Partnership registration depends on privity of contract, and a sub-partnership does not alter the original firm's constitution.

Partnership for income-tax registration follows the Indian Partnership Act, 1932, so partnership depends on contract and privity between the persons claimed to be partners. A later arrangement by one partner with strangers over his interest did not, by itself, make those strangers partners in the original firm or alter its constitution; at most, it created a sub-partnership inter se. As consent of all existing partners was required for introduction of new partners, the original deed continued to govern the firm. The firm was therefore registrable under section 26A of the Indian Income-tax Act, and the issue was decided in favour of the assessee.

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Issues: Whether a firm constituted under a partnership deed was registrable under section 26A of the Indian Income-tax Act for the relevant assessment years, where one partner had separately entered into a later arrangement with other persons sharing his interest in the firm.

Analysis: The expression of partnership under the Income-tax Act was held to follow the Indian Partnership Act, 1932. Since partnership arises from contract and not from status, there must be privity of contract between the persons said to be partners. A transfer or sharing arrangement made by one partner with strangers does not, by itself, introduce those strangers into the original firm or affect the constitution of the principal partnership. Such an arrangement creates only a sub-partnership inter se among the parties to it. Sections 29(1) and 31(1) of the Indian Partnership Act, 1932 supported the view that the transferees could not claim to be partners of the original firm without the consent of all existing partners. The original partnership deed remained effective and the later sub-partnership did not alter the genuine partnership constituted by the earlier deed.

Conclusion: The firm was registrable under section 26A of the Indian Income-tax Act. The question was answered in favour of the assessee and against the Income-tax Department.

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