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K.D. Kamath & Co. v. CIT (1971) 2 SCC 873

Facts Of The Case:
In this case appellant was a firm which consists of six partners. Since October 1, 1958 the business have been carried out by the firm and the deed of partnership was signed on March 20, 1959. Further, under the Indian Partnership Act, 1932 partnership was registered on August 11, 1959. Corresponding to the previous year ending March 31, 1959, for the assessment year 1959-1960 the appellant firm filed an application under section 26A of the Income tax Act for registration of the partnership and the registration was to be done under the name of M/s. K. D. Kamath and Co.

But the Income-tax Officer, declined to grant registration by an order dated September 28, 1960. The application was declined based on the grounds that the deed of partnership dated March 20, 1959 was not genuine therefore, no partnership was brought into existence.

The Income tax officer further stated that the firm was a sole concern of K. D. Kamath. Though the Income-tax Officer stated that there is no genuine partnership, the main focus of his finding is that there is no relationship of partners was created under the said document. Therefore, the appellant appealed to the Appellate Assistant Commissioner (AAC) but he sustained the order of the ITO. Further appellant appealed to the Income-tax Appellate Tribunal.

The Income tax appellate tribunal held that the two essentials of partnership laid down by the Courts for determining the partnership (i.e.,) an agreement between the partners to share profits and losses, and the partners acting as agents � were fully satisfied in this case. The Tribunal held that the partnership deed made it clear that the partners will be sharing all profits and losses, and the other partners could act as the agents of the firm (subject to the authority of K.D. Kamath).

Thus, the partnership deed was held to be genuine and the Income Tax Officer was directed to register the firm. Then the Commissioner of Income Tax made an application under Section 66(1) of the Income Tax Act praying for a reference being made by the Appellate Tribunal to the High Court of the question of law mentioned in the application. Therefore, Tribunal referred this matter to the high court. The High Court held that as there was an agreement between the parties to share their profits and losses the first essential condition for a partnership was satisfied in this case.

Then the High court focussed on the second essential, (i.e.,) whether the partners are acting as agents or not. High court observed that since the complete control of the business was with K.D. Kamath, all the other partners did not have the power to act as agents of the other, so the second essential element, (i.e.,) agency was absent here. Therefore, High court held that the firm could not be granted registration. Then the appellant filed for an appeal in the Supreme Court against the decision of the High Court.

Case Details: Case Title : K.D. Kamath & Company V. Commissioner Of Income Tax (1971) 2 Scc 873.
Citation : (1971) 2 Scc 873, [1972] 1 Scr 1034, [1971] 82 Itr 680,(1972)1 Ctr 124.
Court : Supreme Court Of India.
Judges : Hon'ble Justice P. Jaganmohan Reddy And Hon'ble Justice, C. A.Vaidialingam.
Judgment Date : 11-10-1971

Laws And Legal Provisions Involved:
  • Indian Partnership Act, 1932 � Sections 4, 14 and 18.
  • Indian Income-Tax Act, 1922 � Section 26A and Section 66(1).
Issues Of The Case:
  1. First and the most important issue in this case was whether all the essentials of partnership laid down by the Courts and the partnership act for determining the validity of partnership was satisfied?
  2. In this case the main issue was whether the firm, M/s K. D. Kamath & Co., can be registered under Section 26A of the Income Tax Act for the assessment year 1959-1960?

Arguments Of The Parties:
Arguments of Petitioner:
S. K. Venkataranga Iyengar, learned counsel for the appellant referred Various clauses in the partnership deed and he argued that the view of the High Court regarding the essential element of agency is absent in this case, is wrong. The counsel further argued that the partnership deed leaves no space for doubt. He argued by citing the evidence that there is an agreement to share the profits and losses of the business as per the proportion mentioned in the deed.

Therefore, one of the essentials to constitute a partnership is satisfied in this case. The learned counsel further argued that, though a larger amount of control for the conduct of business may be left in the hands of the K. D. Kamath (First Partner) that by circumstances itself, does not militate against the view of one partner acting as agent of the other partners.

Learned counsel referred various decisions of the High Courts as well as of the Supreme court which were in connection to this case. Learned counsel highlighted one circumstance which is similar to this case, in that case it has been held that "the mere fact that more control is to be exercised only by one of the partners is not a circumstance which militates against the parties having entered into a partnership arrangement as understood in law.

Arguments of Respondent:
Mr. S. K. Iyer, learned counsel for the revenue throughout the argument supported the reasoning of the High Court. Learned counsel argued that whether there is an agreement to share the profits and the losses of the business and whether each of the partners is entitled to act as agent of all are to be determined by looking into all the facts as borne out by the deed of partnership. He highlighted the decision of the High Court (i.e.,) one of the essential conditions, namely, the right of one partner to act as agent of all, does not exist in the present case.

Further the learned counsel argued that the opinion expressed by the High Court that the appellant is not eligible for registration under section 26A of the Income tax Act is correct. The learned counsel referred certain clauses in the partnership deed as well as certain provisions of the Partnership Act. Learned counsel stated that it is clear that the various authorities, as well as the High Court, have only considered some of the clauses of the partnership deed for coming to the conclusion one way or the other.

Hon'ble Supreme court of India reversed the judgment and order given by the High Court and also allowed for the appeal. In this case court held that all the essential conditions of the partnership were satisfied. Therefore, the firm was held to be eligible for registration for the assessment year 1959-1960.

Legal Analysis:
In many important cases, various High Courts as well as supreme court of India had highlighted the two important essentials for partnership (i.e.,) Existence of an agreement between the partners for the sharing of all profits and losses incurred in the business of the firm, and the partners acting as agents.

Similar to the second essential the Supreme Court of India stated that as per Section 4 of the Indian Partnership Act, the business of the firm should be conducted by all the partners or by any of the partners acting on behalf of the others. In this given case, even though the authority and management of the business is vested in the first partner, K. D. Kamath, all other parties from 2 to 6 as working partners have to work under the direction of K.D. Kamath.

Therefore, it is clear that the conduct of business by K.D.Kamath, is done by him acting for all other partners. Hence, the second condition regarding the partnership in also satisfied. Clause (16) of the partnership deed dated March 20, 1959 upholds this condition. Clause (16) of the partnership deed provides that "the firm's affairs are to be carried on for mutual benefits� and it was also mentioned in the deed that "the business of the firm was to be done for the common interests of all�.

Moreover, Section 11 of the Partnership Act states that the parties can form agreements to ascertain their rights and duties. In this case an agreement for the sharing of profits and losses is also there. Hence both the prerequisites of a partnership are satisfied here. Thus, the doubts regarding the genuineness and legality of partnership are cleared.

In this case all the ingredients of a valid partnership are satisfied under the partnership deed, dated March 20, 1959. Therefore, the firm was eligible for registration for the assessment year 1959-1960. This given case law is a very interesting and important case law. By analysing this case law one can get a clear idea about the partnership.

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