Decided on May 31,1982



D.S. Meenakshi Sundaram, Judicial Member - (1.) THIS is an appeal filed by the revenue objecting to the order of the Commissioner (Appeals) directing the ITO to grant registration to the assessee-firm under Section 185(1)(a) of the Income-tax Act, 1961 ('the Act') for the assessment year 1977-78.
(2.) The assessee, Gagrat & Co., is a firm of lawyers practising at Delhi. It consists of the following five partners : (i) Shri R. A. Gagrat (ii) Shri C. M. Mehta (iii) Shri J.R. Gagrat (iv) Shri B. R. Agarwala (v) Shri J. Lal This firm is evidenced by a deed of partnership dated 22-11-1976. The assessee applied for registration in Form No. 11 on 5-1-1977 on the strength of the above said partnership deed for the assessment year 1977-78 relevant for the previous year ended 31-3-1977. The ITO after examining the various clauses of the partnership deed came to the conclusion that the relationship of partnership was not intended to be brought about among the five partners and that, therefore, the assessee-firm was not entitled to registration. He was further of the view that the profits of the firm were also not distributed as specified in the deed of partnership. In support of these conclusions the ITO relied on the various clauses of the deed of partnership and the decision of the Supreme Court in M.P. Davis v. CAIT [1959] 35 ITR 803. The assessee preferred an appeal objecting to this order of the ITO. The Commissioner (Appeals) disagreed with the reasonings and conclusions of the ITO and held that the assessee-firm had been held to be a genuine firm and granted registration throughout in all the earlier assessment years and that the mere fact that a new deed was drawn up in the year under appeal with some adjustments in the various clauses which did not detract, from the relevant provisions of the Partnership Act or the Income tax Act, could not entitle the ITO to refuse registration to the assessee in the year under appeal. He rejected the ITO's conclusion that the share of profit of each partner being variable from year to year, the percentage of losses to be shared by them was not clear. He pointed out that the partnership clearly laid down that losses were to be shared by four of the five partners in proportion to their shares in the profits of the firm which shares were clearly, specified. He also held that the decision of the Supreme Court in the case of M.P. Davis (supra), relied on by the ITO, was distinguishable and that the ITO had completely ignored the submissions made on behalf of the assessee and had nothing to say as to why the later decision of the Supreme Court in K.D. Kamath & Co. v. CIT [1971] 82 ITR 680 would not apply to the facts of the present case. He further observed that it was settled law that bare suspicion will not be sufficient to justify the inference of fact that a partnership is not genuine-Krishna Flour Mills v. CIT [1962] 44 ITR 501 (SC) and Umacharan Shaw & Bros. v. CIT [1959] 37 ITR 271 (SC). He further observed that the mere fact that a former employee was taken up as a partner, or that he did not bring in any capital or that a partner occupied a dominant position and is in control of the business would not constitute evidence or a finding that the partnership is not genuine. In support of this, he relied on a number of decisions mentioned in para 10 of his order. He, therefore, held that the ITO was not justified in refusing registration to the assessee-firm and, accordingly, directed the ITO to grant registration to the assessee-firm for this year. Aggrieved by this order of the Commissioner (Appeals) the revenue has come up in appeal to the Tribunal.
(3.) BEFORE us Shri S.C. Tiwari, the learned departmental representative, relied on the various clauses of the deed of partnership dated 22-11-1976 and contended that partnership is not a matter of mere form but of real substance ; that we should look at the true character and relationship of Shri J. Lal with the other partners of the firm, and that J. Lal was acting as a partner with respect to outside world will be of no consequence at all nor his designation or his signing the partnership deed as a partner would be of any relevance or consequence. He contended that we should confine ourselves to his relationship vis-a-vis his other partners. He pointed out (i) that according to Clause 2 of the deed of partnership, Shri J. Lal had no right to dissolve the assessee-firm, (ii) that according to Clause 4, the name, goodwill and other assets of the firm belonged to Mr. Gagrat and later to his son, Shri J.R. Gagrat ; (in) that according to clause 6, Mr. J. Lal had no right to contribute to the capital of the firm ; (iv) that clause 7 clearly indicated that J. Lal had no say in classification of expenditure as capital or revenue ; and (v) that he had also no say in respect of the expenses and allowances specified in the said clause. Shri Tiwari pointed out that according to clause 8, Mr. Lal was entitled to one month's leave subject to the approval of his partner, Mr. B.R. Agarwala. He emphasised with reference to Clause 11 that share of J. Lal was fixed and determined and it sounds like an annual salary to an employee. He pointed out that J. Lal had nothing to do with the sharing of the fortunes made by the firm or in the losses of the firm. He further pointed out that in Clause 13, J. Lal was conspicuous by his absence since he would not have any share. He also pointed out that according to Clause 16, L Lal could not operate any bank account or any other account of the firm. Shri Tiwari heavily relied on Clause 18 of the partnership deed to emphasise that Mr. Lal had to act under the direction and supervision of Mr. B.R. Agarwala which clearly established that Mr. Lal was only a subordinate of Mr. B.R. Agarwala. He also referred to Clause 23 which showed that Mr. Lal had to work under the restrictions imposed by the sharing partners. He further relied on Clause 24 which specifically deprived Mr. J. Lal of any participation in the financial affairs of the firm. He also pointed out that according to Clause 25, J. Lal had no right to give notice nor entitled to get any share if any partner ceased to be a partner. Shri Tiwari further relied on the fact that Mr. Lal had filed his return of income claiming the income received from the partnership as salary income and not as share of profits and claimed deduction under Section 16. According to Mr. Tiwari this was not a light matter and not a matter for correction as held by the Commissioner (Appeals). He, therefore, contended that the assessee-firm had not discharged its burden of proof to show that there was in existence a genuine firm which was entitled to registration. According to him, the profit-sharing ratio was not specified and that similarly the share in losses were also not specified. He relied on the decision in M.P. Davis (supra), referred to by the ITO, and further contended that the decision of the Supreme Court in K.D. Kamath & Co. (supra) would not apply to the facts of the present case. According to Mr. Tiwari, the cumulative effect of all the circumstances clearly established that Mr. J. Lal was only an employee and not a partner in the firm and that, therefore, the ITO was fully justified in refusing registration to the assessee-firm and that the Commissioner (Appeals) erred in reversing his order. He, therefore, contended that the order of the Commissioner (Appeals) should be reversed and that of the ITO should be restored.;

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