimla Kapur, which paragraph has already been reproduced by my learned brother, Pandit J., and after reproducing the same, it recorded the following finding :
"A perusal of the statement of facts clearly shows that Smt. Vimla Kapur is not a partner, although she is shown to be partner. In this view of the matter, we are of the opinion that the Income-tax Officer was right in holding that the partnership was not genuine and Smt. Vimla Kapur was not a partner, we would not interfere with the order passed by the Appellate Assistant Commissioner and would dismiss the appeal."
44. From what has been stated above, it is clear that the Appellate Tribunal agreed with the contention of the assessee that there was no legal defect in the partnership deed. The finding of the Appellate Assistant Commissioner in this connection was set aside by it. According to the Tribunal, the only point which needed consideration was whether Shrimati Vimla Kapur was in fact a partner or not. For considering this question, the Tribunal solely relied upon the finding recorded by the Appellate Assistant Commissioner which was based on the appreciation of the statement of Smt. Vimla Kapur. In my opinion, this way of examining, whether Smt. Vimla Kapur was in fact a partner of the firm or not, was perverse keeping in view the facts and circumstances of the case. No doubt, the statement of Smt. Vimla Kapur was a relevant material to be taken into consideration while forming the opinion whether she was a genuine partner of the firm or not, but the other relevant evidence and proved facts on record had to be taken into consideration along with her statement and it was then alone that a finding can be arrived at as to whether she was a genuine partner or not. If the approach of the Tribunal is correct, and the finding, whether a particular partner is a genuine partner or not, is to be based solely on the statement of that partner whose genuineness in the partnership is disputed, this will be clearly laying down a wrong law. In a given case, a partner may be a partner in the firm for some period and he might leave the partnership after some time and there might be a quarrel between the partners, and if his statement alone is taken to be the basis for determining whether he was a genuine partner in the original partnership in that case the final decision whether the original partnership should be registered or not, will be in the hands of that partner whose partnership is being disputed which will lead to a very anomalous position which cannot be supported by any reason whatsoever. Take another instance. A partner may be a sleeping partner, who is not taking active interest in the business, or a partner who is not so efficient so as to remember each and every detail of the partnership deed and the business thereof and if the genuineness of such a partnership is disputed he might not be able to give correct facts orally which may coincide with the partnership deed. In that case also if the approach of the Tribunal is correct, a finding shall have to be recorded that the partnership is not genuine even though there may be other overwhelming evidence to the contrary. In my opinion, the question whether a particular partnership is genuine or not is to be determined from all the relevant evidence on record including the statement of Smt. Vimla Kapur, so also the partnership deed and the circumstances based on admitted facts of the case and it is then alone that an inference is to be drawn as to whether the partnership is genuine or not. If this approach is adopted, the finding that the firm is not genuine, merely based on the appreciation of the statement of Smt. Vimla Kapur, is vitiated. Therefore, in my opinion, the finding that Smt. Vimla Kapoor was not a genuine partner, which is based merely on the appreciation of the statement of Smt. Vimla Kapur is vitiated. It has to be now seen, keeping in view the admitted facts and taking into consideration the relevant evidence and circumstances of the case, whether an inference can be drawn that Smt. Vimla Kapur was not a partner.
45. I am inclined to hold and agree with the Tribunal that there is no legal defect in the partnership deed. It may not be necessary for me to reproduce the terms of the partnership deed in detail as the same have already been referred to in the judgment of my learned brother, Pandit J. The contention of the learned counsel for the revenue that the preamble of the partnership deed itself shows that Srnt. Vimla Kapur was not being taken in as a partner in the entire business, but was taken as a partner only with regard to the contract, which the partnership had entered into with the Punjab State Electricity Board and, therefore, the partnership deed was legally defective, has not appealed to me. A partnership can be entered into for any period or for any particular contract. Preamble of the partnership deed, in my opinion, does not violate any provision of law and it is permissible for the partner to enter into a partnership for any period of time and for any nature of work specified or unspecified. Again, the contention that Smt. Vimal Kapur entered into partnership with the sole object of safeguarding her own interest and that of her brother, Dr. Rajinder Nath, is again of no consequence. No provision of law has been shown to us by the learned counsel for the revenue which prohibits a partnership deed containing terms giving protection to the rights of partners and non-partners who are creditors of the partnership. The question whether Smt. Vimla Kapur entered into the partnership with the object of safeguarding her interest and that of her brother or not, is not relevant because what motivated her to become the partner is of no consequence. The relevant question is did she in fact enter into the partnership or not ? For the purpose of Section 185 of the Income-tax Act, the satisfaction of the Income-tax Officer that the firm is genuine or not is primarily for the purposes that the assessee may not escape assessment to income-tax by bringing into being on paper a firm, which in fact is not genuine. As to the terms of the partnership, if the partnership deed does not violate any provision of the law, it is up to the partners to agree upon the terms which may be more beneficial to one partner than the other, and merely because some of the partners of the firm, with their anxiety to further their business prospects, give easy terms to another partner or a person from whom they took loan because they needed money to run the business, would not be a ground to hold that the partnership deed is not genuine if the partnership deed does not contravene any provision of law and it is proved that the partnership exists in the terms specified in the instrument. The contention that Smt. Vimla Kapur according to the deed was not to contribute anything towards the losses and, therefore, the partnership was legally defective, is again without any merit. The provisions of Section 4 of the Indian Partnership Act, 1932, are as follows :
"Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all."
46. Thus, it is apparent that the only requirement of the partnership is that the partners should agree to share the profits of the business carried on by all or any of them acting for all. It is not necessary that each partner must share the losses. It is the matter between the partners so as to allow any partner not to share the losses. In the present partnership deed all the partners including Smt. Vimla Kapur, according to Clause 9 of the partnership deed, were to share profits. Therefore, the ingredients of Section 4 of the Indian Partnership Act, 1932, are satisfied. Clause 9 of the instrument further provides a profit of 10 paise in a rupee in addition to a guaranteed amount to Dr. Rajinder Nath who had advanced a loan of Rs. 50,000 to the partnership. This again does not violate the provisions of the Indian Partnership Act. The learned counsel for the revenue could not lay hands on any provision of law or any authority for the proposition that in case the share in the profits is given to a non-partner of a partnership, the partnership will become invalid. In my opinion, it is up to the partners to take loan from a non-partner and in order to attract any person for giving loan to the partnership, the partners may agree to any condition as proposed by the creditors so long as the said condition does not violate any provision of law. It is open to the partnership to agree to the term that the creditor in addition to the guaranteed amount of interest will also get some percentage of profit if the partnership earns the profits.
47. The contention of the learned counsel for the revenue that Clause 9 of the partnership deed is vague inasmuch as hundred per cent. shares in the profit have not been specified, is without any merit. As I read Clause 9 of the instrument, ignoring the printing mistake, I find that cent. per cent. profits have been distributed and there is no vagueness in the deed. It may be pointed out here that there appears to be a printing mistake in the paper-book as far as the number of clauses are concerned, and it is because of this error in printing that the objection, which is tried to be raised on behalf of the revenue, to this portion of the deed, is being pressed into service. In fact, Clauses 7, 8 and 9 printed subsequent to the main Clause 9 are the sub-clauses of Clause 9 and the main Clause 10 of the deed begins subsequent to Sub-clause (9) of Clause 9. In order to clarify the whole position, Clause 9 and its sub-clauses, which are also nine in number, are reproduced below:
"9. That the shares in the profit and loss of parties 1 to 5 shall be as under :--
(1) S. Teja Singh Bahiya, party No. 1 ... 38.25 (2) S. Mohinder Singh Sidhu, party No. 2 ... 21.25 (3) S. Jeevinder Singh, party No. 3 ... 17.00 (4) S. Bhag Singh, party No. 4 ... 4.25 (5) S. Deva Singh, party No. 5 ... 4.25 (6) Smt. Vimla Kapur ... 5.00
(a) That the share in profit of Smt. Vimla Kapur, party No. 6, shall be five (5) naye paise in the rupee, and in addition,
(b) Smt. Vimla Kapur, party No. 6, shall have a guaranteed profit of rupees fifteen hundred only (Rs. 1,500 only) subject to asliding scale with the minimum at rupees five hundred only, as stated fully hereinafter (e.g., in Clause 12) irrespective of the absence of profit or loss arising from the new partnership, i.e., she is entitled to any further profit in excess of the guaranteed profit according to her share of profit as calculated by her fixed share of profit in the new partnership, at five (5) naye paise in the rupee above mentioned, and
(c) It is further agreed that Smt. Vimla Kapur, party No. 6, shall not be liable for any of the losses, debts and liabilities of the previous partnerships or of any of the parties 1 to 5 or of the new partnership in any manner whatever.
(7) The parties 1 to 6 have hereby agreed to pay guaranteed profit of rupees nine thousand five hundred only (Rs. 9,500 only) subject to a sliding down scale with a minimum at rupees four thousand five hundred only as stated fully hereinafter (e.g., in Clause 9) to Dr. Rajinder Nath aforesaid. He shall not be liable for any loss whatever of any of the partnerships hereinbefore mentioned. His guaranteed profit is not affected by the absence of the profit from the partnership. But his right to profit, even though a non-partner, has been fixed at ten (10) paise in the rupee, arid in case of excess of any profit, accruing over and above the sum payable to him as a guaranteed profit, the said Dr, Rajinder Nath shall be entitled to payment of further profit as calculated at the rate of ten (10) naye paise in the rupee. Any rights of the parties 1 to 5 to object to the above and all objections whatever are hereby waived.
(8) It is hereby mutually agreed that Dr. Rajinder Nath aforesaid and Smt. Vimla Kapur, party No. 6, shall recoup, recover and be paid back their loans, contributions and investments, along with the guaranteed least profit and further profits, from out of all payments received or to be received by the new partnerships and old in addition to the repayment, recovery and realisation from the movable and immovable assets of parties 1 to 5 and the said partnerships, including those not covered by the mortgages, and irrespective of the absence of profit and irrespective of any new partnership or the previous partnerships.
(9) That the sura of rupees fifty thousand agreed to be received and paid by Dr. Rajinder Nath aforesaid to parties 1 to 6 and the new partnership is hereby agreed to be paid back to him inclusive of the said guaranteed profit and principal, i.e., the sum of rupees fifty-nine thousand five, hundred only (Rs. 59,500 only) on the expiry of twelve (12) months from the date of this new partnership, i.e., on 25th day of September, 1961, but a reduction of guaranteed profit of rupees twenty-five hundred only (Rs. 2,500 only) has been agreed upon by Dr. Rajinder Nath aforesaid to be accepted, if the payment of rupees fifty-seven thousand only (Rs, 57,000 only), i.e., rupees two thousand five hundred only (Rs. 2,500 only) less than rupees fifty-nine thousand five hundred only (Rs. 59,500 only) is made earlier by three months, i.e., on the expiry of nine (9) months from the date of this new partnership, i.e., 25th day of June, 1962, and a further reduction of another guaranteed profit of rupees two thousand five hundred only (Rs. 2,500 only) has been agreed upon by Dr. Rajinder Nath aforesaid, if the payment of rupees fifty-four thousand five hundred only (Rs. 54,500 only), i.e., twenty-five hundred only (Rs. 2,500 only) less than rupees fifty-seven thousand only (Rs. 57,000 only) is made earlier by another three months, i.e., on the expiry of six (6) months from the date of this new partnership, i.e., 25th March, 1962."
48. If these clauses are read as sub-clauses to Clause 9, the whole mystery is solved. The heading of Clause 9 is "that the shares in the profit and loss of parties 1 to 5 shall be as under : ". Then follows five sub-clauses giving the shares in profits of the five partners. Sub-clause (6) deals with the case of Smt. Vimla Kapur. In Sub-clause (6)(a) it has been provided that Smt. Vimla Kapur will be entitled to five (5) paise profit in a rupee. Sub- Clause (6)(b) further makes a provision about guaranteed profits to Smt. Vimla Kapur and Sub-clause (6)(c) specifically provides that Smt. Vimla Kapur shall not be liable for any losses, debts and liability of previous partnership or any of the parties 1 to 5 or of the new partnership in any manner whatsoever. So Sub-clause (6)(a), (b) and (c) deal with the rights of Smt. Vimla Kapoor and it is specifically provided that she will not be responsible for any loss under the new partnership also. Sub-clause (7) of Clause 9 then provides about the guaranteed profits of Dr. Rajinder Nath and it is specifically provided that he shall not be liable for any loss to the partnership. He has also been given share of 10 paise in a rupee from the profits, if any, and in case of excess of any profit accruing over and above the sum payable to him as a guaranteed profit, he shall be entitled to payment of further profit as calculated at the rate of 10 paise in a rupee. It is, therefore, clear that Sub-clause (7) deals with the case of Dr. Rajinder Nath. Sub-clause (8) of Clause 9 provides for the payment of the loans, contributions and investments along with guaranteed least profits and further profits to Dr. Rajinder Nath and Smt. Vimla Kapur. Sub- Clause (9) provides the time limit for the repayment of the guaranteed profits and principal amount. Then follows the main Clause 10. By reading these provisions of Clause 9, which are in the form of sub-clauses, as I read them, it is apparent that the cent per cent, profits have been clearly earmarked. Out of a rupee, 85 paise share out of the profits goes to the first five partners as specified in Sub-clauses (I) to (5) of Clause 9 and 5 paise share out of a rupee vests in Smt. Vimla Kapur and 10 paise share out of a rupee is given to Dr. Rajinder Nath. Therefore, it is not correct to contend that the cent. per cent. shares in the profits have not been allocated. The contention that only 90 paise share out of one rupee profit has been enumerated in the deed is without any merit. In fact, when Clause 9 is taken into consideration along with its nine sub-clauses, the whole picture regarding the distribution of profits becomes clear and cent. per cent. profit in different proportions have been allocated to the persons mentioned in the sub-clauses. The error in the numbering of the Clauses in the paper-book has to be ignored and the deed has to be interpreted in a consistent and harmonious manner.
49. As regards the losses, it is clear in the sub-clauses that the losses, if any, have not to be shared by Smt. Vimla Kapur or Dr. Rajinder Nath. The entire losses are to be borne by the other five partners. As to what will be the share in the losses qua the five partners, after reading the various sub-clauses of the deed, it is apparent that in addition to the share of losses, which each of them is liable to pay, in the same ratio proportion as that of their profits, they have to distribute the 15 paise share of losses out of one rupee in the same ratio proportion as they are entitled to the profits as mentioned in Sub-clauses (I) to (5). It is true that this is not specifically mentioned in the deed, but the reading of the whole clause shows that Smt. Vimla Kapur and Dr. Rajinder Nath were not to share any loss and the other five partners undertook to bear the same in the same ratio proportion as they were entitled to the profits and further undertook to distribute the 15 paise share of losses out of a rupee in the same ratio proportion as they are entitled to profits. Therefore, it is idle to contend that the partnership deed is defective as it has failed to give the specific shares of profit and loss.
50. As regards the contention of the learned counsel for the revenue that since the financial powers under Clause 17 of the agreement given to Smt. Vimla Kapur are very wide and, therefore, the partnership deed is not legally valid, it will suffice to say that merely because a particular partner is given the financial control in the management of the affairs of the partnership so as to carry on the business effectively, it cannot be said that the principle of agency has been violated. It is apparent from the reading of Clause 17 that Teja Singh, partner, was the managing director of the new partnership but his power over the accounts and their operation and on the financial policy were controlled by Smt. Vimla Kapur and she could give directions and that the nature of expenditure, the manner and the limit of expenditure, were not to be departed from the statement of expenditure as made to Smt. Vimla Kapur, party No. 6. In my opinion, the provisions of Section 4 of the Indian Partnership Act are not violated by this clause. This Section only provides that the partnership is a relation between persons who have agreed to share the profits of a business carried on by all or any of them for all. In the present case, all the partners decided to share the profits of the business in accordance with the terms of the partnership deed. Merely because, the financial powers of the partnership have been subjected to the supervision and control of Smt. Vimla Kapur, because of the fact that she was instrumental in arranging loan of Rs. 50,000 from her brother, Dr. Rajinder Nath, would not, in any way, violate the provisions of section 4 of the Partnership Act. Nor is it shown that any other provision of the Partnership Act is violated on this account. The business in question can be carried on by all or any of them acting for all. The power given to Smt. Vimla Kapur at the most can be termed as a working arrangement for controlling the finances of the partnership which was considered necessary for bringing into being the partnership. This course cannot be objected to as it does not violate any provision of law or principle of partnership. It was held by their Lordships of the Supreme Court in Commissioner of Income-tax v. A. Abdul Rahim and Co. [1965] 55 ITR 651, that merely because a particular partner in the partnership deed is a benamidar is no ground to reject the registration of the firm under Section 26A of the Indian Income-tax Act, 1922, At the most it can be said that Smt, Virnla Kapur became a partner in order to safeguard the interests of Dr. Rajinder Nath . and it was because he had advanced Rs. 50,000, and, therefore, she was given some financial powers in the management of the partnership, but this by itself would not be a ground to hold that the partnership was not genuine. Even the existence of a benamidar partner in a partnership does not justify the refusal to register the partnership.
51. I have already found that merely because there are provisions in the deed which provide safeguards to the repayment of the loan with guaranteed profits and other profits, if any, to Dr. Rajinder Nath, or that he was given a share of 10 paise in a rupee in the profits, would not make the partnership deed illegal in the eyes of law. Similarly, there is no other ground as has been discussed above to hold that the partnership was legally defective. In this view of the matter, I am of the firm opinion that the partnership deed is not, in any way, defective in law and the circumstances under which this partnership has come into existence cannot be ignored. It is an admitted fact that the firm, M/s. Eastern [Commercial Corporation, was carrying on business and was registered with the income-tax department up to the assessment year 1961-62. It is not disputed that on April 1, 1961, there was a change in the constitution of the firm when the fifth partner, Shri Jeevinder Singh, was taken in. There is no denial of the fact that the financial position of the firm was not sound and it was badly in need of funds to carry on its commitments. It is an admitted fact that the firm approached Shri D. N. Kapur, Manager, Oriental Bank of Commerce, Patiala, and Smt. Vimla Kapur, wife of Shri D. N. Kapur, for their help for arranging the finances. It is again admitted that Dr. Rajinder Nath is the brother of Smt. Vimla Kapur and it was Smt. Vimla Kapur, who had been instrumental in arranging a sum of Rs. 50,000 as loan from her brother on the conditions specified in the partnership deed. Further, it is admitted that besides arranging a loan of Rs. 50,000, Smt. Vimla Kapur contributed Rs. 5,000 as capital towards the partnership. It is not the case of the revenue that Smt. Vimla Kapur or Dr. Rajinder Nath are in any way related to the other five partners or they are their friends. Circumstances in which the firm admitted Smt. Vimla Kapur as its partner are not in dispute. The five partners of the firm were under a severe financial strain and in this situation they agreed to give some easy terms to Smt. Vimla Kapur as it was only on these conditions that she was prepared to get the loan of Rs. 50,000 arranged and to pay Rs. 5,000 as share capital in the partnership capital. These circumstances clearly go to point out that there was nothing hanky-panky in bringing the new partnership into existence, but it was the dire need of the partners to reconstitute the firm as they did by bringing in Smt. Vimla Kapur as a partner. The statement of Smt. Vimla Kapur has to be taken into consideration while keeping in view the above-mentioned facts and the various terms of the partnership instrument. No doubt, some of the answers given by her to the questions put to her when she was examined before the Appellate Assistant Commissioner on March 6, 1968, that is, after about seven years of the partnership coming into existence and also when the partnership had come to an end, are against the facts mentioned in the deed inasmuch as she stated that Teja Singh, his three sons and the other persons were partners in the partnership. She could not disclose the names of the sons of Teja Singh, who were partners and that she could not disclose the capital investment of the other partners, but this by itself is nothing. Teja Singh and his sons are not related to Smt. Vimla Kapur. It was Teja Singh alone who was known to her and to her husband according to her statement. It was again Teja Singh who approached her and her husband for getting the loan. Teja Singh was the managing director and he was in fact managing the whole show even on behalf of his partner-sons. Therefore, if she could not tell the names of the sons of Teja Singh and could not tell as to how many of them were partners, that fact would not entitle us to conclude that she was not a genuine partner.
52. Further, her statement that her share in the firm was 10 paise in a rupee, while in fact according to the deed it was 5 paise, is again not very material keeping in view all the circumstances of the case. It is to be seen that she is the wife of Shri D. N. Kapur, who is the Manager of Oriental Bank of Commerce, Patiala, whom Shri Teja Singh contacted for financial help. It cannot be ignored that it was Mr. D. N. Kapur, who in fact conceived the whole arrangement for the investment of the money of his brother-in-law, Dr. Rajinder Nath, and his wife, Smt. Vimla Kapoor. It is, therefore, apparent that Shri D. N. Kapur, Manager of the Oriental Bank of Commerce, Patiala, completed the whole deal. The name of Smt. Vimla Kapur was only mentioned in the deed because the bank manager himself could not enter into the partnership. In this situation, Smt. Vimla Kapur cannot be expected to know all the details of the partnership deed when it is apparent that it was through her husband that the whole show was managed. Dr. Rajinder Nath lives at Delhi. He advanced the loan of Rs. 50,000 only because of Shri D. N. Kapur, Manager, Oriental Bank of Commerce, From the circumstances it is clear that in fact the whole show on behalf of Smt) Vimla Kapur was managed by Shri D. N. Kapur and in this manner she cannot be blamed if she could not give certain answers correctly.
53. Moreover, Smt. Vimla Kapur was examined before the Appellate Assistant Commissioner, after about seven years and no one is expected to remember the minor details after such a long time, especially when the partnership had already come to an end. Even a person may have defective memory and may not be able to reproduce the exact facts after such a lapse of time. Therefore, her statement alone cannot be made the basis of the finding that the firm is not genuine.
54. I further find that annexure "D" in the paper book shows that the accounts of the firm in question were opened in the Oriental Bank of Commerce Ltd., Patiala, of which Mr. D. N. Kapur was the manager. A certificate dated December 24, 1969, shows that M/s. Eastern Commercial Corporation, Patiala, had a current account in this bank and the number of the said account was 223, which account stands closed and that the said account was being operated by Mrs. Vimla Kapur as partner. This document would clearly show that the partnership deed, after having been entered into, was implemented and Smt. Vimla Kapur operated upon the accounts of the partnership firm. It is not denied that she did contribute a sum of Rs. 5,000 as her capital share and so also a loan of Rs. 50,000 was taken by the partnership from Dr. Rajinder Nath.
55. Moreover, the fact that in the partnership, Smt. Vimla Kapur was having only a share of five paise profit in a rupee would again be a circumstance which would show that it was not with a view to evade income-tax that a non-genuine firm was being brought into existence. It is to be noted that the old firm with five partners already stood registered with the income-tax authorities. The five partners would not have dissolved the partnership merely for the sake of evading tax to the extent of five paise out of a rupee by introducing a bogus partner. For the purposes of Section 185 of the Act, the underlying idea, which is to be kept in mind, is that no bogus firm is brought into existence in order to evade the payment of income-tax. I am fortified in my view by a decision of the Madhya Pradesh High Court in United Patel Construction Co. v. Commissioner of Income-tax [1966] 59 ITR 424, 426, 427, where it held as follows :
"The Income-tax Officer is entitled to enquire whether an instrument of partnership is intended by the parties to be really effective as governing their rights and liabilities inter se in relation to the partnership business or whether it is only a pretence to escape liability for tax. But a conclusion that a partnership is not genuine cannot be grounded only on suspicion. The Tribunal's finding on the point will be insupportable if it is based on no evidence or upon irrelevant considerations or upon a view of facts which could not reasonably be entertained."
56. In my view, all the facts and circumstances referred to above lead to an irresistible conclusion that the firm in question was a genuine one and the income-tax authorities went wrong in refusing the registration to the said firm. The question of law referred to us, in my opinion, should be answered in the affirmative and is hereby being answered accordingly.
57. order of the court.--In view of the difference of opinion between us on the question of law referred for our opinion by the Income-tax Appellate Tribunal, we direct that the case be placed before the learned Chief Justice for nominating a third judge of this court to hear and decide the same in accordance with the provisions of Section 259(2) of the Income-tax Act, 1961.
Bal Raj Tuli, J.
58. This reference has been placed before me for decision because of the difference of opinion between P. C. Pandit J. and B. S. Dhillon J. The facts have been set out in detail in the judgment of both the learned judges and I need not re-state them.
59. The first question for decision in the reference is whether the findings of fact recorded by the Income-tax Tribunal, that Smt. Vimla Kapur was not a partner in the firm and the partnership was not genuine, can be said to be vitiated so as to entitle this court to reappraise the evidence pertaining to those findings. It is submitted on behalf of the revenue that in case the assessee wanted to challenge the findings of fact recorded by the Tribunal, a specific question on that point should have been got referred. P. C. Pandit J. has agreed with this submission and has held that no specific question challenging the findings of fact has been got referred and, therefore, those findings of fact are binding on this court. B. S. Dhillon J. has taken a contrary view and, in my opinion, rightly. The application for reference submitted by the assessee has not been made a part of the statement of the case, but the last paragraph of the statement of the case, reproduced below, clearly leads to the conclusion that the findings of fact bad been challenged and that the Tribunal intended that this court should give a finding whether those findings were legally correct or not or whether the inference of law drawn from the facts found was correct or not. That paragraph reads as under :
"The assessee's contention before the Tribunal was that the partnership was registered with the Registrar of Firms and Smt. Vimla Kapur was one of the partners of the firm. Since she was instrumental in arranging the finances, she enjoyed greater powers than the other partners. It was also urged on behalf of the assessee that a certificate from the bank was also produced before the authorities to the effect that Smt. Vimla Kapur was operating the bank account of the firm and that, therefore, there was no scope for holding that Smt. Vimla Kapur was not a partner. It was further contended before the Tribunal that the firm with 5 partners had already been registered and the introduction of the sixth partner who was instrumental in raising the finances required by the firm's business with 5 paise share would not make the firm ingenuine. But those contentions were not accepted by the Tribunal who upheld the order of the revenue authorities refusing registration to the firm."
60. I arn, also, in agreement with the conclusion of B. S. Dhillon J., that the finding of the Tribunal, that Suit. Vimla Kapur was not a partner of the firm, is vitiated and that it should be held that she was a partner of the firm, but, with great respect, I do not agree with the learned judge that the partnership was entitled to registration. My reason for coming to this conclusion is that the partnership, as constituted, really consisted of seven partners, that is, Teja Singb, Mohinder Singh, Jeevinder Singh, Bhag Singh, Deva Singh, Smt. Vimla Kapur and Dr. Rajinder Nath ; and since Dr. Rajinder Nath did not join in the execution of the partnership deed and in the making of the application for registration of the firm under Section 185 of the Income-tax Act, the assessee-firm was not entitled to registration. There is no difference in. the position of Smt. Vimla Kapur and Dr. Rajinder Nath qua the membership of the firm. Both were creditors who had advanced money to the other five partners of the firm in order to enable them to complete their contract with the Punjab State Electricity Board. Both of them were to be paid guaranteed profits irrespective of the fact whether the firm earned a profit or incurred a loss. The only difference was that Smt. Vimla Kapur was given the control over the finances of the firm by providing that she alone would be authorised to sign cheques on behalf of the firm and all payments were to be made with her consent; even the other five partners were to withdraw the amount for their private use from the firm with her consent. Dr. Rajinder Nath was not to take part in carrying on the business of the firm, but he was entitled to guaranteed profits the amount of which was to depend on the period for which the amount lent by him remained outstanding and was not repaid to him and in addition thereto he was to be paid 10 per cent. of. the profits of the firm irrespective of the fact that he was repaid the entire amount advanced by him even before the contract with the Punjab State Electricity Board came to an end. Smt. Vimla Kapur was also allowed guaranteed profits on a sliding scale in. addition to 5 per cent, share in the profits of the firm. The interest of Dr. Rajinder Nath in the firm was to be watched by Smt. Vimla Kapur who was his wife's brother's wife. The amount advanced by him was to be secured by mortgage of property as mentioned in Clause 6 of the deed of partition. He was to be paid interest at the rate of 12 per cent, per annum by the firm and parties 1 to 5 if the amount of Rs. 59,500 mentioned in Clause 9 of the deed was not paid within one year. This stipulation contained in Clause 11 of the partnership deed is as under :
"It is also further agreed that interest at the rate of 12 per cent. per annum will be payable by the new partnership and parties 1 to 5 to Dr. Rajinder Nath aforesaid until the date of recovery or repayment of the entire sum of Rs. fifty-nine thousand and five hundred only (Rs. 59,500 only) as agreed above, if the same stands over as unpaid or unrealised or unrecovered on the expiry of one year as fixed hereinbefore from the date of this new partnership as mentioned above. It is also further agreed that the time and the dates fixed as above are the essence of the contract and its Clauses of payment, realisation and recovery."
61. Clause 25 of the deed of partnership is also significant. It provides that "the balance-sheet of the accounts of the new partnership and previous partnership so far as it may be, shall be prepared every three months until determination or cancellation of the said contract, and shall be furnished immediately to Dr. Rajinder Nath, aforesaid". According to Section 4 of the Indian Partnership Act, partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. All the ingredients of this section are fulfilled by Dr. Rajinder Nath. He had agreed to share the profits of the business which was being carried on by the five partners previous to their borrowing money from him and Mrs. Vimla Kapur and that business was to be carried on by Teja Singh as the managing partner and Mrs. Vimla Kapur as the controller of finance on behalf of the firm. The duties of the other partners of the firm were not specified in the deed of partnership. Thus, these two partners were to carry on business, acting for all including Dr. Rajinder Nath. It is also significant to note that to the extent of the amount of guaranteed profits, the term used is "profit" and not interest whereas in Clause 11, provision for payment of interest to him has been made. The use of the phrase "guaranteed profits "clearly shows that it was not by way of interest, but was on account of. Dr. Rajinder Nath's having agreed to become a creditor-cum-partner in the venture, just like Smt. Vimla Kapur, who was to watch his interest as well. If Dr. Rajinder Nath had been treated only as a creditor, there would have been no provision of guaranteed profits and a percentage of the profit in addition thereto. In the case of a creditor, any amount paid by way of return on the money borrowed from him is treated as expenditure after deducting which along with the other expenses, the net profits distributable amongst the partners are determined. According to the terms of the deed of partnership, the net profits had to be distributed among seven persons including Dr. Rajinder Nath, and not that the amount paid to him was first to be deducted from the profits and the net profits determined thereafter had to be distributed amongst the six partners of the firm. He can be easily termed as having been a sleeping partner of the firm. It is not necessary that all the partners must take part in Carrying on the business. He was to be kept in constant touch with the affairs of the firm by drawing up the balance-sheet every three months, a copy of which was to be supplied to him under Clause 25 of the deed of partnership. The partnership was to last till the amount mentioned in Clause 9 of the partnership deed was repaid to Dr. Rajinder Nath and Smt. Vimla Kapur or till the contract of the firm with the Punjab State Electricity Board came to an end. Thus, the duration of the firm was co-extensive with the period during which Dr. Rajinder Nath and Smt. Vimla Kapur remained the creditors of the firm. In law, therefore, Dr. Rajinder Nath was as much a partner of the firm as Smt. Vimla Kapur and since he did not sign the partnership deed and the application for the registration of the firm, the Income-tax Officer rightly declined to register the firm and the appeals against his order were rightly disallowed.
62. The learned counsel for the revenue has, however, strenuously argued that the deed of partnership was meant to safeguard the interests of Dr. Rajinder Nath and Smt. Vimla Kapur as creditors of the firm and both of them could enforce their rights as creditors only by reference to the deed of partnership and, therefore, either this deed constituted an arrangement between the creditors and the partners of the firm or constituted a partnership among all the seven parties mentioned above. Thus, looking from any angle, the assessee-firm was not entitled to registration under Section 185 of the Income-tax Act. To counter this submission, the learned counsel for the assessee has relied on the observations of the Income-tax Appellate Tribunal that no fault could be found with the partnership deed as such and, therefore, the revenue cannot now challenge that having regard to its terms, the deed was not a partnership deed, but was a deed to safeguard the interests of the creditors. There is no doubt that the partnership deed is a complex document; it makes provisions for the running of the business in partnership and also prescribed the terms on which the loans were taken from Dr. Rajinder Nath and Smt. Vimla Kapur and the manner of their repayment. As I look at the matter, the deed was a composite deed between the partners of the firm and their creditors, namely, Dr. Rajinder Nath and Smt. Vimla Kapur, who also became partners in the venture and that partnership was to last till the amounts mentioned in Clause 9 of the partnership deed were repaid to them or till the termination of the contract of the firm with the Punjab State Electricity Board, whereafter the accounts were to be taken and profits distributed.
63. It is argued by the learned counsel for the assessee that Dr. Rajinder Nath could not sue for the dissolution of the firm and rendition of accounts on the basis of the partnership deed in which he was not described as a partner. The right to dissolve the firm and claim accounts is an inherent right of a partner of a firm and if a person cannot exercise that right, he cannot be termed as a partner. After due consideration, I do not find any merit in this submission. It is true that in the deed of partnership, Dr. Rajinder Nath is not mentioned as a partner, but this fact would not have stood in his way to prove himself as a partner if at any time he so intended. Under section 69(3) of the Partnership Act, the registration of a firm is not necessary to entitle a partner thereof to enforce his right to sue for the dissolution of the firm or for accounts of a dissolved firm or any right or power to realise the property of a dissolved firm. Under section 42 of the said Act, a firm is dissolved if constituted for a fixed term, by the expiry of that term, or, if constituted to carry on one or more adventures or undertakings, by the completion thereof. In the case of the assessee, the firm would have got dissolved on the repayment of loans taken from Dr. Rajinder Nath and Smt. Vimla Kapur, or on the completion of the contract with the Punjab State Electricity Board. There was no qnestion of dissolving the firm earlier by notice as in the case of partnership at will or through the court as is mentioned in Section 44 of the said Act. All the rights of Dr. Rajinder Nath to the return of the amount advanced by him to the firm and the claim for guaranteed profits of 10 per cent. share of the profits earned by the firm, and interest on his amount if the same remained outstanding after the expiry of one year, could be enforced by him as against the other partners and the assessee-firm only on the basis of the partnership deed. He is, therefore, deemed to be a party to this deed. While determining his share of 10 per cent. in the profits, he was entitled to the rendition of accounts and to inspect and scrutinize the books of accounts in order to find out whether the profits had been correctly determined. Such rights are not available to a mere creditor of the firm. I am, therefore, of the view that Dr. Rajinder Nath was a partner of the firm and since he did not sign the partnership deed nor joined the other partners in making the application for the registration of the firm, the assessee-firm was not entitled to registration under Section 185 of the Income-tax Act.
64. It has also been argued by the learned counsel for the assessee that Dr. Rajiader Nath could not be considered to be a partner of the firm because he could not carry on business on behalf of the firm and the essential ingredients of mutual agency between the partners was lacking. I have no hesitation in repelling this submission. It is true that Dr. Rajinder Nath could not carry on the business of the firm, but it is not essential that every partner must be able to carry on the business of the firm. All that is required is that the partners may authorise one or more of them to carry on the business on behalf of them all and that is what has been clone in the case of the assessee-firm, viz., Teja Singh was nominated as managing partner while Smt. Vimla Kapur was given control over the finances of the firm. On this ground, therefore, Dr. Rajinder Nath cannot be hold to be not a partner of the firm.
65. It has been strongly urged by the learned counsel for the revenue that the share of each partner in. the firm has not been specified in the deed of partnership. Whereas the profits of the firm have been distributed 100 per cent. amongst the six partners and Dr. Rajinder Nath, the provision for the share of losses is only to the extent of 85 per cent, and that too amongst five partners. Under section 182 of the Income-tax Act, the partners can claim set-off for the losses suffered by them and in the case of the partners of the assessee-firm set-off on account of the losses can be claimed to the extent of 85 per cent. and not 100 per cent. I do not think that on that ground the partnership can be termed as not genuine. If the share of the losses of the partners is less than 100 per cent. the revenue will not suffer because losses to the extent of the share of each partner may be allowed as set-off in his assessment against the other income in accordance with Section 182(2) of the Income-tax Act, 1961. It has been pointed out by Dhillon J., in his judgment that even the remaining 15 per cent. of the losses had to be shared by five partners excluding Smt. Vimla Kapur in the proportion in which they were to share 85 per cent. of the losses. Whether that is so or not, is not necessary to determine because the Income-tax Officer will be entitled to disallow any loss claimed by a partner which is in excess of his share mentioned in the deed of partnership. To the creditors the liability of each partner is joint and several and to the full extent of the amount due.
66. For the reasons given above, the question referred to this court for decision is answered in the negative, that is, in favour of the revenue and against the assessee. Since the matter was not free from difficulty, there is no order as to costs.