COMMISSIONER OF INCOME-TAX VS N.A. PAPPURAJA SONS, 1999 PTD-MADRAS-HIGH-COURT-INDIA 289 (1996)

Income-tax---

----Firm---Registration---Validity of partnership---Partnership , deed stipulating that all partners should contribute at least Rs.15,000 as capital-- Two of partners not contributing any money initially but father of such partners having credit balance of more than Rs.60,000 in firm and partners contributing requisite amount before end of accounting year---Firm entitled to registration---Indian Income Tax Act, 1961, S.185.

The assessee was a firm consisting of nine partners. Clause 4 of the partnership deed stipulated that each partner should contribute at least Rs.15,000 on which no interest would be paid, and the surplus, if any, would be credited to the current account on which interest was payable, The Income-tax Officer found that even though more than one year had expired from the date of constitution of the partnership, two partners had not brought in the necessary capital. Hence, he refused to grant registration. The Appellate Assistant Commissioner found that a sum of Rs.63,252 was standing to the credit -of R, the father of the two partners. According to the Appellate Assistant Commissioner, the failure of the two partners to bring in capital, as stipulated in the partnership deed, should not disentitle the firm to the benefits of registration. He further pointed out that the credit balance lying in the name of the third person, which belonged to the partners, could be construed as their capital. Accordingly, the Appellate Assistant Commissioner directed the Income-tax Officer to grant registration. This was confirmed by the Tribunal. On a reference, it was submitted on behalf of the assessee that before the end of the accounting year relevant to the assessment year under consideration, all the partners had brought in capital:

Held, that a perusal of the partnership deed, dated December 9, 1973, and the accounts of the partnership firm would reveal, according to the Tribunal, that all the partners credited their capital in the partnership account. This finding was arrived at by the Tribunal on the basis of the facts arising in the case. Therefore in the present case, it could not be said that the partnership firm had violated any of the conditions prescribed under the partnership deed so as to disentitle it from obtaining registration under section 185 of the Income Tax Act, 1961

Agarwal & Co. v. CIT (1970) 77 ITR 10 (SC); CIT v. Agra Wines (1995) 201 ITR 875 (All.); CIT v. Hassanally & Sons (1971) 81 ITR 282 (Cal.); Haja Allauddin Maracair (S.S.K.) v. CIT (1952) 22 ITR 545 (Mad.); Kurien (V.K.) and George (K.P.) v. CIT (1967) 63 ITR 675 (Ker.); R.C. Mitter & Sons v. CIT (1959) 36 ITR 194 (SC); Ratanchand Darbarilal v. CIT (1985) 155 ITR 720 (SC); Umacharan Shaw & Bros. v. CIT (1959) 37 ITR 271 (SC) and Virendra Kumar Avinash Kumar v. CIT (1988) 171 ITR 263 (All.) ref.

C.V. Rajan for the Commissioner.

R. Janakiramen for the Assessee.

JUDGMENT

K.A. THANJKKACHALAM, J.---In pursuance of the order of this Court, the Tribunal referred the following question, for the opinion of this Court, under section 256(2) of the Income Tax Act, 1961:

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in holding that the assessee-firm was entitled to the benefits of registration?"

The assessee is a partnership firm consisting of nine partners including a minor. Clause 4 of the partnership deed, dated December 9, 1973, stipulated that each partner should contribute at least Rs.15,000 on which no interest will be paid, and the surplus, if any, will be credited to the current account on which interest is payable. The Income-tax Officer found that even though more than one year had expired from the date of constitution of partnership, two partners had not brought in the necessary capital. Hence, he refused to grant registration.

The assessee submitted that the provisions in the partnership deed, dated December 9, 1973, have not been actually ignored by the partners because a sum of Rs.63,252 standing to the credit of Sri N.A.P. Rajar malinga Raja was free of interest and belongs to Sint. Ramani, Krishnamoorthy and others.

In view of this, separate capitals have not been brought in by these two partners. Even otherwise it was contended that partnership was an agreement between the partners and always subject to modification, according to the desire of the partners. If any partner does not strictly follow the provisions of the deed, it is implied that the other partners have agreed to the departure. Reliance was placed on two decisions in 61 ITR 671 (sic) and V.K. Kurien and K.P. George v. CIT (1967) 63 ITR 675 (Ker.) According to the Appellate Assistant Commissioner, the failure of the two partners to bring in capital, as stipulated in the partnership deed, should not disentitle the firm to the benefits of registration. He further pointed out that the credit balance lying in the name of the third person, which belongs to the partners, could be construed as their capital. Accordingly, the Appellate Assistant Commissioner directed the Income-tax Officer to grant registration.

Aggrieved, the Department filed ''a second appeal before the Appellate Tribunal. The Appellate Tribunal confirmed the direction given by the Appellate Assistant Commissioner distinguishing the decision in CIT v. Hassanally & Sons (1971) 81 ITR 282 (Cal.).

Before us, learned standing counsel for the Department submitted that the Tribunal was not correct in granting registration to the firm. According to learned standing counsel, in the partnership deed, it is clearly stated that each one of the partners should bring in a capital of Rs.15,000. But two of the partners have not brought in capital as stipulated in the partnership deed. When there is a partnership deed stipulating that each of the partners should contribute capital, the assessee-firm should follow the stipulation as contained in the partnership deed. Learned standing counsel submitted that if there is no partnership deed, then it is open to the assessee firm to contend that it is not necessary for the partners to bring in capital. Learned standing counsel further submitted that in view of the decision in CIT v. Hassanally & Sons (1971) 81 ITR 282 (Cal.) if any one of the partners failed to bring in capital, that would disentitle the partnership firm to g registration. Learned standing counsel also pointed out that in the decisions cited by learned counsel appearing for the assessee, the facts are entirely different. In many of the decisions Hindu undivided families were converted into partnerships and, therefore, the partners have not brought capital in those cases since the share of each member of the joint family was treated as his capital contribution after certain adjustments were made.

On the other hand, learned counsel appearing for the assessee submitted that in the case there is no deviation from the stipulation contained in the partnership deed. It was explained that Raja Ramalingaraja had Rs.63,252 in his account in the partnership firm. Two of the partners, who have not brought in capital, were his son and daughter. Their father's credit to the firm can be considered as the capital contribution on behalf of his son and daughter. It was further submitted that before the end of the accounting year, relevant to the assessment year under consideration, all the partners have brought in capital. Therefore, it was submitted that the stipulations contained in the partnership deed were strictly complied with. Even otherwise, learned counsel appearing for the assessee submitted that there is no condition precedent as per section 4 of the Indian Partnership Act for contribution of capital to constitute a valid firm.

We have heard learned standing counsel for the Department as well as learned counsel appearing for the assessee. The fact remains that under a partnership deed, dated December 9, 1973, a partnership firm was constituted with nine partners. The firm was in existence even prior to December 9, 1973. Partner No.5 was then a minor. He became a major and elected to continue. One of the then partners died. So, his minor daughter was admitted to the benefits # the partnership firm. Three other married daughters, partners Nos.6 to 9, were taken in. Partner No.5 is also one of the legal heirs. That is how the reconstitution or change in constitution took place. Clause 4 of the partnership deed which dealt with capital contribution, is as under:

"(4) The aforesaid partners shall take over the assets and liabilities as on March 31, 1973, and continue to carry on the business.

The partners shall contribute a sum of Rs.15,000 each towards their fixed capital and that should be provided before the end of the year. Any other amount that may be advanced shall be credited to their current account, which shall carry interest at the rate of 12 per cent per annum.

The partners are entitled to draw any sum or sums out of the current account and such drawings shall be charged with an interest at 12 per cent per annum and debited to the same account. "

For the assessment year 1974-75, when the firm applied for registration, it was refused on the ground that the terms and conditions specified about capital contribution had not been complied with. There was no appeal by the assessee. In the present assessment year 1975-76, there was no capital contribution by two of the partners. According to the assessee, none of the conditions stipulated in the partnership deed has been violated. The father of two of the partners, Raja Ramalingaraja, was having to his credit a sum of Rs.63,252 free of interest. It belongs to Smt. Ramani, Krishnamoorthy and others. In view of this fact, separate capital has not been brought in by these two partners. According to the assessee, partnership is an agreement. When two of the partners failed to bring in capital and if other partners have agreed for the same, then there is no disqualification for granting registration. It also remains to be seen that all the partners brought their capital and credited the same in the firm's account before the end of that accounting year relevant to the assessment year under consideration, though there is some shortfall. The point for consideration is, whether this would disentitle the partnership firm to get registration under section 185 of the Income Tax Act, 1961. Section 185(1) of the Income Tax Act, 1961 states that:

On receipt of an application for the registration of a firm, the income-tax Officer shall inquire into the genuineness of the firm and its constitution as specified in the instrument of partnership, and---

(a) if he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified, he shall pass an order in writing registering the firm for the assessment year;

(b) if he is not so satisfied, he shall pass an order in writing refusing to register the firm."

Section 4 of the Partnership Act, 1932, describes a partnership as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually "partners and collectively "a firm", and the name under which their business is carried on is called the "firm name".

Therefore, before granting registration, the Income-tax Officer should find out the genuineness of the firm and its constitution as specified in the instrument of partnership. Therefore, according to the assessee, contribution of capital is not a part of the constitution of the firm.

In S.S.K. Haja Allauddin Maracair v. CIT (1952) 22 ITR 545, this Court, while considering the provisions of section 26-A of the Indian Income-tax Act, 1922, held that it was not .proper for the Income-tax Authorities and the Appellate Tribunal take each circumstance by itself and then reject it on the ground that each by itself was not conclusive. The cumulative effect of all the circumstances should be considered in arriving at the conclusion whether the partnership was real or not. A perusal of the provisions of the deed did not throw any doubt on the fact that the partnership was real and it must, therefore, be registered under section 26-A.

In R.C. Mitter & Sons v. CIT (1959) 36 ITR 194, the Supreme Court, while considering the provisions of section 26-A of the Indian Income-tax Act, 1922, held that in order that a firm may be entitled to registration under section 26-A of the Income Tax Act, the following essential conditions must be satisfied, viz.:

(i) the firm should be constituted under an instrument of partnership, specifying the individual shares of the partners;

(ii) an application on behalf of, and signed by, all the partners and containing all the particulars as set out in the Rules must be made;

(iii) the application should be made- before the assessment of the firm under section 23, for that particular year;

(iv) the profits or losses if any of the business relating to the accounting year should have been divided or credited, as the case may be, in accordance with the terms of the instrument, and

(v) the partnership must be genuine and must actually have existed in conformity with the terms and conditions of the instrument of partnership, in the accounting year. "

So also in Ratanchand Darbarilal v. CIT (1985) 155 ITR 720, the Supreme Court, while considering the provisions of section 26-A of the Indian Income-tax Act, 1922, held that (headnote) " the following conditions are to be satisfied in order that a firm may be entitled to registration:

(i) the firm should be constituted under an instrument of partnership specifying the individual shares of the partners;

(ii) an application on behalf of and signed by all the partners and containing all the particulars as set out in the rules must be made;

(iii) the application should be made before the assessment of the firm for that particular year;

(iv) the profit or loss, if any, of the business relating to the accounting year should have been divided or credited, as the case may be, in accordance with the terms of the instrument; and

(v) the partnership must be genuine and must actually have existed in conformity with the terms and conditions of the instrument of partnership, in the accounting year.

Once such conditions are satisfied, it is the obligation of the Income-tax Officer under the Act to extend the benefit of registration and allow the firm to enjoy the benefit provided by the Act."

Likewise the Supreme Court in Agarawal & Co. v. CIT (1970) 77 ITR 10 held that the conditions of registration prescribed by section 26-A and the relevant rules are (headnote):

(i) on behalf of the firm, an application should be made to the Income-tax Officer by such person and at such times and containing such particulars, being in such form and verified in such manner as are prescribed by the rules;

(ii)the firm should be constituted under an instrument of partnership;

(iii) the instrument must specify the individual shares of the partners; and

(iv) the partnership must be valid and must actually exist in the terms specified in the instrument. If all the above conditions are fulfilled, the Income-tax Officer is bound to register the firm unless the assessee has contravened section 23(4) of the Indian Income-tax Act, 1922. "

In Virendra Kumar Avinash Kumar v. CIT (1988) 171 ITR 263, the Allahabad High Court while considering the provisions of section 185 of the Income Tax Act, 1961, held that partnership is a matter of agreement and for a valid agreement, there must be more than one party, there must be a proposal and acceptance thereof and in addition to that, there should be a valid consideration for the agreement. Capital contribution is not a necessary element of a genuine partnership.

In CIT v. Agra Wines (1993) 210 ITR 875, the Allahabad High Court, while considering the provisions of sections 185 and 256 of the Income Tax Act, 1961, and section 4 of the Indian Partnership Act, 1932, held that there was no legal infirmity in the order of the Income-tax Appellate Tribunal when it held that, in the instant case, there was a genuine firm in existence. Under section 4 of the Indian Partnership Act, 1932, to constitute a partnership in law, it is necessary that there must be an agreement entered into by two or more persons, the agreement must be to share the profits of a business and the business must be carried on by all or any of those persons acting for all. It is not the requirement of law that the business should in fact be carried on by all the partners and that all of them should participate in carrying on the business. Likewise, law also does not require that every partner must contribute capital. The considerations on Rich the registration was refused by the Income-tax Officer being unsustainable, the Tribunal was right in its direction to grant registration to the assessee-firm.

According to the facts arising in Umacharan Shaw & Bros. v. CIT (1959) 37 ITR 271 (SC), three brothers, V, A and P formed a joint Hindu family governed by the Dayabhaga law. The family carried on the business of sale of foreign liquor and the licences for its three shops were held in the different names of the members, but not in the name of the family. It was claimed that in 1938, the family was disrupted and on April 7, 1939, the three brothers entered into a deed of partnership, which was registered, by which they agreed to carry on the business in partnership. They opened a separate book of account which they called the Bahi Khata which purported to show the capital contribution and accounts of the partners as well as the division of profits amongst them. The application for an order that the family had effected a partition and for registration of the partnership for 1939-40 were rejected and the profits of the business continued to be assessed in the hands of the joint family. A died in 1945 and according to the partnership deed of 1939, his sons, S, was taken in as a partner. V died on January 25, 1947, and his son, R, was admitted into the partnership. On April 10, 1947, a fresh deed of partnership was entered into by P,S and R in respect of the three liquor shops. The deed, which was duly registered, provided (i) that the partnership would be deemed to have commenced from January 25, 1947, the date of V's death; (ii) that the capital of the partnership was the amount as found to the credit of the parties thereof; (iii) that banking accounts could be opened in the firm's name or any other name as may be agreed upon.

For the assessment year 1948-49, at first two returns were filed showing the income from the business as having been received in the status of a Hindu undivided family, but a third return was filed showing the income as that of the firm. Simultaneously applications were made for an order recognising the partition and for registration of the deed, dated April 10, 1947. The claim of registration was reje4ted by the Income-tax Officer on the grounds that there was no separate capital account of the partners and that the share of profits of each partner was not credited in his account in the ledger. On these, facts, the Supreme Court held that there was nothing to establish that the Bati Khata which showed the capital account of the partners was not genuine or that it was not regularly maintained in the ordinary course of business. Therefore, there was no material to come to the conclusion that the firm was not genuine.

In CIT v. Hassanally & Sons (1971) 81 ITR 282 (Cal.) the facts are as under:

A firm, which had previously consisted. of two partners applied for fresh registration for the assessment year 1960-61. It was stated that a fresh deed of partnership had been executed and according to it, the new firm consisted of seven partners. It was claimed that the new partners who were the sons of the original partners had contributed to the initial capital out of gifts made by their respective fathers. According to the Tribun4l, the gifts to the sons of the original partners had been made after January 1, 1959, on which date the firm was deemed to have commenced its business. The new partners drew salaries though the deed provided specifically that they would not do so. All the partners were not allowed to operate the bank account of the firm, whereas the deed of partnership authorised them to do so. On these facts, the Calcutta High Court held that the business of the firm was not carried on in conformity with some of the material terms of the deed of partnership and hence the firm was not entitled to registration.

According to the facts arising in the present case, the Department was of the view that two of the partners failed to bring in capital contribution. Therefore, the partnership was not constituted in accordance with the terms of the partnership deed, wherein clause 4 stated that each of the partners should bring in Rs.15,000 as the capital. The assessee explained that the father of two of the partners was already having credit to his account in the partnership firm to the extent of Rs.63,252 and the two partners and others are entitled for the same. In view of this fact, separate capital was not entered in the name of the two partners. It was further submitted that before the end of the accounting year relevant to the assessment year under consideration, all the partners have brought their capital to the firm though there was some shortfall. Therefore, counsel for the assessee submitted that even according to the stipulation contained in clause 4 of the partnership deed, capital contribution was made by all the partners. Hence, it cannot be said that the partnership was constituted in violation of any of the terms contained in the partnership deed. A perusal of the partnership deed dated December 9, 1973, and the accounts of the partnership firm would reveal, according to the Tribunal that all the partners credited their capital in the partnership account. This findings was arrived at by the Tribunal on the basis of the facts arising in the case. Therefore, in the present case, it cannot be said that the partnership firm has violated any of the conditions prescribed under the partnership deed so 'as to disentitle it from obtaining registration under section 185 of the income-tax Tax Act, 1961. In that view of the matter, considering the facts arising in the case, in the light of the judicial pronouncements cited supra, we hold that the order passed by the Tribunal in directing the Income-tax Officer to grant registration to the assessee-firm in the assessment year 1975-76 is in order. Accordingly, we answer the question referred to us in the affirmative and against the Department. No costs.

M.B.A./1765/FC Order accordingly.