1983 (11) TMI 36 - HC - Income Tax

Court denies registration based on lack of genuine partnership. Partner's fixed salary not indicative of profit-sharing.

The court upheld the rejection of registration for the assessment years 1974-75 and 1975-76, as Sri T. Raghavendra Rao was deemed not a genuine partner of ... Deduction From Profits And Gains, New Industrial Undertaking Issues:1. Whether the Tribunal was right in upholding the refusal of registration to the assessee for the assessment years 1974-75 and 1975-76Rs.Analysis:The case involved a dispute regarding the registration of a firm for the assessment years 1974-75 and 1975-76. The firm, initially consisting of six partners, had a new partnership deed drawn up after the death of one partner, adding two more partners, including Sri T. Raghavendra Rao as the 8th partner. The rejection of registration was based on the contention that Sri T. Raghavendra Rao was not a partner of the firm. The key issue was whether Sri Raghavendra Rao could be considered a partner of the firm, as this determination would impact the registration status.The deed of partnership dated December 14, 1973, described Sri T. Raghavendra Rao as the 8th partner and designated him as a working partner responsible for the day-to-day business operations. However, crucially, he was not required to contribute any capital to the firm. The deed also specified that he would receive a fixed monthly salary of Rs. 400 but would not be entitled to any share in the profit or loss of the firm. A subsequent amendment further clarified that he would receive a fixed annual amount as his share of profit, regardless of the firm's financial performance.The court analyzed the provisions of the Partnership Act, emphasizing that the sharing of profits alone is not conclusive evidence of partnership. It noted that there must be a direct and principal interest in the business or the business must be carried on behalf of the person sharing the profits. In this case, the fixed payment to Sri Raghavendra Rao, described as profit, was mandatory even in loss-making years, which raised doubts about its classification as profit-sharing. Additionally, the deed did not specify the share of the 8th partner beyond his salary.Considering the lack of a genuine partnership relationship between Sri T. Raghavendra Rao and the other partners, the court concluded that he could not be considered a partner of the firm. As a result, the rejection of registration for the assessment years 1974-75 and 1975-76 was upheld. The court did not find it necessary to delve into the cited legal precedents and ruled in favor of the revenue authority, making no order as to costs.