1985 (12) TMI 80 - AT - Income Tax

Firm's Partnership Valid under Indian Partnership Act, Registration Unjustly Cancelled

DN. Dastur & Co. Versus Eleventh Income-Tax Officer.

The Tribunal found that the firm satisfied all requirements under the Indian Partnership Act, constituting a valid partnership. The cancellation of the ... Firm, Registration, Cancellation Of Registration Issues Involved:1. Cancellation of firm registration.2. Entitlement of a partner to a fixed sum instead of profit share.3. Non-entitlement of a partner to goodwill or assets on dissolution.4. Partner's rights to operate bank accounts and inspect books of account.5. Validity of Form No. 11 and its signatures.Issue-wise Detailed Analysis:1. Cancellation of Firm Registration:The primary issue is the cancellation of the firm's registration by the Income Tax Officer (ITO) under section 186 of the Income-tax Act, 1961. The ITO's basis for cancellation was that one partner, Mr. Pardawala, received a fixed amount as his share of profits, was not entitled to the firm's assets or goodwill upon dissolution, and did not have rights to operate the bank account or inspect the books of account. The ITO concluded that Mr. Pardawala was not a genuine partner, leading to the cancellation of the registration.2. Entitlement of a Partner to a Fixed Sum Instead of Profit Share:Clause 7 of the partnership deed stated that Mr. Pardawala was entitled to a fixed sum of Rs. 8,400 per annum as his share of profits and was not liable for losses. This arrangement was challenged by the ITO, who argued that a genuine partner should share both profits and losses. However, the Bombay High Court in the case of Raghunandan Nanu Kothari v. Hormusjee and the Supreme Court in K.D. Kamath & Co. v. CIT held that a partner could receive a fixed sum as profit and still be considered a genuine partner, provided other partnership elements were satisfied.3. Non-Entitlement of a Partner to Goodwill or Assets on Dissolution:Clause 8 of the partnership deed specified that Mr. Pardawala was not entitled to any share in the goodwill or other assets of the firm. The Tribunal noted that this was an inter se arrangement among the partners and did not affect the genuineness of the partnership. The Tribunal referenced the Bombay High Court's decision, which supported the validity of such arrangements.4. Partner's Rights to Operate Bank Accounts and Inspect Books of Account:Clause 9 of the partnership deed stated that only Mr. Dastur and Mr. Shukla could operate the bank accounts, and Clause 10 restricted Mr. Pardawala from inspecting the books of account. The Tribunal found that these clauses were internal arrangements and did not invalidate the partnership. The Supreme Court in K.D. Kamath & Co. clarified that control and management could be vested in one partner by agreement, which did not negate the partnership's validity.5. Validity of Form No. 11 and Its Signatures:The ITO questioned the validity of Form No. 11, stating that it lacked Mr. Pardawala's signature. However, the assessee provided a duplicate Form No. 11 with all three partners' signatures. The Tribunal found that the original Form No. 11, which was filed and based on which registration was granted, contained all necessary signatures. The Tribunal also noted that the procedural requirement of filing Form No. 11 was met, and the registration should not have been canceled on this ground.Conclusion:The Tribunal concluded that the firm met all the requirements under section 4 of the Indian Partnership Act, 1932, to constitute a valid partnership. The cancellation of the firm's registration was deemed unwarranted, and the appeal by the assessee was fully allowed. The Tribunal quashed the orders of the lower authorities, affirming the genuineness of the partnership and the validity of the registration.