# [1965] 2 S.C.R. 13

- **Citation:** [1965] 2 S.C.R. 13
- **Court:** Supreme Court of India
- **Decided:** 1964-11-04
- **Case number:** Civil Appeal No. 982 of 1963
- **Bench:** K. SUBBA RAo, J.C. Shah, s. M. SIKRI
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1965-2-s-c-r-13-3303
- **Pages:** 9

## Headnote

lnrome Tax Act, 1922, Section 16A registration of partnership--More
tha itwo partners-Otherwise genuine-Whether can be refused registration
w!wn one partner is benamidar.
Benamidar-Status of-If trustee of the real owner.
A partnership consisting of three partners was reconstituted to take in
a 4th partner who was a nephew of, and wa• given a part out of his own
share by, one of. the existing partners. The application by the new part·
nership firm for registration under s. 26-A of the Income-tax Act, 1922,
was rejected by the Income-tax Officer on the ground that as the new
partner was a benamidar, the partnership was not a genuine one. The
Appellate Assistant Commissioner, the Appellate Tribunal and the Hi~
Court, all took the view that the new partnership agreement was valid m
law and the fact that one of the partners was a benamidar of another was
not a sufficient ground for refusing to register the firm.
It was contended on behalf of the Revenue that apart from the fact
that the 4th partner was a dummy and therefore the new partnership was
not a genuine one, the actual share of the old partner was not what was
otated in the agreement but was the total of his apparent share and that
of the benamidar; to this extent the agreement did not contain a correct
1P<Cilication of the individual shares of partners as required under s. 26-A
and registration was, therefore, rightly rejected.
HELD : (dismissing the appeal)
(i) When a firm makes an application under s. 26-A of the Act for
registration, the Income-tax Officer can reject the application if he comes
to the conclusion that the partnership is not genuine or the instrument of
partnership has not specified correctly the individual shares of the partners.
But once he comes to the conclusion that the partnership is a genuine and
nlid one, he cannot refuse registration on the ground that one of the
partners is a benamidar of another. If the partnership is genuine and
legal, the share given to the benamidar will be correct specification of his
individual share in the partnership. The beneficial interest in the income
pertaining to the share of the said benamidar may have relevance to the
matter of assessment, but non in regard to the question of registration.
[210.F]
R. C. Mitter &: Sons v. C.J.T., Calcutta, (1959) Supp. 2 S.C.R. 641;
Cl.T. Madras v. Slvakasi Match Exporting Co., (1964) 53 I.T.R. 204;
Sir Sunder Singh Majithia v. Cl.T. C.P. &: U.P., (1942) 10 I.T.R. 457,
referred to.
ed. The Central Talkies Circuit, Malunga, (1941) 9 LT.R. 44, consider·
.Hirana".d Ramsukh \•. C.l.T., Hyderabad, (1963) 47 I.T.R. 598; P. A.
B
R<11u Chet11ar v. C.I.T., Madras, (1949) 17 I.T.R. 51, distinguished.
(ii) A benamidar is a mere trustee of the real owner and has no
~eneficial interest in the property or the business of the real owner. As
111 the case of a trustee, he possesses the legal character to enter into a
14
SUPREME COUllT REPORTS
[1965) 2 S.C.R.
partnetship with another,
and the fact that he is accountable for his
A
profits to, and has a right to be indemnified for his losses by, a third
party or even by one of the partners does not disgorge him to the said
character.
[190-E, G-H)
Gur Narayan v. Sheo Lal Singh, (1918), L.R. 46 I.A. I, Aruna Group
of Estates, Bodinayakanur v. State of Madras, (1962) 2 M.L.J 264, referred to.
B
.CIVIL APPELLATE JURISDICTION : Civil Appeal No. 982 of
1963.
Appeal from the judgment and order, dated April 4, 5, 1961
of the Gujarat High Court in Income-tax Reference No. 8 of 1960.
K. N. Ra;agopala Sastri and R. N. Sachthey, for the appellant. c
T. A. Ramachandran and 0. C. Mathur, for the respondent.

## Text

13
A
COMMISSIONER OF INCOME-TAX, AHMEDABAD
c
D
F
G
ll,
A. ABDUL RAHIM & CO., BARODA
November 4, 1964
[K. SUBBA RAo, J.C. SHAH AND s. M. SIKRI, JJ.]
lnrome Tax Act, 1922, Section 16A registration of partnership--More
tha itwo partners-Otherwise genuine-Whether can be refused registration
w!wn one partner is benamidar.
Benamidar-Status of-If trustee of the real owner.
A partnership consisting of three partners was reconstituted to take in
a 4th partner who was a nephew of, and wa• given a part out of his own
share by, one of. the existing partners. The application by the new part·
nership firm for registration under s. 26-A of the Income-tax Act, 1922,
was rejected by the Income-tax Officer on the ground that as the new
partner was a benamidar, the partnership was not a genuine one. The
Appellate Assistant Commissioner, the Appellate Tribunal and the Hi~
Court, all took the view that the new partnership agreement was valid m
law and the fact that one of the partners was a benamidar of another was
not a sufficient ground for refusing to register the firm.
It was contended on behalf of the Revenue that apart from the fact
that the 4th partner was a dummy and therefore the new partnership was
not a genuine one, the actual share of the old partner was not what was
otated in the agreement but was the total of his apparent share and that
of the benamidar; to this extent the agreement did not contain a correct
1P<Cilication of the individual shares of partners as required under s. 26-A
and registration was, therefore, rightly rejected.
HELD : (dismissing the appeal)
(i) When a firm makes an application under s. 26-A of the Act for
registration, the Income-tax Officer can reject the application if he comes
to the conclusion that the partnership is not genuine or the instrument of
partnership has not specified correctly the individual shares of the partners.
But once he comes to the conclusion that the partnership is a genuine and
nlid one, he cannot refuse registration on the ground that one of the
partners is a benamidar of another. If the partnership is genuine and
legal, the share given to the benamidar will be correct specification of his
individual share in the partnership. The beneficial interest in the income
pertaining to the share of the said benamidar may have relevance to the
matter of assessment, but non in regard to the question of registration.
[210.F]
R. C. Mitter &: Sons v. C.J.T., Calcutta, (1959) Supp. 2 S.C.R. 641;
Cl.T. Madras v. Slvakasi Match Exporting Co., (1964) 53 I.T.R. 204;
Sir Sunder Singh Majithia v. Cl.T. C.P. &: U.P., (1942) 10 I.T.R. 457,
referred to.
ed. The Central Talkies Circuit, Malunga, (1941) 9 LT.R. 44, consider·
.Hirana".d Ramsukh \•. C.l.T., Hyderabad, (1963) 47 I.T.R. 598; P. A.
B
R<11u Chet11ar v. C.I.T., Madras, (1949) 17 I.T.R. 51, distinguished.
(ii) A benamidar is a mere trustee of the real owner and has no
~eneficial interest in the property or the business of the real owner. As
111 the case of a trustee, he possesses the legal character to enter into a
14
SUPREME COUllT REPORTS
[1965) 2 S.C.R.
partnetship with another,
and the fact that he is accountable for his
A
profits to, and has a right to be indemnified for his losses by, a third
party or even by one of the partners does not disgorge him to the said
character.
[190-E, G-H)
Gur Narayan v. Sheo Lal Singh, (1918), L.R. 46 I.A. I, Aruna Group
of Estates, Bodinayakanur v. State of Madras, (1962) 2 M.L.J 264, referred to.
B
.CIVIL APPELLATE JURISDICTION : Civil Appeal No. 982 of
1963.
Appeal from the judgment and order, dated April 4, 5, 1961
of the Gujarat High Court in Income-tax Reference No. 8 of 1960.
K. N. Ra;agopala Sastri and R. N. Sachthey, for the appellant. c
T. A. Ramachandran and 0. C. Mathur, for the respondent.
The Judgment of the Court was delivered by
Subba Rao, J.
This appeal by certificate raises the question
whether the Income-tax Officer can refuse to register a genuine
D
partnersliJp entere.d into between more than 2 oersons on the
ground that one of them is only a benamidar for another.
The relevant facts may briefly be stated.
Three persons by
name Abdul Rahim Valibhai, Abdulla Rehman and Abdul Rahim
Malanghbhai, constituted a partnership having 9 annas, 5 annas E
and 2 annas share respectively. The said partnership was carrying
on business in goat and sheep skins. From the beginning of Samvat
year 2012 (15-11-1955 to 2-11-1956) there was a change in the
constitution of the said firm.
A 4th partner by name Abdul
Rehman Kalubhai was inducted into the partnership with 2 annas
share carved out of the 9 annas share of Abdul Rahim Valibhai.
F
The said Abdul Rehman Kalubhai is a nephew of Abdul Rahim
Valibhai.
On March 6, 1956, a partnership deed was executed
between the said 4 persons. Under the said partnership, Abdul
Rahim Valibhai, Abdulla Rehman, Abdul Rahim Malanghbhai and
Abdul Rehman Kalubhai had 7 annas, 5 annas, 2 annas and 2
annas share respectively. On May 8, 1956, the said firm presented
G
an application to the Income-tax Officer for its registration under
s. 26A of the Indian Income-tax Act, 1922, hereinafter called the
Act.
The Income-tax Officer held that the partnership was a
bogus one and, on that finding, refused to register it. The
assessee took up the matter on appeal to the Appellate Assistant
Commissioner, who held that the partnership agreement was Talid
H
in law and that the fact that one of the partners was a benamidar
of another was not a ground for refusing to register the firm, though
c. I. T. v. ABDUL RAHIM (Subba Rao,/.)
15
A it might entitle the Income-tax Officer to consider the income pertammg to the share of the benamidar as part of the income of
the real owner in assessing the latter's income to tax. The Incometax Officer questioned the correctness of the decision by preferring
an appeal to the Appellate Tribunal, Bombay Bench. The Tribunal
also held that the partnership was a genuine one and that the fact
B
that one of the partners gave away a small part of his share to his
nephew would not disqualify the partnership from being registered
under s. 26A of the Act.
At the instance of the Revenue the
following question was referred to the Hig~ourt :
''Whether a partnership in which one partner is the
C
benamidar of another partner could be registered under
s. 26A of the Indian Income-tax Act."
The learned Judges of the High Court thought that the question
as framed did not really bring out the true matter in controversy
between the parties and, therefore, they reframed the question as
0
follows:
"Whether on the facts and in the circumstances of
the case, the partnership constituted under the instrument
of partnership, dated 6th March 19 5 6 could be registered under Section 26A of the Indian Income-tax Act."
E .The learned Judges answered the question in the affirmative. They
held that as the partnership was a genuine one the fact that one
of the partners had no beneficial interest in his share by reason
of some arrangement between him and another partner would
not dioentitle the firm from being registered under the Act. Hence
the appeal.
Mr. Rajagopala Sastri, learned counsel for the Revenue, raised
before us the following two points : ( 1) Abdul Rehman Kalubhai
is only a dummy and therefore, the partnership is not a genuine
one; (2) even if Abdul Rehman Kalubhai is a benamidar of Abdul
Rahim V alibhai in respect of the 2 annas share in the partnership,
G Abdul Rahim Valibhai has in fact 9 annas share in the partnership; as the partnership deed shows that he has only 7 annas share
instead of 9 annas share, there is no correct specification of his
individual share within the meaning of s. 26A of the Act and,
therefore, the Income-tax Officer rightly rejected the firm's application for registration under s. 26A of the Act.
H
Learned counsel for the respondent, on the other hand, argued
that the question whether the partnership was genuine or not is
one of fact and indeed presumably for that reason the question
I Cl
SUPREME COURT REPORTS
(1965] 2 S.C.R.
of genuineness was not referred to the High Court by the Tribunal A
and that the learned counsel for the Revenue cannot now raise that
question before this Court. He further argued that, as the partnership is genuine, the circumstance that under some internal arrangement one of the partners is a benamidar of another partner will
not detract from its validity or disqualify it from being registered
.~
under the Act.
B
To appreciate the contentions it will be convenient at the outset
to read the relevant part of s. 26A of the Act and also the rules
made thereunder.
Section 26A.
(I) Application may be made to the
Income-tax Officer on behalf of any firm, constituted
under an instrument of partnership specifying the individual shares of the partners, for registration for the
purposes of this Act and of any other enactment for the
time being in force relating to income-tax or super-tax.
(2) The application shall be made by such person
or persons, and at such times and shall contain such particulars and shall be in such form, and be verified in such
manner, as may be prescribed; ahd it shall be dealt
with by the Income-tax Officer in such manner as may
be prescribed.
Rules 2 to 6B of the Rules made under s. 59 of the Act deal with
the registration of firms.
R u/e 2.
Any firm constituted under an Instrument
of Partnership specifying the individual shares of the
partners may, under the provisions of section 26A of the
Indian Income-tax Act, 1922 (hereinafter in these rules
referred to as the Act), register with the Income-tax
Officer, the particulars contained in the said Instrument
on application made in this behalf.
·
Such application shall be signed by all the partners
personally . . . . ..... .
Rule 4.
If, on receipt of the application referred
to in Rule· 3, the Income-tax Officer is satisfied that .
there is or was a firm in existence constituted as .shown in
the instrument of partnership and that the application
has been properly made, he shall enter in writing at the ·
foot of the instrument or certified copy, as the case may
be, a certificate in the following form .. · ..... .
c
•
D
E
F
G
H.
'
~
c. I. T. v. ABDUL RAHIM (Subba Rao, J.)
17
A
Rule 68.
In the event of the Income-tax Officer
B
c
being satisfied that the certificate granted under Rule 4,
or under Rule 6A, has been obtained without there being
a genuine firm in existence, he may cancel the certificate
so granted.
On a consideration of the said provisions, among others, this
Court in R. C. Mitter & Sons. v. Commissioner of In.come-tax,
Ca/cittta(' ), speaking through Sinha, J.,
as he then was, held
that in order a firm may be entitled to registration under s. 26A
of the Act, the following essential conditions must be satisfied, viz.,
(i) the firm should be constituted under an instrument of partnership, specifying the individual shares of the partners; (ii) an
application on behalf of, and signed by, all the partners and containing all the particulars as set out in the Rules must be made;
(iii) the application should be made before the assessment of the
firm under section 23, for that particular year; (iv) the profits or
losses if any of the business relating to the accounting year should
D
have been divided or credited, as the case may be, in accordance
with the terms of the instrument; and { v) the partnership must
be genui~e and must actually have existed in conformity with the
terms and conditions of the instrument of partnership,
in the
accounting year. This Court again in Commissioner of Income-tax,
E
F
Madras v. Sivakasi Match Exporting Co.( 2 ) held :
"The jurisdiction of the Income-tax Officer is, therefore, conBned to the ascertaining of two facts, namely,
(i) whether the application for registration is in conformity with the rules made under the Act, and (ii) whether
the firm shown in the docur.1cnt preeented for n;gistrar.ion
is a bogus one or has no legal existence."
It is, therefore, settled law that if a partnership is a genuine and
valid one, the Income-tax Officer has no power to reject its
registration if the other provisions of s. 26A of the Act and the
rules made thereunder are complied with.
G
In the present case the partnership was found to be a genuine
one. All the formalities prescribed by the rules have been complied with. The individual shares of the partners as shown in the
Instrument of Partnership have been specified in the application.
Therefore, unless there is some legal impediment in the way of a
benamidar of one of the partners being a partner of the firm, the
H
Income-tax Officer would not be exercising his jurisdiction if he
rejected the application for registration.
---
-~---- ---- ·------- --
--
(1) ]1959] Supp. 2 S.C.R. 641.
(2)j(1964) 53 I.T.R. 204, 209.
18
SUPREME COURT REPORTS
[1965] 2 S.C.R.
The first question, therefore, is whether the benamidar of a
A
person can be a partner of a firm. Under s. 2(6B) of the Act,
"firm", "partner" and "partnership" have the same meanings respectively as in the Indian Partnership Act, 1932 (IX of 1932) :
provided that the expression "partner" includes any person who
being a minor has been admitted to the benefits of partnership.
Under s. 4 of the Indian Partnership Act, "Partnership" is the B
relation between persons who have agreed to share thet profits of
a business carried on by all or any of them acting for all. If the
partnership is genuine, as it is held in the present case, it follows
that the 4 partners mentioned in the partnership deed must be
held to have agreed to share the profits of the business carried on
by them in the manner specified in the document. Indeed, in the C
present case the Instrument of Partnership and the application fo~
registration contain clear recitals that the 4 partners have clear and
definite shares in the profits of the firm.
The Judicial Committee in Sir Sundar Singh Majithia v. Commissioner of Income-tax, C.P. & U.P.(') posed the question that D
arises for consideration of the Income-tax Officer under s. 26A of
the Act. Sir George Rankin, speaking for the Board, said :
"When a document purporting to be an instrument
of partnership is tendered under Section 26-A on behalf
of a firm and application is made for registration of the
E
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 the1 business or whether
it has been executed by way of pretence in order to
escape liability for tax and without intention that its proF
visions should in truth have effect as defining the rights
of the parties as between themselves. To decide that an
instrument is in this sense not genuine is to come to a
finding of fact : .............. ".
In view of the finding given by the Tribunal that the In5trument G
of Partnership was genuine, it follows that it was not executed
as a pretence in order to escape liability for tax, but in truth it
defined the rights and liabilities of the parties between themselves.
This leads us to the question whether the benamidar can be
in law a partner of a firm. in the context of the right of a lienamidar H
to sue in his own nan1e to recover immoveable property, the
(!) (1942) M I.T.R. 457, 461462.
c. I. T. v. ABDUL RAlilM (Subba Rao, J.)
19
A Judicial Committee in Gur Narayan v. Sheo Lal Singh(') defined
the status of a benamidar in law thus :
"As already observed, the benamidar has no beneficial interest in the property or l;msiness that stands in
his name; he represents, in fact, the real owner, and so
B
far as their relative legal position as concerned he is a
mere trustee for him. . . . . . . . . . . . . The bulk of judicial
opinion in India is in favour of the proposition that in a
proceeding by or against the benamidar, the person
beneficially entitled is fully affected by the rules of res
judicata."
C
In Aruna Group of Estates, Bodinayakanur v. State of Madras( 2 )
a Division Bench of the Madras High Court, on the basis of the
said legal position, rightly held that the benami character did not
a11ect the benamidar's capacity as partner or his final relationship
wttb the other members of the partnership. It pointed out that
D
''if any partner is only a benamidar for another, it can only mean
that he is accountable to the real owner for the profits earned
by him from and out of the partnership." Therefore, a benamidar
is a mere trustee of the real owner and he has no beneficial interest
in the property or the business of the real owner. But in law, just
as in the case of a trustee, he can also enter into a partnership
E with others.
H so, what is the principle of law which prohibits the benamidar
of a partner from being also a partner along with the said partner
with others ? Qua the other partners, he has separate and real
existence; he is governed by the terms of the partnership deed; his
rights and liabilities_ are governed by the terms of the contract and
F
by the provisions of the Partnership Act; his liability to third
parties for the acts of the partnership is co-equal with that of the
other partners; the other partners have no concern with the
real owner; they can only look to him for enforcing their rights
or discharging their obligations under the partnership deed. Any
internal arrangement between him and another partner is not
G
governed by the terms of the partnership; that arrangement operates
only on the profits accruing to the benamidar; it is outside the
partnership arrangement. If a benainidar possesses the legal
character to enter into a partnership with another, the fact that
he is accountable for his profits to, and has the ri_ght to be indemH
nified for his losses by, a third party or even by one of the partners
docs 11ot disgorge him of the said character.
(1) (1918) L.R. 46 I.A. I, 9.
(2) (1962) 2 M.L.J. 294.
20
SUPREME COURT REPORTS
[1965] 2 S.C.R.
It is true that different considerations may arise, if the part~
A
ncrship is only between two persons of whom one is a benamidar
of the other. In that event the partnership may be bad not because
the benamidar has no power to enter into the partnership but
because the partnership in law is the relationship between at least
two persons and in the case of a; benamidar and the real owner
in fact there is only one person. It may also be that in a case B
where a benamidar is taken as a partner with the consent of the
other partners, he will only be a "dummy". We do not propose
to express any final opinion on the said two questions, as they do
not arise in this appeal.
A Division Bench of the Bombay High Court in The Central
C
Talkies Circuit, Matunga, In re(') held that there was evidence
to justify the finding of the Income-tax authorities that the alleged
partnership was not a genuine partnership and that they acted
rightly in refusing to register the finn. That finding was sufficient
to dispose of the reference before the Court. But Bea1,1mont, C.J.,
in the course of the judgment made some observations which lend
D
support to the contention of the appellant. The learned Chief
Justice said :
"Speaking for myself, I should say that if it were
shown that one of the partners was only a nominee of a
share allotted to him or her for another partner, the deed
E
would not then spe:ify correctly the individual shares. 1
think it must specify correctly the individual and beneficial shares, because that is a matter which is relevant
from the point of view of the Income-tax authorities. Jf
the Assistant Commissioner had any evidence before him
to lead to the conclusion that the mother in the case was
F
nOi really entitled to a beneficial interest of 4t annas
~hare, I think .fte was justified in refusing to register the
deed."
With great respect, we cannot, agree with the said observations.
If a benamidar has the character of a trustee and, therefore, can G
enter into partnership with another in his own name, the share
allotted to him in the partnership must be held to specify correctly
his individual share therein. Kania, J., as he then was, did not
express any opinion on this a~pect, of the case. A Division Bench
of the Andhri1 Pradesh High Court in Hiranand Ramsukh v. Commission~r of Income-tax, Hyderabad( 2 ) held that a person shown
H
as a partner in a partnership deed was not a genuine partner and
( 1) (1941) 9 I.T.R. 44, 52.
(2) (1963) 47 l.T.R. 598.
c. I. T. v. ABDUL RAHIM (Subba Rao, J.)
21
A
therefore the Income-tax Officer was perfectly justified in refusing
to register the firm. There the assessee-firm originally consisted of
2 partners with equal shares, namely, Ramprasad and Bhagwandas.
After the death of Bhagwandas, Ramprasad took his aunt, Mrs.
Chandrabai, and his minor son as
partners. The Income-tax
Officer held that both Mrs. Chandrabai and Ramprasad's minor
B
son were not genuine partners but were mere dummies, and they
were shown merely as partners to reduce the incidence of tax. As
two of the three partners were not genuine partners, the partnership
itself was not genuine. Though some of the observations in the
judgment are wide, that decision does not touch the present case.
The decision of the Madras High Court in P. A. Raju Chettiar v.
C
Commissioner of Income-tax, Madras(') is also one where the
finding was that the _partnership was not a genuine one.
That
decision also is besides the point.
The legal position may be stated thus : When a firm makes
an application under s. 26A of the Act for registration, the IncomeD tax Officer can reject the, same if he comes. to the conclusion that
the partnership is not genuine or the instrument of partnership does
not specify correctly the individual shares of the partners. But once
he comes to the conclusion that the partnership is genuine and a
valid one he cannot refuse registration on the ground that one of
the partners is a benamidar of another. If the partnership is genuine
E
and legal, the share given to the benamidar will be the correct
specification of his individual share in the partnership.
The
beneficial interest in the income pertaining to the share of the said
benamidar may have relevance to the matter of assessment, but
none in regard to the question of registration.
F
In the result, for the aforesaid reasons, we hold that the answer
given by the High Court is correct. The appeal fails and is dismissed with costs.
Appeal dirmissed.
(I) (1949) 17 J.T.R. 51.