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Case Analysis: K.D. Kamath & Co. v. CIT

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Case Number

Civil Appeal No. 1242 of 1968.

Equivalent Citations

(1971) 2 SCC 873, [1972] 1 SCR 1034, [1971] 82 ITR 680, (1972) 1 CTR 124

Bench

P. Jaganmohan Reddy and C.A. Vaidialingam, JJ.

Date of Judgement

October 11, 1971

Relevant Act/ Section

Indian Income-Tax Act, 1922 – Section 26A

Indian Partnership Act, 1932 – Sections 4, 14 and 18 

Facts and Procedural History

In this case, the appellant was a firm made up of six partners. The firm was doing business since October 1, 1958, and the deed of partnership was signed on March 20, 1959. Thereafter, in August 1959, the firm got registered under the Indian Partnership Act of 1932. The firm applied to an Income Tax Officer (ITO) for registration under Section 26A of the Income Tax Act for the assessment year 1959-60. The registration was to be done in the name of M/s K.D. Kamath and Company. However, the ITO declined the application stating that the deed of the partnership was not genuine and thus, no partnership had been constituted. It further stated that the firm was a sole proprietorship of K.D. Kamath. 

The appellant then appealed to the Appellate Assistant Commissioner (AAC), who sustained the order of the ITO. The appellant then further appealed to the Income-tax Appellate Tribunal. The Appellate Tribunal held that the two essentials of partnership – an agreement between the partners to share profits and losses, and the partners acting as agents – were fulfilled in this case. It was mentioned in the partnership deed that the partners will be sharing all profits and losses, and the other partners could act as the agents of the firm when authorized by K.D. Kamath. Thus, the partnership deed was held to be genuine and the ITO was directed to register the firm. 

The matter was then referred to the High Court by the Tribunal. The High Court was of the view that the first condition essential for a partnership was satisfied in this case, as there was an agreement between the parties to share their profits and losses. It then focussed on the second essential, i.e., whether the partners are acting as agents or not. It observed that since the complete control of the business was with K.D. Kamath, the first partner, and all the other partners did not have the power to act as agents of the other, so the second essential element, i.e., the agency was absent here. Thus, the firm could not be granted registration.

The appellant then filed an appeal in the Supreme Court against this decision of the High Court.

Issue Before the Court

The main issue, in this case, 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 1959-60. 

The ratio of the Case

In some cases, the High Courts had given the following essentials of a partnership:-

  1. The existence of an agreement between the partners for the sharing of all profits and losses incurred in the business of the firm.
  2. Each of the partners must be able to act as an agent of all.

However, the Supreme Court stated that as per Section 4 of the Indian Partnership Act, the second essential is as follows – the business of the firm should be conducted by all the partners or by any of the partners acting on behalf of the others. Hence, the principle of “agency” is implied here.

In this case, though the authority to conduct and run the business is vested in the first partner, K. D. Kamath, he is acting for all the other partners. Also, it was mentioned in the deed that the business of the firm was to be done for the common interests of all. Moreover, it is given in Section 11 of the Partnership Act that the parties can form agreements to ascertain their rights and duties.     

Thus, the second requirement is fulfilled. And since there was already an agreement for the sharing of profits and losses, both the prerequisites of a partnership are satisfied here. 

Decision of the Court

The Court held that all the essentials of the partnership were satisfied and the decision of the High Court that the appellant cannot be granted registration was not sustained. Thus, the firm was held to be eligible for registration under the Income-tax Act for the assessment year 1959-60. 

This case analysis is written by Muskan Harlalka, a second-year BA LLB (Hons.) student at the School of Law, Mody University of Science and Technology, Lakshmangarh, Rajasthan.

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