1958 (3) TMI 93 - HC - Income Tax

Partnership Deed Validity Emphasized in High Court Ruling

Chhotalal Devchand Versus Commissioner of Income-tax

Chhotalal Devchand Versus Commissioner of Income-tax - [1958] 34 ITR 351 Issues Involved:1. Validity of the partnership constituted by two firms and one individual.2. Division of profits in the books of the assessee.3. Specification of individual shares of partners in the partnership deed.4. Compliance of the application for registration with the Act and Rules.Issue-wise Detailed Analysis:1. Validity of the Partnership Constituted by Two Firms and One Individual:The Tribunal refused registration on the ground that the firm was constituted by two firms and one individual, which it deemed invalid under the law. This decision was influenced by the Supreme Court's ruling in Dulichand Laxminarayan v. Commissioner of Income-tax [1956] 29 ITR 535, which held that a partnership could not be constituted between three firms, a Hindu undivided family, and an individual. However, the High Court clarified that a partnership could exist between a firm and an individual, provided that the real partnership is between the individual and the aggregate of persons constituting the firm. The partnership deed in question was signed by all the constituent members of the two firms, thereby making it a valid partnership. The court emphasized that the intention was clear from the partnership deed, which included provisions for arbitration between individual partners or their executors/administrators, indicating a valid partnership.2. Division of Profits in the Books of the Assessee:The Tribunal's second ground for refusal was that the division of profits in the assessee's books was made to the two firms and one individual, rather than to the seven partners. The High Court held that if the shares of the partners are known, the allocation of profits is a matter of arithmetical computation. The court referred to Commissioner of Income-tax v. Shantilal Vrajlal [1957] 31 ITR 903, which held that the allocation of profits in the books of account to the firms and individual partners was immaterial as long as the partnership deed clearly showed how the profits were to be divided. The court concluded that the division of profits in the books did not invalidate the registration.3. Specification of Individual Shares of Partners in the Partnership Deed:The Tribunal argued that the partnership deed did not specify the individual shares of the partners, which is a requirement under section 26A. The High Court explained that an instrument of partnership could be constituted by multiple documents, and as long as these documents collectively specify the shares of the partners, the requirement is met. The court noted that the partnership deeds of the firms Karsondas Premji and Chhotalal Devchand were on file and specified the shares of the partners. The court emphasized that the specification of shares could be gathered from these documents, thereby satisfying the requirements of section 26A. The court rejected the Tribunal's reliance on a strict interpretation of the Supreme Court's judgment in Dulichand Laxminarayan's case, stating that the shares must be specified in the instrument of partnership, which could comprise multiple documents.4. Compliance of the Application for Registration with the Act and Rules:The Tribunal's fourth ground was that the application for registration did not meet the requirements of the Act and Rules. However, the Tribunal did not provide specific reasons for this conclusion, and the respondent's counsel did not point out any flaws in the application. The High Court found that the application was signed by the partners as required by law and contained all necessary information in the schedules. The court concluded that the application complied with the provisions of the Act and Rules.Conclusion:The High Court held that the registration was wrongly refused and answered the question in the affirmative. The Commissioner was ordered to pay the costs.