TaxTMI 
TaxTMI 
2000 (10) TMI 38
X X X X Extracts X X X X
X X X X Extracts X X X X
....and 1974-75 ?" The factual position as indicated in the statement of case is essentially as follows : One Brij Lal was carrying on business in the name and style of K. B. and Co. on proprietorship basis up to June 30, 1971. With effect from July 1, 1971, a partnership was constituted on the basis of a deed of partnership, which was drawn up on July 19, 1971. The shares in the profit and loss were as indicated below : Name of partner Shares in profit Share in losses Shri Brij Lal 1/6th 1/3rd Smt. Asha Rani wife of Shri Brij Lal 1/6th &n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ership. A deed of partnership to record this change was drawn up on May 26, 1972. As per the said deed, Brij Lal and Surinder Kumar became entitled to a 1/5th share each in the profits of the firm and were to share the losses equally. The three minor sons became entitled to a 1/5th share each in the profits. The other terms of the deed remained the same as regards operation of the bank account and goodwill. No capital was required to be contributed by any of the partners under this deed also. The firm closed its accounts for the first time on June 30, 1972, and applied for registration in Forms Nos. 11 and 11A for the assessment year 1973-74. The Income-tax Officer refused registration by an order under section 185. He noted that only Brij Lal had invested capital. The goodwill belonged to him exclusively and he could ask any other partner to quit. Additionally, he could decide whether any amount was required as loan and was authorised to execute necessary documents for that purpose. No intimation was sent to the bank or the Registrar of Firms regarding constitution of the firm or the change therein, Profits of the firm had not been distributed amongst the alleged partners or cr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sidered as on other grounds the refusal of registration was being upheld. On being moved for reference, as stated above, the questions quoted have been referred for the opinion of this court. In support of the application it has been submitted that the true essence of the agreement was not appreciated by the Revenue authorities as well as the Tribunal. Merely because one of the partners had the right to ask others to quit, that did not per se bring in the concept of employer-employee relationship. Learned counsel for the Revenue, on the other hand, submitted that a bare reading of the relevant clauses makes it abundantly clear that there was no element of partnership and what was tell-tale was the employer-employee relationship. To appreciate the rival submissions, the principles laid down by the apex court in the matter of grant of registration need to be noticed. In K. D. Kamath and Co. v. CIT [19711 82 ITR 680, it was observed that the legal requirements under section 4 of the Indian Partnership Act, 1932 (in short "the Partnership Act") to constitute a partnership in law are: (i) there must be an agreement to share the profits or losses of the business ; and (ii) the b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rtner. Section 12 in clauses (a) to (d) deal with the rights and duties of a partner, but that again is subject to the contract between the partners. Section 14 deals with property of the firms. Section 18 provides that, subject to the provisions of the Act, a partner is the agent of the firm for the purposes of the business of the firm. Section 19(1) provides that, subject to the provisions of section 22, the act of a partner which is done to carry on, in the usual way, the business of the kind carried on by the firm, binds the firm. It further states that the authority of a partner to so bind the firm conferred by the said section is called his "implied authority". Sub-section (2) enumerates the various matters, which a partner cannot do under the implied authority, in the absence of any usage or custom of trade to the contrary. Section 20 dealing with the extension and restriction of a partner's implied authority runs as follows : "20. Extension and restriction of partner's implied authority.---The partners in a firm may, by contract between the partners, extend or restrict the implied authority of any partners. Notwithstanding any such restriction, any act done by a partn....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ions of the Partnership Act and it cannot be said that in view of the provisions of clause 5 the element of agency is lacking. Mr. R. C. Pandey, learned counsel for the Revenue, submitted that the power of expulsion was not an absolute power and it was only where the activities of the working partners were found detrimental to the interest of the firm, the power is given for expulsion. In CIT v. Pathrose Rice and Oil Mills [1960] 40 ITR 353 (Ker), clauses 7 and 8 of the deed of partnership were held to be not militating against the provisions of agency. The said clauses read as under : "7. If at any time partners Nos. 2 and 3 want to withdraw from the partnership either jointly or severally or if at any time partner No. 1 wishes to send out partners Nos. 2 and 3 jointly or severally, partner No. 1 has independent and absolute right and power to immediately exclude or discharge them. All amounts due to or from the outgoing partners should be paid in cash, the expenses incidental to such withdrawals being met by the outgoing partners. 8. All activities connected with the business, etc., are to be conducted at the sole discretion of partner No. 1 and all his actions are bindi....