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

Facts of the Case

The appellant, M/s K. D. Kamath and Company, a firm with six partners, sought registration under Section 26-A of the Income-Tax Act, 1922.

• The Deed: The firm was constituted under a deed dated March 20, 1959.

• Refusal by ITO: The Income-Tax Officer (ITO) refused registration, arguing that the partnership was not genuine. The ITO concluded that the business essentially belonged to K. D. Kamath alone, and the deed failed to create a genuine relationship of partners inter se.

• Tribunal's View: The Appellate Tribunal reversed the ITO, finding that the essential criteria of a partnership—agreement to share profits and acting as agents for each other—were met. It noted that the business was carried on by K. D. Kamath acting for all partners.

• High Court Reversal: The High Court ruled against the firm. It focused on the restrictive clauses of the deed, noting that the five working partners lacked the authority to conduct business or raise loans without K. D. Kamath's consent. It held that the absence of free mutual agency among all partners meant the relationship required by partnership law did not exist.

The case reached the Supreme Court.

Issue

1. Whether the partnership deed effectively creates the relationship of partners as defined by Section 4 of the Indian Partnership Act, 1932.

2. Consequently, whether M/s K. D. Kamath & Co. was eligible for registration under Section 26-A of the Income-Tax Act, 1922, for the assessment year 1959-60.

Rule

According to Section 4 of the Indian Partnership Act, 1932, a "partnership" is defined as the relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The legal requirements for a partnership are:

1. An agreement to share the profits/losses of a business.

2. The business must be carried on by all partners or any of them acting for all (the principle of mutual agency).

Judgment

The Supreme Court of India reversed the judgment and order given by the High Court and held the partnership to be valid and eligible for registration.

Legal Analysis

• Satisfaction of Condition 1 (Profit Sharing): Clause (5) of the partnership deed clearly outlined the right of each partner to share profits and bear losses in proportion to their shares. The Court held this unequivocally satisfied the first essential condition of a genuine partnership.

• Satisfaction of Condition 2 (Mutual Agency):

  • The High Court erred by requiring that every single partner must have the authority to act for every other partner.

  • The crucial words in Section 4 are "carried on by all or any of them acting for all."

  • The deed vested the entire control and management of the business in K. D. Kamath (Party No. 1).

  • The Court held that the conduct of the business by K. D. Kamath was done by him acting for all the partners.

  • This conclusion was reinforced by Clause (16) of the deed, which stated the firm's affairs were to be carried on for mutual benefits.

• Effect of Restrictive Clauses (Dominant Partner): The wide powers given to K. D. Kamath, including the full control of the business and the requirement for working partners to act under his direction, do not negate the existence of the partnership. Under Section 11 of the Partnership Act, partners are free to enter into agreements regarding their mutual rights and duties, which can restrict the general implied agency under Section 18.

• Conclusion: Since the relationship established met the definition of a "partnership" under Section 4, all the essential conditions were satisfied, and the firm was legally eligible for registration under the Income-Tax Act.

Commentary: The Test of Mutual Agency

The K. D. Kamath case is fundamental for clarifying the scope of mutual agency in Indian partnership law. The Supreme Court decisively rejected the interpretation that every single partner must possess unrestricted powers of agency.

The ratio establishes that:

The test of mutual agency is satisfied if the business is carried on by any one partner (even the most dominant one) who is acting on behalf of all the partners, even if the partnership agreement severely restricts the independent actions of the other partners (the working partners).

This upholds the principle of party autonomy, allowing firms to structure internal management with a dominant figure while retaining the legal status of a partnership for external and fiscal purposes.