TaxTMI 
TaxTMI 
1986 (10) TMI 329
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....es. 2. A partnership firm 'Y. Seethayya and P.R. Rao', constituted on 1-10-1971, had obtained and was engaged in executing certain contracts for the construction of port-monoliths for the Dry Dock and for the supply of building material at Visakhapatnam. The partnership consist ed of two partners, namely, Y. Seethayya and P.R. Rao, each having a 50 per cent share. After the contracts were executed in part, Shri P.R. Rao got himself released from the partnership, with the result that only Y. Seethayya remained in charge and responsible for the contracts. 3. A new partnership called 'Ravi Constructions, Visakhapatnam' was constituted on 3-5-1972. This partnership, according to the partnership deed, consisted of 9 partners. The names of the partners and their shares in profits and losses are mentioned in clause 8. Indeed, for a proper appreciation of the question at issue, it is necessary to set out clauses 7 and 8 in full, and refer to some other clauses of the partnership. Clauses 7 and 8 read as follows : "7. The first partner Shri Y. Seethayya shall act and function as consultant and shall be paid 1 per cent (one per cent) of the payments received from the....
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.... name of Shri Y. Seethayya, it was first mentioned that 1 per cent of payment received in lieu of profit thereof was his share. This was however struck off and, by placing an asterisk mark at the bottom, it was stated that his share was 1 per cent of the payments received from the department. When this was pointed out by the ITO to the authorised representative of the assessee, the auditor of the assessee-firm filed a letter dated 22-4-1976, explaining that the striking off of the words in column 5 should be treated as a mistake, and that the entry originally made should be treated as the correct entry. 5. The ITO refused registration to the firm and treated it as an unregistered firm for the following reasons : (i) In this case, there is no agreement to share the profits of the business, which is an essential condition of partnership. A perusal of the deposition of Shri Y. Seethayya recorded on 27-1-1975 clearly proves that he was getting only commission, and not profit ; that he was not at all concerned with the business of the firm notwithstanding the statement in clause 7 ; and that Shri Y. Seethayya was shown as a partner in the partnership deed only for the sake of continu....
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....ng reasoning: The two elements necessary to constitute a genuine partnership, viz,. an agreement entered into by all persons concerned and mutual agency among them are present in this case. The partnership deed itself describes Y. Seethayya as a partner, and, thus, the first requirement is satisfied. So far as the second requirement is concerned, it is necessary to remember that the very existence of the firm's business (the execution of certain subsisting contracts) owed its origin to the presence of Shri Y. Seethayya as a partner in the firm. But for him there was no such business. Moreover, he had also acted and functioned as a consultant as shown in clause 7 of the partnership deed. The deposition of Shri Y. Seethayya does not negative this fact. The several clauses in the partnership deed also go to show that there was mutual agency among all the 9 partners. So far as the manner of giving the share to Sri Y. Seethayya is concerned, it was only a mode of describing his share in the profits. True, it is that in the previous partnership firm Y. Seethayya's share was 50 per cent, but nothing prevents him from reducing his share in the reconstituted firm ; he did not ....
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.... thereof, does not of itself make the receiver a partner with the persons carrying on the business." Section 9 provides that partners are bound to carry on the business of the firm to the greatest common advantage, to be just and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner or his legal representatives. Section 11 provides that, subject to the provisions of the said Act, the mutual rights and duties of the partners of a firm may be determined by contract between the partners, and that such contract may be express or may be implied by a course of dealing. Sections 12 and 13 make it clear that the conduct of the business of the firm and mutual rights and liabilities of the partners is a matter of contract between the parties ; but, subject to any such contract, each partner has a right to participate in the conduct of the business and is bound to attend diligently to his duties in the conduct of the business ; he has also a right to have access to, and to inspect and take copies of the books of the firm. A partner is not entitled to receive any remuneration for taking part in the conduct of the business. ....
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....at Shri Y. Seethayya had no concern with the business thereafter, or with its profits or losses whatsoever, on the other hand, the contention of the learned counsel for the assessee is that it was a valid and genuine partnership, and that the stipulation to pay 1 per cent of the payments received from the department towards Seethayya's share was only one mode of describing his share in the profits. It is emphasized that, according to clause 7, Shri Y. Seethayya was to provide advice and guidance to the other partners in the conduct of the firm's business. 12. The relevant facts are these : (a)the partnership deed described Shri Y. Seethayya as a partner ; (b)the contracts in question were initially awarded to a firm, Y. Seethayya and P.R. Rao, consisting of two partners, Y. Seethayya and P.R. Rao, each of whom had a 50 per cent share; the said partnership executed the contracts to some extent, whereafter the partnership came to an end with the retirement of Shri P.R. Rao ; Shri Y. Seethayya was left alone with the contracts. At that stage, the assessee-partnership 'Ravi Constructions' was formed on 2-5-1972 to carry on and complete the said contracts. As so....
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....mpletely vitiated their findings and conclusions. They went more by form and not by substance. Merely because the partnership deed describes Shri Y. Seethayya as a partner, they were of the opinion that he is a partner. When it was argued that he had no share in the profits, the appellate authorities referred to certain decisions and held that sharing the profits need not necessarily be provided in a direct manner but can be provided in such manner as the partners think fit, and that the provision in this case is ultimately a mode of giving a share in the profits. When it was next argued that Shri Y. Seethayya is not at all responsible for the business of the firm and that the recital in clause 7 about his tendering aid and advice was a mere 'make-believe', and reliance in support of this contention was placed upon his own deposition, the said deposition was explained away in a very unsatisfactory manner. It is this erroneous and compartmentalized approach, which has resulted in the ir coming to the unsustainable conclusion that Shri Y. Seethayya was a partner, and that there was a genuine partnership comprising him and eight other partners, which is entitled to registratio....
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.... in force. It must be remembered that, according to clause 9 of the partnership deed, Shri Y. Seethayya was to cease to be a partner as soon as the contracts in question came to an end. If, by 27-1-1975, the said contracts had come to an end, it means that he was no longer a partner on that date. If so, there is no question of his saying that he is not taking any interest in the actual business. He was really referring to the situation, when the contracts were in progress and when the alleged partnership consisting of himself and eight other persons was existing. The interpretation placed by the appellate authorities is too involved and too strained to be called reasonable. It is not as if he stated anywhere also that he was taking interest in the business of the partnership, while the contracts were in progress, or when he was a partner in the said firm. We are, therefore, of the opinion that his deposition clearly shows that the recital in clause 7 that he was to be paid 1 per cent of the payments received from the department 'for his advice and guidance' is only make-believe, as rightly held by the ITO. 14. In the light of what we have said above, and, in particular, ....
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....f the income of the firm. 17. As against the above, the learned standing counsel brings to our notice the decision of the Calcutta High Court in CIT v. Janata Medical Stores 1985 Tax LR 504. In this decision, it was held that, in view of the decision of the Supreme Court in K.D. Kamath & Co. v. CIT [1971] 82 ITR 680 , where a partnership deed confers immunity from loss on one of the partners, it detracts from there being a genuine partnership between the executants of the deed, and that such a firm cannot be granted registration under the Act. 18. In Raj Construction Co. v. Addl. CIT [1985] Tax LR 684, the Rajasthan High Court was of the opinion, that in order to entitle a firm to registration under the Act, the specification of shares of partners in profits as well as losses is necessary. However, it was held that, even if there is no such specification in the deed, if such specification is found in Form 11, that is enough to warrant the grant of registration. A Full Bench of this Court also has taken the same view in CIT v. Krishna Mining Co. [1980] 122 ITR 362. It was held that, if the specification of shares of the partners is evident from the partnership deed, or where i....