Genuine partnership turns on mutual agency and profit sharing, not on every partner's active participation or capital contribution.

A partnership remains valid where there is an agreement to share profits and carry on business through mutual agency, even if every partner does not personally participate or contribute capital. The lady partner's capital contribution, profit credit in the firm's books, and treatment of that capital as her absolute property supported genuineness; later gifts were only an application of income. The fact that the partners were close relatives, or that one partner managed the business and borrowings stood in her name, did not by itself show a sham firm. Cancellation of continuation of registration under section 186(1) was therefore unjustified and the assessee succeeded.

---

---

Issues: Whether the firm was genuine and whether continuation of registration could be cancelled under section 186(1) of the Income-tax Act, 1961 on the ground that the lady partner had only a limited interest in the capital, did not actively ate the business, and the profits and capital were allegedly controlled by the other partner.

Analysis: The partnership law requires an agreement to share profits and carry on business by all or any of them acting for all; active participation by every partner or contribution of capital by every partner is not essential. The lady partner had stated that she was a partner, had contributed capital, and her share of profit was credited in the firm's books. The capital brought by her was treated as her absolute property, and the subsequent gifts made by her were only an application of income. The fact that the firm consisted of close relatives, or that one partner managed the business, did not by itself make the firm invalid or ingenuine. The borrowings raised in her name and the family gifts did not establish that the partnership was a sham.

Conclusion: The cancellation of registration was unjustified and the firm could not be treated as ingenuine. The finding was in favour of the assessee.

Final Conclusion: The orders cancelling continuation of registration for all the assessment years under appeal were set aside, and the appeals succeeded.

Ratio Decidendi: For a valid partnership, mutual agency and an agreement to share profits are essential, but personal participation by each partner or personal contribution of capital is not indispensable; a partnership cannot be treated as ingenuine merely because the partners are close relatives or one partner manages the business.

---