Decided on March 25,1952



SATYANARAYANA RAO, J. - (1.) THE following question has been referred to us by the Income-tax Appellate Tribunal under Section 66(1) of the Income Tax Act, 1922 :-- " Whether there was evidence to hold that the partnership constituted by the deed, dated 13th January, 1944, was not genuine " " One S. S. K. Haja Allauddin Maracair carried on business in piecegoods at Colombo from the year 1935 under the name and style of S. S. K. Haja Allauddin and Sons. Up to the accounting year ending with 31st December, 1943, his income was assessed. in the status of an individual. During the assessment year 1945-46, however, it was claimed by the assessee that the business ceased to be owned by the individual Haja Allauddin Maracair and that had become the business of a partnership which came into existence on 1st January, 1944, evidenced by a deed of partnership of 13th January, 1944. THE accounting year of the assessee is the calendar year 1944, the assessment year being 1945-46. Under the Business Names Ordinance obtaining in Ceylon this partnership was registered on Haja Allauddin swearing to an affidavit dated 11th February, 1944, in which he pleaded that the partnership was real and genuine. THE partners in this partnership were the three major sons of the first wife of Haja Allauddin. He has also minor sons by the second wife but they are not made parties. On an examination of the various clauses of the deed of partnership the revenue authorities and the Appellate Tribunal found that the partnership was not real and therefore assessed Haja Allauddin as an individual during the assessment year. It has been represented to us on behalf of the assessee by Mr. Viswanatha Aiyar that there was also an application to register the partnership under Section 26A of the Act and that application is kept pending till this reference has been answered by usTHE point for consideration therefore is whether the view taken by the Appellate Tribunal that this partnership was not real is supported by any evidence in the case. Apart from the circumstance that this firm was registered under the Ceylon Business Names Ordinance, the only other material on which the conclusion of the authorities was based was the deed of partnership.
(2.) THOUGH the partnership commenced on 1st January, 1944, the deed was entered into on the 13th January, 1944, and was attested by a Notary Public in Ceylon. The father and the three adult sons by the first wife became partners under this deed, their shares being 30 shares in 100 to Haja Allauddin, 25 shares to Mahomed Owdhu, 25 shares to Mahomed Lebbe and 20 shares to Shaik Muhamad Bukari. The style of the firm remained the same, viz., S. S. K. Haja Allauddin and Sons. Clause 5 provides that the capital of the partnership shall consist of the net value of the stock-in-trade, book debts and other assets of the said business carried on till then solely by the father less the outstanding liabilities of that business which were estimated to be about Rs. 40,000. In substance and in effect the father during his lifetime was admitting these three major sons as sharers in the business and but for this partnership deed the sons would not have any interest in the business. From the point of view of the father, therefore, the recitals in the document are undoubtedly against his pecuniary interest. The net capital, it was perhaps contemplated, could be known only after the income-tax up to the end of 1943 was paid by all the partners in equal shares out of the said capital as provided by clause 6 of the deed of partnership. Under clause 7, provision was made for raising additional capital if it was found necessary or expedient for the efficient carrying on of the business, and that it should be contributed by the partners in the shares in which they held the interest in the partnership is also provided by the said clause. No term was fixed for the duration of the partnership but it could be terminated by three months' notice by a partner. Death, retirement or expulsion of any partner would not have the effect of terminating or dissolving the partnership. The partners were permitted to draw during the continuance of the partnership every month Rs. 50 by the father, Rs. 40 each by his first and second sons and Rs. 25 by the third son.
(3.) THE importance of this provision is that the father is not treated as the sole owner of the capital and the profits and was not given absolute discretion to draw any amount he liked from the funds of the partnership but his right was restricted along with the sons to a particular amount per month. This is undoubtedly a curtailment and a restriction on his proprietary rights in the business. THE father being aged was undoubtedly given an important position in the management of the affairs of the business but as rightly pointed out by the Appellate Tribunal, such control over the sons by the father is not at all inconsistent with the existence of a real partnership, THE sons were required to attend to the business at Colombo and most senior of them in age including the father should be termed the managing partner and in that capacity was entitled to draw every month Rs. 25 in addition to the drawings permitted under the previous clause. THE father however was at liberty to stay outside Ceylon for a longer period than the sons in which case the period was only three months per year. THEre are also the other usual clauses found in any deed of partnership specifying the duties and the rights of the partners inter se which it is unnecessary to refer or enumerate in the course of this judgment. To ensure due obedience of the sons the father is given the liberty to dissolve the partnership in, case of gross ingratitude or misbehaviour or neglect or disobedience on the part of the sons but in such an event the partner who is sent out would be entitled to receive his share of the capital and the profits. THE power to dissolve, though specifically mentioned in clause 22 of the deed, does not take away the right of the sons to dissolve the partnership if they so choose by giving three months notice as required by clause 1 of the deed.;

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