MUSHTAQUE AND CO Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE assessee in this case, M/s. Mushtaque and Company. Davangere, had been refused registration under section 185(1)(b) of the Income-tax Act, 1961, on the ground that the element of agency which is an essential ingredient to constitute a valid partnership was absent in this case. THE assessment year involved is 1962-62. THE corresponding accounting period was the year ended March 31, 1962. THE instrument of partnership produced before the authorities was dated March 30, 1962, and the partnership was deemed to have come into operation with effect from April 1, 1961. THE consitution of the partnership in terms of the aforesaid deed was as under : <FRM>JUDGEMENT_561_ITR84_1972Html1.htm</FRM>

(2.) AN application for registration of the firm under section 26A of the Income-tax Act, 1922, was made to the Income-tax Officer on March 30, 1962, followed by a fresh application for registration made on September 29, 1962, under the form prescribed as contemplated under section 184 of the Income-tax Act, 1961. The Income-tax Officer held that the assessee was not entitled to registration for two reasons : firstly, on the ground that the partnership deed was weighted overwhelmingly in favour of the managing partner, Shri Sayyad Hafeex Saheb, who had the power to dismiss the other partners, and, secondly, on the ground that the distribution of profits had not been made in accordance with what had been stated in the partnership deed. In support of his case, the Income-tax Officer had relied on clause 5 of the partnership deed which read as under :

(3.) ON second appeal, the Tribunal took the view that this case was covered by the ratio of the decision of the Mysore High Court in the case of K.D. Kamath andamp; Co. In the present case, the agreement stipulated that the managing partner shall have full rights to admit new partners and raising additional funds and loans for the business, and in case it was found that the activities of the working partners were detrimental to the interest of the firm, the managing partner has power to expel ot restrict their powers. Moreover, in all important matters the working partners had to seek advice from the mnanaging partner and act accordingly. The Tribunal, accordingly, observed on a true reading of the document that it was clear that no relation of partnership was created by the document in question since the working p[artners could not represent the firm on their own. The decision of the Mysore High Court in the case of City Tobacco Mart cited by the learned representative for the assessee was also considered by the Tribunal. The Tribunal observed that the present case went a step further, inasmuch as powers were given to the managing partner to expel the other working partners by restricting their sphere of activities and in all important matters the working were required to seek advice from the managing partner and act accordingly. These restrictions, according to the Tribunal, struck at the root of the partnership by taking away the element of agency which was an essential ingredient of a partnership. The assessee's representative also relied on the decision of the Madras High Court in the case of Subbu and Company and A.M. Palaniappa Chettiar. The Tribunal found that the facts in the present case were quite different from the facts in the above cases and observed that the analogy drawn by the representative for the assessee was not appropriate. Having regard to these considerations, the Tribunal took the view that the assessee's case fell squarely within the ratio of the Mysore High Court's decision in the case of K.D.Kamath andamp; Co. The Tribunal accordingly held that no valid partnership was constituted by the document dated March 30, 1962, and the authorities below were, therefore, right in refusing to grant the benefit of registration to the assessee. The Tribunal dismissed the assessee's appeal accordingly. A copy of the Tribunal's order dated October 6, 1967, in I.T.A. No. 1696 of 1965-66 is annexed herewith, marked "D", and forms part of the statement of the case.