- (1.) THE following question has been referred to us by the Income-tax Appellate Tribunal, Allahabad Bench, under Section 66(1) of the Indian Income-tax Act for our opinion: Whether, in the circumstances of the case and on a correct construction of the deed of partnership, dated the 3rd of April, 1944, a genuine partnership can be inferred ?
(2.) THE assessee firm Lalli Ram Sunder Lal was assessed upto the assessment year 1944-45 as a Hindu undivided family firm. On the 3rd of April, 1944, one Ram Charan Sarogia, representing this Hindu undivided family, entered into a deed of partnership with two brothers, Ram Charan Laharia and Grovind Das. THE agreement of partnership laid down that Ram Charan Sarogia representing the first party and Ram Charan Laharia and Govind Das constituting the second party would be entitled to profits and would bear the losses in equal shares. An application was presented for registration of this deed of partnership under Section 26A of the Indian Income-tax Act during the assessment year 1945-46. THE Income-tax Officer rejected this application and the appeals to the Appellate Assistant Commissioner of Income-tax and to the Income-tax Appellate Tribunal failed. THE assessee firm, therefore, applied for a reference to this Court. The statement of the case forwarded by the Tribunal incorporates a translation of the partnership deed, dated the 3rd of April, 1944, as an appendix. This deed clearly lays down that the two parties to it would be entitled to profits and would bear losses in equal shares after deducting one anna in the rupee out of the profits for the temple of Shri Thakur Ji Rashiq Siromaniji situated in Rambagh outside Laxmi Gate, Jhansi. In Section 4 of the Indian Partnership Act, partnership has been defined 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." The deed in question clearly provides for the sharing of profits between the two parties to it, In addition, there is also a clear provision for the sharing of losses. These provisions for the sharing of profits and losses raise a very strong presumption that this deed creates a partnership. It was contended by the learned Counsel for the Department that an examination of other terms of the deed would show that though there were provisions for the sharing of profits and losses, this document really purported to give to party No. 2 the status of an agent or a servant and did not really bring into existence a partnership. It was further contended that, in any case, it did not create a genuine partnership. So far as the second contention is concerned, the statement of the case by the Income-tax Appellate Tribunal shows that the Tribunal nowhere found that the agreement in question was not genuine and was a colourable transaction. Even in the appellate order passed by the Tribunal, it was clearly mentioned that "the point for determination in the appeal is whether on a proper construction of the terms of the deed of partnership, dated the 3rd of April, 1944, on the basis of which registration is sought, a genuine partnership has come into existence.' It is, therefore, quite clear that the Tribunal never considered that the genuineness of the terms of the deed itself was at all in doubt. The only point that was considered and decided was whether the terms of the deed itself constituted a legal partnership. There being no consideration of the question of genuineness of the transaction by the Tribunal, this point cannot be taken into account by us in giving our opinion on the question referred to us.
(3.) ON the construction of the deed itself, as we have said above, a strong presumption arises that a partnership came into existence due to the provisions that the two parties to the agreement were to be entitled to profits and to bear losses in equal shares. The provision in the contract about the liability to bear losses in equal shares is ordinarily much more consistent with the constitution of a partnership than with any other relationship between the contracting parties. There can, of course, be cases where, under special circumstances, the parties to the agreement may be sharing both profits and losses and yet they may not be partners. This will, however, depend on the individual circumstances of each case and it will have to be seen whether, in the particular case under discussion, such special circumstances have been shown as would be enough to rebut the presumption of partnership arising out of the agreement to share profits and losses in equal shares. In the present case, an examination of the agreement deed shows that there are no such special circumstances in existence. There is no doubt that, under the agreement, all the assets of Firm Lalli Ram Sunder Lal were to continue to belong to the first party and even the ownership of the firm was to vest in the first party. This means that the rights under the goodwill of the firm were also to belong to the first party. The. second party was further debarred from the right of borrowing money for partnership business without the consent of the first party. None of these provisions is, however, inconsistent with the existence of partnership. It is not essential that, in a partnership, all the contracting parties should be owners of the assets or the goodwill of the firm, nor is it necessary that the right of borrowing money on behalf of the partnership business should be exercisable by every partner. The further provisions of the agreement deed relate to the manner of dissolution of the partnership business. In paragraph 7 of the agreement deed, it was laid down that if any dishonesty of party No. 2 was found, or, due to his action, there was loss to the business, or some bad slur was given to the goodwill of the firm, then party No. 1 would have a right to dissolve the partnership. This right of the dissolution of the partnership was again, in no way, inconsistent with the existence of a legal partnership and did not create a contract by which the second party could be considered to be the servant or agent of party No. 1. Under the agreement deed, party No. 2 was to do the whole business with great skill and honesty and since his contribution in the partnership was to consist of his personal services it was not unnatural that provision should have been made for the dissolution of the partnership at the instance of party No. 1 in case the actions of party No. 2 indicated dishonesty or gave a bad name to the firm.;