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K. D. KAMATH & CO. V . CIT (1971) 2 SCC 873

  1. K. D. KAMATH & CO. V . CIT (1971) 2 SCC 873 & CO. V . CIT (1971) 2 SCC 873  

FACTS

  • The appellant was a firm with six partners, constituted under a document dated March 20, 1959. The appellant filed an application to the ITO under Section 26-A for registration of the partnership in the name of M/s K. D. Kamath and Company.
  • The ITO refused registration citing the absence of a genuine partnership established by the March 20, 1959 deed. The ITO asserted that the claim of the firm's constitution was not authentic as the business primarily belonged to K. D. Kamath alone. ITO concluded that there was no relationship of partners inter se created under the document.
  • The Appellate Tribunal found that the partnership met essential criteria: profit-sharing agreement and acting as agents for each other.It noted that while K. D. Kamath held overriding authority, other partners were authorised to act for the firm.Therefore, it directed the ITO to register the firm under Section 26-A of the Income-Tax Act.
  • The Tribunal posed the question to the High Court: Could M/s K.D. Kamath & Co. be granted registration under Section 26-A for the assessment year 1959-60?
  • The High Court ruled against the assessee in its response. It held that the five other partners lacked authority to act as agents for each other, as they couldn't conduct business or raise loans without K.D. Kamath's consent. Due to this absence of agency among partners, the High Court concluded that the partnership deed failed to establish a genuine partnership

ISSUE

  • Could M/s K.D. Kamath & Co. be granted registration under Section 26-A of I.T. Act for the assessment year 1959-60?
  • Whether the partnership deed creates the relationship of partners as between the parties?

JUDGEMENT

Hon'ble Supreme court of India reversed the judgement and order given by the High Court. The court held that all the essential conditions of the partnership were satisfied. Therefore, the firm was held to be eligible for registration.

LEGAL ANALYSIS

  • Legal requirements under Section 4 of the Partnership Act to constitute a partnership in law are: (1) there must be an agreement to share the profits or losses of the business; and (2) the business must be carried on by all the partners or any of them acting for all. There is implicit in the second requirement the principle of agency
  • The partnership deed clearly outlined the right of each partner to share profits and bear losses in proportion to their shares, as mentioned in clause (5). This fulfills the first requirement of a partnership agreement to share both profits and losses, establishing a genuine partnership.
  • The entire control and management of the business is vested in K. D. Kamath, party No. 1, and that parties Nos. 2 to 6 as working partners have to work under his direction, so the conduct of business by party No. 1, is done by him acting for all the partners. Therefore, it is clear that as the partnership business is carried on by party No. 1, acting for all, the second condition of agency is also satisfied. This idea is reinforced by clause (16) which provides that the firm’s affairs are to be carried on for mutual benefits.
  • Section 18 of the Partnership Act establishes a partner as the agent of the firm. But that section itself is subject to the provisions of the Act. Parties under Section 11 can enter into an agreement regarding their mutual rights and duties as partners of the firm, which in this case is evidenced by the deed- of partnership.
  • Further Section 18 will have to be read along with Section 4. If the relationship of partners is established as a “partnership” as defined in Section 4 is found to exist, there is no escape from the conclusion that in law a partnership has come into existence.

COMMENTARIES RATIO

  • The mere fact that partnership agreement gives very wide powers to one of the partners including the power to dismiss working partners for misconduct if his sole discretion though fit and he retains full control of the business and the working partners are to carry out all instructions given to them from time to time does not negative the existence of the partnership if it appears that there was mutual agency.