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THE NATURE OF PARTNERSHIP

Steel Bros. and Co. Ltd. v. CIT


AIR 1958 SC 315
[The entire deed must be considered to decide the existence of partnership]

Prior to November 29, 1928, Steel Bros. & Co. Ltd. (Steels) and Ellermans
Arracan Rice and Trading Co. Ltd. (Ellermans) carried on trade in Burma rice
and/or its by-products in Burma, in London and elsewhere inter alia through Burma
and London Bullenger Rice Pool and the New General Rice Company Limited. Apart
from the selling of rice, both these Companies had rice milling machines and
produced rice from paddy. There was another Company known as the Burma Co.
Ltd., (Burma). This Company also had a few rice mills. It never purchased paddy or
sold rice. All the shares of this Company were held by Steels, who were also its
Managing Agents.
On or about November 29, 1928, an agreement was entered into between the
Steels, Burma and Ellermans to provide for the amalgamated working of the Burma
Rice business in Burma and London of all the three companies under the management
of Steels. The combined business of Steels, Burma and Ellermans was referred to as
the Combination. All stocks of Burma rice and by-products in hand at 30th
November, 1928, were excluded from this Agreement and remained the property of
the individual owners to be disposed of by them as they thought fit and the entire
business in Burma carried on by Ellermans was to be taken over and managed by
Steels as from 1st December, 1928, and conducted from Steels offices in London,
Rangoon and other Burma Branches in Steels name solely and in conjunction with
the whole of the rice business of all descriptions of Steels and Burma and Steels were
to conduct the said business in such manner as they in their absolute discretion
thought fit. The profit or loss of the business of the Combination carried on at the
undermentioned places was to be shared by and divided between Steels and
Ellermans in a fixed ratios. The Rice Mills belonging to Burma viz. Burma Upper
Kanungtoe Mill in Rangoon, Burma Mill in Bassein and Burmas Martaban Mill in
Moulmein were to be worked by the Steels for the purpose of the Combination. The
agreement was to take effect as from 1st December, 1928, and could be terminated on
30th November, 1930, or on any subsequent 30th November, by any party giving
notice to that effect to others not later than the preceeding 1st August. The agreement
was signed and the common seals of Steels and Ellermans were affixed and it was
also signed by one James Kilgour Michie for and on behalf of Burma.
For Assessment Years 1943-44 and 1944-45, the Combination (the assessee)
made applications to the ITO under Section 26-A of the Act for registration of their
partnership said to be constituted of Steels and Ellermans. These applications were
signed by the Steels and Ellermans only and were supported by a copy of the
Agreement dated November 29, 1928, which was relied upon as the instrument of
partnership of which registration was sought.

Kamal Pushp Enterprises v. D.R. Construction Co.

By two separate orders, ITO refused registration of the partnership on the ground
(i) that the partnership was not constituted of Steels & Ellermans only but was
constituted of those two parties and a third party viz. Burma and that the partnership
deed did not specify the shares of the said three partners and (ii) that the loss arising
during the previous year had not been properly allocated proportionately to the said
three partners the whole of the loss falling to the shares of Steels and Burma having
been borne by Steels only. On appeal the orders of the ITO were upheld on the
grounds that the application for registration was signed by two partners, Steels and
Ellermans, whereas the partnership deed showed that it was a partnership of three
partners and that the individual shares of Steels and Burma were not shown
separately. On appeal, the Income Tax Appellate Tribunal held that although the
agreement entered into on November 29, 1928, showed that the three companies
would carry on the whole of their Burma rice business on amalgamation, on an
examination of the agreement it appeared that the companies which formed the
partnership were really Steels and Ellermans; and Burma which was a hundred per
cent subsidiary of Steels had hardly anything to do with the Combination. Upon the
application of the CIT, the Tribunal referred the following question of law to the High
Court for its decision under Section 66(1) of the Act:
Whether on a proper construction of the deed of agreement dated November 29, 1928,
and having regard to the relevant facts and circumstances of the case, the Tribunal was
right in holding that the partnership was really between Steels and Ellermans and that
therefore registration should have been allowed under Section 26-A of the Indian Income
Tax Act.
The High Court answered the referred question in the negative.

N.H. BHAGWATI, J. - 9. The sole question that arises for our determination in this appeal
is whether on a proper construction of the agreement dated November 29, 1928, and having
regard to the facts and circumstances of the case the applications by the assessee for the
registration of the partnership showing Steels and Ellermans as the only partners thereof were
rightly refused by the Income Tax Officer.
The determination of this appeal therefore turns on the true construction of the
Agreement dated November 29, 1928, regard being had to the relevant facts and
circumstances of the case. The relevant facts and circumstances of the case find their place in
the referred question as framed and were also sought to be imported under Section 6 of the
Indian Partnership Act, 1932.
12. The facts and circumstances which were thus sought to be relied upon by the
appellant were: (i) that all the shares of Burma were owned by the Steels, (ii) that according
to the findings of the Tribunal Burma never purchased paddy or sold rice, (iii) that no share
of the profits of the Combination had ever been paid to or received by Burma and (iv) that in
carrying out of the Agreement the only earnings of Burma had been by way of milling hire
paid by Steels to Burma.
13. Turning now to the Agreement dated November 29, 1928, we find in the first instance
that it is an Agreement entered between three parties viz. Steels, Burma and Ellermans to

Kamal Pushp Enterprises v. D.R. Construction Co.

provide for the amalgamated working of the Burma Rice business in Burma and London of
Steels, Burma and Ellermans under the management of Steels. The entire business in Burma
rice hitherto carried on by Ellermans is to be taken over and managed by Steels as from 1st
December, 1928, and conducted from Steels offices in London, Rangoon and other Burma
branches in Steels name solely and in conjunction with the whole of the rice business of all
descriptions of Steels and Burma. Steels are to conduct the said business in such manner as
they in their absolute discretion shall think fit. The combined business of Steels, Burma and
Ellermans is therein referred to as the Combination (clause 1). At the end of each
accounting year the profit or loss of the business of the Combination carried on at the various
places therein mentioned is to be shared by and divided between Steels and Ellermans in the
(fixed) ratio. The accounts after being signed in the manner therein mentioned are to be
accepted as final and conclusive and binding on Steels and Ellermans and from the accounts
of each year a profit and loss account is to be prepared in London and such account is to be
final and conclusive and binding on all the parties viz. Steels, Burma and Ellermans [clause
3(d)]. A restriction is imposed on Steels, Burma and Ellermans against hiring out to any other
parties of the properties owned by them or the user thereof by the respective owners for any
purpose without the previous consent of Steels [clause 4(a)]. Steels and Burmas existing
Rangoon fleet or rice cargo boats, motor barges and towing launches also such of Ellermans
towing launches as may be considered necessary for the purpose of the Combination are to be
employed for such purposes but remain the property of the respective owners (clause 6). All
bonuses paid to any member of the staff for passing language examination, the cost of
furlough passages to and from Europe for all members of Steels, Burma and Ellermans staffs
employed for the purpose of the Combination whose leave is due and taken during the period
of the agreement and the cost of medical attendance to which Steels, Burma and Ellermans
staff employed for the purpose of the Combination are entitled under their respective
agreements are chargeable to the Combination (clause 7). All Bullenger Settlements are to be
for account of the Combination and are to be embodied in the Combination P and L a/c for
distribution in the ratios laid down in clause 3 thereof (clause 10). The agreement is to come
into effect on the 1st December, 1928, and can be terminated on 30th November, 1930, or
any subsequent 30th November, by any party giving notice to that effect to the others not
later than the preceding 1st August (clause 12). In the event of any dispute arising out of or in
relation to the Agreement other than a dispute for the settlement of which specific provision
has been therein made, the same is to be decided by arbitration in accordance with the
provisions of the Arbitration Act, 1889, (clause 13). It is further declared that in entering into
the agreement and making the arrangements thereby contemplated, the parties intend to work
their respective business jointly and give mutual assistance to each other and secure greater
economy in working (clause 14). The Agreement is signed not only by Steels and Ellermans
but also by one James Kilgour Michie for and on behalf of Burma.
14. The clauses of the Agreement would, if there was nothing more, spell out a
partnership between the Steels, Burma and Ellermans. The relationship which has been
brought into existence between the three parties is a relationship between partners who have
agreed to share the profits of a business carried on by all or any of them acting for all within
the meaning of the definition of partnership given in Section 4 of the Indian Partnership Act,
1932. Even if the definition of partnership which was contained at the relevant date in Section

Kamal Pushp Enterprises v. D.R. Construction Co.

239 of the Indian Contract Act (9 of 1872) be taken into account, the relationship between the
parties is one which subsists between partners who have agreed to combine their property,
labour and skill in the business of the Combination and to share the profits thereof between
them. It is however pointed out on behalf of the appellant that there are several clauses in the
Agreement which confer rights on Ellermans which rights are not conferred on Burma and
they are:
(1) The right to be fully advised of the progress of the business from time to time
and to have due consideration given to any suggestions or observations which they may
from time to time make in reference thereto.
(2) The right to have the accounts made up in Burma for the year ending 30th
November, 1930, and for any subsequent year audited by a firm of Chartered
Accountants in Burma designated for the purpose by Steels if a request in writing is
received by Steels in London from them before the 1st November, immediately preceding
the commencement of the period covered by such accounts; the right to inspect all
accounts and also to receive a copy of the accounts.
(3) The right of their Superintending Engineers along with those of the Steels, before
any Mills or other articles are taken over by Steels from any party to the agreement for
the purposes of the Combination to satisfy themselves that all are in efficient working
order and also to decide whether any item of expenditure shall be classed as repairs or
renewals.
(4) A similar right given to their Superintending Engineers to decide what Mill
stores are likely to be required for purposes of the Combination and to fix the current
market value thereof.
(5) The right to have an assurance that the Mills owned by them shall get a fair share
of all paddy landed and that the Mills taken over for the purposes of the Combination will
be worked as far as possible to full capacity.
(6) The right to refer matters under sub-clause (c) and (e) of clause 4 to arbitration.
(7) The right of their Superintending Engineers along with those of the Steels to
satisfy themselves that the cargo boats, motor barges and towing launches of all parties
employed for the purpose of the Combination are in efficient working order.
(8) The right to the utilization of the finance provided by them.
(9) The right to the use of their bankers in Connection with bills and drafts..
(10) The right to have their London office drawn upon for a fair share of clean drafts.
(11) A specific provision made in clause 14 for the protection of their interests.
15. These are specific provisions made in favour of Ellermans under the terms of the
agreement none of which obtains so far as Burma is concerned. It is therefore urged that
Burma could not be a partner along with Steels and Ellermans in the Combination. It has,
however, to be noted that Burma was a subsidiary company of the Steels and all the hundred
per cent shares of Burma were owned by the Steels. Steels were moreover the Managing
Agents of Burma. The relationship between Steels and Burma was thus a relationship
between a parent Company and a subsidiary company and even though in law they were
separate entities they were in reality one and the same. There was no conflict of interests at
any time between Steels and Burma and Steels who were the Managing members of the
Combination were expected not only to look after their own interests but also the interests of
Burma. The Ellermans on the other hand were strangers who became members of the

Kamal Pushp Enterprises v. D.R. Construction Co.

partnership along with Steels and Burma. They had to be given certain rights in order to
protect their interests as against Steels and Burma. It was not necessary under the
circumstances to provide any special rights of this nature in favour of Burma and the fact that
no such rights were given to Burma as were given to Ellermans does not lead to the
conclusion that Burma was not a partner along with Steels and Ellermans in this
Combination. It would have been superfluous to provide these rights to Burma for the simple
reason that they would have been exercised only by Steels who were its Managing Agents. If
as a matter of fact the Steels were the managing members of the Combination they would be
doing everything necessary for the protection not only of their own interests but also the
interests of Burma and if that was so there was no need at all to provide any separate rights
for Burma of the nature which were provided for Ellermans.
17. If this position is borne in mind the provision in clause 3(a) of the Agreement also is
easy to understand. So far as the partnership was concerned a joint share between Steels and
Burma was reserved by bracketting Steels and Burma together and providing for the
distribution of profit or loss of the business of the Combination in the ratios therein specified
as between Steels and Burma on the one hand and Ellermans on the other. These ratios were
also suggestive as providing roughly two shares between the Steels and Burma bracketted
together and one share for the Ellermans who were the third partner in the Combination. As
between Steels and Burma however it was not thought necessary to distribute the profits any
further for the simple reason that whatever profits went to Burma would ultimately find their
way to Steels the Steels having owned all the 100 per cent shares of Burma. Even though
this distribution of the shares in the ratios mentioned above was thus provided in clause 3(a)
of the Agreement (reserving for Steels & Burma jointly and for Ellermans individually the
particular shares in the profit or loss as therein specified), clause (3) went on to provide that
the profit or loss of the Combination will be shared by and divided between Steels and
Ellermans. The Steels were to receive whatever came to the joint shares of the Steels and
Burma and what they did thereafter was purely a matter between them and Burma. Burma
agreed under clause 3(a) of the Agreement to have a joint share in the profit or loss of the
Combination along with Steels and also agreed that whatever came to their joint share should
be received by the Steels and that is why clause 3(a) provided for the actual division of the
profit or loss between the Steels and Ellermans. The fact that no provision was made for the
receipt of any share by Burma in the profit or loss falling to the joint share of Steels and
Burma does not necessarily mean that Burma had no share in the Combination. There is no
ambiguity whatever nor is there any mystery or mistake in the provision contained in clause
3(a) in regard to the distribution of the profit or loss of the Combination. As a matter of fact,
clause 3(a) definitely points to the conclusion that Burma was a partner along with Steels and
Ellermans in the Combination.
On a true construction of the Agreement dated November, 29, 1928, we have, therefore,
come to the conclusion that Burma was a partner along with Steels and Ellermans in the
Combination and had a joint share with the Steels in the profit or loss of the Combination. It
was entitled to terminate the partnership by giving notice to the other partners as specified in
clause 12 of the Agreement. It had also a right to refer all the disputes arising between the
partners to be decided by arbitration in accordance with the provisions of the Arbitration Act,
1889. There was a sharing of the profit or loss of the business of the Combination and there

Kamal Pushp Enterprises v. D.R. Construction Co.

was also an agency insofar as Steels were to manage and carry on the business on behalf of
all the partners of the Combination. Thus all the ingredients of partnership were satisfied and
it is futile to urge that the agreement was a hybrid document which was a tripartite agreement
so far as the business of the Combination was concerned and was a partnership agreement
only between two partners viz. Steels and Ellermans. There is not the slightest doubt
whatever that Burma was a partner with Steels and Ellermans in the business of the
Combination and the partnership which was entered into under the terms of agreement was a
partnership between three partners viz. Steels, Burma and Ellermans.
Adverting to these facts and circumstances, we find that there is nothing in them which
runs counter to the conclusion which we have reached above. The fact that all the shares of
Burma were owned by the Steels really explains why Burma was not given any specific rights
like Ellermans in the Agreement dated November 29, 1928, for the protection of its interests,
inasmuch as the interests of Burma was absolutely safe in the hands of the Steels and no
provision was required to be made for the protection of Burmas interests as such. The fact
that Burma never purchased paddy or sold rice is also devoid of significance because Burma
had contributed its properties to the Combination and there could not be any independent
purchase of paddy or sale of rice by Burma after the Steels assumed and carried on the
management of the business of the Combination. The circumstance that no share of the
profits of the Combination had ever been paid to or received by Burma has been already
explained above. The Steels and Burma had a joint share amongst themselves which was
roughly two-thirds of the total profit or loss of the Combination. All the hundred per cent,
shares of the Burma were owned by Steels and if as a result of internal arrangement between
themselves the Steels appropriated to themselves all the profits which came to the Steels and
Burma jointly in the Combination, that was certainly not a circumstance which would go to
show that Burma was in fact no partner in the Combination. The further circumstance that in
the carrying on of the Agreement, the only earnings of Burma had been by way of milling
hire paid by Steels to Burma, again is of no consequence. So far as the books of account of
the Combination were concerned it does not appear that there was any payment by the
Combination to Burma at all of the milling charges and if by some arrangement between
Steels and Burma, Steels actually did pay to Burma a sum of money out of the profits earned
in the joint share of the Steels and Burma, that again was a matter of internal arrangement
between Steels and Burma and such payment by the Steels could not detract from the position
of Burma as a partner in the Combination if the terms and conditions of the Agreement dated
November 29, 1928 did not spell out anything to that effect. These facts and circumstances
are of no significance whatever and do not help the appellant in the contention which has
been urged on its behalf that the real position of Burma was that of a party to the Combine
but not that of a partner in the Combination. There is no justification whatever, in our
opinion, for contending that the Agreement dated November 29, 1928, was a composite
agreement which could be divided into two parts viz. (1) a tripartite agreement between the
members of the Combination and (2) an agreement of partnership between Steels and
Ellermans only, Burma being merely a confirming party to it insofar as a part of its assets
were thrown into the Combination.
21. The answer given by the High Court to the referred question in the negative was
accordingly correct and this appeal will be dismissed with costs.

Kamal Pushp Enterprises v. D.R. Construction Co.

K. D. Kamath & Co. v . CIT


(1971) 2 SCC 873

[The entire deed must be considered to decide the existence of partnership]


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 requirements 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
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

Kamal Pushp Enterprises v. D.R. Construction Co.

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.
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 firms 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 firms 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 firms business and with the object that the firms business should not

Kamal Pushp Enterprises v. D.R. Construction Co.

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 firms 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 firms 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 firms 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

10

Kamal Pushp Enterprises v. D.R. Construction Co.

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 firms 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

Kamal Pushp Enterprises v. D.R. Construction Co.

11

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 firms 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.

12

Kamal Pushp Enterprises v. D.R. Construction Co.

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 firms 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.

Kamal Pushp Enterprises v. D.R. Construction Co.

13

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 firms affairs are to be carried on for mutual
benefits. That clause is to the effect that the firms 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 firms
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 firms 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 firms
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

14

Kamal Pushp Enterprises v. D.R. Construction Co.

restriction on the working partners right to borrow on behalf of the firm or pledge the firms
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.
*****

Kamal Pushp Enterprises v. D.R. Construction Co.

15

K. Jaggaiah v. K. Venkatasatyanarayana
AIR 1984 AP 149

[A single venture capable of being carried on by two or more persons may be


treated as business]

The suit was laid for settlement of accounts of the partnership dealings between the
plaintiff and the two defendants. It was alleged that the plaintiff and the defendants
constituted a partnership firm and agreed to jointly carry on the contract work in
1965 for the maintenance work to be carried on from the mile stone 17/10 to 26/4 in
Guntur-Narsaraopet road, that the contract work was taken in the name of the Ist
defendant, that the plaintiff invested a sum of Rupees 11,000/- while the 2nd
defendant invested Rs. 3000/-, and that it was agreed that the Ist defendant should be
in the management of the work, maintaining regular account books and keeping the
same for perusal and inspection for at all times. When the plaintiff demanded the Ist
defendant to settle the account of the partnership and pay the moneys due to the
partners, he refused either to show that account or settle same.

KODANDARAMAYYA, J. 2. Sri Y. G. Krishnamurthy, the learned counsel for the


appellant instilled life into this appeal at the end of his argument stating that there cannot be
any partnership between the parties in this case as there is no business to be carried on by the
partners within the meaning of S. 4 of the Partnership Act 9 of 1932 in view of the fact that a
single contract with the Government cannot be the subject-matter of a partnership.
3. The word 'business' was defined in Sec. 2 (b) of the Partnership Act, IX of 1932, which
includes every trade, occupation and profession. It is clear that the definition is not
exhaustive. It was ruled as early as in 1913 in Re Abenheim (1913) 109 LT 219, 220 that
'business' would include a single commercial venture. Lindley on Partnership 14th ed., p. 116
basing on the above decision sums up this legal position thus:If persons who are not partners in other business share the profits and loss, or the
profits, of one particular transaction or adventure, they become partners as to that
transaction or adventure, but not as to anything else. For example, if two solicitors,
who are not partners, are jointly retained to conduct litigation in some particular case,
and they agree to share the profits accruing therefrom, they become partners so far as
the business connected with that particular case is concerned, but no further. So a
partnership may be limited to purchase and sale of particular jewels, the working of it
in a particular patent, the working of it in a particular place, the development of a
parcel of land, the exploitation of a contract of service, or the sowing, cropping,
harvesting and sale of a particular crop. In all such cases as these, the rights and
liabilities of the partners are governed by the same principles as those which apply to
ordinary partnerships, but such rights and liabilities are necessarily less extensive
than those of persons who have entered into less limited contracts. The extent to
which persons can be considered as partners depends entirely on the agreement into
which they have entered and upon their conduct.

16

Kamal Pushp Enterprises v. D.R. Construction Co.

Thus, the test is whether there is any activity capable of being described as a business for
that venture. It is not necessary that there must be more than one transaction or venture. It is
enough even if a single venture is capable of being carried on by two or more persons. In the
present case the road building activity even though is a single contract it is spread over for a
particular period an the firm must employ certain workers, supervise the work and get the
approval from the Government and finally receive the bills. Thus the transaction is not a
solitary one incapable of being participated by more than two individuals. There is no
inherent improbability of the said transaction not being capable of the subject-matter of a
venture under a partnership. Hence, this contention is wholly untenable.
4. The learned counsel relied upon a judgment of the Privy Council in Senaji
Kapurchand v. Pannaji Devichand [AIR 1930 PC 300] before the enactment of the
Partnership Act. The question arose in that case is whether the members of the firm
consisting of more than 22 was legally constituted having regard to S. 4 (2) of the Companies
Act, 1913 which is in the following terms:No Company, Association or Partnership consisting of more than twenty persons
shall be formed for the purpose of carrying on any other business that has for its object
the acquisition of gain by the Company, Association or Partnership or by the individual
members thereof, unless it is registered as a Company under this Act, or is formed in
pursuance of some other Act, or of Letters Patent. The venture in that case was purchase
of 200 bales with different shares and the question was whether that single transaction
constitutes a business within the meaning of S. 4 (2). If it does, considering the members
of the partnership, the constitution of the firm is illegal as offending S. 4 (2) of the Act.
The High Court in its judgment held that "no doubt a single venture where a single
contract are purchased and sold may not amount to a business." But it is pointed out in
that case (but on the allegations in the plaint although a number of bales were purchased
at one time, sales were to go on, profits were to be realized and those profits were to be
divided). Reading the plaint as a whole it seems to us that this is not a single venture
which would take it out of the definition of S. 4.
This judgment of the High Court was approved by Lord Thankerton without any independent
discussion and dismissed the appeal. It is clear that the very case illustrates that the test is not
whether the venture consists of a single transaction or more but whether the venture is ,
considering its activity, capable of being participated by more than one individual considering
its activity.
5. The learned counsel further relied upon a judgment in Nathi Lal v. Sri Mal [AIR 1940
All. 230] holding that "a single transaction or venture does not amount to business and
consequently it does not come under business mentioned in S. 4, Partnership Act", relying on
Senaji Kapurchand v. Pannaji Devichand [AIR 1939 PC 300]. With respect, I disagree with
this judgment and dissent, with the view expressed in the above judgment. The learned
commentator in Pollock & Mulla on Sale of Goods and Partnership Act, Fourth Edition,
also takes the view that this judgment does not appear to be good law. Hence, I am of the
opinion that there is a valid partnership between the parties within the meaning of Sec. 4 of
the Act and consequently the present contention is wholly unsustainable. Accordingly, I
dismiss the appeal.

Kamal Pushp Enterprises v. D.R. Construction Co.

17

Helper Girdharbhai v. Saiyed Mohmad Mirasaheb Kadri


AIR 1987 SC 1782

[Sharing of profits and contributing to losses were not the only elements in a
partnership, existence of agency was essential and whether there was a
partnership or not is a mixed question of law and fact, depending upon the varying
circumstances in different cases]

Whether the appellant and his father had sublet the premises in question in or about
1960 in terms of Section 13 (1)(e) of the Bombay Rents, Hotel and Lodging House
Rates Control Act, 1947 (the Rent Act) was the question involved in the appeal.
The appellant claimed to be the tenant in respect of the two premises which were
quite adjacent to each other, one of which was involved in the appeal. The respondent
was the landlord of the two premises and these were situated at Raikhad Ward,
Ahmedabad. The respondent had alleged in the two suits that the appellant was his
tenant in the suit premises which were leased out to him and before him to his father,
for conducting the business in the name of Ahmedabad Fine & Weaving Works and
according to the terms of tenancy suit premises were leased for manufacturing cloth
in the name of Ahmedabad Fine & Weaving Works. The respondent had further
alleged that Appellant 1 had closed the business and he was not using the said
premises for the purpose for which it was let to him. It was the case of the appellant
that in respect of the suit premises he was carrying on his business with Respondents
2, 4 and 5 in the name of Respondent 2 M/s Bharat Neon Signs (Respondent 2).
It was not in dispute that the premises were being used by Bharat Neon Signs
firm being defendant 2 in the original suit. At the time of the institution of the suit the
defendants 2 to 5 were admittedly the partners. The present appellant who was the
original defendant 1 claimed to be a partner. The main controversy was whether the
appellant had sublet the premises to defendant 2 or whether he being a partner of the
said firm had permitted the said firm to use the premises in question. It was clear
from the evidence or record that the partnership firm had undergone metamorphosis
from time to time and again ever since the year 1960.
The main question in issue was whether there was a genuine partnership in which
the appellant was a partner.

SABYASACHI MUKHARJI, J. - 8. Whether there was a partnership or not may in


certain cases be a mixed question of law and fact, in the sense that whether the ingredients of
partnership as embodied in the law of partnership were there in a particular case or not must
be judged in the light of the principles applicable to partnership. The first question, therefore,
is what is a partnership? That has to be found in Section 4 of the Indian Partnership Act,
1932. The following important elements must be there in order to establish partnership (1)
there must be an agreement entered into by all parties concerned, (2) the agreement must be
to share profits of business; and (3) the business must be carried on by all or any of the
persons concerned acting for all. The partnership deeds were there entitling the petitioner to
share in the partnership. It is true that in the partnership deeds the bank accounts were not to

18

Kamal Pushp Enterprises v. D.R. Construction Co.

be operated by the appellant, and further that irrespective of the profit the clause of the
partnership deed provided that there should be a fixed percentage of profit to be given to the
partner Appellant 1. The appellant was not to share the losses. But there is nothing illegal
about it. The appellant was to bring his asset being the tenancy of the premises in question for
the user of the partnership. One point was emphasised by Mr Mehta, learned counsel
appearing for the respondents, that the original first partnership deed did not mention the
appellant or his father as a partner. It was in the second partnership deed that the appellant and
his father joined the firm. The first started as emphasised by Mr Mehta on October 4, 1960
and it was only on October 24, 1960 the second partnership deed was executed. Therefore, it
was emphasised that there was a gap of time when there was user by the partnership firm of
the premises in question when the appellant was not a member of the firm. It was emphasised
that this aspect was not considered by the Court of Small Causes and the High Court,
therefore, was justified in interfering with the findings of the Court of Small Causes. We are
unable to agree. These deeds were there, the partners were cross-examined, there was no
specific evidence as to from what date the firm started functioning from the particular
premises in question. Secondly, it was emphasised by Mr Mehta that the partnership deed was
a camouflage. It is evident from the sales tax registration and other registration certificates
and licences under the Shops and Establishments Act that the partnership was registered in the
name of the appellant and the appellant was also indicated as a partner. It was so in the
income tax returns and assessments. Therefore, it was submitted that the Court of Small
Causes committed an error of law resulting in miscarriage of justice. It was submitted by Mr
Mehta that once it was accepted that the partnership deed was a mere camouflage the other
subsequent acts and conducts were merely ancillary and were put in a formal way. But the
Question is from the three deeds itself which were examined in detail by the Court of Small
Causes and which were re-examined by the High Court could it be said unequivocally that
there was no partnership. The deeds gave the appellant the right to share the profits and made
him agent for certain limited purposes of the firm and there was evidence that the partnership
deeds were acted upon. There was evidence of suit of dissolution of the partnership where
none of the partners took the plea that it was a false or a fictitious document. Though the
decree in the dissolution suit was not binding in these proceedings, inter se between the
parties as partners it is a piece of evidence which cannot be wholly ignored. All these factors
were present before the Court of Small Causes. These were reappraised by the High Court.
One point was emphasised by Mr Mehta that in the partnership deed which is not necessary to
recite the terms, the petitioner was completely excluded in operating the bank accounts etc.
There is nothing inherently illegal or improbable in making a provision of such a type. In the
eye of law, such a clause is really neutral proving neither the existence nor non-existence of a
genuine firm.
9. The first partnership deed is dated October 13, 1960. It recited that the partnership firm
should be presently started at Ahmedabad and the same should later be started in another city.
In this the appellant was not a partner. Ex. 69 is a partnership deed wherein Girdharlal the
father of Appellant 1 and Appellant 1 joined as partners. It recited that the partnership started
from October 4, 1960 at Ahmedabad. It was registered in the name of seventh or eighth
partners, Girdharbhai who was the appellant and his father. It was recited that the work of the
partnership would be done by the parties of the fourth, fifth, sixth, seventh and eighth as per

Kamal Pushp Enterprises v. D.R. Construction Co.

19

advice and instructions of the first, second and third. All the work had been done by some of
the partners of which appellants were not parties and that they had to do the said work as per
instructions of the other partners. Clauses 6 and 7 of the said partnership deed recited inter
alia as follows:
6. The year of accounts of our partnership shall be Aso Vadi 30th day i.e. Diwali
end the first account year is decided to be the Aso Vadi 30th day of Samvat Year
2017. While settling accounts at the close of the year 33 per cent amount from the
sum which may remain as net profit after deducting all expenditures, viz. interest,
discount, rent of the shop, rent of the godown, insurance, brokerage, travelling,
telegrams, postage, salaries of employees, etc. shall be carried to Reserve Fund and
thereafter, in the sum that remains as net profit, the shares of us the partners have
been fixed.
7. While settling accounts at the close of the year, if the sum less than Rs 1500
falls to the 0-03 shares of the partners of the seventh and eighth parts, the amount
falling short has to be debited towards the head of expenditure and Rs 1500 have to
be paid in full to each of them two, and in those circumstances or if there be loss, the
parties of seventh or eighth parts have not been held liable therefor: and in the year of
losses, it has been decided to pay Rs 1500 to each of them, after debiting the same
towards the head of expenditure and in the year of losses nothing has to be carried to
the Reserve Fund and the loss has to be borne by us the parties first to sixth parts.
10. Clause 8 empowered the operating of the bank accounts by partners other than the
appellant and his father. We find intrinsically nothing improbable. It is embodied in the deeds
the functioning of the partnership. The third partnership which is dated September 22, 1961
also indicates as parties of sixth part the name of the appellant. The relevant portion of the
partnership deed reads as follows:
To wit, the parties of the first to sixth parts out of us, deceased Khristi
Girdharbhai Chimanlal and Shah Virchand Keshavji had jointly started the business
of manufacturing and selling Neon Signs Tubes, in partnership in Ahmedabad from
October 4, 1960, in the name and style of Bharat Neon Signs. However, on account
of the death of Khristi Girdharbhai Chimanlal on February 1, 1961 and other reasons,
the said partnership was dissolved from September 8, 1961. Thereafter, we the parties
from the first to seventh part have, after purchasing at its cost price, all the debts and
dues; goods, stock etc., together with goodwill of the dissolved partnership, started
manufacturing and selling of Neon Signs Tubes in partnership from September 9,
1961. We, the parties of all the seven parts execute the deed of the said partnership
today i.e. September 22, 1961. The terms and conditions thereof are as under:
(1) The entire work of our partnership has to be carried out in the name of
Bharat Neon Signs.
(2) The work to be carried out by our partnership is of manufacturing and selling
Neon Signs Tubes and of obtaining orders therefor.
(3) Whatever moneys that may be required to be invested in our partnership, are
to be invested by the parties of the first, second, third, fourth and seventh parts out of

20

Kamal Pushp Enterprises v. D.R. Construction Co.

us and the interest at the rate of 7 1/2 per cent per annum has to be paid for the
moneys that may be paid for the moneys that may be invested in this partnership.
11. We are of the opinion that these were evidence that these terms were acted upon.
There was nothing intrinsically wrong in law in constituting a partnership in the manner it
was done. It was contended by Mr Mehta that there was no agency; reading the partnership
deeds as we have read that conclusion does not emanate from position appearing debiting the
fixed amount payable to the appellant in the expenses account which also is not inconsistent
with partnership. This is also not inconsistent with treating the rent of the firm in the context
of the total expenditure of the firm.
12. The High Court on a reappraisal of these very evidence came to the conclusion that
the partnerships were camouflages and were not acted upon and in fact and in reality the
partnership firm was a sub-tenant of the appellant herein.
19. In the instant case the basic question is whether keeping in background the partnership
deeds referred to hereinbefore and the facts that came to light, was there partnership or not.
Sharing of profits and contributing to losses were not the only elements in a partnership,
existence of agency was essential and whether there was a partnership or not is a mixed
question of law and fact, depending upon the varying circumstances in different cases.
20. In the light of the aforesaid principles and the facts that have emerged, we are of the
opinion that the High Court exceeded its jurisdiction under Section 29(2) of the Rent Act. We
are further of the opinion that the Court of Small Causes was right in the view it took and it
was a possible view to take. In the result the appeal is allowed and the judgment and order of
the Gujarat High Court dated August 21, 1979 are set aside. The order and judgment of the
Court of Small Causes are restored. The suit for possession is accordingly dismissed.
*****

Kamal Pushp Enterprises v. D.R. Construction Co.

Commissioner of Sales Tax v. K. Kelukutty


(1985) 4 SCC 35

[Same persons were partners in two firms should both firms be regarded
as separate persons for assessment of sales tax ?]

The respondent, K. Kelukutty was a partnership firm dealing in timber. It consisted


of six partners. It filed returns of its taxable turnover for the assessment years 196869 and 1969-70 under the Kerala General Sales Tax Act, 1963, and the assessments
were completed by the Sales Tax Officer. Subsequently, the Sales Tax Officer
discovered that the partners of the respondent firm owned a sawmill, and the sawmill
was run by a partnership firm K.K.K. Sons Saw Mills which consisted of the same
partners as the respondent firm. He found that during the assessment years 1968-69
and 1969-70 they had sold sawdust from the mill, but had not been assessed to sales
tax on that turnover. The Sales Tax Officer took the view that as both K. Kelukutty
and K.K.K. Sons Saw Mills consisted of identical partners, the two businesses carried
on respectively by them had to be treated as the business of a single partnership firm
and, therefore, the turnover of the sale of sawdust had to be included in the earlier
assessments made on the respondent firm. The assessment orders were upheld by the
Appellate Assistant Commissioner, Sales Tax. The appeals filed by the respondent
firm before the Sales Tax Appellate Tribunal were allowed by it and the cases were
remanded for fresh consideration. The Revenue applied to the High Court in revision
on the following two questions:
(A) Was the Appellate Tribunal justified in law in holding that the reasoning in the
decision reported in 70 ITR 843 is applicable to the instant case and directing a further
investigation and de novo disposal of the matter, in the light of the observations contained
in paragraph 15 of the order?
(B) In the light of admitted or proved fact that the partners of the assessees firm and
that of the firm K.K.K. Saw Mills are the same, was the Appellate Tribunal justified in its
view that there is no bar in there being two firms with the same partners, carrying on
business independently? Is not the said approach and view against the principles of
Partnership Act, and the ratio of the decision reported in 21 STC 72 and 14 ITR 272?
On February 14, 1978, the High Court of Kerala dismissed the two revision petitions
in the view that Messrs K.K.K. Sons Saw Mills was a partnership firm distinct from the
respondent firm for the purposes of sales tax assessment and the turnover of one could not
be included in the turnover of the other.
The word dealer was defined under clause (viii) of Section 2 of the Kerala General
Sales Tax Act to mean any person who carries on the business of buying, selling,
supplying or distributing goods... and the word person under clause (xvi-A) of Section
2 as including a firm. Therefore, a partnership firm must be regarded under that Act as an
assessable entity separate and distinct from its individual partners. The question was:
Whether when the partners constituting a partnership firm carrying on one business
constituted another partnership firm carrying on a separate and distinct business were
there two distinct partnership firms in whose hands the turnover of the two businesses fell

21

22

Kamal Pushp Enterprises v. D.R. Construction Co.

to be respectively assessed or was there in law only a single partnership firm liable to
assessment on the turnover of both businesses?

R.S. PATHAK, J. - 7. It seems to us that the approach adopted by the High Courts is not
sound, and that the true solution has to be found not in the tax law but in the partnership law.
We are concerned here with the Kerala General Sales-tax Act. There is no doubt that under
that Act a partnership firm must be regarded as an assessable entity. What precisely is the
significance of that concept? Does the tax law clothe a partnership firm with juristic
personality? How far does the tax law depart from the fundamental concept embodied in the
partnership law that a business carried on by a partnership firm is, in its material essence, a
business carried on by individual members in partnership, and that a name given to a
partnership firm is nothing more than a compendious description of the partners carrying on
the business?
8. Romer, L.J said that for taxing purposes a partnership firm is treated as an entity
distinct from the persons who constituted the firm. What that implies is that for the purposes
of assessment to tax the income of the partnership firm has to be assessed in the hands of the
firm as a single unit, the firm itself being treated as an assessable entity separate and distinct
from the partners constituting it. The firm is an assessable unit separate and distinct from the
individual partners, who as individuals constitute assessable units separate and distinct from
the firm. It is on that basis that the provisions of the tax law are structured into a scheme
providing for the assessment of partnership income. We do not think the principle goes
beyond the purposes of that scheme. It does not confer a corporate personality on the firm.
Beyond the area within which that principle operates, the general law, that is to say, the
partnership law holds undisputed domain.
9. Now in every case when the assessee professes that it is a partnership firm and claims
to be taxed in that status, the first duty of the assessing officer is to determine whether it is, in
law and in fact, a partnership firm. The definition in the tax law defines an assessee or a
dealer as including a firm. But for determining whether there is a firm, the assessing officer
will apply the partnership law, subject of course, to any specific provision in that regard in the
tax law modifying the partnership law. If the tax law is silent, it is the partnership law only to
which he will refer. Having decided the legal identity of the assessee, that it is a partnership
firm, he will then turn to the tax law and apply its relevant provisions for assessing the
partnership income.
10. The Kerala General Sales-tax Act contains no provision which bears on the identity of
a partnership firm. Therefore, recourse must be had for that purpose to the partnership law
alone. Where it is claimed that they are not one but two partnership firms constituted by the
same persons and carrying on different businesses, the assessing authority must test the claim
in the light of the partnership law. It is only after that question has been first determined
namely, whether in law there is only one partnership firm or two partnership firms, that the
next question arises: whether the turnover is assessable in the hands of the partnership firm as
a taxable entity separate and distinct from the partners? There is first a decision under the law
of partnership; thereafter, the second question arises, the question as to assessment under the
tax law. It is clear, therefore, that reference must be made first to the partnership law.

Kamal Pushp Enterprises v. D.R. Construction Co.

23

11. The Indian Partnership Act, 1932 has, by Section 4, defined a partnership as the
relation between persons who have agreed to share the profits of a business carried on by all
or any of them acting for all. The section declares further that the persons who have entered
into partnership with one another are called individually partners and collectively a firm.
The components of the definition of partnership, and therefore of a firm consist of (a)
persons, (b) a business carried on by all of them or any of them acting for all and (c) an
agreement between those persons to carry on such business and to share its profits. It is the
relationship between those persons which constitutes the partnership. The relation is founded
in the agreement between them. The foundation of a partnership and, therefore, of a firm is a
partnership agreement. A partnership agreement is the source of a partnership; it also gives
expression to the other ingredients defining the partnership, specifying the business agreed to
be carried on, the persons who will actually carry on the business, the shares in which the
profits will be divided, and the several other considerations which constitute such an organic
relationship. It is permissible to say that a partnership agreement creates and defines the
relation of partnership and therefore identifies the firm. If that conclusion be right, it is only a
further step to hold that each partnership agreement may constitute a distinct and separate
partnership and therefore distinct and separate firm. That is not to say that a firm is a
corporate entity or enjoys a juristic personality in that sense. The firm name is only a
collective name for the individual partners. But each partnership is a distinct relationship. The
partners may be different and yet the nature of the business may be the same, the business
may be different and yet the partners may be the same. An agreement between the partners to
carry on a business and share its profits may be followed by a separate agreement between the
same partners to carry on another business and share the profits therein. The intention may be
to constitute two separate partnerships and therefore two distinct firms Or to extend merely a
partnership, originally constituted to carry on one business, to the carrying on of another
business. It will all depend on the intention of the partners. The intention of the partners will
have to be decided with reference to the terms of the agreement and all the surrounding
circumstances, including evidence as to the interlacing or interlocking of management,
finance and other incidents of the respective businesses.
12. In the present case, there are two businesses, a business in timber and a business in
sawdust. Both businesses are carried on by the same partners, one as a partnership firm called
K. Kelukutty, and the other under the name K.K.K. Sons Saw Mills, said to be a separate
partnership firm. On the material before us it is not possible to say, in the light of the
considerations to which we have adverted, whether there is one firm or two. That is a question
which appropriately falls for examination by the authorities constituted under the Kerala
General Sales-tax Act.
*****

24

Kamal Pushp Enterprises v. D.R. Construction Co.

Mahabir Cold Storage v. CIT


AIR 1991 SC 1357

[A registered partnership firm is neither a person nor a legal entity. A firm cannot be
a partner in another firm though its partners may be partners in another firm in their
individual capacity]

The appellant-assessee was a registered partnership firm under a deed executed and
registered on November 10, 1958 between Prayagchand Periwal and Hanumanmal
Periwal and M/s Periwal and Co. Pvt. Ltd. having its business at Purnea, Bihar. It
derived income from the business of cold storage. M/s Prayagchand Hanumanmal,
partnership firm consisted of Prayagchand and Hanumanmal Periwal with 50 per cent
share each started its business with its Head Office at Calcutta and a Branch Office at
Purnea. It started functioning w.e.f. May 3, 1956. The Branch Office at Purnea
carried on the business in the name and style of Shri Mahabir Cold Storage. The
partners had taken loan from Periwal & Co. Pvt. Ltd. for erection of cold storage and
for its running capital. Later the company was taken as a partner for better
management and financial assistance. Prayagchand and Hanumanmal each had 25 per
cent and Periwal and Co. (P) Ltd. has the remaining 50 per cent shares in the profits
of the newly constituted partnership M/s Mahabir Cold Storage at Purnea. The new
partnership also obtained registration under the Income Tax Act, 1922 and later under
the I.T. Act. 1961. It filed voluntary returns and it was separately assessed from the
assessment year 1960-61.
In the assessment year 1959-60, M/s. Prayagchand Hanumanmal installed
machinery of the value of Rs 5,80,055 in Sri Mahabir Cold Storage. The
development rebate on the capital asset (machinery) was not claimed till the
assessment year 1962-63 in which year the appellant claimed development rebate.
The ITO and on appeal the AAC disallowed the claim on the finding that the new
firm had neither inherited the claim as a transferee, nor it amounted to a succession.
On second appeal, the Tribunal held in favour of the appellant.
At the request of the revenue the Tribunal referred the following question:
Whether on the facts and in the circumstances of this case the order of the Tribunal
allowing the unabsorbed development rebate in respect of the plant and machinery not
installed by the assessee, under Section 33(1) of the Income Tax Act was legal and
proper.

The High Court answered the question in favour of the revenue and against the
assessee with the reasoning that the old firm retained its identity carrying on its
business separately at Calcutta. It was a separate entity for the purpose of taxation.
The whole firm was not reconstituted. The business at Purnea was carried on by a
new reconstituted partnership firm which itself claimed to be a separate identity
under the Income Tax Act and claimed separate registration and was separately
assessed to income tax. An assessee who installed the new plant or machinery must
carry on the business with him in order to get development rebate and it must not

Kamal Pushp Enterprises v. D.R. Construction Co.

25

transfer them before the expiry of 8 years. If the identity of the two firms was
different, an assessable identity was clearly so, then it was plain that in respect of the
plant or machinery installed by the old partnership firm at Calcutta, the new firm at
Purnea, a distinct and different assessable identity, could not claim development
rebate either under the repealed Act or the present Act. The appellant which had not
installed the new machinery and plant was not entitled to any development rebate in
respect of machinery and plant worth Rs 5 lakhs and odd installed in the previous
year relating to the assessment year 1959-60 by M/s Prayagchand Hanumanmal.

K. RAMASWAMY, J. - 6. Shri B. Sen, learned senior counsel for the appellant raised
twofold contentions. According to the learned counsel, M/s Prayagchand Hanumanmal
consisting of original partners Prayagchand Periwal and Hanumanmal Periwal, merely had
taken M/s Periwal and Co. (P) Ltd. for the purpose of better management and financial
assistance. The old partnership admittedly having started its branch at Purnea in cold storage
business has been continuing to have its identity as an assessable entity whose character has
not been lost by taking new partner M/s Periwal and Co. (P) Ltd. for the purpose of benefit of
profits only. Therefore, the assessee is entitled to the development rebate under Section 33 of
the Act. Alternatively it is contended that in the books of account of M/s Prayagchand
Hanumanmal as a creditor with a sum of Rs 3,50,000 in all on two dates in its accounts for the
year ended October 31, 1959 debited the amount of the three partners of the assessee as they
stood in the books of the old firm. Correspondingly the new firm also in its turn transferred of
Rs 3,50,000 to the credit of the partners account by debiting the account of the old firm
showing the opening balance of Rs 4,25,606. It would, thus, show that there is a transfer of
the capital asset to the appellant and thereby the appellant is an owner under Section 33 of the
Act. Accordingly it is entitled to development rebate. Shri Bhatnagar, the learned counsel for
the revenue contended that the appellant is not the assessee, nor the owner of the machinery
and plant. The owner is M/s Prayagchand Hanumanmal and as such the assessee is not
entitled to the development rebate.
11. The crucial question, therefore, is whether the appellant is the owner of the machinery
and plant in the relevant assessment year 1962-63. Acquisition of ownership is a condition
precedent to avail of the development rebate under Section 33(1) of the Act. It is now fairly
clear from the statement of facts that the old and the new partnership firms are separately
registered under the Act and the old one was doing its business at Calcutta and the new one at
Purnea. They have been separately assessed as independent assessable entities. Only the new
firm alone was reconstituted consisting of the two partners of the old firm M/s Prayagchand
Hanumanmal and Periwal & Co. (P) Ltd. Prayagchand and Hanumanmal individually are
entitled to 25 per cent shares each for the profits in the appellant firm and Periwal & Co. (P)
Ltd. has 50 per cent shares of profit. Under the Indian Partnership Act, 1932 the partnership
firm registered thereunder is neither a person nor a legal entity. It is merely a collective name
for the individual members of the partnership. A firm as such cannot be a partner in another
firm though its partners may be partners in another firm in their individual capacity. Either
under the repealed Act or the Act a firm is liable to be separately assessed to tax as well as all
its partners in their capacity as individuals if they have taxable income. The appellant is
separately registered under Section 26-A of the Act and assessed to tax from the assessment

26

Kamal Pushp Enterprises v. D.R. Construction Co.

year 1960-61 and onwards. There is no reconstitution of the original firm Prayagchand
Hanumanmal inducting Periwal & Co. (P) Ltd. as its partner. Thus it is clear that the appellant
assessee is a new identity under the Act. It is not a successor in interest of the old firm as per
the provisions of the Act.
*****

Kamal Pushp Enterprises v. D.R. Construction Co.

27

Bhagwanji Morarji Goculdas v. Alembic Chemical Works


AIR 1948 P.C. 100

[Agreement by a company with individuals constituting firm]

SIR JOHN BEAUMONT 9. Their Lordships think that the decisions of the Courts in
India upon this point were right.
10. Before the Board it was argued that under the Indian Partnership Act, 1932, a firm is
recognized as an entity apart from the persons constituting it, and that the entity continues so
long as the firm exists and continues to carry on its business. It is true that the Indian
Partnership Act goes further than the English Partnership Act, 1890, in recognising that a firm
may possess a personality distinct from the persons constituting it; the law in India in that
respect being more in accordance with the law of Scotland, than with that of England. But the
fact that a firm possesses a distinct personality does not involve that the personality continues
unchanged so long as the business of the firm continues. The Indian Act, like the English
Act, avoids making a firm a corporate body enjoying the right of perpetual succession. The
agreement of 7th December, 1907 was made between the company and four named
individuals, and when all of those four individuals had ceased to be members of the firm,
there was no privity between the company and the firm as it then existed.
12. In the trial Court and before this Board some reliance was placed on S. 87B (c),
Companies Act. That sub-clause was introduced into the Companies Act by the amending
Act of 1936. The sub-clause renders a transfer of his office by a managing agent void unless
approved by the company in general meeting, but there is a proviso removing from the
operation of the sub-clause any change in the partners of a managing agents firm, so long as
one of the original partners continues to be a partner in such firm, and original partners are
defined to mean, in the case of managing agents appointed before the commencement of the
amending Act, 1936, partners who were partners at the date of the commencement of the Act.
So for the purposes of the proviso, the appellant was to be regarded as an original partner.
Their Lordships agree with the learned trial Judge that this section of the Companies Act has
no application to the present case. It places the appellant in the position of an original partner
for the purposes of the proviso but does not make him an original partner for the purposes of
the managing agents agreement. For these reasons their Lordships will humbly advise His
Majesty that this appeal be dismissed with costs.
*****

28

Kamal Pushp Enterprises v. D.R. Construction Co.

Nanchand Gangaram v. Mallappa Mahalingappa Sadalge


(1976) 2 SCC 429 : AIR 1976 SC 835

[Joint Hindu family business and partnership business - distinction]


The respondents are Hindus governed by Mitakshara School of Hindu Law.
Mahalingappa, the prepositus of the joint family died in 1922, survived by three sons,
namely, Mallappa, defendant No. 1, Appa-saheb, defendant No. 2, Neelkanth (the sons
are referred to as M, A and N). Mahalingappa and his sons constituted a joint Hindu
family. The family was trading in tobacco. Mahalingappa, as karta was managing the
joint family business. After his death, his eldest son Neelkanth, father of Chandrakant,
defendant No. 3, began to look after the management of the family business. N also
started C.N. Tennis Bidi Factory in the name of his son Chandrakant in 1942 or
thereabout. N died on July 8, 1946. Thereafter A defendant No. 2 continued and
managed the joint family business and the family concerns with the consent of the other
members. After 1951, the family business was managed by M (defendant No. 1).
The appellant had business dealings in tobacco and money dealings with the
defendants joint family. There used to be periodical verification of accounts and
acknowledgements were made from time to time by the manager of the family. The
plaintiffs accounts were burnt in fire on October 22, 1949 and he had to reconstruct the
accounts from available information and documents. On April 15, 1953, accounts were
taken, and the amount due from the defendants family to the plaintiff was worked out
and verified. The accounts thus stated were acknowledged and signed by defendant No. 1
and by defendant No. 4, as guardian of her minor son, defendant No. 3. A balance of Rs
69,465/15 /- was found due to the plaintiff from the defendants.
With the preceding allegations, the plaintiff, on January 28. 1954, instituted the suit
for the recovery of Rs 75,000, comprising of Rs 69,465/15/- as principal plus interest at
12 per cent per annum. Subsequently, by an amendment of the plaint, he added an
alternative ground that if the defendants proved that there had been a partition in the
family, they were still liable for the dues pertaining to the ancestral business carried on by
all the defendants either as members of the joint Hindu family or as partners of a firm.
Defendants Nos. 1 and 2 in their joint written statement, admitted that there was an
ancestral tobacco business of the family managed by N till his death in 1946; that after
Ns death, the family business was managed by them CM and A and that all the
defendants were jointly liable for the plaintiffs claim. The defendants denied that there
was ever a partition of the joint family. They however conceded that a deed of
partnership, an agreement and a partition award had been brought into existence from
time to time with the sole object of lessening the burden of income-tax, and they were not
intended to be acted upon. It was added that after the interim attachment of the property;
defendant No. 3, taking advantage of these bogus documents, obtained an ex parte decree
to show that there had been division of the joint family, and that this decree was not
opposed by the answering defendants because they were assured that it would not be
executed. They admitted that the appellants claim was partially true, but denied
correctness of the total balance claimed as due. They further averred that the suit was
time barred as the acknowledgment relied on by the plaintiff was not legal and could not
extend limitation, that interest was wrongly calculated, that if they (defendant Nos. 1 and
2) were held liable, they should be allowed to pay in easy instalments.

Kamal Pushp Enterprises v. D.R. Construction Co.

29

Defendant No. 3 resisted the plaintiffs claim and denied that there was any
acknowledgment made on his behalf on April 15, 1953 by his mother, defendant No. 4.
In the alternative, he pleaded that she had no authority to acknowledge the debt so as to
bind him as he was then a minor. Defendant No. 4 in her written statement denied the
plaintiffs claim and supported the contention raised in his written statement by defendant
No. 3.
The trial Court held that the joint family had disrupted in 1945 and the plaintiff was
aware of this fact, that the acknowledgments of the debt had been made by defendants
Nos. 1 and 2 and not by defendant No. 3, and on that account the suit was within time
only as against defendants Nos. 1 and 2; that defendant No. 3 had on attaining majority
repudiated his liability as partner; that the thumb impressions of defendant No. 4 on the
acknowledgment had been taken by practising fraud; that in any case defendant No. 4 had
no authority to acknowledge the debt on behalf of her minor son. The Court, however,
upheld the appellants contention that the old accounts had been destroyed in fire and that
the plaintiff was entitled to interest at 12 per cent per annum. On these findings, the trial
Court decreed the plaintiffs claim in toto against defendants Nos. 1 and 2 but dismissed it
against defendants Nos. 3 and 4. The High Court affirmed the findings of the trial Court
and dismissed the appeal.

R.S. SARKARIA, J. - 13. It is common ground between the parties that during the lifetime
of Mahalingappa, the family consisting of Mahalingappa and his sons, was a joint Hindu
family trading in tobacco. It is further not disputed that after the death of Mahalingappa, the
surviving coparceners continued to be joint, and Neelkanth, the eldest son of Mahalingappa
managed the family business as karta till November 4, 1945.
39. Mr Datar next contends that even if,the joint status of the family stood disrupted from
November, 1945, then also, on the principle of Section 45, Partnership Act the
acknowledgments made by defendants Nos. 1 and 2, representing themselves, jointly or
severally, as karta of the joint Hindu trading family, would, in the absence of public notice to
the traders in general or particular notice to the plaintiff, be binding on all the erstwhile
members of the joint family.
41. Kashiram [AIR 1945 Bom. 511] case decided by an eminent Single Judge certainly
supports the proposition propounded by Mr Datar. Applying the principle of Section 45 of the
Partnership Act, 1932 therein the learned Judge held that unless intimation of the severance of
joint status between the members of the joint family is given to the outside creditors who had
dealings with the joint family through its karta either by public notice or individual notice in
that behalf, the karta would be deemed to continue to represent the family and to have power
to incur debts for family necessity and to make acknowledgments or part payments in respect
of the same so as to extend the period of limitation. With great respect to the learned Judge,
we do not think that this is a correct enunciation of the law on the point. Firstly, the
legislature has, in its wisdom, excluded joint Hindu trading families from the operation of the
Partnership Act. Section 4 of that Act defines partnership as the relation between persons
who have agreed to share the profits of a business carried on by all or any of them acting for
all. Section 5 further makes it clear that this Act governs only that relation of partnership
which arises from contract and not from status such as the one obtaining among the members

30

Kamal Pushp Enterprises v. D.R. Construction Co.

of a joint Hindu family trading partnership. Secondly, the question whether an


acknowledgment made by the karta of an erstwhile joint Hindu family after its severance,
would extend limitation against all the former members of that family, turns primarily on an
interpretation of clause (b) of sub-section (3) of Section 21, read with Section 19 of the
Limitation Act, 1908. Clause (b) of Section 21(3) provides:
Where a liability has been incurred by or on behalf of a Hindu undivided family as such,
an acknowledgment or payment made by or by the duly authorised agent of, the manager
of the family for the time being shall be deemed to have been made on behalf of the
whole family.
42. The key words in this clause are the manager of the family for the time being. These
words unerringly indicate that at the time when the acknowledgment is made and signed, the
person making and signing it, must be the manager of a subsisting joint Hindu family. If at the
relevant time the joint Hindu family as such was no longer in existence because of division or
disruption of its joint status, any acknowledgment made by the erstwhile karta of such family
cannot keep the debt alive and extend limitation as against all the members of the family, his
representative capacity as karta being coterminus with the joint status of the family.
43. Explanation II to Section 19 lays down that for the purpose of this section signed
means signed either, personally or by an agent duly authorised in this behalf. Section 21(1)
provides that the expression agent duly authorised in this behalf in Sections 19 and 20 shall
in the case of a person under disability include his lawful guardian or manager or an agent
duly authorised in this behalf. It is well settled that coparceners do not derive their title
through the karta of the coparcenary. Defendants Nos. 1 and 2 do not fulfil the requirements
of this sub-section.
44. It is therefore the duty of the creditor to ascertain after due enquiry whether the person
making the acknowledgment still holds his representative capacity as karta of the family. The
law does not cast any duty upon the members of the family who do not figure in the
endorsement or writing admitting the debt, to inform the creditor by a general notice about the
disruption of the family. If the creditor fails to make an enquiry and satisfy himself about the
capacity of the executant to represent the family at the time of making the acknowledgment,
he does so at his own peril. Disruption of the joint family status as already noticed puts an end
to the representative capacity of the karta and any acknowledgment of a debt made by him
after such disruption, cannot save the creditors claim from becoming time barred against the
other members.
46. We approve of the law enunciated on the point by the High Courts in these cases.

*****

Kamal Pushp Enterprises v. D.R. Construction Co.

31

Lachhman Das v. CIT


AIR 1948 P.C. 8

[Was it competent for a member of a joint Hindu family to contract in his own
individual capacity with the family as a partnership and to maintain a
separate interest for himself in that concern ?]

In the application for reference, it was stated that the following questions of law
arose:
(1) Can there be a partnership within the meaning of S. 2(6B), Income-tax Act, 1922,
between a Hindu undivided family as such on the one part and one of its undivided
members in his individual capacity on the other part? (2) Even if such a partnership was
permissible in law, is there any evidence on record in this case to show the existence of
such a partnership between the Hindu undivided family of Messrs. Lachhman Das and
Sons (including Daulat Ram) as represented by its Karta Lachhman Das on the one part
and Daulat Ram on the other part?
The High Court answered the question in the negative and thus reversed the
decision of the Tribunal.

M.R. JAYAKAR, J. (13) Before their Lordships objection was taken to the form of the
question as set out above on the ground that in the previous proceedings before the Incometax authorities the partnership relied upon was between the members of the Hindu family as
such on the one hand and Daulat Ram, in his individual capacity, on the other.Their
Lordships, however, must accept the question as stated in the case presented for their
consideration, whatever its previous form might have been. Their Lordships are, therefore,
concerned in this case only with the validity of a partnership between the Karta of the family
representing it on the one hand and a member of that family in his individual capacity on the
other. It is unnecessary to consider in this case the question relating to the validity of a
partnership between a Hindu undivided family as such of the one part and one of its undivided
members in his individual capacity of the other. With reference to the latter kind of
partnership, there seems to be some authority favouring the view that such a partnership
cannot exist under the rules of Hindu law, but their Lordships do not propose to deal with that
question in this case.
(14) The argument before their Lordships on behalf of the appellant is as follows: (1) It
cannot be doubted that a coparcener in a joint and undivided Hindu family can enter into
contractual relationships with the members of that family while remaining joint with them;
and (2) if so, partnership being in its nature a contractual relationship, there should be, on
general principles of Hindu law, no objection to the validity of such a transaction.This
argument was reinforced by another that the rules of Hindu law permit the formation of a
partnership between the managing members of a Hindu joint family on the one hand and a
stranger on the other.In such a case, it is argued, the family as a unit does not become a
partner, and consequently the objections to the formation of such a partnership due to the
fleeting and changeable nature of a joint Hindu family do not arise; such of its members as in

32

Kamal Pushp Enterprises v. D.R. Construction Co.

fact enter into contractual relations with the stranger alone become partners, and the
partnership would be governed by the Partnership Act.
(15) Authority for this proposition, it would appear, was to be found in Maynes Hindu
Law, Edn. 9, page 396, and in a decision of this Board, 36 Bom. L.R. 976, where this passage
from Mayne was approved and relied upon. This Tribunal relied upon Maynes authority but
the High Court distinguished it on the ground that Daulat Ram, though he might have made a
contribution in his individual capacity from his separate funds, could not be regarded as a
stranger so long as he continued his connection with his undivided family in the capacity of a
coparcener. The term stranger, the High Court said, implies an idea of being foreign or
alien to the family, and this description cannot fit in with a coparcener of the same family so
long as he is a composite member thereof.
(16) After careful consideration, their Lordships cannot accept this view and on general
principles they cannot find any sound reason to distinguish the case of a stranger from that of
a coparcener who puts into the partnership what is admittedly his separate property held in his
individual capacity and unconnected with the family funds. Whatever the view of a Hindu
joint family and its property might have been at the early stages of its development, their
Lordships think that it is now firmly established that an individual coparcener, while
remaining joint, can possess, enjoy and utilise, in any way he likes, property which was his
individual property, not acquired with the aid of or with any detriment to the joint family
property. It follows from this that to be able to utilise this property at his will, he must be
accorded the freedom to enter into contractual relations with others, including his family, so
long as it is represented in such transactions by a definite personality like its manager. In
such a case he retained his share and interests in the property of the family, while he
simultaneously enjoys the benefit of his separate property and the fruits of its investment. To
be able to do this, it is not necessary for him to separate himself from his family. This must
be dependent on other considerations, and the result of a separate act evincing a clear
intention to break away from the family. The error of the Income-tax Officer lay in his view
that before such a contractual relationship can validly come into existence, the natural family
relations must be brought to an end. This erroneous view appears to have coloured his and
the subsequent decisions of the Income-tax authorities.
(17) In this view of the Hindu law, it is clear that if a stranger can enter into partnership,
with reference to his own property, with a joint Hindu family through its Karta, there is no
sound reason in their Lordships view to withhold such opportunity from a coparcener in
respect of his separate and individual property.
(18) For the respondent, it was argued that the case of a partnership with a stranger can
be distinguished on the ground that the Kartas entering into a partnership on behalf of a joint
Hindu family is in substance of the nature of an alienation, in so far as it permits the person
accepted into partnership to participate in the fruits of the family partnership and to that extent
it causes a loss or detriment to the family, much in the same way as if the Karta had made a
pro tanto alienation of the family property. On this basis, it is argued, that, on general
principles of Hindu law, an alienation may be permitted, in certain events, in favour of a
stranger, but not in favour of a coparcener; the two cases are therefore distinguishable.
Dealing with this argument, their Lordships find the analogy remote and fantastic between an

Kamal Pushp Enterprises v. D.R. Construction Co.

33

alienation of the family property and an acceptance of a stranger to the benefits of a


partnership with it. In no sense can such acceptance be regarded as an alienation; and,
further, even if it could be so regarded, it is now established by several rulings, including one
of this Board that a joint Hindu family can alienate an asset belonging to it to a member of
the family without causing a disruption of the family. This case also throws a side-light upon
the question at issue in this appeal in so far as it holds that there is nothing to prohibit
members from entering into a partnership in respect of a portion of the joint property which
they have partitioned among themselves.
(19) On the respondents behalf, their Lordships attention was invited to a case (1940) 8
I.T.R. 369, but the facts of that case are clearly distinguishable. The partnership there was
formed between the same individual acting, on the one hand, as the Karta of the joint Hindu
family and, on the other, as a partner in his individual capacity. He came to occupy, in the
same transaction, two different capacities: one as representing the interests of the family and
the other as representing his private interests. These two capacities might in certain
conceivable circumstances be in conflict. The partnership in that case was therefore rightly
disallowed.
(20) In conclusion, it was argued for the respondent that a joint Hindu family being, by
its nature a frequently changing entity no partnership could be formed with it. This objection,
if valid, would be equally operative against a partnership of the family with a stranger, which
the authorities prove, and it is practically conceded in this case, can be validly formed. But,
apart from this answer, it may be pointed out that though in its nature a joint Hindu family
may be fleeting and transitory, it has been regarded as capable of entering, through the agency
of its karta, into dealing with others. Without accepting the view of some eminent Hindu
Judges that a Hindu joint family is, in its true nature, a corporation capable of a continuous
existence in spite of the fleeting changes in its constitution, it is enough to state that for the
purposes of such a transaction effected through the medium of its karta, it has been, for a long
time past, regarded as an entity capable of being represented by its manager. The class of
cases of which the ruling (1939) 7 I.T.R. 269 is an illustration, went on a different principle,
namely, that a firm, not being recognised as a legal entity, cannot as such enter into
partnership with another firm as such. That principle cannot be applicable to a joint Hindu
family in transactions where it acts through the agency of its karta.
(21) For all these reasons their Lordships answer is in the affirmation to the question
which is before them. The appeal will therefore be allowed.
*****

34

Kamal Pushp Enterprises v. D.R. Construction Co.

Chandrakant Manilal Shah v. CIT


AIR 1992 SC 197
[Karta entering in to partnership agreement Sections 4, 6]

Chandrakant Manilal Shah was the karta of a Hindu Undivided Family (HUF) and the
family was carrying on business of cloth. Naresh Chandrakant, one of the sons of
Chandrakant Manilal Shah, joined the business on a monthly salary of Rs 100 since about
April 1959. It was asserted that with effect from November 1, 1959 the business had been
converted into a partnership between Chandrakant Manilal Shah as karta of HUF and
Naresh Chandrakant. The deed of partnership executed in this behalf of November 12,
1959 indicated that Naresh Chandrakant had been admitted as a working partner with
effect from November 1, 1959 having 35 per cent share in the profits and losses of the
firm and the remaining 65 per cent share was held by Chandrakant Manilal as the karta of
the HUF. An application was made for registration of the firm which was dismissed by
the ITO on the ground that there was no valid partnership. The view taken by the ITO
was upheld in appeal by the AAC. On further appeal, the Income Tax Appellate Tribunal
also came to the same conclusion that there was no valid partnership and the business
consequently must be taken to continue in the hands of the joint family. However, at the
instance of the assessee the following question was referred by the Tribunal to the High
Court for its opinion:
Whether on the facts and in the circumstances of the case, there was a valid partnership
under Annexure A between Shri Chandrakant, as the karta of the HUF and Shri Naresh,
a member of the family?
The High Court by the judgment under appeal answered the aforesaid question in the
negative, in favour of the Revenue and against the assessee.

N. D. OJHA, J. - 4. It has been urged by the learned counsel for the appellants that the mere
fact that Naresh Chandrakant had neither separated from the HUF nor brought in any cash
asset as his capital contribution to the partnership but was contributing only his skill and
labour, could not in law detract from a valid partnership being created. Learned counsel for
the respondent, on the other hand, contended that the view taken in this behalf by the Tribunal
and the High Court was correct.
5. Having heard learned counsel for the parties, we are inclined to agree with the
submission made by learned counsel for the appellants. In our view, this contention derives
full support from the view of the Judicial Committee of the Privy Council in Lachhman Das
v. CIT [AIR 1948 PC 8]. There the question which fell for consideration was:
Whether in the circumstances of this case, there could be a valid partnership
between Lachhman Das as representing a Hindu undivided family on the one hand and
Daulat Ram, a member of that undivided Hindu family in his individual capacity, on the
other?
6. In other words, the question was the same as the one arising in the present case but for
the difference in the factual background that, whereas in the case before the Judicial
Committee the member had brought in his separate capital, the member in the present case

Kamal Pushp Enterprises v. D.R. Construction Co.

35

claims only to be a working partner. Does this difference in facts make a difference in
principle? That is the question.
7. It had been urged before the High Court for the assessee that, when a karta of a HUF
could enter into a partnership with a stranger as held by the Privy Council in P.K.P.S.
Pichappa Chettiar v. Chokalingam Pillai [AIR 1934 PC 192], there was no reason why a
coparcener also could not enter into such a partnership by making contributions in his
individual capacity from his separate funds. This plea was repelled by the High Court on the
ground that a coparcener could not be regarded as a stranger so long as he continued his
connection with his undivided family in the capacity as a coparcener. While reversing the
judgment of the High Court, it was held by the Privy Council:
After careful consideration, their Lordships cannot accept this view and on general
principles they cannot find any sound reason to distinguish the case of a stranger from
that of a coparcener who puts into the partnership what is admittedly his separate
property held in his individual capacity and unconnected with the family funds. Whatever
the view of a Hindu joint family and its property might have been at the early stages of its
development, their Lordships think that it is now firmly established that an individual
coparcener, while remaining joint, can possess, enjoy and utilise, in any way he likes,
property which was his individual property, not acquired with the aid of or with any
detriment to the joint family property. It follows from this that to be able to utilise this
property at his will, he must be accorded the freedom to enter into contractual relations
with others, including his family, so long as it is represented in such transactions by a
definite personality like its manager. In such a case he retains his share and interests in
the property of the family, while he simultaneously enjoys the benefit of his separate
property and the fruits of its investment. To be able to do this, it is not necessary for him
to separate himself from his family. This must be dependent on other considerations, and
the result of a separate act evincing a clear intention to break away from the family. The
error of the Income Tax Officer lay in his view that, before such a contractual
relationship can validly come into existence, the natural family relationship must be
brought to an end. This erroneous view appears to have coloured his and the subsequent
decisions of the income tax authorities.
In this view of the Hindu law, it is clear that if a stranger can enter into partnership,
with reference to his own property, with a joint Hindu family through its karta, there is no
sound reason in their Lordships view to withhold such opportunity from a coparcener in
respect of his separate and individual property.
8. The aforesaid view of the Privy Council was approved by this Court in Firm Bhagat
Ram Mohanlal v. Commissioner of Excess Profits Tax, Nagpur [AIR 1956 PC 374] but on
the facts of that case it was held that the partnership set up in that case was not valid.
12. Learned counsel for the respondent has laid considerable emphasis on two points.
Firstly, it was urged that Hindu law does not recognise any contract among the coparceners
inter se except in two cases, namely, where there is a partial partition and where a coparcener
has separate property and brings in such separate property as capital towards consideration for
becoming a partner. While elaborating the first point, it has been urged that if, even in a case
where there is neither partial partition nor any separate property is brought in by the
coparcener as consideration for the partnership it is held that a valid partnership can still come

36

Kamal Pushp Enterprises v. D.R. Construction Co.

into existence, it would create an anomalous situation inasmuch as such coparcener would be
having an interest in the coparcenary property both as a coparcener and partner. Reliance in
this behalf has been placed on the following observations made in the case of Bhagat Ram
Mohanlal: (ITR p. 526)
If members of a coparcenary are to be regarded as having become partners in a firm
with strangers, they would also become under the partnership law partners inter se, and it
would cut at the very root of the notion of a joint undivided family to hold that with
reference to coparcenary properties the members can at the same time be both
coparceners and partners.
13. The second point emphasised by learned counsel for the respondent is that skill and
labour cannot be treated as property.
14. It must be confessed that the observations made in the case of Bhagat Ram Mohanlal
relied upon do appear to support the contention of the Revenue. In Firm Bhagat Ram
Mohanlal v. CEPT, a partnership had been entered into in 1940 between Mohanlal (M) and
two outsiders (R and G), M admittedly representing a HUF consisting of himself and his two
brothers Chotelal (C) and Bansilal (B). In 1944, the HUF got divided and, consequently, the
firm was reconstituted with five partners viz. the two outsiders (R and G), M, C and B. This,
according to the Revenue, had resulted in a change in the persons carrying on the business
leading to certain consequences adverse to the assessees in the context of the Excess Profits
Tax Act. The firm attempted to get over the difficulty in two ways:
(a) It was contended that, even initially, in 1940, the firm must be considered as
having been constituted with all the five persons, R, G, M, C and B, as partners; in other
words when M entered into the partnership on behalf of the HUF, the consequence was
that not only he but his two undivided brothers B and C also became partners in the firm
in their individual capacity; and
(b) It was suggested that when M entered into the partnership agreement in 1940, all
the three coparceners M, C and B, could be regarded as having entered into the contract as
kartas of (i.e. representing) the HUF.
15. Both these contentions were negatived. So far as the first contention was concerned,
the Court observed that it could be disposed of as being an afterthought opposed to the factual
findings in the case. However, the Court proceeded to observe that it was difficult to visualise
a situation, which the appellants contended for, of a HUF entering into a partnership with
strangers through its karta and the junior members of the family also becoming its partners in
their personal capacity. After referring to Lachhman Das and Sunder Singh Majithia v. CIT
[(1942) 10 ITR 457] where divided members of a family were held competent to carry on the
erstwhile joint family business in partnership, the Court pointed out: (ITR p. 526)
But in the present case, the basis of the partnership agreement of 1940 is that the
family was joint and that Mohanlal was its karta and that he entered into the partnership
as karta on behalf of the joint family. It is difficult to reconcile this position with that of
Chotelal and Bansilal being also partners in the firm in their individual capacity, which
can only be in respect of their separate or divided property.

Kamal Pushp Enterprises v. D.R. Construction Co.

37

16. This was followed by the observations on which Sri Manchanda, learned counsel for
the Revenue has placed considerable reliance. Similarly, so far as Contention (b) was
concerned, the Court observed that even if such a contention could be raised consistently
with the principles of Hindu law, it was in the teeth of the pleadings in the case and so could
not be allowed to be raised. These passages no doubt suggest that, in the Courts view, an
undivided member of a HUF cannot be a partner along with the karta of the family, except
where he furnishes capital in the form of property belonging to him in his individual right or
obtained by him on a partition of the family and that the Court left open the question whether
more than one member of a HUF can represent the family in a partnership with outsiders.
17. It will be apparent that this Court had rejected both contentions of the assessee as
being an afterthought or contrary to the factual findings in the case. This was sufficient to
dispose of the case. However, the further expressions of opinion, coming from such an
eminent Judge as Venkatarama Ayyar, J., are entitled to the greatest weight and respect. We,
however, think that the scope of these observations, made in the context of the special facts
and circumstances of the case, has been magnified by the learned counsel for the Revenue.
We may observe, at the outset, that his basic postulate that, under the Hindu law, there can be
no contract inter se between the undivided members of the family is basically incorrect. This
Court has recognised the validity of such contract in various situations. For instance, an
undivided member of a HUF (including its karta) can be employed by the HUF for looking
after the family business and paid a remuneration therefor: vide, Jitmal Bhuramal v. CIT
[(1962) 44 ITR 887 (SC)] and Jugal Kishore Baldeo Sahai v. CIT [(1967) 63 ITR 238].
Again on the second contention which was left open, subsequent decisions of this Court have
held that it is open to more than one member of a HUF to represent the family in partnership
with strangers. In CIT v. Sir Hukumchand Mannalal and Co. [AIR 1971 SC 383] it was
held by this Court:
The Indian Contract Act imposes no disability upon members of a Hindu undivided
family in the matter of entering into a contract inter se or with a stranger. A member of a
Hindu undivided family has the same liberty of contract as any other individual: it is
restricted only in the manner and to the extent provided by the Indian Contract Act.
Partnership is under Section 4 of the Partnership Act the relation between persons who
have agreed to share the profits of a business carried on by all or any of them acting for
all: if such a relation exists, it will not be invalid merely because two or more of the
persons who have so agreed are members of a Hindu undivided family.
18. This position has also been recognised in Ratanchand Darbarilal v. CIT [AIR 1985
SC 1572]. In that case, there were two firms, one at Katni and one at Satna, constituted by two
members of an undivided family with others. The question posed however was whether the
Satna firm could be treated as an independent unit of assessment. This Court held that it was a
question of fact on which the Tribunals findings were conclusive. In this view, it left
unanswered, as academic, the following question on which the Commissioner had sought a
reference:
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was
justified in directing that the firm owning the Satna business should be registered in spite
of the fact that the members of the two HUFs entered as partners inter se without their

38

Kamal Pushp Enterprises v. D.R. Construction Co.

effecting in the first instance a severance of joint status by partitioning either partially or
totally, the assets of the respective HUFs?

However, in the course of its judgment, the Court observed:


The High Court obviously fell into an error in proceeding on the footing that without
a partition or a partial partition some of the members belonging to the Hindu undivided
family could not constitute themselves into a partnership firm. We do not think this view
is correct in law. It is a well settled proposition applicable to Hindu law that members of
the joint family and even coparceners can, without disturbing the status of a joint family
or the coparcenary, acquire separate property or run independent business for themselves.
19. Turning now to the specific observations on which reliance has been placed, we do
not think that they should be read as permitting a partnership between the karta of a HUF and
its individual member only when he brings in some capital but not otherwise. In the context in
which they were made, it is seen that they were only limited to point out that there was no
claim before the Court, as in Lachhman Das or Majithia tccccccccchat the other member had
brought in any separate or divided property as capital. On the contrary, the claim was that the
coparceners of the HUF other than the karta, who was the eo nomine partner, should be
regarded as partners, though they had not entered into any such agreement and had placed
neither capital nor services at the disposal of the firm. It was this claim that was held
untenable. Much more significance cannot be read into these observations for, if construed
too strictly and in the manner suggested, they will militate against the possibility of a valid
partnership being formed in two classes of cases about which there can be no doubt. The first
is where an undivided member seeks to become a partner by furnishing capital which has
been held permissible in Lachhman Das and approved in Firm Bhagat Ram Mohanlal itself.
The other is the case of a partnership firm on which more than one partner represents a HUF,
the validity of which has been upheld in the cases referred to earlier. The observations cannot,
therefore, be read as precluding altogether a claim by an undivided member of a HUF that he
has in fact agreed to become a partner along with the karta for genuine and valid reasons. In
our view, the Allahabad, Madhya Pradesh and Mysore decisions rightly held that the
observations in Firm Bhagat Ram Mohanlal do not militate against the formation of a valid
partnership in such cases.
20. This takes us on to the second point made by Sri Manchanda, that, though an
undivided member can, by contributing separate capital, enter into a partnership with the karta
qua the family business, he cannot do so by offering as his contribution to the firm not
material capital but only his labour and skill. With regard to this submission made by the
learned counsel for the respondent that skill and labour cannot be equated with property, it
may not be out of place to refer to some earlier history. As has been stated in Mullas Hindu
Law, before the commencement of the Hindu Gains of Learning Act, 1930 (hereinafter
referred to as the Act) it was settled law that income earned by a member of a joint family by
the practise of a profession or occupation requiring special training was joint family property
if such training was imparted at the expense of joint family property.
This being so, if such a member of a joint family were to enter into a partnership with the
karta of the family to carry on business, the fruits even of his skill and labour would have
been property of the joint family and the very purpose of entering into a partnership namely

Kamal Pushp Enterprises v. D.R. Construction Co.

39

having a share of his own in the profits of the business would have been defeated. In this state
of law if an agreement was reached between such member of the joint family and the karta
that out of the profits of the business a defined share will be payable to and be the separate
property of such member, the agreement would have been illegal. Indeed such a member
would have been getting a separate share in the profits of the business without making any
contribution of his own.
23. To hold to the contrary, we may observe, would also be incompatible with the
practical, economic and social realities of present day living. We no longer live in an age
when every member of a HUF considered it his duty to place his personal skill and labour at
the services of the family with no quid pro quo except the right to share ultimately, on a
partition, in its general prosperity. Today, where an undivided member of a family qualifies in
technical fields - may be at the expense of the family - he is free to employ his technical
expertise elsewhere and the earnings will be his absolute property; he will, therefore, not
agree to utilise them in the family business, unless the latter is agreeable to remunerate him
therefor immediately in the form of a salary or share of profits. Suppose a family is running a
business in the manufacture of cloth and one of its members becomes a textile expert, there is
nothing wrong in the family renumerating him by a share of profits for his expert services
over and above his general share in the family properties. Likewise, a HUF may start running
a diagnostic laboratory or a nursing home banking on the services of its undivided members
who may have qualified as nurses and doctors and promising them a share of profits of the
business by way of remuneration. This will, of course, have to be the subject matter of an
agreement between them but, where there is such an agreement, it cannot be characterised as
invalid. It is certainly illogical to hold that an undivided member of the family can qualify for
a share of profits in the family business by offering moneys - either his own or those derived
by way of partition from the family - but not when he offers to be a working partner
contributing labour and services or much more valuable expertise, skill and knowledge for
making the family business more prosperous.
24. For the reasons discussed above, we have reached the conclusion that the decisions
referred to above which support the contentions of learned counsel for the appellants lay
down the correct legal position. In this view of the matter, it cannot be said that when a
coparcener enters into a partnership with the karta of a HUF and contributes only his skill and
labour, no contribution of any separate asset belonging to such partner is made to meet the
requirement of a valid partnership. Reverting to the facts of the instant case it is noteworthy
that it is not the case of the Revenue that the partnership between Chandrakant Manilal Shah
as karta of HUF and Naresh Chandrakant was fictitious or invalid on any other ground.
Consequently, the judgment of the High Court cannot be sustained.
25. In view of the foregoing discussion, this appeal succeeds and is allowed.
*****

40

Kamal Pushp Enterprises v. D.R. Construction Co.

Champaran Cane Concern v. State of Bihar


AIR 1963 SC 1737
[Co-ownership v. partnership]

The Champaran Cane Concern was assessed to agricultural income tax under the
Bihar Agricultural Income Tax Act, 1948, (the Act) by the Agricultural Income Tax
Officer, Motihari for three years 1948-49, 1950-51 and 1951-52. It was assessed as a
partnership firm though the assessee claimed that it was a co-ownership concern
belonging to two persons, Padampat Singhania having 1/4th share and Lala Bishundayal
Jhunjhunwala having 3/4th share. The concern carried on agricultural operations in six
farms consisting of a little over acres 2000-00 of land out of which about 1600-00 were
purchased jointly by Padampat Singhania and Bishundayal Jhunjhunwala and 483-00
were purchased in the name of a mill, namely, Motilal Padampat Sugar Mill, of which the
aforesaid two persons were the owners. Later on, by a resolution of the mill-company, the
farms were separated from the mill and the lands in their entirety were cultivated by the
concern.
The assessee had claimed that the concern was a co-ownership concern belonging to
the two persons abovenamed in the shares and as they were residents of Uttar Pradesh at
very long distance from the farms in Champaran, they appointed one S.K. Kanodia as
common Manager for facility of cultivation and management. This common Manager
looked after and managed the agricultural operations during the years in question. The
further case of the assessee was that the lands were undivided between the two co-owners
and the total net profits arising out of the joint cultivation were divided between the two
co-owners. On these statements, the assessee pleaded that Section 13 of the Act applied
and the common Manager should have been assessed in respect of the agricultural income
tax payable by each of the two co-owners in respect of their shares only. This plea of the
assessee was rejected by the Income Tax Officer. Appeals were then preferred against the
assessments made to the Deputy Commissioner of Agricultural Income Tax. These
appeals were dismissed with certain modifications. On revision, the Board of Revenue
reduced the assessment but did not accept the plea of the assessee that the assessments
should have been made under Section 13 of the Act. The assessee then moved the Board
for making a reference to the High Court which the Board refused. The assessee then
moved under Section 28(3) of the Act and it called for a reference from the Board which
expressed the real issue between the parties:
Whether in the facts and circumstances of the case, the common manager
should be assessed under Section 13 of the Bihar Agricultural Income Tax Act in
respect of the agricultural income tax payable by the persons jointly liable?
The High Court held that the question whether the assessee was a co-ownership concern
or a partnership firm was a question of fact, and even otherwise, there were facts and
circumstances from which it was open to the taxing authorities to come to the conclusion
that the firm was a partnership firm. On this footing the High Court answered the question
against the assessee.
Section 13: Where any person holds land, from which agricultural income is derived, as a
common manager appointed under any law for the time being in force or under any
agreement or as receiver, administrator or the like on behalf of persons jointly interested

Kamal Pushp Enterprises v. D.R. Construction Co.

41

in such land or in the agricultural income derived therefrom, the aggregate of the sums
payable as agricultural income tax by each person on the agricultural income derived
from such land and received by him shall be assessed on such common manager, receiver,
administrator or the like, and he shall be deemed to be the assessee in respect of the
agricultural income tax so payable by each such person and shall be liable to pay the
same.

S.K. DAS, J. - 5. We may now refer to some of the provisions of the Act which bear upon
the question before us. Section 2 of the Act is the definition section. According to the
definition given in that section agricultural income means inter alia any income derived
from land which was used for agricultural purposes. It was not disputed before us that the
income which the assessee in these cases derived was from land which was used for
agricultural purposes, namely, the cultivation of sugarcane etc. The definition section further
stated that the word firm had the same meaning as in the Indian Partnership Act, 1932, and
the word person meant any individual, association of individuals, owning or holding
property for himself or for any other or partly for his own benefit and partly for another either
as owner, trustee, receiver, common manager, administrator or executor or in any capacity
recognised by law and included an individual, Hindu family, firm or company. The charging
section is Section 3 which says that agricultural income tax shall be charged for each financial
year in accordance with and subject to the provisions of the Act on the total agricultural
income of the previous year of every person. Agricultural income tax means the tax payable
under the Act. It would appear from what we have stated above that by reason of the
definition of the words firm and person, the assessee if it is a partnership firm would be
liable to tax as a firm on its agricultural income by reason of the charging section, namely,
Section 3. In Section 3 of the Indian Income Tax Act, 1922 which is similar in terms, the
words of every firm or association of persons or the partners of the firm were subsequently
added in 1924 and the Indian Income Tax Act makes a distinction in the matter of assessment
between a registered and an unregistered firm.
It is quite clear from the section that where a common manager appointed under any law
or under any agreement holds land from which agricultural income is derived, on behalf of
persons jointly interested in the land or in the agricultural income derived therefrom, the
aggregate of the sums payable as agricultural income tax by each person on the agricultural
income derived from such land and received by him shall be assessed on the common
manager in respect of the agricultural income tax so payable by each such person and the
common manager shall be liable to pay the same. We have already stated that the learned
Solicitor-General has not now argued before us that Section 13 will apply in the case of a
partnership firm. He has however very strongly argued that Section 13 in terms will apply if
the assessee in the present cases is a co-ownership concern (as distinguished from a
partnership firm) and the common manager thereof must be assessed in respect of the
aggregate of the sums payable as agricultural income tax by each such co-owner.
7. Thus, the entire controversy before us narrows down to this: on the facts and
circumstances stated in the cases, was the assessee a partnership firm or a co-ownership
concern? Now, partnership or no partnership is ordinarily a question of fact, but we agree

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Kamal Pushp Enterprises v. D.R. Construction Co.

with learned counsel for the assessee that it is a mixed question of fact and law in the sense
that if the authorities who have to ascertain questions of fact apply a wrong principle of law
in instructing themselves as to what they have to find, then their finding of fact is not
conclusive because they have done it according to wrong principles. Looked at from the
aforesaid standpoint, the question before the taxing authorities in the present cases was
whether on the facts and circumstances established in the cases an inference of a partnership
firm within the meaning of the Indian Partnership Act, 1932 followed. That, we take it, must
be a question of law. That was the question which was referred to the High Court and the
High Court answered it on the footing that the proper inference was that the assessee was a
partnership firm within the meaning of the Indian Partnership Act. The assessee contends that
the proper inference is that the assessee was a co-ownership concern and not a partnership
firm and on that footing the common manager is entitled to be assessed umder Section 13 of
the Act.
8. Let us first see what are the facts and circumstances which have been established in the
case. First of all, we have the name of the assessee as the Champaran Cane Concern, a name
which may apply to a partnership firm as well as to a co-ownership concern. Secondly, the
finding of the Deputy Commissioner of Agricultural Income Tax, a finding which is part of
the statement of the case, is that the two co-owners appointed Kanodia as the common
manager for facility of management. Now, the appointment letter showed that the two coowners joined together in appointing Kanodia as common manager for supervision of
cultivation and for management of the agricultural properties in the district of Champaran.
Partnership within the meaning of the Indian Partnership Act of 1932 is a relation between
persons who have agreed to share the profits of a business carried on by all or any of them
acting for all. The appointment of Kanodia by the two co-owners acting together is consistent
with either view and does not clinch the issue in favour of a partnership. The High Court
appears to have taken the appointment of Kanodia by the two co-owners as a circumstance
establishing a partnership. The High Court has further pointed out that the two co-owners
lived in Uttar Pradesh and belonged to two different families. We do not see how that
circumstance gives any indication in law of a partnership. As to the division of the profits and
losses, the finding of the Deputy Commissioner of Agricultural Income Tax was that the two
proprietors had no definite shares in the agricultural lands, by which he must have meant that
the lands of the six farms had not been partitioned amongst the two co-owners by metes and
bounds. The cultivation was made jointly on behalf of the two co-owners by the common
manager and the profits arising therefrom were distributed to them in proportion of their
respective shares of Rs 0-4-0 and Rs 0-12-0. This circumstance has again been taken by the
High Court as a circumstance from which an inference of partnership necessarily follows.
Again, we do not agree with the High Court. Two co-owners may appoint a common manager
for facility of cultivation and management without entering into a partnership and the fact that
the profits or even the losses are distributed in accordance with the shares of the two owners
does not necessarily establish a partnership within the meaning of the Partnership Act, 1932.
In Lindley on Partnership (12th Ed., p. 57) the main differences between co-ownership and
co-partnership have been compared. One of the principal differences is that co-ownership is
not necessarily the result of agreement, whereas partnership is. In the cases before us there is

Kamal Pushp Enterprises v. D.R. Construction Co.

43

nothing in the record to show that there was any agreement between the two proprietors to
form a partnership firm. The second difference is that co-ownership does not necessarily
involve community of profit or of loss, but partnership does. In the cases before us there is a
finding that there is community of profit. A third difference is that one co-owner can without
the consent of the other, transfer his interest etc. to a stranger. A partner cannot do this. About
this point there is no evidence nor any finding that the two proprietors Padampat Singhania
and Bishundayal Jhunjhunwala could not transfer their interests in the concern without the
consent of each other. The greatest difficulty which faces the respondent in the present cases
is that it cannot point to any fact or circumstance from which it can be inferred that one
proprietor was the agent, real or implied, of the other. In a partnership each partner acts for
all. In a co-ownership one co-owner is not as such the agent, real or implied, of the other.
There is a complete absence of any fact or circumstance establishing a relation of agency
between the two proprietors in the present case; nor have the taxing authorities come to any
finding that there was such a relation.
9. The High Court made a reference to the returns filed on behalf of the assessee for the
three years in question as also the frame of the question which the assessee itself wished to be
referred to the High Court. As to the frame of the question we have stated earlier that the
Board of Revenue really made a mistake and it may even be that on behalf of the assessee the
question was not properly framed. The assessees contention all along was that it was a coownership concern and not a partnership, but in framing the question the word partners was
used. We do not think that a mistake in the framing of the question, which was later corrected
by the High Court, will change the real position in law. As to the returns which were filed
they were not printed in the paper book. Learned counsel for the respondent gave us copies of
the returns. These returns showed that in all the three years the assessee indicated its status as
a co-ownership concern and the name of the assessee was shown as the manager, Champaran
Cane Concern or common manager, Champaran Cane Concern. The body of the return
contained four alternatives as to whether the return was being submitted by an individual,
firm, a joint family or an association of individuals. The intention of putting four alternatives
in the printed form of the return is to cut out the alternatives which do not apply. In the cases
before us the alternatives relating to individual, family and association of individuals were cut
out and the alternative firm remained. The High Court seems to have thought that the
retention of the word firm in the return amounted to an admission that the assessee was a
partnership firm. We do not agree. In the printed form of the return there was no alternative as
to a co-ownership concern and in a popular sense, a co-ownership concern may describe itself
as a firm. That does not necessarily mean that it is a partnership firm within the meaning of
Section 4 of the Indian Partnership Act as indicated in Section 2(k) of the Act. In our view no
facts and circumstances have been found in these cases from which the taxing authorities
properly instructed in law could have come to the conclusion that the assessee was a
partnership firm within the meaning of Section 2(k) of the Act. On the contrary the facts and
circumstances found by the taxing authorities were all consistent with the claim of the
assessee that it was a co-ownership concern the common manager whereof was liable to
assessment under Section 13 of the Act.

44

Kamal Pushp Enterprises v. D.R. Construction Co.

10. A number of decisions were cited at the Bar as to the distinction between coownership and partnership. We have already referred to the main differences between the two.
The legal position as to this distinction seems to us to be so clear and well settled that we
consider it unnecessary to refer to the case law on the subject. We do not think that any useful
purpose will be served by referring to the decisions cited at the Bar.
11. For the reasons given above we have come to the conclusion that the answer which
the High Court gave to the question was not correct. We accordingly allow the appeals.
*****

Kamal Pushp Enterprises v. D.R. Construction Co.

45

Laxmibai v. Roshan Lal


AIR 1972 Raj. 288

Roshanlal's case was that he and Laxminarain entered into a partnership orally at Abu
Road on 23-6-1956 for taking building contract from the Western Railway, and it was
agreed that the partnership business would be carried in the name of Laxminarain Rama
Nand in which name the defendant had already taken contracts as an approved contractor
of the Western Railway. The terms of the contract of partnership are alleged to be that
both the partners would share profits and losses half to half and would get interest on the
amount invested by them in the partnership business at the rate of 6% per annum. It was
alleged that contract for construction of Selavi Railway Station and staff quarters as well
as for construction of Dam near Kivarli was taken by the firm and on the completion of
the contract the defendant Laxminarain withdrew the amount of the bills submitted by the
firm, but did not render accounts of the partnership business to the plaintiff. It was stated
that contract for no other construction was taken. The plaintiff's case is that he served a
notice on the defendant Laxminarain to render accounts but the latter neither gave any
reply nor rendered the accounts. Consequently, the present suit was filed on 24-9-1960
for dissolution of the partnership and for rendition of accounts. The suit was resisted by
the defendant mainly on the ground that no oral agreement of the alleged partnership
between the parties ever took place. The defendant pleaded that he alone had taken the
said contract and the plaintiff had agreed to finance him in this contract. In other words,
it was pleaded that there was only a relation of debtor and creditor between the defendant
and the plaintiff. The defendant's case is that the plaintiff was employed by him to look
after the work on his behalf on payment of a lump sum of Rs. 150/-. Alternatively, the
defendant also pleaded that in case the plaintiff succeeded in proving the alleged
partnership, the same was illegal and void being in contravention of the General
Conditions of contracts laid down by the Western Railway.
The Munsiff held that the partnership as alleged by the plaintiff between the plaintiff
and the defendant was proved and that each of them had half share in the profits and
losses of this partnership. He further held that the partnership shall be deemed to have
been dissolved on 6-7-1959. He appointed Shri Chunnilal Gandhi, Advocate as
Commissioner to go into the accounts and submit his report.

C. M. LODHA, J. - 8. I do not consider it necessary to refer to other cases in view of the


pronouncement of their Lordships of the Supreme Court on this point in [AIR 1963 SC 1737].
[Their Lordships quoted observations made in para 7 of Champaran Cane Concern v. State of
Bihar [AIR 1963 SC 1737] and proceeded.]
Thus in a case like the present it is the application of legal principles in the process of
reaching the conclusion which affords a justification for interference with that conclusion on
second appeal, and if there is no such error in applying the true legal principles, then, there is
no scope for interference by the Court of second appeal. It is, therefore, necessary to examine
whether the finding arrived at by the Courts below regarding the existence of the alleged
partnership is vitiated by an error of law because unless there is an error of law in arriving at
the conclusion on a mixed question of fact and law the conclusion based upon evidentiary
facts cannot be challenged in second appeal.

46

Kamal Pushp Enterprises v. D.R. Construction Co.

9. Learned counsel for the appellants urged that there must be three elements present
before any relation which may be termed as 'partnership' can come into existence:
(i) There must be an agreement entered into by all the persons concerned,
(ii) The agreement must be to share the profits of a business, and
(iii) The business must be carried on by all or any of the persons concerned acting for all
i. e. there must be facts or circumstance from which it can be inferred that each of
the persons alleged to be partners was the agent, real or implied of another.
While pointing out the principal differences between co-owner and partnership their
Lordship of the Supreme Court in AIR 1963 SC 1737, held that partnership is necessarily the
result of an agreement and that it necessarily involves community of profit or of loss. It was
also observed that a partner cannot without the consent of other partners transfer his interest
etc. to a stranger and lastly it was pointed out that in a partnership each partner acts for all,
that is, a relation of agency between the various partners must be established. It is true that a
contract merely to take a share of profits does not necessarily lead to an inference of
partnership. A loan to a person engaged in any trade upon a contract with such person that
the latter shall receive interest and also a share of the profits does not of itself constitute the
latter a partner. It is also true that the more use of the word 'partner' or 'partnership' in an
agreement does not necessarily show that there was a partnership. The parties may call
themselves partners but if it appears that one party is to do nothing more than advance money
to the other and is to be paid along with interest by a share of the profits, they cannot be
treated as partners, but must be treated only as creditor and debtor.
10. Learned counsel for the appellants strenuously urged that in the first place no
agreement to share profits and losses has been proved and that in any case in his submission
the existence of the essential element of agency has not been established. He has been at
pains to show that the plaintiff merely agreed to finance the contract taken by the defendant
Laxminarain in his own name and there was only a relationship of creditor and debtor
between the parties.
11. Admittedly there is no instrument of partnership in the present case. However, that is
not material.
12. The direct evidence regarding the agreement of partnership between the parties
consists of the statements of Roshanlal and Joharimal, who is the brother of the plaintiff
Roshanlal. Roshanlal has stated that the agreement between him and Laxminarain took place
on 23-6-1956 and the share of each of the two partners was fixed as half to half, and it was
further agreed that interest at 6 % per annum would be paid on investment made by each
partner in the partnership business. To the same effect is the statement of Joharimal, who
deposes to have been present at the time of the talk between Roshanlal and Laxminarain.
Joharimal is, no doubt, a close relation of the plaintiff, but relationship by itself is no ground
for rejecting his testimony. He further states that the account has been signed by him on
behalf of the plaintiff Roshanlal and that the (other) account was signed by Laxminarain in
his presence. He has further stated that the accounts pertain to the partnership. The criticism
advanced by the learned counsel with respect to the evidence of these two witnesses is that
they do not state in so many words that there was an agreement to share the profits and losses

Kamal Pushp Enterprises v. D.R. Construction Co.

47

and that Joharimal admits that no deed of partnership was written and that he had no authority
to sign the account on behalf of his brother Roshanlal.
13. I have carefully gone through the statements of these witnesses and do not find any
substance in the criticism advanced by the learned counsel for the appellants. By stating that
each partner had half share in the partnership business the witnesses clearly conveyed
nothing else but that they agreed to share profits and losses half to half. I do not find any
substantial reason to reject the testimony of these witnesses regarding the oral agreement of
partnership alleged to have taken place between Roshanlal and Laxminarain on 23-6-1956,
more so, when both the Courts below have accepted this testimony.
14. Learned counsel for the appellants has urged with great emphasis that there is
complete absence of the element of agency in the alleged partnership business between
Roshanlal and Laxminarain. It is contended that according to the 'General Conditions' of
contracts given by the Western Railway the contractor could not assign, sublet or transfer his
interest in the contract and that Roshanlal could not have represented the contractor's interest
before the Railway. This circumstance, according to the learned counsel, disproves the
existence of the element of agency so essential for the purpose of constituting partnership. I
may make it clear that the learned counsel expressly stated that it was not his argument that
the alleged partnership was in any way illegal or was hit on account of the 'General
Conditions' laid down by the Western Railway in granting such contracts.
15. It may be observed that in the written statement filed by the defendant it has been
admitted that the plaintiff Roshanlal used to look after the work in connection with the
construction and he was agreed to be paid a lump sum of Rupees 150/-. The defendant has
failed to substantiate that any remuneration had been fixed for the services rendered by the
plaintiff in connection with the contract. The fact that the plaintiff used to participate in the
construction work stands proved by the evidence of Munshilal and Jas Bhai. Jas Bhai wanted
to take a sub-contract and had a talk with Laxminarain as well as Roshanlal in this connection
though he was not successful in getting the sub-contract, as the rates offered to him did not
suit him. Munshilal states that he wanted some 'Tagaris' for which he approached Shri
Joharimal brother of Roshanlal who wrote a slip addressed to the shop of Laxminarain asking
Laxminarain to give the share of Laxminarain's 'Tagaris' to him. It further appears from the
reply filed by Laxminarain to the interrogatories submitted by Roshanlal that all the account
books pertaining to the contract in question had been handed over to Roshanlal. It may be
that according to the Rules and practice in vogue in the Western Railway no other person
except the person in whose name the contract was given may be able to deal with the Railway
but nevertheless from the facts and circumstances put on the record I have come to the
conclusion that in the Building Contract for which the partnership is alleged to have been
formed in the present case Roshanlal could and did act as an agent for the other partner
Laxminarain. The element of agency is implicit in such a partnership and no specific
objection as to the lack of it has been raised by the defendant either in his written statement or
in the course of evidence. On the other hand, involvement and participation of Roshanlal in
the building work for which the contract had been taken by Laxminarain is admitted even by
the defendant though he has tried to give a different colour to the same by stating that

48

Kamal Pushp Enterprises v. D.R. Construction Co.

Roshanlal was engaged to look after the work in lieu of a lump sum payment of Rs. 150/- and
he has also admitted that the work was mainly financed by Roshanlal.
16. In order to substantiate his contention that the relationship between the parties was
that of creditor and debtor, learned counsel for the appellants laid great stress on the
promissory note, admittedly executed by Madanlal son of Laxminarain on behalf of
Laxminarain Ramanand in favour of Roshanlal. It is argued that if it is a question of
advancing money for partnership business, there was no occasion for Madanlal to have
executed a promissory note in favour of the plaintiff. The argument on the face of it is, no
doubt, attractive but on a close examination I find that it is devoid of substance. It is
mentioned in the promissory note itself that the amount of Rs. 2500/- was taken from
Roshanlal for the purpose of making a deposit in the partnership contract of Kivarli work.
Again it is not without significance that the rate of interest mentioned in the promissory note
is nil.
The explanation submitted by the learned counsel for the respondent for obtaining this
promissory note from Madanlal is that the contract in connection with which the partnership
had been formed was taken up sometime in December, 1956 and the amount of Rs. 2500/evidenced by the promissory note for the purpose of deposit was advanced on 4-8-1956 and
with a view to evidence this advance towards the partnership business that the promissory
note was obtained. The explanation appears to be plausible.
17. Besides the oral evidence produced by the plaintiff to prove the agreement of
partnership, the plaintiff also placed a few other circumstances on the record to corroborate
the fact about the existence of partnership. Bhagwandas and Bhabootmal state that they had
been approached by Roshanlal and Laxminarain to mediate between them to settle the
accounts of partnership business of the parties. Kanakram, who used to bring sand and
concrete in connection with the construction work has also corroborated the fact of the
existence of partnership between the parties. Devi Shankar, who was a clerk in the Divisional
Office of the Western Railway further states that Madanlal on behalf of his father
Laxminarain and Chhangalal on behalf of his uncle Roshanlal used to come to him for
settlement of the bills in connection with the construction work, and that on enquiry from
Madanlal, he came to know that Laxminarain and Roshanlal had both shares in this work.
Laxminarain has admitted in his statement that his son Madanlal used to work in connection
with this contract on his behalf. It is surprising that Laxminarain does not corroborate the
theory of advance of Rs. 2500/- as loan by Roshanlal towards the construction work
undertaken by him and he expresses complete ignorance about it. It is further clear from the
statement of Laxminarain that Madanlal used to represent him in every way in connection
with the contracts of Salavi Railway Station and Kivarli Dam.
18. There is yet another circumstance going against the defendant and it is this that the
plaintiff admittedly gave him a notice for rendition of accounts before filing the present suit
but the defendant did not give any reply to it.
19. The evidence which I have referred to above in brief has been carefully considered by
the learned District Judge, who after a thorough discussion of the same has concurred in the
conclusion arrived at by the trial Court that the existence of the partnership as alleged by the

Kamal Pushp Enterprises v. D.R. Construction Co.

49

plaintiff is fully established and the learned counsel for the appellants has failed to show how
the inference drawn by the Courts below as to the existence of partnership between the parties
is vitiated by application of any erroneous principle of law.
20. The result is that I do not see any force in this appeal and hereby dismiss it.
*****

50

Kamal Pushp Enterprises v. D.R. Construction Co.

Cox v. Hickman
(1860) 8 H.L.C. 268

[Mode of determining the existence of a partnership sharing of


profits creditor-debtor relationship]
Smith and Smith carried on business under the name of B. Smith & Son. They got into
difficulties and called a meeting of their creditors. Later they executed a deed of
arrangement in favour of their creditors. The parties to the deed being S. and S. of the
first part, five of the creditors (including Cox and Wheatcroft) of the second part, and the
general body of creditors of the third part, and the deed provided that the five creditors of
the second part were to carry on the business of S. and S. as trustees for the creditors
under the name of The Stanton Iron Company, and to divide the net income of the
business, after paying the expenses, among the general creditors of S. and S., such net
income to be deemed to be of the creditors to be held, and that at any such meeting a
majority in value of the creditors present was to have power to make rules as to the mode
of conducting the business, or to order its discontinuance, and that when all the debts had
been paid the trustees were to hold the property assigned under the deed in trust for S.
and S. themselves. The deed also contained a covenant by the parties who executed it,
not to sue S. and S. for their debts. Cox never in fact acted as a trustee, and Wheatcroft
resigned six weeks after the deed, and before the goods for which bills now sued were
given had been supplied, and no new trustees were appointed in place of Cox and
Wheatcroft. The remaining three of the five creditors who were the parties to the deed, of
the second part, carried on the business under the provisions of the deed, and goods were
supplied to the business by Hickman. Hickman drew three bills of exchange for the
goods supplied by him, those bills were accepted on behalf of the Stanton Iron Company
by one of the above-mentioned three creditors. Hickman sued Cox and Wheatcroft on
those three bills, and alleged that they were liable upon them as partners in the business
of the Stanton Iron Company because they were two of the five creditors who were the
original parties to the deed of the second part and had executed the deed accordingly.

THE LORD CHANCELLOR (LORD CAMPBELL) - The only question in these


cases is whether the defendants by executing the deed of 13th November, 1849, as creditors of
Messrs. Smith & Co., rendered themselves liable to the creditors who should afterwards deal
with the trustees appointed by this deed to carry on the concern of Messrs. Smith & Co.,
under the new firm of The Stanton Iron Company. The Plaintiff alleges that although the
Defendants never acted or held themselves out as partners in this new firm, and the creditors
of the new firm are entitled to sue the creditors of the old firm as partners in the new firm.
It is quite clear that the creditors of the old firm, by executing the deed, never intended to
incur such a liability, and I think that the creditors of the new firm cannot be supposed to have
dealt with this firm in the belief that they could have a remedy against all or any of the
creditors of the old firm.
Is there such a participation in the profits of the new firm by the creditors of the old firm,
as to make them partners in the new firm? They certainly are not partners inter se, as was

Kamal Pushp Enterprises v. D.R. Construction Co.

51

properly held by the Master of the Rolls and they could derive no profits from the new business,
beyond the payment of the debts due to them from the old firm. There was a formal release of
these debts; but we must look at the real nature of the transaction, according to the understanding
of all who were parties to it. The business of Messrs. Smith & Co. was to be carried on by the
trustees till the debts of that firm were paid, and then the business was to be transferred back to
Messrs. Smith & Co.

I am of opinion that the creditors of the old firm cannot be considered, by executing the
deed, as having authorised the trustees as their agents either to purchase the goods or to accept
the bills....
I must, therefore, advise your Lordships to reverse the judgment of the Court of Common
Pleas, and to adjudge that the Defendants below are not liable, as acceptors of the bills of
exchange, on which the action is brought.

LORD CRANWORTH - In the first place let me say, that I concur with those of the
learned Judges who are of opinion that no solid distinction exists between the liability of
either defendant in an action on the bills, and in an action for goods sold and delivered. If he
would have been liable in an action for goods sold and delivered, it must be because those
who were in fact carrying on the business of the Stanton Iron Company, were carrying it on as
his partners or agents, and, as the bills were accepted, according to the usual course of
business for ore supplied by the plaintiff, I cannot doubt that if the trade was carried on by
those who managed it as partners or agents of the defendant, he must be just as liable on the
bills as he would have been in an action for the price of the goods supplied. His partners or
agents would have the same authority to accept bills in the ordinary course of trade, as to
purchase goods on credit.
The liability of one partner for the acts of his co-partner is in truth the liability of a
principal for the acts of his agent. Where two or more persons are engaged as partners in an
ordinary trade, each of them has an implied authority from the others to bind them all by
contract entered into according to the usual course of business in that trade. Every partner in
trade is for the ordinary purposes of the trade, the agent of his co-partners, and all are
therefore liable for the ordinary trade contracts of the others. Partners may stipulate among
themselves that some one of them only shall enter into particular contracts, or into any
contracts, or that as to certain of their contracts none shall be liable except those by whom
they are actually made; but with such private arrangements third persons, dealing with the
firm without notice, have no concern. The public have a right to assume that every partner
has authority from his co-partners to bind the whole firm in contracts made according to
ordinary usages of trade. This principle applies not only to persons acting openly and
avowedly as partners, but to others who, though not so acting, are by secret or private
agreement, partners with those who appear ostensibly to the world as the persons carrying on
the business.
In the case now before the House, the Court of Common Pleas decided in favour of the
respondent that the appellant, by his execution of the deed of arrangement, became, together
with the other creditors who executed it, a partner with those who conducted the business of
the Stanton Iron Company. The Judges in the Court of Exchequer Chamber were equally

52

Kamal Pushp Enterprises v. D.R. Construction Co.

divided so that the judgment of the Court of Common Pleas was affirmed. The sole question
for adjudication by your Lordships is, whether this judgment thus affirmed was right.
In the first place there is an assignment by Messrs. Smith to certain trustees of the mines
and all the engines and machinery used for working them, together with all the stock in trade,
and in fact, all their property, upon trust to carry on the business, and after paying its
expenses, to divide the net income rateably amongst the creditors of Messrs. Smith, as often
there shall be funds in hand sufficient to pay one shiling in the pound; and after all the
creditors are satisfied, then in trust for Messrs. Smith.
Upto this point the creditors, though they executed the deed are merely passive, and the
first question is, what would have been the consequence to them of their executing the deed if
the trusts had ended there? Would they have become partners in the concern carried on by the
trustees merely because they passively assented to its being carried on upon the terms that the
net profits should be applied in discharge of their demands. I think not; it was argued that as
they would be interested in the profits, therefore they would be partners. But this is a fallacy.
It is often said that the test, or one of the tests, whether a person not ostensibly a partner, is
nevertheless, in contemplation of law, a partner, is whether he is entitled to participate in
profits. This, no doubt is in general, a sufficiently accurate test; for a right to participate in
profits affords cogent, often conclusive evidence that the trade in which the profits have been
made, was carried on in partnership for or on behalf of the person setting up such a claim.
But the real ground of the liability is that the trade has been carried on by persons acting on
his behalf. When that is the case he is liable to the trade obligations, and entitled to its profits,
or to a share of them. It is not strictly correct to say that his right to share in the profits,
makes him liable to the debts of the trade. The correct mode of stating the proposition is to
say that the same thing which entitles him to the one makes him liable to the other, namely,
the fact that the trade has been carried on his behalf, i.e., that he stood in the relation of
principal towards the persons acting ostensibly as the traders by whom the liabilities have
been incurred and under whose management the profits have been made.
Taking this to be the ground of liability as a partner, it seems to me to follow that the
mere concurrence of creditors in an arrangement under which they permit their debtor, or
trustees for their debtor, to continue his trade, applying the profits in discharge of their
demands, does not make them partners with their debtor, or the trustee. The debtor is still the
person solely interested in the profits, save only that he has mortgaged them to his creditors.
He receives the benefit of the profits as they accrue, though he has precluded himself from
applying them to any other purpose than the discharge of his debts. The trade is not carried
on by or on account of the creditors; though their consent is necessary in such a case, for
without it all the property might be seized by them in execution. But the trade still remains
the trade of the debtor or his trustees; the debtor or the trustees are the persons by or on behalf
of whom it is carried on.
I have hitherto considered the case as it would have stood if the creditors had been merely
passively assenting parties to the carrying on the trade, on the terms that the profits should be
applied in liquidation of their demands. But I am aware that in this deed special powers are
given to the creditors, which, it was said, showed that they had become partners, even if that

Kamal Pushp Enterprises v. D.R. Construction Co.

53

had not been the consequence of their concurrence in the previous trust. The powers may be
described briefly as, first, a power of determining by a majority in value of their body, that the
trade should be discontinued, or, if not discontinued, then, secondly, a power of making rules
and orders as to its conduct and management.
These powers do not appear to me to alter the case. The creditors might, by process of
law, have obtained possession of the whole of the property. By the earlier provisions of the
deed, they consented to abandon that right, and to allow the trade to be carried on by the
trustees. The effect of these powers is only to qualify their consent. They stipulate for a right
to withdraw it altogether; or, if not, then to impose terms as to the mode in which the trustees
to which they had agreed should be executed; I do not think that this alters the legal condition
of the creditors. The trade did not become a trade carried on for them as principals, because
they might have insisted on taking possession of the stock, and so compelling the
abandonment of the trade, or because they might have prescribed terms on which alone it
should be continued. Any trustee might have refused to act if he considered the terms
prescribed by the creditors to be objectionable. Suppose the deed had stipulated, not that the
creditors might order the discontinuance of the trade, or impose terms as to its management,
but that some third person might do so, if, on inspecting the accounts, he should deem it
advisable. It could not be contended that this would make the creditors partners, if they were
not so already; and I can see no difference between stipulating for such a power to be reserved
to a third person, and reserving it to themselves.
I have on these grounds, come to the conclusion that the creditors did not, by executing
this deed, make themselves partners in the Stanton Iron Company, and I must add that a
contrary decision would be much to be deprecated. Deeds of arrangement like that now
before us, are, I believe, of frequent occurrence; and it is impossible to imagine that creditors
who execute them, have any notion that by so doing they are making themselves liable as
partners. This would be no reason for holding them not to be liable, if, on strict principles of
mercantile law, they are so; but the very fact that such deeds are so common, and that no such
liability is supposed to attach to them, affords some argument in favour of the appellant. The
deed now before us was executed by above a hundred joint creditors; a mere glance at their
names is sufficient to show that there was not intention on their part of doing anything which
should involve them in the obligations of a partnership. I do not rely on this; but, at least, it
shows the general opinion of the mercantile world on the subject. I may remarks that one of
the creditors I see is the Midland Railway Company, which is a creditor for a sum of 39,
and to suppose that the directors could imagine that they were making themselves partners is
absurd.

LORD WENSLEYDALE - The question is whether either of the defendants, Cox or


Wheatcroft, was liable as acceptor of certain bills of exchange... drawn by the plaintiff below
on the Stanton Iron Company, and accepted by one James Haywood as per Pro that
Company. And the simple question will be this, whether Haywood was authorised by either
of the defendants, as partner in that Company, to bind him by those acceptances. Haywood
must be taken to have been authorised to accept for them by those who actually carried on
business under that firm. Were the appellants partners in it? The case will depend entirely on
the construction of the deed... There is no other evidence affecting either of them. And the

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Kamal Pushp Enterprises v. D.R. Construction Co.

question is whether the subscription of both, as creditors of the Smiths, made them partners in
the business carried on by the trustees in the name of the Stanton Iron Company. Wheatcroft
could not be liable in the character of trustee, for he had ceased as such before the bills were
drawn, and the plaintiff knew it.
One of the provisions in the deed was this: that it gave authority to the trustees to execute
all contracts and instruments in carrying on the business, which would certainly authorise the
making or accepting bills of exchange. The question then is, whether this deed makes the
creditors who sign in partners with the trustees, or what is really the same thing, agents, to
bind them by acceptances on account of the business.
The law as to partnership is undoubtedly a branch of the principal and agent; and it would
lend to simplify and make more easy of solution, the questions which arise on this subject, if
this true principle were more constantly kept in view. Mr. Justice Story lays it down in the
first section of his work on Partnership. He says, Every partner is an agent of the
partnership, and his rights, powers, duties, and obligations, are in many respects governed by
the same rules and principles as those of an agent; a partner virtually embraces the character
of both a principal and agent.
A man who allows another to carry on trade, whether in his own name or not, to buy and
sell and to pay over all the profits to him, is undoubtedly the principal, and the person so
employed is the agent, and the principal is liable for the agents contracts in the course of his
employment. So if two or more agree that they should carry on a trade, and share the profits
of it, each is a principal, and each is an agent for the other, and each is bound by the others
contract in carrying on the trade, as much as a single principal would be by the act of an
agent, who was to give the whole of the profits to his employer. Hence it becomes a test of
the liability of one for the contract of another, that he is to receive the whole or a part of the
profits arising from the contract by virtue of the agreement made at the time of the
employment. I believe this is the true principle of partnership liability. Perhaps the maxim
that he who partakes the advantage ought to bear the loss, often stated in the earlier cases on
this subject is only the consequence, not relation of principal, agent, and partner.
Can we then collect from the trust deed that each of the subscribing creditors is a partner
with the trustee and by the mere signature of the deed constitutes them his agents for carrying
on the business on the account of himself and the rest of the creditors? I think not. It is not
true that by this deed the creditors will gain an advantage by the trustees carrying on the trade;
for if it is profitable, they may get their debts paid, but this is not that sharing of profits which
constitutes the relation of principal, agent and partner.
If a creditor were to agree with his debtor to give the latter time to pay his debt till he got
money enough out of his trade to pay it, I think no one could reasonably contend that he
thereby made him his agent to contract debts in the way of his trade; nor do I think that it
would make any difference that he stipulated that the debtor should pay the debt out of the
profits of the trade.
The deed in this case is merely an arrangement by the Smiths to pay their debts, partly out
of the existing funds and partly out of the expected profits of their trade; and all their effects

Kamal Pushp Enterprises v. D.R. Construction Co.

55

are placed in the hands of the trustees, as middlemen between them and their creditors, to
effect the object of the deed, the payment of their debts. These effects are placed in the hands
of the trustees as the property of the Smiths, to be employed as the deed directs, and to be
returned to them when the trusts are satisfied. I think it is impossible to say that the agreement
to receive this debt, so secured, partly out of the existing assets, partly out of the trade, is such
a participation of profits as to constitute the relation of principal and agent between the
creditors and trustees. The trustees are certainly liable, because they actually contract by their
undoubted agent; but the creditors are not, because the trustees are not their agents. I,
therefore, advise your Lordships to reverse the judgment. Judgment reversed.
*****

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Kamal Pushp Enterprises v. D.R. Construction Co.

Mollwo, March & Co. v. The Court of Wards


(1872) L.R. 4 P.C. 419
[Creditor-debtor relationship]

The Plaintiffs/Appellants, merchants of London, brought an action against the late Rajah
Pertab Chunder Singh, to recover a balance of nearly three lacs of rupees claimed to be
due to them from the firm of W.N. Watson & Co. of Calcutta. The Rajah having died
during the pendency of the suit, the defence was continued by the Respondent, the Court
of Wards, on behalf of his minor heir.
The plaint alleged that the firm of W. N. Watson & Co. consisted of W.N. Watson,
T.O. Watson, and the Rajah, liable as a partner in it. The two Watsons commenced
business in partnership, as merchants at Calcutta, in 1862, under the firm of W.N. Watson
& Co. Their transaction consisted principally in making consignments of goods to
merchants in England, and receiving consignments from them. The Watsons had little or
no capital. The Rajah supported them, and in 1862 and 1863, he made large advances to
enable them to carry on their business, partly in cash, but chiefly by accepting bills,
which the Rajah met at maturity. In the middle of 1863, the total amount of these
advances was considerable and the Rajah desired to have security for his debt and for any
future advances he might make and also wished to obtain some control over the business
by which he might check what he considered to be the excessive trading of the Watsons.
Accordingly, an agreement was entered into on the 27th of August, 1863, between
the Rajah of the one part, and Messrs. W.N. Watson & Co. on the other part, by which,
in consideration of money already advanced and which might be thereafter advanced by
the Rajah to them, the Watsons agreed to carry on their business subject to the control of
the Rajah in several important particulars. Under the agreement, whilst the advances
made by the Rajah remained unpaid, the Watsons bound themselves not to make
shipments, or order consignments, or sell goods, without his consent. No money was to
be drawn from the firm without his sanction, and he was to be consulted with regard to
the office business of the firm, and he might direct a reduction or enlargement of the
establishment. It was also agreed that the shipping documents should be at his disposal,
and should not be sold or hypothecated, or the proceeds applied, without his consent; and
that all the proceeds of the business should be handed to him, for the purpose of
extinguishing his debt. They further agreed to, and in fact did, hand over to the Rajah as
security the title deeds of certain tea plantations, and they also agreed, that as further
security all their other property including landed or otherwise including their stock in
trade, should be answerable for the debt due to him. This agreement was not signed by
the Rajah, but he was undoubtedly an assenting party to it.
Subsequent to the agreement, the Rajah made further advances, and the amount due
to him ultimately exceeded three lacs of rupees. In 1864 and 1865, the firm of W.N.
Watson & Co. fell into difficulties. An arrangement was then made under which the
Rajah upon the Watsons executing to him a formal mortgage of the tea plantations, to
secure the amount of his advances, released to them, by a deed bearing date the 3rd of
March, 1865 all right to commission and interest under the agreement of August, 1863,
and all other claims against them.

Kamal Pushp Enterprises v. D.R. Construction Co.

57

In point of fact, the Rajah up to this time, had never received possession of any of
the properties or moneys of the firm, nor any of the proceeds of the business; and did not
in fact receive any commission. A sum of Rs. 27,000 on this account was, indeed, on the
30th of September 1863 placed to his credit in the books of the firm in a separate account
opened in his name, but the sum so credited was never paid to him and was subsequently
written back by the Watsons. Some evidence was given as to the extent of the
interference of the Rajah in the control of the business. It seems the Rajah knew little of
its details for it was conceded that the Rajah availed himself only in a slight degree of the
powers of control conferred upon him by the agreement; in fact, that he did no more, but
much less, than he might have done under it.

SIR MONTAGUE E. SMITH - It may be assumed, although the exact amount is a


question in dispute in the appeal, that a large balance became due from the firm to the
Plaintiffs during the time when it is contended that the Rajah was in partnership with the two
Watsons.
The question in the appeal depend, in the main, on the construction and effect of a written
agreement entered into between the Watsons and the Rajah.The subsequent acts of the
Rajah do not in any way add to or enlarge his liability.
(N)o liability can in this case be fastened upon the Rajah on the ground that he was an
ostensible partner, and, therefore, liable to third persons as if he was a real partner. It is
admitted that he did not so hold himself out; and that a statement made by one of the Watsons
to the Plaintiffs to the effect that he might be in law a partner, by reason of his right to
commission on profits, was not authorized by the Rajah.
The liability, therefore, of the Rajah for the debts contracted by W.N. Watsons & Co.
must depend on his real relation to that firm under the agreement.
It was contended, for the Appellants, that he was so liable:
First, because he became by the agreement, at least as regards third persons, a partner
with the Watsons; and
Secondly, because, if not a true partner, the Watsons were the agents of the Rajah in
carrying on the business and the debt to the Plaintiffs was contracted within the scope of their
agency.
The case has been argued in the Courts of India and at their Lordships Bar, on the basis
that the law of England relating to partnership should govern the decision of it. Their
Lordships agree that, in the absence of any law or well established custom existing in India on
the subject, English law may properly be resorted to in mercantile affairs for principles and
rules to guide the Courts in that country to a right decision. But whilst this is so, it should be
observed that in applying them, the usages of trade and habits of business of the people of
India, so far as they may be peculiar, and differ from those in England, ought to be borne in
mind.
The agreement, on the face of it, is an arrangement between the Rajah, as creditor, and the
firm consisting of the two Watsons as debtors, by which the Rajah obtained security for his past
advances; and in consideration of forbearance, and as an inducement to him to support the

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Kamal Pushp Enterprises v. D.R. Construction Co.

Watsons by future advances, it was agreed that he should receive from them a commission of 20
per cent, on profits, and should be invested with the powers of supervision and control above
referred to. The primary object was to give security to the Rajah as a creditor of the firm.

It was contended at the Bar that, whatever may have been the intention, a participation in
the net profits of the business was in contemplation of law such cogent evidence of
partnership that presumption arose sufficient to establish, as regards third parties, that relation
unless rebutted by other circumstances.
It appears to their Lordships that the rule of construction involved in this contention is too
artificial: for it takes one term only of the contract and at once raises a presumption upon it.
Whereas the whole scope of the agreement, and all its terms, ought to be looked at before
any presumption of intention can properly be made at all.
It certainly appears to have been at one time understood that some decision of the
English courts had established, as a positive rule of law, that participation in the net profits
of a business made the participant liable as a partner to third persons. The rule had been
laid down with distinctness by Eyre. C.J. in Waugh v. Carver [(1793) 2 W.B. 998] and the
reason of the rule the Chief Justice thus states: Upon the principle that, by taking a part of
the profits, he takes from the creditors a part of that fund which is the proper security to them
for the payment of their debts. That was the foundation of Grace v. Smith [(1775) 2 W.B.
998] and we think it stands upon fair grounds of reason.
The rule was evidently an arbitrary one, and subsequent discussion had led to the
rejection of the reason for it as unsound. Whilst it was supposed to prevail, much hardship
arose from its application, and a distinction, equally arbitrary was established between a right
to participate in profits generally as such and a right to a payment by way of salary or
commission in proportion (to use the words of Lord Eldon) to a given quantum of the
profits.
It was also affirmed and acted on the Pott. v. Eyton. [(184) 3 C.B. 32]. Where C.J. in
giving the judgment of the Court, adopts the rule as laid down the Lord Eldon and say, Nor
does it appear to make any difference whether the money is received by way of interest on
money lent, or wages, or salary as agent, or commission on sales.
The present case appears to fall within this distinction. The Rajah was not entitled to a
share of the profits as such, he had no specific property or interest in them qua profits for,
subject to the power given to the Rajah by way of security, the Watsons might have appropriated
or assigned the whole profits without any breach of the agreement. The Rajah was entitled only
to commission, or a payment equal in proportion to one-fifth of their amount.
This distinction has always been admitted to be thin, but it may be observed that the
supposed rule itself was arbitrary in the sense of being imposed by law and of being founded
on an assumption opposed in many cases to the real relation of the parties; and when the law
thus creates a rule of liability and a distinction both equally arbitrary, the distinction which
protects from liability is entitled to as much weight as the rule which imposes it.
But the necessity of resorting to these fine distinctions has been greatly lessened since
the presumption itself lost the rigid character it was supposed to possess after the full
exposition of the law on this subject contained in the judgment of the House of Lords in

Kamal Pushp Enterprises v. D.R. Construction Co.

59

Cox. v. Hickman (1860) 8 HLC 268 and the cases which have followed that decision. It was
contended that these cases did not overrule the previous ones. This may be so, and it may be
that former cases were rightly decided on their own facts; but the judgment in Cox v.
Hickman had certainly the effect of dissolving the rule of law which had been supposed to
exist, and laid down principles of decision by which the determination of cases, of this kind is
made to depend, not on arbitrary presumptions. Profits of trade is a strong test of partnership,
and that there may be cases where, from such participation alone, it may as a presumption not
of law but of fact, be inferred; yet that whether that relation does or does not exist must
depend on the real intention and contract of the parties.
It is certainly difficult to understand the principle on which a man who is neither a real
nor ostensible partner can be held liable to a creditor of the firm. The reason given in Grace
v. Smith [(1975) 2 W.B. 998], that by taking part of the profits he takes part of the fund
which is the proper security of the creditors, is now admitted to be unsound and insufficient to
supports it; for of course the same consequences might follow in a far greater degree from
the mortgage of the common property of the firm, which certainly would not of itself make
the mortgagee a partner.
Where a man holds himself out as a partner, or allows others to do it, the case is wholly
different. He is then properly estopped from denying the character he has assumed, and upon
the faith of which creditors may be presumed to have acted. A man so acting may be rightly
held liable as a partner by estoppel.
Again, wherever the agreement between parties creates a relation which is in substance a
partnership, no mere words or declarations to the contrary will prevent, as regards third
persons, the consequences flowing from the real contract.
It was strongly urged that the large powers of control and the provision for empowering
the Rajah to take possession of the consignments and their proceeds, in addition to the
commission on net profits, amounted to an agreement of this kind, and that the Rajah was
constituted, in fact, the managing partner.
The contract undoubtedly confers on the Rajah large power of control. Whilst his advances
remained unpaid, the Watsons bound themselves not to make shipments, or order consignments,
or sell goods, without his consent. No money was to be drawn from the firm without his sanction,
and he was to be consulted with regard to the office business of the firm, and he might direct a
reduction or enlargement of the establishment. It was also agreed that the shipping doucuments
should be at his disposal, and should not be sold or, hypothecated, or the proceeds applied,
without, his consent; and that all the proceeds of the business should be handed to him, for the
purpose of extinguishing his debt.
On the other hand, the Rajah had no initiative power; he could not direct what shipments
should be made or consignments ordered, or what should be the course of trade. He could not
require the Watsons to continue to trade, or even to remain in partnership; his powers, however
large, were powers of control only. No doubt he might have laid his hands on the proceeds of the
business; and not only so but it was agreed that all their property, landed and otherwise should
be answerable to him as security for his debt.
Their Lordships are of opinion that by these agreements the parties did not intend to
create a partnership, and that their true relation to each other under the agreement was that

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Kamal Pushp Enterprises v. D.R. Construction Co.

of creditor and debtors. The Watsons evidently wished to induce the Rajah to continue his
advances, and for that purpose were willing to give him the largest security they could offer;
but a partnership was not contemplated and the agreement is really founded on the
assumption, not of community of benefit, but of opposition of interests.
It may well be that where the is an agreement to share the profits of a trade, and no more,
a contract of partnership may be inferred, because there is nothing to show that any other was
contemplated; but that is not the present case, where another and different contract is shown
to have been intended, viz. that of loan and security.
It was strongly insisted for the Appellants that if a true partnership had not been
created under agreement, the Watsons were constituted by it the agents of the Rajah to carry
on the business, and that the debt of the Plaintiffs was contracted within the scope of their
agency.
Of course, if there was no partnership, the implied agency which flows from that relation
cannot arise, and the relation of principal and agents must on some other ground be shown
to exist. It is clear that this relation was not expressely created, and was not intended to be
created by the agreement, and that if it exists it must arise by implication. It is said that it
ought to be implied from the fact of the commission on profits, and the powers of control
given to the Rajah. But this is again an attempt to create, by operation of law, a relation
opposed to the real agreement and intention of the parties, exactly in the same manner as that
of partners was sought to be established, and on the same facts and presumptions. Their
Lordships have already stated that reasons which have led them to the conclusion that the
trade was not agreed to be carried on for the common benefit of the Wotsons and the Rajah
so as to create a partnership; and they think there is no sufficient ground for holding that it
was carried on for the Rajah as principal, in any other character. He was not, in any sense,
the owner of the business, and had no power to deal with it as owner. None of the ordinary
attributes of principal belonged to him. The Watsons were to carry on the business; he could
neither direct them to make contracts, nor to trade in the manner which he might desire; his
powers were confined to those of control and security, and subject to those powers, the Watsons
remaned owners of business and of the common property of the firm. The agreement in terms
and, as their Lordships think, in substance, is founded on the relation of creditor and debtors, and
establishes no other.
Their Lordships opinion in this case is founded on their belief that the contract is really
and in substance what if professes to be viz., one of loan and security between debtors and
their creditor. If cases should occur where any persons, under the guise of such an
arrangement, are really trading as principals, and putting forward, as ostensible traders, others
who are really their agents, they must not hope by such devices to escape liability; for the law,
in cases of this kind, will look at the body and substance of the arrangement, and fasten
responsibility on the parties according to their true and real character.
For the above reasons their Lordships think that the Judges of the High Court, in holding
that Rajah was not liable for the debts of the firm of W.N. Watson & Co., took a correct view
of the case; and they will, therefore, humbly advise Her Majesty to affirm their judgement,
and to dismiss this appeal with costs.

Kamal Pushp Enterprises v. D.R. Construction Co.

Abdul Latiff v. Gopeswar Chattoraj


AIR 1933 Cal. 204 : 141 I.C. 225

[Distinction between agency and partnership; Servant or agent receiving share


of profits is not a partner in a partnership firm]
The plaintiff had worked as a contractor for loading and unloading wagons for the
Indian Iron and Steel Co. Ltd. for a long time. As he had various other businesses to
attend to, it was inconvenient for him to look after the said contract work personally. It
was agreed between the plaintiff and the defendant (a pleader) that the defendant would
carry on and look after the business by bestowing personal labour, and would receive
advances from the company and make advances from his own pocket whenever
necessary, would keep proper accounts of all income and expenditure and explain the
same to the plaintiff, and would be liable to make good to the plaintiff all losses that
would accrue by reason of negligent performance of the work; and that the profits would
be divided half and half between the parties, but the loss, if any, would be borne entirely
by the defendant. The defendant worked under this arrangement from 1st November,
1919 till 15th April 1921. During this period, the defendant was negligent in the
performance of the work he was entrusted with and was also guilty of misfeasance and
malfeasance, and did not render account. Consequently, on 15th April, 1921, the plaintiff
wrote to the company withdrawing the powers which he had conferred on the defendant
to receive payments and do other acts on his behalf, and since then all connection of the
defendant with the plaintiff and with the business ceased. The defendant had paid to the
plaintiff in all Rs. 1,200.
The prayers on the plaint were that it might be held that the defendant was bound to
render account to the plaintiff for the period from 1st November, 1919 to 15th April 1921,
that he might be ordered to render such account, and that a decree might be passed
against him for such amount as might be found due as a result of accounting and also for
a sum of Rs 4,376-3-0 which the company had deducted from the plaintiffs bills, after
the defendant had ceased to work on account of demurrage, back charges and store
charges, for work which the defendant had done during the aforesaid period.
The defendant averred that the suit was not maintainable because the relationship
between the plaintiff and the defendant was not that of principal and agent but that it
was agreed between the plaintiff and the defendant that the plaintiff would renew the
contract with the company in his own name, that the defendant would allow the
plaintiffs name to stand in the office of the company and would carry out the works
relating to the contract with his own men and money and keep the accounts on the terms
that out of the net profits the plaintiff would get four annas and the defendant 12 annas,
but it was admitted that Plaintiff was not to be liable for loss, if any. It was denied that
any amount had been deducted from the plaintiffs bill. Charges of negligence;
misfeasance and malfeasance were repudiated; and it was contended that the business,
which at the inception of that partnership was in ruins, attained a flourishing state during
the defendants management. It was also asserted that the plaintiff had received not Rs.
1,200 only but in all Rs 2,517.
The Subordinate Judge held that the suit failed on the preliminary ground that it
was not maintainable in the form in which it was laid. The Subordinate Judge also held

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Kamal Pushp Enterprises v. D.R. Construction Co.

that the business in question was a partnership business within the meaning of S. 239,
the Indian Contract Act, (corresponding to s. 4 of the Indian Partnership Act, 1932), that
the plaint was framed as if the relations between the parties were as those of principal
and agent while in reality the parties were partners, and therefore no decree could be
made. He held that the claim for accounts was not maintainable and that, inashmuch as
the claim for damages was inseparable from the claim for accounts, the latter claim too
was incompetent.

MUKERJI AND BARTLEY, JJ. - This is an appeal by the plaintiff from a decree
dismissing his suit for accounts and for damages. The first and most important question for
consideration in this appeal is whether the suit in the form in which it was brought was
maintainable. Now, it is quite true that the frame of the suit was not that of a partnership
action, and read carefully, the plaint would seem to suggest that the cause of action was
founded on such relations as exist between a principal and an agent though the terms
principal and agent appear nowhere in it. At the same time it is only fair to say that the
defendant in his written statements nowhere explicity took the plea that it was a partnership
that existed between the plaintiff and(the defendant); but that, on the other hand, an out
and out transfer of the business or rather its good will to(the defendant) was suggested, it
being said that the plaintiff was to get a four annas share of the net profits. The Subordinate
Judge noticed this difficulty, for he observed:
The defendants case as made in the written statement is that the plaintiff transferred
his business to the (defendant).in consideration of participation in the net profits of the
business to the extent of four annas out of 16 annas, and hence it is clear there was no
allegation of partnership in the written statements.

The Subordinate Judge, however, thought, and in this respect he was right, that whatever
might have been the words used in the pleadings, the relationship between the parties was to
be determined upon the real character of the contract between them which, in his opinion,
was a partnership contract.
There is no doucument evidencing the contract, nor any direct oral evidence beyond what
the plaintiff and the defendant themselves have given as witnesses examined in the case.
There is some evidence proceeding from witnesses who have spoken to what they afterwards
heard from the parties themselves; and inferences have also to be drawn from their subsequent
conduct.
The essential ingredients of the transaction were that the business was to remain in the
name of the plaintiff, and so far at any rate as the company was concerned, it was the plaintiff
who would take the work under contract from the Company, he would make over the work for
management to the defendant, and the defendant would get 12 annas out of the net profits as his
remuneration, the plaintiff would get the remaining 4 annas thereof but would not be liable for
the loss, if any. The distinction between agency and partnership is sometimes a very subtle
one, especially in cases where one party gets as his remuneration a share in the profits and
does not remain liable for the loss, and this distinction becomes important when a question
arises in connection with their dealings with third parties. Partnership is defined in s. 239
(of the Indian Contract Act), corresponding to s.4 of the Indian Partnership Act, 1932 and

Kamal Pushp Enterprises v. D.R. Construction Co.

63

Agency in s. 182, and although every partner is an agent of the firm and his other partners
for the purposes of the business of the partnership, s. 242 (corresponding to Explanation 2(b)
of Section 6 of the Indian Partnership Act, 1932, says:
No contract for the remuneration of a servant on agent of any person, engaged in any
trade or undertaking by a share of the profits of such trade or undertaking shall, of itself,
render such servant or agent responsible as a partner therein, nor give him the rights of a
partner.
The receipt by a person of a share in the profits of a business is prima facie evidence that
he is a partner in the business, but it is now well settled, notwithstanding many dicta and
decisions to the countrary, that the receipt of a share of the profits is not a conclusive test of
partnership. In Ross v. Parkyns [(1875) 20 Eq. 331], Jessel, M.R. observed:
It is said that mere participation in profits inter se affords cogent evidence of
partnership. But it is now well settled by the case of Cox v. Hickman [(1860) 8 HCL
268] and Mollwo v. Court of Wards [(1873) 4 P.C. 419], that although a right to
participation in profits is a strong test of partnership and there may be cases where upon
a simple participation in profits there is a presumption, not of law, but of fact that there is
a partnership, yet whether the relation of partnership does not exist must depend upon the
whole contract between the parties and that circumstance is not conclusive.
On the other hand as agreement to share all profits and all loss is an agreement of
partnership even though the words partner or partnership do not occur in the agreement,
while even though some losses are to be shared in by the parties the agreement may show
that a partnership was not intended.
In Lindley on Partnership, 7th Edition, p. 46 it is said:
Whatever difference of opinion there may be as to other matters, persons engaged in
any trade, business or adventure upon the terms of sharing the profits and making good
all losses arising therefrom, are necessarily to some extent partners in that trade, business
or adventure; nor is the writer aware of any case in which persons who have agreed to
share profits and losses in this sense have been held not to be partners.
Again at p. 48 it is said,
The inference that where there is community of profit there is a partnership so strong
that even if community of loss be expressly stipulated against, partnership may
nevertheless subsist. In Coope v. Eyre (1788) 1 H. Bl. 37, 48, Lord Loughborough is
reported to have said, In order to constitute a partnership, communion of profits and loss
is essential. But there is nothing to prevent one or more partners from agreeing to
indemnify the others against loss, or to prevent full effect from being given to a contract
of partnership containing such a clause of indemnity.
Judged by the tests laid down in the propositions quoted above, the terms of the
agreement, such as they have been alleged on behalf of the parties in this case, would be
equally consistent with a partnership as with an agency. But a more certain test is to find out
whether not only was there a common business but common interest of all the parties in it, or
whether the common business was to be carried on by the defendant on behalf of the plaintiff,
so that the plaintiff could be regarded as the principal. On this point there is not, nor indeed

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Kamal Pushp Enterprises v. D.R. Construction Co.

could there be any, direct evidence, so long as the terms were not put into writing. But there
are the following facts, viz. the plaintiff was to take the contract in his own name, and there
is no evidence that he was under any obligation to disclose the name of the defendant to the
company; the work was to stand in his own name so far as the company was concerned and
there is nothing to suggest that the company was going to hold anybody else laible far any
loss that might be caused. There is no evidence suggesting that anybody else than the
plaintiff was to have a voice in determining what work was or was not to be undertaken or
when the work was to be stopped or whether the contract with the company was or was not to
be renewed on the expiry of its period or other matters of that description. By themselves
these two circumstances may no be enough, but taken along with participation in profits and
non-liability for the loss, they may not unreasonably, in our judgment, be regarded as taking
the case beyond the pale of a partnership contract. It is quite true that for a partnership it is not
essential that there should be a common stock or that there should be a joint capital or stock,
and the dictum that a partnership in profits is a partnership in assets by which they are made is
also not universally true. It may be, and indeed it is nothing extraordinary, that in a
partnership concern, the duty is delegated to one partner, to decide upon what contracts
should be undertaken or even to enter into contracts in his own name, and to another to
finance the enterprise and to a third to manage or carry out the work; but these are more or
less matters of delegation. But when the division of work in the aforesaid way is founded not
merely on mutual consent given for the sake of mutual convenience but is founded on an
assertion of a right and to the exclusion of others, such as appears to have been the case here,
more congent proof is necessary to hold that notwithstanding all this the intention was to
create a partnership. These circumstances ordinarily would militate against a supposition of
the parties having a common interest in the business, though the business itself is a common
one.
It has been argued that the stipulation that the defendant was to advance money was
inconsistent with the theory of agency, and the fact that he would charge no interest on such
advances but get a share in the profits suggests that the intention was to make him a dormant
partner, that is to say, one who was not known or appeared to be such, and whose real
character was concealed under the cloak of a mere lender of money. But on examining the
materials on the record we are satisfied that it was never contemplated that the defendant
would, in fact, have to make very considerable advances, and the evidence that there is on the
record amply establishes that the business was carried on and was also intended to be carried
on with the amount that was due from the company at the inception and with further advances
made by the company.
One very strong circumstance which, in our opinion, completely demolishes the
defendants case as to partnership is that afforded by his own conduct; if there was a
partnership which the plaintiff had wrongfully dissolved, as it is his case, it is inexplicable
that the defendant should not have raised a protest expressly stating that he was a partner, or
should have refraind from resorting to the Court within the time allowed by law to assert his
rights and to ask for relief.
It has been suggested to us on behalf of the appellant that there was no liability on his part
to render account. The ground for this plea it is difficult to make out. When the plaintiff was

Kamal Pushp Enterprises v. D.R. Construction Co.

65

to get a share of the profits, and when under his agreement it was the defendants own case
that he was to keep the accounts and when it has been established beyond doubt that he
handled the cash and never made over the books, it is idle to contend that he was not bound
to account. The conclusions which we have recorded above are sufficient to establish the
position that the plaintiff is entitled to a preliminary decree for accounts for the period in suit
on the footing of the defendant having been an agent liable to render the same.
*****

66

Kamal Pushp Enterprises v. D.R. Construction Co.

Badri Prasad v. Nagarmal


1959 Supp (1) SCR 769

[Illegal associations]
The cloth dealers of Budhar a town in Rewa State formed themselves into an Association
when cloth control came into force to collect the quota of cloth to be allotted to them and
sell it on profit wholesale and retail. The Association consisted of 25 members who made
contributions to the initial capital which was one lac of rupees. No formal Articles of
Association were written; nor was it registered. The Association functioned through a
President and a pioneer worker; they kept accounts and distributed the profits.
Respondent 1, Nagar Mal, was the President of the said Association from January 1946 to
26-6-1946. Before that, Seth Badri Prasad, one of the plaintiffs-appellants was the
President. Nagar Mal ceased to be President after 26-6-1946, and Seth Badri Prasad again
became President. The Association worked till February 1948; then cloth was
decontrolled and the work of the Association came to an end. On 25-6-1949 thirteen
members of the Association out of the twenty-five brought a suit, and in the plaint they
alleged that Respondent 1, who was President of the Association, from January 1946 to
June 1946, had given an account of income and expenditure for the months of January,
February and March, 1946, but had given no accounts for the months of April, May and
June, 1946. They, therefore, prayed - (a) that Defendant 1 (Nagar Mal) be ordered to give
the accounts of the Cloth Association, Budhar, from the beginning of the month of April
1946 to 26-6-1946; (b) that Defendant 1 be ordered to pay the amount, whatever is found
due to the plaintiffs on account being done, along with interest at the rate of annas 12 per
cent per month; and (c) that interest for the period of the suit and till the realisation of the
dues be allowed.
The real dispute between the parties related to the sale of cloth of a consignment
known as the Gwalior consignment. In April 1946, a consignment of 666 bales of cloth
had come from Gwalior and an order was passed by the Cloth Control Officer that the
consignment would be allotted to Nagar Mal who would give the Association an option
of taking over the consignment; if the Association did not exercise the option, the
consignment would be taken over by Nagar Mal. There was some dispute as to whether
the other members of the Association were willing to take over the consignment of
Gwalior cloth. There was an order to the effect that only 390 bales should be allotted to
the Association out of which Nagar Mal had given the Association benefit of the sales of
106 bales, and the dispute related to the share of profits made on the remaining 284 bales.
Nagar Mals main defence was that none of the members of the Association was
entitled to any share in the profits on the sales of 284 bales of Gwalior cloth. The District
Judge passed a preliminary decree in favour of the plaintiff-appellants directing Nagar
Mal to render accounts of the Cloth Association at Budhar from 1-4-1946 to 26-6-1946,
and further directed that leaving out 106 bales of Gwalior cloth which Nagar Mal gave to
the Association, an account should be rendered of the rest of the 390 bales and the profits
on the sale thereof shall be according to the capital shares of the members of the
Association. On Nagar Mals appeal, the learned Judicial Commissioner of Vindhya
Pradesh reversed the finding of the District Judge and came to the conclusion that the

Kamal Pushp Enterprises v. D.R. Construction Co.

67

other members of the Association were not entitled to participate in the profits made on
the sale of 284 bales of the Gwalior cloth and dismissed the suit.
Rewa State Companies Act, 1935, Section 4(2): 4. (2) No company, association or
partnership consisting of more than twenty persons shall be formed for the purpose of
carrying on any other business that has for its object the acquisition of gain by the
company, association or partnership, or by the individual members thereof, unless it is
registered as a company under this Act, or is formed in pursuance of a Charter from the
Durbar.

S.K. DAS, J. - On behalf of Respondent 1, Nagar Mal, who was Defendant 1 in the suit, a
preliminary objection has been taken to the effect that the suit was not maintainable by reason
of the provisions of Section 4 of the Rewa State Companies Act, 1935 and the appeal filed by
the plaintiffs must, therefore, be dismissed. We are of the opinion that the preliminary
objection must succeed.
Mr Sardar Bahadur conceded that the aforesaid provision was in force in the Rewa State
at the relevant time when the Association was formed at Budhar and he has further conceded
that the said provision was in force till the Indian Companies Act came into force in the said
area in 1950. We must, therefore, decide the preliminary point on the basis of the provision in
Section 4(2) of the Rewa State Companies Act, 1935.
6. Now, the preliminary point taken on behalf of Respondent 1 is this. It is contended that
by reason of Section 4(2) aforesaid, the Cloth Association at Budhar was not a legal
Association, because it was formed for the purpose of carrying on a business which had for its
object the acquisition of gain by the individual members thereof and further because it was
not registered as a Company under the Rewa State Companies Act, 1935; nor was it formed in
pursuance of a charter from the Durbar. It has been contended before us on behalf of
Respondent 1 that by reason of the illegality in the contract of partnership the members of the
partnership have no remedy against each other for contribution or apportionment in respect of
the partnership dealings and transactions. Therefore, no suit for accounts lay at the instance of
the plaintiffs-appellants, who were also members of the said illegal Association.
7. We consider that this contention is sound and must be upheld. On behalf of the
appellants, Mr Sardar Bahadur has urged the following points in answer to the preliminary
objection: firstly, he has contended that we should not allow the preliminary objection to be
raised at this late stage; secondly, he has contended that even though the Association was in
contravention of Section 4(2) of the Rewa State Companies Act, 1935, the purpose of the
Association was not illegal and a suit was maintainable for recovery of the contributions made
by the appellants and also for accounts; thirdly, he has contended that on the analogy of
Section 69(3)(a) of the Indian Partnership Act, 1932, it should be held that the appellants had
a right to bring a suit for accounts of the Association which was dissolved in February 1948.
8. We proceed now to consider these contentions of learned counsel for the appellants.
The first contention that Respondent 1 should not be allowed to raise an objection of the kind
which he has now raised at this late stage can be disposed of very easily. The objection taken
rests on the provisions of a public statute which no court can exclude from its consideration.
The question is a pure question of law and does not require the investigation of any facts.

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Kamal Pushp Enterprises v. D.R. Construction Co.

Admittedly, more than twenty persons formed the Association in question and it is not
disputed that it was formed in contravention of Section 4(2) of the Rewa State Companies
Act, 1935.
The appellants herein have not asked for a return or refund of their subscriptions; on the
contrary, they have asked for a rendition of accounts in enforcement of an illegal contract of
partnership. The reliefs they have asked for necessarily imply a recognition by the court that
an association exists of which accounts ought to be taken. When the association is itself
illegal, a court cannot assist the plaintiffs in getting accounts made so that they may have their
full share of the profits made by the illegal association. The principles which must apply in
the present case are those referred to in the following passage at p. 145 of Lindley on
Partnership (11th Edn.):
The most important consequence, however, of illegality in a contract of partnership is
that the members of the partnership have no remedy against each other for contribution or
apportionment in respect of the partnership dealings and transactions. However
ungracious and morally reprehensible it may be for a person who has been engaged with
another in various dealings and transactions to set up their illegality as a defence to a
claim by that other for an account and payment of his share of the profits made thereby,
such a defence must be allowed to prevail in a court of justice. Were it not so, those who
- ex hypothesi - have been guilty of a breach of the law, would obtain the aid of the law
in enforcing demands arising out of that very breach; and not only would all laws be
infringed with impunity, but, what is worse, their very infringement would become a
ground for obtaining relief from those whose business it is to enforce them. For these
reasons, therefore, and not from any greater favour to one party to an illegal transaction
than to his companions, if proceedings are instituted by one member of an illegal
partnership against another in respect of the partnership transactions, it is competent to
the defendant to resist the proceedings on the ground of illegality.
It is true that in order that illegality may be a defence, it must affect the contract on which
the plaintiff is compelled to rely so as to make out his right to what he asks. It by no means
follows that whenever money has been obtained in breach of some law, the person in
possession of such money is entitled to keep it in his pocket. If money is paid by A to B to be
applied by him for some illegal purpose, it is competent for A to require B to hand back the
money if B has not already parted with it and the illegal purpose has not been carried out. The
case before us stands on a different footing. It is a claim by some members of an illegal
association against another member on the footing that the association should be treated as
legal in order to give rise to a liability to render accounts in respect of the transactions of the
association. Such a claim is clearly untenable. Where a plaintiff comes to court on allegations
which on the face of them show that the contract of partnership on which he sues is illegal,
the only course for the courts to pursue is to say that he is not entitled to any relief on the
allegations made as the courts cannot adjudicate in respect of contracts which the law declares
to be illegal Senaji Kapurchand v. Pannaji Devichand [AIR 1930 PC 300].
10. As to the last contention of learned counsel for the appellants, based on the analogy of
Section 69(3)(a) of the Partnership Act, it is enough to point out that under the Indian
Partnership Act, 1932 an unregistered firm is not illegal; there is no direct compulsion that a

Kamal Pushp Enterprises v. D.R. Construction Co.

69

partnership firm must be registered, though the disabilities consequent on non-registration


may be extremely inconvenient. Moreover, the suit before us was not one for accounts of a
dissolved firm, but for accounts of an illegal association which was in existence at the
relevant period for which accounts were asked. We do not think that the argument by analogy
is of any help to the appellants; in our opinion, the analogy does not really apply.
11. For the reasons given above, we hold that the preliminary objection succeeds. The
appeal is accordingly dismissed. As the preliminary objection was taken at a very late stage,
we direct that the parties must bear their own costs of the hearing in this Court.
*****

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Kamal Pushp Enterprises v. D.R. Construction Co.

Narayanlal Bansilal Pittie v. Tarabai Motilal


(1970) 3 SCC 293

[Partnership business started for two years extended for another three years]
Narayanlal Bansilal Pittie (Pittie) was the son-in-law of Tarabai, widow of Motilal.
Tarabai carried on business in cotton, cotton-seed and cotton bales in the name and style
of Narayandas Chunilal in Bombay and also in Jalna within the former State of
Hyderabed. Tarabai instituted suit No. 7 of 1354 Fasli in the Court of the Sadar Adalat,
Aurangabad, against Pittie for a decree for Rs 2,84,308/- alleging that she, Pittie and one
Chogmal entered into a partnership to carry on business at Jalna in cotton, cotton-seed
and cotton bales for a period of five years Samvat Years 1982 to 1986, that her share in
the profit and loss was six annas in a rupee, of Pittie six annas and of Chogmal four
annas; that the transactions of the partnership resulted in a profit of Rs 5, 257-12-9 in the
first year and in a profit of Rs 27,047-13-6 in the second year, that in the next three years
the partnership suffered heavy losses and after giving credit for the profits earned in the
first two years, the total loss suffered by the partnership was Rs 2,08,960/-, that Chogmal
represented that he was unable to pay his share of loss amounting to Rs 52,000/- odd and
it was mutually agreed that he should pay Rs 21,317-7-0 only and the balance of the loss
of Rs 1,87,642-9-0 should be borne in two equal shares by her and Pittie, that on that
account Pittie was liable to pay Rs 93,827-4-6 with interest at the rate of 12 annas per
mensem, that on Kartik Vadi 15, Samvat 1987, the amounts which were to be contributed
by her and Pittie were removed from the partnership account and were debited to their
respective personal ledgers and the partnership was dissolved; that she paid the entire
amount of the loss suffered by the partnership and was on that account entitled to recover
from Pittie his share of Rs 93,827-4-6 agreed to be paid by him with interest at the rate of
12 annas per cent. per mensem, that in 1945, Rs 2,84,308/- were due by Pittie on account
and that he failed and neglected to pay the same in spite of repeated demands. It was
claimed in the plaint that the cause of action for the suit arose when partnership was
dissolved and Pittie agreed to pay his share of the loss as settled by mutual agreement and
since Pittie had a permanent place of residence in Bombay which qua the State of
Hyderabad at all material times before the institution of the suit was foreign territory the
claim was within limitation by virtue of Section 13 of the Hyderabad Limitation Act.
Pittie by his written statement denied that there was a partnership agreement for five
years as alleged by Tarabai. He contended that he had entered into a partnership
agreement with Tarabai and Chogmal to carry on business in cotton, cotton-seed and
cotton bales for Samvat Year 1982 and that the partnership agreement was by mutual
agreement extended for Samvat Year 1983. Pittie denied that the transactions after
Samvat Year 1983 were of the partnership and contended that in any event the suit was
barred by the law of limitation for he was a permanent resident of the State of Hyderabad
and was at all relevant times residing in Hyderabad. He denied the settlement of account,
dated Kartik Vadi 15, 1961. He contended that no account was ever sent to him and that
no demand was made of him and the claim made against him was false and frivolous and
was filed after he had filed a suit against Tarabai in the High Court of Bombay in respect
of the amount of Rs 5,63,821-5-3 due at the foot of a mutual, open and current account
which suit was settled on February 2, 1944 and Tarabai agreed to pay and did pay Rs
5,21,906/- in two instalments. He also contended that in view of the consent decree

Kamal Pushp Enterprises v. D.R. Construction Co.

passed in the suit filed by him in the High Court of Bombay in which suit Tarabai had not
raised any contention about her claim was barred as resjudicata.
Tarabai accepted the case of Pittie that the original agreement of partnership was for
one year and that it was extended for another year. She alleged however that after the
expiry of the second year, it was agreed between Pittie, Chogmal and herself that the
partnership agreement should be continued for three years more and that accordingly the
partnership was not dissolved at the end of the second year.
After the death of Tarabai, the suit was prosecuted by her adopted son Vijay Kumar
and her daughters. The subordinate Judge dismissed the suit holding that it was barred as
res judicata. In his view Tarabai might and ought to have raised in the suit filed on the
original side of the High Court of Bombay by Pittie her claim to recover the amount
claimed by her and especially in the counter-claim made by her, and since she failed and
neglected to do so, her suit filed in the Court of the Subordinate Judge was barred. This
judgment was set aside by the High Court of Bombay in appeal and the suit was
remanded to the subordinate Judge for trial. The Trial Court again dismissed the suit
holding that Tarabai failed to prove that the partnership agreement was by mutual consent
extended for a period of three years after the first two years. Against the decree passed by
the Trial Court dismissing her suit, Tarabai appealed to the High Court of Bombay. The
High Court reversed the decree passed by the Trial Court. In the view of the High Court
taking an overall view of the entire evidence, it must be held that Tarabai had
established her case that the partnership agreement was extended by mutual agreement
till the end of Samvat year 1987 and that accounts were made up and Pittie had agreed to
pay Rs 93,827-4-6 as his share of the loss. The High Court held that the claim was,
because of Section 13 of the Hyderabad Limitation Act, not barred. The Court, however,
refused to award to Tarabai any interest prior to the date of the suit and passed a decree of
Rs 93,827-4-6 with interest at the rate of 6 per cent per annum from the date of the suit, i.
e. January 4, 1945, till the date of decree and interest on judgment at 6 per cent. per
annum from the date of the decree until realization.
Pittie filed on the original side of the High Court of Bombay Summary Suit No. 837
of 1943 against Tarabai claiming that at the foot of a mutual, open and current account
between him and the firm of Narayandas Chunilal represented by Tarabai in respect of
certain commercial transactions at the end of Maru Year 1999 there was due to him a sum
of Rs 5,69,338-11-9 and interest amounting to Rs 69,258-0-3 and that he was entitled to
recover that amount with interest at 6 per cent per annum and costs of the suit. She denied
that there existed between the firm of Narayandas Churulai and Pittie any mutual, open
and current account. She alleged that on or about June 20, 1940, she requested Pittie to
advance Rs 60,000/- to her, that Pittie insisted upon security for repayment of the sum as
also the general balance that might from time to time be found due by her to him, that on
or about June 20, 1940, she deposited with Pitties firm at Bombay title deeds of her
immovable property situate at Kudchi in District Belgaum to secure repayment of the
loan of Rs 60,000/- and the amount that may be found due by her to Pitties firm from
time to time at the foot of the account, that Pittie demanded from her payment of the
amounts that became due to him and that on December 22, 1942, it was agreed between
the parties at Bombay that she should pay towards the amount due at the foot of the
fresh Khata No. Ill a sum of Rs 15,000/-every month and after the same was fully paid,
Pittie should return to her the title deeds in respect of the Kudchi property, that pursuant

71

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Kamal Pushp Enterprises v. D.R. Construction Co.

to the agreement she sent to Pittie from time to time four demand drafts of Rs 15,000/each which were duly received by Pittie and that she was at all times material to the suit
ready and willing to comply with and carry out the terms of the agreement and that she
had not committed any default in payment of any of the instalments under the agreement.
Suit was settled out of court. On February 2, 1944, the terms of the settlement were
recorded. Tarabai admitted liability for Rs 5,21,906/- and interest thereon at the rate of 6
per cent per annum from February 1, 1944, and another sum of Rs 1,111-6-0 for interest
on Khata No. 2. Tarabai admitted that she had paid to Pittie a sum of Rs 1,40,000/-in part
payment of the amount due and had also given a cheque for Rs 1,111-6-0 in full payment
of the interest in Khata No. 2 and she agreed to pay the balance of Rs 3,81,900/- and
interest from February 1, 1944 at 6 per cent per annum thereon and Rs 7,0001- for costs
of the suit and of the counter-claim on or before October 2, 1944. It was stipulated that in
the event of Tarabai failing to pay the amount of Rs 3, 81,906/-, interest and costs on or
before October 2, 1944, Pittie shall be entitled to a decree and Tarabai shall submit to a
decree in favour of Pittie on die terms set out in the settlement, that the counter-claim
shall stand dismissed and that the four factories including the machinery to which the
title-deeds deposited related shall remain as security for payment of the amounts admitted
to be due by Tarabai.
Tarabai paid the full amount due by her under the decree in Suit No. 837 of 1943.
Neither in the written statement filed in the suit, nor in the course of negotiations for
settlement of Pitties claim was any plea set up that Tarabai was a creditor of Pittie for
the amount agreed to be paid by him on settlement of the partnership account. She made
no counter-claim in the suit filed by Pittie. She admitted liability to pay Rs 5,21,906/without apparently setting up even a demand in respect of the amount which she has
claimed in this suit.

J.C. SHAH, J. - 9. In the plaint as originally filed, it was alleged that the partnership was to
continue for five years. Pittie in his written statement relied upon his letter, dated November
13, 1927, which expressly recited that he did not desire to continue the partnership. Tarabai
by her reply accepted the case of Pittie that the duration of the partnership was to be originally
one year and that it was extended by another year by mutual agreement. She pleaded that by
an arrangement reached between the three partners, the partnership was extended for three
years. This case set up in the reply to Pitties written statement was not supported by any
documentary evidence. Again in respect of the alleged settlement of accounts after the expiry
of three years under which it is the case of Tarabai that Pittie had agreed to pay Rs 93,827-4-6
also there is no written record. It is common ground that no separate books of account were
maintained by the partnership, but the transactions were entered in the books of account
maintained by Tarabais firm Narayandas Chunilal and the final liability pursuant to the
alleged settlement of accounts was transferred to the journal as the last entry for the year. This
entry could be posted in the journal at any time before the suit.
11. It is common ground that there was a partnership between Tarabai, Pittie and
Chogmal which lasted for two years. Correspondence in this connection may be briefly
noticed.

Kamal Pushp Enterprises v. D.R. Construction Co.

73

12. By letter, dated October 21, 1925, Pittie proposed certain conditions on which he was
willing to enter into the proposed partnership. These conditions were that the share of Pittie in
the profit and loss will be six annas in the rupee, that of Tarabai will be six annas and of
Chogmal four annas in the rupee; that Pittie will invest a sum of Rs 50,000/- for which he will
charge interest at the rate of eight annas per cent. and if any additional sum was invested
interest will be charged at the rate of 12 annas per cent. per mensem; that expenses of one of
his employees will be borne by the partnership and that he shall be entitled to inspect the
books of account of the partnership including the ledgers; that information with regard to
daily purchases and sales affected shall be sent by letters and telegrams; that the partnership
shall be restricted to Jalna and shall be in cotton, Kardi and Kapas; and that the extent of the
business shall not exceed Rs 2 lakhs and goods exceeding Rs 2 lakhs in value should not be
purchased at one time. By letter, dated October 25, 1925, in the hand of Chogmal, Tarabai
and Chogmal agreed to the conditions. This letter shows that even though no formal deed was
executed, all the terms of the partnership were recorded in writing.
13. On November 24, 1926, Pittie addressed a letter to Tarabai stating that in the previous
year he had done business in cotton in partnership with the firm of Narayandas Chunilal,
accounts whereof had not been sent to him. He enquired whether Tarabai intended to do
business in partnership in the year Samvat 1983 and if so on what terms? In reply to that letter
Chogmal wrote that the accounts could not be sent because there was some stock of cottonseed lying with the firm, and that it was better to carry on the business in the same manner as
last year. By letter, dated November 29, 1926, Pittie wrote to Tarabai that the partnership
should be continued on the same terms as the previous year. Pittie complained that no
statement of account had so far been received and he demanded that the statement of account
be sent immediately. By his letter, dated November 11, 1927 Pittie wrote:
(II) We had dealings in partnership with you at Jalna for the past two years, but have
so far not sent the accounts nor intimated the profit or loss which should be done
forthwith.
(III) This year we do not intend to do business in partnership with you which please note.
In reply thereto Chogmal wrote to Pittie on November 13, 1927 that:
We note that you want us to send you a list of parties here. xxx At present there is
nobody to take money from you. The rainfall has been heavy at all places in our district
and it is difficult to say anything at present. At present there's no such business for which
you could send an employee, We note that you do not intend to do business this year. We
have written to Bombay. Please settle the same there. We have noted what you write
about accounts. The accounts will be ready in 15 days. By then the small quantity of
cotton-seeds left will be sold and the accounts will be finalised.
The two letters, dated November 11, 1927, and November 13, 1927, leave no room for doubt
that Pittie was unwilling to carry on the business after the end of Samvat year 1983. But
witnesses were examined to support the case that Tarabai, Pittie and Chogmal reached an
agreement extending the partnership for three years. These witnesses are Goverdhandas
Jamnadas, and Mohanlal Nathmal.

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Kamal Pushp Enterprises v. D.R. Construction Co.

14. Goverdhandas said that he was serving as a Munim in the firm of Narayandas
Chunilal conducted by Tarabai between the years 1922 and 1933; that he was serving in
Bombay and was looking after the business dealings of the firm at various places in the
Bombay province and in the Hyderabad State; that in Samvat year 1982, Chogmal, Tarabai
and Pittie were partners in the business of the firm at Jalna and that the partnership which was
limited to transactions in cotton, cotton-seed and cotton bales at Jalna continued for a period
of five years; that the partnership agreement was initially for one year and it was extended by
one year, that thereafter there was an extension of the partnership agreement for three years;
that Pittie had addressed a letter in 1927 to Jalna shop of the firm of Narayandas Chunilal
intimating his unwillingness to remain a partner, but that thereafter in a meeting between
Tarabai and Pittie at Tarabais residence in Bombay, it was agreed that the partnership on the
original terms and with the same partners shall continue for three years more and accordingly
the business of the firm continued at Jalna for three years up to Sharwan Samvat, 1987. The
witness then stated that Chogmal the third partner insisted that the accounts of the partnership
be settled, that accounts were made in the presence of the three partners and copies of the
accounts were given to the three partners and Tarabai was explained the accounts; that the
amount of loss falling to the share of Chogmal exceeded Rs 50,000/- and as he expressed his
inability to pay that amount it was agreed in the presence of the witness that an amount of Rs
21,000/-odd shall be borne by Chogmal and the balance of the loss shall be borne by Pittie
and Tarabai in equal shares. In cross-examination the witness stated that the accounts were
scrutinised at Jalna for 5 or 6 days and during that time Pittie was also staying at Jalna but
there was no talk about the accounts between Tarabais firm and the Hyderabad concern of
Pittie at that time. He stated that beside him only Pittie and Tarabai were present at the time
when accounts were made. According to the witness, accounts were settled and the copies of
the account disclosing the total losses were given to the three partners. But in token of that
receipt no writing was taken from any partner. He also stated that there was no writing about
the debiting of losses in pursuance of the arrangement and that the talks went on for two days
in Bombay in the residential house of Tarabai and thereafter Chogmal executed a mortgage in
favour of Tarabai in respect of his property to the extent of the losses suffered by him, but
there was no agreement in writing about the extension of the term of the partnership
agreement. He admitted that Pittie had sent a letter complaining at the end of the second year
that as Tarabais firm did not submit a statement of account of the partnership dealings he did
not desire to continue in the partnership. The witness then stated that he was asked by Tarabai
to give the statements of account regularly and re-supplied the statements of account to Pittie
three or four months later.
15. Witness Mohanlal stated that the partnership between Tarabai, Pittie and Chogmal
continued for a period of five years. He deposed to the details of the profit and loss suffered
by the partnership year after year, and stated that the amounts of losses were debited
separately against the-personal Khata of the parties. According to the entry this was done on
the instructions of Tarabai by opening a fresh account. In cross-examination he stated that he
was not present at the time of settlement of accounts at Jalna nor at Bombay. He said that he
came to know about the entries a fortnight after they were made.

Kamal Pushp Enterprises v. D.R. Construction Co.

75

16. There was no agreement of partnership in writing. There was no written record of the
extension of the partnership as was set up in the reply to the written statement. There was no
correspondence between the parties evidencing the settlement of accounts and extension of
the partnership. The case of extension of the agreement of partnership after Samvat Year,
1983, was not set up in the plaint and was set up to meet by way of a reply to the letter, dated
November 13, 1927, disclosed by Pittie and was sought to be supported by oral evidence of
Goverdhandas. He is the only person who speaks about the partnership agreement and its
extension at the end of Samvat year 1983. He said that the accounts were prepared and copies
of statements of account were sent to the partners. In respect of this settlement no attempt was
made to take the signatures of the contracting parties in acknowledgment of their correctness.
Under the settlement, according to the plaintiffs Pittie and Tarabai agreed to discharge a part
of the liability of Chogmal. No attempt was made at the trial to tender in evidence the
statement of account alleged to have been prepared at the settlement. No attempt was made
even to tender in evidence the mortgage deed obtained from Chogmal which it was claimed
was in satisfaction of liability for a part of the loss suffered by him. The parties though
closely related were accustomed to do business transactions and invested them with some
formality. They were living at different places, and during the course of Samvat Years 1982
and 1983 when the partnership was admittedly subsisting there was correspondence in
relation to its dealings. After November 13, 1927, there is complete absence of
correspondence. Not even a letter was addressed to Pittie by Tarabai, demanding the amount
claimed to be due to her. There is no evidence that any statement of account was sent from
Jalna to Bombay in respect of the partnership after the alleged settlement. The partnership did
not maintain separate books of accounts, entries were posted only in the books of account of
the Jalna firm of Narayandas Chunilal, for, it was only in respect of the cotton, cotton-seeds
and cotton bales transactions in which the defendant Pittie was a partner.
17. Conduct of Tarabai between 1930 and 1945 also throws a great doubt upon the
veracity of her claim. If Pittie was liable in a sum of Rs 93,827-4-6 payable with interest at
the rate of 12 annas per cent. per mensem there would have been a demand made in writing
during a period of 15 years which elapsed before the suit was filed. It is admitted on all hands
that no such demand was ever made. In 1943 Pittie filed a suit against Tarabai in the High
Court of Bombay claiming a sum exceeding Rs 6 lakhs at the foot of a mutual, open and
current account in respect of transactions between Pitties firm and the firm of Narayandas
Chunilal conducted by Tarabai.
18. A clinching circumstance is that Tarabai made no claim, when the parties negotiated a
settlement of the suit filed by Pittie on the mutual, open and current account and paid the
amount settled in two instalments without demanding that her claim against Pittie may be
given credit for. If there was truth in the story of Tarabai and Pittie had agreed to pay Rs.
93,827-4-6 with interest, such a claim could naturally have been made in the course of the
settlement. The conduct of Tarabai and the great delay in institution of the suit coupled with
the absence of any documentary evidence which may even indirectly support the case of the
plaintiffs raise great doubt upon the truth of the story set up in her plaint.
19. Counsel for the plaintiffs said that Tarabai did not make a counter-claim in the
Bombay suit for her dues in respect of the partnership because she was advised that under the

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Kamal Pushp Enterprises v. D.R. Construction Co.

Indian Limitation Act, 1908, applicable to the counters claim filed in Bombay the claim for
Rs 93, 827-4-6 if made by Tarabai was barred. That contention may be technically correct,
but there is no reason why a reference should not have been made in the written statement or
the counter-claim that there was such a claim in respect of which Tarabai intended to take
proceedings in the appropriate court where the claim may be within limitation. In any case,
there is no reason for not insisting upon settlement of that claim when negotiations were held
in respect of the claim made in the Bombay suit. On February 2, 1944, the suit was agreed to
be settled and it was one of the terms that it should not be disposed of till the date of the
second instalment. Tarabai would naturally have, if there was any truth in her claim, set up
her claim at one or more of the various stages of the suit, but that was not done.
20. Counsel for the plaintiffs submitted that Pittie did not enter the witness-box to deny
the claim made in the plaint and he examined no witnesses in support of his defence nor did
he produce his books of account to support his case. Counsel -urged that even on the case of
Pittie the partnership had earned in the first two years profit and in respect of that profit no
claim was made by Pittie at any time. That conduct according to counsel for the plaintiffs
supports Tarabais claim that the profit was wiped out by the losses suffered by the
partnership in the later three years. On behalf of Pittie it is urged that he could not give
evidence due to ill health. Pittie had applied before the Trial Court that he be examined on
commission, because he had suffered a coronary attack. The application made by him at the
trial was rejected by the Civil Judge. In his application, dated April 18, 1961, Pittie stated that
his case was fixed on April 18, 1961, for evidence of the parties and the parties were ordered
to call for their witnesses and keep them present on that date, but Tarabai had not called any
witnesses and it was therefore difficult for him to consider whether he was required to tender
any rebuttal evidence since the burden of proof was wholly on Tarabai. He further stated that
he desired to give evidence in Court, but as he was sick and bedridden since last three
months and was under the treatment of doctors he was not in a position to undergo journey
from Bombay to Aurangabad, and he prayed that he should be examined on commission. The
application was supported by a certificate of a leading physician in Bombay who stated that
Pittie was under treatment for heart and blood pressure and for the sake of his health he had
been advised to stay in Bombay for 2 months for rest and treatment. The application filed by
Pittie was rejected by the Court.
22. The contention that Pittie had not produced his books of account is not accurate. The
lawyer for the plaintiffs was given an opportunity to inspect Pitties books, under the order of
the Court. It is true that the inspection was restricted to the question whether Pittie was
between 1930 and 1945 in the Hyderabad State. The order related primarily to the bar of
limitation pleaded by Pittie. The books of account were inspected by the plaintiffs and were
available in Court. It is not the case of the plaintiffs that there was any Khata in the books of
account of Pittie which related to the partnership account.
23. It is true that an amount of Rs 32,000/- odd was the profit of partnership earned during
the first two Samvat Years 1982 and 1983 and approximately an amount of Rs 12,000/- was
earned by Pittie. There is no clear evidence on record why Pittie did not make a demand. But
from this circumstance alone, we are unable to infer that the partnership was continued after

Kamal Pushp Enterprises v. D.R. Construction Co.

77

Samvat Year 1983 and the profit payable to Pittie for the first two years was set off against
the losses suffered by the partnership in the subsequent three years.
24. We have carefully considered the evidence on the record and we are of the view that
the High Court was in error in holding that the settlement alleged between Tarabai and Pittie
in November, 1927, in which Pittie agreed to continue to remain a partner in the business of
the Jalna firm to the extent to which it related to the business in cotton, cotton-seed and cotton
bales and that he agreed to pay in November, 1930, Rs 93,827-4-6 is not proved.
25. The appeal is allowed. The decree passed by the High Court is set aside and the
decree passed by the Trial Court is restored.
*****

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Kamal Pushp Enterprises v. D.R. Construction Co.

Uduman v. Aslum
(1991) 1 SCC 412 : AIR 1991 SC 1020
[Partnership at will]

The appellants/defendants 1 to 3 and the respondent/plaintiff are sons of appellant


4/defendant - their mother. Their father, M.O. Hassan Kuthus Marican, started the
proprietory concern M/s M.O. Hassan Tithus Marican doing import and export and other
business in Pondicherry. On July 20, 1962, a partnership consisting of the appellants, the
respondendent and the father was constituted and registered as per the provisions of the
French Law and the business was carried on. By relinquishment deed dated August 1,
1968 their father had retired from the partnership. Thereafter the appellants and the
respondent continued the business in terms of Ex. B-2. When misunderstanding between
the parties had arisen in 1973 and in May 1978, the respondent laid the suit for
dissolution of the partnership and for accounting etc. It is the respondents case that the
partnership is at will and by issue of notice dissolving the partnership, it stood dissolved
with effect from the date of the receipt of the notice by the appellants. He sought to have
his share in the partnership ascertained and decree granted accordingly. The appellants
contended that under the French Law the partnership is not at will. The contract operates
as law. In terms of the contract, the respondent has to relinquish his share in favour of the
appellants and to take the value thereof without dissolving the firm. One of the issues
raised was the maintainability of the suit which was tried as a preliminary issue. The trial
court held that the partnership was not at will. The suit for dissolution of the partnership
was not maintainable. The suit was dismissed. On appeal, the Division Bench held that
the partnership was at will and the respondent could seek its dissolution. It was further
held that the rights of the parties were governed by the Indian Partnership Act, 1932.
Accordingly the appeal was allowed; and the trial court was directed to try the suit on
merits.

K. RAMASWAMY, J.

3. The only question that needs decision is whether the


partnership in question is a partnership at will. Considerable debate was made across the bar
contending that it is the French Law and not the Indian Partnership Act, 1932 (the Act) that
would govern the facts of the case. Admittedly the Pondicherry (Laws) Regulation 7 of 1963
was made in exercise of the powers under Article 240 of the Constitution extending the Act to
Pondicherry/Union territory on and from October 1, 1963. Section 69 had come into force
from July 1,1964. Though Ex. B-1 was made in accordance with the Civil Code of France,
1804, the cause of action to lay the suit had arisen to the respondent in 1978 by which time
the Act was in operation. Therefore, the rights and remedies of the parties are regulated by the
provisions of the Act.
4. Shri Parasaran, the learned senior counsel for the appellants referred to us the
provisions of the French Civil Code and the Code of Commerce touching the partnership and
contended that those provisions do have bearing to cull out the intention of the parties
manifested in the relevant clauses of the partnership deeds Exs. B-1 and B-2 which would
suggest that the partnership in question is not at will but one in perpetuity. While agreeing
that the French Civil Code would be looked into to construe the covenants in the partnership

Kamal Pushp Enterprises v. D.R. Construction Co.

79

deed, Shri Krishnamurthy Iyer, the learned senior counsel for the respondent contended that
there is no express embargo in the French Law to treat a partnership at will and the contract is
treated as law. In that light clause IV treats the partnership as at will. But the partnership at
will cannot be put to an end to if the notice of dissolution was not issued in good faith and
that it was not an opportune moment.
5. Article 1865 in Chapter IV of the French Civil Code postulates that a partnership ends
(1) by the expiration of the time for which the partnership was made; (2) by the destruction of
the subject matter or the termination of the business; (3) by the death of any of the partners;
(4) by the civil death, interdiction of insolvency of one of the partners; and (5) by the fact that
one or more of the partners have expressed a desire to cease being in partnership. Article 1869
provides that if the partnership articles contain provisions stipulating that the partners shall,
in the case of the death of one of the partners continue the partnership with his heir, or that the
partnership shall only continue with the surviving partners such provisions shall be adhered
to. In the latter case, the heir of the deceased partner is only entitled to require a partition of
the partnership property as it stood at the time of such death and the heir has no share in any
rights which the partnership may acquire after the death of such partner, unless they were a
necessary consequence of what had been done before the death of the partner to whose rights
he has succeeded. Article 1869 further provides that a partnership can be dissolved at the
will of the partners does not apply to partnership, the duration of which has been fixed. The
dissolution is effected by the partner who wishes to retire sending a notice of such intention to
all his co-partners. Such notice of dissolution of partnership must be given in good faith and
not at an inopportune moment.
6. Article 18 of the Code of Commerce provides that the contract of a company is
regulated by the civil law, by the laws in particular to commerce and by the agreement of the
parties. Article 1134 postulates that the agreements legally formed take the place of law for
those who have made them. They can rescind the contract only with their mutual consent or
for the reasons authorised by law. They have to be executed in good faith. These are the
translated articles supplied by the appellants and their correctness was not disputed by the
respondent.
7. A conjoint reading of these provisions clearly manifests that normally a partnership
ends on happening of one of the five events mentioned in Article 1865. If the duration of the
partnership is mentioned in the contract, the partnership ends by the expiration of the time for
which the partnership was made. The death of a partner operates as a dissolution of
partnership by operation of clause 3 of Article 1865. Article 1869 empowers the parties to
stipulate in the partnership deed that on death of one of the partners the partnership would
continue with the surviving partners provided an express provision in that regard was made in
the contract. The heirs of the deceased partners would then be entitled to seek partition of the
share of the deceased partner. Article 1869 further adumbrates that a partnership cannot be
dissolved at will if there is a stipulation of duration in the contract of partnership. The contract
between the parties operates as law as per the terms thereof. It is undoubted that a partnership
at will can be put to an end by issue of the notice provided it was issued in good faith and at
an opportune moment. But it is subject to the contract of the parties. Therefore we hold that
the contract of partnership is consistent with the French Civil Code. But since the parties are

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Kamal Pushp Enterprises v. D.R. Construction Co.

governed by the provisions of the Act, it would apply to the facts of the case and the rights are
to be adjudicated accordingly.
8. The further contention of Shri Parasaran is that clause (5) of the contract of partnership
envisages that the partnership would continue notwithstanding one of several partners
withdrew from partnership. The continuing partners should pay to the withdrawing partners or
to the heirs of the deceased partner, only the value of the share of the retiring or deceased
partner according to the last inventory. This was reiterated under Ex. B-2 after retirement of
their father. Clause (12) thereof expressly prohibited the parties to assign his/their share to the
third parties without the consent of the continuing partners which would clearly indicate that
the partnership is not at will and the Division Bench committed serious error in its
construction that it is a partnership at will. Shri T.S. Krishnamurthy Iyer, placed strong
reliance on paragraph 4 of the contract, Ex. B-1; wherein it has specifically been stated that it
is a partnership at will and any one of the partners is entitled to exercise his right to dissolve
the firm and seek the reliefs under the Act. The High Court on consideration of the relevant
clauses of the deed and of Section 7 of the Act held that the partnership is at will.
9. The material question is whether the partnership deed is at will. Clause (3) specifies the
shares of the partners and clauses (4) and (5) read thus:
(4) The business of the firm has been started on July 1, 1962 and the partnership will
be brought to an end at will.
(5) The partnership will continue till there are two partners, even in the case of one or
several partners withdraw themselves or die, the partnership will continue between the
two partners, will remain owners of all the capital, on condition that they should pay back
to the withdrawing partners and to the heirs of the deceased partners, only the amount of
their rights according to the last inventory.
10. Clause (6) empowers the first three appellants to manage the business jointly or
severally. Under clause (7) they have to maintain the accounts. Clauses (8) and (9) give right
to participation and to invest the funds in other business etc. Clause (10) provides that in
case one of the partners withdraws himself from the partnership firm, the other continuing
partners of the firm will have the absolute rights on the quotas rights and the other rights
benefitted by the firm as on the date of the withdrawal, the outgoing partner shall have the
right only to receive the balance in his account after his share in the profit or loss on the date
of the withdrawal from the partnership has been transferred. Clause (11) provides that in
case of death of one of the partners, his heirs shall have the right only to the share in the
profits or the loss in the remainder of his account for the period starting from the beginning of
the accounting year up to the date of death. Thereafter all other rights shall be devolved on
the partners who are continuing the partnership firm. Clause (12) provides that the parties
should not be eligible under any pretext to assign their rights in the partnership to anyone,
without the assent of other partners. The other clauses are not relevant for consideration and
hence omitted.
12. This section 11 contemplates two exceptions to a partnership at will. The first one is
where there is provision made in the deed of the partnership for the duration of the
partnership; or (2) where there is provision in the contract for the determination of the
partnership; in either of these cases, the partnership is not at will. Duration of partnership may

Kamal Pushp Enterprises v. D.R. Construction Co.

81

be express or may in given circumstances be implied. Section 11(1) of the Act postulates that
subject to the provisions of the Act the mutual rights and duties of partners of a firm may
be determined by contract between the partners and such contract may be express or implied
by course of dealings. Section 32(1) deals with the retirement of a partner (a) with the consent
of the other partners; (b) in accordance with an express agreement by the partners; or (c)
where the partnership is at will, by giving notice in writing to all of his partners of his
intention to retire. For the purpose of this case sub-sections (2) and (3) are not material.
13. In Chapter VI, Section 40 gives right to the partners to dissolve the partnership by
agreement with the consent of all the partners or in accordance with the contract between the
partners. Section 43 declares that where the partnership is at will, the firm may be dissolved
by any partner giving notice in writing to all the other partners of his intention to dissolve the
firm which stands dissolved by operation of sub-section (2) thereof from the date mentioned
in the notice as the date of dissolution or if no date is so mentioned from the date of
communication of the notice. In Banarasi Das v. Seth Kanshi Ram [AIR 1963 SC 1165], this
Court held that where the suit was filed after issuing the notice dissolving the partnership
against more than one partners/defendants, the partnership stood dissolved from the date on
which the last partner received the notice from the court. Section 44 empowers the court, at a
suit of a partner, to dissolve the firm on the happening of any one of the grounds enumerated
in clauses (a) to (g), the details thereof are not also material as the dissolution of the
partnership in question is not by the court.
14. It is settled canon of construction that a contract of partnership must be read as a
whole and the intention of the parties must be gathered from the language used in the contract
by adopting harmonious construction of all the clauses contained therein. The cardinal
principle is to ascertain the intention of the parties to the contract through the words they have
used, which are key to open the mind of the makers. It is seldom that any technical or
pedantic rule of construction can be brought to bear on their construction. The guiding rule
really is to ascertain the natural and ordinary sensible meaning to the language through which
the parties have expressed themselves, unless the meaning leads to absurdity.
15. In Ram Singh v. Ram Chand [AIR 1924 PC 2], Lord Dunedin speaking for the Board
held that the rights in the partnership is a legal right under the Code of Civil Procedure and
under the contract. Therefore, the right of the parties under the contracts Exs. B-1 and B-2 are
legal rights to which they are tied down. The question, therefore, is whether Exs. B-1 and B-2
partnership deeds expressly indicate the intention of the parties regarding the duration of the
partnership? If not, whether it can be implied from the terms of the contracts. The relevant
clauses have already been referred to. Clause (4) of the contract empowers a partner to put an
end to the partnership at will. If the exercise of the right to dissolve the partnership is given
acceptance as contended for by Shri Krishnamurthy Iyer, the rest of the clauses in the contract
get nullified. If the contention of Shri Parasaran is accepted that under clause (5) of the
contract, the partnership will continue in perpetuity and the only right to the outgoing partner
is the right to retirement and to payment of his share in the partnership is accepted, clause (4)
would be rendered nugatory. The right to continue the business by the firm as an ongoing one
would be discernible from clauses (6) to (9) so long as the objects are lawful. Clauses (10) to
(12) would lend an added assurance by imposing express limitations on the outgoing partners

82

Kamal Pushp Enterprises v. D.R. Construction Co.

or the heirs of the deceased partner to receive only the benefits derived by the firm up to the
date of withdrawal or death of a partner together with profits and loss. The legal
representatives of the deceased partner are not entitled to be partners. There is an absolute
embargo to induct strangers into the partnership except with the consent of all the other
partners. Thereby it is clear that the partnership would continue till there are two partners as
specified in clause (5). Thereafter either partner may put an end to the partnership as
partnership at will.
16. Clause (5) also manifests the intention of the parties that so long as there exist two
partners, partnership cannot be determined, although he/she may withdraw from partnership
and terminate the legal relationship between himself and other partners. If one partner desires
to withdraw or retires from partnership, the partnership shall continue between the remaining
partners, unless all the partners mutually agree to determine the relationship. It also further
indicates that on the retirement or death of one of the partners the partnership does not
automatically comes to an end. Therefore, so long as there are two partners, the partnership
would continue unless either by mutual agreement or according to law it is put an end to the
partnership. This construction of the relevant clauses put up by us appears to be the intention
of the parties and any other construction would run counter to the express intention of the
partners, manifested in the contract.
17. In Karumuthu Thiagarajan Chettiar v. E.M. Muthappa Chettiar [AIR 1961 SC
1225], relied on by the appellants, the facts are that the appellants and the respondent therein
entered into a written partnership with respect to the managing agency business of two mills,
the terms of which were inter alia that the management shall be carried on in rotation once in
four years, the appellant to manage for the first four years and thereafter the respondent to
manage for the next four years and in the same way thereafter. It also provided that the
partners and their heirs and those who get their rights shall carry on the management in
rotation. After the dispute arose between the partners, notice of dissolution was given by the
appellant to the respondent to terminate the partnership treating as a partnership at will, and
the directors of the mill in their turn terminated the managing agency on the ground that the
partners were acting detrimental to the good management of the mills. The accounts were to
be settled once in every year. In case of either partner relinquishing his rights of the
management, it shall be forwarded to the other partners but it shall not be transferred. It was
also further provided that the two partners would carry on the affairs of the firm by rotation
once in four years and the income earned thereby shall be divided between the partners every
year. In that context when it was contended that there was no duration provided under the
contract and that, therefore, under Section 7 of the Act, the contract was treated to be a
partnership at will, it was held at page 1007 thus: Our attention was drawn in this case to a
clause which lays down that either partner may withdraw from the partnership by
relinquishing his right of management to the other partner. That however, does not make the
partnership at will, for the essence of a partnership at will is that it is open to either partner to
dissolve the partnership by giving notice. Relinquishment of one partners interest in favour
of the other, which is provided in this contract, is a very different matter. It is true that in this
particular case there were only two partners and the partnership will come to an end as soon
as one partner relinquishes his right in favour of the other. That however is a fortuitous

Kamal Pushp Enterprises v. D.R. Construction Co.

83

circumstance: for if (for example) there had been four partners in this case and one of them
relinquished his right in favour of the other partners, the partnership would not come to an
end. That clearly shows that a term as to relinquishment of a partners interest in favour of
another would not make the partnership one at will.
Accordingly it was held that the partnership is not at will as it continued to subsist till the
termination of the managing agency and, therefore, Section 7 is not attracted.
18. Giving our anxious consideration to the controversy, we have no hesitation to reach
the finding and hold that the duration of the partnership has been expressly provided in the
deed, namely, that the partnership will continue till there are two partners and that,
therefore, it is not a partnership at will. Thereby, the respondent has no right to dissolve the
partnership except to seek accounting for the period in dispute or his right to withdraw or
retire from partnership and to take the value of his share in the partnership either by mutual
agreement or at law in terms of the partnership deeds Exs. B-1 and B-2.
19. Though Shri Krishnamurthy Iyer contended that the appellants established a limited
company and transferred the assets of the firm to it and thereby the partnership ceased to
subsist, we cannot give countenance to the contention for the reason that it is a question of
fact and was not raised in the courts below. Therefore, it cannot be raised for the first time in
this Court.
20. In case the respondent desires to retire from partnership and the rights and liabilities
are not mutually affected, it would be open to the respondent to amend the plaint
appropriately and seek a decree in that regard. It is also open to the respondent to seek
accounting for the profits during the entire period in dispute as per law. It is also open to the
appellants to amend the written statement raising appropriate pleadings, except the limitation.
In case the respondent elects to adopt the above course the suit would be disposed of
expeditiously giving priority. Otherwise the suit should be dismissed. The appeal is allowed
accordingly and we direct the parties to bear their own costs throughout.
*****

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Kamal Pushp Enterprises v. D.R. Construction Co.

Chandrika Prasad Agarwal v. Vishnu Chandra


1981 All LJ 967
[Partnership at will]

The three defendants-appellants and the plaintiff-respondent entered into a


partnership for carrying on the business of manufacturing brickets from Coke-breeze.
The Instrument of Partnership was executed on 18-12-1975. Each of the four partners
was to invest Rs. 15,000/- in the business. Rs. 39,500/- was borrowed from the Canara
Bank for the business of the Firm. The production could start in the beginning of March
1976. According to the Instrument of Partnership, originally executed, the plaintiff was
to maintain the accounts. He could keep Rs. 2500/- in cash with him. The rest of the
money had to be kept deposited in the Firms account with the bank which was operated
upon by the plaintiff and the third defendant. There was a change in the terms of the
partnership with effect from 1-6-1976. Under the Instrument executed that day, the first
defendant was entrusted with the responsibility of keeping accounts and he could employ
a Munim. All the cash and the documents of the Firm were handed over by the plaintiff
to the first defendant. It was the plaintiffs case that he paid Rs. 3,000/- to the first
defendant after 1-6-1976, The Firm suffered heavy loss amounting to Rs. 1,032/- during
the period that he maintained accounts on account of the low production which started
very late and the heavy amount of interest paid to the bank. Further, the defendants who
were in league with each other ignored him, did not take his advice in the affairs of the
partnership, did not pay him the sum of Rs. 250/- per month which was payable to each
partner, and also did not supply him th of the goods produced by the Firm for resale in
accordance with the terms of the partnership. There was a loss of faith between the
partners and the business of partnership could not be carried on, whereupon he served a
notice dated 20-11-1976 dissolving the partnership Nos. 1 and 3 on 23-11-1976 and the
partnership stood dissolved from that date. The plaintiff also asked the first defendant to
render accounts. He did not pay any heed.
The three defendants admitted the partnership, but denied that it was at will. They
pleaded that under Paragraph 20 of the Instrument of Partnership, as amended on 1-61976 no partner could retire from the Firm until the loan taken from the Canara Bank was
paid off. They asserted that the plaintiff had no right to dissolve the partnership nor even
to retire from the firm until the loan was paid off. Further, according to the defendants
the plaintiff did not invest the full amount of Rs. 15,000/-. He invested only Rs. 12,000/initially and the sum of Rs. 1,000/- on 14-8-1976, and after deducting his share of loss his
net capital in the Firm was Rs. 12,741.80. It was suggested that the business of the
partnership was running at a loss. About the plaintiffs case that he was not supplied th
of the goods produced, it was pleaded that the plaintiff wanted the goods on credit, when
according to the terms of the partnership they could be supplied only against cash
payment. About the payment of Rs. 250/- per month, it was pleaded that the payment
was not made to any of the partners as the business of the Firm was running at loss.
Two issues on which the parties went to trial were: (1) Whether the partnership
entered into between the parties to this suit was partnership at will? If so, its effect? If
not, its effect? and (2) Whether the defendants violated the terms of the partnership
agreement? If so, whether the plaintiff is entitled to a decree of dissolution of Firm even
if it be held that the partnership was not at will? The trial court held that the partnership

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85

was at will and the defendants had violated the terms of the partnership and further that
even if it were held that the partnership was not at will, the plaintiff was entitled to a
dissolution of the Firm. On appeal by the defendants, the lower appellate court affirmed
the trial courts decree.

DEOKI NANDAN, J. - 6. The two questions on which the second appeal was admitted
after hearing under Order 41, Rule 11 C. P. C. by this Court were:(i) Whether the partnership was at will or for a fixed duration?
(ii) Whether the respondent was entitled for retirement from the partnership or for the
dissolution of the Firm itself?
7. I have heard learned counsel for the parties and aim of the view that the two courts
below have gone wrong in holding that the partnership in question was a partnership-at-will.
8. Having read the Instrument of Partnership, I find that the following terms thereof make
provision for the duration, or the determination of the partnership, namely clause 7, which
provides that if any of the parties unfortunately dies then in that case the partnership shall not
be dissolved, but his sons will become partners of his share and that person will become the
partner who may have been nominated by the deceased partner; clause 18 which is to the
effect that if any party wanted to separate from the business of the partnership he could do so
by giving one months notice to the other partners, but in that case the partnership would not
be dissolved and if the majority of the partners were unable to pull on with any partners, then
the majority of the partners will have the right to expel that partner if they consider just after
asking his explanation, clause 20, as it originally stood which provided that none of the
partners would be entitled to withdraw any part of his capital and further that no partner
would be allowed to go out from the partnership before the expiry of one year and even if he
did so, his capital would not be returned before the end of the year; and lastly, the amended
clause 20 which provided that no partners could withdraw from the partnership so long as the
loan taken from the Canara Bank, Etah, was not repaid.
9. The terms of partnership, referred to above, do clearly contemplate that the partnership
shall continue indefinitely until such time as all the partners agree to dissolve it or the Firm
was otherwise dissolved in accordance with law.
10. Clause 7 of the Instrument of Partnership, referred to above, provides against the
contingency of the dissolution of the partnership by the death of a partner under Cl. (c) of S.
42 of the Partnership Act. It is thus a provision made by contract between the partners for the
duration or for the non-determination of the partnership in spite of the death of one of
them.
11. A dissolution of partnership has been defined by S. 39 of the Partnership Act as the
dissolution of partnership between all the partners of a Firm and in case of a partnership-atwill. S. 43 (1) gives a partner the right of dissolving such a partnership by notice in writing to
all the other partners of his intention to dissolve the Firm, and may be against their will. Seen
in this context, clause 18 of the Instrument of Partnership is clearly a provision made by
contract between the partners for the non-determination of the partnership between all the
partners at the instance of one partner only. That clause gives a partner, acting singly, only

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Kamal Pushp Enterprises v. D.R. Construction Co.

the right to withdraw from the partnership by serving one months notice on the other partners
and also the right to the remaining three partners, if they were unanimous, to expel the fourth
partner from the business of the partnership. This is clearly inconsistent with the concept of a
partnership-at-will and the right of an individual partner to dissolve it by notice.
12. Clause 20, as it originally stood, clearly implied that no partner could withdraw from
the partnership before the end of a year and even if he did, his capital would not be paid back
by the Firm. That was clearly a provision, fixing by contract, the duration of the partnership
at least one year. The amended clause 20 extended that period of one year to such time as the
loan taken from the Canara Bank was repaid.
13. I find it impossible to agree with the view of the two courts below that the partnership
was a partnership-at-will.
14. I may here refer to the case cited at the Bar and referred to in the judgments of the two
courts below. The first of these cases is that of Karumuthu Thiagarajan Chettiar v. E. M.
Muthappa Chettiar [AIR 1961 SC 1225]. In that case the partnership consisted of only two
persons. Even so, the Supreme Court held on an interpretation of the terms of the partnership
that it was not a case of a partnership-at-will. The case of Abbott v. Abbott [(1936) 3 All ER
823], is referred to therein with approval. That was a case where there were more than two
partners and it was provided that the retirement of a partner would not terminate the
partnership and there was an option for the purchase of the retiring partner share by the other
partners. It was held that in such circumstances the partnership could not be said to be
partnership-at-will. Similar is the case here under clause 18 of the Instrument of Partnership,
referred to above. I have looked into the report of Abbotts case.
One of the terms of the partnership in that case was that the death or retirement of any
partner shall not terminate the partnership. Another term was, as noticed by the Supreme
Court, that if any partner shall die or retire, the surviving or continuing partners shall have the
option of purchasing the share of the deceased or retiring partner. The question posed by
Clausom, J., in that case was whether on a reading of the deed as a whole, the parties could be
said to have agreed that anyone of them could bring the business to an end in a moment or
whether there was some agreement inconsistent, with that being done.
On reading the first of the conditions, referred to above, namely, the condition that death
or retirement of any partner shall not terminate the partnership, the learned Judge observed
that constituted a limitation upon the character of the partnership being a partnership-at-will,
in as much as a single partner could not determine the partnership although he could
determine it as between himself and the others. That clause further showed that the partners
had agreed that the partnership shall continue notwithstanding that one partner goes out or
even notwithstanding the death of one partner. Clause 18 of the Instrument of Partnership,
referred to above, is closely similar and does show that no single partner could dissolve the
partnership by notice. He could only terminate the partnership between himself and others
and not between all of them by notice, and further that the partnership was to continue
notwithstanding the retirement or expulsion of a single partner, who was in minority, by the
remaining partners continuing the partnership. I may here observe that the learned Additional
District Judge who heard the appeal, is not right in saying that the intention of the parties was

Kamal Pushp Enterprises v. D.R. Construction Co.

87

not to be seen in a matter like this. In interpreting the terms of an instrument, it is the
intention of the makers which has to be gathered by a court. In Thiagarajans case (supra)
even the Supreme Court approached the matter by saying. As we read the terms of the
agreement, it seems to us clear that the intention could not be to create a partnership at will.
15. Two other cases cited before me by the learned counsel for the respondent were: (1)
Keshavlal Lallubhai Patel v. Patel Bhailal Narandas [AIR 1968 Guj 157] and (2) Iqbalnath
Premnath Anand v. Rameshwarnath Premnath Anand [AIR 1976 Bom 405]. In Keshavlal
case one of the terms of the Instrument of Partnership expressly declared that the partnership
shall be a partnership-at-will and that was one of principal reasons on which the Gujarat High
Court held that there was no room or scope for taking the view that the partnership was not a
partnership-at-will. The case is thus clearly distinguishable. Iqbalnaths case is a single
Judge decision of the Bombay High Court and in that case also in the partnership deed itself
there was a clause opening with the words Partnership being at will, which according to the
learned Judge was sufficient to disclose to the Court the intention of the parties that the
partnership was a partnership at will within the meaning of the Act and that in view of such an
express declaration by the parties there would be no question of a contrary implication. This
case too is, therefore, clearly distinguishable and could be no authority for holding that the
partnership in the case before me was also a partnership-at-will, although having read the
terms of the Instrument of Partnership I find that there are definite indications to the contrary.
16. The second question whether the respondent was entitled for retirement from the
partnership or for dissolution of the partnership itself is answered by clause 18 of the
Instrument of Partnership, referred to above, and does not call for a separate answer.
17. For a complete disposal of the case. I consider it necessary to add that in my view the
defendants-appellants were not guilty of breach of any of the terms of the partnership when
they did not supply the of the goods produced to the plaintiff for resale and did not pay him
Rs. 250/- per month, and that the plaintiff was not entitled to sue for dissolution of partnership
on any such ground.
18. I shall take up the second point first. Clause 14 of the Instrument of Partnership
provided that each party would be entitled to draw Rs. 250/- every month for his own
expenses. Clause 15 at the same time provided that no partner would be entitled to any salary
or honorarium for attending to the business of the partnership. It is the plaintiffs own case
that the partnership suffered loss. The non-withdrawal of the amount of Rs. 250/- by the
plaintiff and also by the other partners was in the interest of the partnership. There is nothing
to show that the plaintiff demanded the sum of Rs. 250/- from the defendants-appellants after
1-6-1976 and the defendants unreasonably refused to pay that amount to him. On the other
hand, Ext. A-5, which is a reply dated 20-11-1976 to the plaintiff to the latters notices dated
5-11-1976 and 16-11-1976, goes to show that it was the plaintiff himself when he was in
charge of the affairs of the partnership up to 31-5-1976 who had agreed that the amount of Rs.
250/- per month would not be paid because of the loss in the business. The notices dated 511-1976 and 16-11-1976 were not filed by the plaintiff. On the other hand the defendants
have filed two notices, one dated 5-11-1976 and the other undated, both of them addressed to
M/s. Bharat Coal Company, which are Exts. A1 and A2 respectively. They only show that the
plaintiff was bent upon wrecking the partnership.

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Kamal Pushp Enterprises v. D.R. Construction Co.

19. With regard to the non-supply of th production to the plaintiff, the defendants case
was that the plaintiff did not want to pay in cash and wanted the same on credit. There is a
reference in the notice which the plaintiff purported to serve for dissolving the partnership
about the non-payment of Rs. 250/- per month and the non-supply of th part of the goods
produced, but there does not appear to be any other notice or document on record from the
side of the plaintiff to establish that he ever demanded the same and the other partners refused
to supply him the of the production against cash payment. It is highly probable that the
defendants case was true, and the two courts below do not seem to be justified in accepting
the plaintiffs word in support of his claim that the defendants committed a breach of the
terms of the partnership by not supplying him th of the production every month for resale.
The term clearly was that the supply shall be made against cash payment and there does not
appear anything on record to prove that the plaintiff ever tendered the price of the th
production in cash and was yet denied supply by the defendants.
20. It is thus clear that neither of the two grounds i.e. the non-payment of Rs. 250/- p.m.
to the plaintiff and the non-supply of the of the production to him could be an adequate
ground for dissolution of the partnership under Section 44 of the Indian Partnership Act.
21. As to the point whether the plaintiff was entitled to a decree for dissolution on the
ground that the business of the Firm was running at loss, I am afraid that here too the courts
below have gone wrong. What is required to be proved under clause (f) of Section 44 of the
Indian Partnership Act is that the business of the Firm cannot be carried on save at a loss. It is
not unusual to find a manufacturing business suffering loss in the first few years of its being
set up. Indeed, the plaintiff himself has alleged that there was loss in the beginning because
the production was low on account of having been started late and the heavy amount of
interest payable to the bank. The amount of loss up to 31-5-1976 in the first six months of the
business was only Rs. 1032.82 when the capital of the four partners was proposed to be Rs.
60,000/- and the loan taken from the bank was Rs. 39,500/-. I do not think that a loss of Rs.
1,000/- odd in the first six months of the business in a case where the capital invested is
rupees one lac could be said to be such as to justify the dissolution of the partnership on the
ground that the business could not be carried on save at a loss. Indeed, the defendants would
not have contested this suit unless they were making profit out of the business of the
partnership. It appears to me that the defendants were not in the wrong and that it was the
plaintiff who was in the wrong and was acting in a manner prejudicial to the interests of the
partnership by serving notices of the kind which he served on M/s. Bharat Coal Company.
22. In the result, the appeal succeeds.
*****

Kamal Pushp Enterprises v. D.R. Construction Co.

Gherulal Parakh v. Mahadeodas Maiya


1959 SUPP (2) SCR 406 : AIR 1959 SC 781
[Section 8 Particular Partnership]

The appellant, Gherulal Parakh, and the first respondent, Mahadeodas Maiya,
managers of two joint families entered into a partnership to carry on wagering contracts
with two firms of Hapur, namely, Messrs Mulchand Gulzarimull and Baldeosahay
Surajmull. It was agreed between the partners that the said contracts would be made in
the name of the respondents on behalf of the firm and that the profit and loss resulting
from the transactions would be borne by them in equal shares. In implementation of the
said agreement, the first respondent entered into 32 contracts with Mulchand and 49
contracts with Baldeosahay and the nett result of all these transactions was a loss, with
the result that the first respondent had to pay to the Hapur merchants the entire amount
due to them. As the appellant denied his liability to bear his share of the loss, the first
respondent along with his sons filed OS No. 18 of 1937 in the Court of the Subordinate
Judge, Darjeeling, for the recovery of half of the loss incurred in the transactions with
Mulchand. In the plaint he reserved his right to claim any further amount in respect of
transactions with Mulchand that might be found due to him after the accounts were
finally settled with him. That suit was referred to arbitration and on the basis of the
award, the Subordinate Judge made a decree in favour of the first respondent and his sons
for a sum of Rs 3375. After the final accounts were settled between the first respondent
and the two merchants of Hapur and after the amounts due to them were paid, the first
respondent instituted a suit, out of which the present appeal arises, in the Court of the
Subordinate Judge, Darjeeling, for the recovery of a sum of Rs 5300 with interest
thereon. Subsequently the plaint was amended and by the amended plaint the respondents
asked for the same relief on the basis that the firm had been dissolved. The appellant and
his sons, inter alia, pleaded in defence that the agreement between the parties to enter into
wagering contracts was unlawful under Section 23 of the Contract Act, that as the
partnership was not registered, the suit was barred under Section 69(1) of the Partnership
Act and that in any event the suit was barred under Order 2 Rule 2 of the Code of Civil
Procedure. The Subordinate Judge found that the agreement between the parties was to
enter into wagering contracts depending upon the rise and fall of the market and that the
said agreement was void as the said object was forbidden by law and opposed to public
policy. He further found that the partnership was between the two joint families of the
appellant and the first respondent respectively, that there; could not be in law such a
partnership and that therefore Section 69 of the Partnership Act was not applicable. In the
result, he dismissed the suit with costs.
On appeal, the learned Judges of the High Court held that the partnership was not
between the two joint families but was only between the two managers of the said
families and therefore it was valid. They found that the partnership to do business was
only for a single venture with each one of the two merchants of Hapur and for a single
season and that the said partnership was dissolved after the season was over and therefore
the suit for accounts of the dissolved firm was not hit by the provisions of sub-sections
(1) and (2) of Section 69 of the Partnership Act. They further found that the object of the
partners was to deal in differences and that though the said transactions, being in the
nature of wager, were void under Section 30 of the Indian Contract Act, the object was

89

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Kamal Pushp Enterprises v. D.R. Construction Co.

not unlawful within the meaning of Section 23 of the said Act.In regard to the claim, the
learned Judges found that there was no satisfactory evidence as regards the payment by
the first respondent on account of loss incurred in the contracts with Mulchand but it was
established that he paid a sum of Rs 7615 on account of loss in the contracts entered into
with Baldeosahay. In the result, the High Court gave a decree to the first respondent for a
sum of Rs 3807-8-0 and disallowed interest thereon for the reason that as the suit in
substance was one for accounts of a dissolved firm, there was no liability in the
circumstances of the case to pay interest. In the result, the High Court gave a decree in
favour of the first respondent for the said amount together with another small item and
dismissed the suit as regards the plaintiffs other than the first respondent and the
defendants other than the appellant.

K. SUBBA RAO J. - This appeal filed against the judgment of the High Court of Judicature
at Calcutta raises the question of the legality of a partnership to carry on business in wagering
contracts.
5. Before we consider the questions of law raised in the case, it would be convenient at
the outset to dispose of questions of fact raised by either party. The learned Counsel for the
appellant contends that the finding of the learned Judges of the High Court that the
partnership stood dissolved after the season was over was not supported by the pleadings or
the evidence adduced in the case. In the plaint as originally drafted and presented to the Court,
there was no express reference to the fact that the business was dissolved and no relief was
asked for accounts of the dissolved firm. But the plaint discloses that the parties jointly
entered into contracts with two merchants between March 23, 1937, and June 17, 1937, that
the plaintiffs obtained complete accounts of profit and loss on the aforesaid transactions from
the said merchants after June 17, 1937, and that they issued a notice to the defendants to pay
them a sum of Rs 4146-4-3, being half of the total payments made by them on account of the
said contracts and that the defendants denied their liability. The suit was filed for recovery of
the said amount. The defendant filed a written-statement on June 12, 1940, but did not raise
the plea based on Section 69 of the Partnership Act. He filed an additional written-statement
on November 9, 1941, expressly setting up the plea. Thereafter the plaintiffs prayed for the
amendment of the plaint by adding the following to the plaint as para 10:
That even Section 69 of the Indian Partnership Act is not a bar to the present suit as
the joint business referred to above was dissolved and in this suit the Court is required
only to go into the accounts of the said joint business.
It would be seen from the aforesaid pleadings that though an express allegation of the fact
of dissolution of the partnership was only made by an amendment on November 17, 1941, the
plaint as originally presented contained all the facts sustaining the said plea. The defendants
in their written-statement, inter alia, denied that there was any partnership to enter into
forward contracts with the said two merchants and that therefore consistent with their case
they did not specifically deny the said facts. The said facts, except in regard to the question
whether the partnership was between the two families or only between the two managers of
the families on which there was difference of view between the Court of the Subordinate
Judge and the High Court, were concurrently found by both the Courts. It follows from the

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91

said findings that the partnership was only in respect of forward contracts with two specified
individuals and for a particular season. But it is said that the said findings were not based on
any evidence in the case. It is true that the documents did not clearly indicate any period
limiting the operation of the partnership, but from the attitude adopted by the defendants in
the earlier suit ending in an award and that adopted in the present pleadings, the nature of the
transactions and the conduct of the parties, no other conclusion was possible than that arrived
at by the High Court. If so, Section 42 of the Partnership Act directly applies to this case.
Under that section in the absence of a contract to the contrary, a firm is dissolved, if it is
constituted to carry out one or more adventures or undertakings, by completion thereof. In this
case, the partnership was constituted to carry out contracts with specified persons during a
particular season and as the said contracts were closed, the partnership was dissolved.
6. At this stage a point raised by the learned Counsel for the respondents may
conveniently be disposed of. The learned Counsel contends that neither the learned
Subordinate Judge nor the learned Judges of the High Court found that the first respondent
entered into any wagering transactions with either of the two merchants of Hapur and
therefore no question of illegality arises in this case. The law on the subject is well-settled and
does not call for any citation of cases. To constitute a wagering contract there must be proof
that the contract was entered into upon terms that the performance of the contract should not
be demanded, but only the difference in prices should be paid. There should be common
intention between the parties to the wager that they should not demand delivery of the goods
but should take only the difference in prices on the happening of an event. Relying upon the
said legal position, it is contended that there is no evidence in the case to establish that there
was a common intention between the first respondent and the Hapur merchants not to take
delivery of possession but only to gamble in difference in prices.
We proceed on the basis that the appellant and the first respondent entered into a
partnership for carrying on wagering transactions and the claim related only to the loss
incurred in respect of those transactions.
7. Now we come to the main and substantial point in the case. The problem presented,
with its different facets, is whether the said agreement of partnership is unlawful within the
meaning of Section 23 of the Indian Contract Act. Section 23 of the said Act, omitting
portions unnecessary for the present purpose, reads as follows:
The consideration or object of an agreement is lawful, unless it is forbidden by law, or
the Court regards it as immoral, or opposed to public policy.
In each of these cases, the consideration or object of an agreement is said to be unlawful.
Every agreement of which the object or consideration is unlawful is void.
Under this section, the object of an agreement, whether it is of partnership or otherwise. is
unlawful if it is forbidden by law or the Court regards it as immoral or opposed to public
policy and in such cases the agreement itself is void.
8. The learned Counsel for the appellant advances his argument under three sub-heads: (i)
the object is forbidden by law, (ii) it is opposed to public policy, and (iii) it is immoral. We
shall consider each one of them separately.

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Kamal Pushp Enterprises v. D.R. Construction Co.

9. Re. (i) - forbidden by law: Under Section 30 of the Indian Contract Act, agreements by
way of wager are void; and no suit shall be brought for recovering anything alleged to be won
on any wager, or entrusted to any person to abide the result of any game or other uncertain
event on which any wager is made. Sir William Anson s definition of wager as a promise
to give money or money s worth upon the determination or ascertainment of an uncertain
event accurately brings out the concept of wager declared void by Section 30 of the Contract
Act. As a contract which provides for payment of differences only without any intention on
the part of either of the parties to give or take delivery of the goods is admittedly a wager
within the meaning of Section 30 of the Contract Act, the argument proceeds, such a
transaction, being void under the said section, is also forbidden by law within the meaning of
Section 23 of the Contract Act. The question, shortly stated, is whether what is void can be
equated with what is forbidden by law. This argument is not a new one, but has been raised in
England as well as in India and has uniformly been rejected. In England the law relating to
gaming and wagering contracts is contained in the Gaming Acts of 1845 and 1892.
While the Act of 1845 declared all kinds of wagers or games null and void, it only
prohibited the recovery of money or valuable thing won upon any wager or deposited with
stakeholders. On the other hand, the Act of 1892 further declared that moneys paid under or in
respect of wagering contracts dealt with by the Act of 1845 are not recoverable and no
commission or reward in respect of any wager can be claimed in a Court of law by agents
employed to bet on behalf of their principals. The law of England till the passing of the Act of
1892 was analogous to that in India and the English law on the subject governing a similar
situation would be of considerable help in deciding the present case.
19. Before closing this branch of the discussion, it may be convenient to consider a
subsidiary point raised by the learned Counsel for the appellant that though a contract of
partnership was not illegal, in the matter of accounting, the loss paid by one of the partners on
wagering transactions, could not be taken into consideration. Reliance is placed in support of
this contention on Chitty s Contract, p. 495, para 908, which reads:
Inasmuch as betting is not in itself illegal, the law does not refuse to recognise a
partnership formed for the purpose of betting. Upon the dissolution of such a partnership
an account may be ordered. Each partner has a right to recover his share of the capital
subscribed, so far as it has not been spent; but he cannot claim an account of profits or
repayments of amounts advanced by him which have actually been applied in paying the
bets of the partnership.
20. The aforesaid discussion yields the following results: (1) Under the common law of
England a contract of wager is valid and therefore both the primary contract as well as the
collateral agreement in respect thereof are enforceable; (2) after the enactment of the Gaming
Act, 1845, a wager is made void but not illegal in the sense of being forbidden by law, and
thereafter a primary agreement of wager is void but a collateral agreement is enforceable; (3)
there was a conflict on the question whether the second part of Section 18 of the Gaming Act,
1845, would cover a case for the recovery of money or valuable thing alleged to be won upon
any wager under a substituted contract between the same parties: the House of Lords in Hills
Case had finally resolved the conflict by holding that such a claim was not sustainable
whether it was made under the original contract of wager between the parties or under a

Kamal Pushp Enterprises v. D.R. Construction Co.

93

substituted agreement between them; (4) under the Gaming Act, 1892, in view of its wide and
comprehensive phraseology, even collateral contracts, including partnership agreements, are
not enforceable; (5) Section 30 of the Indian Contract Act is based upon the provisions of
Section 18 of the Gaming Act, 1845, and though a wager is void and unenforceable, it is not
forbidden by law and therefore the object of a collateral agreement is not unlawful under
Section 23 of the Contract Act; and (6) partnership being an agreement within the meaning of
Section 23 of the Indian Contract Act, it is not unlawful, though its object is to carry on
wagering transactions. We, therefore, hold that in the present case the partnership is not
unlawful within the meaning of Section 23(A) of the Contract Act.
21. Re. (ii) - Public Policy: The learned Counsel for the appellant contends that the
concept of public policy is very comprehensive and that in India, particularly after
independence, its content should be measured having regard to political, social and economic
policies of a welfare State, and the traditions of this ancient country reflected in Srutis, Smritis
and Nibandas. Before adverting to the argument of the learned Counsel, it would be
convenient at the outset to ascertain the meaning of this concept and to note how the Courts in
England and India have applied it to different situations. Cheshire and Pifoot in their book on
Law of Contract 3rd Edn., observe at p. 280 thus:
The public interests which it is designed to protect are so comprehensive and
heterogeneous, and opinions as to what is injurious must of necessity vary so greatly with
the social and moral convictions, and at times even with the political views, of different
judges, that it forms a treacherous and unstable ground for legal decision .... These
questions have agitated the Courts in the past, but the present state of the law would
appear to be reasonably clear. Two observations may be made with some degree of
assurance.
First, although the rules already established by precedent must be moulded to fit the
new conditions of a changing world, it is no longer legitimate for the Courts to invent a
new head of public policy. A judge is not free to speculate upon what, in his opinion, is
for the good of the community. He must be content to apply, either directly or by way of
analogy, the principles laid down in previous decisions. He must expound, not expand,
this particular branch of the law.
Secondly, even though the contract is one which prima facie falls under one of the
recognized heads of public policy, it will not be held illegal unless its harmful qualities
are indisputable. The doctrine, as Lord ATKIN remarked in a leading case, should only
be invoked in clear cases in which the harm to the public is substantially incontestable,
and does not depend upon the idiosyncratic inferences of a few judicial minds . In
popular language ... the contract should be given the benefit of the doubt.
Anson in his Law of Contract states the same rule thus, at p. 216:
Jessel, M.R., in 1875, stated a principle which is still valid for the Courts, when he
said: You have this paramount public policy to consider, that you are not lightly to
interfere with the freedom of contract ; and it is in reconciling freedom of contract with
other public interests which are regarded as of not less importance that the difficulty in
these cases arises
We may say, however, that the policy of the law has, on certain subjects, been
worked into a set of tolerably definite rules. The application of these to particular

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instances necessarily varies with the conditions of the times and the progressive
development of public opinion and morality, but, as Lord Wright has said, public policy,
like any other branch of the Common Law, ought to be, and I think is, governed by the
judicial use of precedents. If it is said that rules of public policy have to be moulded to
suit new conditions of a changing world, that is true; but the same is true of the principles
of the Common Law generally.

In Halsbury s Laws of England, 3rd Edn., Vol. 8, the doctrine is stated at p. 130 thus:
Any agreement which tends to be injurious to the public or against the public good is
void as being contrary to public policy. It seems, however, that this branch of the law
will not be extended. The determination of what is contrary to the so-called policy of the
law necessarily varies from time to time. Many transactions are upheld now which in a
former generation would have been avoided as contrary to the supposed policy of the
law. The rule remains, but its application varies with the principles which for the time
being guide public opinion.
A few of the leading cases on the subject reflected in the authoritative statements of law
by the various authors may also be useful to demarcate the limits of this illusive concept.
25. The Indian Courts, both before and after the passing of the Act 21 of 1848 and also
after the enactment of the Contract Act, have held that the wagering contracts are not illegal
and the collateral contracts in respect of them are enforceable. There is not a single decision
after the above cited case, which was decided in 1846, up to the present day wherein the
Courts either declared wagering contracts as illegal or refused to enforce any collateral
contract in respect of such wagers, on the ground of public policy. It may, therefore, be stated
without any contradiction that the common law of England in respect of wagers was followed
in India and it has always been held that such contracts, though void after the Act of 1848,
were not illegal. Nor the legislatures of the States excepting Bombay made any attempt to
bring the law in India in line with that obtaining in England after the Gaming Act, 1892. The
Contract Act was passed in the year 1872. At the time of the passing of the Contract Act,
there was a Central Act, Act 21 of 1848, principally based on the English Gaming Act, 1845.
There was also the Bombay Wagers (Amendment) Act, 1865, amending the former Act in
terms analogous to those later enacted by the Gaming Act, 1892. Though the Contract Act
repealed the Act 21 of 1848, it did not incorporate in it the provisions similar to those of the
Bombay Act; nor was any amendment made subsequent to the passing of the English Gaming
Act, 1892. The legislature must be deemed to have had the knowledge of the state of law in
England, and, therefore, we may assume that it did not think fit to make wagers illegal or to
hit at collateral contracts. The policy of law in India has therefore been to sustain the legality
of wagers.
26. The history of the law of gambling in India would also show that though gaming in
certain respects was controlled, it has never been absolutely prohibited. The Gambling Acts
do not prohibit gaming in its entirety, but aim at suppressing gaming in private houses when
carried on for profit or gain of the owner or occupier thereof and also gaming in public.
Gaming without contravening the provisions of the said Acts is legal. Wherever the State
intended to declare a particular form of gaming illegal, it made an express statute to that
effect: See Section 29-A of the Indian Penal Code. In other respects, gaming and wagering are

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95

allowed in India. It is also common knowledge that horse races are allowed throughout India
and the State also derives revenue therefrom.
28. To summarize: The common law of England and that of India have never struck
down contracts of wager on the ground of public policy; indeed they have always been held to
be not illegal notwithstanding the fact that the statute declared them void. Even after the
contracts of wager were declared to be void in England, collateral contracts were enforced till
the passing of the Gaming Act of 1892, and in India, except in the State of Bombay, they have
been enforced even after the passing of the Act 21 of 1848, which was substituted by Section
30 of the Contract Act. The moral prohibitions in Hindu Law texts against gambling were not
only not legally enforced but were allowed to fall into desuetude. In practice, though
gambling is controlled in specific matters, it has not been declared illegal and there is no law
declaring wagering illegal. Indeed, some of the gambling practices are a perennial source of
income to the State. In the circumstances it is not possible to hold that there is any definite
head or principle of public policy evolved by Courts or laid down by precedents which would
directly apply to wagering contracts. Even if it is permissible for Courts to evolve a new head
of public policy under extraordinary circumstances giving rise to incontestable harm to the
society, we cannot say that wager is one of such instances of exceptional gravity, for it has
been recognized for centuries and has been tolerated by the public and the state alike. If it is
has any such tendency, it is for the legislature to make a law prohibiting such contracts and
declaring them illegal and not for this Court to resort to judicial legislation.
29. Re. Point 3 - Immorality: The argument under this head is rather broadly stated by
the learned Counsel for the appellant. The learned Counsel attempts to draw an analogy from
the Hindu Law relating to the doctrine of pious obligation of sons to discharge their fathers
debts and contends that what the Hindu Law considers to be immoral in that context may
appropriately be applied to a case under Section 23 of the Contract Act. Neither any authority
is cited nor any legal basis is suggested for importing the doctrine of Hindu Law into the
domain of contracts. Section 23 of the Contract Act is inspired by the common law of
England and it would be more useful to refer to the English Law than to the Hindu Law texts
dealing with a different matter. Anson in his Law of Contracts states at p. 222 thus:
The only aspect of immorality with which Courts of Law have dealt is sexual immorality ....
Halsbury in his Laws of England, 3rd Edn., Vol. 8, makes a similar statement, at p.138:
A contract which is made upon an immoral consideration or for an immoral purpose
is unenforceable, and there is no distinction in this respect between immoral and illegal
contracts. The immorality here alluded to is sexual immorality.
In the Law of Contract by Cheshire and Pifoot, 3rd Edn., it is stated at p. 279;
Although Lord Mansfield laid it down that a contract contra bonos mores is illegal,
the law in this connection gives no extended meaning to morality, but concerns itself only
with what is sexually reprehensible.
In the book on the Indian Contract Act by Pollock and Mulla it is stated at p. 157:
The epithet immoral points, in legal usage, to conduct or purposes which the State,
though disapproving them, is unable, or not advised, to visit with direct punishment.

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The learned authors confined its operation to acts which are considered to be immoral
according to the standards of immorality approved by Courts. The case law both in England
and India confines the operation of the doctrine to sexual immorality. To cite only some
instances: settlements in consideration of concubinage, contracts of sale or hire of things to be
used in a brothel or by a prostitute for purposes incidental to her profession, agreements to
pay money for future illicit cohabitation, promises in regard to marriage for consideration, or
contracts facilitating divorce are all held to be void on the ground that the object is immoral.
30. The word immoral is a very comprehensive word. Ordinarily it takes in every
aspect of personal conduct deviating from the standard norms of life. It may also be said that
what is repugnant to good conscience is immoral. Its varying content depends upon time,
place and the stage of civilization of a particular society. In short, no universal standard can
be laid down and any law based on such fluid concept defeats its own purpose. The provisions
of Section 23 of the Contract Act indicate the legislative intention to give it a restricted
meaning. Its juxtaposition with an equally illusive concept, public policy, indicates that it is
used in a restricted sense; otherwise there would be overlapping of the two concepts. In its
wide sense what is immoral may be against public policy, for public policy covers political,
social and economic ground of objection. Decided cases and authoritative text-book writers,
therefore, confined it, with every justification, only to sexual immorality. The other limitation
imposed on the word by the statute, namely, courts consider immoral, brings out the idea
that it is also a branch of the common law like the doctrine of public policy, and, therefore,
should be confined to the principles recognized and settled by Courts. Precedents confine the
said concept only to sexual immorality and no case has been brought to our notice where it
has been applied to any head other than sexual immorality. In the circumstances, we cannot
evolve a new head so as to bring in wagers within its fold.
31. Lastly it is contended by the learned Counsel for the appellant that wager is extracommercium and therefore there cannot be in law partnership for wager within the meaning
of Section 4 of the Partnership Act; for partnership under that section is relationship between
persons who have agreed to share the profits of a business.
32. For the foregoing reasons we must hold that the suit partnership was not unlawful
within the meaning of Section 23 of the Indian Contract Act.
33. In the result, the appeal fails and is dismissed with costs.
*****

Kamal Pushp Enterprises v. D.R. Construction Co.

RELATIONS OF PARTNERS TO ONE ANOTHER


Chennuru Gavararaju Chetty v. Chennuru Sitaramamurthy Chetty
1959 Supp (1) SCR 73
[Partnership property]

The contesting parties used to carry on the business of salt manufacture in accordance
with the rules laid down by the Government under the Madras Salt Act, 1889(the Act). It
was not permissible to manufacture salt otherwise than under the provisions of the Act.
The land and the factory where salt used to be manufactured by the parties, were
government property. The first plaintiff, the father of Plaintiffs 2 to 4, Plaintiff 5, the first
defendant and the deceased father of Defendants 2 to 7, had made bids for the lease of the
land and the factory, and the highest bid of the defendants aforesaid, was accepted; and a
lease for 17 years from January 1926, to December 1942, was granted by the Government
in favour of the first defendant and the father of Defendants 2 to 7. By a deed of
partnership dated March 18, 1926, the first plaintiff with a two-anna share, the father of
plaintiffs 2, to 4, having a similar share, and Plaintiff 5 with another two-anna share, on
the one hand, and the first defendant, having a five-anna share and the father of
Defendants 2 to 7, with the remaining five-anna share, entered into a partnership for
running the salt factory. They contributed a sum of Rs 30,000 for paying the premium for
the lease and for other incidental expenses in running the factory, in proportion to the
shares just indicated. The father of Defendants 2 to 7, who had a five-anna share in the
business, died in August 1935, and the Defendants 2 to 7 were admitted as partners in
place of their father. In accordance with the rules of the salt department, the requisite
licence for the manufacture of salt, was granted to the first defendant and the father of the
Defendants 2 to 7, in whose name, the lease also stood. In or about the year 1939,
differences arose between the parties, but the business continued to be carried on by the
Defendants 1 to 7. In August 1941, in accordance with the changed policy of the
Government, which substituted the practice of settling salt leases by renewal of the lease
in favour of those leaseholders whose conduct had been satisfactory in the opinion of the
Department, for the old practice of settling salt leases to highest bidders, the Collector
enquired from the old leaseholders whose record had been satisfactory from the point of
view of the Salt Department, whether they would take renewal for a period of 25 years.
The appellant as also the other defendants aforesaid, their conduct having been
satisfactory, were amongst those lessees who had been invited to make applications for
the renewal of their leases. Accordingly, they made their application in July, 1942, and a
fresh lease for 25 years, was granted to them on April 15, 1943, for the period January
1943 to December 1967. As the term of the previous lease and of the licence to
manufacture and sell salt - which was the partnership business - was to expire at the end
of December, 1942, one of the contesting defendants, served a notice upon one of the
plaintiffs to the effect that as the partnership was expiring at the end of the month, the
partners should settle their accounts, and make arrangements for the disposal of the
unsold stock of 82102 maunds of salt. The reply to the notice was given on December 28,
1942, through an advocate, alleging inter alia that the application for the renewal of the

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lease for a period of 25 years, had been made on behalf and with the consent of all the
partners, and that, thus, the partnership business was agreed to be continued even after
the expiry of the term of the previous partnership. The answer further attributed fraud and
evil intention to the other party. The answer also called upon the defendants to pay a
penalty of Rs 2500 per head, and to hand over the entire partnership lease property to the
plaintiffs party. Thus, the exchange of the notices aforesaid, was a prelude to the
institution of the suit on January 5, 1943, that is to say, even before the fresh lease had
been executed by the Government in favour of the contesting Defendants 1 to 7.
The suit was instituted on the footing that the original partnership continued even
after December 1942, inasmuch as the fresh lease had been obtained in pursuance of a
unanimous resolution of all the partners to obtain the new lease for the partnership
business. But an alternative case also was sought to be made out that even if the
partnership did not continue after December, 1942, as a result of the acts of the
defendants, the benefit of the fresh lease for 25 years, should be treated as an asset of the
dissolved partnership business, and should be taken into account in the process of
dissolution of the partnership. The plaint contained a large number of reliefs to which, the
plaintiffs claimed, they were entitled, for example, a declaration that the partnership was
continuing, and that the Defendants 1 to 7 had forfeited their rights in the partnership as a
result of their fraudulent acts, an injunction restraining Defendants 1 to 7 from carrying
on the salt works independently of the partnership and on their own account, and the
declaration that the renewal of the lease in the name of the Defendants 1 to 7, for a
further period of 25 years, was for the benefit of the partnership. But at the trial, the
plaintiffs, perhaps, realizing the weakness of their position, elected to put in a
memorandum in the trial court on February 8, 1946, confining their prayers to reliefs on
the basis of a dissolved partnership, and giving up other reliefs, which they claimed on
the footing of the partnership still continuing. Thus, at the trial, the reliefs claimed were
confined to taking accounts between the parties of the dissolved partnership, and treating
the fresh lease for 25 years, as part of the assets of the dissolved firm. It is, therefore, not
necessary to refer to the defendants written statement, except with reference to the
plaintiffs claim to have the renewed lease for 25 years treated as an asset of the dissolved
partnership. The contesting Defendants 1 to 7 stoutly denied that the plaintiffs claim in
respect of the fresh lease for 25 years, was wellfounded. They asserted that they only
were entitled to run the business on the fresh lease and licence meant only for their
benefit and not for the benefit of the dissolved partnership.
The trial court passed a preliminary decree, declaring that the partnership stood
dissolved on December 31, 1942, and for taking accounts. As regards the benefit of the
renewed lease for 25 years, the trial court negatived the plaintiffs claim that the
dissolved partnership carried any firm or trade name, which could be said to have any
tangible goodwill, and that the defendants could not be restrained from carrying on the
business in their own names as they had been doing in the past. After expressing a doubt
as to whether there was any goodwill of a particular firm name, the court directed that
the Commissioner is authorized to sell the goodwill of the old firm for what it is worth
by way of realization of the assets of the dissolved firm as amongst the partners. In
effect, therefore, the trial court decided that the plaintiffs were not entitled to the benefit
of the new lease.

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On appeal to the High Court, the learned Chief Justice, delivering the
judgment of the Division Bench, came to the conclusion that the plaintiffs case
that the fresh lease had been obtained as a result of the resolution of the partners
to carry on the business after the lapse of the specific period of the partnership
which came to an end in December 1942, had not been made out. But on the
alternative plea of the plaintiffs, the Court, after an elaborate discussion of
English and Indian law on the subject, held that the plaintiffs were entitled to
treat the new lease as an asset of the dissolved partnership. The High Court
allowed the appeal.

B.P. SINHA, J. - The only question for determination in this appeal by the first defendant,
on a certificate granted by the High Court of Madras, is whether the renewal of a lease for
running a salt factory, granted by the Government in favour of the appellant and others
(Defendants 1 to 7), could be treated as an asset of the dissolved partnership between the
contesting parties. The trial court decided this question in favour of the contesting defendants.
On appeal by the plaintiffs and some defendants on the side of the plaintiffs, the High Court
of Madras determined this controversy in favour of those appellants. Hence, this appeal by the
first defendant whose interest is identical with that of Defendants 2 to 7. The reference in this
judgment to appellant will, thus, include the interest of the other non-appealing defendants
also.
6. In support of this appeal, the learned counsel for the appellant, has contended that the
High Court has misdirected itself in construing the provisions of the Indian Trust Act, in
holding that a constructive trust had been made out in favour of the plaintiffs; that there is no
absolute rule that the renewal of a lease which was the subject-matter of a partnership, must
always enure to the benefit of the old partners; and that the essential ingredients of Section 88
of the Trust Act, had not been made out in this case. He also contended that the lease by itself,
did not create a right to manufacture salt and to sell it, and that a licence is a necessary
prerequisite to carry on the business of manufacture and sale of salt in accordance with the
rules of the Department, and that it is open to the Department not to recognize any partners in
the business. In this case, it was further contended, the licence to sell salt had been granted
only in 1945. Under the English law, there may be a presumption that the renewal of a lease
which formed the subject-matter of a partnership, will enure for the benefit of the partners,
but he contended that in the circumstances of this case, such a presumption could not arise,
and even if it did, it was rebutted by the following facts: The term of the original partnership
was a fixed one, terminating with the term of the lease and of the licence to manufacture salt,
which came to an end with the year 1942; the partnership-deed did not contemplate that this
business would be extended beyond the fixed term in the event of a fresh lease being obtained
from the Government. It was highly significant that the term of the partnership to carry on the
salt business was deliberately fixed as conterminous with the terms of the lease and the
licence. The plaintiffs never took any steps to obtain a renewal of the lease, nor was there
any evidence that they asked the defendants to take a renewal for the benefit of all the
partners. On the other hand, when the defendants applied on their own behalf for a fresh lease
for 25 years, the plaintiffs put in a petition of protest, and prayed to the Government for being
included in the category of lessees in the lease to be granted for 25 years, as co-lessees, but

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without any success. There is no allegation in the plaint of any attempt at concealment on the
part of the appellants to the effect that they were taking the lease for their own benefit. Nor
was there any evidence that the defendants had taken any advantage of their position as
partners, or had utilized any funds of the partnership for obtaining the fresh lease. Lastly, it
was contended that differences having cropped up between the parties during the years 1939
to 1942, it could not be said that the plaintiffs placed such a confidence in the defendants as to
place them in the position of constructive trustees within the meaning of Section 88 of the
Trust Act.
7. On the other hand, it was contended on behalf of the respondents that the fresh lease for
25 years, was granted to the appellants as a result of the changed policy of the Government,
by which they substituted the renewal to approved parties in place of the old practice of
settling the terms of the lease by open competition and by holding auction-sales. The
contesting defendants obtained the lease in their names because they were entered in the
government records as the original lessees, and as the original lease was admittedly for the
benefit of all the partners, the new lease also must be treated as being founded on the old
lease. It was also contended that Section 88 of the Trust Act, was not exhaustive, and that
even if the present case did not come strictly within the terms of that section, the rule of
English law relating to constructive trusts, applied to the case, and that therefore, the High
Court was quite justified in coming to the conclusion that the lessees were in the position of
trustees when they obtained the renewed lease. The plaintiffs failed in their attempt to be
included in the category of joint-lessees along with those defendants because of the changed
policy and the rules of the Department. Hence, the plaintiffs were in a position of
disadvantage as compared to the defendants in whose name, the original lease and the licence
stood. In view of those facts, it was further contended, the plaintiffs could not either get the
lease independently for themselves, or succeed in getting their names included in the category
of joint-lessees. Lastly, it was contended that in the circumstances of the present case, the
presumption of law that the defendants were constructive trustees, had not been rebutted.
8. Before dealing with the arguments advanced on behalf of the parties, it is convenient to
set out, in brief outline, the system of working salt factories under the Act (Madras 4 of
1889), which was enacted to consolidate and amend the law relating to the Salt Revenue in
the Presidency. Under the Act, a salt factory includes any place used or intended to be
used for the manufacture of salt or for the storage or keeping of the same, as defined from
time to time by the Collector of Salt Revenue . Licensee, under the Act, means a person to
whom a licence to manufacture salt or saltpetre, is issued, and includes any person registered
as the transferee of such licence under the provisions of the Act. Under Section 8, only
licensees or public servants under the Central Government, are authorized to manufacture salt.
Section 9 of the Act, authorizes the Collector of Salt Revenue to grant licences for the
manufacture of salt in respect of specified salt works, containing such particulars and
conditions as the Central Government may prescribe from time to time. Such a licence may be
for the manufacture of salt for sale to the Central Government or for general sale; and may be
transferred or relinquished in accordance with the prescribed rules. Section 12 lays down that
a licensee shall be taken to be the owner of the licence and of the salt works specified therein.
It is open to the Central Board of Revenue to establish a new salt factory, and, subject to the

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payment of compensation, to close any salt factory or a portion thereof, and thus, cancel or
amend the licence. A provision has also been made by Section 17 for the grant of a temporary
licence for the manufacture of salt in certain contingencies. Section 25 authorizes the
Collector of Salt Revenue to impose upon a licensee a fine according to the prescribed scale,
or to suspend a licence or even to cancel a licence for want of due diligence or default by a
licensee. Section 43 contains a prohibition against the removal of salt from a salt factory
otherwise than on account of the Central Government or for transport to a place of storage
authorized by the Collector of Salt Revenue , except under a permit and upon payment of duty
at the fixed rate. The Central Government is authorized to make rules generally for carrying
out the provisions of the Act, and specially for regulating certain matters set out in Section85.
Such rules, on publication in the Official Gazette, have the force of law, and have to be read
as part of the Act. It is common ground that elaborate rules have been laid down by the
Government, for regulating the manufacture and sale of salt, so as to safeguard public revenue
and to prevent the manufacture of contraband salt. It is, thus, clear that the business of
manufacture of salt, which the parties to the agreement of partnership carried on, was not an
ordinary occupation, which is free from such strict rules and regulations as have been laid
down by and under the Act. The licensee owes a special responsibility to the Government,
and therefore, the transfer or relinquishment of licences under the Act, has to be regulated
according to the rules laid down by the Government. It is true that there is no absolute
prohibition against such transfer or relinquishment, but the Government through its public
officers, has the determining voice in such matters.
9. It is in the background of the law laid down by or under the Act that we have to discuss
the rights and liabilities of the parties in respect of the renewed lease. The first lease is an
indenture between the Secretary of State for India in Council as the lessor, and the first
defendant and the father of Defendants 2 to 7, as the lessees. The consideration for the lease is
the sum of Rs 25,000. The lease is for a period of 17 years from January 1, 1926, subject to
either party having the right to determine the lease by a notice in writing at the close of the
salt manufacturing season. It provides that on the expiry of the lease or its sooner
determination as aforesaid by notice on either side, the lessees shall leave the demised
premises which had been leased out exclusively for the manufacture, storage and sale of salt
and for the works connected therewith, without any right to erect any dwelling houses etc. It
also provides that the lessees shall be granted a modified excise licence. It also contains the
condition that the lessees shall not, except with the written consent of the lessor, first had and
obtained, assign, underlet, or part with the possession of the leased land or any portion
thereof. The lessees may take a partner or partners, who may be approved by the Collector in
the business. The lease also contains detailed provisions as to how the business of
manufacture has to be carried on under the supervision of the public authorities like the
Collector.
10. The renewed lease dated April 15, 1943, is between His Excellency the GovernorGeneral-in-Council, as the lessor and the contesting defendants as the lessees, for a period of
25 years commencing from January 1, 1943. There is no payment of any premium for the
lease. The other terms and conditions of the lease are similar to the previous one. Though
temporary licences were granted from time to time, it was only on April 17, 1945, that a

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revised permanent licence was granted, and the temporary licence granted for 1945, was
cancelled.
11. The co-partnership deed as it is called, which is dated March 18, 1926, is between
five individuals, and provides that those five persons should enjoy the profit or bear the loss
thereof, according to the shares indicated above; that as the licence in the salt stand in the
names of Chennuru Appala Narasayya Chetty and Guruswamy Chetty out of us, the said
individuals only shall be responsible thereto; and that In case the said Appala Narasayya
Chetty and Guruswamy Chetty or their heirs fail to render proper accounts whenever
demanded according to the aforesaid terms to the remaining three sharers or their heirs during
the salt lease period of seventeen years and commit defaults or any kind of frauds, Appala
Narasayya Chetty Garu and Guruswamy Chetty Garu shall pay by way of penalty to the said
three sharers at the rate of Rs 2500 (two thousand five hundred) per share for the year when
fraud is committed, without having anything to do with the other profits and losses. It is,
thus, clear that the partnership was for the fixed term of 17 years, ending with the period of
the lease, and the parties did not, in terms, contemplate the continuance of the partnership
after the expiry of that period. Their rights and liabilities are entirely with reference to the said
period of 17 years, there being no provision for the continuance of the business by the
partnership after the expiry of the said term.
12. If there had been a specific stipulation in the partnership deed, or even an indication
that the partnership business would continue even after the expiration of the 17 years, which
was the term of the partnership, different considerations may have arisen. It could then have
justly been said that the managing partner owed a duty to the other partners to obtain a
renewal of the previous lease. It is, therefore, not without significance that in para 12 of the
plaint, the plaintiffs specifically alleged that it had been unanimously resolved by the partners
that a renewal of the lease should be obtained for a further period for the benefit of the
partnership, and that as a matter of fact, the renewal was obtained in pursuance of that
resolution and by using the goodwill of the partnership. This specific case has failed in both
the courts below, but the High Court, in disagreement with the trial court, has accepted the
alternative case as made out in para 17 of the plaint, that the renewal of the lease should be
treated as an asset of the partnership in settling the accounts and dividing the assets of the
dissolved partnership. But even in para 17, there is no specific case made out under Section
88 of the Indian Trusts Act (2 of 1882). It is not alleged, in terms, that the contesting
defendants filled a fiduciary character, and were, thus, bound to protect the interests of all the
partners in obtaining the renewal of the lease, or that, in so doing, their interests were adverse
to those of the other partners, and they had, thus, gained a pecuniary advantage to the
detriment of the other partners. Though the plaintiffs had suggested that the contesting
defendants had large funds, amounting to about Rs 90,000 of the partnership, portion of
which had been set apart from payment of premium and for other expenses incidental to the
renewal of the lease, it had been found, and there cannot be the least doubt about it, that no
funds of the partnership had been utilised for obtaining the new lease. As already indicated,
no premium had to be paid for the fresh lease obtained by the contesting defendants.
15. As already indicated, the partnership stood automatically terminated at the end of the
year 1942. The actual grant of the lease in question was made in April 1943, and the

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103

permanent licence to manufacture and sell salt, was granted only in 1945. Hence, strictly
speaking, when the suit was instituted in January 1943, legally, there was no lease in
existence, nor could the business of manufacture and sale of salt be effectively carried on until
the grant of the permanent licence. The plaintiffs could have a cause of action in respect of the
renewed lease if their substantive case of continuing partnership had been established. But
that case having failed, it is a little difficult to appreciate how they could claim any interest in
the renewed lease as an asset of the partnership business. The fiduciary character as between
the partners had ceased on the termination of the original lease and of the partnership
business. On such a termination, there was no interest of the partners, which the contesting
defendants were bound to protect. For the same reasons, the defendants character as partners
had ceased, and they could not, therefore, be said to have availed themselves of their character
as partners in obtaining the fresh lease. For all these reasons, it must be held that the plaintiffs
have failed to bring the case strictly within the terms of Section 88 of the Indian Trusts Act. A
passing reference was made by the learned counsel for the respondents to the terms of Section
90 of the Trusts Act. But it will be noticed that whereas Section 88, quoted above, makes a
specific reference to partners and agents etc. Section 90, in terms, applies to a tenant for life, a
co-owner, a mortgagee, or any other qualified owner of any property. Section 90, therefore, in
terms, could not apply to the case. Even if it did, it does not carry the case any further in
favour of the plaintiff-respondents.
17. On a close examination of the English precedents, it will be found that there is no
absolute rule of law or equity that a renewal of a lease by one partner, must necessarily enure
for the benefit of all the partners. There is a presumption of fact, as distinguished from a
presumption of law, that there is an equity in favour of the renewal of the lease enuring for the
benefit of all the partners. But such a presumption being one of fact, is rebuttable, and must,
therefore, depend upon the facts and circumstances of each case. The Indian legislature has
substantially adopted the English law while enacting the rules laid down in the Indian Trusts
Act. In the instant case, the facts that the parties deliberately chose to fix the term of the
partnership as conterminous with the term of the lease and licence ending with the year 1942;
that they did not, in express terms, or by necessary implication, make any provision for
extending the period of the partnership or for obtaining renewal of the lease and the necessary
licence; that there was no averment or proof of any clandestine acts on the part of the
contesting defendants in the matter of obtaining the renewal of the lease; that the plaintiffs
themselves made attempts, though unsuccessful, to get themselves included in the category of
grantees at the time of the renewal of the lease; that the special nature of the business required
personal efficiency and good conduct on the part of the actual managing agents; that no funds
of the expiring partnership or any goodwill of the partnership was utilized for obtaining the
fresh lease; that the fresh lease and licence were granted to the contesting defendants in
consideration of their personal qualities of good management and good conduct; that the
parties were not on the best of terms during the last few years of the partnership, and finally,
that the lease and the permanent licence were actually granted after the partnership stood
automatically dissolved at the end of 1942, are all facts and circumstances which point to only
one conclusion, namely, that the renewal of the lease was not intended to be for the benefit of

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all the partners. Those facts and circumstances amply rebut any presumption of fact that the
lease should enure to the benefit of all the parties.
18. For the reasons given above, it must be held that the judgment and decree passed by
the High Court, insofar as they reverse those of the trial court, are erroneous, and must be set
aside. The appeal is allowed.
*****

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105

Miles v. Clarke
[1953] 1 All ER 779
[Partnership Property]

HARMAN, J. This is a partnership action in which the issues on the writ, at the hearing of
a motion, and on the pleadings when the matter came to be dealt with in this court were two:
First, was there a partnership at all? Secondly, if there was a partnership, what were the assets
of the partnership? The defendant was advised, and I think obviously rightly advised, that to
contest the issue whether in law there was a partnership was to contest the incontestable, and
that, therefore, at the outset he would be wise to concede that a partnership had existed, and
that a partnership at will had begun on April 1, 1950, and had expired at the issue of the writ
in the action. This advice he rightly took. The expiry of the partnership may conveniently be
taken to have occurred on May 29, 1952. That left to be decided the question: What were the
partnership assets? Though it was pleaded in the defence that none of the assets used in the
business belonged to anyone but the defendant, yet the statement of claim, as it stood, did not
conveniently raise that matter. It seemed to me and to counsel who represented the parties
that the right course to take was to treat the hearing as deciding that a partnership existed and
make an order on that footing, and then order the ordinary partnership accounts with an
addition in a special form in order to raise the matters which remained in controversy between
the parties. Consequently, on Feb. 19, 1953, I made an order declaring that there was a
partnership between the plaintiff and the defendant, and that it began on April 1, 1950, and
was dissolved on May 29, 1952. I ordered, first, the following inquiry:
Any inquiry whether any and if so which of the following items as at April 1, 1950,
formed part of the partnership property or whether any and if so which of them remained
the separate property of the plaintiff or the defendant as the case may be....
and then follows the list: (i) the lease of the property at Shepherds Market where the business
was carried on; (ii) the furniture and fittings in the studio; (iii) and, perhaps, most important,
the equipment of the studio; (iv) the plaintiffs and the defendants photographic negatives
and prints which were brought in by each of them at the outset; (v) the defendants goodwill
or reputation; and (vi) the plaintiffs goodwill or reputation. That order was followed by an
order (in para. 2 and para. 3) for the taking of the usual account and inquiry in a partnership,
in common form. In para. 4 I ordered an inquiry whether either the plaintiff or the defendant
was entitled to be credited in the partnership accounts with any sum on account of any of the
items referred to. I then treated the summons to proceed as having been issued and having
come before the master and the inquiries ordered in para. 1 and para. 4 of the order as having
been adjourned into court. This judgment will be a judgment to assist the master in answering
the inquiry ordered in paras. 1 and 4 when the matter is sent back to him.
The defendant, who was a gentleman of some means, was minded to start a business in
commercial and fashion photography. After looking about for some time, he found the
premises which subsequently became the place of business of the partnership and in June
1948, he entered into a lease whereby the property, which consisted of two squash racquets
courts, dressing-rooms, and so forth, was demised to him for a period of seven years from
midsummer, 1948, at a rent of 400 a year, which was, I am told, an advantageous lease,

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bearing in mind the neighbourhood and the fact that squash racquets courts are easily
adaptable as photographic studios, having a good overhead light. One court was left open as a
large studio, the other was divided by partitions and a floor put in, part of it being used as
dark rooms, part as offices, and part as a smaller studio. There the defendant started to carry
on a photographic art or craft, but he employed persons to carry out the photographic work for
him. At the beginning he made a very considerable loss. In January, 1950, after some earlier
approaches which were ineffective, he applied to the plaintiff to see whether he would come
into business as a partner. The plaintiff has been taking photographs all his life, and he is,
apparently, well-known and has a good connection in this particular work. He was at that
time working for others, using their studio partly for his own purposes and partly on their
behalf, and he was making a very considerable income as what he called a free-lance
photographer. He, it seems, was not very anxious to come in, and during the first month or so
of 1950 he came down occasionally to the defendants studio and took photographs, but from
about the beginning of April he attended there as a full-time occupation and brought with him
his own considerable connection. He took photographs of such subjects and such models as
the defendant on his side should provide. The upshot of it was a very successful business.
The plaintiffs faithful clients followed him, and brought their work to him. The business is
now in the hands of a receiver, after the partnership quarrel, in a flourishing condition.
These two people, having, as it were, thrown in their lot together in this way, were too
busy to think about the terms on which they should carry on business. They agreed that the
profits, if there should be any, should be shared equally, and I take it the losses also, though,
of course, they did not contemplate losses, and they did not have to face any. There also
appears to have been an agreement reached that the plaintiff should draw 125 a month on
account of his share of the profits, but that arrangement did not always continue, because the
plaintiff appears to be a rather improvident person who is almost incapable of managing his
own life. The only two matters that were agreed were that there should be an equal sharing of
the profits and that the plaintiff should have these monthly drawings on account. They both
contemplated a regular legal connection, and the plaintiff employed as his solicitors Messrs.
Blacket Gill & Topham, who, as early as January 1950, can be found writing to the defendant
setting out what the plaintiff understood. At that time the plaintiff, by the advice, no doubt, of
his solicitors, contemplated that there would be a limited company and not a partnership to
carry on the business. Whether the matter was carried on in one guise or the other really
made no difference in substance to the parties. Miss Blacket Gill, the senior partner in that
firm of solicitors, who conducted all the negotiations on the part of the plaintiff, wrote on
January 31, 1950, in these terms:
We understand from (the plaintiff) that you and he are desirous of forming a limited
company to carry on business as photographers. The business will be carried on at 5,
Shepherd Street and the assets of the company will consist of Mr. Miless goodwill, your
goodwill and a lease and you will each hold shares in accordance with the value of the
assets you put into the company. We understand that very little detail has been arranged
between you except that you both agree that you wish to proceed on these lines.
The defendant employed an accountant who treated as an item on the debit side of the
business a bank overdraft of 1,000 or so, which was, in fact, the defendants private bank

Kamal Pushp Enterprises v. D.R. Construction Co.

107

overdraft which neither party had contemplated for one moment as being a liability of the
business. As the so-called accounts start from that monstrous unreality, it seems to me
impossible to place any reliance on what should be put on the other side. On the other side, in
fact, certain assets, including the lease and the stock-in-trade, are set down as assets of the
business, but when one knows that the chief liability shown is not a business liability I do not
think one is entitled to assume that that which appears as an asset is in truth an asset of the
business. It is obvious that these parties and their advisers, so far as they thought about it at
all, always contemplated that the lease, the equipment and the studio furniture, and the stockin-trade and so forth should all be brought into the common pool, but the fact is that nothing
was ever finally agreed about it, and they just drifted on.
On what terms were these people partners? The only answer one can give is that they
were partners on the terms that they shared the profits between them. What more? It is said,
and I think rightly, that, even though there was no further agreement, one must assume that
the stock-in-trade, such as stocks of film, was put into the pool and cannot be taken out again,
but must become part of the partnership assets. That is not denied. There remain, however,
more important items. The first is the lease and the second is the plaint which may be worth
2,000. It is said with force by counsel for the plaintiff that those two classes of assets were
put forward throughout as being brought in as part of the assets of the intended association,
and, the plaintiff having come into the business on that footing, it would be inequitable now
to deny him a right to share in those assets. It is said on the other side that it is not necessary
to assume any further agreement between the parties, but one need only say that everything
that belonged to one of them at the beginning of the partnership still belonged to that one at
the end, and that the law will not make any imaginary agreement between the parties, it being
ascertained as a fact that there was no agreement. In my judgment, no more agreement
between the parties should be supposed than is absolutely necessary to give business efficacy
to that which has happened, and that, I think, is the only safe way to proceed.
It is absolutely necessary to assume that things quae ipso usu consumuntur, the stock-intrade, must be treated as having been brought into the partnership and their value must be
ascertained by inquiry. They were all brought in by the defendant. I do not see the necessity
of assuming that anything else went into the partnership. It seems to me that, as the parties
failed to agree, it is not for me to say that the defendant must be assumed to have thrown the
lease and the plant into the pool. The partnership could get on quite well if he gave his
partner a licence to go on the leasehold property for the purposes of the business and to use
the cameras to make the joint profile. Therefore, in my judgment, nothing changed hands
except those things which were actually used and used up in the course of the carrying on of
the business. The stock of negatives which each of these partners brought in was for the use
of the business so long as it was going on. As I understand there is no great difficulty in
separating them again now, and, indeed, being ex necessitate negatives or photographs taken
before 1950, so far as they are fashion negative I cannot think that, except historically, they
have any great value. However, if desired, the parties can each take away their negatives. Of
course, the stock of negatives of photographs taken during the course of the partnership must
be a partnership asset. Everything that changed its existence during the currency of the
partnership must be.

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It was said that, apart from those matters, each party brought in a connection, and that the
plaintiff brought in something of value in the shape of his good will or connection which must
in some way be quantified or valued and treated as an asset of his. Some such scheme was,
undoubtedly, envisaged, but it was never agreed on, and it seems to me it would be idle to
suggest that, as the parties had not agreed anything of that sort, it ought to be treated as having
happened. The plaintiff came there because, having the connection he did, if he had the
studio and the equipment to his hand, he could make a good profit and presumably it would
be worth his while to take half that profit in return for the benefit of the use of the studio and
the equipment. I see no reason to suppose that, though his connection and skill were very
useful to make profits, one ought to treat them in some way as capital assets. Therefore,
neither his connection, nor the defendants connection, if it was of any value (which I doubt),
should be treated in any way as being a partnership asset.
The only partnership assets remaining are, I think, the studio name, or the goodwill, such
a it is, which has been attaching to it (and should have thought that was probably little), and
the photographs in so far as they accumulated during the two years when the partnership was
subsisting. Now that the parties have separated, the plaintiff will take away his own
connection, no doubt, and his own clients, just as he brought them, and the defendant will
presumably keep his own. It may be that it will be to his advantage that he will be able to
keep the leasehold premises, but, as they were his before and he did not agree to assign them
or to sub-let them, that is the inevitable result of the failure of the parties to make a more
reasonable bargain.
Therefore, I propose to answer the inquiries by declaring that the lease, furniture and
fittings, and the equipment of the studio did not form part of the partnership property, but
remained the separate property of the defendant; that the plaintiffs and defendants
photographic negatives and prints brought into the business on April 1, 1950, remain the
property of the person bringing them in; and, further, that neither the defendants nor the
plaintiffs goodwill or reputation form part of or should be treated as assets of the partnership.
I will make a general declaration on the contrary that the stock-in-trade and consumable
chattels ought to be treated as partnership property brought in by the defendant, and, in
default of an agreement, I will direct a further inquiry, namely, as to what value ought to be
attributed to those things in taking the partnership account. Lastly, it is suggested that, if the
property remains that of the defendant, it is not right, in taking the accounts, to treat any
depreciation as a charge against the profits, which would mean that the plaintiff would pay
half of it. In my judgment, that is right. It would not be right to assume that the defendant
leased or licensed either the leasehold property or the plant in the partnership at any price at
all, because he did not, and, therefore, in my judgment, the result of no agreement works in
the plaintiffs favour, and is that he does not have to contribute to wear and tear on those
assets. That being so, in taking the accounts no sum ought to be charged against profit by
way of depreciation. It is also said that certain partnership profits have been devoted to
making improvements. For all I know that may be true or there may be nothing in it. The
accounts are not sufficient to show. If it turns out that there is nothing in it the parties need
not proceed with that inquiry.

Kamal Pushp Enterprises v. D.R. Construction Co.

109

Arjun Kanoji Tankar v. Santaram Kanoji Tankar


(1969) 3 SCC 555
[Partnership Property]

Santaram (the plaintiff) commenced an action in the City Civil Court at Bombay against his
younger brother Arjun for an order winding up a partnership in respect of a business carried on by
them in the name of Hindmata Printing Press, Bombay and for account of the business. It was
the case of the plaintiff that the business was started by him in 1937 and that the defendanthis
brotherjoined him some time later and assisted him in carrying on the business; that by
agreement, dated March 16, 1953, the defendant was admitted as a partner in the business with
equal share in the profits and losses of the business, but without any interest in the machinery,
goodwill and the premises which were to be utilised for the purpose of partnership; that under the
terms of the partnership the defendant was carrying on the business; and that disputes arose
between the parties and the business could not be carried on and accordingly the plaintiff served a
notice, dated April 19, 1957, terminating the partnership.
The defendant contended that he started business of the Hindmata Printing Press and admitted
the plaintiff as a partner; that the assets of the business and several immovable properties were
acquired with the aid of profits arising from that business; that the business was managed jointly
by the plaintiff and the defendant and that the plaintiff and the defendant had equal share in the
profits, losses and all assets, articles and properties of the business; that by deed, dated March 16,
1953, the terms of the partnership were recorded, and that the account of the profits and goodwill
and assets including the tenancy rights in the premises in which the business was carried on
should be taken.
The High Court agreed with all the findings recorded by the City Civil Court, prima facie, the
finding of the Trial Court on the question whether the parties qua the business of the Hindmata
Printing Press stood in the relation of partners with equal shares in the profits and losses, was a
finding on a question of fact and the decision of the Trial Court confirmed by the High Court.

J.C. SHAH, J. - 6. Counsel for the defendant, however, contended that the learned Judges
had failed to give due effect to certain important circumstances, and on that account the
judgment of the High Court was open to challenge. Counsel said that there was clear and
reliable evidence to show that Rs 5,000/- were borrowed by the plaintiff and the defendant
from Wagh and the amount was utilised for purchasing machinery which was set up in the
branch of the business at R. C. Church Compound. This conduct of the plaintiff according to
counsel established that even before 1953 the plaintiff and the defendant were partners in the
business. Wagh, the creditor has stated that the plaintiff had told him at that time that the loan
was borrowed to purchase a cylinder machine. The Trial Court did not believe the testimony
of Wagh in view of various circumstances. The Court pointed out that the recital in the
promissory note was that the loan was for personal needs, and that according to plaintiff the
cost of cylinder machine is Rs 13,000/- and the amount of Rs 5,000/- could not be sufficient
to meet the cost of the machine.
7. Reliance was placed by the defendant upon certain entries in a rough-cash book of
the firm which was tendered in evidence by the defendant. In that book there were two entries
- (1) for Rs 5,000/- borrowed from Wagh and (2) for Rs 2,000/- debited to B. J. Contractor.

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The learned Trial Judge was of the view that the entries produced were unreliable and were
apparently fabricated with a view to support the case of the defendant. There were several
entries in the rough cash-book dated, June 11, 1948, and before the last credit entry and
before the last two debit entries there were certain figures which indicated that the previous
entries had been totalled up before the two entries were posted. All these credit entries were in
the handwriting of the plaintiff, but the last two entries of Rs 5,000/- and Rs 2,000/- were in
the handwriting of Nadkarni, Accountant in the firm. In the view of the learned Judge these
entries were of a doubtful character, because it appeared that the previous entries on the
same page, in the handwriting of the plaintiff, were crossed out, though according to Nadkarni
whenever rough entries were posted in the fair cash-book cross-marks were placed on the
entries in the rough cash-book. That clearly indicated that the disputed entries were not posted
in the fair cash-book and no explanation for the failure to post them in the fair cash-book was
given. The plaintiff stated that the fair cash-books relating to the business prior to the year
1953 were left by him at the Press when the defendant took charge of the business. This part
of the case was not challenged by the defendant. But the books of account were not produced
by the defendant. The defendant, it is common ground, was entrusted with the management of
the business under the deed of partnership and when the disputes arose between the parties he
had custody of all the books of account and he had withheld those books of account from the
Court.
8. Counsel for the defendant contended that the amount of Rs 5,000/- borrowed under the
promissory note dated, February 17, 1948, from Wagh was treated as debt due by the
partnership after the year 1953 and was paid out of the profits of the business, but there is no
reliable evidence in support of that case. It is common ground that the loan of Rs 5,000/borrowed from Wagh has been repaid, but there is no evidence about the source from which it
was repaid. On the evidence no link is established between the amount invested for setting up
a Branch of the business at R. C. Church Compound and the amount borrowed from Wagh. A
detailed argument was advanced before the Trial Court with regard to the borrowing
ofRs.5,000/- from Wagh under the promissory note, dated February 17, 1948, for utilising the
sum for purchasing a cylinder machine, but no argument was apparently advanced before the
High Court in that behalf. The judgment of the High Court exhaustively refers to the
arguments advanced before that Court, there is no reference to the argument that the finding
of the Trial Court that the amount of Rs 5,000/- was borrowed not for the purpose of the
business but for the purpose of the defendant was not sustainable.
9. It was also urged that the Courts below had ignored the admission of the plaintiff that
the defendant was managing the partnership business. There is, in our judgment, no substance
in this contention either. After 1949 the defendant was apparently taking an active interest in
the management of the business and under the deed of partnership, dated March 16, 1953, he
was given the sole management of the partnership business. Disputes had started between the
plaintiff and the defendant and there were negotiations between them for settlement. It
appears that certain close relatives of the parties also lent their good offices in the
negotiations, but nothing concrete resulted. There is no warrant for the contention that the
Courts below ignored the so-called admission of the plaintiff that the defendant was taking an
active part in the management of the affairs of the business for some time before 1953. It

Kamal Pushp Enterprises v. D.R. Construction Co.

111

cannot be said, merely because of the plaintiffs willingness to negotiate, that the defendant
was admitted as a partner in the business since the year 1937.
10. Reliance was also placed upon certain recitals in the deed of partnership. In the
preamble, in so far as it is material, after setting out the names of the two contracting parties,
it is recited:
WHEREAS from about the 14th day of December, 1937, down till today the said
Shantaram Kanoji Tankar were carrying on the business in the name, style and firm of
Hindmata Printing Press situate at Mistry Building, Jorbai Wadia Road, Parel,
Bombay-12, as the sole proprietors thereof AND WHEREAS the parties hereto have
been carrying on the said business in the name, style and firm of Hindmata Printing Press
on certain terms and conditions mutually agreed upon by and between them but no
written record thereof having been made .
The use of the words were carrying on the business and sole proprietors is relied upon by
counsel for the defendant. But, in our judgment, the use of these expressions does not justify
an inference that by some inadvertence the name of the defendant was omitted from the
recitals in the preamble. Reliance was also placed upon Paragraphs 3, 8, 12, 15 and 17 of the
deed of partnership. But, there is nothing in the recitals in those paragraphs which supports
the case of the defendant that he was a partner in the business before March 16, 1953.
Paragraph 3 only recites that the defendant was put in sole charge and management of the
business; Paragraph 8 recites that out of net profits from the business a fourth share shall be
set apart for the improvement of the press and repayment of the debts of the business and the
remaining profit shall be equally shared by the partners. Paragraph 12 authorises the
managing partner to operate all accounts and withdraw from the Banks such amounts as he
shall need for the conduct and management of the business and by Paragraph 15 certain
publications brought out in the name and style of Hindmata Prakashan up to December 31,
1952, shall be owned by the partnership. Paragraph 17 incorporates an arbitration clause
under which all disputes and differences and questions whatsoever were to be referred to
arbitration. But none of these clauses assist the defendant in upsetting the inference arising
from the overwhelming evidence led by the plaintiff, on which reliance has been placed by
the Trial Court and the High Court, that the defendant had no right of ownership in the
business prior to 1953.
11. It was the case of the plaintiff that the defendant worked with him only on condition
that he and his wife and children were maintained by the plaintiff was highly improbable.
Whether the plaintiff had created any expectations in the mind of the defendant that he would
be given some remuneration is wholly irrelevant in determining whether the plaintiff had
agreed to treat the business. The defendants claim that he was the partner prior to the year
1953 must fail.
12. We are unable to agree that the defendant did not object to the plaintiff alone
representing the business when he obtained leases of the premises in which the business was
carried on, in opening the Bank accounts, purchasing properties in his name, in proceedings
for assessment of income-tax, obtaining fire insurance policies, maintaining the muster rolls
of employees and making the declaration under Section 4 of the Press Act, because the
plaintiff was the elder brother and the defendant out of respect allowed him to pose as the

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Kamal Pushp Enterprises v. D.R. Construction Co.

owner of the business, even though he had an equal right. These circumstances and others are
formidable evidence of conduct in favour of the plaintiff, and there is not a single
circumstance in favour of the defendants case which may throw doubt on the truth of the
plaintiffs story. We are accordingly of the view that the Courts below were right in holding
that the business of the Hindmata Printing Press since the commencement in the year 1937
was the exclusive business of the plaintiff till he admitted the defendant as a partner in the
year 1953. It must inevitably follow that all the assets of the business belonged to the plaintiff
and the defendant had no interest therein.
13. Counsel for the defendant contends that in any event by virtue of Section 14 of the
Partnership Act, 1932, all the assets with aid of which the business was carried on by the
plaintiff must be deemed in law to have become partnership assets, under the deed of
partnership, dated March 16, 1953.
In Lindley on Partnership, 12th Edn., it is stated at p. 365:
Again, it by no means follows that property used by all the partners for partnership
purposes is partnership property. For example, the house and land in and upon which the
partnership business is carried on often belongs to one of the partners only, either subject
to lease to the firm, or without any lease at all. x x If, however, a partner brings such
property into the common stock as part of his capital it becomes partnership property, and
any increase in its value will belong to the firm. (T)he only true method of determining as
between the partners themselves what belongs to the firm, and what not, is to ascertain
what agreement has been come to upon the subject. But this is by no means always an
easy matter.
We are unable to agree with counsel for the defendant that whenever there is a partnership
and the assets which originally belonged to one of the partners are used for the purposes of
the partnership, they must be presumed to have become partnership assets. In Miles v. Clarke
[(1953) 1 All ER 779], the defendant started the business of a photographer and then admitted
the plaintiff - a successful free lance photographer - as a partner. The leasehold premises,
furniture and studio equipment belonged to the defendant. It was intended to record the
terms of partnership into a formal agreement, but no terms were ever settled, except that the
partners were to share the profits equally. On dissolution of the partnership it was held that no
terms ought to be implied except such as were essential to business efficacy and that only the
consumable items of stock-in-trade were to be regarded as assets of the partnership, and the
lease of the property, equipment and personal goodwill were to be treated as being the
property of the partners who brought them into the business.
14. There is no evidence in the present case that the plaintiff had, when entering into a
partnership with the defendant, surrendered his individual interest in the assets brought by
him into business, or had admitted that the defendant was to be the owner in equal share with
him in all the assets brought into the partnership. The right of the defendant to a share in the
assets brought into the business depended upon the terms of the agreement of partnership.
There is no rule that whatever is brought by a partner in the partnership and is continued to be
used by the members is presumed to have become the property of the partnership.
15. The appeal therefore fails and is dismissed with costs.

Kamal Pushp Enterprises v. D.R. Construction Co.

113

Arm Group Enterprises Ltd. v. Waldorf Restaurant


(2003) 6 SCC 423
[Partnership Property]

D.M. DHARMADHIKARI, J. The appellants (the landlord) have acquired from the
original owner title to Building No. 2 of which ground floor, area 2537 sq. ft in Park Street,
Calcutta are the leased premised in dispute between the parties before us. The previous owner
of the premises obtained a compromise decree of eviction on 27-4-1955 against Allenberry &
Company Ltd. (Respondent 3) which was the tenant in the leased premises. Presently in the
said premises, a well-known restaurant in the trade name of Waldorf Restaurant is being
run by registered partnership firm of that name (Respondent 1 herein and hereinafter shortly
referred to as the firm).
2. Under the terms of the compromise decree, the tenant Allenberry & Co. (Respondent 3
herein), has vacated the suit premises. The firm in assertion of its claim to the status of subtenant has been successful for the past 45 years in resisting the execution of the decree against
it.
3. The main question involved in these appeals is whether the respondent firm can claim
status of sub-tenant and seek protection against eviction in execution of the compromise
decree obtained against the tenant, under the provisions of the West Bengal Premises Rent
Control (Temporary Provisions) Act, 1950 (hereinafter shortly referred to as the Act of 1950).
4. The suit premises presently in use for running Waldorf Restaurant originally belonged
to Chitpur Golabari Company Ltd. (Respondent 2 herein). Between the period 1-1-1939 to
31-12-1951 Allenberry & Company (Respondent 3 herein) was a contractual tenant of the
original landlord. On 12-8-1953 Allenberry & Co. (hereinafter shortly referred to as the
tenant) gave a formal notice to the landlord expressing its intention to surrender the tenancy
and vacate the leased premises by 31-8-1953. The service of notice to the landlord for
surrender of the leased premises resulted in law in determination of the lease under Section
106 read with Section 111 of the Transfer of Property Act. This legal position has been
finally settled by the judgment of this Court in the case of Calcutta Credit Corpn. Ltd. v.
Happy Homes (P) Ltd. [AIR 1968 SC 471]. That was a case in respect of another portion of
the same building which was also in occupation of original tenant and was part of the leased
premises which were surrendered by the tenant.
5. Despite the service of formal notice of surrender of tenancy by the tenant, vacant
possession of the suit premises was not handed over to the landlord. The landlord, therefore,
instituted Suit No. 1645 of 1954 on 28-5-1954 for eviction of the tenant. The said suit was
decreed on 27-4-1955 in terms of a compromise under which the tenant vacated the suit
premises and reserved liberty to the landlord to take necessary legal steps for evicting subtenants who had been inducted by the tenant. The three sub-tenants named in the compromise
decree were Chowranghee Sales Bureau Pvt. Ltd., Happy Homes (P) Ltd. and Waldorf
Restaurant (Respondent 1 herein).
6. After obtaining the compromise decree of eviction against the tenant, the landlord
instituted three separate suits for eviction against the above named three sub-tenants.

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Separate decrees of eviction were obtained against the two sub-tenants. This Court in the case
of Happy Homes (P) Ltd. [AIR 1968 SC 471] held that after service of notice of surrender of
tenancy by the tenant, its continuance in the leased premises was only as a statutory tenant
and not as a contractual tenant. This Court held that such statutory tenant had no right to sublet the premises. The sub-tenant could not, therefore, claim the status of direct tenant under
the landlord on the basis of the provisions of Sections 12 and 13 of the Act of 1950.
7. Happy Homes Pvt. Ltd. was also one of the sub-tenants found to have been inducted
after surrender of tenancy by the original tenant Allenberry & Co. The sub-tenant sought
protection against eviction in execution of the compromise decree against the tenant on the
ground that it had become direct tenant under the landlord in accordance with Section 13 of
the Act of 1950. The above plea of the sub-tenant Happy Homes Pvt. Ltd., was negatived by
this Court.
8. Coming back to the facts of this case, after obtaining a decree of compromise against
the tenant, the landlord instituted a suit on 9-6-1956 against the firm for its eviction. The firm
contested the suit by taking a plea that before surrender by the tenant of its tenancy with effect
from 31-8-1953 under statutory notice, the tenant had inducted on 1-7-1953 Eng Chick Wong
being the sole proprietor formed a partnership with two others viz. Wong Lee Si Moi &
Wulishih. The partnership firm of the three partners above named was registered on 1-3-1954
i.e. much after the surrender of tenancy by the tenant with effect from 31-8-1953. The suit
instituted by the landlord against the firm came to be decided after thirty-six years of its
institution. Learned Single Judge of the Calcutta High Court, sitting on original side, by
judgment dated 25-8-1992 in Suit No. 1546 of 1956, filed for eviction, held that the dispute in
the suit can be decided in proceedings of execution of the compromise decree. The suit was
held as barred by provisions of Section 47 of the Code of Civil Procedure. On the basis of
judgment in the said suit of the Calcutta High Court, the landlord moved an application on 196-1993 for execution of the compromise decree against the firm.
15. On the side of the landlord the application for execution filed by it was allowed by the
learned Single Judge of the Calcutta High Court on 20-4-2000. Learned Single Judge of the
High Court came to the conclusion that the firm came into existence on its registration under
the Partnership Act only on 1-3-1954 i.e. after the surrender of tenancy by the original tenant
on 31-8-1953. In the opinion of the High Court, the registered partnership firm could not
have been inducted as a sub-tenant, as alleged on 1-7-1953, when as a matter of fact on that
date the restaurant was only a proprietary concern of Eng Chick Wong.
16. Aggrieved by the judgment of the learned Single Judge, the firm preferred an appeal
to a Division Bench. The Division Bench by the impugned judgment delivered on 4-8-2000
allowed the appeal of the firm and set aside the judgment of the learned Single Judge. After
examining the entire facts and events in the long course of litigation, the Division Bench came
to the conclusion that by operation of law Eng Chick Wong either as the proprietorship
concern or as a partner of partnership firm became a tenant directly under Chitpur Golabari
Co. (original landlord). It further held that the landlord would be entitled to bring a suit for
eviction against the firm on the ground that as sub-tenant, it was inducted unlawfully by the
proprietor of Waldorf Restaurant who had become tenant directly under the Act of 1950 but
recourse to execution proceedings was impermissible in law.

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115

18. In these appeals learned counsel appearing for the appellant questions the correctness
of judgment of the Division Bench and supports judgment of the learned Single Judge. The
main contention advanced is that the firm having come into existence on its registration on 13-1954 i.e. after surrender of tenancy by the tenant on 31-8-1953, it could not claim status of a
tenant directly under the landlord by recourse to Section 13(2) of the Act of 1950. It is
submitted that admitting the fact of entry of Eng Chick Wong in the tenanted premises on 17-1953 for carrying on the business of restaurant as the sole proprietor, the firm, of which the
sole proprietor subsequently became a partner and which came into existence on 1-3-1954 on
registration, could not, on surrender of tenancy of the tenant, claim status of direct tenant
under the Act of 1950. The argument advanced is that the Division Bench failed to make a
distinction between the claim of status of direct tenant by the sole proprietor and the firm of
which the sole proprietor subsequently became a partner. Alternatively, it is submitted that the
sole proprietor to whom the tenant had sub-let the suit premises on 1-7-1953 having left India
and ceased to be a partner of a firm, the present firm comprising totally new partners and in
occupation of the disputed premises have absolutely no right, title or interest to resist
execution of the decree obtained against the tenant. It is submitted that with the tenant who
has voluntarily surrendered the tenancy and vacated the leased premises and the sub-tenant,
meaning the erstwhile proprietor, having lost possession of the premises, the present partners
of the firm (Respondent 1 herein) in occupation through the erstwhile proprietor Eng Chick
Wong, are also liable to be evicted in execution of the compromise decree obtained against
the tenant.
19. In reply to the argument advanced on behalf of the appellant, learned counsel
appearing for the firm laid much emphasis on the pleadings of the appellant submitted in the
courts below. By taking us through the pleadings, it is pointed out that throughout in the long
course of litigation in the counter civil suits and the execution proceedings, at many places
averments have been made stating that the Waldorf Restaurant was inducted as a tenant on
1-7-1953. On behalf of the respondents learned counsel argues that the above averments in
the pleadings of the appellant in the courts below amount to admission that Waldorf
Restaurant in either of the capacities as proprietary concern or partnership firm, came into
possession of the suit premises as a sub-lessee on 1-7-1953 prior to the surrender of tenancy
by the tenant on 31-8-1953.
20. The conclusion of the Division Bench is supported on the ground that the firm
presently in occupation has become a direct tenant under the landlord after surrender of
tenancy by the original tenant and has a protection against eviction under the Act of 1950.
21. It is also contended that the compromise decree under which the tenant has already
surrendered the tenancy and vacated the premises, is not executable against the firm as subtenant, as the latter has become direct tenant under the Act of 1950. It is submitted that the
remedy of the landlord is to institute a fresh suit on grounds, if available to them, under the
provisions of the West Bengal Premises Tenancy Act, 1997.
22. We have considered the arguments advanced by learned counsel appearing for the
contesting parties. Before dealing with the main contention raised, we may dispose of two
preliminary grounds on plea of res judicata and limitation to which reference has been made
in the judgment of the High Court.

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23. So far as the plea of res judicata is concerned, we find that since both the landlord and
the firm, had filed cross-suits against each other and in both the courts came to a common
conclusion that the parties should litigate their rights in execution proceedings and nothing
was decided on merits of rights and claims of the parties, such a plea is no longer available to
the parties against each other in the execution proceedings.
24. As regards the bar of limitation, it was rightly not pressed on behalf of the firm. As
both the parties had instituted suits against each other, the appellants cannot be held to be
lacking in bona fides in resorting to the remedy of suit. The long period spent in the suit
deserves to be condoned. Under Section 14 of the Limitation Act, the period spent in
prosecuting civil proceedings bona fide and with due diligence is liable to be excluded in
computing the period of limitation for the suit or the application.
25. We now take up for consideration the hotly contested issue between the parties on the
alleged claim of the firm to the status of direct tenant under the landlord on the basis of
provisions of Section 13 of the Act of 1950. The provisions of Sections 12 and 13 were
construed in the light of the scheme of the Act of 1950 by this Court in the case of Indra
Kumar Karnani v. Atul Chandra Patitundi [AIR 1966 SC 186]. This Court in that case held
that consent of landlord is not required for creating sub-tenancy by the tenant of the first
degree. Consent of landlord, however, is held to be necessary where the sub-tenant defined
in the Act as tenant inferior to the tenant of the first degree creates a sub-tenancy. In the
case of creation of sub-tenancy by the tenant of the first degree, the sub-tenant, even on
termination of tenancy of the tenant of the first degree, becomes direct tenant under the
landlord and is thus protected, meaning thereby that he can be evicted only on proof of any of
the grounds under the provisions of Section 12 of the Act of 1950.
27. In the present case, the firm with totally new partners excluding the erstwhile sole
proprietor is claiming status of a direct tenant under the Act of 1950 and resisting execution of
the compromise decree against it.
28. Waldorf Restaurant is merely a trade name. It is not a legal person and has no
existence independent of the proprietor who initially carried on business in that trade name in
the suit premises as sub-tenant and later on by joining as partner of the firm registered in the
same trade name. The present firm (comprising totally new partners) has not disputed that
fact that on 1-7-1953 the tenant (Allenberry & Co.) had sub-let the suit premises to Eng Chick
Wong as sole proprietor of Waldorf Restaurant.
29. On this undisputed fact, the erstwhile proprietor of Waldorf Restaurant, namely, Eng
Chick Wong could alone claim status of a direct tenant under the landlord on termination of
tenancy of the original tenant. The crucial question, however, is whether the present
partnership firm, in which the erstwhile proprietor Eng Chick Wong was a partner and has
now ceased to be so, can claim direct tenancy in its favour under the landlord on surrender of
tenancy by Allenberry & Co. As we have noted above, the tenancy was surrendered on 31-81953 and as has been held by this Court in the case of another sub-tenant Happy Homes (P)
Ltd., after surrender of tenancy by the tenant, sub-tenant inducted by a statutory tenant cannot
claim status of a direct tenant under the Act of 1950. In the present case, on 1-7-1953 the firm

Kamal Pushp Enterprises v. D.R. Construction Co.

117

had not become a sub-tenant. The firm (Respondent 1 herein), therefore, cannot claim status
of a direct tenant under the landlord and seek protection of the Act of 1950.
30. Learned counsel appearing for the appellant have place before us a chart to show how
the partnership of the firm went on changing continuously with retirement of partners one
after the other and entry of new partners. It is not necessary to go into details of the various
changes in the constitution of the firm. The fact, however, is not disputed that when the firm
was first registered on 1-3-1954, the partnership firm comprised Eng Chick Wong as the
erstwhile sole proprietor of the business with two other partners joining him viz. Hsi Wen
Wong and Wulishih. Sometime in the year 1958, the two above named partners retired and
Eng Chick Wong continued as partner with a new partner Philip Wing Hui Wu. In the year
1963, the two above named partners were joined by three new partners. In December, 1991
Eng Chick Wong ceased to be a partner and the partnership consisted of only three partners.
In the present partnership firm, there are now three new partners Hsi Wen Wong, Mata Prasad
Pandey and Charles Mantosh.
31. The appellant in the courts below sought discovery of all partnership agreements,
correspondence exchanged between Waldorf and Allenberry relating to formation of the subtenancy and relevant facts regarding constitution and reconstitution as also registration of the
firm in the name of Waldorf Restaurant. These documents, if produced would even disclose
as to the actual point of time when the proprietor also has been inducted actually as subtenant. The firm, formally by its reply, refused to supply copies of partnership agreement and
other relevant information sought as above. It took a plea that it was their internal affair and
the plaintiff can have no concern with it. The tenanted premises were sub-let to the sole
proprietor of a business concern, who later on with other two individuals constituted a
partnership firm. Whether in such a situation, the tenanted premises held by him as erstwhile
sole proprietor, would become a partnership property or not would depend upon the terms of
the partnership agreement. The burden to prove as to when the sub-tenancy was created and
that the suit premises which were sub-let to the proprietor, on his forming a partnership firm,
became property of the firm, was squarely on the firm which is resisting the execution
proceedings and seeking to claim a benefit in the form of a statutory protection. The firm has
deliberately withheld from disclosure the details as to the initial creation of sub-tenancy and
various agreements of partnership entered into between the partners from time to time which
would have shown the nature of partnership and as to the rights, if any, acquired by it in this
regard. There is no evidence to prove that the tenanted premises of which the sole proprietor
Eng Chick Wong was the sub-tenant, became the asset or property of the firm from the year
1954 when the partnership was registered.
32. Under Section 14 of the Partnership Act, 1932, in the absence of an agreement to the
contrary, property exclusively belonging to a person, on his entering into partnership with
others, does not become a property of the partnership merely because it is used for the
business of the partnership. Such property will become property of the partnership only if
there is an agreement - express or implied - that the property was, under the agreement of the
partnership, to be treated as the property of the partnership. See decision of this Court in the
case of Arjun Kanoji Tankar v. Santaram Kanoji Tankar [(1969) 3 SCC 555].

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Kamal Pushp Enterprises v. D.R. Construction Co.

33. The reasoning adopted by the Division Bench is erroneous that sub-tenancy is created
both for the proprietary concern and the partnership firm merely because the trade name in
which the business was continued remains the same i.e. Waldorf Restaurant. The reasoning
adopted by the Division Bench which has been supported by learned counsel appearing for
the firm, is obviously misconceived in law and proceeded upon misdirection on facts. As we
have stated above, Waldorf Restaurant is merely a trade name. It is not a legal entity
independent of proprietor of the business carried on in that name and the partnership firm
which came into existence later on. Sub-tenancy was created in favour of Eng Chick Wong
as the sole proprietor. In the absence of disclosure of the partnership agreement, to which the
proprietor was a party, it is not ascertainable whether tenanted premises were brought as
assets into the business of the firm by the erstwhile sole proprietor. The Division Bench is
also wrong in assuming that there could have been a sub-letting by the sole proprietor to the
partnership firm and even in that case the firm will have status of a sub-tenant and protection
under the Act of 1950. We have already noted above that under the Act of 1950 only the
tenant inferior to the tenant of first degree can claim protection as direct tenant under the
landlord. A sub-tenant of a tenant inferior to the tenant of first degree does not have any
such status or protection under the Act of 1950. There is neither evidence nor a case set up by
either of the parties that the erstwhile proprietor had sub-let the premises to the present firm.
The provisions of the Act of 1950 do not permit, without consent of the landlord, creation of
sub-tenancy by a sub-tenant or in other words tenant inferior to the tenant of first degree.
34. In the aforesaid situation, claim for status of direct tenant and protection under the Act
of 1950 could if at all have been claimed only by Eng Chick Wong as the sole proprietor of
the business concern by substantiating the necessary conditions precedent including the point
of time when he became one such, in the background of the notice of surrender of tenancy by
the tenant. After Eng Chick Wong had walked out of the tenanted premises ceasing to have
any concern, connection or interest in the firm and left India, the present partners of the firm,
who are in occupation of the business premises have no right in praesenti to resist their
dispossession under the decree obtained against the tenant. Along with the tenant who has
already surrendered the tenancy and vacated the leased premises and the sub-tenant having
already lost possession of the leased premises, the present firm with its new partners who
claim to be in occupation through the sub-tenant have no right to resist the execution of the
decree.
35. The Division Bench of the High Court has wrongly assumed creation of sub-tenancy
by the proprietor in favour of the partnership firm. The erstwhile proprietor of the business
himself became one of the partners of the firm. Such an act on his part was sub-letting or not
would depend upon the terms of the partnership deeds, which were withheld from disclosure
to the Court despite a lawful demand therefor. Mere carrying on by the tenant a partnership
business as partner in the leased premises, no doubt, does not per se amount to sub-letting
unless it is shown that he withdrew his control of the leased premises and parted with the
possession of the property and thereby surrendered his individual tenancy rights in favour of
the partnership firm.
36. Two additional grounds urged on behalf of the firm now remain for decision. It is
emphatically argued that in the pleadings of the appellant before the High Court in earlier

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119

litigation, there is admission that Waldorf Restaurant entered the leased premises as subtenant. It is argued that this admission is binding on the appellant. We have been taken
through relevant parts of the pleadings. It is true that at several places in the pleadings there
is mention of alleged unlawful entry of Waldorf Restaurant in the leased premises. As we
have found above, Waldorf Restaurant was being run in the leased premises firstly, as sole
proprietary concern in the year 1953 and subsequently, after surrender of tenancy by the
tenant as a partnership concern from 1954.
37. We have also held that Waldorf Restaurant is merely a trade name. It is not a legal
entity. The legal entities or the legal persons are the proprietor and the partnership firm.
Mere averment in the pleadings of the appellants the use of the leased premises by Waldorf
Restaurant was a wrongful entry and that too by way of reference to the claims made by the
firm in the various proceedings cannot be an admission of the fact that the firm came into
possession of the premises prior to the surrender of the lease by the tenant. There can be no
admission on a question of law to be held as binding on the appellant. All the more so when
the said fact is one which has to be necessarily and properly established by the firm, as a
condition precedent to claim the cover of statutory protection under the Tenancy Act.
39. Thus we find that the tenantAllenberry & Co. has surrendered the tenancy and
vacated the leased premises. Eng Chick Wong, the sole proprietor of the proprietary concern
Waldorf Restaurant has also vacated the premises and left India. The possession of the leased
premises has been left with the firm through its partners who must vacate the premises on
extinguishment of the rights of the tenant and the sub-tenant. Consequently, we allow these
appeals.
*****

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Gattu Lal v. Gulab Singh


(1985) 1 SCC 432

[A partner having abandoned his right cannot claim share in the decretal amount]

O. CHINNAPPA REDDY, J. - The appellant, Gattu Lal entered into a partnership with
Jagdeo Singh to work a forest to manufacture coal, the forest having been taken on lease by
Jagdeo Singh from Thakur Lallu Singh. The partnership was for a period of five years from
June 28, 1943 and the agreement of partnership was oral. About three months after the
formation of the partnership, Jagdeo Singh assumed exclusive control of the forest and
altogether excluded Gattu Lal from any benefit in the partnership. Thereafter on July 13,
1944, Gattu Lal entered into what is described by the courts below as sub-partnership with
Thakur Gulab Singh, the son of Lallu Singh, aged about 19 or 20 years at that time. It is not
disputed and indeed it cannot possibly be disputed that the arrangement was really with
Thakur Lallu Singh, the father, but in the name of Thakur Gulab Singh, the son. This is
obvious from a reading of the evidence of Gulab Singh himself. The deed of sub-partnership
recited the circumstance that Gattu Lal had entered into a partnership with Jagdeo Singh for
working the Hathibar forest to manufacture coal and that each of them had an eight annas
share therein. By the deed of sub-partnership, Gulab Singh was given a half share in the eight
annas share of Gattu Lal. Gattu Lal was to be entitled to his share of the profits and losses
from the date of the sub-partnership. It was then recited in the deed of sub-partnership that
Jagdeo Singh was giving some trouble and that the partnership of Gattu Lal and Jagdeo Singh
had not been reduced to writing and got registered. If Jagdeo Singh persisted in his attitude,
Gattu Lal would have to take legal action against him. If thereafter possession of the forest
was obtained then Gulab Singh and Gattu Lal were to carry on the partnership business each
having a half share in the profits and losses. Gulab Singh was to supply the funds whenever
Gattu Lal so demanded. If Gulab Singh refused or hesitated to supply the funds, Gattu Lal had
the right to break the partnership. If Gattu Lal was to take legal action against Jagdeo Singh,
Gulab Singh was to bear all expenses and after accounts were settled Gulab Singh and Gattu
Lal were liable each for one half at the time of making the accounts of the partnership firm
Gulab Singh Gattu Lal. The partnership was to last for five years which term could be
extended by mutual consent. A few days earlier, Gattu Lal had executed a Chhithi referring
to the proposed sub-partnership and acknowledging receipt of a sum of Rs 251 for meeting
the expenses. In this chhithi also, it was stated that if the dispute between Jagdeo Singh and
Gattu Lal was not settled mutually and if Gattu Lal was required to file a suit, Gulab Singh
was to bear all the expenses which might have to be incurred. Thereafter the amount was to be
adjusted half and half in the accounts. Notwithstanding the so-called sub-partnership, nothing
further happened and Jagdeo Singh continued to work the forest and manufacture coal all by
himself, to the total exclusion of Gattu Lal. Ultimately Gattu Lal was forced to file a suit for
dissolution of partnership and rendition of accounts against Jagdeo Singh. A preliminary
decree was passed on July 7, 1952. An appeal and second appeal by Jagdeo Singh were
dismissed. A final decree for Rs 3,63,836 was passed by the trial court in favour of Gattu Lal.
On appeal by Jagdeo Singh and further second appeal by him to the High Court, the amount
was reduced to Rs 2,86,078-62 p. and costs. The Supreme Court refused to grant special

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leave against the judgment of the High Court which thus became final. It is the admitted case
of the parties that neither Lallu Singh nor Gulab Singh contributed even a pie towards the
expenses of litigation. In fact, apart from the sum of Rs 251 said to have been paid to Gattu
Lal at the time of the passing of the chhithi, it is not claimed by Gulab Singh that any other
or further amount was ever paid by Gulab Singh or Lallu Singh to Gattu Lal. On the other
hand, when Lallu Singh was called as a witness to depose on behalf of Gattu Lal in the suit
filed by him against Jagdeo Singh, he turned hostile and denied all knowledge of any
partnership between Gattu Lal and Jagdeo Singh. The plaintiff Gattu Lal was, therefore,
forced to seek the permission of the court to declare the witness hostile and to cross-examine
him. He was granted permission to so cross-examine Lallu Singh. Obviously if there was no
partnership between Jagdeo Singh and Gattu Lal (the knowledge of the existence of which
was denied by Lallu Singh), there could be no question of sub-partnership between Gattu Lal
and Lallu Singhs son, Gulab Singh. As we stated at the outset, Gulab Singh was only a tool
and the real party to the sub-partnership was Lallu Singh himself. Despite the attitude taken
by Lallu Singh in the suit filed by Gattu Lal against Jagdeo Singh in which Gattu Lal
ultimately obtained a decree for Rs two lakhs and eighty six thousand and odd Lallu Singhs
son, Gulab Singh unabashedly and unashamedly filed the suit out of which the present appeal
arises for a share of the amount which had been decreed in favour of Gattu Lal. The suit was
resisted on various grounds and was ultimately dismissed by the trial court. On appeal by the
respondent, the High Court decreed the suit on the basis of the alleged sub-partnership. It is
not necessary for us to discuss the various questions which were canvassed before the trial
court and the High Court. One of the grounds on which the suit was dismissed by the trial
court was that whatever rights Gulab Singh had under the deed of sub-partnership, had been
abandoned by him and therefore, he was not entitled to claim any share in the fruits of the
decree obtained by Gattu Lal on the basis of the deed of sub-partnership. This finding was
reversed by the High Court, in our view for no good reason. The High Court observed that
they found nothing in the conduct of the appellant before them which could have induced the
respondent (the present appellant) to believe that there was any abandonment by Gulab Singh.
We are afraid it is impossible to agree with this finding. Not only did Gulab Singh not spend a
pie towards the litigation started by Gattu Lal against Jagdeo Singh, his father deliberately
gave false evidence denying knowledge of the very partnership between Gattu Lal and Jagdeo
Singh which in turn was the basis of the sub-partnership. Yet Gulab Singh has now the
audacity to file the present suit to recover a share of the fruits of the decree obtained by Gattu
Lal! As we said earlier, Gulab Singhs evidence itself shows that it was Lallu Singh that was
the moving spirit in the formation of the sub-partnership and matters connected with it. The
High Court completely ignored the conduct of Lallu Singh in the suit filed by Gattu Lal
against Jagdeo Singh. In their judgment, the High Court extracted the following passage from
Lindley on Partnership, twelfth edition, (pp. 499-500):
Independently of the Statutes of Limitation, a plaintiff may be precluded by his
own laches from obtaining equitable relief. Laches presupposes not only lapse of
time, but also the existence of circumstances which render it unjust to give relief to
the plaintiff; and unless reasonable vigilance is shown in the prosecution of a claim to
equitable relief, the court, acting on the maxim vigilantibus non dormientibus
subveniunt leges, will decline to interfere.

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The doctrine of laches is of great importance where persons have agreed to


become partners, and one of them has unfairly left the other to do all the work, and
then, there being a profit, comes forward and claims a share of it. In such cases as
these, the plaintiffs conduct lays him open to the remark that nothing would have
been heard of him had the joint adventure ended in loss instead of gain; and a court
will not aid those who can be shown to have remained quiet in the hope of being able
to evade responsibility in case of loss, but of being able to claim a share of gain in
case of ultimate success.
We entirely agree with the principle enunciated. The High Court was wrong in not applying
the principle to the facts of the present case. The judgment of the High Court is set aside and
that of the learned District Judge restored. The appeal is allowed with costs throughout.
*****

Kamal Pushp Enterprises v. D.R. Construction Co.

123

Trimble v. Goldberg
(1906) AC 494 (PC)
[Accountability for profits of competing business -section 16]

LORD MACNAGHTEN - This is an appeal from an order of the Supreme Court of the
Transvaal reversing the judgment of the Witwatersrand High Court at Johannesburg.
The trial of the action took place before Smith J. On all questions of disputed fact and on
all questions of law but one of the learned judges of the Supreme Court agreed with the trial
judge. On one point they differed from him. Founding their opinion on an equity he had
failed to appreciate or discover, they entered judgment for the respondent declaring him
entitled to share with the appellants in the profits of a purchase which they had made secretly
and meant to keep to themselves. Considering the purchased property, though not within the
scope of the partnership adventure, yet connected with it indirectly and thinking the purchase
injurious to the common interest, they held on general principles that the appellants were
liable to account to their partner for any profit derived from the transaction; and they regarded
the veil of secrecy as a damning proof of guilt and aggravation of the wrong of which, in their
view, Goldberg was entitled to complain.
Goldberg was a land speculator. Trimble was an auctioneer: he had been acting chief
detective of the whole of the Transvaal before the war. Bennett was a merchant in Durban in
a good financial position. The partnership agreement between Goldberg, Trimble and Bennett
was dated February 10, 1902. The object of the joint adventure was the purchase and re-sale
of certain properties belonging to a gentleman named Hollard. They consisted of 5500 shares
in a company called the Sigma for building and other real estate in Johannesburg and
elsewhere in South Africa.
There was nothing special in the partnership agreement of February 10, 1902. Profits and
losses were to be shared equally. No partner was to sell or dispose of his interest without the
consent in writing of his partners, All dealings with the property of the partnership were to be
transacted by and through Trimble, to whom the other partners were to give powers of
attorney.
The Sigma Syndicate, whose full title was the Sigma Building Syndicate, Limited, had
been formed in 1896 under the laws of the South African Republic with limited liability. Its
capital was 25,000/- divided into 25,000 shares of 1 each all fully paid up. The Board of
Directors was to consist of at least four and at most six members of the company. The
management of the companys affairs was committed to the board with the most extended
powers and without limit or reserve. The powers of the board specially enumerated included
any purchase, sale, or exchange of immovable properties.
The syndicate was formed for the purpose of making profit by purchasing and re-selling a
number of stands on Marshall Square and Government Square in Johannesburg.
In the early part of 1902 Hollard, a wealthy man and a director of the Sigma Syndicate,
was about to leave South Africa and anxious to dispose of everything he had there before
quitting the country. He put all his properties on the market for sale through Goldberg.

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Kamal Pushp Enterprises v. D.R. Construction Co.

Goldberg was furnished with a prospectus or proposal containing a schedule of the various
lots shewing the aggregate price of the lots and the value placed on each. The total was
94,566/-. The Sigma shares were put at 30,000/-. The prospectus was accompanied by an
elaborate report prepared by a Mr. Dumat, an attorney in Johannesburg. Goldbergs original
intention seems to have been to form a syndicate for the purpose of purchasing the property,
charging the syndicate 9500/- as commission for his services. The gentlemen who were to
compose the syndicate wanted further time. After carefully considering Dumats report and
expressing no little disappointment and dissatisfaction with it, Goldberg advised Hollard not
to grant an extension of time to the syndicate, and proposed to accept Hollards offer and buy
on his own account. Bennett and Trimble joined him in the adventure. The one would not
come in without the other, and so the syndicate disappeared, and the partnership agreement of
February 10, 1902, was arranged. To meet Hollards requirements a remittance of 12,500/was telegraphed in advance and Trimble was dispatched to Johannesburg to complete the
business.
Armed with powers of attorney from his two partners, Trimble went to Johannesburg, saw
Hollard there, and settled the terms of the purchase offhand. The purchase deed was executed
by Hollard and by Trimble on behalf of himself and his partners on February 14, 1902. The
purchase price as proposed was 94,566/- The sum of 12,500/-, which had been sent
forward, was taken as part payment; the balance was secured by mortgage bonds over the
several properties comprised in the purchase.
After this matter was settled, Trimble went one day with Hollard to see the stands
belonging to the Sigma Syndicate. When they came to Government Square Trimble asked
Hollard if the syndicate would sell the stands there en bloc. Hollard said Yes, adding that he
thought the board would sell for 120,000/- Trimble asked about conditions, and Hollard
referred him to Davis, the secretary, who would, he said, lay the matter before the board. It
seems that the syndicate had tried without much success to sell their stands. They had put
them up for sale by auction, but had only managed to sell one stand on Marshall Square. The
board, holding as they did 23,000 shares out of 25,000, decided in the presence of all the
shareholders to take 100,000/- for their stands on Government Square, and negotiations were
going on with the Government or the private secretary to his Excellency on that footing.
Trimble, of course, was not made aware of this fact, and after some negotiation with Davis he
was content to take an option to buy for 110,000/- Trimble at once communicated with
Bennett, and told him that he thought from some secret information he had gained, which it
seems would not bear the light, that money was to be made out of the deal. He asked Bennett
to join with him in the speculation, intimating that he was prepared to give even a larger price.
Bennett consented to join, and agreed to finance the enterprise. The directors of the syndicate
were only too glad to accept Trimbles offer, and thus he secured the stands on Government
Square for himself and Bennett at the price of 110,000/-.
Goldberg was not told anything about this purchase at the time. He did not hear of it until
the end of 1902 or some time in 1903. Meeting Trimble one day in the street, he said,
according to Trimbles uncontradicted evidence, corroborated by an accountant called
Winship, who was present, Dont you think you might have let me have a show in? Later
on, however, he took a more exalted view of his rights, and in June, 1904, he brought this

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action, alleging, in the first place, that the partnership had given Trimble a mandate to buy the
stands on joint account - an allegation which both Courts held not proved. He also contended
that, on general principles applicable to all cases of partnership, he was entitled to share with
his partners in the benefit of their purchase. On this ground the Court of Appeal gave effect
to his claim.
It seems to their Lordships that judgment of the Court of Appeal is not well founded. The
purchase was not within the scope of the partnership. The subject of the purchase was not
part of the business of the partnership, or an undertaking in rivalry with the partnership, or
indeed connected with it in any proper sense. Nor was the information on which it seems
Trimble acted acquitted by reason of his connection with the Sigma Syndicate. The way in
which the information was acquired may have been much to Trimbles discredit, as the Court
of Appeal has pointed out; but Goldberg is not in a position to complain of that. He at least is
not averse to sharing the profit to which it seems to have conducted.
Now if the purchase from Hollard had been completed so far as to make the partnership
the absolute and unincumbered owner of the 5500 shares in the Sigma Syndicate, and if those
shares had been divided between the three partners and registered in their separate names any
one of the three would have had as good a right to buy any property of the syndicate which
the direction might think fit to offer for sale as any other shareholder in the syndicate or any
member of the general public.
The Court of Appeal appears to have regarded the purchase in question, though not
expressly prohibited by the partnership articles, as a breach of good faith and consequently as
a violation of the fundamental condition of the partnership. Suppose it had been forbidden in
express terms, what would have been the result? The other partners or partners discovering
the breach of contract might have claimed immediate dissolution, or even damages, on proof
of actual loss to the partnership. But a claim to share in the profits of the forbidden purchase
would not have been warranted by principle or precedent. And here there was no loss to the
partnership; only a disappointment to the partner left out in the cold. The purchase apparently
was an advantage to the partnership. Through it the directors of the Sigma Syndicate were
enabled to obtain for their property 10,000/- more than they would have obtained if they had
sold to the Government at their own price. And the partnership, as a shareholder in the
syndicate, was proportionately the gainer.
The Court of Appeal seems to have been much impressed by the secrecy of the
transaction. No doubt it would have been better if Goldberg had been told at the time that
Trimble and Bennett were making this purchase. In a case in the House of Lords, which will
be mentioned presently, in which the circumstances were somewhat analogous, Lord
Blackburn observed, I generally think it is advisable as a matter of prudence, as well as on
other grounds, to let everything be above board That is a very proper sentiment, worthy,
perhaps of a more unhesitating acceptance. But still there was no legal obligation on Trimble
or Bennett to tell Goldberg what they were doing unless he had a right to take part in the
speculation if he chose to do so. Their excuse for silence, if it be an excuse, was that they
considered Goldberg an undesirable partner and not financially strong.

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The learned judges of the Court of Appeal also seem to lay some stress on a provision in
the articles of association of the Sigma Syndicate which states that Each share gives,
according to the issued shares, a right to a proportionate share in the ownership of the
companys assets and in the distribution of profits. But there is nothing special in that
provision. It is no more than an accurate description of the position of every shareholder in
every trading company limited by shares.
Then there was an argument which it is very difficult to follow. It was said that the
moment Trimble determined to buy these stands, he put himself in a position in which his
interest and his duty conflicted. It was his interest to buy as cheaply as he could. It was his
duty to sell the Sigma shares as dearly as possible. The value of the shares depended on the
value of the stands, and so it was his duty to enhance the value of the stands by every
legitimate means in his power. He ought not to have thought of buying them for less than the
utmost price he felt he might have been forced or tempted to give. He knew he was buying
cheaply, he told Bennett so. The fallacy of this line of argument lies in assuming that Trimble
had anything to do with selling the stands, or any right to meddle with the conduct of the sale.
That was in the hands of the directors. They were dealing at arms length with him. It seems
extravagant to suppose that he would have advanced the interests of the partnership by
retiring from the field and declining to enter into a competition which actually had the effect
into a competition which actually had the effect of raising the price of the stands and so
improving the value of the Sigma shares.
In Cassels v. Stewart, which was an appeal from two concurrent judgments in Scotland,
three gentlemen, Reid, Cassels and Stewart, were partners in an undertaking called the
Glasgow Iron Company. The contract of co-partnership contained an article forbidding any
partner to assign his interest, or give any person or persons a right to interfere with the
business, and declaring further that any such assignation should be of no effect as regards the
company. There was also a clause declaring that on the retirement of a partner, the remaining
partners should have power to buy his interest at the amount standing to his credit at the last
balance. Reid sold all his interest to Stewart. Reids name, however, remained on the books,
and he signed all deeds relating to the business until his death, which occurred seven years
after the sale. Cassels was not till then informed of the arrangement. When he found it out he
claimed to participate in the purchase on the ground(1) that a mandate had been given to
Stewart to buy Reids interest for the partnership; (2) that under the terms of the partnership
agreement the purchase could only be legally made with his consent; and (3) that Stewart had
secretly acquired a benefit for himself within the scope of the partnership business. It was
held that the alleged mandate was not proved. But it was argued by Sir F. Herschell, the
Solicitor-General, and the Lord Advocate that, putting aside the alleged mandate, the
agreement was entered into under such circumstances as entitled the appellant to participate in
it, the acquisition of the shares of outgoing partners...was one of the objects of the
company. Apart from the express terms of the contract the secret agreement by which the
respondent acquired for himself alone a benefit falling within the scope of the partnership
business was a breach of the good faith of the partnership, and when such a benefit was
acquired each partner had a right to demand that it should be communicated to each of them
equallyon general principles it was inequitable, having regard to the fiduciary relations

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127

due to each other, that such an agreement should be made behind the back of another partner.
Without calling on to the respondent, the House, consisting of Lord Selborne L.C. and Lords
Penzance, Blackburn and Watson dismissed the appeal.
It seems to their Lordships that the decision of the Supreme Court of the Transvaal in the
present case cannot stand with the decision in Cassels v. Stewart. There was at least as close
a connection between the partnership and the partners purchase in that case as there is in this.
In their Lordships opinion the order under appeal cannot be supported on authority or on any
recognized doctrine of equity. Their Lordships will therefore humbly advise His Majesty that
the appeal should be allowed, the order of Smith J. restored, and the appeal from that order
dismissed with costs.
*****

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Pulin Bihari Roy v. Mahendra Chandra Ghosal


AIR 1921 Cal. 72

[Liability of a partner for carrying on competing business -section 16]

SIR ASUTOSH MOOKERJEE, J. This is an appeal by the plaintiffs in a suit for


recovery of money due on adjustment of accounts upon dissolution of a partnership business,
called the Joint Salt Bond Business, and carried on by them and the three sets of defendants at
Sadarghat, Chittagong. The plaintiffs constitute a firm styled Krishnadas Sanatan Brajendra
Kumar Ray. The first party defendants are members of a firm known as Krishna Kumar
Ghosal; the second party defendants are members of a firm styled Ramkamal Radhaballabh
Saha; the third party defendants are members of a firm named Gangadas Seal. In the salt
business, the Rays claim a five annas nine pies share, the Ghosals four annas share, the Sahas
four annas six pies share and the Seals one anna nine pies share. The business was managed
by the different sets of partners during the four quarters of the year by turns, namely, the
Ghosals during the first quarter, the Seals during the second quarter, the Sahas during the
third quarter and the Rays during the fourth quarter. The partnership was started in 1306 B.E.
for the purpose of importing salt from foreign ports and selling it in Chittagong. The Rays had
a firm in Calcutta which ordinarily purchased salt for the joint business, and the purchase
money had to be paid by the defendant partners to them at Chittagong. If there was delay in
payment on the part of any set of partners, it became liable to the set which made the payment
on its behalf. There was a book kept called the order book in which the price for sale of salt as
fixed by the partners from time to time was recorded. Each set of partners could sell as much
salt as it liked out of the joint stock, but was liable for the excess taken by it over that due for
its share to the set or sets of partners who might have taken less than a proportionate share.
There used to be a periodical adjustment of accounts generally at the end of each quarter
which is described in these proceedings as a Bantan. The term literally signifies division. The
Bantan, it is said, was intended to remove inequalities in the appropriation of salt by the
partners and to settle the amount of money due among the partners inter se by reason of such
inequality. In addition to the Bantan, there was a Nikash which was intended to be held
annually, but in fact took place at irregular intervals. The term Nikash, signifies final
adjustment of accounts, and one of the points in controversy in the Court below was, how far
a Bantan might be treated as a final settlement. The business was carried on in this manner,
according to the plaintiffs, to the end of 1320 B.E. and they claim accounts from 26th Sraban
1320 up to 30th Chaitra, 1320, as according to them the Bantan had taken place for the
antecedent period. The defendants urged, on the other hand, that the Nikash which alone
constitutes final account, had not been held for the period subsequent to 1316 B.E. The
defendants consequently claimed that accounts might be taken for the entire period between
the commencement of 1317 B.E. and the termination of 1321 B.E. The Subordinate Judge has
given effect to the contention of the defendants in this respect. To appreciate the full
significance of the claim of the defendants that accounts might be taken for the longer instead
of the shorter period, it is essential to bear in mind that some of the plaintiffs had, during the
year 1321 B.E. if not also during 1320 B.E., engaged in another salt business, and the
question consequently arose whether they had rendered themselves liable to account to their

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129

partners for the profits of such separate business. The plaintiffs retorted that other partners
had acted in a similar manner, specially, with respect to salt imported in S.S. Baron Balfour.
The Subordinate Judge has held that the partners who had engaged in rival salt business
before the dissolution of the partnership were liable to render mutual accounts. The plaintiffs
have appealed against the decree of the Subordinate Judge and have assailed his decision
upon every material point. The grounds which emerge for consideration may, however, be
concisely enumerated, namely, first, that the Bantans which covered the period up to 25th
Sraban 1320 B.E. were final adjustments and could not be reopened; secondly, that the salt
bond business was dissolved at the end of 1320 B.E. and not at the end of 1321 B.E.; thirdly,
that even if the partnership business be not deemed to have been dissolved at the end of 1320
B.E., each partner was entitled to have separate dealings in salt and could not be called upon
to account for the profits of such transactions; fourthly, that if such separate dealings in salt
were improper, the defendants could at most get compensation to the extent of Rs. 5,000;
fifthly, that the Court should not, at this stage, have gone into the question of the custody of
the account books, and that, in any event, the investigation has been inadequate and the
conclusion incorrect.
As regards the first ground, we are of opinion that the accounts must be taken,
notwithstanding the Bantans which have taken place as found by the Subordinate Judge. The
Subordinate Judge has correctly held that there were two sets of accounts taken, the Bantan
and the Nikash. The scope and object of the two were not identical, as is clear from the
samples of the Bantan and the Nikash which have been produced. The Bantan was an
adjustment of the dues of the partners inter se on account of the inequality in the proportion of
salt taken by each set of partners on their own account for sale by them to their own
customers as opposed to joint sale of salt by the joint firm. Such an adjustment would show
what quantity of salt had been taken by each set of partners and how much money would have
to be contributed by one set to another on account of inequality in the appropriation. On the
other hand, the Nikash at the end of the year would show the outstanding balance from
customers of the joint business and expenditure of all descriptions incurred during the year.
Opportunity would, no doubt, be taken on the occasion of this yearly settlement of accounts,
to rectify the errors, if any, in the Bantan, which would, prima facie, form the basis of the
annual account. But there has apparently been some misapprehension as to the true relation
of a Bantan to a Nikash. One extreme view is that the Bantan may be entirely ignored and the
Nikash taken irrespective thereof. The opposite extreme view is that the Bantan is absolutely
conclusive and that its accuracy cannot be challenged at the time of the Nikash. Neither of
these views can clearly be supported. The Bantan was regularly taken in the presence of the
parties or their representatives, though its scope was limited. Consequently, if its accuracy is
challenged at the time of the Nikash, the burden lies upon the party who assails it to establish
the alleged error. The elementary principle that an account once taken in the presence of the
parties interested and acquiesced in by them will not be lightly reopened must plainly be
applied to a Bantan. Subject to this reservation, the Bantan cannot be treated as a conclusive
answer to the claim for accounts for any period. This, however, does not, as the Subordinate
Judge has correctly held, affect the decree in the former suit brought by the Raya against the
Seals and finally decided by this Court on the 4th December, 1919. That decree confirmed the
decision of the primary Court, and, though conclusive between those parties, expressly left

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unaffected all matters outside the scope of the accounts comprised in that litigation. The
direction given by the Subordinate Judge in this respect is not open to criticism.
As regards the second ground, the evidence is conclusive that the salt bond business was
not dissolved at the end of 1320 B.E., but continued till the end of 1321 B.E. The case for the
plaintiffs is that the dissolution was effected by the retirement of Jogendrakrishna and
Nilkrishna, two of the members of the plaintiff firm, from the salt business at the end of 1320
B.E. Now, it is well-settled that where no fixed term has been agreed upon for the duration of
a partnership, any partner may determine the partnership at any time on giving notice of his
intention so to do to all the other partners. But the dissolution takes place as from the date of
the communication of the notice: Mellersh v. Keen [(1359) 27 Beav. 230]. Tested in the light
of this principle, the case for the plaintiff firm completely collapses. In the matter of the
alleged dissolution by retirement, the parties acted in the most unbusiness like way
imaginable. The obvious course was to communicate their intention to dissolve the
partnership, in writing to the other partners. It is not necessary to consider whether notice to
the defendants firms would have been sufficient or whether notice to each individual member
of each of the firms concerned was essential. No written notice was in fact given, and the oral
evidence of verbal intimation to some of the persons interested is of the vaguest description.
On the other hand, the evidence discloses that the persons who intended to retire from the
business did in fact continue to take salt from the business and to associate otherwise with its
work. In such circumstances, a presumption may legitimately be drawn in favour of the
continuance of the partnership. There is, in our opinion, no reasonable doubt as to the
soundness of the conclusion of the Subordinate Judge that there was no effective dissolution
of the firm at the end of 1320 B.E. and that it was continued till the end of 1321 B.E. In such
a contingency, it was not only open to the Court but incumbent upon it, to direct the accounts
to be taken for a longer period than that mentioned in the plaint. The accounts in a suit of this
description have to be taken for the benefit of all the persons concerned; the scope and extent
of such accounts must be determined by the Court on the true state of facts disclosed in the
evidence and cannot be restricted to the limited measure of relief claimed by the plaintiff on
inaccurate allegations.
As regards the third and fourth grounds, we have been invited to hold that each partner
was entitled to have separate dealings in salt and could not be called upon to account for the
profits of such transactions for the benefit of all the partners of the original business. This
contention is opposed to the elementary rule that if a partner, without the consent of the other
partners, carries on any business of the same nature as and competing with that of the firm, he
must account for and pay over to the firm all profits made by him in such business, and he
must also make compensation to the firm for any loss occasioned thereby. This obligation is
formulated in section 259 of the Indian Contract Act and has long been recognised as a
fundamental rule in the law of partnership: Trimble v. Goldberg [(1906) AC 494]. The rule is
not applicable to a really different business, though the same knowledge and information may
be useful in both. In the case before us, however, there is no doubt as to the true nature of the
separate business carried on by some of the members of the salt bond partnership. The
evidence makes it abundantly clear that the separate transactions were of precisely the same
nature as the business carried on by the partnership and that there was thus a breach of duty of

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131

the partners concerned not to carry on like business in the same field of competition. The
correctness of the view taken by the Subordinate Judge cannot be successfully questioned.
We may add in this connection that it was faintly suggested that the sum recoverable on
account of this breach of obligation was limited by agreement to Rs. 5000. The agreement
however does not admit of such a construction; the sum of Rs. 5000 mentioned therein was
prescribed as a penalty and does not absolve the parties in default from the obligation to
account for all the profits made in such business.
As regards the fifth ground, it has been urged that the Court should not, at the preliminary
stage have gone into the question of the custody of the account books, that the investigation
has at any rate been inadequate and that the conclusion is not supported by the evidence. We
are of opinion that this contention should prevail. Section 257 of the Indian Contract Act
makes it obligatory upon each partner to render true accounts and full information of all
things affecting the partnership to any partner or his legal representatives. The occasion in this
case, will, however, arise after the preliminary decree is made. At that stage each partner
should be served with the notice contemplated by section 66 of the Indian Evidence Act to
produce such accounts and papers as may be in his custody. If he omits to produce the books
and the books are proved to be at the time in his custody or under his control, the presumption
recognised in illustration (g) to section 114 of the Indian Evidence Act may be applied,
namely, that evidence which could be and is not produced has been withheld because if
produced it would be unfavourable to the person who withholds it. In such circumstances,
secondary evidence will become admissible, and the party who has withheld the document
will not be able to use the original document as evidence at a later stage without the consent
of the other party or the order of the Court, as provided in section 164 of the Indian Evidence
Act. The procedure as to notice was not followed in the Court below, and it has transpired
that some of the account books, namely, the books of 1318 B.E., 1319 B.E. and one of the
books of 1320 B.E. were at the time the plaintiffs were called upon to produce them actually
in this Court in the records of the appeal preferred in the previous suit brought by the Rays
against the Seals. These books appear to have been subsequently returned to the plaintiffs,
and they have expressed their readiness to produce them whenever called upon. In these
circumstances, we are of opinion that the finding in the judgment of the Subordinate Judge
relating to the custody of the account books should be expunged and that the direction in the
decree based thereon should be omitted. When the enquiry is undertaken by the
commissioner, proper orders as to the production of account books and other papers by all the
partners will be given by the Subordinate Judge on the lines indicated above.
The result is that this appeal is allowed in part and the decree of the Subordinate Judge
modified in two respects, namely, first, as to the use to be made of the Bantan when the
accounts are taken, and, secondly, as to the omission of the order for production of account
books; subject to these variations, the decree of the Subordinate Judge will stand confirmed.

*****

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RELATIONS OF PARTNERS TO THIRD PARTIES


Holme v. Hammond
(1872) L.R. 7 Ex. 218; 41 L.J. Ex. 157
[ Section 19 Duty of a partner as an agent of the firm]

Thomas and William Henry Fisher and George Henry Smith carried on business in copartnership as auctioneers, under a deed which provided that in case of the death of
Thomas Fisher, the other two partners should carry on the business, or what was called
the co-partnership and should pay to the executors of Thomas Fisher the share of the
profits to which he would have been entitled if he had survived. Thomas Fisher died in
August, 1869; the two survivors carried on the business until the death of Smith, when
William Henry Fisher continued to carry it on alone. W.H. Fisher and Smith having sold
a mill and machinery in May, 1870, on account of the plaintiff and having received the
proceeds of the sale in the following month of July. The plaintiff brought an action
against W.H. Fisher and the defendants to recover that sum as money had and received
insisting that the defendants, who are the executors of Thomas Fisher, and who have
claimed to be entitled to the share of the profits which the testator would have been
entitled to if he had lived and in respect of which they have received certain sums
together with other moneys due to the estate of Thomas Fisher not specifically as profits,
but generally on account), became partners with W.H. Fisher and Smith upon or after the
death of Thomas Fisher, and as such are liable to the demand in this action.

KELLY, C.B. The single question in this case is, whether the defendants at the time when
this money was received were the partners of W.H. Fisher and Smith; and this depends upon
whether they have expressly or impliedly entered into a contract of co-partnership, since the
death of Thomas Fisher, with W.H. Fisher and Smith, who survived him. It is contended that
having claimed and actually received portion of the profits of the business as supposed to
have been ascertained upon an account taken from the 30th of June, 1869 to the 30th of June
1870, the defendants have made themselves, or must be taken to have become, partners, and
as such liable to this action.
Upon a careful consideration of the authorities bearing on this question, it certainly
appears to have been thought in former times, and there are judicial dicta to that effect, that
the mere reception of a share in the profits of a commercial co-partnership made the
participator a partner and liable to the debts and losses of the firm. But looking to the
decisions themselves in which the question has arisen, it will be seen that in no one case has
the party sought to be charged been held liable except where a contract of co-partnership has
been found to have been entered into.
In Grace v. Smith[Wm. Blacks 998] in which the language of De Gray, C.J., and
Blackstone, J., appears to support the argument for the liability as partners of all who
participate in the profits of a commercial concern, the decision was that there was no
sufficient evidence of a contract of co-partnership and so no liability as partners.

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133

In the leading case of Waugh v. Carver [(1763) 2 Hy. Bl. 235] where the defendant was
held liable as partner, it was because the contract proved was decided, and rightly decided, to
be a contract establishing a commercial co-partnership, and the agreement in the articles that
neither should be liable for the acts or the losses of the others, but each for his own (though
valid and binding inter se), was of no effect against the creditors of the co-partnership firm.
So in Cox v. Hickman [(1860) 8 H.L.C. 268]; Bullen v. Sharp, [(1865) L.R. 1 C.P. 86],
and the Irish case of Shaw v. Galt [16 Irish Com. Law Rep. 357], the parties sought to be
charged were held not liable, on the ground that the acts done and the contracts entered into in
those cases did not amount to contracts of co-partnership so that the parties had not become
partners. It is necessary to consider the various terms and provisions of the contracts which
were brought into question in those and other cases. It is enough to say, that whenever the
plaintiff has failed to establish a contract of co-partnership the action has failed and the
decision has been that the defendant was not liable.
In some of those cases the law of principal and agent has been referred to as governing
the matters in question, but this branch of the law has really no bearing upon the case of
partnership, except, indeed, that whenever a contract of partnership among commercial men
exists, each partner is in point of law the agent for the others and for the firm collectively, and
they are bound by any contract he may enter into within the scope of the partnership with
reference to the nature of the undertaking, this agency being an incident to the contract of copartnership.
It has also been argued that the statute 28 & 29 Vict. C. 86, enacting that widows, lenders
of money, and some other classes of persons taking a share in the profits of a co-partnership
shall not be deemed partners, would be useless if these and other classes of persons might at
common law become sharers in profits without incurring such liability. But it seems to me
that the effect of the statute is sharing in profits shall be no evidence at all of a contract of
partnership, whereas, with regard to others, it is evidence, though insufficient of itself to
establish the liability.
We have, therefore, now to look to the facts of the present case to determine whether
upon the evidence the defendants have become parties to contract of partnership. Upon the
death of Thomas Fisher the partnership before subsisting was dissolved by operation of law;
W.H. Fisher and Smith from that time carried on the business; But this was, in contemplation
of law, a new partnership. The defendants could not become partners with them but by some
agreement, express or implied, to which they were parties. At the trial, taking into
consideration the claims of the defendants to a share in the profits the acquiescence in that
claim by the two survivors, and the actual payment and acceptance of the proportion of the
profits supposed to have been ascertained, together with the accounts made out of the
transactions of the firm, which were alleged, and which indeed did seem, to show that the
defendants instead of calling for an account of the state of the partnership at the death of their
testator, and withdrawing from the concern whatever money or stock of property belonged to
his estate, had left a portion of his capital and his share in the partnership stock and property
in the business. I was, with all the circumstances before me and the accounts unexplained,
inclined, to think that, upon the whole evidence, a contract by the defendants to succeed their
testator and to become partners in his stead might be inferred. But now that it appears that

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there was no capital at all, either of the testators or the other partners, employed in the
business; that the stock and co-partnership property consisted merely of a small quantity of
furniture and fittings in the office of the value of 100.00; that the defendants neither left in
nor drew out any money of the testators except that they drew out several successive sums of
100.00, upon the general account of what might turn out to be due to the estate; and that,
consequently, the whole case for the plaintiff was reduced to the single fact that, in pursuance
of the clause in the articles of partnership, the parties considered that in paying and receiving
those sums they were to be taken as well on account of the share of the profits as of other
moneys due to the testator; I am of opinion that there is no evidence whatever to establish a
contract of co-partnership on the part of the defendants, and, consequently, that the action is
not maintainable.

MARTIN, B. I was under the impression that Thomas Fisher had left capital in the
concern, and that the defendants had suffered this capital to remain, but it appears that this
was not so, and that the testator, Thomas Fisher, had drawn out all his capital, and that the
defendants did nothing more than claim and receive profits under the above clause. In my
opinion this act did not make them liable to the plaintiffs demand. They did nothing on their
own behalf at all; they merely did that which a court of equity would have compelled them to
do as executors under the will, and in my opinion it would be contrary to reason to hold them
liable by that act to a responsibility which must of necessity be borne by them in their own
personal capacity, and paid out of their private funds; Wightman v. Townroe [(1813) 1 M. &
S. 412]. It seems admitted by the learned counsel for the plaintiff that the defendants could
not have interfered in or meddled with the sale; so also the money, the proceeds of it; was not
their the property, and if they had taken possession of it against the will of the surviving
partners in order to pay it to the plaintiff they would have been trespassers; and it is difficult
to understand how defendants can, in contemplation of law, have received money of which
they had neither right nor possession, and their taking which against the will of the surviving
partners would have been a wrongful act.
As I have said, up to a certain time in the argument I was in favour of the plaintiff. I
understood that part of Thomas Fishers capital remained, by the permission of the
defendants, in the firm, and that they took a share in the profits in part earned by it. Under
such circumstances I thought it not unreasonable that they should be liable upon a valuable
contract by means of which the profits were in part earned, and that the principle of Waugh v.
Carver [(1793) 2 Hy. Bl. 235], applied; but upon consideration, I doubt whether this was
correct. The principle of Waugh v. Carver has been much broken in upon...(I)t seems to me
that the principle on which their opinions Lord Wensleydate and Lord Cranworth in Cox v.
Hickman [(1860) H.L.C. 268] proceeds is correctly stated by OBrien, J., in the case of
Shaw v. Galt [16 Irish Com. Law Rep. 357]. He there expresses himself as follows: The
principle to be collected from them appears to be, that a partnership, even as to third parties, is
not constituted by the mere fact of two or more persons participating or being interested in the
net profits of a business; but that the existence of such partnership implies also the existence
of such a relation between those persons as that each of them is a principal and each an agent
for the others. If this principle be correct, the defendants are clearly not liable. The surviving

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partners were not agents of theirs in any sense; all that the defendants did was in an adverse
character to them, and was a requirement that they should fulfil their contract with the testator
by paying the one-third of the net profits for the benefit of his estate...As I have already said,
in my opinion the defendants are entitled to the judgment of the Court.
*****

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Rhodes v. Moules
(1895) 1 Ch. 236 (CA)

[The securities misappropriated by one partner were habitually held by the firm]

LORD HERSCHELL L.C. This is one of those painful cases in which whatever
judgment is pronounced the loss must fall upon some innocent person who has not by act or
default contributed to it.
The litigation in this case has arisen out of the frauds of Mr. Rew, who practiced his
profession as a solicitor in partnership with Messrs. Hughes and Masterman and the City of
London. There is no doubt that the certificates of 280 De Beers shares were placed in his
hands by Mr. Rhodes, the Plainytiff, in August, 1891. Those shares he has fraudulently
misappropriated, and the first question is whether his partners, Messrs. Hughes and
Masterman, are liable to make good the loss to the Plaintiff. Before stating the circumstances
under which the shares were received by Rew, it is necessary to revert to some prior
transactions between the Plaintiff and Mr. Rew acting on behalf of the firm. It is clear that
Mr. Rhodes was a client of the firm, and that the firm had acted for him in previous matters.
[His Lordship stated that facts as given above, and then proceeded as follows: ]
Some criticisms were presented to the Court on the evidence of Mr. Rhodes, and the
learned Judge in the Court below has adverted to some inconsistencies in his evidence. I have
read his evidence, and there seem to me to be no inconsistencies in it which are at all material.
I think it cannot be doubted that Mr. Rew had represented to Mr. Rhodes that the lenders
required some security beyond the mortgage of the freehold, that such security was to be
collateral and to consist of these De Beers shares, and that he induced Mr. Rhodes to leave the
De Beers shares with him on the representation that he would arrange with the lenders that he
should hold them as for them collateral security or their loan. Whatever verbal differences
there may be, I think there can be no doubt that this is the substance of the transaction in
view, net merely of Mr. Rhodes statements, but of the letters to which I have referred written
previously by Mr. Rew to Mr. Rhodes.
The question is whether under these circumstances the firm are liable in respect of these
shares which have been misappropriated in the manner I have mentioned. It is said that they
are not, inasmuch as it was beyond the scope of Mr. Rews authority as a solicitor to take the
shares for any such purpose, or under such circumstances, and that, inasmuch as his partners
were admittedly ignorant of his having so taken them, they cannot be bound by the transaction
or incur any liability in respect of it. It is clear that on previous occasions the firm had acted
for Mr. Rhodes in negotiating loans, and in receiving from him these very securities and
transmitting them to the lenders, and in the first instance certainly receiving them back from
the lenders. That that was a firm transaction I think it is impossible to dispute, because as I
have shewn, it passed through the books of the firm, the firm credited themselves with the
charges in respect of it, and an account was sent in the name of the firm, and that account was
discharged by Mr. Rhodes. Therefore, it is impossible to dispute that Mr. Rhodes had on the
previous occasion actually carried through a transaction with the firm, and as a part of the
transaction they not only negotiated the loan, but received from him these very securities to be

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137

handed to the lender. Even apart from that, I am not satisfied that it would be outside the
scope of a solicitors business when they were negotiating a loan for one of their clients to
receive from him securities, whatever their nature, for the purpose of transmission to any of
their clients who were making the loan. It is not necessary to decide that as a matter of law;
all I say it, I am not satisfied. But, in the present case, having regard to the prior dealings of
this gentleman with the firm, I think it is impossible for them to say that Mr. Rhodes was not
perfectly justified in assuming that the partner with whom on this occasion he dealt had
authority from the firm to receive from him the shares which he handed for the purpose of
carrying out the mortgage transaction which they were negotiating for him. If these shares
had been handed over to the lenders the transaction would be on all fours with the one which
had been previously carried through by him on behalf of the firm. In the present case it is true
that the shares were not handed over to the lenders; but Mr. Rew represented to the Plaintiff
that this was by arrangement between him and the lenders, who were also his clients, and who
had arranged that he, or rather that the firm, should hold the securities on behalf of the lenders
instead of handing them over to him. It seems to me that that can make on possible difference
in the result. That was merely a matter between Mr. Rew, or the firm, and their other clients
with whom they had negotiated the loan. If in fact that authority had been receiveda
question which I shall have to deal with presentlyit seems to me it would be quite immaterial
whether the transaction was carried out in that way or by Mr. Rew receiving them to hand
them over afterwards to his clients, the lenders.
For these reasons, apart from authority, I find it difficult to discover any ground upon
which it could be said that Mr. Rhodes was not justified in treating, and entitled to treat, the
transaction as a transaction with the firm which rendered, not Mr. Rew only, but the firm
responsible, if the shares received under the circumstances I have detailed were
misappropriated and not forthcoming. This, of course, is subject to the question whether the
firm had discharged themselves by shewing that they were held for the Defendants Moules
under such circumstances that those Defendants are liable to the Plaintiff; in which case, of
course, the firm would be discharged from liability, because they would in fact have handed
them over to the lenders, and be freed from responsibility to Mr. Rhodes, the lenders being
then the persons responsible; but that is a subsequent part of the case which I will deal with
presently.
The Defendants relied mainly upon the case of Cleather v. Twisden [28 Ch. D. 340],
decided in this Court in the year 1884. It was said that this case established that it was not
part of the business of a solicitor to take over for custody bonds payable to bearer, and,
consequently, when one partner had done so without his other partners being aware of it, they
were under no liability if he misappropriated them. I do not think that case covers the present
one. In the view which I take, these bonds were not handed to Mr. Rew merely for safe
custody: they were handed to him in connection with a mortgage transaction which he was
carrying out, in order that they should pass through him as collateral security to the lenders
for whom he was acting. But it is to be observed that in the case of Cleather v. Twisden Lord
Justice Bowen said [28 Ch. D. 349]: The claim is against the firm to which Parker belonged
in respect of the custody of certain bonds by Parker. This is conceded to be beyond the
ordinary scope of the business of solicitors, though, of course, it may be brought within it by

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special circumstances. There was, therefore, there no evidence on the question; but it was
conceded by those who were arguing the case that such a transaction was beyond the ordinary
scope of the solicitors. It cannot be said, therefore, that in that case it was held as a matter of
law to be so, because obviously when that had been conceded as a matter of fact any finding
as a matter of law would have been superfluous. So that I do not think the case can be taken
as a decision in point of law that such a transaction would be beyond the scope of solicitors
authority. As the Lord Justice said, it must depend upon the special circumstances; and
certainly if it were to appear that it had been part of the practice of solicitors in the City to
take securities of this description for safe custody, or if indeed in the case of a particular firm
it appeared that such had been the practice, the case would have been one requiring the Court
to determine whether in the case of that firm at all events, if not generally, it was not a matter
within the scope of the authority of one of the partners. I should say the decision in Cleather
v. Twisden appears to me substantially to have amounted only to this, that Parker had really
taken charge of the bonds for a client as a personal matter as between him and that client, as a
solicitor of course, but still not as a member of the firm, but as an individual. That seems to
have been the conclusion at which the Court arrived, and there were undoubtedly
circumstances which point to that conclusion to which it is not necessary to refer further.
Lord Justice Bowen says this [28 Ch. D. 351]: That the bonds were in the custody of Parker
is common ground, the real question is whether in letters for which the firm are responsible,
language has been used which would justify the plaintiffs in assuming that Parkers custody
was the custody of the firm. In the present case I have a difficulty in seeing how it can be
doubted that letters for which the firm were responsible - letters relating to the previous
transaction to which I have alluded, which passed through the letter-book of the firm, charges
made by the firm and paid by the Plaintiff - would justify the Plaintiff in assuming that when
Rew received those shares he received them, not as an individual, but on behalf of the firm,
and that his receipt of them was the receipt of the firm. In Lord Justice Frys judgment he
says this [28 Ch. D. 356]: He (that is, Parker) was advising the trustees in the realization
of the property, and I do not doubt that as to any parts such as the mortgages, which were
received by Parker for distribution, the firm would be responsible; but as to the bonds they
were not received for the purpose of distribution but for safe custody long before the
distribution began. Therefore, I do not see any reason to think that if circumstances such as
we have in the present case had been brought before the Court which decided that case - if
they had been aware of such previous transaction as we are aware of here, and had seen that
the securities were received in connection with a mortgage transaction in the way they were
here - they would have come to any other conclusion than that in which we have arrived.
But then it is said on behalf of the Plaintiff, the Defendants Moules are responsible for
these shares, and the receipt of them by Mr. Rew was a receipt on their behalf. He held them
on their behalf, and whatever the liability of the firm to the Moules they cannot call upon the
Plaintiff to repay the sum lent without not only reconvening to him, but giving up to him
these De Beers shares. In order to establish this case I think they must make out two things:
first, that Mr. Rew did in fact receive an hold these De Beers shares for the Defendants
Moules; and secondly, that he did so with the authority of the Moules. Now, I have not been
satisfied that he did in fact receive them, or ever intended to receive them and hold them for

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139

the Moules. No doubt he led Mr. Rhodes to believe that he did: but that is quite a different
question.
The case is a very peculiar one. Mr. Rew when he drew up the mortgage from Mr.
Rhodes to the Moules made himself a mortgage, not only without any authority to do so, but
without any legitimate reason for doing so. He was, of course, not a mortgagee. He had told
Mr. Rhodes that the mortgagees would require some collateral security and that he thought
they would take the De Beers shares. He had no communication on the subject with the
Moules at all; they never required further security, and he never communicated with them on
the subject. He told Mr. Rhodes that it was by arrangement with them that the shares were to
be left in the custody of the firms. No such arrangement had been made: and again, as I have
said, there was no communication on the subject. We know that Mr. Rew had commenced the
Stock Exchange transactions which ultimately led to his ruin at a date prior to this, viz., in the
January of that year, and he ultimately did dispose of those shares as his own. Under those
circumstances I cannot say, in the absence of any evidence, that he ever identified them as
their property, that he ever put them in an envelope or wrote their name on them or did
anything to earmark them as theirs; and, in view of the falsehoods and irregularities to which I
have referred, I cannot be satisfied that at the time he received those shares he ever meant to
hold them really for the Moules. But even if he did, is there evidence that he had authority to
receive and hold these shares on behalf of the Moules so as to make them liable? It was not
suggested that he received any express authority, that they ever actually heard anything of the
transaction: but it is said that he had a general authority, that the whole of the business in
connection with the estate in which they were interested was left so entirely to Mr. Rew that
he was intended to be by them absolutely master of the situation, taking what he pleased and
doing what he pleased. Now, I have read the correspondence, and it conveys to my mind
precisely the opposite impression. I do not find Mrs. Moules leaving everything to him in that
blind way at all. She requires to know about everything. He professes to tell her about
everything. He asks her approval at every step, and that approval is conveyed, and doubts
were sometimes suggested, and, seeing that neither she nor her son ever learned that these
shares had been taken or held for them by Mr. Rew or the firm, it seems to me it would be
somewhat extravagant to arrive at the conclusion, notwithstanding all that, that they were held
by the firm or Mr. Rew for the Moules, or that, having been in effect handed to them, they had
become responsible for them.
For these reasons I am unable to come to the conclusion that the Defendants the Moules
are liable. I do not think that the firm who undoubtedly received these shares from Mr.
Rhodes have discharged themselves of liability. It follows in the result, I think, that as regards
the Moules, the appeal should be dismissed with cost; and as regards the other Defendants the
judgment must be reversed with the usual result, and that judgment with costs should be for
the Plaintiff.
*****

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Hamlyn v. Houston & Co.


(1903) 1 K.B. 81

[Liability of other partners/firm for wrongful acts of a partner- One partner bribed
the clerk of a competing firm to obtain information relating to contracts]

COLLINS, M.R. The decision of the learned judge in this case was, in my opinion, right.
The defendant Strong appears to have been a sleeping partner in a firm consisting of himself
and the defendant Houston, or, at any rate, he delegated the transaction of the whole of the
firms business to Houston. The jury have found that it was in the course of the business of
the firm to obtain by legitimate means information in regard to contracts made or tendered for
with brewers and with buyers of grains by competing firm What Houston did for the purpose of
obtaining information which, according to the finding of the jury, it was within the scope of
his authority to obtain by legitimate means, was to bribe the clerk of the plaintiff, who was a
competitor in business, to give him access to documents belonging to the plaintiff; indeed, it
would appear that he actually had possession of one of the plaintiffs books for a time. It was
argued for the defendants that this action by Houston was so completely outside the scope of
the authority given to him that the defendants firm cannot be responsible for it in an action
brought against them by the plaintiff for damages thereby occasioned to him. The defendants
counsel have endeavoured to frame a definition with regard to what is and what is not within
the scope of an agents authority so as to render his principal liable. They suggested that,
where the end sought to be obtained by the agent is in itself illegal, and the means employed
to accomplish it are illegal, it cannot be said that the action of the agent is within the scope of
the general authority given to him to conduct a business, but that it is otherwise where the end
and the means employed are legal, or where the end is legal or illegal. Trying this case by the
test so suggested, was the end to be obtained here in itself illegal? The defendants counsel
say that it was, but it does not appear to me to be so. According to the finding of the jury it
was part of the defendants business to obtain information as to the contracts and tenders of
competitors in business, and, the more secret these matters were, the greater was the value of
that information to the defendants firm. The jury have in effect found that it was within the
scope of the authority given to Houston to obtain such information by legitimate means, and I
do not see that there was anything illegal in so obtaining it. It is too well established by the
authorities to be now disputed that a principal may be liable for the fraud or other illegal act
committed by his agent within the general scope of the authority given to him, and even the
fact that the act of the agent is criminal does not necessarily take it out of the scope of his
authority. If the act done by the agent is within the general scope of the authority given to
him, it matters not for the present purpose that it was directly contrary to the instructions of
his principal, or even that it may have been an offence against society itself. The test is that
which is applied to this case by the learned judge. Was it within the scope of the authority
given to Houston to obtain this information by legitimate means? If so, it was within the
scope of his authority for the present purpose to obtain it by illegitimate means, and the
defendants are liable. That is the law as expressed in the Partnership Act, 1890, and as laid
down by decisions previous to that Act, in which it has been held that a principal is liable for
the fraud or other wrongful act of his agent if committed within the scope of his employment.

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This doctrine does not appear to rest upon the notion of the principals holding out the agent
as having authority. The grounds upon which it seems to rest, as explained in cases such as
Barwick v. English Joint Stock Bank [(1867) L.R. 2 Ex. 259], appear to be that the principal
is the person who has selected the agent, and must therefore be taken to have had better means
of knowing what sort of a person he was than those with whom the agent deals on behalf of
his principal; and that, the principal having delegated the performance of a certain class of
acts to the agent, it is not unjust that he, being the person who ahs appointed the agent, and
who will have the benefit of his efforts if successful, should bear the risk of his exceeding his
authority in matters incidental to the doing of the acts the performance of which has been
delegated to him. For these reasons I think this application must be dismissed.

METHEW, J. - I agree. A little confusion has been introduced into this case by the
reference made to the criminal law. It is not suggested that Houstons partner would be liable
determinally; the question is only one of civil liability. The rule of law applicable is perfectly
plain. The question is whether the action of Houston was within the scope of his authority for
the purpose of making the firm liable. I think the jury were entirely warranted in finding that
Houston was authorized to obtain information as to the contracts and tenders made by
competing firms by legitimate means. He did obtain such information by illegitimate means.
It being within the scope of his authority to procure the information, it is immaterial for the
present purpose whether the acts which he committed in order to procure it were fraudulent or
even criminal or not, and his partner is responsible for those acts.
*****

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Tower Cabinet Co., Ltd v. Ingram


(1949) 1 KBD 1032
[Holding out - section 28]

LYNSKEY, J. - The respondent company, the Tower Cabinet Co., Ltd., claimed from
Merry's, who in the writ were described as "sued as a firm", the sum of 23.17s. for the price
of six suites of furniture sold and delivered. Judgment was obtained, and the company then
sought to render a Mr. S. G. Ingram liable for the debts of Merry's. They alleged that he was
liable, first, under s. 14, and, secondly, under s. 36, of the Partnership Act, 1890. The matter
was referred for trial before Master Grundy, the issue being whether Mr. Ingram had
represented himself to be, or knowingly suffered himself to be represented to be, a partner
under S. 14, or was liable under the provisions of S. 36 as, a partner.
The facts found by the learned master were that in January, 1946, Mr. A. H. Christmas
and Mr. Ingram commenced together to carry on business in partnership as household
furnishers under the name of Merry's at Silver street, Edmonton. The partnership was
registered under the Registration of Business Names Act, 1916, as being carried on by Mr.
Christmas and Mr. Ingram. That partnership subsisted until Apr. 22, 1947, on which date the
parties agreed to dissolve it. The master was satisfied that there was a dissolution of this
partnership in April, 1947, and that Mr. Ingram had given notice to the firm's bankers that he
had ceased to be a partner in the business carried on in the name of Merry's. From then until
some time in May, 1948, Mr. Ingram had no connection with the partnership except that Mr.
Christmas had agreed to pay him for his share of the partnership a sum of some 3,000, and
by May, 1948, about 1,000 had been paid by instalments. Mr. Ingram was not professionally
represented at the time of the dissolution. He arranged with Mr. Christmas to notify those
dealing with the firm that he (Mr. Ingram) had ceased to be connected with it, but he did not
advertise or procure the advertisement in the London Gazette of the fact that he had ceased to
be member of the firm. After his cessation of membership, new notepaper was printed for use
in the future business of the firm. While Mr. Ingram had been a partner, the notepaper had
been headed Merrys and thereunder had borne the names: A. H. Christmas and S. G.
Ingram, indicating that they were both partners. After the dissolution the name Merrys
appeared on the new notepaper, and A. H. Christmas, Director, apparently as being the
person responsible for the running of the business.
In January, 1948, Mr. Christmas, or Merry's, were approached by the Tower Cabinet
Company through their representative, a Mr. Harold Selbey, who obtained an order for six
suites of furniture. He reported the order to one of the directors of the company, Mr. Jack
Smead, who telephoned to Merry's and asked for a director in order to secure confirmation of
the order. It is not clear to whom he spoke. In pursuance of that conversation, a letter was
written in the form of an order, and dated Jan. 5, 1947, in mistake for Jan. 5, 1948. That order
form read: Merrys, A. H. Christmas, S. G. Ingram. Household Furnishers. To Tower
Cabinet Co., Ltd. Please supply six light bedroom suites . 168 units on delivery. It was
signed by Mr. Christmas as the manager. That order or confirmation was given on the
notepaper which had been the notepaper of the firm at the time when Mr. Ingram was a

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143

member, but Mr. Christmas had no authority from Mr. Ingram to use it, and in using it he was
acting in direct conflict with the arrangement that he had made with Mr. Ingram that he
should notify people that Mr. Ingram was no longer interested in the firm.
In May, 1948, Mr. Ingram was worried about the state of the business, and he came to try
and see if he could resuscitate it in order to salvage his share in the previous partnership. He
seems to have put some 300 into the business, and to have endeavoured to take control
again. A letter was written by Mr. Christmas to the company in May, 1948, saying:
Dear Sirs, I wish to advise you that as from today I am no longer connected with the
above business. Mr. S. G. Ingram is now sole proprietor and responsible for all
outstanding debts. Yours faithfully, (signed) A. H. Christmas.
According to the evidence of Mr. Ingram, that letter was written without his knowledge
and without his authority and he had no idea it was being sent, but it is not of any great
materiality from the point of view of the questions which we have to decide in this case. It is
clear on the master's finding that in January and February, 1948 when the goods were ordered
and delivered Mr. Ingram was not in fact a partner in this business. The question is whether
the company are able to make him liable as a partner by reason of the provisions of the
Partnership Act, 1890, dealing either with holding out or with failure to give notice when a
partnership has ceased and credit has been given to the partnership firm as if the outgoing
partner were still a partner.
[Section 14 of the Act of 1890 was identical with the provisions of section 28 of
the Indian Partnership Act, 1932. The court re-produced section 14 and proceeded.]
Before the company can succeed in making Mr. Ingram liable under this section, they
have to satisfy the court that Mr. Ingram, by words spoken or written or by conduct,
represented himself as a partner. There is no evidence of that. Alternatively, they must prove
that he knowingly suffered himself to be represented as a partner. The only evidence of Mr.
Ingram's having knowingly suffered himself to be so represented is that the order was given
by Mr. Christmas on notepaper which contained Mr. Ingram's name. that would amount to a
representation of Mr. Christmas that Mr. Ingram was still a partner in the firm, but on the
evidence and the master's finding that representation was made by Mr. Christmas without Mr.
Ingram's knowledge and without his authority. That being the finding of fact, which is not
challenged, it is impossible to say that Mr. Ingram knowingly suffered himself to be so
represented. The words are "knowingly suffers" not being negligent or careless in not
seeing that all the notepaper had been destroyed when he left.
The company also rely on s. 36 which provides:
(1) Where a person deals with a firm after a change in its constitution he is
entitled to treat all apparent members of the old firm as still being members of the
firm until he has notice of the change. (2) An advertisement in the LONDON
GAZETTE as to a firm whose principal place of business is in England or Wales, in
the EDINBURGH GAZETTE as to a firm whose principal place of business is in
Scotland, and in the DUBLIN GAZETTE as to a firm whose principal place of
business is in Ireland, shall be notice as to persons who had not dealings with the firm
before the date of the dissolution or change so advertised. (3) The estate of a partner

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Kamal Pushp Enterprises v. D.R. Construction Co.

who dies, or who becomes bankrupt, or of a partner who, not having been known to
the person dealing with the firm to be a partner, retires from the firm, is not liable for
partnership debts contracted after the date of the death, bankruptcy, or retirement
respectively.
It is said by counsel for the company that sub-s. (1) deals with the case in which it appears
to the world that a man is still a partner in a firm and notice must be given before his liability
as a retiring partner can cease. Secondly, he says that sub-s. (2) equally applies to the position
of a partner when it is apparent to the world that he was a partner.
Referring to the old authority of Farrar v. Delfinne, counsel for the company says that
the distinction has to be drawn between what are described by Cresswell, J., in that case as
notorious partners of the partnership and partners who are "profoundly secret" members of the
partnership. Counsel says that this section, being in a codifying Act, re-enacts the law as it
existed in 1843 and later. It should be noticed that even in Farrar case Cresswell, J., laid
considerable emphasis on the question of actual notice. He said (1 Car. & Kir. 580):
Todd and the defendant were once in partnership, but they have not been so since the
year 1837. The plaintiff dealt with the firm during the partnership, and he continued
to do so afterwards; and the question is, whether the defendant is liable in respect of
such subsequent dealings now that the partnership is dissolved. The law stands thus:
If there had been a notorious partnership, but no notice had been given of the
dissolution thereof, the defendant would have been liable. If there had been a general
notice, that would have been sufficient for all but actual customers; these, however,
must have had some kind of actual notice. If the partnership had remained
profoundly secret, the defendant could not have been affected by transactions which
took place after he had retired; but if the partnership had become known to any
person or persons, he would be in the same situation, as to all such persons, as if the
existence of the partnership had been notorious. The question for you, therefore, is
was this partnership actually known to the plaintiff, either by general report, or by
direct communication? Because, if it were, and he did not know, either from notice
of the fact, or from surmise, that the dissolution had taken place, you must infer that
he still dealt on the faith of the partnership, and the defendant will therefore be liable.
It is said by counsel for the company, who seeks to adopt this judgment in his favour, that
s. 36(1) and (2) are dealing with what are described in the judgment as "notorious"
partnerships, and sub-s. (3) is dealing with cases of "profoundly secret" partnerships.
Looking at the Act itself, I find difficulty in adopting that suggested construction. The words
of sub-s. (1) are:
Where a person deals with a firm after a change in its constitution he is entitled to
treat all apparent members of the old firm as still being members of the firm until he
has notice of the change.
The point depends, in my view, on what is the meaning of sub-s. (1) of "apparent
members." Apparent to whom? Does it mean apparent to the whole world, or notorious, or
does it mean apparent to the particular person with whom the section is dealing? In my
reading of that sub-section, "apparent members" means persons who appear to be members to

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145

the person who is dealing with the firm, and they may be apparent either by the fact that the
customer has had dealing with them before, or because of the use of their names on the
notepaper, or from some sign outside the door, or because the customer has had some indirect
information about them. Both sub-s. (1) and sub-s. (2), in my view, deal with cases where
they are apparent members.
Sub-section (3) again deals with the particular individual. It does not deal with the public
at large. Its words are, to my mind, simple and obvious. It does not deal merely with
question of apparent members or non-apparent members. It implies the test: "... a partner
who, not having been known to the person dealing with the firm to be a partner..." Whether
he was to other people an apparent partner, or whether he was a dormant partner, the words
seem to me to be equally applicable. If the person dealing with the firm did not know that the
particular partner was a partner, and if that partner retired, then, as from the date of his
retirement, he ceases to be liable for further debts contracted by the firm with that person.
The fact that later the person dealing with the firm may discover he was a partner seems to be
to be irrelevant, because the date from which the sub-section operates is the date of the
dissolution. If the person who subsequently deals with the firm had no knowledge prior to the
dissolution that the retiring partner was a partner, then sub-s. (3) comes into operation, and, in
effect, relieves the person retiring from liability.
It is said by counsel for the company that the company did know that Mr. Ingram was a
partner because the order for the goods contained a statement to the effect, or, apparently, to
the effect, that he was a partner of the firm. In my view, that document, which only came into
existence in January, 1948, was, no doubt, a representation by Mr. Christmas that Mr. Ingram
was a partner at that particular date. That representation was untrue. He was not a partner at
that date, and it seems to me one cannot draw the inference that that gave the company
knowledge that, in fact, Mr. Ingram had been a partner prior to the date of his dissolution of
the partnership in April, 1947. Even if it did give such notice, in my view, the section had
already commenced to operate, and it would not avail, subject to s. 14 dealing with holding
out, to render Mr. Ingram liable.
The result is that, in my view, the learned master was not correct in his view of the effect
of the sub-section or of the decision which he quoted. In my view, it is established that the
company had no knowledge that Mr. Ingram was a partner prior to the date of the dissolution.
That being so, Mr. Ingram is brought directly within the words of sub-s. (3), and is, therefore,
under no liability to the company in respect of the debts subsequently incurred by Mr.
Christmas at a time when he was not a partner. This appeal ought to be allowed.

LORD GODDARD, C.J. - I agree. I need only add that, in my opinion, the words "all
apparent member" in s. 36(1) mean all members apparent to the person dealing with the firm.
Secondly, I think sub-s. (3) exactly applies to the facts of this case, and I can see no good
reason for holding that that they apply to the case of a dormant partner. I think that the Act,
which is a codifying Act, intends in this section to incorporate the law, except with regard to
the notices in the LONDON GAZETTE, which was new, laid down by Cresswell, J. in
Farrar v. Deflinne (1), to which my brother has referred, or, at any rate, to adopt the
statement of law which he there lays down when he told the jury that the question for them
was : "Was this partnership actually known to the plaintiffs, either by general report, or by

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direct communication?" I feel convinced that the true construction to put on this section is
that there must be actual knowledge which may be acquired either because of the fact that it is
notorious, or because it has been directly communicated, but it is not enough to say that other
people knew. The fact may be so notorious that a jury would be justified in finding that the
person did know a certain fact, but it does not follow because other people know it that he
knew it. I think what Cresswell, J. meant in that case was that the jury must be satisfied that
there was actual knowledge, which might be gained from either of one of two sources.

*****

Kamal Pushp Enterprises v. D.R. Construction Co.

147

CIT v. Dwarkadas Khetan And Co.


AIR 1961 SC 680
[Minor made a full-fledged partner - the partnership becomes invalid]

M. HIDAYATULLAH, J. - The Commissioner of Income Tax has filed this appeal, with
special leave, against the judgment and order of the High Court of Bombay, by which the
High Court answered two questions referred to it in favour of the respondents, Messrs
Dwarkadas Khetan & Co., Bombay. These questions were:
(1) Whether the instrument of partnership dated 27-3-1946 created a deed of
partnership?
(2) If the answer to Question 1 is in the affirmative, whether the fact that on 11-1946 there was no firm in existence would be fatal to the application for
registration of the firm under Section 26-A of the Indian Income Tax Act or whether
the firm could be registered with effect from 26- 3-1946 if it is held that the firm was
genuine?
2. Prior to January 1, 1945, there was a firm called Dwarkadas Khetan & Co. On that
date, the firm ceased to exist, because the other partners had previously withdrawn, and it
came to be the sole proprietary concern of Dwarkadas Khetan. On February 12, 1946,
Dwarkadas Khetan obtained the selling agency of Seksaria Cotton Mills, Ltd. On March 27,
1946, he entered into a partnership, with three others by an instrument of partnership executed
that day. Those three others were Viswanath Purumul, Govindram Khetan and Kantilal
Kasherdeo. Dwarkadas Khetans share in the partnership was 7 annas in the rupee, while the
remaining 9 annas share was divided equally among the three others. Though Kantilal
Kasherdeo was a minor, he was admitted as a full partner and not merely to the benefits of the
partnership, as required by Section 30 of the Indian Partnership Act. To the instrument of
partnership, Kantilal Kasherdeo was also a signatory, though immediately after his signature
there was the signature of one Kasherdeo Rungta, the natural guardian of the minor. In the
instrument, Kantilal Kasherdeo was described as a full partner entitled not only to a share in
the profits but also liable to bear all the losses including loss of capital. It was also provided
that all the four partners were to attend to the business, and if consent was needed, all the
partners including the minor had to give their consent in writing. The minor was also entitled
to manage the affairs of the firm, including inspection of the account books, and was given
the right to vote, if a decision on votes had to be taken. In short, no distinction was made
between the adult partners and the minor, and to all intents and purposes, the minor was a full
partner, even though under the partnership law he could only be admitted to the benefits of
the partnership and not as a partner.
3. The deed of partnership was produced before the Registrar of Firms showing the names
of the four partners. The Registrar of Firms granted a registration certificate, and in the
certificate, Kantilal Kasherdeo was shown as a full partner and not as one entitled merely to
the benefits of the partnership. Banks were also informed about the four partners, and it does
not appear that to them intimation was sent that one of the named partners was a minor.

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Though the partnership came into existence on March 27, 1946, the firm was stated to have
started retrospectively from January 1, 1946.
4. The Income Tax Officer refused to accord registration on the ground that a minor had
been admitted as a partner contrary to law, and that the deed could not, therefore, be
registered. The appeal to the Appellate Assistant Commissioner also failed, the Commissioner
holding that registration could only be of a legal or valid document and not of a document
which was invalid in law. An appeal was then taken to the Tribunal, and it was contended that
the document must be construed as showing only that the minor was admitted not as a full
partner but to the benefits of the partnership. The Accountant Member held that the order of
the Appellate Assistant Commissioner was correct, giving two reasons. The first was that the
construction sought to be placed upon the document was not open, and the second, that since
retrospective operation was given to the firm even though no firm existed from January 1,
1946, registration could not be granted. The Judicial Member differed from the Accountant
Member, holding, as was contended, that the document must be construed as showing merely
that the minor had been admitted to the benefits of the partnership. The appeal was then
placed before the President, who agreed with the conclusion of the Accountant Member, with
the result that the refusal to register the firm under Section 26-A by the authorities was
upheld.
10. Section 30 of the Indian Partnership Act clearly lays down that a minor cannot
become a partner, though with the consent of the adult partners, he may be admitted to the
benefits of partnership. Any document which goes beyond this section cannot be regarded as
valid for the purpose of registration. Registration can only be granted of a document between
persons who are parties to it and on the covenants set out in it. If the Income Tax Authorities
register the partnership as between the adults only contrary to the terms of the document, in
substance a new contract is made out. It is not open to the Income Tax Authorities to register
a document which is different from the one actually executed and asked to be registered. In
our opinion, the Madras view cannot be accepted.
11. The answer to the first question should, therefore, have been in favour of the
Department. The answer given by the High Court is vacated, and the question will now be
answered in the negative. As already stated, there is no need to answer the second question,
which does not arise.
12. The appeal is allowed with costs here and in the High Court.
*****

Kamal Pushp Enterprises v. D.R. Construction Co.

149

Shivagouda Ravji Patil v. Chandrakant Neelkanth Sadalge


AIR 1965 SC 212

[Can a minor who was admitted to the benefits of a partnership can be adjudicated
insolvent on the basis of debt or debts of the firm after the partnership was dissolved,
on the ground that he attained majority subsequent to the said dissolution, but did not
exercise his option to become a partner or cease to be one of the said firm]

K. SUBBA RAO, J. - 2. The facts are not in dispute and may be briefly stated. Mallappa
Mahalingappa Sadalge and Appasaheb Mahalingappa Sadalge, Respondents 2 and 3 in the
appeal, were carrying on the business of commission agents and manufacturing and selling
partnership under the names of two firms "M. B. Sadalge" and "C.N. Sadalge". The
partnership deed between them was executed on October 25, 1946. At that time Chandrakant
Nilakanth Sadalge, Respondent 1 herein, was a minor and he was admitted to the benefits of
the partnership. The partnership had dealings with the appellants and it had become indebted
to them to the extent of Rs 1,72,484. The partnership was dissolved on April 18, 1951. The
first respondent became a major subsequently and he did not exercise the option not to
become a partner of the firm under Section 30(5) of the Indian Partnership Act. When the
appellants demanded their dues, Respondents 2 and 3 informed them that they were unable to
pay their dues and that they had suspended payment of the debts. On August 2, 1954, the
appellants filed an application in the Court of the Civil Judge, Senior Division, Belgaum, for
adjudicating the three respondents as insolvents on the basis of the said debts. The 1st
respondent opposed the application. The learned Civil Judge found that Respondents 2 and 3
committed acts of insolvency and that the 1st respondent had also become partner as he did
not exercise his option under Section 30(5) of the Partnership Act and, therefore, he was also
liable to be adjudicated along with them. The first respondent preferred an appeal to the
District Judge, but the appeal was dismissed. On second appeal, the High Court held that the
1st respondent was not a partner of the firm and, therefore, he could not be adjudicated
insolvent for the debts of the firm. The creditors have preferred the present appeal against the
said decision of the High Court.
3. Learned counsel for the appellants, Mr Pathak, contends that the 1st respondent had
become a partner of the firm by reason of the fact that he had not elected not to become a
partner of the firm under Section 30(5) of the Patnership Act and, therefore, he was liable to
be adjudicated insolvent along with his other partners.
4. The question turns upon the relevant provisions of the Provincial Insolvency Act, 1920
(5 of 1920) and the Indian Partnership Act. Under the provisions of the Provincial Insolvency
Act, a person can only be adjudicated insolvent if he is a debtor and has committed an act of
insolvency as defined in the Act: see Sections 6 and 9. In the instant case Respondents 2 and 3
were partners of the firm and they became indebted to the appellants and they committed an
act of insolvency by declaring their inability to pay the debts and they were, therefore, rightly
adjudicated insolvents.
5. But the question is whether the first respondent could also be adjudicated insolvent on
the basis of the said acts of insolvency committed by Respondents 2 and 3. He could be, if he

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had become a partner of the firm. It is contended that he had become a partner of the firm,
because he did not exercise his option not to become a partner thereof under Section 30(5) of
the Partnership Act. Under Section 30(1) of the Partnership Act a minor cannot become a
partner of a firm but he may be admitted to the benefits of a partnership. Under sub-sections
(2) and (3) thereof he will be entitled only to have a right to such share of the properties and
of the profits of the firm as may be agreed upon, but he has no personal liability for any acts
of the firm, though his share is liable for the same. The legal position of a minor who is
admitted to a partnership has been succinctly stated by the Privy Council in Sanyasi Charan
Mandal v. Krishnadhan Banerji [ILR 49 Cal, 560, 570] after considering the material
provisions of the Contract Act, which at that time contained the provisions relevant to the law
of partnership, thus:
A person under the age of majority cannot become a partner by contract ... and so
according to the definition he cannot be one of that group of persons called a firm. It
would seem, therefore, that the share of which Section 247 speaks is no more than a
right to participate in the property of the firm after its obligations have been satisfied.
It follows that if during minority of the 1st respondent the partners of the firm committed
an act of insolvency, the minor could not have been adjudicated insolvent on the basis of the
said act of insolvency for the simple reason that he was not a partner of the firm. But it is said
that sub-section (5) of Section 30 of the Partnership Act made all the difference in the case.
Under that sub-section the quondam minor at any time within six months of his attaining
majority, or of his obtaining knowledge that he had been admitted to the benefits of
partnership, whichever date is later, may give public notice that he has elected to become or
that he has elected not to become a partner in the firm and such notice shall determine his
position as regards the firm. If he failed to give such a notice, he would become a partner in
the said firm after the expiry of the said period of six months. Under sub-section (7) thereof
where such person becomes a partner, his rights and liabilities as a minor continue up to the
date on which he becomes a partner, but he also becomes personally liable to third parties for
all acts of the firm done since he was admitted to the benefits of partnership and his share in
the property and profits of the firm shall be the share to which he was entitled as a minor.
Under the said two sub-sections, if during the continuance of the partnership, a person, who
was admitted at the time when he was a minor to the benefits of the partnership, did not
within six months of his attaining majority elect not to become a partner, he would become a
partner after the expiry of the said period and thereafter his rights and liabilities would be the
same as those of the other partners as from the date he was admitted to the partnership. It
would follow from this that the said minor would thereafter be liable to the debts of the firm
and could be adjudicated insolvent for the acts of insolvency committed by the partners. But
in the present case the partnership was dissolved before the first respondent became a major;
from the date of the dissolution of the partnership, the firm ceased to exist, though under
Section 45 of the Act, the partners continued to be liable as such to third parties for the acts
done by any of them which would have been the acts of the firm if done before the dissolution
until public notice was given of the dissolution. Section 45 proprio vigore applies only to
partners of the firm. When the partnership itself was dissolved before the first respondent
became a major, it is legally impossible to hold that he had become a partner of the dissolved

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151

firm by reason of his inaction after he became a major within the time prescribed under
Section 30(5) of the Partnership Act. Section 30 of the said Act presupposes the existence of a
partnership. Sub-sections (1), (2) and (3) thereof describe the rights and liabilities of a minor
admitted to the benefits of partnership in respect of acts committed by the partners; subsection (4) thereof imposes a disability on the minor to sue the partners for an account or
payment of his share of the property or profits of the firm, save when severing his connection
with the firm. This sub-section also assumes the existence of a firm from which the minor
seeks to sever his connection by filing a suit. It is implicit in the terms of sub-section (5) of
Section 30 of the Partnership Act that the partnership is in existence. A minor after attaining
majority cannot elect to become a partner of a firm which ceased to exist. The notice issued
by him also determines his position as regards the firm. Sub-section (7) which describes the
rights and liabilities of a person who exercises his option under sub-section (5) to become a
partner also indicates that he is inducted from that date as a partner of an existing firm with
co-equal rights and liabilities along with other partners. The entire scheme of Section 30 of
the Partnership Act posits the existence of a firm and negatives any theory of its application to
a stage when the firm ceased to exist. One cannot become or remain a partner of a firm that
does not exist.
6. It is common case that the first respondent became a major only after the firm was
dissolved. Section 30 of the Partnership Act, therefore, does not apply to him. He is not a
partner of the firm and, therefore, he cannot be adjudicated insolvent for the acts of
insolvency committed by Respondents 2 and 3, the partners of the firm. The order of the High
Court is correct. In the result, the appeal fails and is dismissed with costs.
*****

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Kamal Pushp Enterprises v. D.R. Construction Co.

CIT v. Shah Mohandas Sadhuram


(1965) 3 SCR 771

S.M. SIKRI, J. - The question referred to is:


Whether the assessee, Mohandas Sadhuram, can be granted registration under
Section 26-A of the Indian Income Tax Act on the basis of the partnership deed made
on 1-4-1952 for Assessment Year 1953-54 and on the basis of the said deed read with
the supplementary deed on l-4-1953 for Assessment Year 1954-55.
2. The respondent, Shah Mohandas Sadhuram, the asssessee, is a firm. The assessee
claimed registration under Section 26-A of the Indian Income Tax Act on the strength of a
patnership deed executed on April 1, 1952. The partnership deed first describes the parties
and then recites:
Whereof the above four members were till this day members of a joint family,
whereof yesterday that is on 31-3-1962 the said four members have become divided
not only interest but also by metes and bounds, each of the said members taking to
his share one fourth () of the said joint family assets and liabilities as detailed in the
books of account as maintained by the firm known as Seth Mohandas Sadhuram and
whereof we the first and second members have decided to constitute all the said four
members as a partnership admitting the third and fourth members thereof to the
benefits of the said partnership but not to the liabilities thereunder.
3. The first and second members referred to in the recital are Atmaram and Doulatram,
both majors. The other relevant clauses are as follows:
(4) The said firm is agreed to do business of banking and commerce (which term
includes all that is usually and customarily is understood to be done thereunder) and
also to deal in automobiles business. The automobiles business having been started
by the said first and second members under the name and style of Vijaya
automobiles, Mysore, when they were members of the said joint family as a
partnership venture apart from the said family, it is agreed between us now that the
said automobiles business shall- hereafter be continued to be done under the name
and style of Vijaya automobiles as part of the said firm.
(7) It is agreed that the capital contribution of each member will be equal and the
accounts to be maintained to indicate the said capital contribution, will show what
each member has so contributed in the personal capital ledger account.
(8) It is further agreed that after debiting all working expenses inclusive of those
referred to in para 6, supra the profits of the firm less six pies per every rupee of
profits which will be reserved for charity fund will be distributed pro rata according
to the proportion of capital investment; as detailed of each member, all to be paid to
his account in the books of account, from where each member can draw. The losses
are agreed to be shared by the members in the like manner.
The share of profits for the 3rd and 4th member will be paid to them, the said
profits to be credited to their accounts, and from there their maintenance charges and

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153

other expenses of necessities if any may be drawn by the said Guardian from the said
accounts.
(10) It is agreed that the duration of this partnership will be for a period the of
one year i.e from, 1st of April, 1952 to 31st March, 1953, and the members might
agree to continue the said partnership even thereafter under these terms or on terms to
be determined then.
(11) It is agreed that the profits and losses of the Bombay branch and other
branches if any outside the State of Mysore will be credited or debited separately in
the books of account of these branches and final allocation made in those books of
account, as distinct from the profits and losses of the firm in State of Mysore.
(12) It is agreed that the first and the second members do maintain proper
accounts as is customarily to be maintained.
4. For Assessment Year 1953-54, the Income Tax Officer rejected the application for
registration on the ground that in the case of the assessee, the minors are made parties to a
contract by the eldest brother acting on their behalf. The minor has actually been debited with
a share of loss. Taking these facts into account, I hold that the partnership is not entitled to the
benefits of registration. For Assessment Year 1954-55, he also rejected the application but
added this further ground that a supplementary deed of partnership extending the life of the
partnership beyond 1-4-1953 for a further period at the will of the partners is filed. This is on
10 annas stamp paper. (The supplementary deed rests on clause 10 of the original deed). I
have already held that the original deed is not registerable. The supplementary dead cannot
confer any fresh rights in the matter.
9. This Court held in CIT v. Dwarkhdas Khetan &.Co. [41 ITR 528] that the Income Tax
Officer was only empowered to register a partnership which was specified in the instrument
of partnership and it was not open to the Department to register a partnership different from
that which was formed by the instrument. It further held that Section 30 of the Indian
Partnership Act was designed to confer equal benefits upon the minor by treating him as a
partner but it did not render a minor a competent and full partner, and any document which
made a minor full partner could not be regarded as valid for the purpose of registration.
10. Does this deed then make the minors full partners or does it only confer benefits of
partnership on them? Is any clause of the deed void? Before we discuss these questions it is
necessary to consider what are the incidents and true nature of benefits of partnership and
what is a guardian of a minor competent to do on behalf of a minor to secure the full benefits
of partnership to a minor. First it is clear from sub-section (2) of Section 30 of the Partnership
Act that a minor cannot be made liable for losses. Secondly, Section 30 sub-section(4) enables
a minor to sever his connection with the firm and if he does so, the amount of his share has to
be determined by evaluation made, as far as possible, in accordance with the Rules contained
in Section 48 which section visualises capital having been contributed by partners. There is no
difficulty in holding that this severance may be effected on behalf of a minor by his guardian.
Therefore, sub-section (4) contemplates that capital may have been contributed on behalf of a
minor and that a guardian may on behalf of a minor sever his connection with the firm. If the
guardian is entitled to sever the minors connection with the firm, he must also be held to be

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Kamal Pushp Enterprises v. D.R. Construction Co.

entitled to refuse to accept the benefits of partnership or agree to accept the benefits of
partnership for a further period on terms which are in accordance with law. Sub-section (5)
proceeds on the basis that the minor may or may not know that he has been admitted to the
benefits of partnership. This sub-section enables him to elect, on attaining majority, either to
remain a partner or not to become a partner in the firm. Thus it contemplates that a guardian
may have accepted the benefits of a partnership on behalf of a minor without his knowledge.
If a guardian can accept benefits of partnership on behalf of a minor he must have the power
to scrutinise the terms on which such benefits are received by the minor. He must also have
the power to accept the conditions on which the benefits of partnership are being conferred. It
appears to us that the guardian can do all that is necessary to effectuate the conferment and
receipt of the benefits of partnership.
11. It follows from the above discussion that as long as a partnership deed does not make
a minor full partner a partnership deed cannot be regarded as invalid on the ground that a
guardian has purported to contract on behalf of a minor if the contract is for the purposes
mentioned above.
12. Let us then examine the partnership deed in the light of these principles. It need
hardly be stated that the partnership deed must be construed reasonably. The recital set out
above expressly states that it is the major members who had decided to constitute the
partnership and admit the minors to the benefits of the said partnership. The rest of the clauses
must be construed in the light of this recital. Clause 4 only states the business to be carried on
and the name of the business. It seems to us that the expression it has been agreed between
us has reference to the agreement mentioned in the recital. Regarding clause 7, which deals
with capital contribution, it is urged that a guardian is not entitled to agree to contribute
capital. We are unable to agree. If it is one of the terms on which benefits of partnership are
being conferred either the guardian must refuse to accept the benefits or he must accept this
term. In some cases such an agreement by a guardian may be avoided by the minor, if it was
not entered into for his benefit, but the agreement will remain valid a long as it is not avoided
by the minor.
13. Regarding clause 10, Mr Karkhanis submits that this embodies a clear agreement
enabling the minor to continue the said partnership even thereafter under these terms or on
terms to be determined then, and therefore this clause is void. We can find no defect in this
clause. The duration of a partnership has to be fixed between the major members, and the
guardian on behalf of a minor may agree to accept the benefits of the partnership only if the
duration is to the benefit of the minor. Clause 10 enables the guardian to accept the benefits of
partnership under these terms or under such other terms as may be determined. If the terms
determined in future are similar, no objection can be taken; if on the other hand the terms
determined later are in contravention of law, the partnership deed will be held to be bad.
Clause 11 has reference to the manner of keeping accounts and a guardian is entitled to assent
to the mode of keeping accounts.
14. In our opinion, the partnership deed, reasonably construed, only confers benefits of
partnership on the two minors and does not make them full partners. The guardian has agreed
to certain clauses in orders to effectuate the decision of the major members to confer the
benefit of the said partnership to the minors. Accordingly we hold that the Income Tax

Kamal Pushp Enterprises v. D.R. Construction Co.

155

Authorities should not have declined to register the firm. We may mention that the
supplementary deed dated April 1, 1953, has not been included in the statement of the case,
but it is common ground that nothing turns on any of the clauses in the supplementary deed.
15. Accordingly, agreeing with the High Court, we hold that the firm is entitled to be
registered under Section 26-A of the Income Tax Act, and the answer to the question referred
is in the affirmative.
*****
[Read also Commissioner of Income-Tax v. Shah Jethaji Phulchand, [(1965) 56 I.T.R.
25], in which the above case was followed by the same judge.]
*****

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Kamal Pushp Enterprises v. D.R. Construction Co.

INCOMING AND OUTGOING PARTNERS


Syndicate Bank v. R.S.R. Engg. Works
(2003) 6 SCC 265
[Section 32]

K.G. BALAKRISHNAN, J. The plaintiff-appellant filed two suits against the


respondents. The first respondent in both the suits is a partnership firm engaged in
engineering works. Respondents 2 to 4 are its partners. In the first suit, namely, OS No. 1921
of 1980 which was filed for recovery of Rs. 59,775,95 with interest thereon, the plaintiff
alleged that for the purpose of expansion of industry of the respondents, a loan of Rs. 40,000
was sanctioned in favour of the respondents on 5-12-1974. The loan was to be repaid after 9
months in instalments. The respondents had also executed the requisite documents in favour
of the plaintiff Bank. Respondents 2 and 3 in their written statement admitted that the
respondents had borrowed Rs. 40,000 from the appellant, but they contended that the first
respondent firm was dissolved and the fourth respondent took over the entire liability and
therefore, they are to liable for the suit claim. The trial court passed the decree only against
Respondent 1 and Respondent 4 for the suit claim.
2. The appellant filed Regular First Appeal No. 632 of 1987 before the High Court and
prayed that decree shall be passed against all the respondents as all of them had joint and
several liability. This plea was rejected by the High Court and the High Court affirmed the
decree of the trial court. Aggrieved by the same, Civil Appeal No. 3765 of 1995 is filed.
3. In OS No. 1922 of 1980 filed against these respondents, the plaintiff alleged that these
respondents were given an overdraft facility to the extent of Rs. 20,000 by the appellant Bank
and that the respondents availed that facility and committed default in paying the amount due
from them and, therefore, the appellant filed the suit for recovery of Rs. 35, 157, 68 with
interest thereon. The respondents raised similar contention that the partnership was dissolved
and the fourth respondent had taken over the entire liability and that Respondents 2 and 3
stood absolved of the suit liability. The trial court accepted this contention and passed a
decree in favour of the plaintiff against Respondents 1 and 4. Aggrieved by the same, the
appellant filed a regular first appeal being RFA No. 631 of 1987 before the High Court and
the High Court affirmed the trial court decree by its judgment and aggrieved by the same,
Civil Appeal No. 1337 of 1995 is filed.
4. We heard learned counsel for the appellant and also the learned counsel for the
respondents. The learned counsel for the respondents contended that by virtue of the
dissolution deed dated 26-7-1976, R-1 partnership firm was dissolved and the fourth
respondent took over the entire liability and, therefore, the trial court was justified in passing
the decree against Respondents 1 and 4. The respondents also contended that notice of
dissolution of the firm was given to the plaintiff, but the appellant Bank did not raise any
objection and, therefore, it was urged that under Section 32(2) of the Indian Partnership Act,
1932, Respondents 2 and 3 are not liable for any payment under the suit. The learned counsel
for the appellant, on the other hand, contended that the loan was availed of by these

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respondents in the year 1974 and Respondents 2 to 4 jointly executed various documents and
they have admitted the execution of these documents. It was further contended that the
dissolution of the partnership on 28-7-1976 will not affect their liability to discharge the suit
claim and inter se arrangement between the partners, namely, Respondents 2, 3 and 4 is not
binding on the appellant Bank. The contention of the appellant is that in view of sub-section
(3) of Section 32 of the Indian Partnership Act. 1932, Respondents 2 and 3 cannot escape the
liability as regards the suit claims made by the appellant.
5. At the time when the appellant advanced the money to the first respondent firm,
Respondents 2, 3 and 4 were its partners. They admitted that they executed the requisite
documents in favour of the appellant. Thereafter the firm was alleged to have been dissolved
on 28-7-1976. The contesting respondents have no case that any public notice was given
about the retirement of Respondents 2 and 3 from the firm as envisaged under Section 32(3)
of the Indian Partnership Act. Respondents 2 and 3 have contended that the appellant was
aware of the dissolution of the partnership but that by itself will not absolve the liability of the
retiring partners.
6. Under sub-section (2) of Section 32, the liability of the retiring partner as against third
party would be discharged only if there is an agreement made by the retiring partner, with the
third party, and the partners of the reconstituted firm. Of course, an agreement could be
implied by the course of dealing between such third party and the reconstituted firm, after
retirement of a partner. In the instant case, there was no agreement between the appellant
Bank and Respondents 2 and 3 as regards their liability in respect of the dissolved firm.
There is also no evidence to show that there was an implied contract between the appellant
and Respondent 4 who allegedly agreed to discharge the liabilities of Respondents 2 and 3. It
is also pertinent to note that there was no public notice under sub-section (3) of Section 32 of
the Indian Partnership Act by Respondents 2 and 3. Even if there was a public notice, it may
not alter the position as the alleged liabilities of Respondents 2 and 3 were incurred by them
prior to the so-called dissolution of the firm.
8. In the instant case, at the time when the partners entered into the agreement for
overdraft facility, they were the members of the partnership firm; so also Defendant 2 to 4
jointly executed an agreement and obtained loan from the Bank. Subsequent retirement of
Defendants 2 and 3 is of no consequence unless there is a subsequent contract between these
members of the partnership firm and the plaintiff. The law on this aspect is succinctly made
clear in the celebrated book Lindley on Partnership (16th Edn.) and at pp. 358-59, it is stated
as under:
It is perhaps self-evident that a creditor's rights will not normally be prejudiced by an
agreement transferring an accrued liability from one partner to another unless the creditor
is made a party to the agreement or assents to its operation. Otherwise the agreement
will, as regards him, be strictly res inter alios acta. Lord Lindley illustrated this
proposition by the following example:
... Let it be supposed that a firm of three members, A, B and C, is indebted to D;
that 4 retires, and B and C either alone, or together with a new partner, E, take
upon themselves the liabilities of the old firm. D's right to obtain payment from
A, B and C is not affected by the above arrangement, and A does not cease to be

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liable to him for the debt in question. But if, after A's retirement, D accepts as
his sole debtors B and C, or B, C and E (if E enters the firm), then A's liability
will have ceased and D must look for payment to B and C or to B, C and E, as
the case may be .

9. There is no a priori presumption to the effect that the creditors of a firm do, on the
retirement of a partner, enter into an agreement to discharge him form liability. An adoption
by the creditor of the new firm as his debtor does not by any means necessarily deprive him of
his rights against the old firm especially when the creditor is not a party to the arrangement
and then there is no fresh agreement between the creditor and the newly constituted firm.
After the creditor has taken a new security for a debt from a continuing partner, it may be
strong evidence of an intention look at only the continuing partner for the payment due from
the firm.
10. It is also important to note that it has long been recognised that partnership is not a
species of joint tenancy and that, in the absence of some contrary agreement, there is no
survivorship as between partners, at least so far as it concerns their beneficial interests in the
partnership assets.
11. Having due regard to these principles, the High Court erred in confirming the
judgment passed by the trial court and the plaintiff-appellant had every right to proceed
against all the defendants in the suit. Hence, the appeals are allowed and the impugned decree
is modified to the extent that there shall be a decree against all the respondents, namely,
Respondents 1 to 4, in both the suits.
*****

Kamal Pushp Enterprises v. D.R. Construction Co.

159

Pamuru Vishnu Vinodh Reddy v. Chillakuru Chandrasekhara Reddy


(2003) 3 SCC 445

[Section 32 retirement of a partner does not comprehend dissolution]

SHIVARAJ V. PATIL J. - The few facts which are relevant and necessary for disposal of
this appeal in brief are that one Pamuru Rama Subba Reddy filed the suit OS No. 126 of 1976
for dissolution and accounting of the partnership assets of the firm Vijay Mahal Theatre. The
defence set up to resist the suit was that the plaintiff and the 4th defendant retired from the
firm in the year 1971 and, therefore, the plaintiff was not entitled to seek dissolution of the
partnership and the settlement of the accounts. The suit was decreed. In the first appeal, the
High Court affirmed the findings of the trial court; however, set aside the decree for
dissolution of the firm and directed the defendants to pay the amounts due to the plaintiff
towards his share in the assets of the firm on valuation without resorting to the sale of the
assets of the firm. The High Court directed the trial court to make an enquiry into the
valuation and to decide the date on which the valuation of the plaintiffs share shall be arrived
at taking into account that the plaintiffs share was not paid to him. Against the said judgment
of the High Court, special leave petition was filed before this Court which was dismissed as
withdrawn in 1987.
2. The first defendant died during the pendency of the suit and Defendants 7 to 11 were
added as his legal representatives. M. Subbareddy to whom the share of the plaintiff was said
to have been transferred was impleaded as the 12th defendant to the suit as per the directions
of the High Court. During the pendency of the enquiry into the valuation of the plaintiffs
share in the assets of the partnership firm, the plaintiff died and his minor son Pamuru Vishnu
Vinodh Reddy, represented by his natural guardian was added as the legal representative of
the deceased plaintiff.
3. The trial court, pursuant to the directions given by the High Court, appointed a
Commissioner for ascertaining the value of the share of the plaintiff as on the date and also as
on 5-4-1971. Thereafter, the son of the deceased plaintiff (appellant herein) filed IA No. 270
of 1987 to decide the date on which the valuation of the plaintiffs share was to be made
before the Commissioner proceeds to hold an enquiry as per the directions of the High Court.
The learned Additional District Judge, after hearing the parties, allowed the said application
holding that the date on which the Commissioner values the property was the relevant date to
ascertain the valuation of the plaintiffs share in the partnership firm. The 3rd defendant,
being aggrieved by the said order, filed a revision petition before the High Court. The High
Court allowed the revision petition, set aside the order of the learned Additional District
Judge and held that the relevant date for the purpose of ascertaining the value of the share of
the plaintiff was the date on which he ceased to be a partner, observing that if the latter date
than the date on which the plaintiff ceased to be a partner was taken for the purpose of
ascertaining the value of his share, it would confer unjustified windfall on the outgoing
partner and it would be inconsistent with the concept of retirement or expulsion. The son of
the original plaintiff who was Respondent 1 in the revision petition before the High Court,
aggrieved by the order made by the High Court, is before this Court in this appeal challenging
the validity and correctness of the impugned order.

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4. The short question that arises for consideration in this appeal is as to which is the
relevant date for the purpose of ascertaining the value of the share of the plaintiff in the
partnership firm i.e. whether 5-4-1971 or the date on which the Commissioner made the
valuation of the share of the plaintiff.
5. Shri M.N. Rao, the learned Senior Counsel on behalf of the appellant contended that
the High Court was not justified in reversing the order of the trial court declaring that the date
on which the Commissioner valued the property of the partnership firm as the relevant date
for ascertaining the value of the share of the plaintiff in the firm; the High Court failed to
appreciate that the trial court had recorded a finding taking note of the observation of the
Division Bench judgment of the High Court dated 24-11-1983 passed in AS No. 481 of 1979
to the effect that the trial court while deciding the relevant date for ascertaining the value of
the share of the plaintiff shall take into account the fact that the value of his share had not
been paid. He added that the High Court by the said judgment dated 24-11-1983 had modified
the decree of dissolution of the partnership firm granted by the trial court only on the ground
of equity to allow the partnership firm to carry on its business and granted the decree for
accounting and also for the payment of value of the plaintiffs share of 25% in the said firm;
in that view, the relevant date for ascertaining the value of the share of the plaintiff can only
be the date on which the Commissioner valued the properties of the partnership firm. He
further submitted that the High Court committed an error in the impugned order in holding
that the plaintiff had admittedly retired from the partnership firm on 5-4-1971, the date on
which an agreement to sell his share was entered into although neither the value of the share
was ascertained nor was it paid till date; the fact that the High Court in the judgment dated 2411-1983 made in the first appeal granted relief of rendering of accounts of partnership firm
from 5-4-1971 till date itself clearly indicated that the plaintiff continued to be a partner of the
firm. It was further submitted that the High Court ought to have appreciated that the share of
the plaintiff was being utilized by the partnership firm and had earned profits and in such
circumstances the relevant date for valuing the share of the plaintiff should have been the date
when the Commissioner ascertained the value of the assets of the firm.
8. Partnership with the plaintiff as per Ext. B-7 was admitted in the written statement but
it was contended that the plaintiff and the 4th defendant gave up their shares and retired from
the partnership; the plaintiff transferred his share to M. Subbareddy and the same was
evidenced by Ext. B-21 dated 5-4-1971; since Ext. B-21 was not filed before the Income Tax
Authorities, a fresh deed was executed on 9-11-1971 which was also attested by the plaintiff
and the 4th defendant wherein the wife of the second defendant was also taken as a partner;
the plaintiff denied the attestation of Exts. B-21 and B-22; they were sent to the expert; the
trial court found that attestation of the two documents by the plaintiff was proved but held
that the plea set up by the defendants that the plaintiff was paid his share and the account was
settled was not accepted; in that view, the trial court held that the plaintiff continued to be a
partner of the firm and consequently, decreed the suit for dissolution; the auditor who was
examined as DW 3 in the case was common for both, the plaintiff and the defendants; the
High Court having considered both documentary and oral evidence, concluded that the
plaintiff had agreed to sell his share and the agreement was binding on him and that it was
affirmed twice, both in Exts. B-21 and B-22. The High Court affirmed the finding that no

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161

payment was made to the plaintiff as agreed. It was also found that the plaintiff retired on 5-41971 with the consent of all the partners. The relevant portions of the said judgment in AS
No. 481 of 1979 read as under:
Once we hold that the retirement was obtained by consent of all partners Section
32(1)(a) of the Partnership Act is attracted and a retirement with the consent of all the
other partners can be effected without dissolution. The failure on the part of the
remaining partners to settle the accounts of the retiring partner would make them
liable for the decree for accounting.... Hence we do not see any infirmity in granting a
decree for accounting including delivery of the share of the plaintiff without
dissolution of the firm as such.
In fact we have adjourned the case to enable the parties to come to an agreement
regarding the value of the share of the plaintiff and also the amount due to him
towards profits. But since there is no agreement between the parties, we have to
proceed to our judgment.
Hence we have no hesitation to pass a decree for directing delivery of the share
of the plaintiff.
Accordingly, we set aside the decree for dissolution and direct a preliminary
decree directing accounting against Defendants 1 to 5 from 5-4-1971 and also for the
payment of the value of the plaintiffs share of 25% in the suit firm. The court below
should determine the value of the share of the plaintiff. The learned counsel for the
plaintiff requested to give a direction regarding the date on which the valuation of the
plaintiffs share shall be arrived at. However, as we are directing the trial court to
make enquiry into valuation, we shall direct the trial court itself to decide the date
taking into account that his share was not paid till now.
Use of the word retire in Section 32 of the Act is confined to cases where a partner
withdraws from a firm and the remaining partners continue to carry on the business of the
firm without dissolution of partnership as between them. Where a partner withdraws from a
firm by dissolving it, it shall be dissolution and not retirement. Retirement of a partner from a
firm does not dissolve it, in other words, it does not determine partnership inter se between all
the partners. It only severs the partnership between the retiring partner and continuing
partners, leaving the partnership amongst the latter unaffected and the firm continues with the
changed constitution comprising of the continuing partners. Section 32 provides for
retirement of a partner but there is no express provision in the Act for the separation of his
share and the intention appears to be that it would be determined by agreement between the
parties. Section 37 deals with rights of outgoing partners. Although the principle applicable to
such cases is clear but at times some complicated questions arise when disputes are raised
between the outgoing partner or his estate on the one hand and the continuing or surviving
partners on the other in respect of subsequent business. Such disputes are to be resolved
keeping in view the facts of each case having due regard to Section 37 of the Act. Section 48
deals with the mode of settlement of accounts between the partners after dissolution of the
partnership firm.

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Kamal Pushp Enterprises v. D.R. Construction Co.

11. The findings as recorded by the High Court in AS No. 481 of 1979 that the plaintiff
has retired from the partnership firm on 5-4-1971 and that the partnership firm had also been
reconstituted thereafter, have attained finality. In the same judgment, it is held that the
plaintiff had agreed to sell his share and the agreement was binding on him as affirmed twice
in Exts. B-21 and B-22. By the said judgment, the High Court set aside the decree granted by
the trial court for dissolution having regard to the fact that the plaintiff had retired from the
partnership firm and the reconstituted firm continued its operations.
12. From these findings of fact, it is clear that the plaintiff had retired from the firm on 54-1971 after selling his share in the partnership firm. Once he had retired from the partnership
firm, he had no right to claim any further share in the profits of the firm. A finding of fact is
also recorded that the defendants had not paid the value of the share of the plaintiff pursuant
to the agreement for retiring from the firm. If the defendants have failed to pay the value of
the share of the plaintiff as agreed to, it has become a debt on the defendants and the plaintiff
is entitled to recover the same with interest. After the retirement from the partnership firm and
particularly when the firm was reconstituted with new partners, there was no question of
using the plaintiffs share for earning profit in the reconstituted firm. The High Court, despite
specific request by the counsel for the plaintiff in AS No. 481 of 1979 to give a direction
regarding the date on which the valuation of the plaintiffs share shall be arrived at, did not
give a direction but directed the trial court to make inquiry into valuation and decide the date
taking into account that his share was not paid till then. There is no nexus or reason to say that
the relevant date for valuation of the share of the plaintiff is the date when the Commissioner
valued his share, that too after a long lapse of time and taking note of the events that the
plaintiff had retired from the firm on 5-4-1971 having sold his share and the firm had been
reconstituted with new partners. When the plaintiff retired from the partnership firm on 5-41971, his share could be valued as on that date which stands to reason. Once the valuation is
made as on that date, for any delay in payment he is to be compensated by awarding interest
as is evident from Section 37 of the Act itself. The value of the share of the plaintiff on the
date of his retirement from the firm could be regarded as a pure debt with effect from the date
on which he ceased to be a partner as per the agreement entered into between the parties.
Otherwise the result would be that he was deemed to have been continued as a partner of the
firm even after he retired from the firm by selling his share. If consideration was not paid as
per the agreement, he could enforce it as per law. However, mere non-payment of
consideration does not take away the legal effect of retirement from the partnership firm. The
High Court in the impugned order in Chillakuru Chandrasekhara Reddy v. Pamuru Vishnu
Vinodh Reddy [AIR 1995 AP 49] has observed thus:
20. It follows from the above, that in cases where there is an agreement to
purchase the share of a partner, the value of the share of the outgoing partner or
retiring partner shall be ascertained on the basis of the value on the date of the
retirement, unless it is a case where the valuation is directed by the court in the
exercise of its discretion, in which event, the relevant date will be the date on which
the share is actually valued. Admittedly, it is a case where the plaintiff had retired
from the concern on 5-4-1971 and agreed to sell his share to Sri M. Subbareddy.
Therefore, there was an express agreement to sell the share, pursuant to which, he

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163

sold his share to Defendant 12 and thereafter he retired and ceased to be a partner on
5-4-1971. If there was delay in payment of his financial entitlement, he is entitled to
interest at the rate of six per cent per annum in the property of the firm. Section 37 of
the Indian Partnership Act, also says that in the case of an outgoing partner, he is
entitled to such share of the profits made since he ceased to be a partner as may be
attributable to the use of his share of the property of the firm or to interest at the rate
of six per cent per annum on the amount of his share in the property of the firm. The
language used in Section 37 is that since he ceased to be a partner. In other words,
since he ceased to be a partner, he is entitled to interest at the rate of six per cent per
annum on the amount of his share in the property of the firm. Section 37 itself makes
it clear that the relevant date is the date on which he ceases to be a partner. The
proviso to Section 37 also says that if option is given to surviving partners to
purchase the share of an outgoing partner and if any partner assuming to act in
exercise of the option does not in all material respects comply with the terms thereof
he is liable to account under Section 37.
21. Therefore, in any view of the matter, the relevant date for the purpose of
ascertaining the value of the share of the plaintiff is the date on which he ceased to
be a partner as it is a case where there was an express agreement between the
parties to sell the share of the plaintiff in favour of Sri M. Subbareddy and with effect
from that date he became a secured creditor and there was a debt due to him from
the other partners who are continuing in the partnership business. It is in the nature
of a debt due to him or the amount due to him is unpaid purchase money. Therefore,
the relevant date is the date on which he ceases to be a partner.
13. The cause of action of the plaintiff arose on the date of his retirement from the
partnership firm and on which date the liability of the defendants also arose. In this view, the
plaintiff could certainly claim the value of his share as on 5-4-1971 with interest till the
payment was made. The view of the trial court that the relevant date to value the share of the
plaintiff is as on the date of the Commissioners report cannot be accepted, as there was no
nexus between the date of retirement of the plaintiff from the firm and the date of the
Commissioners report. The date of the Commissioners report may be fluctuating i.e. it could
be earlier or later in the absence of any time-frame. In this view, the High Court was right and
justified in passing the impugned order upsetting the order of the trial court. We have every
good reason to concur with the finding recorded in the impugned order by the High Court. We
find no merit in the appeal. Consequently, it is dismissed. No order as to costs.
*****

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Kamal Pushp Enterprises v. D.R. Construction Co.

Vishnu Chandra v. Chandrika Prasad Agarwal


(1983) 1 SCC 22 : AIR 1983 SC 523

[Section 32(1)(b) Retirement of a partner without dissolution of the firm]

D.A. DESAI AND R.B. MISRA, JJ. - Appellant as plaintiff filed a suit for dissolution
of partnership and rendition of accounts of a firm styled as Shyam Bricketing Udyog
having its principal place of business at Etah in the State of Uttar Pradesh alleging that the
partnership was a partnership at will and by the notice and by institution of the suit the
firm stood dissolved effective from November 23, 1976.. The respondents resisted the suit
alleging that the partnership is not a partnership at will. The trial court in this suit granted
relief of dissolution of firm effective from November 23, 1976, and passed a preliminary
decree for taking accounts. The High Court allowed the appeal, set aside the concurrent
findings and dismissed the plaintiffs suit.
Two questions that were agitated before the High Court were : (i) whether the partnership
was a partnership at will or for a fixed duration; (ii) whether the respondent (appellant before
us) was entitled for retirement from the partnership or for dissolution of the firm itself. After
an elaborate discussion and after specifically referring to Clauses 7, 18 and 20, both amended
and unamended, of the instrument of partnership the High Court held that the partnership was
not a partnership at will
5. The second contention is whether the plaintiff is entitled to retire from the partnership.
To begin with it would be advantageous to refer to clause 18 of the instrument of partnership.
It reads as under:
That if any partner wants to dissociate from the partnership business then he can
dissociate after serving one months notice to remaining partners, but in that event
the partnership business will not come to an end. If the majority of the partners do not
agree to work with other partner then in that event the majority partners will have the
right to seek explanation from that partner and, if think fit and justiciable, may expell
him from the partnership business.
Before proceeding further it is also advantageous to note that in the concluding portion of
para 20 of the instrument of partnership it was provided that: no partner will separate from
the partnership business till one year from the beginning of the business, and if he will
dissociate then his capital will not be given till the end of one year. These two clauses leave
no room for doubt that a partner can dissociate from the firm. Section 32(1) provides, inter
alia, that a partner may retire... (b) in accordance with an express agreement by the partners.
A partnership business is run in accordance with the terms of the contract of partnership. The
terms, inter alia, envisage a situation that a partner can retire from partnership. The expression
used in Clause 18 that a partner may dissociate from the partnership envisages a situation
where a partner wants to retire from business. The contract of partnership also envisages a
situation where a partner may be expelled from the partnership. But that situation need not be
examined. The only point on which the parties are at variance is whether a partner can retire
from the partnership and the expression, that if any partner wants to dissociate from the
partnership business, comprehends a situation where a partner wants to retire from the

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165

partnership. Therefore, it does appear that the contract of partnership permits a partner to
retire from the partnership. Unfortunately the High Court examined the contention from an
angle impermissible in that while examining the second contention the High Court proceeded
to appreciate the contention put forward on behalf of the plaintiff-appellant whether there was
a breach of the contract of partnership. Nowhere while examining the contention whether it is
open to the partner to retire from partnership, the absolute right to dissociate from business as
conferred by Clause 18 has been gone into by the High Court. The High Court negatived the
contention observing that non-payment of Rs 250 p.m. to the plaintiff could not be an
adequate ground for dissolution of partnership under Section 44 of the Indian Partnership Act,
1932 (Act). Maybe, the High Court may be right in that if dissolution is sought under
Section 44 of the Act alleging that there has been a breach of the contract of partnership. That
is not the plaintiffs contention when he prayed for a decree on the ground that he may be
permitted to retire from the partnership. The High Court fell into error in not examining the
contention whether the plaintiff-appellant is entitled to retire from the partnership without
dissolving the firm. Clause 18 of the contract of partnership clearly comprehends a situation
where a partner may retire from an ongoing partnership after giving one months notice. That
is what is clearly intended by the expression that in the event of retirement of a partner the
partnership busines will not come to an end. Clause 18 provides for two independent
contingencies. The first part of it confers a right on the partner to retire from partnership as
envisaged by Section 32(1)(b) of the Act. The second part of clause 18 provides for the
consequence of such retirement by providing that even on such retirement the partnership will
neither be dissolved nor the business will come to an end. In other words, without dissolving
the firm and continuing the ongoing business, a partner may retire from the partnership, a
situation clearly comprehended by Section 32 and incorporated as a term of contract of the
partnership between the parties to the contract. With great respect, the High Court did not
examine the matter from this angle and fell into an error in believing that the plaintiff sought
dissolution on two grounds : (i) that the partnership is a partnership at will; and (ii) that
dissolution is sought under Section 44. The implication of Section 32 of the Act completely
escaped the notice of the High Court and that is why we are constrained to interfere in this
matter.
6. It was contended that even if a partner is entitled to retire from the partnership as per
the terms incorporated in clause 18 of the contract of partnership, it has to be read along with
the provision made in clause 20 which provides that no partner will separate from the
partnership business till one year from the beginning of the business and if he will dissociate
then his capital will not be given till the end of one year. A mere reading of the clause shows
that there was no embargo on the right to retire from the partnership conferred by clause 18
even during the period of one year from the commencement of the business but it only
provided for a consequence which will ensue on the action of the party. A combined reading
of clauses 18 and 20 would unmistakably show that a partner may retire from the firm after
giving one months notice, that he should not retire within a period of one year but if he does
retire within a period of one year the capital invested by him will not be refundable to him till
the expiry of the period of one year. This right to retire from partnership may not be exercised
till a period of one year but there is not a complete embargo on the exercise of such a right

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Kamal Pushp Enterprises v. D.R. Construction Co.

conferred by clause 18. The High Court was, therefore, in error in holding that the plaintiff
was not entitled to seek retirement from the firm.
7. The partnership business commenced on December 1, 1975. The period of one year
would expire on November 30, 1976. Plaintiff sought dissolution effective from November
23, 1976. His request was thus under clause 20 premature by a period of seven days. At best,
if the court thinks fit the retirement may be made effective from November 30, 1976, but on
this technical ground the relief cannot be denied. At best the capital would become refundable
as envisaged by clause 20, after November 30, 1976. But in any view of the matter the
plaintiff is entitled to a relief for a declaration that he has retired from the partnership without
dissolution of the firm from the date of institution of the suit and the accounts may be made
till that date and necessary preliminary decree will have to be made.
8. Accordingly this appeal is allowed and the judgment of the High Court is set aside.

*****

Kamal Pushp Enterprises v. D.R. Construction Co.

167

DISSOLUTION OF A FIRM
Saligram Ruplal Khanna v. Kanwar Rajnath
AIR 1974 SC 1094

[Partnership for a fixed term dissolution on expiry of the term - section 42, 47]

H.R. KHANNA, J. - This appeal by special leave is directed against the judgment of a
Division Bench of the Bombay High Court affirming on appeal the decision of the learned
Single Judge whereby a suit for dissolution of partnership and rendition of accounts filed by
the two plaintiff-appellants, Saligram Ruplal Khanna and Pessumal Atalrai Shahani, against
Kanwar Rajnath defendant-respondent was dismissed. The partnership which was sought to
be dissolved carried on business under the name and style of Shri Ambernath Mills
Corporation (hereinafter referred to as SAMCO). The property which according to the
appellants belonged to the partnership consisted of three mills at Ambernath. One of them
was a woollen mill, the other was a silk mill and the third was an oil and leather cloth factory
with land. bungalows and chawls attached thereto. In addition to that, there was a bobbin
factory at Taradeo with offices at Bombay, Ahmedabad and other places. For the sake of
convenience, the above property may be described, as it was done in the High Court, as
Ambernath Mills. Although the case involves a tangled skein of facts, the points which
survive for determination in appeal are rather simple.
2. The Ambernath Mills originally belonged to a company called Ahmed Abdul Karim
Bros. Private Ltd. The mills were declared to be evacuee property in September, 1951 and the
Custodian took over the management of the mills in pursuance of the provisions of the
Administration of Evacuee Property Act, 1950. It was then decided that the mills should be
managed by displaced persons who had been industrialists in Pakistan. A private limited
company was formed of 31 persons for taking over the management of the mills. Rs 25,000
were contributed by each one of those persons in that connection. The appellants and the
respondent too were members of the company. Appellant No. 1 and the respondent had
migrated at the time of partition from Gujarat in West Punjab. The respondent was a big
industrialist and left behind extensive properties in Pakistan. He held verified claim of rupees
23 lakhs in lieu of property left by him in West Pakistan. Appellant No. 1 had a verified claim
of Rs 22,000 in respect of residential property left in Pakistan. In addition to that, he had a
disputed claim in respect of industrial properties. Appellant No. 2 had a verified claim of
about Rs 30,000. The two appellants and the respondent were associated by the Custodian
with the management of the Ambemath Mills. By August, 1952 all the members of the private
limited company dropped out. It was accordingly decided by the Custodian to grant a lease of
the Ambernath Mills to the respondent and the two appellants. On August 30, 1952 two
documents were executed. One of the documents was an agreement of partnership between
the two appellants and the respondent for carrying on the business of Ambernath Mills under
the lease in the name and style of Shri Ambemath Mills Corporation. The other document was
the agreement of lease executed by the Custodian of Evacuee Property as lessor and the
appellants and the respondent carrying on business in partnership under the name and style of
SAMCO as lessees. The subject-matter of the lease was Ambernath Mills. It was stated in the

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lease that the lessees had appointed the respondent as their chief representative with full
powers of control, management and administration of the entire demised premises. The lease
was to be for a period of five years to be computed from the date on which the possession of
the demised premises was handed over to the lessees, subject to sooner determination thereof
on any of the contingencies provided in Clause 21 or on the breach of any condition on the
part of the lessees or in the event of any dispute among the lessees resulting in the closure of
the mills. It was also provided that the lessees would purchase and the lessor would sell to the
lessees at an agreed price the stocks of raw materials, unsold finished goods, consumers
stores, spare parts, cars and trucks and other moveables which had already been vested in the
lessor, as well as three diesel generating sets purchased by the lessor. In the event of any
difference on the question of the price, the same was to be fixed through one or more experts.
The sale was to be completed within a period of three months from the date of the agreement.
The lessees were authorized to take as partner one or more displaced persons who had filed
claims under the Displaced Persons Claims Act, 1950 subject to the prior approval of the
Government. The agreement also contained a provision for reference of any dispute arising
out of the agreement of lease to arbitrators chosen by the parties by mutual consent. The
annual rent payable by the lessees was fixed at Rs 6,00,000 payable in four quarterly
instalments of Rs 1,50,000 each on or before 30th day of each quarter. The lessees also
undertook to deposit or furnish bank guarantee in the sum of Rs 7,00,000 as security for the
payment of the value of raw material, unsold finished goods, stores, spare parts and other
articles.
According to the partnership agreement executed by the two appellants and the
respondent on August 30, 1952, each partner has agreed to contribute a capital of Rs 1,00,000.
The amount of Rs 25,000 already paid by each partner to the Custodian was regarded as part
payment of the capital of rupees one lakh. Each partner had one-third share in the partnership,
but it was provided that the shares would be adjusted by the respondent if fresh partners were
taken in the partnership. The respondent was to be the managing partner and was entitled to
assign work in the partnership to the two appellants. It was agreed that the appellants were not
to interfere directly or indirectly in any manner with the management and control of the
business by the respondent. The respondent was also authorised to form a limited liability
company for running the business of the partnership with the consent of the Custodian and the
appellants agreed to join the company as shareholders on such terms and conditions as might
be agreed when such company was formed. The period of the partnership was five years
being the period of said lease.
3. The partnership took possession of Ambernath Mills on August 31, 1952. The
respondent directed Appellant No. 1 to be in charge of the administration of the mills at
Ambemath, while Appellant No. 2 being an engineer, was placed in charge of the properties,
machinery and stores of the mills. The respondent was in overall charge of the concern.
4. It appears that the partnership made some progress in the first few months. The stocks
of raw material, finished goods, stores and other moveables which were deemed to have been
purchased by SAMCO under the terms of the agreement of lease were in the meantime valued
by an auditor appointed by the Custodian at rupees 30 lakhs. The Custodian called upon the
partnership in April, 1953 to pay a sum of rupees 7 lakhs or to furnish a bank guarantee for

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169

the said amount as provided in the agreement of lease. This payment could not be made by the
partnership. There was also difficulty in paying the sixth instalment of the rent. A cheque for
Rs 1,50,000 was issued but the same was dishonoured. Subsequently, arrangements were
made to pay Rs 1,00,000. An amount of Rs 50,000 out of the sixth instalment remained
unpaid.
5. On February 12, 1954 the Custodian served a notice on the respondent and the two
appellants to show cause why the agreement of lease should not be cancelled on account of
breach of conditions in the matter of the payment of the sixth quarterly instalment of rent and
the failure to deposit or furnish bank guarantee for the amount of Rs 7,00,000. A writ petition
was thereupon filed by the partnership on February 16, 1954 in the Bombay High Court for
quashing the notice issued by the Custodian.
6. In the meantime. Appellant No. 2 sent letter dated February 8, 1954 to the respondent
suggesting that his share in the partnership be reduced to 1 anna in a rupee or to such other
fraction as the respondent thought fit. A similar letter was addressed by Appellant No. 1. On
February 24, 1954 the parties entered into a second agreement of partnership. It was agreed in
the new partnership agreement that the share of Appellant No. 1 would be 3 annas and that of
Appellant No.2, 1 anna in a rupee. The respondent was to have the remaining 12 annas share.
It was also agreed that the two appellants would not have the right, title and interest in the
name, capital assets and goodwill of the partnership. It was provided that the new partnership
would be deemed to have been formed as from October 1, 1953. Accounts for the period from
August 30, 1952 to September 30, 1953 were to be made upon the basis of the partnership
agreement dated August 30, 1952 and the profits and losses for that period were to be
distributed accordingly. The capital of the partnership was agreed to be arranged by the
respondent and he was to be the managing partner in control of the entire affairs of the
partnership. He was also to get interest at six per cent on all finances arranged by him. The
appellants agreed to carry on such duties in the concern as might be assigned to them by the
respondent. The period of the partnership was to be the outstanding period of the lease.
7. The writ petition referred to above filed by the partnership to quash the notice of the
Custodian was allowed by a Single Judge of the Bombay High Court on March 31, 1954. On
appeal filed by the Custodian, a Division Bench of the High Court as per judgment dated
April 13, 1954 set aside the order of the Single Judge and dismissed the writ petition.
Certificate of fitness for appeal to this Court was granted by the High Court on May 5, 1954.
Stay order was also issued on that day restraining the Custodian from dispossessing the
respondent and the appellants from Ambernath Mills. Appeal against the decision of the
Division Bench of Bombay High Court was then filed in this Court. The Custodian of
Evacuee Property made an order on May 25, 1954 cancelling the agreement of lease of
Ambernath Mills, dated August 30, 1952. The possession of the mills was voluntarily
delivered by the partnership to the Custodian on June 30, 1954.
8. Representations were made on behalf of SAMCO to the Minister of Rehabilitation
during the later half of 1954 for being allowed to retain Ambernath Mills. A communication
was also addressed on December 14, 1954 to the Minister of Rehabilitation suggesting, inter
alia, that the claim of the Custodian against the partnership in respect of arrears of rent and the
value of raw material and other goods should be referred to arbitration.

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Kamal Pushp Enterprises v. D.R. Construction Co.

13. The respondent was unable to submit to the Central Government compensation claims
to the extent of Rs30,00,000 within three months of the agreement dated August 14, 1957. By
April, 1959 he submitted compensation claims to the extent of Rs 20,00,000. A supplemental
agreement was executed by the respondent and the President on April 29, 1959. In this
agreement the President acknowledged the receipt from the respondent of the sum of Rs
20,00,000 by way of adjustment of compensation claiMs The respondent undertook to pay the
remaining amount of Rs 30,11,000 and Rs 18,00,000 under the award of Mr Morarji Desai, in
all, Rs 48,11,000. It was agreed that the aforesaid amount would be paid by the respondent in
seven annual instalments. A second supplemental agreement was executed by the President
and the respondent on April 6, 1960, but we are not concerned with that. On April 21, 1960
the grant of the Ambernath Mills was made by the President to the respondent. The same day
the respondent executed in favour of the President a mortgage of the Ambernath Mills for the
payment of Rs 48,11,000. The sum was payable in seven equal annual instalments. On April
22, 1960 the respondent took possession of Ambernath Mills which had been lying idle for
nearly six years since June 30, 1954. On May 7, 1960 the respondent sent a circular letter to
all displaced persons whose compensation claims had been transferred to him informing them
that possession of the mills had been handed over to him by the Central Government. They
were also informed that statement of their accounts was being prepared. One such letter was
sent to Appellant No. 1. He also received a statement of account and in September 1960 a
cheque for Rs 204 was sent to him by way of interest.
15. It was alleged in the plaint that after the termination of the agreement of lease by the
Custodian on May 25, 1954 the two appellants and the respondent assembled and orally
agreed not to dissolve the partnership in spite of the termination of the lease. The agreement
between the parties was further stated to be that the partnership should be continued for the
purpose of acquiring on behalf and for the benefit of the said partnership the properties Ex.1
(Ambernath Mills) hereto and to exploit the said industries. The respondent was stated to
have made a representation that he was acquiring the Ambernath Mills on behalf of the
partnership and that the agreement had been executed in the respondents name because the
Central Government desired to deal with only one individual. It was also stated that the
respondent had admitted utilisation of a sum of Rs 2,00,000 out of the partnership fund for
payment of earnest money. The respondent being a partner, according to the appellants, stood
in a fiduciary character vis-a-vis the appellants and was bound to protect their interest. He
could not gain for himself pecuniary advantage by entering into dealings under circumstances
in which his interest were adverse to those of the appellants. The properties and profits
acquired by the respondent were stated to be for the benefit of the partnership also. In the
plaint, as it was initially filed, the appellants prayed for a declaration that the partnership
between them and the respondent was still subsisting on the terms and conditions set out in
partnership deed dated February 24, 1954 excepting the terms relating to the period of
partnership. Prayer was made for a declaration that the Ambernath Mills belonged to the
partnership and for rendition of the partnership accounts. By a subsequent amendment prayer
was added that the partnership be dissolved from the date of the filing of the suit.
16. The respondent in his written statement denied the alleged oral agreement between the
parties on or about May 25, 1954. According to the respondent, the partnership stood

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171

dissolved on March 10, 1955 when the Central Government acquired the Ambernath Mills.
According further to the respondent, the funds of the partnership were utilized for the
payment of various creditors of the partnership and after those payments were made the
partnership did not have sufficient funds to pay to the remaining creditors. With regard to the
negotiations for the acquisition of the mills, the respondent stated that Appellant No. 1 was
aware that Ambemath Mills were being acquired by the respondent for himself alone. The
respondent denied that he ever told Appellant No. 1 that the amount of earnest money of Rs
2,00,000 for the purchase of the Ambemath Mills had been paid out of funds belonging to the
partnership. Allegation was also made by the respondent that Appellant No. 1 had requested
that he might be given some benefit in the nature of appointment of agency in the business of
Ambemath Mills. The claim of the appellant for rendition of the accounts was stated to be
barred by limitation. In an affidavit filed on January 11, 1961 the respondent stated that in
case it was held that there was an oral agreement of partnership between the parties, the same
should be taken to have been dissolved.
17. Learned trial Judge held that the appellants had failed to prove that there was an oral
agreement between the parties on or about May 25, 1954. It was further held that there was no
agreement, express or implied, to form a partnership for acquiring the mills and for carrying
on the business thereon. The appellants were held not entitled to have the mills treated as
partnership assets by invoking principles enunciated in Section 88 of the Indian Trusts Act, to
which reference had been made on behalf of the appellants. The learned Judge also held the
appellants claim for rendition of accounts to be barred by limitation because in his view the
partnership had stood dissolved on May 25, 1954 when the agreement of lease was cancelled.
In any case, according to the learned Judge, the partnership must be deemed to have been
dissolved either on January 14, 1957 when the suit filed by the two appellants and the
respondent against the Custodian and the Central Government for permanent injunction was
finally dismissed in appeal by a Division Bench of the Bombay High Court or on August 30,
1957 when the period of the lease came to an end.
18. In appeal before the Division Bench the following four contentions were advanced on
behalf of the appellants:
(1) that on May 25, 1954 the parties expressly agreed to continue their partnership
for acquiring the mills and exploiting them, that a partnership at will thus came into
existence between them, and that therefore the mills acquired by the defendant or his
agreement with the President of India, dated August 14, 1957 and the subsequent grant by
the President of India on April 21, I960 must be held to be an asset of the said
partnership;
(2) that if such an express agreement is held not to have been proved, an implied
agreement to the same effect should be inferred from the conduct of the parties and the
correspondence between them;
(3) that, even supposing that there was no express or implied agreement as stated
above, the rights acquired by the defendant as a result of his agreement with the President
of India, dated August 14, 1957 and the subsequent Presidential grant are impressed with
a trust in favour of the partnership under Section 88 of the Indian Trusts Act; and
(4) that, even if it is held that the mills are no longer an asset of the partnership, the
plaintiffs are still entitled to accounts of the partnership which admittedly existed

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Kamal Pushp Enterprises v. D.R. Construction Co.

between them and the defendant for working the mills under agreement of lease dated
August 30, 1952.

The learned Judges constituting the Division Bench repelled all the contentions advanced on
behalf of the appellants and substantially agreed with the findings of the trial Judge. On the
question of limitation, the learned Judges held that the partnership had been dissolved at the
latest on November 10, 1955 when all the attempts of the partners to get the Custodians order
dated May 25, 1954 set aside came to an end with the decision of the Supreme Court. The
present suit for rendition of accounts brought on December 20, 1960 more than three years
after the date of the dissolution of the partnership was held to be barred by limitation. In the
result the appeal was dismissed.
19. In appeal before us Mr S.T. Desai on behalf of the appellants has frankly conceded
that he is not in a position to challenge the concurrent findings of the trial Judge and the
appellate Bench that the appellants had failed to prove that on May 25, 1954 the parties had
expressly agreed to continue the partnership for acquiring the mills and exploiting them.
Although Mr Desai indicated at the commencement of the arguments that he would challenge
the finding of the Appellate Bench that the rights acquired by the respondent as per agreement
dated August 14, 1957 with the President and the subsequent Presidential grant are impressd
with trust in favour of the partnership under Section 88 of the Indian Trusts Act, no arguments
were ultimately advanced by him on that score. Mr Desai, has. however, challenged the
finding of the trial Judge and the Appellate Bench that no implied agreement as alleged by the
appellants could be inferred from the material on record. The main burden of the arguments of
Mr Desai, however, has been that the appellants were entitled to the accounts of the
partnership which admittedly existed between the parties as per partnership agreements dated
August 30, 1952 and February 24. 1954. According to Mr Desai, there had been no
dissolution of the firm of the parties prior to the institution of the suit and the appellants suit
for rendition of accounts was not barred by limitation. The High Court, it is urged, was in
error in holding to the contrary. The above contentions have been controverted by Mr Cooper
on behalf of the respondent and. in our opinion, are not well-founded.
20. We may first deal with the question as to whether the implied agreement as alleged by
the appellants can be inferred from the material on record. In this respect Mr Desai has
submitted that the appellants no longer claim any interest in the ownership of Ambernath
Mills which now vests in the respondent. It is, however, urged that an agreement can be
inferred from the conduct of the parties that Ambernath Mills were to be run by the
respondent in partnership with the appellants, even though the ownership of the same might
vest in the respondent. In this connection we find that no case of such an implied agreement
was set up in the trial Court, either in the plaint or otherwise, nor was such a case set up in
appeal before the Division Bench. What was actually contended was that the agreement was
for acquiring the mills as an asset of the partnership. The above stand of the appellants could
plainly be not accepted when one keeps in view the agreement of lease dated August 30, 1952
as well as other documents on record. The said agreement of lease shows that Ambemath
Mills would become the absolute property not only of the appellants and the respondent but of
all persons who were to be associated with the lessees in the ownership of the proprietary
interest in proportion to the total compensation payable to each of them. The agreement of

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173

lease further contemplated that the lessee rights of the two appellants and the respondent were
to be distinct from the proprietary interest in the demised premises and that the lessees were at
liberty, in spite of the transfer of proprietary interest, to continue the lease for the unexpired
residue of the term on the terms and conditions of the lease and payment of rent prescribed
thereunder. The respondent submitted representation on August 9, 1954 on behalf of the
SAMCO to the Custodian for the restart of the mills and along with it the respondent sent
copies of letter of authority and particulars of verified claims of 30 displaced persons. It is
implicit in the representation that in case Ambernath Mills was transferred, the same would
vest in all the 30 displaced persons whose claims were submitted,
21. There are two documents which run counter to the stand taken on behalf of the
appellants in this Court that there was an implied agreement that in case the respondent
acquired the ownership of the mills, the mills would be worked by the respondent in
partnership with the appellants. One of those documents is agreement dated September 20,
1957 which was signed by the Appellant No. 1 and the respondent a day before the
respondent executed bond in favour of that appellant in view of the fact that Appellant No. 1
agreed to have his claim compensation amounting to Rs 6,994 adjusted towards the price of
Ambemath Mills. It was stated in the agreement dated September 20, 1957 that the respondent
was contemplating the formation of joint stock company to own, run and manage the mills
and it was agreed between the parties that in the event of such company being formed,
Appellant No. 1 would have the option to purchase shares of the said company to the extent of
50 per cent of the amount of the adjusted claim compensation. In case the option was
exercised in favour of the purchase of the shares of the company, the respondent was to
ensure that the said shares would be allotted to Appellant No. 1 at par. It was further agreed
that if the shares applied for or any proportion thereof were not allotted to Appellant No. 1 by
the said company, the respondent would not in any way be liable to Appellant No. 1 on that
account. In the bond the respondent agreed to pay to Appellant No. 1 interest at the rate of six
per cent on the amount of compensation from the date of the adjustment of the Appellant No.
1s claim compensation. Had Appellant No. 1 any interest in the Ambemath Mills which were
being acquired by the respondent there could arise no occasion for the execution of the
agreement dated September 20, 1957 and the bond dated September 21, 1957. All that was
agreed by the respondent in those two documents was that in case he promoted a company for
owning, running and managing of the Ambernath Mills, Appellant No. 1 would get a share of
the value of half of his claim compensation of Rs 6,994. The said amount when compared to
the price of Ambernath Mills was wholly insignificant. No question could arise of the
respondent borrowing money from Appellant No. 1 for payment of price of the mills, in case
the acquisition of the mills was for the benefit of the respondent as well as the appellant. It
may also be stated that the interest on account of the above compensation was duly paid by
the respondent to Appellant No. 1.
22. Another document which has a bearing in the above context is letter dated December
18, 1959 which was addressed by Appellant No. 1 to the Collector of Bombay in connection
with the recovery of arrears of sales tax. Appellant No. 1 in that letter stated that the
responsibility for the payment of such arrears of sales tax was that of the respondent and
Appellant No. 1 was no more in picture. The above letter shows that Appellant No. 1

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Kamal Pushp Enterprises v. D.R. Construction Co.

repudiated his liability for the payment of the sales tax by disclaiming his connection with the
business in question.
24. We are, therefore, of the view that no inference of the implied agreement referred to
by Mr Desai can be drawn from the material on record.
25. So far as the question is concerned as to whether the claim for rendition of accounts
was within time, we find that according to Clause 16 of the partnership deed dated August 30,
1952 the period of partnership was fixed at five years, being the period of lease. Clause 17 of
the deed of partnership dated February 24, 1954 provided that the period of partnership shall
be the outstanding period of such lease. The possession of Ambernath Mills under the
agreement of lease was delivered on August 31, 1952. The period of five years of the lease
was thus to expire on August 30, 1957. As the partnership was for a fixed period, the firm
would in normal course dissolve on the expiry of the period of five years on August 30, 1957.
No agreement between the partners to keep the firm in existence after the expiry of the fixed
term of five years has been proved.
The above provision (of section 42) makes it clear that unless some contract between the
partners to the contrary is proved, the firm if constituted for a fixed term would be dissolved
by the expiry of that term. If the firm is constituted to carry out one or more adventures or
undertakings, the firm, subject to a contract between the partners, would be dissolved by the
completion of the adventures or undertakings. Clauses (c) and (d) deal with dissolution of
firm on death of a partner or his being adjudicated insolvent.
26. It was indicated in the agreement of partnership that the period of partnership had
been fixed at five years because that was the period of the lease of Ambernath Mills. The
lease, however, ran into rough weather. On February 12, 1954 the Custodian served notice on
the respondent and the two appellants to show cause why the agreement of lease should not be
cancelled in accordance with the terms of that agreement on account of the breach of
conditions in the matter of payment of instalment of rent and the failure of the respondent and
the appellants to deposit or furnish bank guarantee for the amount of Rs 7,00,000. The
respondent and the appellants challenged the validity of the above notice by means of a writ
petition and, though they succeeded before a Single Judge, the Appellate Bench of the
Bombay High Court upheld the validity of the notice. On May 25, 1954 the Custodian
cancelled the lease of Ambernath Mills and on June 30, 1954 got possession of the mills. The
respondent and the appellants assailed the decision of the Appellate Bench of the Bombay
High Court in this Court, but this Court also took the view as per judgment dated November
10, 1955 that there was no legal infirmity in the notice for the termination of the lease issued
by the Custodian. After the above judgment of this Court, whatever hope or expectation the
partners of SAMCO had of running Ambernath Mills on lease under the agreement of lease
dated August 30, 1952 came to an end and were extinguished.
27. In the meantime, as already stated earlier, the possession of Ambernath Mills was
handed over by the partners of SAMCO to the Custodian on June 30, 1954. On March 10,
1955 the Central Government issued notification under Section 12 of the Displaced Persons
(Compensation and Rehabilitation) Act, 1954 for acquiring the mills. The mills were then
advertised for sale. The partners of SAMCO having been thwarted for good in their efforts to

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175

get back the mills on lease now made an effort to acquire the ownership of the mills in
accordance with Clauses 17 to 21 of the agreement of lease. Suit was accordingly brought by
the respondent and the appellants for permanent injunction restraining the Central
Government and the Custodian from selling the Ambemath Mills to any person other than the
partners of SAMCO. The suit was dismissed by the City Civil Court and the appeal filed by
the partners of SAMCO too was dismissed by a Division Bench of the Bombay High Court
on January 14, 1957. The Division Bench held that the agreement of purchase contained in
Clauses 17 to 21 of the agreement of lease was indefinite and vague and such agreement of
sale was not capable of specific performance. It was further held that in view of notification
dated March 10, 1955, the Central Government acquired the mills free from all
encumbrances. The rights of the partners of SAMCO which were in the nature of an
encumbrance were held to be no longer enforceable. No appeal was filed against the above
decision of the Bombay High Court. As such, the aforesaid judgment became final. Any
expectation which the partners of SAMCO could have of acquiring the ownership of
Ambernath Mills under Clauses 17 to 21 of the agreement of lease was also thus dashed to the
ground.
30. Reference has also been made on behalf of the appellants to the consent given by the
respondent on behalf of SAMCO on November 13, 1957 to the award of Rs 18,00,000 by Mr
Morarji Desai in favour of the Custodian against SAMCO. It is urged that this document
would go to show that the firm of SAMCO had not been dissolved before that date. We are
unable to agree. The arbitration proceedings had been started as a result of application under
Section 20 of the Arbitration Act filed on April 21, 1955 when SAMCO was in existence and
was a running concern. The arbitration proceedings related to a claim of the Custodian of Rs 3
0,00,000 on account of the price of stocks of raw material, stores and other moveables as well
as about the arrears of rent. Counter-claim had also been made by SAMCO against the
Custodian for a sum of Rs 17,67,080 as per written statement dated December 18, 1956 filed
in arbitration proceedings. The consent which was given by the respondent on November 13,
1957 was with a view to get the dispute between SAMCO with the Custodian finally settled.
This was a necessary step for the purpose of winding up the affairs of SAMCO and to
complete transaction of arbitration proceedings which had been begun but remained
unfinished at the time of dissolution. According to Section 47 of the Indian Partnership Act,
after the dissolution of a firm the authority of each partner to bind the firm, and the other
mutual rights and obligations of the partners, continue notwithstanding the dissolution, so far
as may be necessary to wind up the affairs of the firm and to complete transactions begun but
unfinished at the time of the dissolution, but not otherwise. The word transaction in Section
47 refers not merely to commercial transaction of purchase and sale but would include also all
other matters relating to the affairs of the partnership. The completion of a transaction would
cover also the taking of necessary steps in connection with the adjudication of a dispute to
which a firm before its dissolution is a party. The legal position in this respect has been stated
on page 251 of Lindley on Partnership, 13th Edn. as under:
Notwithstanding a dissolution each partner can pay, or receive payment of, a
partnership debt; for it is clearly settled that payment by one of several joint debtors, or to
one of several joint creditors, extinguishes the debt irrespective of any question of

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Kamal Pushp Enterprises v. D.R. Construction Co.

partnership. So, again, it has been held that a continuing or surviving partner may issue a
bankruptcy notice in the firm name in respect of a judgment obtained before the
dissolution, and that notice to him of the dishonour of a bill of exchange is sufficient, and
that he can withdraw a deposit or sell the partnership assets, or pledge them for the
purpose of completing a transaction already commenced, or of securing a debt already
incurred, or the overdraft on the partnership current account at the bank.

31. The proposition, in our opinion, cannot be disputed that after dissolution, the
partnership subsists merely for the purpose of completing pending transactions, winding up
the business, and adjusting the rights of the partners; and for these purposes, and these only,
the authority, rights, and obligations of the partners continue (see page 573 of Halsburys
Laws of England, 3rd Edn., Vol. 28). We would, therefore, hold that the consent given by the
respondent on November 13, 1957 to the award of Mr Desai would not detract from the
conclusion that the firm of the parties stood dissolved on the expiry of the fixed period of
partnership, viz., August 30, 1957.
32. The proposition of law referred to by Mr Desai that a dissolution does not necessarily
follow because a partnership has ceased to do business would not be of any material help to
the appellants because we are not basing our conclusion of the dissolution of the firm of the
parties upon the fact that the partnership had ceased to do business. On the contrary, we have
arrived at the above conclusion in accordance with the principle of law that a firm constituted
for a fixed term shall stand dissolved, in the absence of a contract to the contrary, on the
expiry of that term.
33. Our attention has also been invited to the correspondence between Appellant No. 1
and the respondent during the period from June to September, 1957. These letters reveal that
Appellant No. 1 entertained hopes and expectations of deriving some benefit in case the
respondent succeeded in acquiring the Ambemath Mills. The exact nature of the benefit was
not, however, specified in the letters. The respondent in his replies while not belying those
hopes and expectations took care not to make any commitment. After, however, the
respondent succeeded in acquiring the mills, there developed a coolness in his attitude
towards Appellant No. 1. This circumstance must necessarily have caused disappointment and
disillusionment to Appellant No. 1. The respondent, it seems, kept some kind of carrot
dangling before Appellant No. 1 during the delicate stage of his negotiations with the
Government for the acquisition of the mills lest Appellant No. 1 did something to sabotage
those efforts. After acquisition of the mills by the respondent his attitude changed and he gave
a cold rebuff to Appellant No. 1. The above conduct of the respondent may have a bearing on
the question of the award of costs, but it cannot affect our decision on the point as to whether
the suit is within limitation or not.
*****

Kamal Pushp Enterprises v. D.R. Construction Co.

177

Santiranjan Das Gupta v. Dasuram Murzamull


(1973) 3 SCC 463 : AIR 1973 SC 48
[Suit for dissolution of partnership and accounts - section 44]

According to the plaintiff-appellant he had a mill at Nojai where he was carrying on his
milling business. The defendants represented to him that if the milling business was
carried on in partnership with them then the plaintiff would make large profits and on that
representation and assurance he entered into a partnership with the defendants on or
about January 10, 1948 The partnership business, to quote the plaint commenced from
about the middle of January 1948, and the work continued up to September 10, 1948.
Some disputes arose and on or about November 6, 1946 Murzamull Agarwal told the
plaintiff that the business in partnership was no longer possible. In September 1951, the
plaintiff instituted the present suit for dissolution of partnership and accounts out of
which the present appeal arises. In Para 13 of the plaint it was averred that the partnership
in question had stood dissolved on and from November 6, 1948.
Besides other legal objections taken by the defendants in their written statement it
was pleaded that there was no partnership between the parties and that there was only a
milling agreement, dated January 11,1948 between them under which the defendants
were getting paddy milled in the plaintiffs rice mills for which the dues had all along
been paid to the plaintiff in accordance with the milling contract. This plea gave rise to
issue no. 1. The trial court decreed the suit holding issue no. 1 in favour of the plaintiff.
On appeal, the High Court had come to the conclusion that there was no partnership
between the parties and dismissed the plaintiffs suit.

I.D. DUA, J. - 5. Before us Shri Nag, the learned counsel for the appellant, has very fairly
and frankly conceded that there is no written instrument of partnership. According to him the
partnership was oral and was entered into some time on or about January 10, 1948. We have
on the record a written agreement between the parties Ex. B, dated January 11, 1948. This
agreement purports to be a milling hire arrangement between Santi Ranjan Das Gupta,
proprietor of Das Gupta Rice Mills, Nojai, Nowgong (plaintiff-appellant in this litigation) and
Messrs. Dasuram Murzamull of Gauhati (defendants-respondents). According to this
agreement, the plaintiff who was not able to run the mill business for himself entered into a
milling hire arrangement with the defendants on the following conditions:
1. An amount of as. 8 (annas eight only) per maund of paddy milled by me will
be paid to me by Messrs. Oasuram Murzamull and this would include boiling, drying,
milling, storing and loading in wagons of the rice produced in the mills. All the
running expenses of the mills including cost of labour, lubricants, spare parts etc.,
will be borne by me.
2. The stock of paddy maintained by Messrs. Dasuram Murzamull in my mills
will be absolutely theirs and I shall have no claim on it or any rent for it. Creditors of
mine will have also no claim for the paddy or rice or products thereof etc.

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Kamal Pushp Enterprises v. D.R. Construction Co.

3. The milling charges will. Be payable to me either daily or weekly as may be


demanded at the rate of eight annas per maund of paddy, rice, khudi, gura, husks etc.,
will all go to M/s Oasuram Murzamull.
4. That this milling arrangement will continue till 31st Chaitra 1364 B. S.
6. According to Shri Nag this agreement is merely a paper transaction designed to defeat
the plaintiffs creditors because he was in a bad financial position . . . Reliance in support of
the plaintiff-appellants version was placed on the evidence of the plaintiff himself as P. W. 1.
According to his testimony he had in Baisakh 1363 B. S. Entered into a partnership with
Bijali Das Gupta, Renubora Das Gupta, Mihir Das Gupta and that the partnership was
registered as such. The business, according to him, was being run even on the date of his
evidence (December 9 1957) under the same name and style. In 4948 the defendant firm
entered into a partnership business with the plaintiff when he was the sole proprietor of his
mill, Murzamull Babu in his capacity as managing partner of the defendant firm having
entered into the partnership on behalf of that firm. There was, however, no written document
executed for this partnership. Information regarding this partnership was sent to the bank
concerned and to the Deputy Director of Procurement, Nowgong, orally. This witness had to
admit that there was no written proof of the partnership nor was there any written record with
respect to such partnership. The partnership was dissolved became the defendants men had
left the mill with their stock when the plaintiff was out of Assam between August and
October, 1948. Reference was also made to the testimony of Nirmal Chandra Basu (P. W. 2)
who claims to have been an employee of the Assam Bank in 1948. According to him in the
middle of January, 1948 he learnt that the plaintiff and the defendant had entered into a
partnership. According to his evidence also the factum of the partnership was never reduced
to writing. The other circumstances on which Shri Nag mainly placed reliance in support of
the existence of the partnership are that the rate charged for milling by the plaintiff were
much lower than the prevailing market rates and that the loading and unloading charges were
also undertaken by the, plaintiff. These circumstances, according to the learned counsel
suggest that the milling agreement was merely a device or a paper transaction and that the real
arrangement between the parties was that they were to do their business in partnership.
7. In our opinion, the evidence to which our attention was drawn by Shri Nag is wholly
inadequate for coming to the conclusion that the plaintiff-appellant and that defendant firm
had entered into a contract of partnership as suggested on behalf of the plaintiff. It is
inconceivable that the parties should have entered into an oral agreement of partnership
without retaining any record of its terms and conditions. This is not the normal course of
business. It is equally inconceivable that the partnership business should have maintained no
accounts of its own, which would be open to inspection by both parties even though kept
secret from the rest of the world. Absence of such accounts is conceded by the appellant
before us. Maintenance of separate accounts by the plaintiff and the defendant firm as
suggested by the appellant is no substitute for the maintenance of the accounts of the
partnership business as such, accessible to both parties and, indeed, keeping only separate
accounts by the parties would tend to negative rather than support the plea of partnership.
Some of the other features which go against the appellants plea are: (1) no account of the
partnership was opened with any bank and mere oral information with respect to the newly

Kamal Pushp Enterprises v. D.R. Construction Co.

179

created partnership was sent to the bank and (2) no written intimation was conveyed to the
Deputy Director of Procurement with respect to the newly created partnership, only oral
information having been sent to him. These circumstances further render the story of the
partnership more doubtful.
8. Shri Nag submitted that the trial court had on a consideration of the entire material
come to a positive finding on issue No. 1 and that the High Court was, therefore, not justified
in reversing it. The trial court, in our view, was influenced by considerations which are
wholly inadequate for supporting the conclusion that the parties had entered into a
partnership. According to the trial court the terms of partnership as reproduced in the plaint
are reasonable whereas the terms contained in Ex. B suggest that the plaintiff had agreed to
charge very low rates for milling the defendants paddy and he had also undertaken expenses
for loading and unloading, which unfairly increased the financial burden on him without any
corresponding remuneration. The trial court has also more than once made a reference to the
likelihood of the parties making concealed profits from the partnership business and this in its
view accounted for the absence of written deed of partnership. This reasoning is, in our view,
too thin to satisfactorily explain or justify the extraordinary circumstance of complete absence
of accounts even for the private use of the parties. Whenever the parties try to conceal the real
nature of an agreement of partnership between them they almost invariably, in their own selfinterest, take good care to have in their respective possession written records of their rights
and liabilities as also of their partnership business dealings. They further try to keep full
record of the accounts of the business. This conduct is guided by the ordinary rules of
prudence which govern normal human behaviour. Those accounts no doubt may not be
described or treated as official accounts of the partnership maintained in the ordinary course
of business. They are intended to be kept strictly and exclusively for the personal and private
use of the parties themselves. In the present case it is admitted on both sides that there is no
such written record nor were any such accounts ever maintained by the parties for their own
exclusive use.
9. The High Court, in our opinion, adopted a correct approach to the case, giving due
weight to the absence of written records. On proper consideration of all circumstances of the
case, it came to the correct conclusion that there was no reliable evidence on which the
existence of partnership could be founded. We find no reason to disagree with this view. The
appeal accordingly fails and is dismissed with costs.

*****

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Kamal Pushp Enterprises v. D.R. Construction Co.

M/s. Juggilal Kamlapat v. M/s. Sew Chand Bagree


AIR 1960 Cal. 463

[Dissolution of firm No public notice under section 45(1)]

G.K. MITTER, J. - This is an application in execution of a decree on an award made by


the Bengal Chamber of Commerce dated June 14, 1950 on a dispute between Juggilal
Kamlapat, the award holders, and Sew Chand Bagree, against whom the award was made.
The decree was passed on May 28, 1951 for a total sum of over Rs. 31,000/-.
(2) The award was given in respect of a contract entered into between Sew Chand Bagree
and Juggilal Kamlapat on Sep. 25, 1948. The application is being opposed by Manik Chand
Bagree and Moti Chand Bagree whose case is that the firm of Sew Chand Bagree was
dissolved in Oct. 1945 by mutual consent of its partners and that thereafter their brother
Jankidas Bagree started a new business in the name of Sew Chand Bagree with which they the
other brothers had no concern. Sew Chand Bagree the individual, was the father of the three
persons already mentioned. From a copy of entries in the Register of firms maintained by the
Registrar of Firms, West Bengal, it appears that the business of Sew Chand Bagree was
established in the year 1924, that it was formerly a joint Hindu family business and that the
partnership firm was started on October 28, 1933. The three partners shown in the said record
are Manik Chand Bagree, Moti Chand Bagree and Jankidas Bagree. This document does not
show that there has been any change in the constitution of the firm ever since its inception. It
is contended by the award holders that no change in the constitution of the firm having been
notified an no public notice of the dissolution of the firm having been given under the
provision of the Indian Partnership Act, all the partners continue to be liable for any act done
by any of them. The award holders further do not admit that there was a dissolution of the
firm in the year 1945 as alleged by the Bagrees. On the evidence adduced I must hold that
there was a dissolution of the firm. On this finding the question is whether sub-section (1) of
Sec. 45 of the Partnership Act is brought into play or whether the point is covered by the
proviso to the said sub-section.
(8) Mr. Tiberwalla, Counsel for the Juggilal Kamlapat, argued that it had not been
established by the evidence that the firm of Sew Chand Bagree had ever been dissolved. He
submitted that no attempt had been made to get any alteration in the constitution of the firm
noted in the records of the Registrar of Firms up to the year 1959 although dissolution is
alleged to have taken place in the year 1945. Counsel submitted that the Bagrees had not
examined any disinterested third party to show that the dissolution, if any, was known to
outsiders, that no advertisement of the dissolution had appeared in any newspaper, that there
was no evidence of the issue of any circular with regard to it and that no broker other than
Sriratan Damani had been examined. He relied strongly on the absence of the books of
account of Sew Chand Bagree and contended that the same, if produced, would have
established that the firm had never been wound up. There is certainly some force in these
contentions, specially the comment on the non-production of the books of account. But I
must hold on a consideration of the entire evidence adduced that the firm had been dissolved.
The deed of agreement prepared by Messrs. Dutt and Sen and signed by the Bagree brothers,
the issue of the trade license by the Corporation of Calcutta, the opening of the account with

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181

Hindustan Commercial Bank Ltd., and the letter written to Bank of Baroda Ltd., all
corroborate the oral testimony adduced on behalf of the Bagrees. The contracts of Juggilal
Kamlapat with Manik Chand Bagree in a name and style other than Sew Chand Bagree tend
to prove the disruption in the family. On the evidence as a whole I accept the case of the
Bagrees that the firm of Sew Chand Bagree had come to an end in the year 1945.
(13) The registration of the firm under the Act is not compulsory but unless the firm is so
registered it cannot file a suit to enforce a right arising out of a contract. The application for
registration must comply with the provisions of Sec. 58 of the Act. Registration is effected
under Sec. 59. Provision is made for recording of (a) alterations in the firms name, (b)
changes in the names and addresses of partners, (c) changes in and dissolution of the firm
under Secs. 60 and 63 of the Act. Under Sec. 68 any statement, intimation or notice
recorded or noted in the Register of Firms shall, as against any person by whom or on whose
behalf such statement, intimation or notice was signed, be conclusive proof of any fact therein
stated. Under Sec. 72 of the Act a public notice under the Act relating to the retirement of a
partner from the registered firm or to the dissolution of a registered firm etc., has to be given
by notice to the Registrar of Firms and by publication in the local official Gazette and in at
least one vernacular newspaper circulating in the district where the firm to which it relates has
its place or principal place of business. For the proper interpretation of S. 45 of the
Partnership Act, Mr. Tibrewalla referred me to a judgment of Garth C. J., in Chundee Churn
Dutt v. Eduljee Cowasjee Bijnee [ILR 8 Cal 678]. This judgment turned on the interpretation
of Sec. 264 of the Contract Act of 1872 which provided:
Persons dealing with a firm will not be affected by dissolution of which no
public notice has been given unless they themselves has notice of such dissolution.
(19) Section 45 sub-s. (1) of our Act without the proviso is no doubt somewhat similar to
Sec. 36 sub-section (1) of the English Act but the provisions of the two Acts are not identical.
Under Sec. 45 notwithstanding the dissolution of a firm the liability of the partners continues
until public notice is given of the dissolution in respect of any act which would have bound
the firm if done before the dissolution. But the proviso to this sub-section restricts the scope
of it considerably and exempts the estate of a partner who dies or who is adjudicated an
insolvent or of a partner, who not having known to the person dealing with the firm to be a
partner, retires from the firm if the act is done after the date on which he ceases to be a
partner. Under Sec. 36(1) of the English Act an apparent member continues to be liable to an
outsider unless the latter has notice of the change in the firm. But even if there be no such
notice a partner who was not known to the outsider as such ceases to be liable after his
retirement under Sub-sec. (3) of Sec. 36. In the Indian Act the proviso replaces sub-sec. (3)
of the English section. The only difference between Sec. 36 sub-sec. (1) of the English Act
and Sec. 45 sub-sec. (1) of the Indian Act seems to be that under the former any one who is an
apparent member continues liable while under the latter any one who was a member, whether
apparently so or not remains liable until public notice of dissolution as given. But the proviso
to the Indian Section cuts down the liability in the case of a partner who was not known as
such to the person seeking to make him liable. Except for the use of the qualifying word
apparent in sub-sec. 1 of Sec. 36 of the English Act the effect seems to be the same.

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Kamal Pushp Enterprises v. D.R. Construction Co.

(20) The proper function of a proviso said Lord Macmillan in M. and S. M. Rly. Co. v.
Bazwada Municipality [AIR 1944 PC 71]. is to except and deal with a case which would
otherwise fall within the general language of the main enactment, and its effect is confined to
that case. But for the proviso the dissolution of a firm would not have affected the liability
of a partner who had gone out of it or of a dormant partner until public notice of the
dissolution was given. The effect of the proviso is to except the case of a partner who was not
known to the person dealing with the firm to be a partner and who has retired from the firm
without any public notice of dissolution being given.
(21) It was admitted by Rameshwar Agarwalla that he did not know Manik Chand Bagree
and Moti Chand Bagree to be partners of Sew Chand Bagree until six months or a year ago
and even this he came to know only from a copy of the entries made in the records of the
Register of Firms. These persons, therefore, were not known to Juggilal Kamlapat to have
been partners of the firm and they had gone out of the firm before the contract in this case was
entered into. Clearly the proviso is attracted to the facts of this case and Manik Chand Bagree
and Moti Chand Bagree cannot be made liable for payment of the decretal amount.
(22) Mr. Tibrewalla argued that the exception, if any, is limited to the case of a partner
who "retries from the firm" and does not apply to the case of a dissolution of the firm
whereby the relationship of all the partners inter se is put an end to for ever. In my view, this
contention has no substance because the case of a retiring partner is expressly provided in
Sec. 32 of sub-sec. (3) and the proviso to the said sub-section. It certainly would have been
better if instead of the words "retires from the firm", the legislature had used the expression
"severs his connection with the firm". Probably the actual words used have been taken from
the English Act. Without entering into speculation of this kind it is not difficult to find out
what the legislature intended. It appears to me, however, that the contingencies of death,
insolvency, retirement and even expulsion of a partner having already been provided for by
the Indian Act in Secs. 35, 34, 32 and 33 of the Act respectively, Sec. 36 might well have
dealt with the case of a dissolution of firm simpliciter.
(23) The fact that the entries in the record of the Registrar of Firms still show that Manik
Chand Bagree and Moti Chand Bagree, does not help the decree-holder in this case. If the
decree-holder had adduced evidence to the effect that these records had been scrutinized by it
before the transaction was entered into the position might have been different.
(25) The application will, therefore, be dismissed with costs as against Moti Chand
Bagree and Manik Chand Bagree. There will be an order in terms of prayer (a) as against
Jankidas Bagree.
*****

Kamal Pushp Enterprises v. D.R. Construction Co.

183

Sharad Vasant Kotak v. Ramniklal Mohanlal Chawda


(1998) 2 SCC 171
[Section 46]

K. VENKATASWAMI, J. - 2. This appeal by special leave has arisen under the following
circumstances: The appellants are the partners of a suit firm called M/s Paramount Builders.
The partnership was entered into on 29-11-1979 with (seven) individuals as partners.
3. The said partnership firm was registered on 15-12-1980 under Registration No. 158675
with the Registrar of Firms. On 6-5-1986, Shri Mohanlal Hinji Chawda, a partner of the firm
(Sr. No. 6 above) died and in his place, his widow Smt Jijiben Mohanlal Chawda was
admitted as a partner in the firm. After the admission of the said Smt Jijiben Mohanlal
Chawda, another deed of partnership was made consisting of the six old partners and the
newly admitted partner Smt Jijiben Mohanlal Chawda. As a matter of fact, the induction of
the new partner was not brought to the notice of the Registrar of Firms by forwarding the
required particulars. It is on record that still later on 3-11-1992 another partnership deed was
brought into existence consisting of the same partners. It is also on record that yet another
partner Smt Hemkuver B. Kotak (S. No. 4 above) died in September 1994. The fact of death
of this partner also was not intimated to the Registrar of Firms. While so, the 1st respondent
gave a notice of dissolution of the firm to the appellants and also filed a suit for the
dissolution of the partnership firm bearing Suit No. 5016/94 on 15-12-1994 in the High Court
of Judicature at Bombay on the original side. Initially in the plaint, the constitutional validity
of Section 69(2-A) of the Indian Partnership Act (hereinafter called the Act), as amended
by the Maharashtra Act, was not raised. The 1st respondent moved a Chamber Summons No.
301 of 1997 seeking permission of the Court to carry out certain amendments to the plaint.
Briefly, the amendments sought were that subsequent changes and/or modifications in the
partnership deed of M/s Paramount Builders under the deed of partnership dated 20-10-1986
and also in the deed of partnership dated 3-11-1992 are merely in the nature of changes and/or
modifications which do not affect registration of the said firm of M/s Paramount Builders, as
required under the Act, for entitling a partner to institute a suit for reliefs against the partners
on dissolution of firms and alternatively, the other amendment sought was to challenge the
vires of Section 69(2-A) of the Act as in force in State of Maharashtra.
4. The amendment sought was seriously opposed by the appellants inter alia contending
that the suit as filed was not maintainable and, therefore, the amendment cannot be allowed.
In other words, according to the appellants on and from 20-10-1986 when a new partnership
deed was made, the registration already given to the firm ceased to have validity and the
partnership as at present must be deemed to be an unregistered one and, therefore, the suit was
hit by Section 69(2-A). It was also contended that without impleading the State of
Maharashtra and the Union of India, the vires of Section 69(2-A) in the Partnership Act
cannot be challenged. The learned trial Judge accepting the objections raised by the appellants
found that Section 69(2-A) of the Act creates a bar on the threshold of the filing of the suit for
the relief covered in the suit and the very suit filed by the plaintiff was incompetent. That
being the position, the application for amendment could not be permitted. Consequently, the
application was rejected.

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Kamal Pushp Enterprises v. D.R. Construction Co.

5. Aggrieved by the rejection of the amendment application, the first respondent preferred
an appeal to the Division Bench of the High Court in Appeal No. 509 of 1997.
6. The appellate court was of the view that the registration of the firm continues to be in
force notwithstanding any reconstitution of the firm and even when dissolution takes place,
the registration of the firm continues. The Division Bench further held that Section 69(2-A)
requires the registration of a firm and it does not require a fresh registration each time a
reconstitution or dissolution of the continuing firm takes place. After finding that the suit filed
by the first respondent was not hit by Section 69(2-A), the Division Bench held as follows:
The proposed amendment consists of two parts. The first part is only a factual
aspect which has been sought to be introduced in order to demonstrate that the bar
under Section 69(2-A) is not attracted. There is no reason as to why such an
amendment should not be granted. The second part of the amendment pertains to the
constitutional challenge of the validity of Section 69(2-A). As we have already taken
a view that Section 69(2-A) is not attracted, the question of challenge does not
survive and, therefore, it is not necessary to grant the amendment containing
constitutional challenge.
7. Ultimately the appellate court allowed the appeal and permitted the amendment only
regarding the factual portions and not regarding the constitutional validity of Section 69(2-A).
9. In this appeal, the following substantial question of law arises for our consideration:
Whether on the facts of this case the suit for dissolution and account of
partnership is hit by Section 69(2-A) of the Act as amended in the State of
Maharashtra?
(2-A) No suit to enforce any right for the dissolution of a firm or for accounts of
a dissolved firm or any right or power to realise the property of a dissolved firm shall
be instituted in any court by or on behalf of any person suing as a partner in a firm
against the firm or any person alleged to be or to have been a partner in the firm,
unless the firm is registered and the person suing is or has been shown in the Register
of Firms as a partner in the firm:
Provided that the requirement of registration of firm under this sub-section shall
not apply to the suits or proceedings instituted by the heirs or legal representatives of
the deceased partner of a firm for accounts of a dissolved firm or to realise the
property of a dissolved firm.
11. Before proceeding further, we remind ourselves that we are concerned with a suit
filed by a partner for dissolution and accounts. No third-party rights or liabilities are involved
in the present suit filed by Respondent 1.
12. Undoubtedly counsel on both sides addressed arguments covering larger questions.
But we propose to confine ourselves strictly to the facts of the case and decide the controversy
without touching upon the larger issues or connected issues arising out of the pleadings
because the maintainability of the suit is the sole issue based on Section 69(2-A) of the Act.
13. Section 69(2-A) (extracted above) requires two conditions before a partner can sue for
dissolution of a firm and for accounts:

Kamal Pushp Enterprises v. D.R. Construction Co.

185

1. The firm must be registered.


2. The person suing is or has been shown in the register of firms as partner in the
firm.
14. It is not in dispute that the partnership as entered into under a deed dated 28-11-1979
was duly registered and a certificate of registration was granted. It is also an admitted fact that
the plaintiff, first respondent herein, was one of the founder partners under the deed dated 2811-1979 and his name did find a place in the register of firms as a partner and there is nothing
to show that at any point of time, his name has been removed from the register of firms. We
have seen that on the death of one of the partners, his widow was inducted into the partnership
and a deed was entered into on 20-10-1986, repeating almost all the clauses in the partnership
deed dated 28-11-1979 except for consequential changes necessitated by the induction of a
new partner in the place of the deceased partner.
15. It is the contention of the learned Senior Counsel, Mr Nariman, that when the new
partner was inducted under the partnership deed dated 20-10-1986 in the place of the
deceased partner, the firm registered under the partnership deed dated 28-11-1979 ceases to
be on the records of Registrar of Firms and, therefore, the registration already given will not
enure to the benefit of the partnership entered on 20-10-1986. If that be so, according to Mr
Nariman, learned Senior Counsel, the conditions imposed by Section 69(2-A) are not satisfied
and, therefore, the suit as filed was not maintainable.
16. In support of his argument, he placed strong reliance on the expression partnership
as defined in Section 4 of the Act. It is the contention of Mr Nariman that bearing in mind the
definition in Section 4 of the Act, the partners including the second respondent will
collectively be a firm and that firm is not registered inasmuch as the name of the second
respondent does not find a place in the register of Registrar of Firms. Therefore, the learned
Single Judge was right in holding that the suit was not maintainable at the threshold.
According to the learned Senior Counsel, the mere fact that the plaintiffs name find a place
in the register of Registrar of Firms is not sufficient to maintain the suit when admittedly one
of the partners name (second respondents name) was not shown in the register of Registrar
of Firms. He also contended that a comparison of language employed in Sections 31 and 32 of
the Act will show that whenever a partner is inducted into an existing firm, the old firm ceases
to exist and an altogether new firm comes into existence from the date of induction of the new
partner and that new firm must get fresh registration. He also submitted that the partners
entered into another deed on 3-11-1992 and they have expressly treated the firm as a
reconstituted one. In other words, according to the learned Senior Counsel, the deed dated 2010-1986 in the absence of such expression (reconstituted firm) the understanding was the old
firm, ceases to be in existence and a new firm was brought into existence. For this, he also
placed reliance on clauses 4 and 5 regarding Commencement and Accounting Year. He
also placed reliance on a passage from Lindley on Law of Partnership, 15th Edn., p. 374:
Each partner is, it is true, the agent of the firm; but as pointed out before, the firm
is not distinguishable from the persons from time to time composing it; and when a
new member is admitted he becomes one of the firm for the future, but not as from
the past, and his present connection with the firm is no evidence that he ever
expressly or impliedly authorised what may have been done prior to his admission.

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Kamal Pushp Enterprises v. D.R. Construction Co.

This is wholly consistent with the fact that after the admission of a new member, a
new partnership is constituted, and thus special circumstances are required to be
shown before the debts and liabilities of the old partnership are treated as having
been undertaken by the new partnership.
17. Contending contrary and supporting the judgment of the Division Bench, Mr Soli J.
Sorabjee, learned Senior Counsel, submitted that there is a well-recognised distinction
between the legal concept of dissolution and reconstitution of a firm. In the case of an
incoming or an outgoing partner in an existing firm, there is only a reconstitution of the firm
and in all other respects, the existing firm continues with old and new partners. A look at
Chapter V of the Act, according to him, will fortify the above contention. In other words,
Chapter V deals with Income and Outgoing Partners while Chapter VI separately deals with
Dissolution of a Firm. The two are totally different concepts and cannot in law be equated
with each other. According to the learned Senior Counsel, the rules framed by the
Maharashtra Government in 1989 and the forms prescribed under the rules in particular
Forms E, G and H clearly support the said contention. It is also his contention that even when
there is a dissolution of a firm, it does not cease to be a registered firm but for the purposes of
Partnership Act it continues to be registered. In other words, according to the learned Senior
Counsel, the registration of a firm is valid till it is cancelled in a manner known to law. Noncompliance of Sections 61, 62 and 63, as amended in Maharashtra, if at all, will attract the
penalties prescribed under Section 69-A and nothing more and it is incorrect to contend that
non-compliance of the said provisions will result in deregistration of the firm. As the
consequence of deregistration is a drastic one, it is impermissible to hold that non-compliance
with Sections 63(1) and 63(1-A) would lead to deregistration of a firm in the absence of
express and clear legislative provision to that effect. He further contended that merely because
another partnership deed was made on 20-10-1986, it cannot be said that there was a
dissolution of the old firm and consequential formation of a new firm under the latter deed.
According to the learned Senior Counsel, it is the substance of the matter that is relevant to be
looked into and not the phraseology employed by the parties. In other words, the test is
whether after the execution of the deed dated 20-10-1986, for all intents and purposes, the
firm as reconstituted was a different unit or remained the same unit in spite of change in its
constitution. Looked at from this angle, the unit remained the same as it originally was in
spite of change in its constitution and the contention to the contrary, according to the learned
Senior Counsel, was not correct. To support this, he pointed out the similarities between the
two deeds. The alleged dissimilarities as found in clauses 4 and 5 of the document dated 2010-1986 are really not dissimilarities but consequential and incidental changes.
19. In reply to the contention of Mr Nariman that the purpose for which Section 69(2-A)
was introduced by the Maharashtra Legislature will be the last if the view projected by him is
not accepted, Mr Sorabjee submitted that failure to comply with the mandatory provisions in
Section 61, 62 or 63 may attract the penalties provided under Section 69-A of the Act but not
the deregistration of the firm.
20. At the outset, we would like to deal with the substance of the partnership deeds in this
case. As noticed earlier, the first deed of partnership was entered into on 29-11-1979 and that
partnership firm was registered on 15-12-1980. One of the partners (Shri Mohanlal Hinji

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187

Chawda) died on 6-5-1986 and in his place, his widow was inducted. The second deed of
partnership was drawn on 20-10-1986. By reason of the second deed of partnership, can it be
said that the existing firm dissolved or ceased. It is relevant here to note that in both the deeds
it was expressly made that the death, insolvency or retirement of any partner shall not dissolve
the partnership firm. On the other hand, the partner shall be entitled to carry on the
partnership business on the terms and conditions mutually agreed upon by the said partners
(vide clause 11). Therefore, it cannot be contended by the appellants that by reason of death
of one of the partners, the existing firm stands dissolved. Can it then be said that by reason of
inducting the widow of the deceased partner the existing registered firm ceased and totally a
new partnership firm came into existence. According to the appellants, by reason of clauses 4
and 5 in the second deed of partnership, it must be deemed that the old partnership ceased and
entirely a new partnership firm was found under the second deed. We are unable to agree with
the contention of the learned Senior Counsel for the appellants on this aspect. Clauses 4 and 5
relate to commencement of the partnership and accounting year. These are minimal changes
introduced in the second deed of partnership by reason of the introduction of a new partner in
place of clauses 4 and 5 in the first partnership deed and in other respects, namely, the name
of the partnership firm, the address and location of the firm, the business carried on and shares
allotted among the partners and duration of the partnership, are identical. Moreover a careful
reading of clauses 5 and 6 of the second partnership deed will give an impression that the
partners have agreed to continue the existing firm. The profits or losses for the period prior to
and up to the death of the deceased partner is dealt with and provided. There is no indication
that the old firm was dissolved. Likewise, reliance placed on the recitals in the third deed of
partnership drawn on 3-11-1992 will not come to the help of the appellants. Learned counsel
for the appellants placed reliance on the term used in the third partnership deed reconstituted
in the preamble portion. We are of the opinion that this does not make any substantial
difference when we look into the substance of the three deeds.
22. The contention of the learned counsel for the appellants that the induction of the new
partner will result in dissolution of the firm is not also acceptable. Reliance placed on the
language of Sections 31 and 32 of the Act to support the said contention will be of no avail if
we look into Section 17 of the Act. Section 17(a) of the Act (extracted above) suggests only
reconstitution of the firm where a change occurs in the constitution of the firm. Otherwise, the
old firm remains the same.
25. The next question is whether the registration given to the firm under the first
partnership deed ceases when a new partner was introduced into the firm. For this, we refer to
Sections 58, 59 and 63, the relevant portions have already been extracted. Rules 3, 4, 6 and 17
have also been extracted. The forms prescribed in this connection have also been extracted. A
close perusal of these provisions with Forms A, E, G and H will show that there is a
definite distinction between the Certificate of Registration given to the firm and any
alterations to be entered in the Register of Firms. This will suggest in no uncertain terms that
the changes in the constitution of the firm will not affect the registration once made. In other
words, it is not required that every time a new partner is inducted, fresh registration has to be
applied and obtained. However, information about changes have to be given. Failure to
comply attracts penalties under Section 69-A of the Act.

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Kamal Pushp Enterprises v. D.R. Construction Co.

27. In Pratapchand Ramchand & Co..[AIR 1940 Bom 257], the Bombay High Court
observed as follows:
Dealing in particular with Section 63(1), that sub-section among other things
provides that when a registered firm is dissolved any person who was a partner
immediately before the dissolution, or the agent of any such partner or person
specially authorized in this behalf, may give notice to the Registrar of such change or
dissolution, specifying the date thereof, and the Registrar shall make a record of the
notice in the entry relating to the firm in the Register of Firms, and shall file the
notice along with the statement relating to the firm filed under Section 59. Pausing
there, that section evidently contemplates in the case of a dissolution of a firm by
death that notwithstanding the death the firm should still be treated for the purpose of
the Act as still registered. Mr Davar has argued that by reason of the death and the
dissolution of the firm the firm ceased to be registered, and in his argument he went
so far as to say that the firm ought to have been registered again. No doubt it would
have been logical having regard to Section 42 if the Act had so provided. But in fact
it has not. The Act does contemplate notwithstanding dissolution by death that so far
as registration is concerned the firm is to be deemed still to be registered, and it
empowers any person who was a partner immediately before the dissolution to give
notice of the change and requires the Registrar to record that notice in the entry
relating to the registration of the firm and to file it along with the original statement
which had been filed. The next section requiring notice is Section 69(2).
Applying that sub-section to the present case the firm was registered and in my
opinion continued to be registered on the date of the institution of this suit on 26th
October, 1939. There is no time-limit fixed in any of the Sections 60 to 63 as to when
notice of alterations or changes should be given. Mr Davar argued that the word
when with which each of those sections begins involves an obligation upon the
person proposing to give notice of the change to give it immediately upon the change
occurring. The sections do not say so. The position therefore is this: The firm was
registered at the time of the institution of the suit. The firm then consisted of
Chhogamal Dhanaji and Chunilal Idanji, two of the original partners whose names
were shown on the register on the date of registration and were shown on the register
on the date of the institution of the suit. The fact that the firm was registered on the
date of the institution of the suit and that the names of the persons suing (the firm
being a compendious name for the persons suing) were shown in the register on the
date of the institution of the suit appears to me to be a compliance with Section 69(2)
of the Act.
It would seem that the legislature introduced the words with which that subsection concludes, viz., and the persons suing are or have been shown in the register
of firms as partners in the firm advisedly. If additional partners had come into the
firm as partners since the date of registration and their names had not been entered on
the register in accordance with notice of a change in the constitution of the firm given
to the Registrar, it may well be that the firm as then constituted could not sue,
because although it was a registered firm some of the persons then suing would not

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189

be shown in the register of firms as partners in the firm on the date of the suit. That is
not this case. The partners who are suing were shown in the register originally and
are still shown, and the firm according to my construction of the Act remained
registered notwithstanding the death of one of the original partners.
29. In our opinion, the view taken by the Bombay High Court and followed by the other
High Courts is the right view.
30. Learned counsel for the appellants placed strong reliance on the Objects and Reasons
for the amendments introduced in the Maharashtra Act. According to the learned counsel, if
his contention is not accepted, the object with which Section 69(2-A) was introduced will be
lost. We do not think so. In this context, we wish to point out that Section 69(3)(a) of the
Central Act enables the partners of both registered and unregistered firms to file a suit for
dissolution and/or accounts. That being the position by introducing sub-section (2-A) in
Section 69, the Maharashtra Legislature has placed certain restrictions to the extent that even
the suit for dissolution of a firm or for accounts, the suit can be filed only if the firm is
registered and the person suing as a partner is shown in the Register of Firms as a partner in
the firm. In other words, a person, who is not shown in the Register of Firms by induction
after registration even though the firm is registered, cannot file a suit for dissolution or
accounts. This does not in any way mean that the registration given to the firm earlier will
cease. In this case, the firm was registered and there was only a reconstitution of the firm and
the first respondent, the plaintiff in this case, is a person whose name is shown in the Register
of Firms along with the names of the appellants and, therefore, there is compliance of Section
69(2-A). The contention to the contrary by the learned counsel for the appellants cannot be
accepted.
32. We are also not impressed by the arguments of the learned counsel for the appellants
that if the definition of Section 4 is applied to Section 69(2-A) then unless the names of all the
partners find a place in the Register of Firms, the suit filed by the plaintiff cannot be
sustained. The fact that the firm was registered and the plaintiffs name finds a place in the
Register of Firms are not in dispute. The name of the newly introduced partner, of course,
does not find a place in the Register of Firms. That means the person whose name does not
find a place in the Register of Firms may incur certain disabilities and that will not disable the
plaintiff to press the suit against the firm, which was registered against the persons whose
names find a place in the Register of Firms. We are not called upon to decide what are the
disabilities of the person, whose name does not find a place in the Register of Firms. For the
purpose of Section 69(2-A), the partnership firm will mean the firm as found in the certificate
of registration and the partners as found in the Register of Firms maintained as per rule in
Form G. The present suit being one for dissolution and accounts by one of the partners,
whose name admittedly finds place in the Register of Firms along with the names of all the
appellants, the requirements of Section 69(2-A) are satisfied. Section 4 of the Act is also
complied with for this limited purpose.
33. Our conclusion is that on the induction of the second respondent, the existing firm
was only reconstituted on the facts of this case and, therefore, there is no necessity to get a
fresh registration. If by virtue of non-compliance of certain mandatory provisions in not
informing the Registrar of Firms about the change in the constitution of the firm, certain

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Kamal Pushp Enterprises v. D.R. Construction Co.

penalties provided in the Act alone are attracted and that will not lead to the conclusion that
the registration of the firm ceased. This conclusion is based on a conjoint reading of Sections
58-63 and the forms prescribed thereunder. Further, this conclusion does not in any way
militate the object of the Maharashtra Amendment introduced by Act 29 of 1984.
34. In the result, we hold that the suit in question is not hit by Section 69(2-A) of the Act
and, therefore, the Division Bench is right in allowing the appeal. Consequently, the appeal is
dismissed. However, there will be no order as to costs.

*****

Kamal Pushp Enterprises v. D.R. Construction Co.

S.V. Chandra Pandian v. S.V. Sivalinga Nadar


(1993) 1 SCC 589

[Mode of settlement of accounts - section 48(b)(iv)]


(The four appellants and respondents 1 and 2 were brothers carrying on business in
partnership in the name and style of Messers Sivalinga Nadar & Brothers and S.V.S. Oil
Mills, both partnerships being registered under the Partnership Act, 1932. Most of the
properties were acquired by the firm of Sivalinga Nadar & Brothers. The firm of Ms.
S.V.S. Oil Mills merely had leasehold rights in the parcel of land belonging to the firstnamed firm on which the superstructure of the oil mill stood. Both the partnerships were
of fixed durations. Disputes arose between the six brothers in regard to the business
carried on in partnership in the aforesaid two names. For the resolution of these disputes
the six brothers entered into an arbitration agreement dated October 8, 1981, which was
as under:
We are carrying on business in partnership together with other partners under
several partnership names. We are also holding shares and managing the Public
Limited Company, namely, the Madras Vanaspati Ltd., at Villupuram. Disputes
have arisen among us with respect to the several business concerns, immovable
and moveable properties standing in our names as well as other relatives.
We are hereby referring all our disputes, the details of which would be given by us
shortly to you, namely, Sri B.B. Naidu, Sri K.R. Ramamani and Sri Seetharaman.
We agree to abide by your award as to our disputes.
The arbitrators directed that the firms of M/s Sivalinga Nadar & Bros. and M/s
S.V.S. Oil Mills and also the joint house property Rent Account be dissolved as at the
close of business on July 14, 1984.
The arbitrators set out the properties belonging to or claimed to belong to the two
firms in paras. 6 to 24 of their award. Paragraph 25 was a residuary clause which said that
any asset left out or realised hereafter or any liability found due other than those reflected
in the account books was to be divided and/or borne equally among the disputants.
Paragraphs 26 and 27 deal with the use of the firm names. Paragraph 29 refered to the
business carried on by the relatives of the disputants in the names of Sri Brahmasakthi
Agency and Srimagal Finance Corporation. The arbitrators had recognised the fact that
even though the said business was not carried on by the disputants it was desirable to
dissolve the firms also w.e.f. July 24, 1984 in the larger interest of peace and amity
among the disputants and their relatives. Paragraph 30 referred to the properties standing
in the name of the father of the six disputants, i.e., partners of the two firms in question.
The award set out the share of the disputants.
After the award was made, O.P. No. 230 of 1984 was filed by S.V. Chandrapandian
and others for a direction to the arbitrators to file their award in Court which was done.
Thereupon, the applicants S.V. Chandrapandian and others filed a Miscellaneous
Application No. 3503 of 1984 requesting the Court to pass a decree in terms of the award.
Before orders could be passed on that application, O.P. Nos. 247 and 275 of 1984 were
filed by S.V. Sivalinga Nadar and S.V. Harikrishnan respectively under Section 30 of the
Arbitration Act to set aside the award. The applications came up for hearing before a
learned Single Judge of the High Court. The learned Single Judge observed as under:

191

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Kamal Pushp Enterprises v. D.R. Construction Co.

The learned counsel for the respondents also contended that the award falls under
Schedule I Article 12 of the Stamp Act and the allocation of properties owned by
partnership firm on dissolution to the erstwhile partners is not partition of
immovable properties. In this connection, learned counsel for the respondents
placed reliance on the decision reported in Addanki Narayanappa v. Bhaskara
Krishtappa which decision has been confirmed in Addanki Narayanappa v.
Bhaskara Krishnappa. It was submitted by the learned counsel for the respondents
that the contentions with regard to stamp and registration put forward by the
petitioner cannot be accepted. It is to be pointed out that the award has been
submitted for registration long ago on October 27, 1984 itself and it is stamped and
if there is any deficiency, the registering authority could direct proper stamp to be
affixed and therefore I feel there could be no impediment for the award being made
a rule of the Court and a decree being passed in terms of the award as contended by
the learned counsel for the respondents.
The learned Single Judge made the final order in the following terms:
Thus on a careful consideration of the materials available and the contentions of
either side it has to be decided that Application No. 3505 of 1984 in O.P. No.
230 of 1984, filed by the petitioners therein praying for a decree in terms of the
arbitration award dated July 9, 1984 has to be allowed and O.P. Nos. 247 and
275 of 1984 and the applications filed in those two petitions, i.e., Application
Nos. 3474, 3476, 5030, 5031, 5032, 2827, 2828, 3773, 3762, 3874 of 1984 and
4886 and 4887 of 1985, are dismissed. The petitioner in O.P. No. 230 of 1984
and the applicants in Application No. 3505 of 1984 are directed to take steps for
getting the award registered. The parties in all these proceedings are directed to
bear their own costs.
Against the judgment of the learned Single Judge, the matter was carried in appeal to
a Division Bench of the High Court of Madras which reversed the finding recorded by
the learned Single Judge and came to the conclusion that the award required registration
under Section 17(1) of the Registration Act
In this view of the matter the Division Bench allowed the appeal and set aside the
impugned judgment of the learned Single Judge and held that as the award was not
registered it could not be made the rule of the Court).

A.M. AHMADI, J. - 7. Section 4 (of the Partnership Act, 1932) defines partnership as a
relationship between persons who have agreed to share the profit of a business carried on by
all or any of them acting for all. Section 14 provides that subject to contract between the
partners, the property of the firm includes all property and rights and interests in property
originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for
the firm, or for the purposes and in the course of the business of the firm, and includes also
the goodwill of the business. It is also clarified that unless the contrary intention appears,
property and rights and interest in property acquired with money belonging to the firm shall
be deemed to have been acquired for the firm. Section 15 says that the property of the firm
shall be held and used by the partners exclusively for the purposes of the business subject of
course to contract between the partners. Says Section 18, subject to the provisions of the Act,
a partner is the agent of the firm for the purposes of the business of the firm. Under Section 19

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193

the act of a partner which is done to carry on, in the usual way, business of the kind carried on
by the firm, shall bind the firm. This authority to bind the firm is termed as implied
authority. Section 22 lays down that in order to bind a firm, an act or instrument done or
executed by a partner or other person on behalf of the firm shall be done or executed in the
firm name, or in any other manner expressing or implying an intention to bind the firm.
Section 29 deals with the rights of transferee of a partners interest. Sub-section (1) thereof
provides that such a transferee will not have the same rights as the transferor-partner but he
would be entitled to receive the share of profits of his transferor on the account of profits
agreed to by the partners. Sub-section (2) next provides that upon dissolution of the firm or
upon a transferor-partner ceasing to be a partner, the transferee would be entitled against the
remaining partners to receive the share of the assets of the firm to which the transferor-partner
was entitled and will also be entitled to an account as from the date of dissolution. Section 30
deals with the case of a minor admitted to the benefits of partnership. Such a minor is given a
right to his share of the property of the firm and also a right to share in the profits of the firm
as may be agreed upon but his share is made liable for the acts of the firm though he would
not be personally liable for the same. Sub-section (4), however, debars a minor from suing the
partners for an account or for his share of the property or profits of the firm except when he
severes his connections with the firm, in which case for determining his share the law requires
a valuation of his share in the property of the firm to be made in accordance with Section 48.
Sections 31 to 38 relate to incoming and outgoing partners. Section 32 deals with the
consequences of retirement. Sub-sections (2) and (3) of Section 32 deal with the
consequences of retirement while Sections 36 and 37 speak about the rights of an outgoing
partner to carry on competing business and in certain cases to share subsequent profits.
Chapter VI deals with the dissolution of a firm. Section 40 provides that a firm may be
dissolved with the consent of all the partners or in accordance with the contract between the
partners. Sections 41 and 42 deal with dissolution on the happening of certain events while
Section 43 permits a partner to dissolve a firm by notice if it is a partnership at will. Section
44 speaks of dissolution through Court. Section 48 indicates the mode of settlement of
accounts between the partners on dissolution while Section 49 posits that where there are joint
debts due from the firm, and also separate debts due from any partner, the property of the firm
shall be applied in the first instance in payment of the debts of the firm, and, if there is any
surplus, then the share of each partner shall be applied in payment of his separate debts or
paid to him. The separate property of any partner shall be applied first in the payment of his
separate debts, and the surplus (if any) in the payment of the debts of the firm, Chapter VII
deals with the registration of firms, etc., and Chapter VIII contains the saving clause.
8. The above provisions make it clear that regardless of the character of the property
brought in by the partners on the constitution of the partnership firm or that which is acquired
in the course of business of the partnership, such property shall become the property of the
firm and an individual partner shall only be entitled to his share of profits, if any, accruing to
the partnership from the realisation of this property and upon dissolution of the partnership to
a share in the money representing the value of the property. It is well settled that the firm is
not a legal entity, it has no legal existence, it is merely a compendious name and hence the
partnership property would vest in all the partners of the firm. Accordingly, each and every
partner of the firm would have an interest in the property or asset of the firm but during its

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Kamal Pushp Enterprises v. D.R. Construction Co.

subsistence no partner can deal with any portion of the property as belonging to him, nor can
he assign his interest in any specific item thereof to anyone. By virtue of the implied authority
conferred as agent of the firm his action would bind the firm if it is done to carry on, in the
usual way, the business of the kind carried on by the firm but the act or instrument by which
the firm is sought to be bound must be done or executed in the firm name or in any other
manner expressing or implying an intention to bind the firm. His right is merely to obtain
such profits, if any, as may fall to his share upon the dissolution of the firm which remain
after satisfying the liabilities set out in the various sub-clauses (i) to (iv) of clause (b) of
Section 48 of the Act.
9. In the present case the six brothers who were carrying on business in partnership fell
out on account of disputes which they could not resolve inter se. The partnership being of
fixed durations could not be dissolved by any partner by notice. As they could not resolve
their disputes they decided to resort to arbitration. The three arbitrators chosen by them were
men of their confidence and they after giving the partners full and complete opportunity took
care to first circulate a proposed award to ascertain the reaction of the disputants therein. The
letter written to the arbitrators by S.V. Sivalinga Nadar dated February 16, 1983 indicates that
he was quite satisfied with the hearing given by the arbitrators. He was also by and large
satisfied with the proposed award but thought it warranted certain adjustments to make it
acceptable and rational. He was of the view that the award should provide for the reallocation
of the shareholdings of Madras Vanaspati Ltd., whereas Brahmasakthi Tin Factory owned by
his sons should be kept out of the purview of the arbitrators since it was not the subject-matter
of arbitration. Then he raised some objection as to the percentage of his share and the amount
found due to him. In the subsequent letter written on September 9, 1983 he has reiterated
these very objections while raising certain questions regarding valuation of partnership
properties. Even the application filed under Sections 30 and 33 of the Arbitration Act in the
High Court the objections to the award as enumerated in paragraph 15 mainly concerned (i)
the conduct of the arbitrators who, it is alleged, acted negligently, with bias and against
principles of natural justice (ii) deliberate act in leaving out certain properties from
consideration e.g., shareholdings of Madras Vanaspati Ltd., stock-in-trade and cash deposits,
the properties of Velayudha Perumal Nadar, etc., and (iii) failure to grant him a higher share
to which he was entitled. No contention was raised regarding the want of registration of the
award. However, being a question of law, the learned Single Judge entertained the plea and
rejected it but it found favour with the Division Bench.
The submission made in this behalf before the courts below was that the award involved a
partition of immovable properties as a consequence of dissolution of the firms and since the
value of the immovable properties which are the subject-matter of the award indisputably
exceed the value of Rs 100, the award was compulsorily registrable in view of the mandatory
nature of the language of Section 17(1) which uses the expression shall be registered. On the
mandatory character of the provision there is no dispute. The question which requires
determination is whether on the dissolution of the partnership the distribution of the assets of
the firm comprising both moveable and immovable properties after meeting its obligations on
settlement of accounts amongst the partners of the firm in proportion to their respective shares
amounts to a partition of immovable properties or a relinquishment or extinguishment of a

Kamal Pushp Enterprises v. D.R. Construction Co.

195

share in immovable property requiring registration under Section 17 of the Registration Act if
the allocation includes immovable property of the value of Rs 100 and above? In other words
the question to be considered is whether the interest of a partner in partnership assets is to be
treated as moveable property or both moveable and immovable depending on the character of
the property for the purposes of Section 17 of the Registration Act?
12. In CIT v. Juggilal Kamalapat [AIR 1967 SC 401], the facts were that three brothers
and one J entered into a partnership business. The firm owned both moveable and immovable
properties. Sometime thereafter the three brothers created a Trust with themselves as the first
three trustees and simultaneously executed a deed of relinquishment relinquishing their rights
in and claims to all the properties and assets of the firm in favour of J and of themselves in the
capacity of trustees. Thereafter a new partnership firm was constituted between J and the
Trust with specified shares. The Trust brought a sum of Rs 50,000 as its capital in the new
firm. The new firm applied for registration under Section 26-A of the Income Tax Act, 1922
but the application was rejected by the authorities. The Tribunal held that the deed of
relinquishment being unregistered could not legally transfer the rights and the title to the
immovable properties owned by the original firm to the Trust. Since the immovable
properties were not separable from the other business assets it held that there was no legal
transfer of any portion of the business assets of the original firm in favour of the Trust. A
reference was made to the High Court on the question whether the new partnership legally
came into existence and as such should be registered under Section 26-A. The High Court
held that there was no impediment to its registration. The matter was brought in appeal before
this Court. This Court pointed out that the deed of relinquishment was in respect of individual
interests of the three brothers in the assets of the partnership firm in favour of the Trust and
consequently, did not require registration, even though the assets of the partnership included
immovable property. In taking this view reliance was placed on the decision Ajudhia Pershad
case, AIR 1947 Lah 13 as well as the decision of this Court in Addanki Narayanappa, AIR
1966 SC 1300.
13. Again in CIT v. Dewas Cine Corporation [AIR 1968 SC 676], the partnership firm
was dissolved and on dissolution it was agreed between the partners that the theatres should
be returned to their original owners who had brought them into the books of the partnership as
its assets. In the books of accounts of the partnership the assets were shown as taken over on
October 1, 1951 at the original price less depreciation, the depreciation being equally divided
between the two partners. In the proceedings for the assessment year 1952-53 the firm was
treated as a registered firm. The Appellate Tribunal held that restoration of the two theatres to
the original owners amounted to transfer by the firm and the entries adjusting the depreciation
and writing off the assets at the original value amounted to total recoupment of the entire
depreciation by the partnership and on that account the second proviso to Section 10(2)(vii) of
the I.T. Act, 1922 applied. The High Court in reference upturned the decision of the Tribunal
and held in favour of the assessee against which the Revenue appealed to this Court. This
Court after referring to Sections 46 and 48 of the Partnership Act held that on the dissolution
of the partnership each theatre must be deemed to be returned to the original owner in
satisfaction partially or wholly of his claim to a share in the residue of the assets after
discharging the debts and other obligations. In law there was no sale or transfer by the

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Kamal Pushp Enterprises v. D.R. Construction Co.

partnership to the individual partners in consideration of their respective share in the residue.
In taking this view reliance was once again placed on the decision of this Court in Addanki
Narayanappa.
14. In CIT v. Bankey Lal Vaidya [AIR 1971 SC 2270], this Court pointed out that on
dissolution of partnership the assets of the firm are valued and the partner is paid a certain
amount in lieu of his share of the assets, the transaction is not a sale, exchange or transfer of
assets of the firm and the amount received by the partner cannot be taxed as capital gains.
15. Again in Malabar Fisheries Co. v. CIT [AIR 1980 SC 176], the facts were that the
appellant firm which was constituted on April 1, 1959 with four partners carried on six
different businesses in different names. The firm was dissolved on March 31, 1963 and under
the deed of dissolution the first business concern was taken over by one of the partners, the
remaining five concerns by two of the other partners and the fourth partner received his share
in cash. It appears that during the assessment years 1960-61 to 1963-64 the firm had installed
various items of machinery in respect of which it had received Development Rebate under
Section 33 of the I.T. Act, 1961. On dissolution, the Income Tax Officer took the view that
Section 34(3)(b) of the Act applied on the premiss that there was a sale or transfer of the
machinery by the firm whereupon he withdrew the Development Rebate earlier allowed to the
firm by amending the orders in that behalf. The appeal filed on behalf of the dissolved firm
was dismissed by the Appellate Assistant Commissioner but was allowed by the Tribunal. At
the instance of the Revenue a reference was made to the High Court and the High Court
allowed the reference holding that there was a transfer of assets within the meaning of Section
34(3)(b). The dissolved firm approached this Court in appeal. This Court after referring to the
definition of the expression transfer in Section 2(47) of the Act and the case-law on the
point concluded as under:
Having regard to the above discussion, it seems to us clear that a partnership firm
under the Indian Partnership Act, 1932 is not a distinct legal entity apart from the
partners constituting it and equally in law the firm as such has no separate rights of
its own in the partnership assets and when one talks of the firms property or firms
assets all that is meant is property or assets in which all partners have a joint or
common interest. If that be the position, it is difficult to accept the contention that
upon dissolution the firms rights in the partnership assets are extinguished. The firm
as such has no separate rights of its own in the partnership assets but it is the partners
who own jointly in common the assets of the partnership and, therefore, the
consequence of the distribution, division or allotment of assets to the partners which
flows upon dissolution after discharge of liabilities is nothing but a mutual
adjustment of rights between the partners and there is no question of any
extinguishment of the firms rights in the partnership assets amounting to a transfer
of assets within the meaning of Section 2(47) of the Act.
16. From the foregoing discussion it seems clear to us that regardless of its character the
property brought into stock of the firm or acquired by the firm during its subsistence for the
purposes and in the course of the business of the firm shall constitute the property of the firm
unless the contract between the partners provides otherwise. On the dissolution of the firm
each partner becomes entitled to his share in the profits, if any, after the accounts are settled

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197

in accordance with Section 48 of the Partnership Act. Thus in the entire asset of the firm all
the partners have an interest albeit in proportion to their share and the residue, if any, after the
settlement of accounts on dissolution would have to be divided among the partners in the
same proportion in which they were entitled to a share in the profit. Thus during the
subsistence of the partnership a partner would be entitled to a share in the profits and after its
dissolution to a share in the residue, if any, on settlement of accounts. The mode of settlement
of accounts set out in Section 48 clearly indicates that the partnership asset in its entirety must
be converted into money and from the pool the disbursement has to be made as set out in
clause (a) and sub-clauses (i), (ii) and (iii) of clause (b) and thereafter if there is any residue
that has to be divided among the partners in the proportions in which they were entitled to a
share in the profits of the firm. So viewed, it becomes obvious that the residue would in the
eye of law be moveable property i.e. cash, and hence distribution of the residue among the
partners in proportion to their shares in the profits would not attract Section 17 of the
Registration Act. Viewed from another angle it must be realised that since a partnership is not
a legal entity but is only a compendious name each and every partner has a beneficial interest
in the property of the firm even though he cannot lay a claim on any earmarked portion
thereof as the same cannot be predicated. Therefore, when any property is allocated to him
from the residue it cannot be said that he had only a definite limited interest in that property
and that there is a transfer of the remaining interest in his favour within the meaning of
Section 17 of the Registration Act. Each and every partner of a firm has an undefined interest
in each and every property of the firm and it is not possible to say unless the accounts are
settled and the residue or surplus determined what would be the extent of the interest of each
partner in the property. It is, however, clear that since no partner can claim a definite or
earmarked interest in one or all of the properties of the firm because the interest is a
fluctuating one depending on various factors, such as, the losses incurred by the firm, the
advances made by the partners as distinguished from the capital brought in the firm, etc., it
cannot be said, unless the accounts are settled in the manner indicated by Section 48 of the
Partnership Act, what would be the residue which would ultimately be allocable to the
partners. In that residue, which becomes divisible among the partners, every partner has an
interest and when a particular property is allocated to a partner in proportion to his share in
the profits of the firm, there is no partition or transfer taking place nor is there any
extinguishment of interest of other partners in the allocated property in the sense of a transfer
or extinguishment of interest under Section 17 of the Registration Act. Therefore, viewed
from this angle also it seems clear to us that when a dissolution of the partnership takes place
and the residue is distributed among the partners after settlement of accounts there is no
partition, transfer or extinguishment of interest attracting Section 17 of the Registration Act.
17. Strong reliance was, however, placed by the learned counsel for the respondents on
two decisions of this Court, namely, (1) Ratan Lal Sharma v. Purshottam Harit [(1974) 1
SCC 671] and (2) Lachhman Dass v. Ram Lal [(1989) 3 SCC 99]. Insofar as the firstmentioned case is concerned, the facts reveal that the appellant and the respondent who had
set up a partnership business in December 1962 soon fell out. The partnership had a factory
and other moveable and immovable properties. On August 22, 1963, the partners entered into
an agreement to refer the dispute to the arbitration of two persons and gave the arbitrators full
authority to decide their dispute. The arbitrators made their award on September 10, 1963.

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Under the award exclusive allotment of the partnership assets, including the factory, and
liabilities, was made in favour of the appellant and it was provided that he shall be absolutely
entitled to the same in consideration of a sum of Rs 17,000 plus half the amount of realisable
debts of the business to the respondent. The arbitrators filed the award in the High Court on
November 8, 1963. On September 10, 1964, the respondent filed an application for
determining the validity of the agreement and for setting aside the award. On May 27, 1966, a
learned Single Judge of the High Court dismissed the application as barred by time but
declined to make the award the rule of the Court because in his view the award was void for
uncertainty and created rights in favour of the appellant over immovable property worth over
Rs 100 requiring registration. The Division Bench dismissed the appeal as not maintainable
whereupon this Court was moved by special leave. Before this Court it was contended (i) that
the award is not void for uncertainty; (ii) that the award seeks to assign the respondents share
in the partnership to the appellant and therefore does not require registration; and (iii) that
under Section 17 of the Arbitration Act, the court was bound to pronounce judgment in
accordance with the award. This Court while reiterating that the share of a partner in the
assets of the partnership comprising even immovable properties, is moveable property and the
assignment of the share does not require registration under Section 17 of the Registration Act.
The legal position is thus affirmed. However, since the award did not seek to assign the share
of the respondent to the appellant but on the contrary made an exclusive allotment of the
partnership asset including the factory and liabilities to the appellant, thereby creating an
absolute interest on payment of consideration of Rs 17,000 plus half the amount of the
realisable debts, it was held to be compulsorily registrable under Section 17 of the
Registration Act. The Court did not depart from the principle that the share of a partner in the
asset of the partnership inclusive of immovable properties, is moveable property and the
assignment of the share on dissolution of the partnership did not require registration under
Section 17 of the Registration Act. The decision, therefore, turned on the interpretation of the
award in regard to the nature of the assignment made in favour of the appellant. So far as the
second case is concerned, we think it has no bearing since that was not a case of assignment
of partnership property under a dissolution deed. In that case, the dispute was between two
brothers in 2-1/2 killas of land situate in Panipat, Haryana. The said land stood in the name of
one brother - the appellant. The respondent contended that he was a benamidar and that was
the dispute which was referred to arbitration. The Arbitrator made his award and applied to
the Court for making it the rule of the Court. Objections were filed by the appellant raising
various contentions. The award declared that half share of the ownership of the appellant shall
be now owned by Shri Ram Lal, the respondent in addition to his half share owned in those
lands. Therefore, the award transferred half share of the appellant to the respondent and since
the value thereof exceeded Rs 100, it was held that it required registration. It is, therefore,
obvious that this case has no bearing on the point in issue herein.
18. In the present case, the Division Bench of the High Court concluded that the award
required registration because of an erroneous reading of the award. The Division Bench after
extensively reproducing from the Schedules A to F of the award proceeded to state in
paragraph 39 that the allotments are exclusive to the brothers and they get independent rights
of their own under the award in the properties allotted under the schedule and hence it is not a
case purely of assignment of the shares in the partnership but it confers exclusive rights to the

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199

allottees. On this line of reasoning it concluded that the award required registration. The court
next pointed out in paragraph 42 of the judgment that the award also partitions certain
immovable properties jointly owned by the disputants. In this connection it has placed
reliance on paragraph 10(c) of the award which reads as under:
(c). Other Lands and Buildings and House properties belonging to S.V. Sivalinga
Nadar & Bros. standing in the name of the firm and/or otherwise jointly owned by
the disputants. These have been allotted by us to one or other or jointly to some of the
disputants as per schedules annexed hereto.
The reasons which weighed with the Division Bench of the High Court in concluding that the
award requires registration appear to be based on an erroneous reading of the award. We have
carefully read the award and it is manifest therefrom that the Arbitrators had confined
themselves to the properties belonging to the two firms in question and scrupulously avoided
dealing with the properties not belonging to the firm. This is manifest from paragraphs 15 to
18 of the award. However, properties standing in the names of disputants, individually or
jointly, and others as benamidars but belonging to the firm also came to be included in the
distribution of the surplus partnership asset under the award. That is the purport of paragraph
10(c) extracted hereinabove. When on settlement of accounts the residue is required to be
divided among the partners in proportions in which they entitled to share profits under subclause (iv) of clause (b) of Section 48, the properties will have to be allocated to the partners
as falling to their share on the distribution of the residue and, therefore, the Arbitrators
indicated in the schedules the properties falling to the share of each brother. Mere statements
that a certain property will now exclusively belong to one partner or the other, as the case may
be, cannot change the character of the document or the nature of assignment because that
would in any case be the effect on the distribution of the residue. The property falling to the
share of the partner on the distribution of the residue would naturally then belong to him
exclusively but so long as in the eye of law it is money and not immovable property there is
no question of registration under Section 17 of the Registration Act. Besides, as stated earlier,
even if one looks at the award as allocating certain immovable property since there is no
transfer, no partition or extinguishment of any right therein there is no question of application
of Section 17(1) of the Registration Act. The reference to other land and buildings and house
properties jointly owned by the disputants in clause (c) of paragraph 10 of the award merely
indicates that certain properties belonging to the firm stood in the names of individual
partners or in their joint names but they belonged to the firm and, therefore, they were taken
into account for the purpose of settlement of accounts under Section 48 of the Partnership Act
and distributed on the determination of the residue. The award read as a whole makes it
absolutely clear that the Arbitrators had confined themselves to the properties belonging to
the two firms and had scrupulously avoided other properties in regard to which they did not
reach the conclusion that they belonged to the firm. On a correct reading of the award, we are
satisfied that the award seeks to distribute the residue after settlement of accounts on
dissolution. While distributing the residue the Arbitrators allocated the properties to the
partners and showed them in the schedules appended to the award. We are, therefore, of the
opinion that on a true reading of the award as a whole, there is no doubt that it essentially

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Kamal Pushp Enterprises v. D.R. Construction Co.

deals with the distribution of the surplus properties belonging to the dissolved firms. The
award, therefore, did not require registration under Section 17(1) of the Registration Act.
19. For the above reasons, we allow these appeals and set aside the impugned orders of
the Division Bench and remit the matters to the Division Bench for answering the other
contentions which arose in the appeal before it but which were not decided in view of its
decision on the question of registration of the award. We also make it clear that the award
which is pending for registration may be registered by the Sub-Registrar notwithstanding the
objection raised by one of the partners, S.V. Sivalinga Nadar through his lawyer if that is the
only reason for withholding registration. The appeals are allowed accordingly with costs.
*****

Kamal Pushp Enterprises v. D.R. Construction Co.

REGISTRATION OF FIRMS
CIT v. Jayalakshmi Rice and Oil Mills Contractor Co.
AIR 1971 SC 1015 : (1971) 1 SCC 280
[Date of registration of a partnership firm - section 60]

The assessee firm was constituted under a deed of partnership, dated October 6,
1955. It was to come into existence with effect from November 5, 1954. The assessee
filed an application under Section 26-A of the Act for registration of the firm for the
assessment year 1956-57. The previous year of the firm was shown as the year
ending October 26, 1955. This application was received by the Income-tax Officer on
October 14, 1955. On October 20, 1955, the assessee filed before the Registrar of
Firms a statement under Section 58 of the Indian Partnership Act, 1932. On
November 2, 1955, the Registrar of Firms filed the statement of the assessee and
made entries in the register of firms On March 23, 1961, the Incom-tax Officer
passed an order refusing to register the firm under Section 26-A, interalia, for the
reason that the application had not been made in time. The appeal taken to the
Appellate Assistant Commissioner by tax assessee failed. The Income-tax Appellate
Tribunal also upheld the order of the Income tax Officer and the Appellate Assistant
Commissioner. On that a reference was sought and the High Court answered the
question referred in favour of the assessee on the ground that the application had
been filed in time.
Section 26-A of the (Income Tax) Act provides that an application may be made
to the Income-tax Officer on behalf of any firm constituted under an instrument of
partnership specifying the individual shares of the partners for registration for the
purposes of the Act. The application has to be made by such person or persons and at
such time and has to contain such particulars, etc., as may be prescribed. Rules 2 to
6(6) of the Rules made under Section 59 of the Act deal with registration of firms
The material portion of Rule 2 reads:
Such application shall be made.......
(a) Where the firm is not registered under the Indian Partnership Act, 1932
(IX of 1932) or where the deed of Partnership is not registered under the Indian
Registration Act, 1908 (XVI of 1908) and the application for registration is being
made for the first time under the Act.
(i) Within a period of six months of the constitution of the firm or before
the end of the previous year of the firm whichever is earlier, if the firm was
constituted in that previous year,
(ii) before the end of the previous year in any other case,
(b) Where the firm is registered under the Indian Partnership Act, 1932 (IX
of 1932) or where the deed of partnership is registered under the Indian

201

202

Kamal Pushp Enterprises v. D.R. Construction Co.

Registration Act (XVI of 1908) before the end of the previous year of the
firm......

A.N. GROVER, J. - Now it is common ground that the application for registration was not
made within the period prescribed by Rule 2 (a). What has been urged throughout on behalf
of the assessee is that the application to the Income-tax Officer was governed by Rule 2(6)
and was in time as the firm should be deemed to have been registered not on the date on
which it was actually registered by the Registrar of Firms but with effect from the date on
which the application for registration was presented to the Registrar. In other words the firm
should be considered to have been registered on October 20, 1955, on which date the
statement under Section 58 of the Partnership Act was filed by the assessee before the
Registrar of Firms.
4. The real question which has to be determined is whether the registration of a firm under
the Partnership Act takes place with effect from the date on which the application for
registration is made in accordance with Section 58 of that Act. Section 58(1) provides that the
registration of a firm may be effected at any time by sending by post or delivering to the
Registrar of the area in which any place of business of the firm is situated or proposed to be
situated a statement in the prescribed form and accompanied by the prescribed fee stating......
under Section 59 when the Registrar is satisfied that the provisions of Section 58 have been
duly complied with he shall record an entry of the statement in a register called the register
of firms and shall file the statement. In Ram Prasad v. Kamla Prasad [AIR 1935 All. 898],
it was laid down that the registration of a firm under the Partnership Act takes place only
when the necessary entry is made in the register of firms Even under Section 69 of the
Partnership Act which deals with the effect of non-registration it has been consistently held
that the registration of a firm subsequent to the filing of the suit did not cure the defect. Thus
under the Partnership Law it can be taken to have been settled by decisions of High Courts
from a long time that the registration of a firm takes place only when the necessary entry is
made in the register of firms under Section 59 of the Partnership Act by the Registrar. It is
true that sub-section (1) of Section 58 employs language which without anything more may
lend support to the view that the registration of a firm may be effected merely by sending an
application which would mean that as soon as an application is sent and if entry is made under
Section 59 pursuant to it the registration would be effective from the date when the
application was presented. But Section 58(1) is not to be read in isolation and has to be
considered along with the scheme of the other provisions of the Act, namely Section 59 and
Section 69. The latter section may not have a direct bearing on the point under our
consideration but it throws light on what was contemplated by the Legislature with regard to
the point of time when the firm could be regarded as registered. The Kerala High Court has in
Kerala Road Lines Corporation v. Commissioner of Income-tax Kerala [51 ITR 711]
clearly expressed the view that reading Sections 58 and 59 of the Indian Partnership Act
together a firm cannot be said to be registered when the statement prescribed by Section 58
and the required fee are sent to the Registrar and that the registration of the firm is effected
only when the entry of the statement is recorded in the register of firms and the statement is
filed by the Registrar as provided in Section 59. In that case also an identically similar
question arose in respect of registration of a firm under Section 26-A of the Income-tax Act.

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203

5. The High Court in the judgment under appeal referred to the statement extracted from
the report of the Special Committee which had been appointed by the Government of India to
examine the provisions of the Bill before it came to be passed by the Central Legislature as
the Partnership Act and reference was made in particular to the statement relating to Clause
58 corresponding to Section 59 of the Partnership Act to the effect that the Registrar was a
mere recording officer and that he had no discretion but to record the entry in the register of
firms We are unable to see how that statement can be taken into consideration for the purpose
of interpreting the relevant provisions of the Partnership Act. We also cannot concur with the
other reasoning of the High Court for coming to the conclusion that the partnership should be
deemed to have been registered on the date when the application was presented and that the
requirement of Rule 2(b) would be satisfied if it became registered under the Partnership Act
even after the .application was filed. For the reasons given above the appeal is allowed .The
answer to the question referred must be given in the affirmative and against the assessee.

*****

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Kamal Pushp Enterprises v. D.R. Construction Co.

Jagdish Chandra Gupta v. Kajaria Traders (India) Ltd.


AIR 1964 SC 1882

[Reference of dispute to arbitration as envisaged in the partnership agreement


whether barred by section 69]

M. HIDAYATULLAH, J. - By a letter dated July 30, 1955, M/s. Kajaria Traders (India)
Ltd. and M/s. Foreign Import and Export Association (sole proprietary firm owned by the
appellant Jagdish C. Gupta) entered into a partnership to export between January and June
1956, 10,000 tons of manganese ore to Phillips Brothers (India) Ltd., New York. Each partner
was to supply a certain quantity of manganese ore. We are not concerned with the terms of the
agreement but with one of its clauses which provided:
That in case of dispute the matter will be referred for arbitration in accordance with the
Indian Arbitration Act.
The company alleged that Jagdish C. Gupta failed to carry out his part of the partnership
agreement. After some correspondence, the company wrote to Jagdish C. Gupta on February
28, 1959 that they had appointed Mr R.J. Kolah (Advocate O.S.) as their arbitrator and asked
Jagdish Chander Gupta either to agree to Mr Kolahs appointment as sole arbitrator or to
appoint his own arbitrator. Jagdish Chander Gupta afterconsideration and on March 17, 1959
the company informed Jagdish Chander Gupta that as he had failed to appoint an arbitrator
within 15 clear days they were appointing Mr Kolah as sole arbitrator. Jagdish C. Gupta
disputed this and the company filed on March 28, 1959 an application under Section 8(2) of
the Indian Arbitration Act, 1940 for the appointment of Mr Kolah or any other person as
arbitrator.
2. Jagdish Chander Gupta appeared and objected inter alia to the institution of the
petition. Two grounds were urged (i) that Section 8(2) of the Indian Arbitration Act was not
applicable as it was not expressly provided in the arbitration clause quoted above that the
arbitrators were to be by consent of the parties and (ii) that Section 69(3) of the Indian
Partnership Act, 1932 afforded a bar to the petition because the partnership was not
registered. The petition was referred by the Chief Justice to a Divisional Bench consisting of
Mr Justice Mudholkar (as he then was) and Mr Justice Naik. The two learned Judges agreed
that in the circumstances of the case an application under Section 8 of the Indian Arbitration
Act was competent and that the court had power to appoint an arbitrator. They disagreed on
the second point. Mr Justice Mudholkar was of the opinion that Section 69(3) of the Indian
Partnership Act barred the application while Mr Justice Naik held otherwise. The case was
then referred to Mr Justice K.T. Desai (as he then was) and he agreed with Mr Justice Naik
with the result that the application was held to be competent.
3. In this appeal it was not contended that the conclusions of the learned Judges in regard
to Section 8(2) were erroneous. The decision was challenged only on the ground that Section
69(3) was wrongly interpreted and the bar afforded by it was wrongly disallowed.
The section, speaking generally, bars certain suits and proceedings as a consequence of
non-registration of firms. Sub-section (1) prohibits the institution of a suit between partners
inter se or between partners and the firm for the purpose of enforcing a right arising from a

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205

contract or conferred by the Partnership Act unless the firm is registered and the person suing
is or has been shown in the Register of Firms as a partner in the firm. Sub-section (2)
similarly prohibits a suit by or on behalf of the firm against a third party for the purpose of
enforcing rights arising from a contract unless the firm is registered and the person suing is or
has been shown in the Register of Firms as a partner in the firm. In the third sub-section a
claim of set-off which is in the nature of a counter claim is also similarly barred. Then that
sub-section bars other proceeding. The only doubt that has arisen in this case is regarding
the meaning to be given to the expression other proceeding. One way to look at the matter
is to give these words their full and natural meaning and the other way is to cut down that
meaning in the light of the words that precede them. The next question is whether the
application under Section 8(2) of the Arbitration Act can be regarded as a proceeding to
enforce a right arising from a contract, and therefore, within the bar of Section 69 of the
Indian Partnership Act.
4. Mr Justice Mudholkar in reaching his conclusion did not interpret the expression other
proceeding ejusdem generis with the words a claim of set-off. He held further that the
application was to enforce a right arising from the contract of the parties. Mr Justice Naik
pointed out that the words used were not any proceeding nor any other proceedings but
other proceeding and that as these words were juxtaposed with a claim of set off they
indicated a proceeding of the nature of a claim in defence. On the second point Mr Justice
Naik held that this was not a proceeding to enforce a right arising from a contract but was a
claim for damages and such a claim could be entertained because it was based on something
which was independent of the contract to supply ore. He held that the right which was being
enforced was a right arising from the Arbitration Act and not from the contract of the parties.
Mr Justice K.T. Desai agreed with most of these conclusions and suggested that the words
preceeding other proceeding, namely, a claim of set-off had demonstrative and limiting
effect. He seems to have ascertained the meaning of the expression other proceeding by
reference to the meaning of the words a claim of set-off, which he considered were
associated with it.
5. The first question to decide is whether the present proceeding is one to enforce a right
arising from the contract of the parties. The proceeding under the eighth section of the
Arbitration Act has its genesis in the arbitration clause, because without an agreement to refer
the matter to arbitration that section cannot possibly be invoked. Since the arbitration clause is
a part of the agreement constituting the partnership it is obvious that the proceeding which is
before the Court is to enforce a right, which arises from a contract. Whether we view the
contract between the parties as a whole or view only the clause about arbitration, it is
impossible to think that the right to proceed to arbitration is not one of the rights which are
founded on the agreement of the parties. The words of Section 69(3), a right arising from a
contract are in either sense sufficient to cover the present matter.
6. It remains, however, to consider whether by reason of the fact that the words other
proceeding stand opposed to the words a claim of set-off any limitation in their meaning
was contemplated. It is on this aspect of the case that the learned Judges have seriously
differed. When in a statute particular classes are mentioned by name and then are followed by
general words, the general words are sometimes construed ejusdem generis i.e. limited to the

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Kamal Pushp Enterprises v. D.R. Construction Co.

same category or genus comprehended by the particular words but it is not necessary that this
rule must always apply. The nature of the special words and the general words must be
considered before the rule is applied. In Allen v. Emersons [(1944) IKB 362]. Asquith, J.,
gave interesting examples of particular words followed by general words where the principle
of ejusdem generis might or might not apply. We think that the following illustration will
clear any difficulty. In the expression books, pamphlets, newspapers and other documents
private letters may not be held included if other documents be interpreted ejusdem generis
with what goes before. But in a provision which reads newspapers or other document likely
to convey secrets to the enemy, the words other document would include document of any
kind and would not take their colour from newspapers. It follows, therefore, that
interpretation ejusdem generis or noscitur a sociis need not always be made when words
showing particular classes are followed by general words. Before the general words can be so
interpreted there must be a genus constituted or a category disclosed with reference to which
the general words can and are intended to be restricted. Here the expression claim of set-off
does not disclose a category or a genus. Set-offs are of two kinds legal and equitable
and both are already comprehended and it is difficult to think of any right arising from a
contract which is of the same nature as a claim of set-off and can be raised by a defendant in
a suit. Mr B.C. Misra, whom we invited to give us examples, admitted frankly that it was
impossible for him to think of any proceeding of the nature of a claim of set-off other than a
claim of set-off which could be raised in a suit such as is described in the second sub-section.
In respect of the first sub-section he could give only two examples. They are (i) a claim by a
pledger of goods-with an unregistered firm whose good are attached and who has to make an
objection under Order 21 Rule 58 of the Code of Civil Procedure and (ii) proving a debt
before a liquidator. The latter is not raised as a defence and cannot belong to the same genus
as a claim of set-off. The former can be made to fit but by a stretch of some considerable
imagination. It is difficult for us to accept that the legislature was thinking of such far-fetched
things when it spoke of other proceeding ejusdem generis with a claim of set-off.
7. Mr Justice Naik asked the question that if all proceedings were to be excluded why was
it not considered sufficient to speak of proceedings along with suits in sub-sections (1) and (2)
instead of framing a separate sub-section about proceedings and coupling other proceeding
with a claim of set-off? The question is a proper one to ask but the search for the answer in
the scheme of the section itself gives the clue. The section thinks in terms of (a) suits and (b)
claims of set-off which are in a sense of the nature of suits and (c) of other proceedings. The
section first provides for exclusion of suits in sub-sections (1) and (2). Then it says that the
same ban applies to a claim of set-off and other proceeding to enforce a right arising from a
contract. Next it excludes the ban in respect of the right to sue (a) for the dissolution of a firm,
(b) for accounts of a dissolved firm and (c) for the realisation of the property of a dissolved
firm. The emphasis in each case is on dissolution of the firm. Then follows a general
exclusion of the section. The fourth sub-section says that the section as a whole, is not to
apply to firms or to partners and firms which have no place of business in the territories of
India or whose places of business are situated in the territories of India but in areas to which
Chapter VII is not to apply and to suits or claims of set-off not exceeding Rs 100 in value.
Here there is no insistence on the dissolution of the firm. It is significant that in the latter part
of clause (b) of that section the words are or to any proceeding in execution or other

Kamal Pushp Enterprises v. D.R. Construction Co.

207

proceeding incidental to or arising from any such suit or claim and this clearly shows that the
word proceeding is not limited to a proceeding in the nature of a suit or a claim of set-off.
Sub-section (4) combines suits and a claim of set-off and then speaks of any proceeding in
execution and other proceeding incidental to or arising from any such suit or claim as
being outside the ban of the main section. It would hardly have been necessary to be so
explicit if the words other proceeding in the main section had a meaning as restricted as is
suggested by the respondent. It is possible that the draftsman wishing to make exceptions of
different kinds in respect of suits, claims of set-off and other proceedings grouped suits in
sub-sections (1) and (2), set-off and other proceedings in sub-section (3) made some special
exceptions in respect of them in sub-section (3) in respect of dissolved firms and then viewed
them all together in sub-section (4) providing for a complete exclusion of the section in
respect of suits of particular classes. For convenience of drafting this scheme was probably
followed and nothing can be spelled out from the manner in which the section is sub-divided.
9. In our judgment, the words other proceeding in sub-section (3) must receive their full
meaning untrammelled by the words a claim of set-off. The latter words neither intend nor
can be construed to cut down the generality of the words other proceeding. The sub-section
provides for the application of the provisions of sub-sections (1) and (2) to claims of set-off
and also to other proceedings of any kind which can properly be said to be for enforcement of
any right arising from contract except those expressly mentioned as exceptions in sub-section
(3) and sub-section (4).
10. The appeal is, therefore, allowed.
*****

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Kamal Pushp Enterprises v. D.R. Construction Co.

Mohatta Brothers v. Bharat Suryodaya Mills Co. Ltd.


AIR 1976 SC 1703

[Fresh Partnership deed - section 69(2)]

H.R. KHANNA, J. - 2. The plaintiff is a partnership firm doing business under the name
and style of Mohatta Brothers. The plaintiff-firm carried on the business of managing agency
of the defendant-company up to September 4, 1950-Sometime before that date, it appears the
plaintiff-firm expressed an intention of giving up the post of managing agents. On July 31,
1950 Chaturbhujdas on behalf of M/s Chaturbhujdas Kharawala Mohatta & Co., submitted
scheme Ex. 168 in consultation with the plaintiff. Paras 5, 6 and 7 of the scheme were as
under:
(5) Before our this Scheme is approved by the Company the present Directors shall
submit before the Company the Balance Sheets and the Profit and Loss Account upto the end
of the year 1949 and get the same passed, and they shall get the Proforma Balance Sheet upto
the date 31-7-50 prepared by the Auditors of the Company and shall hand over the same to us,
and this Scheme has been given while understanding that at persent everything is according to
the list of machinery given to us by the present Agents. And no one has any kind of charge or
debt claimable from the Company till this day excepting the approximate amount of
Rs4,77,850 due to the Agents and their kith and kin till this day and the list of which is given
to us. We give this Scheme believing the said fact true.
(6) The amounts of the Agents of the Company and their kith and kin which may have
been deposited in the Company on the day the date 31-7-50 and which come to about Rs
4,77,850 as told by the present Agents are to be kept credited in their accounts and interest
thereon is not to be given from the date 1-8-50. And when our Scheme is approved they have
not to take any interest on the said amounts from the Company for five years from the date we
start the work of the Mills and they have not to withdraw the said amounts for a period of ten
years thereafter but the same are to be kept credited in the Company with interest at six per
cent. But the Company shall return the amounts earlier if it so desires.
(7) At presentthe amount of Rs 3,46, 466-11-8 is due to the Punjab National Bank Ltd.
by the Company and thedemand of giving bonus to the workers for the year 1949 is
outstanding from the Company. The present Agent states that in both of the said matters
payments can be made from the amounts obtained by selling the goods of stores, etc. which is
lying with the Company at present, the list of which is given to us by the present Agents, and
from the amounts of E. P. T. deposit and advance payments of the income tax. On making
arrangement accordingly if the debt of the Bank is not fully paid or the liability of bonus is
not fully fulfilled and if the Company is found responsible in any way, then the same is to be
fulfilled by the present Agent. But after fulfilling all liabilities accordingly if any amount
remains in balance the same shall be treated as assets of the Company and half of the said
amount shall be returned towards the above mentioned amount deposited in the Company and
which belongs to the present Agent and their kith and kin. But on fulfilling completely the
liability of the Bank from the sale of goods of the Stores, etc. if there does not remain
sufficient surplus or before getting the amount of E. P. T. deposit and income tax advance

Kamal Pushp Enterprises v. D.R. Construction Co.

209

payment if the amount of bonus is required to be paid then the present Managing Agents has
to give that amount first.
4. It may be stated that the plaintiff-firm with effect from April 1, 1949 consisted of five
partners. In addition to those five partners, Shashi Kumar, who was a minor and whose
mother Satyavati was his guardian, was entitled to four anna share in a rupee in the profits of
the partnership but was not liable for its losses. Partnership deed Ex. 115 was executed for
this purpose on May 19, 1949 and was signed by the five partners and Satyavati., On October
24, 1949 another partnership deed Ex. 116 was executed wherein Satyavati was shown as a
partner of the plaintiff-firm instead other minor son Shashi Kumar.
5. The suit was resisted by the defendant-company. Besides taking other pleas with which
we are not concerned, the defendant contended that the plaintiff firm could not maintain the
suit as the constitution of the old firm which acted as managing agents of the defendantcompany had been changed on October 24, 1949. From that date, it was stated, the plaintifffirm consisted of six partners, including Satyavati. The newly constituted firm, according to
the defendant-company, had not been registered and as such the suit was not maintainable.
6. The trial Court held that the new partnership deed Ex. 116 by which Satyavati became
a partner was not acted upon. As the original partnership mentioned in the partnership deed
dated May 19, 1949 had been registered, the plaintiffs suit was held to be not barred by
Section 69 ofihe Indian Partnership Act. It is not necessary to refer to the other issues and the
findings of the trial Court on those issues. Suffice it to say that the defendant was held entitled
to deduct certain amounts from the amount claimed by the plaintiff. The trial Court
accordingly passed the following order:
The plaintiff has filed this suit for account as the account was to be taken of the
realisation and expenses of the stores. But by pursis (sic) Exhibit 424 the parties have agreed
about the net realisation of the stores and have therefore urged that no Commissioner be
appointed and a final decree be passed. The real account was to be taken of the actual receipts
and expenses of the sale of stores. But now nothing is required to be done and hence there is
no necessity of passing any preliminary decree. The plaintiffs as shown above are entitled to
receive Rs 77,286-0-2, from defendant towards their deposit amount being the net surplus
which they are entitled. Hence defendants are liable to pay the said amount to plaintiff. The
plaintiff should pay the remaining court-fee stamp within a month. I, therefore, pass the
following order.
ORDER
Defendants do pay Rs 77,286-0-2 and the cost of the suit to plaintiff with future interest
at 6 per cent from January 1, 1956. The plaintiff should pay the remaining court fees
within a month. Defendants to bear their own cost.

7. Two cross-appeals were filed against the judgment and decree of the trial Court. One
appeal was by the defendant-company praying for the dismissal of the plaintiffs suit. The
other appeal was by the plaintiff-firm claiming for enhancement of the amount decreed by the
trial Court. One of the contentions advanced by the defendant-company was as under:
The plaintiff-firm was not entitled to file a suit as the plaintiff-firm was differently
constituted from the firm of Mohatta Brothers as on July 31, 1950, and, in any event, as

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Kamal Pushp Enterprises v. D.R. Construction Co.

the minor Shashi Kumar had become major in 1953 and had become a partner of the
plaintiff-firm Mohatta Brothers, Ahmcdabad, and as even the name of Satyavati Devi
who was the partner suing did not appear in the entry in the register of firms the present
suit was barred under Section 69(2) of the Act.
Dealing with the above contention, the High Court disagreed with the finding of the trial Court
that partnership deed Ex. 116 dated October 24, 1949 had not been acted upon. The learned
Judges of the High Court held so far as the first part of the above contention is concerned that
when a firm is reconstituted by introduction of a new partner, it would remain the same registered
firm, and there would be no necessity of fresh registration if the continuing firm was registered
with the Registrar of the Firms under Section 59 of the Indian Partnership Act. Dealing with the
contention that Shashi Kumar had become major, the High Court found that there was no evidence
to show the age of Shashi Kumar and the whole argument in this respect was based on mere
conjecture. On the latter part of the submission, the High Court held that the mandatory condition
under Section 69(2) of the Indian Partnership Act was not fulfilled in the present case as the name
of Satyavati who was a partner of the reconstituted firm and in whose favour a cause of action had
accrued was not shown in the register of the firms This defect was held to be fatal. The High Court
in this context observed:
In view of this legal position which we have discussed the second mandatory condition under
Section 69(2) is not fulfilled in the present case as the name of Satyavati who was partner of the
reconstituted firm and in whose favour the cause of action had acciiied is not shown in the register
of firms This defect would be fatal as the first defect of want of registration of the firm itself and
in both the cases we would have no option but to dismiss the suit. In that view of the matter it
would be wholly unnecessary to go into any of the other contentions which have been raised in
these two appeals and to record any finding on the issues relating to the merits of the case or as
regards the other appeal of the plaintiff as well. Howsoever much we may regret to dismiss the
plaintiffs suit which apparently is well founded by upholding this technical objection of the
defendant company, we are bound to dismiss this suit as in law a non-compliance of this second
mandatory condition is also equally fatal as thenon-compliance of first condition. Ac the same
time, however, in the circumstances of the cases while dismissing the plaintiffs suit we would
order bolh the parties shall bear their own costs all throughout.
8. In appeal before us Mr Sen on behalf of the appellants has assailed the judgment of the
High Court in so far as it has disagreed with thu finding of the trial Court that Satyavati was not a
partner of the plaintiff-firm and the deed of partnership dated October 24, 1949 had not been acted
upon. Mr Sen has also questioned the correctness of the view taken by the High Court regarding
the construction of Section 69(2) of the Indian Partnership Act. As against that, Mr Bhatt on
behalf of the respondents has canvassed for the correctness of the view taken by the High Court,
both on the question of fact as well as on the question of law.
9. After hearing the learned Counsel for the parties and after having been taken through the
relevant material on the record, we are of the opinion that the trial Court took a correct view of the
matter in so far as it has held that Salyavati did not become a partner of plaintiff-firm and that the
deed of partnership dated October 24, 1949 was not acted upon.
10. The main consideration which prevailed with the High Court in holding that Satyavati
became a partner of the plaintiff-firm was the execution of deed of partnership dated October 24,
1949. According to this deed, Satyavati became a partner to the extent of 4 annas share out of 16

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211

annas, which had been previously held by her minor son Shashi Kumar. Shashi Kurnar under the
deed of partnership of May 19, 1949 was entitled to the share of profits to the extent of four annas
in a rupee and was not liable for the losses which were to be borne by the other five partners.
Satyavati became entitled under the deed of October 24, 1949 not only to the share of profit to the
extent of 4 annas in a rupee but also became liable to share losses to that extent. The other
circumstance relied upon by the High Court was resolution dated January 21, 1950 passed by the
Board of Directors of the defendant-company. That meeting was presided over by Shivratan G.
Mohatta, partner of the plaintiff-firm. In that resolution there was reference to partnership deeds
dated May 19, 1949 and October 24, 1949 which had been received along with letter dated
December 1, 1949 from Mohatta Brothers. The Board of Directors took note of the changes
mentioned in the above two partnership deeds and agreed to accept the partners therein mentioned.
The third circumstance relied upon by the High Court is letter dated August 1, 1950 Ex. 118
which was sent on behalf of the plaintiff-firm, Mohatta Brothers, for the purpose of tendering
resignation as Secretaries, Treasurers and Agents of the defendant-company. This letter was
signed, besides the other partners, by Satyavati. There was, however, no indication in the letter as
to whether Satyavati signed it in her capacity as a partner or as the guardian of lier minor son
Shashi Kumar.
11. As against the circumstances relied upon by the High Court, we find that in the register
relating to the registration of firms kept under the Indian Partneiship Act, an entry was made on
May 5, 1952 relating to the registration of the plaintiff-firm. The above entry was plainly in
pursuance of application filed on behalf of the plaintiff-firm shortly before the making of that
entry. The above entry shows that the position taken up on behalf of the plaintiff-firm even in the
year 1952 was that there were only five partners of the plaintiff-firm and that in addition to that,
Shashi Kumar minor was admitted to the benefit of partnership. The entry thus reveals that even in
the year 1952 the stand of the partners of the plaintiff-firm was that Satyavati was not a partnr of
the plaintiff-firm and that it was her minor son Shashi Kumar who was entitled to share in the
profits of the partnership. This entry would be inexplicable if Satyavati had become a partner
ofthu plaintiff-firm with effect from October 24, 1949.
12. Another circumstance which goes to show that Satyavati did not become a partner of the
plaintiff-firm is the entry in the registers of the defendant-company. According to Section 87 of
the Indian Companies Act, 1913, which was the Act in force at the relevant time/every company
shall keep inter alia at its registered office a register of managing agents containing with respect to
each of them the following particulars, that is to say, in the case of a firm, the full name, address
and nationality of each partner and the date on which each became a partner. The entry which was
made in the register of the defendant-company regarding the partners of its managing agents
showed that after April 1, 1949 there were five partners besides Shashi Kumar minor under the
guardianship of his mother Satyavati, of the firm of the managing agents Mohatta Brothers.
Although the above entry was made on October 6, 1949, no subsequent entry was made thereafter
showing Satyavati as partner of the firm of Mohatta Brothers. Had Satyavati in Tact become a
partner since October 24, 1949 of Mohatta Brothers, it seems unlikely that an entry to that effect
would not be made in the register of the defendant-company. It may also be mentioned in the
above context that return has to be sent to the Registrar of the Firms under Section 87 regarding
any change in the particulars required to be contained in the register. Failure to comply with the
above directions entailed imposition of fine.

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Kamal Pushp Enterprises v. D.R. Construction Co.

13. The third significant circumstance which tends to show that Satyavati despite the
execution of the deed of partnership dated October 24, 1949 did not become a partner of the
plaintiff-firm is evidenced by applications in connection with the registration of that firm which
were presented to the income-tax authorities under Section 26A of the Indian Income-tax Act,
1922. Exs. 280 to 286 are the applications which were filed on behalf of the plaintiff-firm for the
years 1949-50 to 1956-57. In all these applications, Shashi Kumar minor under the guardianship
of Satyavaii was shown entitled to 4 annas share in a rupee in the plaintiff-firm. Satyavati was not
shown in any of these applications as partner of the plaintiff-firm. All these applications which
were signed by Satyavati clearly go to show that during these years she did not claim herself to be
partner of the plaintiff-firm. On the contrary, she acknowledged that it was her minor son Shashi
Kumar who was entitled to 4 annas share in the profits of the partnership.
14. Documentary evidence which has been brought on the record, in our opinion, clearly lends
support to the statement of Shivratan (PW 1) that partnership deed dated October 24, 1949 was not
acted upon and that Satyavati did not become a partner of the plaintiff-firm. Jivan Das PW, who
was an employee of the defendant-company, has likewise deposed that Satyavati was never a
partner of Mohatta Brothers.
15. During the hearing of the appeal, affidavit of Satyavati has been filed stating that she was
never a partner of Mohatta Brothers and it was her son Shashi Kumar who was at all material
times admitted to the benefit of the partnership. Mr Bhatt has objected to this Court taking notice
of the contents of the affidavit of Satyavati including her disclaimer of any interest in the plaintifffirm. In this respect we are of the view that even without the above affidavit, the material on the
record clearly goes to shew that Satyavati wai not a partner of the plaintiff-firm.
16. In addition to what has been pointf d out, we find that in the statement of accounts of the
plaintiff-firm it is Shashi Kumar and not Satyavati who is shown to have 4 annas share in the
plaintiff-firm. Entries show that Shashi Kumar shared the profits as well as the losses (sic) in that
proportion. The significant thing which emerges from the account books is that Satyavati was not
shown as the person entitled to 4 annas share in the partnership firm.
17. Soon after the present suit had been filed, on application filed on behalf of the defendants
under Order XXX Rule 2 of the Code of Civil Procedure, names of the partners of the plaintifffirm Wire declared on behalf of the plaintiff-firm. In the declaration the name of Satyavati was not
mpntiom d as one of the partners of the plaintiff-firm. The question as to who should share the
profits of the plaintiff-firm and should be otherwise entitled to its assets is essentially a matter for
the partners of the plaintiff-firm. The facts of the case disclose that the partners of the plaintifffirm have agreed between themselves that so far as the 4 annas share in the profits and assets of
the plaintiff-firm are concerned, it would be Shashi Kumar wlio would be entitled to the same.
That position is also accepted by Satyavati in the applications in connection with the registration
of the firm to the income-tax authorities. It would, in our opinion, be a wholly untenable plea for
the defendant from whom money is claimed, to urge that even though Satyavati as well as the
other partners claim that it is not she but hrr son Shashi Kumar who is entitled to 4 annas share in
the partnership, the court should hold that it is Satyavati who is entitled to that share. The
distinction between a plaintiff-firm and a defendant-firm in the above context should not be lost
sight of. So far as a defendant-firm against whom a suit for recovery of money has been filed is
concerned, if would be open to the plaintiff to prove that a person is a partner of the defendantfirm despite the denial of that fact by that person as well as the other partners of the defendantfirm. The reason for that is that a creditor of a defendant-firm can, except in some cases to which

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213

it is not necessary to refer, also proceed against the personal assets of each and every partner. Such
a consideration does not hold good when the dispute relates to the question as 10 who are the
partners of the plaintiff-firm.
18. It has been mentioned above that Shivratan stated in the course of his deposition that
partnership deed dated October 24, 1949 had not been acted upon. This statement is against the
pecuniary interest of Shivratan. It is plain that if Satyavati were a partner of the plaintiff-firm,
Shivratan and other partners would have to bear losses to the extent of 12 annas in a rupee. As
against that, if Shashi Kumar be entitled to share profits to the extent of 4 annas in a rupee and be
not liable for the losses, in such an event Shivralan and other partners would have to bear the
losses to the full extent of 16 annas in a rupee. If despite that fact, Shivratan has deposed that
Satyavati did not become a partner of the plaintiff-firm and the deed of partnership dated October
24, 1949 was not acted upon, his statement in this respect should not, in our view, be rejected,
especially when there is overwhelming documentary evidence which lends support to the above
statement.
19. The entire course of dealings shows that despite the execution of the deed of partnership
dated October 24, 1949, the said partnership deed was not acted upon and the relations between
the partners of the plaintiff-firm continued to be governed by the deed of partnership dated May
19, 1949 according to which it was not Satyavati but her son Shashi Kumar who was entitled to
four annas share in the partnership. The question, to which a reference has been made in the
course of arguments, as to when it was decided not to act upon the deed of partnership dated
October 24, 1949 is hardly of much importance, the material thing is that the said deed was not
given effect to or acted upon by the parties concerned. The firm which came into existence as per
deed of partnership dated May 19, 1949 was admittedly registered under the Indian Partnership
Act and its partners were shown in the Register of Firms
20. Looking to all the facts we are of the opinion that the trial Court took a correct view of the
matter in so far as it held that Satyavati had not become a partner of the plaintiff-firm and that the
deed of partnership dated October 24, 1949 had not been acted upon. The High Court, in our
opinion, was in error in reversing that finding of the trial Court. In view of this conclusion of ours,
it is not necessary to go into ihe legal question as to what should be the proper construction of
Section 69(2) of the Indian Partnership Act. Leaincd Counsel for the parties are agreed that such
question would arise only in case we had affirmed the finding of ihe High Court that Satyavati had
become a partner of the plaintiff-firm and that deed of partnership dattd October 24, 1949 had
been acted upon.
21.We accordingly accept the appeals, set aside the judgment of the High Court and remand
the case to it for disposal of the appeals filed by the parties on merits.

*****

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Kamal Pushp Enterprises v. D.R. Construction Co.

Seth Loonkaran Sethiya v. Ivan E. John


(1977) 1 SCC 379 : AIR 1977 SC 336

[Section 69 Nature and scope suit by a partner of unregistered firm barred]


The appellant in appeal 416 of 1973 and Respondent 1 in appeal 572 of 1974, Seth
Loonkaran Sethiya, (hereinafter referred to for convenience as the plaintiff) is a financier
living and carrying on business in Agra. Respondents 1 to 3 in the first appeal and
Appellants 1 to 3 in the second appeal viz. Ivan E. John, Maurice L. John and Doris
Marzano, grandsons and granddaughter of one A. John, are partners of the registered firm
called John & Co.. There are three spinning mills and one flour mill at Jeoni Mandi,
Agra which are compendiously described as John Mills, Originally, the members of the
John family were the exclusive owners of all these mills which have been in existence
since the beginning of the current century. In course of time, some strangers acquired
interest therein and by the time the present lis commenced, the following became the
joint owners thereof to the extent noted against their names:
Having run into financial difficulties, M/s John & Co. were driven to tap various
sources for raising loans for their business and other requirements. By virtue of the deed
of agreement
dated June 14, 1947, they entered into a financial agreement with Sethiya & Co., a
partnership firm of the plaintiff and Seth Sugan Chand. Under this agreement which was
originally meant to last for five months but which was allowed to remain in force even
after the expiry of that period, Sethiya & Co. undertook to advance to M/s John & Co.
funds to the extent of Rs 8,00,000 on the security of yam and to act as sole selling agents
of the latter. On January 29, 1948, the Collector, Agra, attached movable and immovable
properties of the mills pursuant to a certificate issued for realization of income tax dues
for the years 1943 to 1945 outstanding against M/s John & Co. which exceeded Rs20
lakhs. On February 5, 1948. the Collector, Agra, appointed Ivan E. John, Maurice L. John
and Doris Marzano as custodians for running the mills. On February 9, 1948, the
aforesaid agreement (Exh. 1321) dated June 14. 1947, with Sethiya & Co. which
continued to remain in operation beyond its original term was renewed upto the end of
April, 1948. by agreement (Exh. 1320). This agreement gave an option to the partners of
Sethiya & Co. to allow it to continue in force until their dues were paid in full by M/s
John & Co. These financial agreements with Sethiya & Co. did not prove adequate to
meet the monetary requirements of M/s John & Co. Accordingly on the same day i.e. on
February 9, 1948, they entered into another agreement (Exh. 1319) with the proprietory
concern of the plaintiff carrying on business under the name and style of M/s Tejkaran
Sidkaran whereby the latter agreed to advance certain amounts to then against
mortgage of cotton, its products and bye-products which might be in their stock from
time to time during the continuance of the agreement. By this agreement, M/s John & Co.
also undertook to pay to M/s Tejkaran Sidkaran a sum of Rs 2,09,245-9-10 which, on
going into the accounts, was found to be due to the latter in respect of the supply of
cotton. Nearly five months thereafter i.e. on July 6, 1948. the aforesaid partners of M/s
John & Co. succeeded in obtaining another financial accommodation from Sethiya & Co.
(vide agreement Exhibit 168: Exhibit A-1). By this deed, the financiers agreed; for the
efficient working of the mills, to advance loan, as and when required, upto the limit of
Rs25t lakhs to the partners of M/s John & Co. on condition that they i.e. the financiers

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215

would have a floating and prior charge for all monies due to them for the time being
including the amount due to them on the date of the agreement and all monies which they
might choose to advance under the agreement, on all business assets including stores,
coal, oil process etc. of the aforesaid three spinning mills.
Describing himself as the sole proprietor of the firm sethiya & Co. and M/s
Tejkaran Sidkaran, Seth Loonkaran Sethiya filed in the court of the Civil Judge, Agra,
on April 18, 1949, an original suit, being suit 76 of 1949, against M/s John & Co. and its
aforesaid partners (hereinafter referred to as the defendants first set1 as also against
Munnilal Mehra, Hiralal Patni and Gambhirmal Pandya and M/s John, Jain Mehra & Co.
(hereinafter referred to as the defendants second set) for recovery of Rs 21,11,500 with
costs and pendente lite and future interest by sale of the assets of M/s John & Co. and for
permanent injunction restraining the defendants first set from committing any breach of
the aforesaid agreement dated July 6, 1948, as also for declaration that he had a prior and
floating charge on all the business assets of M/s John & Co. The suit was later on
amended by the plaintiff with the permission of the trial Court. By his amended petition
of plaint, the plaintiff sought a decree against the defendants first set as also against the
defendants second set.

JASWANT SINGH, J. - 5. The case of the plaintiff was that Ivan E. John, Maurice L. John
and Doris Marzano who were part owners of the aforesaid three spinning mills and a flour
mill as also certain other properties and had been carrying on their business and running the
mills under the name and style of John & Co. being heavily indebted and in urgent need of
money to pay arrears of income ta;; as well as other dues and to carry on day to day business
of the mills approached him time and again for finances, loans etc. for the aforesaid purposes;
that he lent considerable sums of money under various agreements executed by the defendants
first set in Ins favour and in favour of the firm M/s Tejkaran Sidkaran, of which he was the
sole owner, and in that of Sethiya & Co.; that on or about July 6. 1948 all accounts between
his firm sethiya & Co. and the defendants first set were gone into and after a full scrutiny
thereof, a settled amount of Rs 12,72,000 was found to be due to Sethiya & Co. from the
defendants first set upto June 30, 1948; that this amount was admitted and accepted by the
defendants first set and was as such debited to their account and was also acknowledged by
them in the subsequent agreement entered into by them with him; that after the aforesaid
settlement, the defendants first set solicited further financial help from him to run the mills
and to meet their pressing liabilities which was acceded to by him on the terms and conditions
set out in the agreement dated July 6, 1948; that by this agreement, he agreed inter alia to
advance requisite funds to the defendants first set (for carrying on the business of the mills
and payment of the claims of Raja Ram Bhawani Das and to meet other liabilities) up to the
limit of Rs20 lakhs inclusive of the aforesaid amount admittedly found due to him from the
defendants first set on the date of the agreement and to make a further advance of a sum of Rs
5,50,000 on the security of business assets and stocks other than bales of yam and cotton; that
it was also stipulated that he would have a floating and prior charge for the entire amount due
to him on the date of the agreement on all the business assets including stores, coal, oil
process etc. of all the three spinning mills of the defendants first set and that he would be paid
interest at the rate of 6 per cent per annum from the date of incurring liability in respect of
each individual item besides commission at the rate of 1 per cent on all sales of products of

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Kamal Pushp Enterprises v. D.R. Construction Co.

the three spinning mills whether sold directly or otherwise during the currency of the
agreement and a further commission at the rate of 12 per cent on value of all the purchases of
cotton required for consumption of the three spinning mills and godown rent as might be
agreed. The plaintiff further averred that it was specifically agreed between him and the
defendants first set that the agreement would be in operation for the minimum period of one
year and would also continue to be in force thereafter until the entire amount due to him from
the defendants first set was fully paid up. The plaintiff further averred that the accounts of
business done by him under the name of M/s Tejkaran Sidkaran with the defendants first set
were gone into and finally the defendants first set admitted that a sum of Rs 17,79,100 was
due from them to his firm M/s Tejkaran Sidkaran and that under their written authority, he
transferred the above liability to his firm sethiya & Co. and thus all accounts of the
defendants first set with him were amalgamated in one account i.e. of Sethiya & Co. and the
account of his firm M/s Tejkaran Sidkaran with the defendants first set was squared up and
closed. The plaintiff further averred that the defendants second set including Hiralal Patni, the
ex-financier of the John Mills who had not despite best efforts succeeded in securing
possession of the mills as co-proprietor thereof entered into partnership with the defendants
first set under the name and style of M/s John Jain Mehra & Co. and maliciously induced
them to commit breaches of the agreement dated July 6, 1948 by forcibly turning out his
representatives who used to remain in charge of the stocks, stores, coal, waste etc. of the mills
and making them enter into a finance agreement contrary to the terms of the agreement with
his firm. The plaintiff also alleged that the defendants first set had at the instigation of the
defendants second set unjustifiably closed the business of John & Co. and were colluding
with the latter who were guilty of misappropriation and conversion of the goods over which
he had a prior and floating charge. The plaintiff also averred that on April 4, 1949, accounts
were again gone into between him and the defendants first set and a sum of Rs 47,23,738/4/9
were found due to him from them that agreement dated July 6, 1948, between him and the
defendants first set still subsisted and would continue to subsist till July 6, 1949, and
thereafter at his option till all his dues were paid up; and that a sum of Rs 21,11,500 was due
to him from the defendants first set as per Schedule A of the plaint which both sets of the
defendants were liable to pay.
7. The suit was contested by both sets of defendants on various grounds. Defendants first
set inter alia pleaded that there was no settlement of accounts between them and the plaintiff
as alleged by the latter; that the accounts were liable to be reopened as they were tainted with
fraud, obvious mistakes etc., and that on a true and correct accounting a large sum of money
would be found due to them; that though the plaintiff and Seth Sugan Chand (who owned
Indra Spinning and Weaving Milk and had a covetous eye on John Mills) had obtained
various documents, agreements, vouchers, receipts etc. at various times from them, the same
were of no legal value as they were secured by the former by practising undue influence,
fraud, coercion and misrepresentation. It was further pleaded by the defendants that the
plaintiff had illegally and contrary to the agreement dated July 6, 1948, debited them with
huge amounts which were not really due to them. It was further pleaded by the said
defendants that the cotton supplied to them by the aforesaid financiers was of inferior quality
and the amounts charged by them in respect thereof were exorbitant and far in excess of the
prevailing market rates. The said defendants further pleaded that though under the terms of

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217

the agreement dated February 9, 1948, no commission on sales and purchases had been
agreed to be paid by them to the financiers still they had been debited with huge amounts on
that account and likewise though simple interest had been stipulated in the said agreement
compound interest with monthly rests had been debited to their account which was not at all
justified. The said defendants also disputed their liability to pay certain items of expenditure
like demurrage, warfare etc. which had been debited to their account. It was also pleaded by
the said defendants that the plaintiff had no floating or prior charge on any of their stocks,
stores etc. nor could any such charge be claimed by him in law; that the suit was barred by the
provisions of Section 69 of the Partnership Act and that the agreement dated July 6, 1948
which was insufficiently stamped could not form the basis of the suit.
9. The trial Court framed as many as 21 issues and on a consideration of the evidence
adduced by the parties it held inter alia that the suit as brought by the plaintiff was
maintainable; that though the plaintiff had failed to prove that the dissolution of the
partnership between him and Seth Sugan Chand took place on June 30, 1948, and no alternate
date of dissolution subsequent to June 30. 1948, had been set up by him, it was evident from
the record that the dissolution took place sometime after July 30, 1948. and before the
institution of the suit; that the suit being one for recovery of the assets due to a dissolved
partnership firm from a third party was not barred by Section 69 of the Partnership Act; that
Seth Sugan Chand was not a necessary party to the suit: that agreement dated July 6, 1948,
was duly stamped and that no undue influence etc. was exercised by the plaintiff on the
defendants first set in relation to the execution of the agreements between Sethiya &
Company and the defendants first set. The trial Court also held that there was no accounting
on April 4, 1949. as alleged by the plaintiff and that both the plaintiff and the defendants first
set committed a breach of agreement dated July 6, 1948. The breach committed by the
defendants first set according to the trial Court lay in their unjustifiably handing over
possession to M/s John Jain Mehra & Co. of the goods on which the plaintiff held a charge
thereby furnishing him with a cause of action against both sets of defendants. The trial Court
also held that under Clause 13 of the agreement dated July 6, 1948, a charge in favour of the
plaintiff was created in respect of the entire business assets including stock-in-trade, stores,
coal. oil etc. lying inside the three spinning mills which were being run by John & Company;
and that defendants first set utilised, consumed and otherwise dealt with the goods which
were burdened with the floating charge from July 6, 1948, to April 13. 1949. when John &
Co. ceased to be a going concern and there was a final rupture between the plaintiff and the
defendants first set and the plaintiffs floating charge got fixed or crystallised. It also found
that defendants second set were not entitled to prior charge on the properties of John & Co.
existing on April 13, 1949, and were liable to satisfy the plaintiffs claim as despite notice of
his floating charge they consumed, converted and misappropriated stocks and stores and other
business assets of the defendants first set. Finally, the trial Court held the plaintiff to be
entitled to a decree for Rs 18,00.152 against both sets of defendants but rejected his claim for
specific performance and injunction. It accordingly passed a preliminary decree against both
the sets of defendants on April 5. 1954 directing them to deposit the said amount in court
within the prescribed time and in default, gave the plaintiff a right to apply for a final decree
for sale of all the business assets, goods. stocks, stores etc. of the three spinning mills as
mentioned in the operative portion of its judgment. The decree also gave a right to the

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Kamal Pushp Enterprises v. D.R. Construction Co.

plaintiff to apply for a personal decree against the defendants first set and the defendants
second set for the balance of his claim in case the net sale proceeds of the said property were
found insufficient to discharge his claim. Aggrieved by the said judgment and decree of the
trial Court, the plaintiff preferred an appeal, being First Appeal 465 of 1954, before the High
Court at Allahabad claiming the following reliefs:
(a) A decree for a further sum of Rs 64,082/37 5 by which amount his claim was
reduced by the trial Court;
(b) Such rate of interest as he might be entitled to on the aforesaid sum of Rs
64,082/3/5 under the agreement dated July 6, 1948;
(c) Interest on the sum already decreed at the rate agreed to under the agreement
dated July 6, 1948;
(d) Injunction in terms of para 47(b) of the plaint and specific performance of the
agreement dated July 6, 1948;
(e) Costs of the appeal and costs which the lower court wrongly disallowed or
deducted and also interest on the costs already awarded;
(f) A decree for sale of the shares of the defendants in the machinery over which he
had a charge.
10. M/s John Jain Mehra & Co., of which the defendants first set too were partners, also
preferred an appeal against the aforesaid judgment and decree of the trial Court, being First
Appeal 65 of 1955, praying that the decree passed by the trial Court in favour of the plaintiff
be set aside and the suit dismissed with costs throughout.
11. The High Court partially allowed both the appeals 465 of 1954 and 65 of 1955 by its
aforesaid judgment dated December 22, 1972, holding inter alia that no fraud, undue
influence, coercion or misrepresentation was practised by the plaintiff on the defendants first
set in connection with the execution of agreement dated February 9, 1948, or agreement dated
July 6. 1948 (which is the basis of the suit); that the agreement dated July 6, 1948. was neither
insufficiently stamped nor did it require registration; that though it appeared that the deed of
dissolution dated July 22,1948. was prepared for the purpose of the case, there was sufficient
evidence on the record to indicate that Seth Sugan Chand had with drawn from the
partnership carried on under the name of Sethiya & Co. with effect from June 30, 1948, and
had nothing to do with the transaction evidenced by the agreement dated July 6, 1948, which
was entered into by the plaintiff as the sole proprietor of Sethiya & Co.; that the entire rights
and liabilities flowing from the agreement dated July 6. 1948, having become the rights and
liabilities of the plaintiff alone and the suit not being one for recovery of dues of a dissolved
partnership firm arising out of a cause of action which accrued before the dissolution of the
firm, neither Seth Sugan Chand was a necessary party to the suit, nor was the suit barred
under Section 69 of the Partnership Act; that the alterations in the deed of agreement dated
July 6,1948 pointed out by the defendants were not material alterations and did not render the
agreement void; that the plaintiff had a floating charge over the business assets of John & Co.;
that it was the defendants first set and not the plaintiff who committed breach of the
agreement by wrongfully delivering possession of the charged goods on or after April 13,
1949 i.e. after ceasing to be a going concern to M/s John Jain Mehra & Co. a partnership
firm of which the defendants first set became a constituent part by virtue of agreement dated

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219

April 11, 1949. that despite the knowledge of the aforesaid prior charge. M/s John Jain Mehra
& Co. illegally intermeddled with the charged goods and used them for their own business;
that the plaintiffs floating charge on the assets of the defendants first set valuing Rs
13,25,000 became crystallised on April 13, 1949, when on default of the defendants first set,
he intervened by bringing the suit to recover all his outstandings by sale of the charged
properties; that the charge of the plaintiff having become crystallised, as indicated above, the
defendants first and second set held the properties as trustees and were liable to make them
available to the plaintiff for recovery of his dues; that keeping in view the legal position as
well as the nature of the transactions involved, the practice of courts and the fact that the
litigation between the parties had been sufficiently protracted, it would be reasonable to award
pendente lite as well as future simple interest from the date of the decree to the date of actual
payment or realization at the rate of 4 per cent per annum on the principal sum adjudged; that
though keeping in view the facts that no balance was struck on April 4, 1949 in the rokar
(Exh. 179) of Sethiya & Co. and the auditors report which showed that no specific figure was
mutually agreed upon on accounting on that date, it could not be said that accounts were
finally settled between the parties on April 4, 1949, the defendants first set had failed to point
out which entry in the charts (Exhs. 6103 to 6112) produced by the plaintiff was wrong; that
Rs 49,35,925 5/7 were advanced by Sethiya & Co. to the defendants first set under the
agreement dated July 6, 1948, from the date of its execution to the date of the suit; that a sum
of Rs 11,17,000 was due to old Sethiya & Co. from the defendants first set upto June 30,
1948, under the agreements dated June 14, 1947, and February 9, 1948; that Rs 1,55,000 were
advanced by Sethiya & Co. on July 3, 1948, to the defendants first set for purchase of the
share of Beni Madho; that in accordance with the obligation undertaken by it under para 1(8)
of the agreement dated July 6, 1948, Sethiya & Co. paid, on the basis of transfer voucher
(Exh. 3039) dated February 28, 1949, drawn by the defendants first set, a sum of Rs
17,79,100 to Tejkaran Sidkaran in full satisfaction of the amount due to the latter under the
agreement dated February 9,1948: that whereas the aggregate of the debit items came to Rs
82,47,380/15/4, the aggregate of the credit items came to Rs71,13,712/6/6 leaving a balance
of Rs l1,33,668 and paise 55 which the defendants first set were liable to pay to the plaintiff;
that since the receivers appointed by the court at the instance of the plaintiff after the
institution of the suit were able to secure possession of the charged properties that existed
prior to April 11,1949. and it had not been established that there was a removal from the
mills premises of the said properties or dissipation thereof because of the aforesaid
conversion and detention, the plaintiff was not entitled to the decree for money against the
defendants second set; that the plaintiff could, no doubt, proceed against the charged goods
which were in the custody of the receivers for recovery of his dues but as no property on
which he held a charge or on which his floating charge crystallised had remained in the
custody of the defendants second set after the appointment of the receivers, no liability for his
dues could be fastened on them nor could he obtain a decree for specific performance against
them. In the result, in modification of the decree passed by the trial Court, the High Court
passed a preliminary decree for Rs 11,33,668-55 with proportionate costs and pendente lite
and future interest from the date of the decree to the date of the actual payment or realisation
at the rate of 4 per cent per annum on the principal sum of Rs 10,87,674 in favour of the
plaintiff and against the defendants first set but dismissed the suit with costs as against the

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Kamal Pushp Enterprises v. D.R. Construction Co.

defendants second set. The High Court made it obligatory for the defendants first set to pay or
deposit in court the aforesaid sum of Rs 11,33,668-55 together with interest within six months
of the passing of the decree failing which it held the plaintiff entitled to apply for a final
decree for sale of all the business assets, goods, movables, stocks, stores etc. mentioned in the
inventory of Shri P.N. Raina, Commissioner, and the receivers inventories. The High Court
further directed that if the net sale proceeds of the said property were found insufficient to
satisfy the plaintiffs aforesaid amount, he would get a personal decree against defendants 1 to
3 for the balance of his claim remaining due after sale. The High Court also directed that a
sum of Rs28,662/9/ - the sale proceeds of cotton waste over which the plaintiff had charge
and which was in deposit with the bank in the courts account would also be utilised
towards the satisfaction of the aforesaid amount decreed in the plaintiffs favour. It is against
this judgment and preliminary decree that the present appeals are directed.
12. The following main questions arise for our determination:
(1) Whether the firm sethiya & Co. (of which the plaintiff and Seth Sugan Chand
were partners) was dissolved with effect from June 30, 1948, as claimed by the plaintiff?
(2) Whether the agreement dated July 6, 1948, was entered into by the plaintiff with
the defendants first set as a sole proprietor of Sethiya & Co. or was, it entered into by him
as a partner of Sethiya & Co.?
(3) Whether the suit is barred by Section 69 of the Partnership Act?
(4) Whether Seth Sugan Chand was a necessary party to the suit?
(5) Whether any material alterations were made in the aforesaid agreement dated
July 6, 1948, which rendered it void?
(6) Whether the suit which was based upon accounts stated or settled could be dealt
with in the manner in which it has been done?
(7) Whether in addition to the imposition of burden on the charged business assets
etc. of John & Co. for satisfaction of the decretal amount, the defendants second set could
be saddled with any liability in that behalf?
14. Questions 1 and 2: As these two questions are inextricably linked up, they have to be
dealt with together.
15. According to the plaintiff, the firm sethiya & Co. which was formed by him in
partnership with Seth Sugan Chand for the specific purpose of providing money against
pledge of goods to the defendants first set and to act as their sole selling agents and which
consequently entered into financial agreements with the said defendants vide Exhibits 1321
and 1320 on June 14, 1947 and February 9, 1948. respectively was dissolved with effect from
June 30, 1948, and thereafter he alone carried on dealings with the said defendants in the
name of Sethiya & Co. and M/s Tejkaran Sidkaran as their sole proprietor and as such, the
agreement (Exh. 168) dated July 6, 1948, was entered into by him with the said defendants as
the sole proprietor of Sethiya & Co. On the contrary, the defendants assert that the firm
sethiya & Co. was in existence on July 6, 1948, and thereafter as well. Let us examine the
material on the record and see which of these contentions is correct. While the plaintiff relied
in support of his contention upon the deed of agreement (Exh. 168) dated July 6, 1948, and
the deed of dissolution dated July 22, 1948, produced by him, the defendants strongly relied
upon Exhibit A-1 and certain other documents. A close scrutiny of these documents and other

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221

evidence adduced in the case clearly negatives the contention of the plaintiff and goes a long
way to support the assertion of the defendants. It would be noted that in the preamble of Exh.
A-1 which is admittedly a counterpart of Exh. 168, the word partner occurs after the word
sethiya and before the word of and in consonance with its preamble, Exh. A-1 has been
signed by the plaintiff, Seth Loonkaran Sethiya, as a partner of M/s Sethiya & Co. Now
though the word partner occurring in the preamble of Exh. 168 has been scored out, it has
not been initialled either by the plaintiff or by any one of the partners of John & Co. It is also
significant that while affixing his signatures on Exh. 168 and its counterpart Exh. A-1, the
plaintiff described himself as a partner of M/s Sethiya & Co. The contention of the plaintiff
that his partnership with Seth Sugan Chand came to an end with effect from June 30, 1948,
and the agreement dated July 6, 1948 was entered into by him with the defendants first set as
the sole proprietor of Sethiya & Co. is further falsified by the dissolution deed dated July 22,
1948, itself produced by him before the trial Court on December 13, 1949, which would have
passed muster if the defendants had not been vigilant enough. It seems that on seeing this
deed written partly on an impressed stamp paper of Rs10 which was riot in use in July, 1948,
the suspicion of the defendants about the spurious character of the deed was aroused and they
hastened to make an application requesting the trial Court that in view of the fact that the deed
appeared to have been ante-dated and manufactured for the purpose of the case, the stamp
papers on which it was written be sent to the officer-in-charge, India Security Press, Nasik,
for examination and report as to when the said stamp papers were issued for sale from the
press. The reaction of the plaintiff to this application and his subsequent conduct in relation to
the investigation sought to be made to get at the truth regarding the date of issue of the
aforesaid impressed stamp paper and consequently regarding the alleged dissolution of the
firm sethiya & Co. is revealing. It is amazing that the simple request made by the defendants
which should have been readily agreed to by the plaintiff if he had been innocent was stoutly
opposed by him. The circumstances in which the so-called deed of dissolution of partnership
dated July 22, 1948, and the report dated February 27, 1950, of the Assistant Master, India
Security Press, Nasik, disclosing that the first high value (Rs.10) impressed stamp in the type
of watermarked paper as used in the document dated July 22, 1948, was printed in his press
on November 23, 1948, and as such could not have been in existence on July 22. 1948 the
alleged date of execution of the document disappeared is very intriguing. It is also
remarkable that when during the cross-examination of the plaintiff on March 29, 1950, in
connection with the issue relating to the bar of Section 69 of the Partnership Act the
defendants wanted to make use of the aforesaid report from the India Security Press, Nasik,
and it came to light that the report and the original deed of dissolution set up by the plaintiff
were missing, the plaintiff came forward with an amusing application stating therein that in
the interest of the early disposal of the case, he undertakes not to rely on that document in the
suit and to argue the case without that. The manner in which the plaintiff behaved when the
defendants attempted to have the duplicate copy of the aforesaid report of the Assistant
Master, India Security Press obtained by the court proved is no less interesting. A reference to
the minutes of proceedings of the trial Court shows that after the court had, at the request of
the defendants and with the consent of the plaintiffs counsel, passed the order on May 21,
1950, for issuing a commission to Nasik for examination of the said officer of the press in
respect of the aforesaid report about the impressed stamp paper, the plaintiff made an

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application for stay of that order and on July 4, 1950, his counsel, Shri Walter Dutt, made the
following statement:
The court may for the purpose of deciding the issue under Section 69, Partnership Act
take into consideration the fact that the document purporting to be a dissolution deed executed
between the partners of Sethiya & Co. is not genuine although this fact is not admitted by the
plaintiff and the court may therefore, discard such portions of the oral evidence of both
plaintiff and Seth Sugan Chand as it considers would be rendered unreliable, if the view be
taken that the document in question was a fabricated one and the court may presume that the
document was not executed on the date on which it purports to be executed.
16. On a consideration, therefore, of the totality of the telltale facts and circumstances
especially the aforesaid description of the plaintiff as partner of Sethiya & Co. in the preamble
and at the foot of Exh. A-1 and Exh. 168, the clumsy attempt made to obliterate the aforesaid
description in the preamble of Exh. 168, the execution of a part of the so called deed of
dissolution of partnership dated July 22, 1948, on the aforesaid non-judicial impressed stamp
paper of the denomination of Rs10 which was not in existence on July 22, 1948, the
resistance offered by the plaintiff to the defendants application requesting the court to call for
a report from the India Security Press, Nasik, about the date of issue of the said stamp paper,
the aforesaid report no. 780/2C dated February 27, 1950, of the India Security Press, Nasik,
that Rs 10 non-judicial impressed stamp paper which had been used for part execution of the
aforesaid deed of dissolution had not been printed before November 23, 1948, the
disappearance of the said deed of dissolution of partnership of Sethiya & Co. set up by the
plaintiff and the report of the Assistant Master of the India Security Press, Nasik, the
defendants endeavour to have the duplicate copy of the aforesaid report of the India Security
Press, Nasik about the impressed stamp paper of the denomination of Rs10 obtained by the
court proved and the plaintiffs frantic efforts to thwart the attempt firstly by making an
application stating therein that he would not rely on the aforesaid deed of dissolution dated
July 22, 1948, secondly, by making an application for stay of the order passed by the trial
Court regarding issue of a commission to Nasik for formally proving the report of the India
Security Press and thirdly, by asking his counsel, Shri Walter Dutt to make the above-quoted
statement strongly incline us to think in agreement with the subdued findings of the trial
Court that the aforesaid deed of dissolution was fabricated by the plaintiff with the dishonest
intention of playing a fraud on the court and gaining an undue advantage over the defendants.
17. In addition to the facts and circumstances set out above, the debit of items of Rs
1,55,000 and Rs 1,68,552/12/6 to the account of the partnership firm sethiya & Co. on July
3, 1948, and July 10, 1949, respectively and issue by the plaintiff of cheques no. BL 003628
dated July 16, 1948 (Exh. B-11) for Rs 1,55,000, no. BL 003634 dated July 16, 1948 (Exh. B12) for Rs 25,000, no. BL 003636 dated July 20, 1948 (Exh. B-13) for Rs 73,000, no. BL
003630 dated July 9, 1948 (Exh. B-14) for Rs 10,000, no. BL 003635 dated July 17, 1948
(Exh. B-15) for Rs 16,500, no. BL 003632 dated July 10, 1948 (Exh. B-16) for Rs 1,30,000
and no. BL 003633 dated July 10, 1948 (Exh. B-17) for Rs 1,68,552/14/6 as partner of
Sethiya & Co. also go to demolish the theory of dissolution of the firm sethiya & Co. on
June 30, 1948 which the plaintiff sought to build up on sandy foundations and furnish an
eloquent proof of the fact that the firm was very much in existence when the agreement (Exh.

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223

168) dated July 6, 1948, came into being. It has also to be borne in mind that service by post
or advertisement in some paper of notice about the retirement of a partner from a partnership
firm on persons who are in know of the existence of the firm and have been carrying on
dealings with it is of utmost importance to prevent them from assuming that the partnership
continues. In the instant case, it is manifest from the evidence adduced by the plaintiff himself
that neither he nor Seth Sugan Chand gave notice in writing to the defendants first set that the
latter had retired from Sethiya & Co. with effect from June 30, 1948. The evidence also
makes it clear that the concerned persons and the general public were not informed about the
retirement of Seth Sugan Chand from the partnership firm sethiya & Co. by publication of a
notice in some paper. The absence of these notices further belie the plea of the plaintiff
regarding dissolution of the partnership firm Sethiya & Co. on June 30, 1948. That the
plaintiffs story regarding dissolution of the firm sethiya & Co. is a complete myth also
receives strong support from the fact that although approximately Rs 1,10,000 are admitted by
Seth Sugan Chand to be due to him from the partnership not a farthing appears to have been
paid to him nor any document acknowledging the liability appears to have been passed on to
him.
18. The letter (Exh. 21) addressed to the Manager, Bank of Bikaner Ltd., Agra, intimating
to him that Seth Sugan Chand had withdrawn from the partnership of Sethiya & Co. on which
strong reliance is placed on behalf of the plaintiff is not helpful to him as it was not sent to the
bank before July 20, 1948.
19. The alleged dissolution of the partnership between Seth Sugan Chand and the plaintiff
not having been established, it can be safely presumed in view of the above circumstances
that the partnership between hem continued to subsist at least upto July 20, 1948. We are
accordingly of the opinion that the firm sethiya & Co. was not dissolved with effect from
June 30, 1948, as claimed by the plaintiff, and that the agreement dated July 6, 1948, was
entered into by the plaintiff with the defendants first set not as the sole surviving proprietor of
Sethiya & Co. but as a partner of the firm sethiya & Co.
20. Question 3: A bare glance at section 69 is enough to show that it is mandatory in
character and its effect is to render a suit by a plaintiff in respect of a right vested in him or
acquired by him under a contract which he entered into as a partner of an unregistered firm,
whether existing or dissolved, void. In other words, a partner of an erstwhile unregistered
partnership firm cannot bring a suit to enforce a right arising out of a contract falling within
the ambit of Section 69 of the Partnership Act. In the instant case, Seth Sugan Chand had to
admit in unmistakable terms that the firm sethiya & Co. was not registered under the Indian
Partnership Act. It cannot also be denied that the suit out of which the appeals have arisen was
for enforcement of the agreement entered into by the plaintiff as partner of Sethiya & Co.
which was an unregistered firm. That being so, the suit was undoubtedly a suit for the benefit
and in the interest of the firm and consequently a suit on behalf of the firm. It is also to be
borne in mind that it was never pleaded by the plaintiff, not even in the replication, that he
was suing to recover the outstandings of a dissolved firm. Thus the suit was clearly hit by
Section 69 of the Partnership Act and was not maintainable.
22. Question 4: It would be noticed that the present suit has been brought by the plaintiff
alone and in spite of the objection raised on behalf of the defendants, he did not care to

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Kamal Pushp Enterprises v. D.R. Construction Co.

implead Seth Sugan Chand who was a necessary party to the suit. Assuming without holding
therefore, that Section 69 of the Partnership Act did not apply to the present case, the plaintiff
could not in any event maintain the suit for recovery of the aforesaid amount (which was
made up of items, some of which were admittedly due to the old Sethiya & Co.) without
impleading Seth Sugan Chand.
23. Question 5: Before proceeding to determine this question, it would be well to advert
to the legal position bearing on the matter. As aptly stated in paragraph 1378 of Volume 12 of
Halsburys Laws of England (Fourth Edition)
if an alteration (by erasure, interlineation, or otherwise) is made in a material part of a deed,
after its execution, by or with the consent of any party to or person entitled under it, but
without the consent of the party or parties liable under it, the deed is rendered void from the
time of the alteration so as to prevent the person who has made or authorised the alteration,
and those claiming under him, from putting the deed in suit to enforce against any party
bound by it, who did not consent to the alteration, any obligation, covenant, or promise
thereby undertaken or made.
24. A material alteration, according to this authoritative work, is one which varies the
rights, liabilities, or legal position of the parties as ascertained by the deed in its original state,
or otherwise varies the legal effect of the instrument as originally expressed, or reduces to
certainty some provision which was originally unascertained and as such void, or which may
otherwise prejudice the party bound by the deed as originally executed.
25. The effect of making such an alteration without the consent of the party bound is
exactly the same as that of cancelling the deed.
27. Now a comparison of Exh. A-1 (produced by the defendants first set) with Exh. 168
(produced by the plaintiff) would show that besides the obliteration of the word partner from
the preamble as stated above, the plaintiff made two other alterations in Exh. 168. Originally,
the second proviso to sub-clause (8) of Clause 1 of the agreement as given in Exh. A-1 ran
thus:
The payment for purchase of cotton will be made on the first (emphasis ours) day of its
receipt in the mills of the partners.
28. In Exh. 168, however, the word first has been changed into tenth thus making it
read as the payment for purchase of cotton will be made on the tenth (emphasis ours) day of
its receipt in the mills of the partners.
29. The third alteration is no less important. As would be evident from Exh. A-1, subclause (3) of Clause 12 of the agreement as actually drawn up between the parties read as
follows:
A commission of Rupee one per cent on value of all sales of products of the above three
spinning mills, viz. yarn, and newar, whether sold directly by the partners or otherwise but
delivered and produced during the currency of this agreement.
30. After the alteration, the clause has been made to read as follows in Exh. 168:

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A commission of Rupee one per cent on value of all sales of products of the above three
spinning mills, viz. yarn, and newar, whether sold directly by the partners or otherwise but
delivered or produced during the currency of this agreement.
31. As a result of the last change, the word and has been substituted by the word or.
32. As the abovementioned alterations substantially vary the rights and Utilities as also
the legal position of the parties, they cannot be held to be anything but material alterations
and since they have been made without the consent of the defendants first set, they have the
effect of cancelling the deed. Question 5 is, therefore, answered in the affirmative.
33. Question 6: The plaintiffs suit, as already indicated, was for a specific and ascertained
sum of money on the basis of settled account. The courts below have concurrently found that
there was no settlement of account on April 4, 1949, as alleged by the plaintiff. After this
finding, it was not open to them to make out a new case for the plaintiff which he never
pleaded and go into the accounts and pass a decree for the amount which they considered was
due from the defendants first set to the plaintiff. They should have, in the circumstances,
either dismissed the suit or passed a preliminary decree for accounts directing that the books
of account be examined item by item and an opportunity allowed to the defendants first set to
impeach and falsify either wholly or in part the accounts on the ground of fraud, mistakes,
inaccuracies or omissions for it is well settled that in case of fraud or mistake, the whole
account is affected and in surcharging and falsifying the accounts, errors of law as well as
errors of fact can be set right. By adopting the latter course indicated by us, the defendants
first set would have got a fair and adequate opportunity of scrutinising the accounts and
showing whether they were tainted with fraud, mistake, inaccuracy or omission or of showing
that any item claimed by the plaintiff was in fact not due to him.
34. Question 7: The High Court has for cogent reasons held that the goods on which the
burden of charge lay being available for the satisfaction of the liabilities, if any, under the
agreement dated July 6, 1948, the defendants second set could not be held personally liable
for payment of the decretal amount. The opinion expressed by the High Court is correct and
we see no warrant or justification to interfere with the same.
35. In view of the foregoing, we have no hesitation in holding that as material alterations
have been made by the plaintiff in the agreement dated July 6, 1948 (which is the basis of the
suit) rendering it void and as the bar of Section 69 of the Partnership Act clearly applies to the
case, the suit is clearly untenable and has to be dismissed.
36. In the result, appeal 572 of 1974 is allowed and the suit out of which it arose is
dismissed. Consequently, appeal 416 of 1973 fails and is dismissed. In the circumstances of
the case parties are left to pay and bear their own costs of these appeals.

*****

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Delhi Development Authority v. Kochhar Construction Work


(1998) 8 SCC 559

A.M. AHMADI, CJ AND SUJATA V. MANOHAR, J. - 2. This appeal raises a short


question regarding the interpretation of Sections 69(2) and (3) of the Indian Partnership Act,
1932 read with Section 20 of the Arbitration Act, 1940.
Respondent 1, an unregistered firm, filed proceedings under Section 20 of the Arbitration
Act, 1940 in the High Court of Delhi. The Delhi Development Authority entered a counter
and contested the proceedings on various grounds including the ground of limitation. The
learned Single Judge allowed the suit and directed the appointment of an arbitrator. Against
that order a first appeal was filed before a Division Bench of the High Court by the
respondent. That appeal was dismissed holding that the subsequent registration of the firm
cured the initial defect since that was within the period of limitation.
3. Section 69(1) provides that no suit to enforce a right arising from a contract shall be
instituted in any court by or on behalf of any person suing as a partner in a firm against the
firm or any person alleged to be or to have been a partner in the firm unless the firm is
registered and the person suing is or has been shown in the Register of Firms as a partner in
the firm. This sub-section begins with the words: No suit ... shall be instituted in any court ...
, which prima facie bar the institution of the suit by a firm which is unregistered. Sub-section
(2) next provides that no suit to enforce a right arising from a contract shall be instituted in
any court by or on behalf of a firm against any third party unless the firm is registered and the
persons suing are or have been shown in the Register of Firms as partners in the firm. This
sub-section also begins with the words: No suit ... shall be instituted in any court ..., which
clearly bar the institution of a suit by a firm which is not registered. The provisions of subsections (1) and (2) have been made applicable to other proceedings to enforce a right arising
from a contract by virtue of sub-section (3) of Section 69. It would thus seem on a plain
reading of Section 69(2) that a suit instituted in any court by or on behalf of a firm against any
third party shall not be valid unless the firm is registered and the persons suing are or have
been shown in the Register of Firms as partners of the firm. Plainly, the institution of the suit
itself is barred both by sub-section (1) and sub-section (2) of Section 69 of the Partnership
Act. Section 20 of the Arbitration Act provides that where any persons have entered into an
arbitration agreement before the institution of any suit with respect to the subject-matter of the
agreement or any part of it, and where a difference has arisen to which the agreement applies,
they or any of them, instead of proceeding under Chapter II (Chapter II refers to arbitration
without intervention of a court) may apply to a court having jurisdiction in the matter to
which the agreement relates, that the agreement be filed in court. Such an application, says
sub-section (2) thereof, shall be in writing and shall be numbered and registered as a suit.
Therefore, an application filed by an unregistered firm under Section 20 would also be treated
as a suit and would be hit by Section 69(2) if the firm filing the application is not registered
with the Registrar of Firms. This appears to be the position in law which emerges on a plain
reading of Section 69 of the Partnership Act and Section 20 of the Arbitration Act. The fact
that it is an application to be registered and numbered as a suit would not make any difference
for the obvious reason that though sub-sections (1) and (2) of Section 69 of the Partnership

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227

Act refer to a suit, sub-section (3) thereof makes those sub-sections applicable even to other
proceedings which would include an application registered and numbered as a suit under
Section 20 of the Arbitration Act.
4.. (I)n view of the decision of this Court reported in Shreeram Finance Corpn. (1989) 3
SCC 476, we are clearly of the opinion that proceedings under Section 20 of the Arbitration
Act were ab initio defective since the firm was not registered and the subsequent registration
of the firm cannot cure that defect. In view of the above, we allow this appeal, set aside the
order of the High Court and hold that the proceedings were ab initio defective as they could
not have been instituted since the firm in whose name the proceedings were instituted was not
registered at the date of the institution of the proceedings.
*****

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Gwalior Oil Mills v. Supreme Industries


(1999) 9 SCC 113

[ Suit by reconstituted firm Sections 63, 69]

B.N. KIRPAL AND S. RAJENDRA BABU, JJ. - The appellant partnership firm filed a
suit against the respondent claiming damages of Rs 1,13,170 plus interest. The firm had been
registered with the Registrar of Firms on 29-7-1953. The business of the firm was that of
manufacture and dealing in linseed oil and other edible oils. Prior to 1-1-1976, the firm had
five partners: Naranji Kushaldas Patel, Atul Rambhai Patel, Jayantilal Naranji Patel, Arvind
Naranji Patel and Amritlal Chhotubhai Patel. The firm was reconstituted w.e.f. 1-1-1976.
Two partners, namely, Naranji Kushaldas Patel and Amritlal Chhotubhai Patel retired from
the firm and Atul Rambhai Patel continued as a partner. Jayantilal Naranji Patel and Arvind
Naranji Patel were partners in their individual capacity but w.e.f. 1-1-1976, they joined as
HUF. After the reconstitution of the partnership firm on 23-8-1976, an application was filed
by the appellant with the Registrar of Firms for noting the change in and the reconstituted
firm.
On 10-11-1976 and 18-11-1976, the appellant entered into three contracts with the
respondent whereby the respondent had agreed to sell to the appellant expeller linseed oil.
When this oil was not supplied, the appellant filed Suit No. 1004 of 1977 in the High Court of
Bombay on 26-5-1977. The claim in the suit was for the aforesaid amount of Rs 1,13,170
plus interest and costs. On 28-2-1978, the Registrar of Firms carried out the changes with
regard to the reconstitution of the firm pursuant to the application dated 23-8-1976 which had
been filed. In the certificate which was issued by the Registrar, it was stated that the newlyadded partners were w.e.f. 1-1-1976.
In the written statement which was filed by the respondent, a plea was taken to the effect
that the suit was liable to be dismissed in view of the provisions of Section 69 of the Indian
Partnership Act, inasmuch as the newly-added partners names were entered by the Registrar
of Firms on 28-2-1978 and, therefore, on the day when the suit was filed, the firm as
reconstituted was not duly registered with the reconstituted partners of the firm. A
preliminary issue was framed which was as follows:
Whether the suit is liable to be dismissed for the reasons as alleged in para
1(a) of the written statement.
The Single Judge of the High Court came to the conclusion that no suit to enforce a right
arising from a contract could be instituted in a court by or on behalf of a firm against any
third party unless the firm had been registered and the persons suing are or have been shown
in the Register of Firms as partners in the firm. As the reconstitution was recorded with the
Registrar only on 28-2-1978, the reconstituted firm was not in existence when the suit was
filed. The preliminary issue was decided in favour of the respondent.
8. From the facts enumerated above, it is not in dispute that the firm M/s Gwalior Oil
Mills was registered with the Registrar of Firms originally on 29-7-1953. With the passage of
time, the firm was reconstituted and as required by Section 63 of the Partnership Act, 1932,
changes in the constitution of the partners was recorded with the Registrar of Firms. The said

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229

section requires notice to be given to the Registrar whenever there is a change in the
constitution of the firm and that notice is required, inter alia, to specify the date from which
the changes have occurred and it is on the said notice being given that the Registrar carries
out the act of recording the change in the constitution of the firm. In the instant case, the
application under Section 63 was filed on 23-8-1976 but the Registrar made the changes only
on 28-2-1978. It, however, recorded that the partnership had been reconstituted w.e.f. 1-11976.
9. The implication of the registration so granted clearly was that the reconstituted
partnership firm came into existence w.e.f. 1-1-1976. In any case, the firm of M/s Gwalior Oil
Mills never ceased to be a registered partnership firm. The suit was filed by the firm in 1977
and the partner who filed the plaint, namely, Arvind Naranji Patel was admittedly a partner in
the firm in his individual capacity and then as a karta of his Hindu undivided family. Even if
the reconstitution of the firm is ignored, it cannot be said that on 26-5-1977, the registered
firm was not in existence.
10. The aforesaid view which we are taking is in consonance with the observations of this
Court in Sharad Vasant Kotak v. Ramniklal Mohanlal Chawda [(1998) 2 SCC 171].
11. We are in agreement with the observations (made in the above case) and in our view,
the decision of the High Court in the instant case was not correct. For the aforesaid reasons,
this appeal is allowed and the suit filed by the appellant is restored and should now be decided
as expeditiously as possible.
*****

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Haldiram Bhujiawala v. Anand Kumar Deepak Kumar


(2000) 3 SCC 250

[Sections 69(2), 2(d)]

M. JAGANNADHA RAO, J. - 2. This appeal has been preferred by the two defendants,
M/s Haldiram Bhujiawala and Shri Ashok Kumar against the judgment of the Delhi High
Court in FAO No. 365 of 1999 dated 30-11-1999. By that order the High Court summarily
dismissed the appellants appeal against the order of the learned Single Judge dated 2-111999 in IA No. 5996 of 1999 in Suit No. 635 of 1992. The IA was filed under Order 7 Rule
11 CPC by the appellants for rejection of the plaint filed by two plaintiffs, Anand Kumar
Deepak Kumar trading as Haldiram Bhujiawala and Shiv Kishan Aggarwal, on the ground
that the 1st plaintiff was a partnership not registered with the Registrar of Firms on the date of
the suit i.e. on 10-12-1991 and that the subsequent registration of the firm on 29-5-1992
would not cure the initial defect.
3. The suit was filed by the plaintiff (1) for permanent injunction restraining the defendant
appellants, their partners, servants etc. from infringing Trademark No. 285062 and from using
the trademark/name HALDIRAM BHUJIAWALA or any identical name/mark deceptively
similar thereto, (2) for damages in a sum of Rs 6 lakhs, and (3) for destruction of the
material etc.
4. As we are dealing with a matter arising under Order 7 Rule 11 CPC, it will be
necessary to refer to the plaint allegations. One Ganga Ram (sic Bishan) alias Haldiram,
carried on business in the name of Haldiram Bhujiawala, since 1941. In 1965, he constituted a
partnership with his two sons Moolchand, Shiv Kishan and his daughter-in-law Kamla Devi
(wife of another son R.L. Aggarwal) to carry on business under the same name. In December
1972, the said firm applied for registration before the Registrar of Trademarks for registration
of the name Haldiram Bhujiawala - Chand Mal - Ganga Bishan Bhujiawala, Bikaner. The
Registrar of Trademarks granted registration with No. 285062. On 16-11-1974, the
partnership was dissolved and under the terms of the dissolution deed the above trademark
fell exclusively to the share of Moolchand, son of Ganga Bishan and father of the plaintiffs,
for the whole country (except West Bengal). Thus Shri Moolchand became sole proprietor of
the trademark in the said area while Smt Kamla Devi was given ownership of the trademark
rights for West Bengal. It is stated that Shri Lala Ganga Bishan Haldiram executed his last
will dated 3-4-1979 and also reiterated the rights conferred by the dissolution deed on the
respective parties. Ganga Bishan died in 1980. His will was later acted upon. Later, the
testators son, Shri Moolchand too died in 1985 leaving behind his four sons, Shiv Kishan,
Shiv Ratan, Manohar Lal and Madhusoodan. All of them got their names recorded as
subsequent joint proprietors. The latter three formed a partnership in 1983 and were running a
shop in Chandni Chowk, New Delhi selling various goods under the abovesaid trademark of
Haldiram Bhujiawala. In the meantime, on 10-10-1977, Moolchands brother Shri R.L.
Aggarwal (husband of Kamla Devi) and his son Prabhu Shankar, Calcutta applied for
registration in this very name at Calcutta claiming to be full owners of the said trademark
without disclosing the dissolution deed dated 16-11-1974. When the Registrar objected on 144-1978, they replied on 18-7-1978 that they alone were trading in this name in Calcutta. The

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231

defendants have no right to use the said trademark beyond Calcutta. The plaintiffs registered
trademark was, in the usual course, renewed on 29-12-1986 till 28-12-1993. The plaintiffs
have also acquired a right on account of prior adoption and long user. The 1st plaintiff firm,
consisting of three sons of Moolchand and the 2nd plaintiff (the fourth son of Moolchand) are
joint owners of the trademark (except in West Bengal). The 1st defendant firm is a newlyconstituted firm intending to start its business and has been formed by Ashok Kumar, son of
Kamla Devi. The 2nd defendant is Ashok Kumar himself in his individual capacity. They
have no right to use this trademark outside West Bengal. The plaintiffs came to know of the
violation of the trademark by Defendants 1 and 2 in December 1991 when the defendants
opened a shop at Arya Samaj Road, Karol Bagh, New Delhi. The cause of action for the suit
is the fact that the defendants acted
in violation of the common law and contractual rights of the plaintiff.
On these grounds, the defendants are to be restrained by permanent injunction from using
the trademark and a sum of Rs 6 lakhs is payable as damages.
6. In this appeal, learned Senior Counsel for the appellants, Shri Ashok Desai and Shri
R.F. Nariman contended that the 1st plaintiff firm was not registered with the Registrar of
Firms on the date of suit, that the plaint repeatedly referred to the proprietary right of the late
Moolchand as having arisen out of the dissolution deed dated 16-11-1974 and that without
reference to the said document - which was a contract - the plaintiffs could not prove their
right to the trademark through Moolchand and the suit was barred since Section 69(2) referred
to a right arising from a contract. The plaintiffs right was based on the contract dated 1611-1974. The words arising from a contract were akin to the words arising out of a
contract used in Ruby General Insurance Co. Ltd. v. Pearey Lal Kumar [AIR 1952 SC
119], wherein while construing those words in relation to an arbitration clause, this Court
held that the said words had to be construed widely. The learned counsel contended that, on
the facts of this case and as stated in the plaint at several places, the 1st plaintiff was
compelled to rely on the contract of dissolution dated 16-11-1974 to prove title to the
trademark and thereby for an injunction and hence it was not a right claimed under common
law or under any statute, like the Trade Marks Act.
7. On the other hand, learned Senior Counsel for the respondent-plaintiffs, Shri Gopal
Subramanium supported the view of the High Court by contending that the suit for injunction
was based upon two rights, one being statutory under the Trade Marks Act arising out of prior
registration of the trademark and alternatively, the suit was also based on the common law
right available in a passing-off action. The suit was not based on any contract between the
plaintiffs and the defendants. The provision in Section 69(2) did not apply if the right sought
to be enforced did not arise out of a contract between the plaintiffs firm and the defendants.
The reference in the plaint to the dissolution deed dated 16-11-1974 was merely a reference to
a historical fact that that was the source of the right of Moolchand and on his death, the said
right to the trademark devolved on his sons, - three of whom are joined in a firm (i.e. the 1st
plaintiff) and the fourth son is the second plaintiff. The plaintiffs were not parties to the deed
of dissolution. The defendants too were not parties to the dissolution deed though their mother
was. Hence, the bar under Section 69(2) did not apply.

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8. The points that arise for consideration are:


(i) Whether Section 69(2) bars a suit by a firm not registered on the date of suit where
permanent injunction and damages are claimed in respect of a trademark as a statutory
right or by invoking common law principles applicable to a passing-off action?
(ii) Whether the words arising from a contract in Section 69(2) refer only to a
situation where an unregistered firm is enforcing a right arising from a contract entered
into by the firm with the defendant during the course of its business or whether the bar
under Section 69(2) can be extended to any contract referred to in the plaint unconnected
with the defendant, as the source of title to the suit property?
Point 1
9. The question whether Section 69(2) is a bar to a suit filed by an unregistered firm even
if a statutory right is being enforced or even if only a common law right is being enforced
came up directly for consideration in this Court in Raptakas Brett Co. Ltd. v. Ganesh
Property [(1998) 7 SCC 184]. In that case, Majmudar, J. speaking for the Bench clearly
expressed the view that Section 69(2) cannot bar the enforcement by way of a suit by an
unregistered firm in respect of a statutory right or a common law right. On the facts of that
case, it was held that the right to evict a tenant upon expiry of the lease was not a right
arising from a contract but was a common law right or a statutory right under the Transfer
of Property Act. The fact that the plaint in that case referred to a lease and to its expiry, made
no difference. Hence, the said suit was held not barred. It appears to us that in that case the
reference to the lease in the plaint was obviously treated as a historical fact. That case is
therefore directly in point. Following the said judgment, it must be held in the present case
too that a suit is not barred by Section 69(2) if a statutory right or a common law right is
being enforced.
10. The next question is as to the nature of the right that is being enforced in this suit. It is
well settled that a passing-off action is a common law action based on tort. Therefore, in our
opinion, a suit for perpetual injunction to restrain the defendants not to pass off the
defendants goods as those of the plaintiffs by using the plaintiffs trademark and for damages
is an action at common law and is not barred by Section 69(2). The decision in Virendra
Dresses v. Varinder Garments [AIR 1982 Del 482] states that Section 69(2) does not apply
to a passing-off action as the suit is based on tort and not on contract. In our opinion, the
above decisions were correctly decided. (Special Leave Petition No. 18418 of 1999 against
the latter was in fact dismissed by this Court on 28-1-2000.) The learned Senior Counsel for
the appellants no doubt relied upon Ruby General Insurance Co. Ltd. v. Pearey Lal Kumar.
That was an arbitration case in which the words arising out of a contract were widely
interpreted but that decision, in our view, has no relevance in interpreting the words arising
from a contract in Section 69(2) of the Partnership Act.
11. Likewise, if the reliefs of permanent injunction or damages are being claimed on the
basis of a registered trademark and its infringement, the suit is to be treated as one based on a
statutory right under the Trade Marks Act and is, in our view, not barred by Section 69(2).

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233

12. For the aforesaid reasons, in both these situations, the unregistered partnership in the
case before us cannot be said to be enforcing any right arising from a contract. Point 1 is
therefore decided in favour of the respondent-plaintiffs.
Point 2
13. Question however arises as to what is the scope of the words enforcing a right arising
under the contract used in Section 69(2)? Learned Senior Counsel for the appellants
repeatedly drew our attention to the allegation in the plaint at various places that it was only
under the deed of dissolution dated 16-11-1974 that Moolchand, the father of the partners
of the 1st plaintiff firm and the 2nd plaintiff became proprietor of the trademark for the
whole of India (except West Bengal). That right devolved on the plaintiffs on the death of
Moolchand. Therefore, it was contended that the 1st plaintiff firm was definitely seeking to
enforce a right arising from a contract, namely, the contract of dissolution dated 16-111974. It was argued that the 1st plaintiff could not claim any injunction or damages unless
reliance was placed on the said contract and hence the suit was barred by Section 69(2).
14. For the purpose of deciding this point, it is necessary to go into the question as to
what the legislature meant when it used the words arising from a contract in Section 69(2).
15. In our view, it will be useful in this context to refer to the Report of the Special
Committee (1930-31) which examined the Draft Bill and made recommendations to the
legislature.
16. Before going into the above Report of the Special Committee which preceded the
Partnership Act, 1932, it will be necessary to refer to the case in CIT v. Jayalakshmi Rice
and Oil Mills Contractor Co. (1971) 1 SCC 280, where this Court refused to refer to this very
Report for construing Section 59 of the Partnership Act. But, in our view, that decision is no
longer good law as it was clearly dissented on this aspect in the judgment of the Constitution
Bench in R.S. Nayak v. A.R. Antulay (1984) 2 SCC 183. In a number of later judgments, this
Court has referred to the reports of similar committees or commissions (vide G.P. Singhs
Interpretation of Statutes, 7th Edn., 1999, pp. 196-97). In the latest case in Hyderabad
Industries Ltd. v. Union of India notes on clauses were relied upon by the Constitution
Bench for understanding the legislative intent. A restricted view was no doubt expressed in
P.V. Narasimha Rao v. State (1998) 4 SCC 626 (at pp. 691-92) that such reports can be
looked into for the purpose of knowing the historical basis or mischief sought to be remedied,
but not for construing the provision unless there is ambiguity. Even going by this restricted
view, we find that there is considerable ambiguity in Section 69(2) (unlike the English Statute
of 1916 and 1985) as to what is meant by the words arising out of a contract inasmuch as
the provision does not say whether the contract in Section 69(2) is one entered into by the
firm with the defendant or with somebody else who is not a defendant, nor to whether it is a
contract entered into with the defendant in business or unconnected with business. Hence, in
our view, it is permissible to look into the Report even for purpose of construing Section
69(2).
17. We may state that it was on the basis of the Report of the Special Committee that the
Partnership Act, 1932 was later passed by the legislature. The Committee consisted of Sir
Brojendra Lal Mitter, Sir Dinshah F. Mulla, Sir Alladi Krishnaswamy Iyer and Mr Arthur

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Kamal Pushp Enterprises v. D.R. Construction Co.

Eggar. Para 16 of the Report states that the Bill seeks to overcome this class of difficulty by
making registration optional, and by creating inducements to register which will only bear
upon firms in a substantial and fairly permanent way of business. Paras 17, 18 and 19 of the
Report are important (see Mulla: Partnership Act, 1st Ed., 1934, p. 167, at pp. 176-77) reads:
17. The outlines of the scheme are briefly as follows. The English precedent
insofar as it makes registration compulsory and imposes a penalty for nonregistration has not been followed, as it is considered that this step would be too
drastic for a beginning in India, and would introduce all the difficulties connected
with small or ephemeral undertakings. Instead, it is proposed that registration should
lie entirely within the discretion of the firm or partner concerned; but, following the
English precedent, any firm which is not registered will be unable to enforce its claim
against third parties in the civil court; and any partner who is not registered will be
unable to enforce his claims either against third parties or against fellow partners.
It will be noticed that the above extract refers to the English precedent which is partly not
followed and which is partly followed. We shall be referring to the said English precedent
shortly but before we do so, we have also to refer to paras 18 and 19 of the said Report.
18. The Report states in paras 18 and 19 as follows:
18. Once registration has been effected the statement recorded in the register
regarding the constitution of the firm will be conclusive proof of the facts therein
contained against the partners making them and no partner whose name is on the
register will be permitted to deny that he is a partner - with certain natural and proper
exceptions which will be indicated later. This should afford a strong protection to
persons dealing with firms against false denials of partnership and the evasion of
liability by the substantial members of a firm.
19. On the other hand, a third party who deals with a firm and knows that a
new partner has been introduced can either make registration of the new partner a
condition for further dealings, or content himself with the certain security of the
other partners and the chance of proving by other evidence, the partnership of the
new but unregistered partner. A third party who deals with a firm without knowing of
the addition of a new partner counts on the credit of the old partners only and will not
be prejudiced by the failure of the new partner to register.
Similarly, para 23 also refers to those who deal with the firm.
19. The English precedent referred to in para 17, which has been not followed in part but
followed in part in drafting Section 69(2) is the one contained by the Registration of Business
Names Act, 1916. Section 7 of that Act refers to penalties for default in registration. As stated
in the Report, the penalty part of that Act has not been introduced in India but the provisions
of Section 8 creating disabilities in the way of the firm in default is adopted. Section 8 of the
above English Act is relevant and it speaks of
(T)he rights of that defaulter under or arising out of any contract made or entered
into by or on behalf of such defaulter in relation to the business in respect to the
carrying on of which particulars were required to be furnished (see Halsbury
Statutes, 3rd Edn., Vol. 37, p. 867).

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The above provision clearly signifies that the right that is sought to be enforced by the
unregistered firm and which is barred must be a right arising out of a contract with a thirdparty defendant in respect of the firms business transactions.
20. The Business Names Act, 1985 has replaced the above Act of 1916 and Section 4 of
the new Act refers to the civil remedies for breach of Section 4. It provides for dismissal of
the action to enforce a right arising out of a contract made in the course of a business if the
firm is not registered (see Halsbury Statutes, 4th Edn., Vol. 48, p. 101).
21. The above Report and provisions of the English Acts, in our view, make it clear that
the purpose behind Section 69(2) was to impose a disability on the unregistered firm or its
partners to enforce rights arising out of contracts entered into by the plaintiff firm with the
third-party defendants in the course of the firms business transactions.
22. In Raptakos Brett and Co. it was clarified that the contractual rights which are sought
to be enforced by the plaintiff firm and which are barred under Section 69(2) are rights
arising out of the contract and that it must be a contract entered into by the firm with the
third-party defendants. Majmudar, J. stated as follows:
A mere look at the aforesaid provision shows that the suit filed by an
unregistered firm against a third party for enforcement of any right arising from a
contract with such a third party would be barred.
(emphasis supplied)
From the above passage it is firstly clear that a contract must be a contract by the plaintiff
firm not with anybody else but with the third-party defendant.
23. The further and additional but equally important aspect which has to be made clear is
that the contract by the unregistered firm referred to in Section 69(2) must not only be one
entered into by the firm with the third-party defendant but must also be one entered into by
the plaintiff firm in the course of the business dealings of the plaintiff firm with such thirdparty defendant.
24. It will also be seen that the present defendants who are sued by the plaintiff firm are
third parties to the 1st plaintiff firm. Section 2(d) of the Act defines third parties as persons
who are not partners of the firm. The defendants in the present case are also third parties to
the contract of dissolution dated 16-11-1974. Their mother, Kamla Devi was no doubt a party
to the contract of dissolution. The defendants are only claiming a right said to have accrued to
their mother under the said contract dated 16-11-1974 and then to the defendants. In fact, the
said contract of dissolution is not a contract to which even the present 1st plaintiff firm or its
partners or the 2nd plaintiff were parties. Their father Moolchand was a party and his right to
the trademark devolved in the plaintiffs. The real crux of the question is that the legislature,
when it used the words arising out of a contract in Section 69(2), it is referring to a contract
entered into in course of business transactions by the unregistered plaintiff firm with its
defendant customers and the idea is to protect those in commerce who deal with such a
partnership firm in business. Such third parties who deal with the partners ought to be enabled
to know what the names of the partners of the firm are before they deal with them in business.
25. Further, Section 69(2) is not attracted to any and every contract referred to in the
plaint as the source of title to an asset owned by the firm. If the plaint referred to such a

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Kamal Pushp Enterprises v. D.R. Construction Co.

contract it could only be as a historical fact. For example, if the plaint filed by the
unregistered firm refers to the source of the firms title to a motor car and states that the
plaintiff has purchased and received a motor car from a foreign buyer under a contract and
that the defendant has unauthorisedly removed it from the plaintiff firms possession, -it is
clear that the relief for possession against the defendant in the suit does not arise from any
contract which the defendant entered into in the course of the plaintiff firms business with
the defendant but is based on the alleged unauthorised removal of the vehicle from the
plaintiff firms custody by the defendant. In such a situation, the fact that the unregistered
firm has purchased the vehicle from somebody else under a contract has absolutely no bearing
on the right of the firm to sue the defendant for possession of the vehicle. Such a suit would
be maintainable and Section 69(2) would not be a bar, even if the firm is unregistered on the
date of suit. The position in the present case is not different.
26. In fact, the Act has not prescribed that the transactions or contracts entered into by a
firm with a third party are bad in law if the firm is an unregistered firm. On the other hand, if
the firm is not registered on the date of suit and the suit is to enforce a right arising out of a
contract with the third-party defendant in the course of its business, then it will be open to the
plaintiff to seek withdrawal of the plaint with leave and file a fresh suit after registration of
the firm subject of course to the law of limitation and subject to the provisions of the
Limitation Act. This is so even if the suit is dismissed for a formal defect. Section 14 of the
Limitation Act will be available inasmuch as the suit has failed because the defect of nonregistration falls within the words other cause of like nature in Section 14 of the Limitation
Act, 1963. (See Surajmal Dagduramji Shop v. Shrikisan Ramkisan.)
27. For all the reasons given above, it is clear that the suit is based on infringement of
statutory rights under the Trade Marks Act. It is also based upon the common law principles
of tort applicable to passing-off actions. The suit is not for enforcement of any right arising
out of a contract entered into by or on behalf of the unregistered firm with third parties in the
course of the firms business transactions. The suit is therefore not barred by Section 69(2).
28. For the aforesaid reasons, the appeal fails and is dismissed without costs. We should
not be understood as having said anything on the merits of the case for we have confined
ourselves to the allegations in the plaint as we are here only dealing with an application filed
by the appellants under Order 7 Rule 11 CPC.
*****

Kamal Pushp Enterprises v. D.R. Construction Co.

237

Kamal Pushp Enterprises v. D.R. Construction Co.


AIR 2000 SC 2676

[Arbitration proceeding is not a suit or other proceeding to enforce any rights


rights arising under contract and hence not barred - section 69]
The above appeal has been filed against the order of a learned Single Judge of the
Madhya Pradesh High Court rejecting the revision petition filed by the appellant holding
that the provisions of Section 69 of the Partnership Act do not stand in the way of an
unregistered firm defending proceedings against it and it precludes only the initiation of
any proceeding by such a firm. Gas Authority of India Ltd., at Vijaypur, entered into a
contract with the appellant to execute certain works and the appellant in its turn had
entered into a separate contract with the respondent, indisputably an unregistered firm for
carrying out the work, the execution of which was undertaken by the appellant under its
contract with GAIL. Disputes arose between the appellant and the respondent.
Thereupon, the appellant appears to have, invoking Section 8(2) of the Arbitration Act,
1940, served a notice on the respondent seeking for consent for the appointment of an
arbitrator, in terms of the arbitration clause, out of the five proposed arbitrators and the
respondent gave its consent for the appointment of a named advocate, as the arbitrator.
The arbitrator entered into the reference and the appellant filed its claim and the
respondent apart from opposing the claim of the appellant stated its own claim. The
arbitrator passed an award in favour of the respondent and suo motu filed the award
before the trial court under Section 14(2) of the Arbitration Act. When the Court issued
notice to both the appellant and the respondent, it is at this stage the appellant filed
various objections, one of which was based upon Section 69 of the Partnership Act, and
the trial court appears to have framed a preliminary issue of law under Order 14 Rule 2
CPC for decision as follows:
Whether the proceedings regarding making the award a rule of court are
maintainable as the non-applicant firm is not a registered partnership firm under Section
69 of the Partnership Act?
The learned trial Judge decided the preliminary issue against the appellant.

DORAISWAMY RAJU, J. - 5. Mr Sanjay Parikh, learned counsel for the appellant


contended that the courts below ought to have sustained the objection of the appellant based
upon Section 69 of the Partnership Act holding the proceedings to be barred on account of the
respondent being an unregistered firm. According to the learned counsel the proceedings
arising out of an award are certainly proceedings arising out of the agreement between parties
and would fall under the category of other proceedings envisaged in Section 69 of the
Partnership Act. Strong reliance was placed in this regard upon the decision of this Court
reported in Jagdish Chandra Gupta v. Kajaria Traders (India) Ltd. in addition to placing
reliance upon some other decisions of the High Courts, to substantiate his claim. It is
unnecessary to refer to the decisions of the various High Courts in the light of the decisions of
this Court. Per contra, Mr Vimal Dave, while adopting the reasoning of the courts below,
contended that the provisions of Section 69 of the Partnership Act are no impediment to the
respondent getting relief as a defendant in the hands of the arbitrator in a proceeding initiated

238

Kamal Pushp Enterprises v. D.R. Construction Co.

by the appellant itself and as long as the respondent was only a respondent and had not
initiated or commenced any proceedings of its own, there is no merit in the preliminary
objection raised, which, according to the learned counsel, has been rightly overruled.
6. The question as to the scope and ambit of Section 69(3) was considered by this Court
in the decision reported in Jagdish Chandra Gupta. An application filed under Section 8(2)
of the Arbitration Act for the appointment of a named person or anyone else to go into the
disputes between the parties was objected to, among other things, on the ground that Section
69(3) of the Partnership Act affords a bar to the petition because the partnership was not
registered. As against the conclusion of the High Court that the application was maintainable,
an appeal was filed in this Court. In construing the words, a claim of set-off or other
proceeding to enforce a right arising from a contract ..., it was held that the section thinks in
terms of (a) suits, (b) claims of set-off which are in a sense of the nature of suits, and (c) other
proceedings and while the section first provides for exclusion of suits in sub-sections (1) and
(2) of Section 69 the same ban is also applied to a claim of set-off and other proceedings to
enforce any right arising from a contract. This Court ultimately construed the words other
proceedings in sub-section (3) of Section 69 giving them their full meaning untrammelled by
the words a claim of set off, and held that the generality of the words other proceedings
are not to be cut down by the latter words. The said case, being one concerning an application
before the Court under Section 8(2) of the Arbitration Act, 1940 in the light of the arbitration
agreement, this Court finally held that since the arbitration clause formed part of the
agreement constituting the partnership the proceeding under Section 8(2) was in fact to
enforce a right which arose from a contract/agreement of parties.
7. The above referred to decision was adverted to and the principles therein were also
applied in the subsequent decision reported in Raptakos Brett & Co. Ltd. and on the facts of
that case that the cause of action for the suit was not the agreement of tenancy which lapsed
by efflux of time but really one arising under the General Law and Transfer of Property Act it
was held that the bar of suit or other proceedings based upon the lack of registration of the
firm does not apply to the case. In yet another decision of this Court reported in Haldiram
Bhujiawala rendered by a Bench to which one of us (M. Jagannadha Rao, J.) was a party, it
was held that the bar under Section 69(2) was not attracted to that case since the suit for
permanent injunction to restrain the defendants from using the plaintiffs trademark/name was
based upon the statutory rights under the Trade Marks Act and on common law principles of
tort applicable to passing-off actions and not under the unregistered partnership agreement.
8. The persistent plea made on behalf of the appellant before us is that the bar imposed
under Section 69(3) is attracted to the case on hand and that inasmuch as the same prohibits
the enforcement of any right arising from a contract by an unregistered firm, the objection can
be taken at any stage i.e. even post-award proceedings instituted to enforce the award. Unlike
the law in force prior to the Arbitration Act, 1940, the said Act in Section 2(a) defined an
arbitration agreement to be one made in writing to submit present or future differences to
arbitration and, therefore, it was held that after the coming into force of the Act an award
passed on an oral submission or reference can neither be filed and made a rule of court under
the Act nor enforced apart from the provisions of the Act. This decision which is based on the
principle that the arbitrator is a creature of the contract between the parties and a reference to

Kamal Pushp Enterprises v. D.R. Construction Co.

239

the arbitrator could only be by means of an agreement in writing only indicates that such
infirmity goes to the root of the very jurisdiction of the arbitrator to enter into the reference
and decide by passing an award and in our view the same can be of no assistance to the case
of the appellant. It is not the case of the appellant before us that there was no arbitration
clause in writing or that the dispute is not arbitrable but yet the arbitrator has undertaken it for
decision. As rightly pointed out for the respondent the very reference came to be made at the
instance of the appellant and what is really objected to in the form of a preliminary issue is
only the infirmity based upon Section 69 of the Partnership Act, 1932.
9. The prohibition contained in Section 69 is in respect of instituting a proceeding to
enforce a right arising from a contract in any court by an unregistered firm, and it had no
application to the proceedings before an arbitrator and that too when the reference to the
arbitrator was at the instance of the appellant itself. If the said bar engrafted in Section 69 is
absolute in its terms and is destructive of any and every right arising under the contract itself
and not confined merely to enforcement of a right arising from a contract by an unregistered
firm by instituting a suit or other proceedings in court only, it would become a jurisdictional
issue in respect of the arbitrators power, authority and competency itself, undermining
thereby the legal efficacy of the very award, and consequently furnish a ground by itself to
challenge the award when it is sought to be made a rule of court. The case before us cannot be
said to be one such and the learned counsel for the appellant though was fully conscious of
this fact, yet tried to assert that it is open to the appellant to take up the objection based upon
Section 69 of the Partnership Act, at any stage - even during the post-award proceedings to
enforce the award passed. The award in this case cannot either rightly or legitimately be said
to be vitiated on account of the prohibition contained in Section 69 of the Partnership Act,
1932 since the same has no application to proceedings before an arbitrator. At the stage of
enforcement of the award by passing a decree in terms thereof what is enforced is the award
itself which crystallises the rights of parties under the Indian Contract Act and the general law
to be paid for the work executed and not any right arising only from the objectionable
contract. It is useful in this connection to refer to the decision of this Court in Satish Kumar
v. Surinder Kumar wherein it has been stated in unmistakable terms that an award is not a
mere waste paper but does create rights and has some legal effect besides being final and
binding on the parties. It has also been held that the award is, in fact, a final adjudication of a
court of the parties own choice and until impeached upon sufficient grounds in an
appropriate proceeding, an award which is on the face of it regular, is conclusive upon the
merits of the controversy submitted for arbitration. Consequently, the post-award proceedings
cannot be considered by any means to be a suit or other proceedings to enforce any rights
arising under a contract. All the more so when, as in this case, at all stages the respondent was
only on the defence and has not itself instituted any proceedings to enforce any rights of the
nature prohibited under Section 69 of the Partnership Act, before any court as such. We see
no infirmity or error whatsoever in the decision of the courts below to call for our interference
in this appeal. The appeal fails and shall stand dismissed.

THE END