Valid partnership despite managerial control clauses: profit-sharing and agency for all satisfied registration requirements.

A partnership deed was held valid where the former proprietary business was converted into a partnership with defined profit and loss shares. The Supreme Court treated the essential test as whether there was an agreement to share profits or losses and whether the business was carried on by one or more partners acting for all. Clauses giving one partner predominant management control, and restricting the others from borrowing, pledging, or otherwise dealing with the firm's interest without authority, did not destroy the partnership relation because mutual rights and agency may be regulated by contract. The firm was therefore entitled to registration under section 26A.

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Issues: Whether the deed created a valid partnership entitling the firm to registration under section 26A of the Indian Income-tax Act, 1922.

Analysis: The instrument showed that the erstwhile proprietary business was converted into a partnership with specified shares in profits and losses. The Partnership Act, 1932 recognises partnership where there is an agreement to share profits or losses and the business is carried on by all or any of them acting for all. The terms giving one partner predominant control, restricting the others from borrowing or pledging the firm's interest without authority, and authorising one partner to manage the business did not negate partnership, because mutual rights and duties may be regulated by contract and agency may be restricted inter se. On the whole document, the managing partner carried on the business on behalf of all and the essential ingredients of partnership were satisfied.

Conclusion: The deed created a partnership in law and the firm was entitled to registration under section 26A; the answer was in the affirmative and in favour of the assessee.

Final Conclusion: The High Court's view was reversed and the assessee's appeal succeeded, restoring entitlement to registration of the firm.

Ratio Decidendi: A partnership is valid where the deed shows an agreement to share profits and losses and the business is carried on by one or more partners acting for all, even if the contract vests management and restrictive powers in one partner and limits the others' implied authority inter se.

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