# K. D. KAMATH & co v. C.I.T, (Vaidialingam, /.)

- **Citation:** [1972] 1 S.C.R. 1034
- **Court:** Supreme Court of India
- **Decided:** 1971-10-11
- **Case number:** Civil Appeal No. 1242 of 1968
- **Bench:** C. A. Vaidialingam, P. Jaganmohan Reddy
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/k-d-kamath-co-v-c-i-t-vaidialingam-5320
- **Pages:** 21

## Headnote

B
Indian Income-tax Act, !922, s. 26A-Indian Partnership Act, 1932,
ss. 4, 14, IS-Working partners to work under direction and control of
111am;·ging partner-Working Partners not authorised to pledge property
of firm or raise loans on behalf of firm-Whether part11ership lacks essen·
L,iat elentent of agency of partners-Firn1 lVhether to be registered under
s. 26A of Income-tax Act.
The appellant was a firm consisting of six partners and the partnership
was constituted under a document dated March 20, 1959, the business
of the partnership having already commenced from October I, 1958. The
partnership was registdred under the Indian Partnership Act 1932 on or
about August 11, 1959. For the assessment year 1959-60 corresponding
to the previous year ending March 31, 1959 the appellant filed an application for registration under s. 26A of the Indian Income-tax Act, 1922.
The Income-tax Officer by his order dated September 28, 1960 declined
to grant registration on the ground that there was
no
relationship of
partners inter se created under the
partnership deed,
The Appellate
A"istant Commissioner upheld the order of the Income-tax Officer. The
Tribunal held that there was agreement to share profits between partners
and each of the partners could act as agent of all and therefore the re·
quirements of partnership were fully satisfied.
In the reference th' High
Court held that els. 8, 9 and 16 of the deed showed that the management
as Wt!ll as the control of business was entirely left in the hands of the
first partner and that the other partners were only
to serve under
his
directions and further they had no authority to accept any business except
with the consent of the first partruer, nor could they raise any loan or
pledge the firm's interest. On this reasoning the High Court came to the
conclusion that there was no relationship of partners created under the
partnership deed and as the essential element of agency was lacking the
oppellant was not eligible to be· granted registration under s. 26A.
In appeal to this Court,
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HELD : (i) The· mere nomenclature given to a document is by itself
not sufficient to hold that the. document in question is one of partnership.
Two essential conditions to be satisfied are (1) that there should be an
agi'eement to share profits as well as the losses of the business and (2)
the business must be carried on by all or any of them acting for all within
the meaning of the definition of partnership under s. 4 of the partnership
G
Act.
The fact that the exclusive power to control by agreement of the
paTties is vested in one partner or the further circumstance that only on.e
partner can operate the bank account or borrow on behalf of the firm
are not destructive of the theory of partnership prm;ded the two essential
conditions mentioned earlier are satisfied. [1050 F-G]
(ii) Under the partnership deed in question the relationship which
had reen brought into existence between the six parties was a relationship
H
of partners who had ;igreed to share profits and losses of the business
carried dn by all or any of them acting for all and it satisfied the defini•
lion of partnership under s. 4 of the Partnership Act. There was sharing
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K. D. KAMATH & co. v. C.I.T, (Vaidialingam, /.)
1035
of the profits or losses of the business by the partners in the ratio of the
proportion mentioned in cl. 5. That clause read with other clauses clearly
showed that the first condition namely of all persons agreeing to share
profits or losses was satisfied.
Even on the basis that the entire control
or management of the business was vested in Party No. 1 and that parties
2 to 6 were working partners who had to work under his directions, from
all the other circumstances it was clear that the conduct of bus;ness by
Party No. 1 was done by him acting for all the partners. There was no
indication to the contrary in the partnership deed.
Thelrefore even without anything more it was clear that as the partnershi

## Text

_Characters 0–39,873 of 56,312. This is a partial read: ask again with offset=39873 for what follows._

1034
K. D. KAMATH & CO.
C.J.T., BANGALORE
October 11, 1971
A
[C. A. VAIDIALINGAM AND P. JAGANMOHAN REDDY, JJ.J
B
Indian Income-tax Act, !922, s. 26A-Indian Partnership Act, 1932,
ss. 4, 14, IS-Working partners to work under direction and control of
111am;·ging partner-Working Partners not authorised to pledge property
of firm or raise loans on behalf of firm-Whether part11ership lacks essen·
L,iat elentent of agency of partners-Firn1 lVhether to be registered under
s. 26A of Income-tax Act.
The appellant was a firm consisting of six partners and the partnership
was constituted under a document dated March 20, 1959, the business
of the partnership having already commenced from October I, 1958. The
partnership was registdred under the Indian Partnership Act 1932 on or
about August 11, 1959. For the assessment year 1959-60 corresponding
to the previous year ending March 31, 1959 the appellant filed an application for registration under s. 26A of the Indian Income-tax Act, 1922.
The Income-tax Officer by his order dated September 28, 1960 declined
to grant registration on the ground that there was
no
relationship of
partners inter se created under the
partnership deed,
The Appellate
A"istant Commissioner upheld the order of the Income-tax Officer. The
Tribunal held that there was agreement to share profits between partners
and each of the partners could act as agent of all and therefore the re·
quirements of partnership were fully satisfied.
In the reference th' High
Court held that els. 8, 9 and 16 of the deed showed that the management
as Wt!ll as the control of business was entirely left in the hands of the
first partner and that the other partners were only
to serve under
his
directions and further they had no authority to accept any business except
with the consent of the first partruer, nor could they raise any loan or
pledge the firm's interest. On this reasoning the High Court came to the
conclusion that there was no relationship of partners created under the
partnership deed and as the essential element of agency was lacking the
oppellant was not eligible to be· granted registration under s. 26A.
In appeal to this Court,
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HELD : (i) The· mere nomenclature given to a document is by itself
not sufficient to hold that the. document in question is one of partnership.
Two essential conditions to be satisfied are (1) that there should be an
agi'eement to share profits as well as the losses of the business and (2)
the business must be carried on by all or any of them acting for all within
the meaning of the definition of partnership under s. 4 of the partnership
G
Act.
The fact that the exclusive power to control by agreement of the
paTties is vested in one partner or the further circumstance that only on.e
partner can operate the bank account or borrow on behalf of the firm
are not destructive of the theory of partnership prm;ded the two essential
conditions mentioned earlier are satisfied. [1050 F-G]
(ii) Under the partnership deed in question the relationship which
had reen brought into existence between the six parties was a relationship
H
of partners who had ;igreed to share profits and losses of the business
carried dn by all or any of them acting for all and it satisfied the defini•
lion of partnership under s. 4 of the Partnership Act. There was sharing
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K. D. KAMATH & co. v. C.I.T, (Vaidialingam, /.)
1035
of the profits or losses of the business by the partners in the ratio of the
proportion mentioned in cl. 5. That clause read with other clauses clearly
showed that the first condition namely of all persons agreeing to share
profits or losses was satisfied.
Even on the basis that the entire control
or management of the business was vested in Party No. 1 and that parties
2 to 6 were working partners who had to work under his directions, from
all the other circumstances it was clear that the conduct of bus;ness by
Party No. 1 was done by him acting for all the partners. There was no
indication to the contrary in the partnership deed.
Thelrefore even without anything more it was clear that as the partnership business was carried on by Party No. I acting for all, the second condition of agency was
also sa:i·.fiod.
This idea was further reinforced by cl. 16 of the deed
which •rovidf:d that the firm's affairs were to be carried on for mutual
benefits. [ 105 I C-F]
(iii) fhe High Court was wrong in holding that cl. 9 of the deed
under which parties 2 to 6 had no right to raise loans for and on behalf
of the firm or pledge the firm's interest was destructive of the element of
partnership.
No doubt under s. 18 of the Partnership Act a partner is
the agent of the firm for the business of the firm.
But that section itself
clearly says that it is subject to the provisions of the Act.
It is open
to the parties under s. 11 to enter into an agreement regarding their
mutual rights and duties as partners of the firm.
Further if the ingredients of partnership referred to in s. 4 of the Act are found to exist there
is no escape from the conclusion that a partnership has come into exist~
cnce. So far as the outside world was eoncerned, so long as parties 2 to
6 \Vere held out as partners of the firm, as had been done under the
partnership deed their acts would bind the partnelrship.
The provision in
cl. 9 was only an inter se arrangement entered into by the partners in and
by which the working partners had agreed not to raise loans o'r pledge
the firms interest. [I 052 A-El
(iv) The provisions of s. 14 of the Act could not sustain the argument that cL 9 of the deed negatived true theory of agency. Section 14
itself clearly sho\vs that the provisions contained therein are. subject to the
contract between the parties. [1052 G-H]
fn the result, the appeal must be allowed.
Babubhai Gulabdas Navlakhi v. C.l.T., Bombay,
[1962]
46
l.T.R.
492, C./.T., Gujarat v. A. Abdul Rahim & Co., [1965] 55 I.T.R. 651,
C.l.T., Kera/av. Pathrose Rice & Oil Mills, [1960] 40 I.T.R. 353, P.G.
C Ratnaswamy Nadar & Sons v. C. I. T., Madras, [1962] 46 I.T.R. 1148,
C.I.T. v. R. S. Shoe Factory, [1963] 47 l.T.R. 917, Murlidhar Kishan11opal v. C.I.T .. M.P. Nagpur & Bhandara, [1963] 50 I.T.R. 628 and City
Tobacco Mart v. C.l.T., Mysore. [1967] 64 I.T.R. 478, referred to.
Umarbhai Chandbhai v. C.I. T., Bombay City, [1952] 22 l.T.R. 27 and
M. p. Davis v. Commissioner of Agricultural Income-t<l:f,
[1959] 35
LT.R. 803, distinguished.
Stu! Brothers & Co. v. CIT .. [1958] 33 1.T.R. 1 and Agarwal & Co.
v C.l.T .. U.P .. [1970] 77 I.T.R. 10, relied on.
C.l.T .. Mysore v. K. D. KamGth & Co., [1964] 54 I.TR. 72, reversed.
I 036
SUPREME COURT REPORTS
[1972) 1 S.C:R.
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1242 of
1968.
Appeal by special leave from the judgment and order dated
January 21, 1964 of the Mysore High Court in I.T.R.C. No. 13
of 1963.
S. K. Venkataranga Iyengar and J. Ramamurthi, for the
appellant.
S. K. Iyer a.nd R. N. Sachlhey, for the respondent.
The Judgment of the Court was delivered by
Vaidialingarn, J. This appeal, by special leave, raises the
question whether the deed dated March 20, 1959 and marked
Ex. A is an Instrument of Partnership on the basis c.f which'the
appellant firm is eligible to he granted registration under s.- 26A
of the Indian Income-'tax Act, 1922 (hereinafter to be referred
as the Income-tax Act).
The appel!ant is a firm consisting of six partners and the partnership was constituted under the document dated March 20,
1959. The business of the partnership, as recited in the deed. is
stated to have been carried on in partnership from October 1,
1958. The partnership was registered under the Indian Partnership
Act, 1932, (hereinafter to be referred as the Partnership Act) on
or about August 11, 1959. For the assessment year 1959-60,
corresponding to the previous year ending March 31, 1959, the
appellant filed an application to the Income-tax Officer, 'A' Word,
Dharawar under s. 26A for registration of the partnership in the
name of M/s. K. D. Karnath and Company. The Income-tax Officer
by his order dated September 28, 1960 declined to grant regist•·ation on the ground that there was no genuine partnership brought
into existence by the deed of March 20, 1959 and that the claim
of G1e firm having been constituted is not genuine.
The said
officer further held that the business should be held to be the sole
con.cern of K. D. Karnath.
For coming to this conclusion, the
Ir~ome-tax Officer has mainly relied on clauses 8, 9, 12 and 16
of the partnership deed.
Though the Income-tax Officer has used
a loose expression that there is no genuine partnership, the sum
''ll·i substance of his finding is that there is no relationship of
pat tners inter se created under the said document.
Mr. S. K. Iyer, learned counsel for the Revenue,
has also
clarified the position before us by stating that the Department is
not challenging the genuineness of the document.
Accordinr tn
the learned counsel, the stand taken by the Revenue is th~t nc·
legal relationship of partners has been brought about as between
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K. D. KAMATH & co. v. c.I.T. (Vaidiallngam, 1.)
'I 037
the parties to the document. In short, his contention is that the
arrangement evidenced by Ex. A is not that of "partnership" as
understood in law.
On appeal by the assessee, the Appellate Assistant Commissioner on May 5, 1961 confirmed the order of the Income-tax
Officer.
According to the Appellate Assistant Commissioner no
partnership has been brought about by the deed dated March 20,
1959 and that the business continues to be the proprietary concern
of K. D. Karnath.
In coming to this conclusion the appeHate
authority has laid special emphasis on clause 12 of the deed.
The assessee carried the matter in further appeal l.T.A. No.
C .3220 of 1961-62 (Assessment year 1959-60) before the Income·
tax AppeHate Tribunal, Bombay Bench 'B'.' The -Appellate Tribunal, after a reference to the relevant clauses in the partnership
deed, came to the conclusion that the two essential requirements
as laid down by the courts for determining whether there is a
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partnership, namely, an agreement between the parties to ~hare
profits and each of the parties acting as agent of all, are fully
·satisfied in this case. In this connection the Tribunal placed
reliance on the decision of the Bombay High Court in Ba/ubhai
Gulabdas Navlakhi v. Commissioner of Income-Tax, Bombay(1)
and distinguished an earlier decision of the same court reported in
Umarbhai Chandbhai v.
Commissioner of Income-tax,,Bombay
City('). Ultimately, the Appellate Tribunal held that the partnership deed makes it clear that profits and losses are to be shared
between the parties and that, subject to the over-riding authority
of K. D. Karnath, the other paTtners could act fur the firm.
In
this view, the Appellate Tribunal held that the deed does create a
relationship of partners inter se beitween the parties thereto and
directed the Income-tax Officer to register the firm under s. 26A
of the Income-tax Act.
The Commissioner of Income-tax, Bangalore, respondent
hetein, made an application on October 4, 1962 under s. 66(1)·
of the Income-tax Act praying for a reference being made by the
Appel!ate Tribunal to the High Court of the question of law menG
tioned in the application.
The said application was numbered
as 66-RA-978 of 1962-63. The Appellate "Tribunal accordingly
submitted an agreed statement of case and referred to the High
Court for its opinion the_ following question of law :
"Whether, on the facts and in the circumstances of
the case. M/s. K. D. Karnath & Co., could be granted
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registration under Section 26A of the Act . for
the
assessment year 1959-60 ?".
(l) [!962] 46 I.T.R. 492.
(2) [1952] 22 I."f.R. 27
I 038
SUPREME COURT REPORTS
[1972] 1 s.c.R.
The High Court by its judgment and order dated January 21.
1964 in I.T.R. C. No. 13.of 1963 answered the question referred
to it a_gainst the assessee and held that 'the appellant firm could
not be _granted re_gistration under s. 26A for the assessment year
1959-60. It is against this decision of the High Court that the
assessee has filed the .above appeal.
The High Court has generally considered the effect of els. 5
to 9, 12 and 16 o.f_the partnership deed.
The High Court also
considered the question whether the partnership deed satisfies the
two essential requisites to constitute the partnership, namely, ( 1)
whether there is an agreement to share profits as well as the lasses
of the business, and (2) whether each Of the partners under the
deed can act as agent of all. From the discussion in the judgment,
the learned Judges, so far as we could see, have not thought it
necessary to consider elaborately the question whether there is an
agreement in the partnership deed to share the profits and losses
of the business. Obviously, the High Court must have been satisfied from the recitals in th~ partnership deed that this requirement
is amply satisfied in this case. That is why we find that the learned
Ju\lges have focused their attention as they themselves say in the
judgment, on the question whether it is possible to hold from the
recitals in the partnership deed that each partner is entitled to act
as agent of all.
In considering this aspect, the learned Judges
have referred particularly to els. 8, 9 and 16 of the partnership
deed and hav~ held that it is clear from these clauses that the
management, as well as the control o.f the business, is en:i e·y left
in the hands of the alleged first partner K. D. Karnath and that the
other partners are only to work under his directions and share
profits and losses in accordance with the proportions men•ioned in
cl. 5.
It is the further view of the High Court that it is nnt within
the power of the other five parties to act as agent of the. other
partners as they cannot accept any business except with the consent
ol K. D. Karnath mor can they raise any loan or pledge the firm's
interesL On this reasoning, the High Court has come to the conelusion that there is no relationship of partners created under the
partnership deed and as this essential element of agency is lacking,
the appellant was not eligible to be granted registration under
s. 26A. The learned Judges, in coming to this conclusion, have
placed considerable reliance on the decision of the Bombay High
Court in Umarbhai Chanbhai v.
Cnmmissioner of Income-tax,
Bombay City(') as well as the decision of this Court in M. P.
Davis v. Commissioner of Agricultural lncnme-tax(2). At this stage
we may mention that the judgment of the Mysore High Court,
which is under appeal before us, is reported in Commissioner of
. Income-tax, Mysore v. K. D. Karnath & Co.(3).
(I) [1952) 22 I.T.R. 27.
(2) [1959] 35 I.T.R. 803.
(3) [1964] 54 l.T.R. 72.
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K. o. KAMATH & co. v. c.1.r. (Vaidtalingam, J,)
io;9
Mr. S. K. Venkataranga Iyengar, learned counsel for the
assessee-appellant referred us to the various clauses in the partnership deed and urged that the view of the High Court that the
essential element of agency is absent in this case, is erroneous.
The counsel further urged that the partnership deed, read as a
whole, leaves no room for doubt that there is an agreement to
share the profits and losses of the business in the proportion mentioned in the .deed. Therefore, one of the essential ingredients to
constitute a partnership is satisfied in this case. He further urged
that though a large amount of control regarding the conduct ·of
business may have been left in the hands of the first partner K. D.
Karnath, that circumstance, by itself, does not militate against the
view of one partner acting as agent of the other partners.
He
referred us, in this connection, to certain decisions of the High
Courts, as well as of this Court, where under circumstances similar
to the one exisitng before us, it has been held that the mere fact
that more cO.ntrol is to be exercised only by one of the partners,
is not a ·circumstance which militates against the parties having
entered into a partnership arrangement as understood in law.
Mr. S. K. Iyer, learned counsel for the Revenue, supported the
reasoning oi the High Court in its entirety.
According to the
learned counsel, the question whether there is an agreement to
share the profits and the losses of the business and the fu.-ther
question whether each of the partners is entitled to act as agent of
all are to be determined by looking into all the facts as borne out
by the deed of partnership. He urged that on a consideration of
all such facts, the High Court has held that one of the essential
conditions, namely, the right of one partner to act as agent of all,
does not exist in the present case. If so, the counsel urged, the
opinion expressed by the High Coyrt that the appellant is . not
eligible for registration under s. 26A is correct. In support of his
contentions, the cou11sel also referred us to certain clauses in the
partnership deed as well as to certain provisions of the Partnership
Act.
From what is stated above, it is clear that the various authorities, as well as the High Court have only considered. some of the
clauses of the partnership deed for coming to the conclusion one
way or the other. In considering the question whether the partnership deed creates the relationship of partners as between the
parties thereto, as understood in Jaw, it is desirable to have a complete picture of the entire document.
Ex. A, the partnership deed
runs as follows :
"INSTRUMENT OF PARTNERSHIP.
Articles of agreement made at Hubli, this 20th day of March,
1959, Among (1) Shri Krishnarao Dadasaheb Kamat, hereinafter
....
1040
SUPREME COURT REPORTS
[1972] I S.C.R.
called the party hereto of the 1st part, (2) Shri Narayan Ganesh
Kamat hereinafter called the party hereto of the 2nd part, ( 3) Shri
Shripadrao Damodara Kamat, hereinafter called the party hereto
of the 3rd part, ( 4) Shri Dnyanoba Jotiram Mohite, hereinafter
. called the party hereto of the 4th part, (5) Shri Shankar Govind
Joshi, hereinafter, called the party, hereto of the 5th party, and
( 6) Shri Yashavant Bhawoo Kate, hereinafter called the party of
the 6th part, All Hindu inhabitants, residing at Hubli, and whereas
the parteis from 2 to 6, who have been serving with party No. 1
since a very long time and in view of the appreciation of their
honest and sincere services which the above parties have rendered
in past and with the object that the above parties should also have
their material and eco.nomical progress, party No. i.e. Shri K. D.
Kamat has been pleased to convert his sole proprietary concern,
as a partnership £_oncern, by admitting the above parties from 2
to 6 as working partners and the party No. I shall. be the main
financing and managing partner and the business of the partnership
is agreed aind is being carried on accordingly in partnership as from
1st Day of October, 1958, as "Contractors" or any other business
that the parties may think fit under the name and style of "Messrs.
K. D. Kamat & Co., Engineers and Contractors, Hubli" and it is
hereby agreed by and among the parties to this Agreement as
under:-
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2. ·That the business of the partnership is running under the
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name and style of "Messrs K. D. Kamat & Co., Engineers & Contractors, Hubli" as from the 1st day of October 1958 and this
agreement shall take retrospective effect and shall be deemed to
have come into operation as from the commencement of 1st
October, 1958.
3. That the duration of the partnership shall be at will.
4. That the business of the partnership is running at Hub:i and
shall run at Hubli or at such other place or places, as the case may
be under the name and style of "Messrs. K. D. Kamat & Co..
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Engineers & Contractors" or in such other name or names that the
parties may from time to time decide and agree upon.
5. That the final accounts of the partnership firm shall be made
up on the last day of each year of account, which shall generally
be on 31st tlay of March every year of account and the accounts
shall be taken upto that date of all the stock-in;t~ade and after
providing for a!l the working expenses, the rema1mng net profits "
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104 r
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or losses, as the case may be, shall be shared by the parties hereto•
as under.:-
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Names of Partners
Extent of Individual Share
~~~~~-~~~~~·
1. Shri Krishnarao Dadasaheb Kamat
2. Shri Narayan Ganesh Kamat
3. Shri Shri Dadarao--Damodara Kamat
..(, Shri Dayanoba Jotiram Mohite
5. Shri Shankar Govind Joshi
6. Shri \\lshavant Bha\voo Kate
TOTAL
5 shars
2 shares
2 shares
2 shares
2 shares
2 shares
.
15 shares
6. That it is agreed among the partliets {Mt tbe party Nd, 1,
i.e .. Shri K. D. Kamat, shall be the ptinbi{:ial a:nd financing partner
and the rest of the partners i.e. from 2 to 6 are admitted only as
working partners contributing labour.
7. That the Good-will of the firm shall be wholly and solely
belong to party No. 1 i.e. Shri K. D. Karnath.
8. 1hat the party No. 1, i.e .. Shri K. D. Kamat, who is the
principal and financing partn~r and by virtue of his having the Jong
standing experience in the line of business together wi:h the tebhnical knowledge of EHgineer, shall have full right of control and
management of the firm's business and in the best interest of the
firm, it is thus deoided and agreed upon among all the p·attillers
that all the working partners from 2 to 6 shall always work accdt.ding to the instructions and directions given from time to tittle b'Y
Shri K. D. Kamat, in the actual execution cif wo'rks a:nd in my
otber matter cdnnecting thereo1, pertaiititig to ih'fs · pattrier5fiip
tmsil!ess. The decision o.f the principlil p'itttiet &ti fftt ~
o'f
taking any new business or givintr 'tenders f<i'r new wo'fkS, Sfftllr
always vest with him, whose decisio·n sb:a!J be Ima! and btndfflg
upon all the working partners.
9. That it is also agreed among the partners tb:a1 IIb woYkin'g
partner or pa·tners is/ are authorised t6 raise a Joan for and oli
behalf of the firm or pledge the firm's interest directly or indireclly
and such an act sha:TI not be binding on the firm, except under tire
written atiihority of the principal partner.
l 0. That_it is £tt:ther expressly a:gree4 -~hat ~xcepting ifre pln'fi'es
No._ 1 aird 2 1..t. Shl'1 K. D. Kam'a1f alld Stirt N. G. Ka'nla't, fM\ o~r
~ies from 3 !O 6 shall riot ,do cO'n1rac! lit'l'Siness, so lottg :fS fff!Y
tr~ 1-.'r/l-t~i; in filis liffli ·and t'liis clm'.i~e is ii!i\retted m the bl!rterm'l:n~
<t t'he firm's business and witb ihe object: ffi.'ltt ili.e firm's busili'ess-
11042
SUPREME COURT REPORTS
[1972] l S.C.J.<.
should not suffer and the works if taken or standing in the name
of the said parties from 3 to 6, the same shall be the business of
the firm.
11. That it is also further agreed that the Managing Partner
Shri K. D. Kamat shall alone 012erate the Bank accounts and in
.case of any need for convenience, the partner authorised by him
in writing and so intimated to the Bank or Banks, shall operate
the Bank accounts.
12. That in the course of the business or during the existence
of the firm's business, the principal partner has reason to believe
that any working partner or partners is/are not
workin~ and
,conducting to the best interest of the firm, the principal partner
shall have a right to remove such a working partner or partners
from the "partnership concern and in such an eventuality the out
going working partner or partne1s, shall have only right of the
profit or loss upto the date of his retirement, as may be decided
by the principal partner in lump sum either by paying or receiving,
regard being had to the progress of the business or otherwise upto
the date of retirement, only on the completed works.
13. That proper books of accounts shall be kept by the said
parties and entries made therein of all such matters, transactions
and things as are usually entered in the books of accounts kept
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°!JY the persons engaged in business of a similar nature; all books
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of accounts, documents, papers and things shall be kept at the
principal place of business of the firm and each partner shall at
all times, have free and equal access to them.
14. That each partner shall be just and faithful to the other
or others in all matters relating to the business of the firm, shall
attend deligently to the firm's business and give a true account and
shall give information relating to the same without fail.
15. That each partner shall withdraw such sums as will be
mutually determined by the partners from time to time, in anticipation of the profit falling to their individual share and in case of
F
loss, the same shall be made good by the partners.
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16. Thus subject to the provisions herein mentioned and laid
down and made thoroughly known by each of the parties to this
Agreement with sound mind and body, the firm's affairs be ca·ried
on for mutual gain and benefit and if any questions which may
arise or occur touching to the conduct or management or liability
of the firm, the same shall be amicably settled among the parties
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with the consent of principal partner, whose decision in the matter
shall be final and binding on all partners.
K. D. KAMATH & co. v. C.I.T, (Vaidia/lngam, I.)
1043
A
In witness wnereof me parties to this agreement have set their
hands and seals to this Agreement as under :
1. Signed and Delivered by the within
named Shri K. D. Kamat, himself
Sd. K. D. Kamat
2. Signed . & Delivered by the within
B
named Shri N. G. Kamat, himself
Sd. N. G. Kamat
3. Signed & Delivered by the within
Sd. S. D. Kamat
named Shri S. D. Kamat, himself
Sd. V. D. Jituri
in the presence of
4. Signed.. & Delivered by the within
named Shri D. J. Mohite, himself
Sd. D. J. Mohite
c
5. Signed & Delivered by the within
n.tmed Shri S. G. Joshi, himse1f
Sd. S. G. Joshi
6. Signed & Delivered by the within
named Shri Y. B. Kate, himself
Sd. Y. B. Kate.
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Sd./ Certified to.be the true copy
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of the original.
For K. K. D. KAMAT & CO."
The High Court, so far as we could see, has rested its decision
on five circumstances for holding that thece is no relationship of
partners as between the parties inter se, created under the partnership deed.
They are based on consideration in particular of els.
8, 9 and 16. The following are the circumstance>, which according to the learned Judges militate agains: holding in favour of the
assessee; ( 1 ) The management as well as the control of the business is entirely left in the hands of the al'eged first partner K. D.
Karnath; (2) The other partners can merely work under his directions and share in the profits and losses in accordance with the
proportion mentioned in cl. 5; (3). It is not wi'thin the power
of the parties Nos. 2 to 6 to act as agent of other partners; ( 4)
The said parties cannot accept any business except with the consent o.f K. D. Karnath; and ( 5) Those parties cannot raise any
Joan or pledge the firm's interest, directly or indirectly, except
under the written authority of K. D. Karnath.
In view of all
these circumstances, according to the High Court, one of the essential element to constitute partnership, namely, agency is lackin~.
We will now refer to some of the provisions of the Income-tax
H
Act as well as the Partnership Act.
Section 2 ( 6B) of the Income-tax Act provides that the expressions "firm", "partner" and "partnership" have the same meaning
1044
SUPREME COURT REPORTS
[1972] 1 S.C.R.
respectively as i.n the Partnership Act. There is no doubt a proviso
with which we are not concerned. Section 26A of the Income-tax
Act lays down the procedure regarding registration of firms. Section 59 authorises the Central Board of Revenue, subject to the
control ot the Central Government, to make rules for carrying
out the purpose of the Act. The relevant Income"tax Rules lay
down the cletails of the procedure for making an application for
registration of a firm as contemplated under s. 26A.
As there
is no controversy that the application has been made by the appellant in accordance with s. 26A and the relevant Rules, it is unnecessary for us to quote the section and the relevant Rules.
B
Coming to the Partnershlp Act, s. 4 which defines "partnerc
shlp" runs 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."
Section 6 deals with the mode of oetermining the existence of
partnership. As per that section in determining whether a group
of persons is or is not a firm or whether a person is or is not a
partner in a firm, regard is to be had to the real relation between
the parties as shown by all relevant facts taken together. Section
l l ( l) provides that subject to the provisions of the Act, the
mutual rights and duties of the partners of a firm may be determined by contract between the partners and such contract may be
expressed or may be implied by a course of dealing. It further
provides that such contract may be varied by consent of an the
partners and such consent may be expressed or may be implied
by acourse of dealing. Sub-s. (2) clearly provides that notwithstanding anything contained in s. 27 of the Indian Contract Act,
the ccihtract between the partners may provide that a partner shall
not carry on any business other than that of the firm while he is
a partner.
S~ction 12 in els. (a) to (d) deals with the rights and
duties of a partner, but that a)':ain is subject to contract between
the partners. Section 14, on which some reliance has been placed
·by the counsel for the Revenue is as follows :
"Section 14 : The property of the firm :
Subject to contract between the partners, the property of the finn includes al! property and rights and
interests in property originally brought into the stock of
the firm, or acquired, by purchase or otherwise, by or
for the firm, or for the purposes and in the course of the
business or the firm, and includes also the goodwill of the
business.
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K. D. KAMATH & co. v. C.I.T. (Vaidia/lngam, J.)
!045
Unless the contrary intention appears, property and
rights and interests in property acquired with money belonging to the firm are deemed to have been acquired
for the firm."
Section 18 provides that subject to the provisions of the Act, a
partner is the agent of the firm for ihe purpose of the business
ol. the firm.
Section 19 ( 1) provides that subject to the provision>
of s. 22, the act of a partner which is done to carry on, in the
usual way, the business of the kind carried on by the firm binds
the fi'lll. It further states that the authorily of a partner to so bind
the firm conferred by the said section is called his "implied a~tho
rity." Sub-section (2) enumerates the various matters, which a
partner cannot do under the implied authority. in the ab,ence of
·a.ny usage or custom or trade to the contrary.
Section 20 dealing
with the extension and restriction of partner's implied authority
runs as follows :
"Section 20. Extension and restriction of partner's
implied authority :
The partners in a firm may, by contract between the
partners, extend or restrict the implied authoritv of any
partner.
. Notwithstanding any such restriction., any act done
by a partner on behalf of the firm which falls within his
implied authority binds the fr·m, unless, the person with
whom he is dealing, knows of the restriction or does not
know or believe that partner to be a partner."
From a perusal of the partnership deed one thing is clear, namely, under cl. (1) what was originally the sole proprietary concern
of K. D. Karnath has been converted as partnership concern by
admitting parties Nos. 2 to 6 as working partners, along with party
No. I, and party No. 1 is the main financing and managing partner
of the business.
That clause has to be read along with cl. (6)
whereunder the partners have agreed that K. D. Karnath shall be
the principal and financing partner and the rest of the partners.
namely, parties Nos. 2 to 6 are admitted only as working partners
contributing labour.
Clause ( 4) deals with the running of the
partnership business at Hubli as also other place or places or with
such other name or names that the parties (which means partners
Nos. 1 to 6) may from time to time decide and agree upon. Frqm
claus~s ~I), (2) and _(3), it is clear that the busitiess of the pl\rtne.rship is that of Engmeers and Contractors. We are referring to
this asp~ct because it will have a ?earing reg;irging tlw control of
the business agreed to be vested m K. D. Karnath.
There does
1046
SUPREME COURT REPORTS
(1972] 1 S.C.R.
not appear to be any controversy that party No. 1 has been carrying on such business as a proprietary concern for a long tilne
before the partnership was formed and as such he is considerably
experienced in the said technical type of business. . Clause ( 5)
provides that final accounting is to be taken as on March 31 of
every year and the net profits and losses are to be shared by the
parties thereto in the proportion of the shares specified in the said
clause.
Under clause 11, apart from the managing partner, K. D.
Kamath operating the bank accounts, any other partner authorised
by him i~ also eligible to operate the bank accounts. Clause (12)
entitles .a partner, when he ceases to be a partner to be paid his
share of profit or loss, upto the date of his so ceasing to be a partner. Clause ( 13) provides that books of accounts are to be properly maintained and each partner has a right at all times to have
free and equal access to them. Clause (14) enjoins on each partner to be just and faithful to the other partners in all matters
relating to the business of the firm and each of them has got a
duty to diligently attend to the bμsiness of the firm. Each of them
has also an obligation to give a true account and information regarding the business of the firm. Clause (15) enables the partners
to withdraw the amounts in anticipation of profits falling to their
individual share; and in case of loss, each of them is also liable
to make good •the same in proportion to his share :n the partnership. Clause (16) enjoins on the partners to carry on the affairs
of the firm for mutual gain and benefit.
All the above clauses clearly, in our opinion, establish that the
sole proprietary concern ofK. D. Kamath has vanished. The above
clauses also establish the right of each of the partners to share
the profits and also to bear the losses in the proportion of their
shares mentioned in cl. (5). Therefore, one of the essential ingredients to constitute partnership, namely, that there should be
an agreement to share the profits and the losses of the business is
more than amply satisfied in this case.
Then the question is whether the circumstances pointed out by
the High Court and referred to by us earlier, necessarily lead to
the conclusion that no relationship of partners, as understood in
law, has been created as between the parties under the partnership deed.
For this purpose it is necessary to refer to certain
decisions of this Court as wel! as of the High Courts, which may
have a bearing on this aspect. In Steel Brothers & Co. Ltd. vs.
Commissioner of Income-tax(')· one of the questions this Court
had to consider was whether the fact that the control and management of a business was in the hands of one person when there were
(I) [19l8] 33 I.T.R. l.
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K. D. KAMATH & co. v. C.I.T. (Vaidialingam, J.)
1047
three partners is destructive of the element of partnership. The
facts w~re that A and B, two companies were carrying on trade
in Burma rice. Later on, an agreement was entered into between
A, B and C for the working ol the Burma rice business. It was
provided that the entire management of the business and the conduct of its affairs was to be done by A in its absolute discretion.
The profit and loss was provided to be shared in the proportion
mentioned under the agreement. There was a restriction on B and
C against hiring the properties of the firm without the consent of
A. It was held by this Court that notwithstanding the fact that
the management and conduct or the business in its own discretion
was vested with A, that circumstance is not destructive of the
partnership relationship that exists between the parties to the agreement.
In this decision two conditions have been laid down as
eiSential to constitute a partnership in law: (1) sharing of profit
or loss of the business; and (2) business being carried on by all
the parties or any of them_ ~cting for all, in which is implicit the·
theory of agency.
In M. P. Davis v. Commissioner of Agricultural Income-tax( 1)
this Court had to consider whether the relationship as partners
had been crea1ed by the agree1Il'!Ut of partnership relied on by
'the parties.
From the relevant facts it is seen that it was an
extreme case where two brothers ostensibly entered into a partnership arrangement.
But the recitals in the document, as pointed
out by this Court, clearly showed that the entire management was
with one brother A and that B had no right to make any contribution towards capital.
Th>~re was no provision as to how
losses are to be dealt with and there was a very complicated ma.nner
for ascertatning the so called profits.
Having due regard to the
tenor of the document and the clauses contained therein, this Court
held that 1there was no intention fo bring about the rellltionship
of pastner~. between the ~wo brothers.
On the other hand, it is
the view of this Court that the document had b~en executed 'to
con~nue l!'nder the cloak of a partnership the pre-existing and real
rolat1onsh1p, namely, that of master and servant. It is to be
noted ihat this Court did not hold that there was no relationship
of partners created under the document only on the basis that
the exclusive control and managemeint was left in the hands · of
A.
Such a conclusion was reached having due regard to the
various other clauses in the deed. In Jltct this Courr, has already
held in the earlier decision referred to above. thwt the mere circumstance that the control and management are vested in one
partner is not destructive of the existence of pa.rt_nership. No doubt.
~he High .Cou~t in the case on hand, has placed_ some reliance upon
the dec1~1on m M. P. Davis v. Commissioner of Agricultural
I ncome-tax(1). in support of its conclusion that no partnership
(t) [l05Q] JS !.T.R~803~
1Q4&
SUPJ!.E:l;IE CQJJRT J.lEPOJ!.TS
(l 972] l S.C.ll.
.amμ1gement c~n be spelled out from the document before us.
In our opinion, there has not been a proper appreciation by the
High Court of tho~ reasons which led ito this Court fqJ holding in
t)l1;1 said decision that there was no relationship of partners betw~en
t)l~ !wo l:irotllers A and B. That was an extreme case where the
da1,1ses in the pm tnership deed were enfaely different.
In Commissioner of Income-tax, Gujarat v. A. Abdul Rahim
wid Co.(') this Court has held that it is the settled law that if a
llartnership is _genuine and valid one, the Income-tax Officer has
ll.O power •to reject its registration, if the other provisions of s. 26A
and the Rules made thereunder are complied with.
In Agarwal and Co. v. Commissioner of Income-tax, U.P.(')
·this Court dealing with the conditions of re)!istration pm'cribed
in s. 26A and the relevant Rules observed as follows :
"The conditions of regifl(ration prescribed in this section and the relevant rules are: ( 1) on behalf of the
firm, an application should be made to the Income-tax
Officer by such person and at such time and containing
such particulars, being is such form and verified in such
1m1 nner as are prescribed by the rules: ( 2) •the firm
sh~qJr' "e constituted under an instrument of partnership. ( 3) the instrument mmt snec;fv the individual
s:i ... c.