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

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Case Summary

Full Case Details

The appellant was a firm consisting of six partners and the partnership was constituted
under the document, dated March 20, 1959, The business of the partnership, as recited in
the deed, is stated to have been carried on in partnership from October 1, 1958. The
partnership was registered under the Indian Partnership Act, 1932, (the Partnership Act)
on or about August 11,1959. For the assessment year 1959-60, corresponding to the
previous year ending March 31, 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 declined to grant registration on the ground that there was no
genuine partnership brought into existence by the deed of March 20, 1959 and that the
claim of the firm having been constituted was not genuine. The ITO further held that the
business should be held to be the sole concern of K. D. Kamath. The sum and substance
of his finding was that there was no relationship of partners inter se created under the
said document. The Department did not challenging the genuineness of the document.
On appeal of the assessee, the AAC confirmed the order of ITO.The Appellate Tribunal
came to the conclusion that the two essential requirement

the party hereto of the 2nd part, (3) Shri Shripadrao Damodara Kamat, hereinafter called
the party hereto of the 3rd part, (4) Shri Dayanoba Jotiram Mohite, hereinafter called the
party hereto of the 4th part, (5) Shri Shankar Govind Joshi, hereinafter called the party
hereto of the 5th party, and (6) Shri Yashavant Bhawoo Kate, hereinafter called the party
of the 6th part. All Hindu inhabitants, residing at Hubli, and whereas the parties from 2 to
6, who have been serving with party No.,1 since a very long time and in view of the
appreciation of their honest and sincere services which the above parties have rendered in
past and with the object that the above parties should also have their material and
economical progress, party No. 1, i.e., Shri K.D. Kamat has been pleased to convert his
sole proprietory concern, as a partnership concern, by admitting the above parties from 2
to 6 as working partners and the party No. 1 shall be the main financing and managing
partner and the business of the partnership is agreed and is being carried on accordingly
in partnership as from 1st day of October, 1958, as ‘Contractors’ or any other business
that the parties may think fit under the name and style of ‘Messrs. K. D. Kamat & Co.,
Engineers and Contractors, Hubli’ and it is hereby agreed by and among the parties to
this Agreement as under.

2. That the business of the partnership is running under the name and style of
   ‘Messrs. K. D. Kamat & Co., Engineers and Contractors, Hubli’ as from the 1st day of
   October 1958, and this agreement shall take retrospective effect and shall be deemed to
   have come into operation as from the commencement of October 1, 1958.
3. That the duration of the partnership shall be at will.
4. That the business of the partnership is running at Hubli and shall run at Hubli or at
   such other place or places, as the case may be under the name and style of ‘Messrs. K. D.
   Kamat & Co., Engineers and Contractors’ or in such other name or names that the parties
   may from time to time decide and agree upon.
5. That the final accounts of the partnership firm shall be made up on the last day of
   each year of account, which shall generally be on 31st day of March every year of
   account and the accounts shall be taken up to that date of all the stock-in-trade and after
   providing for all the working expenses, the remaining net profits or losses, as the case
   may be, shall be shared by the parties hereto as under omitted).
6. That it is agreed among the partners that the party No. 1, i. e., Shri K. D. Kamat,
   shall be the principal and financing partner and the rest of the partners, i.e., from 2 to 6
   are admitted only as working partners contributing labour.
7. That the good-will of the firm shall be wholly and solely belong to party No. 1,
   i.e., Shri K.D. Kamat.

ents as laid down by the Courts for
determining whether there was a partnership, namely, an agreement between the parties
to share profits and each of the parties acting as agent of all were fully satisfied in this
case. The Tribunal held that the partnership deed made it clear that profits and losses
were to be shared between the parties and that, subject to the over-riding authority of K.
D. Kamath, the other partners could act for the firm. In this view, the Appellate Tribunal
held that the deed did create a relationship of partners inter se between the parties and
directed the ITO to register the firm under Section 26-A of the Income-Tax Act.
The CIT made an application under Section 66(1) of the Income-lax Act praying for
a reference being made by the Appellate Tribunal to the High Court of the question of
law mentioned in the application. The Tribunal referred to the High Court for its opinion
the following question of law:
“Whether, on the facts and in the circumstances of the case, M/s K.D. Kamath &
Co., could be granted registration under Section 26-A of the Act for the assessment year
1959-60?”
The High Court answered the question against the assessee.
Partnership deed:“Instrument of partnership.—Articles of agreement made at Hubli, this
20th day of March, 1959, among (1) Shri Krishnarao Dadasaheb Kamat, hereinafter
called the party hereto of the 1st part, (2) Shri Narayan Ganesh Kamat hereinafter called

8. That the party No. 1, i.e., Shri K.D. Kamat, who is the principal and financing
   partner and by virtue of his having the longstanding experience in the line of business
   together with the technical knowledge of Engineer, shall have full right of control and
   management of the firm’s business and in the best interest of the firm, it is thus decided
   and agreed upon among all the partners that all the working partners from 2 to 6 shall
   always work according to the instructions and directions given from time to time by Shri
   K. D. Kamat, in the actual execution of works and in any other matter connecting
   thereof, pertaining to this partnership business. The decision of the principal partner on
   the aspect of taking any new business or giving tenders for new works, shall always vest
   with him, whose decision shall be final and binding upon all the working partners,
9. That it is also agreed among the partners that no working partner or partners is/are
   authorised to raise a loan for and on behalf of the firm or pledge the firm’s interest
   directly or indirectly and such an act shall not be binding on the firm, except under the
   written authority of the principal partner.
10. That it is further expressly agreed that excepting the parties No. 1 and 2, i.e. Shri
    K.D. Kamat and Shri N.G. Kamat, the other parties from 3 to 6 shall not do contract
    business, so long as they are partners in this firm and this clause is inserted in the
    betterment of the firm’s business and with the object that the firm’s business should not
    suffer and the works if taken or standing in the name of the said parties from 3 to 6, the
    same shall be the business of the firm.
11. That it is also further agreed that the Managing Partner Shri K.D. Kamat shall
    alone operate the Bank accounts and in case of any need for convenience, the partner
    authorised by him in writing and so intimated to the Bank or Banks, shall operate the
    Bank accounts.
12. That in the course of the business or during the existence of the firm’s business,
    the principal partner has reason to believe that any working partner or partners is/are not
    working and conducting to the best interest of the firm, the principal partner shall have a
    right to remove such a working partner or partners from the partnership concern and in
    such an eventuality the out-going working partner or partners, shall have only right of the
    profit or loss up to the date of his retirement, as may be decided by the principal partner
    in lump sum either by paying or receiving, regard being had to the progress of the
    business or otherwise up to the date of retirement, only on the completed works.
13. That proper books of accounts shall be kept by the said parties and entries made
    therein of all such matters, transactions and things as are usually entered in the books of
    accounts kept by the persons engaged in business of a similar nature; all books of

accounts, documents, papers and things shall be kept at the principal place of business of
the firm and each partner shall at all times, have free and equal access to them.

14. That each partner shall be just and faithful to the other or others in all matters
    relating to the business of the firm, shall attend diligently to the firm’s business and give
    a true account and shall give information relating to the same without fail.
15. That each partner shall withdraw such sums as will be mutually determined by
    the partners from time to time, in anticipation of the profit falling to their individual
    share and in case of loss, the same shall be made good by the partners.
16. Thus subject to the provisions herein mentioned and laid down and made
    thoroughly known by each of the parties to this Agreement with sound mind and body,
    the firm’s affairs be carried on for mutual gain and benefit and if any questions which
    may arise or occur touching to the conduct or management or liability of the firm, the
    same shall be amicably settled among the parties with the consent of principal partner,
    whose decision in the matter shall be final and binding on all partners”).
    C.A. VAIDIALINGAM, J. – 8. The High Court has generally considered the effect of Clauses 5
    to 9, 12 and 16 of the partnership deed. The High Court also considered the question whether the
    partnership deed satisfies the two essential requisites to constitute the partnership, namely: (1)
    whether there is an agreement to share profits as well as the losses of the business, and (2)
    whether each of the partners under the deed can act as agent of all. From the discussion in the
    judgment, the learned Judges, so far as we could see, have not thought it necessary to consider
    elaborately the question whether there is an agreement in the partnership deed to share the profits
    and losses of the business. Obviously, the High Court must have been satisfied from the recitals
    in the partnership deed that this requirement is amply satisfied in this case. That is why we find
    that the learned Judges have focussed their attention as they themselves say in the judgment on
    the question whether it is possible to hold from the recitals in the partnership deed that each
    partner is entitled to act as agent of all. In considering this aspect, the learned Judges have
    referred particularly to Clauses 8, 9 and 16 of the partnership deed and have held that it is clear
    from these clauses that the management, as well as the control of the business, is entirely left in
    the hands of the alleged first partner K.D. Kamath and that the other partners are only to work
    under his directions and share profits and losses in accordance with the proportions mentioned in
    Clause 5. It is the further view of the High Court that it is not within the power of the other five
    parties to act as agent of the other partners as they cannot accept any business except with the
    consent of K.D. Kamath; nor can they raise any loan or pledge the firm’s interest. On this
    reasoning the High Court has come to the conclusion that there is no relationship of partners
    created under the partnership deed and as this essential element of agency is lacking, the appellant
    was not eligible to be granted registration under Section 26-A

9. Mr S.K. Venkataranga lyengar, learned counsel for the assessee appellant, referred us to
   the various clauses in the partnership deed and urged that the view of the High Court that the
   essential element of agency is absent in this case, is erroneous. The counsel further urged that the
   partnership deed, read as a whole, leaves no room for doubt that there is an agreement to share the
   profits and losses of the business in the proportion mentioned in the deed. Therefore, one of the
   essential ingredients to constitute a partnership is satisfied in this case. He further urged that
   though a large amount of control regarding the conduct of business may have been left in the
   hands of the first partner K. D. Kamath, that circumstance, by itself, does not militate against the
   view of one partner acting as agent of the other partners. He referred us in this connection, to
   certain decisions of the High Courts as well as of this Court, where under circumstances similar
   to the one existing before us, 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.
10. Mr S.K. lyer, learned counsel for the Revenue, supported the reasoning of the High Court
    in its entirety. According to the learned counsel, the question whether there is an agreement to
    share the profits and the losses of the business and the further question 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 urged that on a consideration of all such facts, the High Court
    has held that one of the essential conditions, namely, the right of one partner to act as agent of all,
    does not exist in the present case. If so, the opinion expressed by the High Court that the appellant
    is not eligible for registration under Section 26-A is correct.
11. In considering the question whether the partnership deed creates the relationship of
    partners as between the parties thereto, as understood in law, it is desirable to have a complete
    picture of the entire document.
12. The High Court has rested its decision on five circumstances for holding that there is no
    relationship of partners as between the parties inter se created under the partnership deed. They
    are based on consideration in particular of Clauses 8, 9 and 16. The following are the
    circumstances, which according to the learned Judges militate against holding in favour of the
    assessee: (1) The management as well as the control of the business is entirely left in the hands of
    the alleged first partner K. D. Kamath; (2) The other partners can merely work under his
    directions and share in the profits and losses in accordance with the proportion mentioned in
    Clause 5; (3) It is not within the power of the parties Nos. 2 to 6 to act as agent of other partners;
    (4) The said parties cannot accept any business except with the consent of K.D. Kamath; and (5)
    Those parties cannot raise any loan or pledge the firm’s interest, directly or indirectly except
    under the written authority of K.D. Kamath. In view of all these circumstances, according to the
    High Court, one of the essential element to constitute partnership, namely, agency is lacking.
    
    16. From a perusal of the partnership deed one thing is clear, namely, under clause (1) what
    was originally the sole proprietary concern of K.D. Kamath has been converted as
    partnership concern by admitting parties Nos. 2 to 6 as working partners, alone with party No. I

and party No. 1 is the main financing and managing partner of the business. That clause has to be
read along with clause (6) whereunder the partners have agreed that K. D. Kamath shall be the
principal and financing partner and the rest of the partners, namely, parties Nos. 2 to 6 are
admitted only as working partners contributing labour. Clause (4) deals with the running of the
partnership business at Hubli as also other place or places or with such other name or names that
the parties (which means partners Nos. 1 to 6) may from time to time decide and agree upon.
From clauses (1), (2) and (3), it is clear that the business of the partnership is that of Engineers
and Contractors. We are referring to this aspect because it will have a bearing regarding the
control of the business agreed to be vested in K. D. Kamath. There does not appear to be any
controversy that party No. 1 has been carrying on such business as a proprietary concern for a
long time before the partnership was formed and as such he is considerably experienced in the
said technical type of business. Clause (5) provides that final accounting is to be taken as on
March 31 of every year and the net profits and losses are to be shared by the parties thereto in the
proportion of the shares specified in the said clause.

17. Under clause (11), apart from the managing partner, K. D. Kamath operating the bank
    accounts, any other partner authorised by him is also eligible to operate the bank accounts. Clause
    (12) entitles a partner, when he ceases to be a partner to be paid his share of profit or loss, up to
    the date of his so ceasing to be a partner. Clause (13) provides that books of accounts are to be
    properly maintained and each partner has a right at all times to have free and equal access to
    them. Clause (14) enjoins on each partner to be just and faithful to the other partners in all matters
    relating to the business of the firm and each of them has got a duty to diligently attend the
    business of the firm. Each of them has also an obligation to give a true account and information
    regarding the business of the firm. Clause (15) enables the partners to withdraw the amounts in
    anticipation of profits falling to their individual share; and in case of loss, each of them is also
    liable to make good the same in proportion to his share in the partnership. Clause (16) enjoins on
    the partners to carry on the affairs of the firm for mutual gain and benefit.
18. All the above clauses clearly, in our opinion, establish that the sole proprietary concern of
    K.D. Kamath has vanished. The above clauses also establish the right of each of the partners to
    share the profits and also to bear the losses in the proportion of their shares mentioned in clause
    (5). Therefore, one of the essential ingredients to constitute partnership, namely, that there should
    be an agreement to share the profits and the losses of the business is more than amply satisfied in
    this case.
19. Then the question is whether the circumstances pointed out by the High Court and
    referred to by us earlier, necessarily lead to the conclusion that no relationship of partners, as
    understood in law, has been created as between the parties under the partnership deed.
    
    23. In certain decisions of the High Courts the two essential conditions necessary to form the
    relation of partnership have been stated to be:(l) that there should be an agreement to share the

profits and losses of the business, and (2) that each of the partners should be acting as agent of all.
Though, these two conditions, by and large, have to be satisfied when the relationship of partners
is created between the parties, we would emphasise that the 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.

28. From a review of the above decisions, it is clear that the mere nomenclature given to a
    document is by itself not sufficient to hold that the document in question is one of partnership.
    Two essential conditions to be satisfied are: (1) that there should be an agreement to share the
    profits as well as the losses of business; and (2) the business must be carried on by all or any of
    them acting for all, within the meaning of the definition of “partnership” under Section 4 of the
    Partnership Act. The fact that the exclusive power and control, by agreement of the parties, is
    vested in one partner or the further circumstance that only one partner can operate the bank
    accounts or borrow on behalf of the firm are not destructive of the theory of partnership provided
    the two essential conditions, mentioned earlier, are satisfied.
29. In the light of the principles laid down by this Court in Steel Brothers and Co. Ltd. v.
    Commissioner of Income-tax [AIR 1958 SC 315], the reasons given by the High Court for
    holding that the relationship of partners has not been created under the deed of partnership before
    us, cannot be sustained. As the control and management of business can be left by agreement in
    the hands of one partner to be exercised on behalf of all the partners, the other consequence by
    way of restriction on the rights of the other partners lose all significance. In fact the clauses
    providing that the working partners are to work under the directions of the managing partner and
    the further clause restricting their right to accept business or raise any loans or pledge the firm’s
    interest except with the consent of the managing partner K.D. Kamath, have all to be related with
    the agreement entered into by the partners regarding the management and control by K.D.
    Kamath. We are of the opinion that under the partnership deed the relationship which has been
    brought into existence between the six parties is a relationship of partners who have agreed to
    share the profits and losses of business carried on by all or any of them acting for all and it
    satisfies the definition of “Partnership” under Section 4 of the Partnership Act. We have already
    pointed out that there is a sharing of the profits or losses of the business by the partners in the
    ratio of the proportion mentioned in clause (5). That clause read with other clauses already
    discussed by us clearly shows that the first condition, namely, all persons agreeing to share profits
    or losses is satisfied’. Even on the basis that 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, from all the other circumstances it is clear that the conduct of business
    by party No. 1, is done by him acting for all the partners. There is no indication to the contrary in
    the partnership deed. Therefore, even without anything more, it is clear that as the partnership
    business is carried on by party No. 1, acting for all, the second condition of agency in also
    satisfied. This- idea is reinforced by clause (16) which provide that the firm’s affairs are to be

carried on for mutual benefits. That clause is to the effect that the firm’s affairs which are
managed by party No. 1 is really for the mutual gain and benefits of all the partners.

30. It is, no doubt, true that the second essential test of the business being carried on by all or
    any of the partners acting for all must be satisfied. The provisions in the partnership deed clearly
    establish that K.D. Kamath, the managing partner, carries on the business, acting for all the
    partners.
31. Much stress has been laid by the High Court on the fact that under clause (9) parties Nos.
    2 to 6 have no right to raise loans for and on behalf of the firm or pledge the firm’s interest. This
    circumstance, according to the High Court, is destructive of the element of partnership. We have
    already held that the management and control of the business done by party No. 1, is carrying on
    of the business on behalf of all the partners. No doubt under Section 18 of the Partnership Act, a
    partner is the agent of the firm for the purpose of the business of the firm. But that section itself
    clearly says that it is subject to the provisions of the Act. It is open to the parties under Section 11
    to enter into an agreement regarding their mutual rights and duties as partners of the firm and that
    can be done by contract, 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, and if the necessary ingredients referred to in that
    section are found to exist, there is no escape from the conclusion that in law a partnership has
    come into existence. It is in the light of these provisions that Section 18 will have to be
    appreciated. Section 18 only emphasises the principle of agency which is already incorporated in
    the definition of “partnership” under Section 4.
32. It should be remembered that so far as the outside world is concerned, so long as the
    parties Nos. 2 to 6 are held out as partners of this firm, as has been done under the partnership
    deed, their acts would bind the whole partnership. The provision in clause (9) in our opinion, is
    only an inter se arrangement entered into by the partners, in and by which, the working partners
    have agreed not to raise loans or pledge the firm’s interest.
33. Mr S.K. lyer, learned counsel for the Revenue, placed some reliance on Section 14 of the
    Partnership Act. According to the counsel, there is no contract to the contrary in the partnership
    deed that the assets brought in by party No. 1, do not belong to the partnership. It is his further
    contention that under Section 14, those assets will belong to the partnership, in which case, it will
    be open to any partner, as agent of the other partners to pledge the firm’s interest or raise loan for
    partnership purposes. This right, according to the counsel is restricted by clause (9) and that
    clause negatives the theory of agency. In our opinion, this contention of the learned counsel
    cannot be accepted. Section 14 of the Partnership Act itself clearly shows that the provisions
    contained therein are subject to the contract between the parties. We have already held that the
    provision regarding the control and management vesting in party No. 1 is not by itself destructive
    of the theory of partnership. Clause (9) in our opinion, itself shows that the theory of agency is
    recognised. But the parties, by mutual agreement, have placed a restriction on the working

partners’ right to borrow on behalf of the firm or pledge the firm’s interest without the written
authority of the principal partner.

35. To conclude, we are of the opinion that all the ingredients of partnership are satisfied
    under the partnership deed, dated March 20, 1959 and that the view of the High Court that the
    appellant-firm cannot be granted registration under Section 26-A of the Income-tax Act for the
    assessment year 1959-60, cannot be sustained.
36. In the result, we answer the question of law in the affirmative in favour of the assessee.