A. KALYANASUNDARAM, A.M. Order assessee has come up in appeal against refusal of registration under s. 185(1)(b) of IT Act, 1961. 2 . Mr. N. M. Ranka, ld. representative of assessee submitted following facts. That firm originally comprised of four partners, namely, Sri Bhagwandas, Kailashchandra, Ramniwas, Jitendra Kumar, Ram Niwas and Sri Jitendra Kumar retired and from 2nd Jan., 1978. Smt. Saraswati Devi and minor Sri Rajendra Prasad became new partners of firm. As per partnership deed, share of profits/losses to be shared by partners was : Share of profit/loss 35 55 1. Sri Bhagwandas (HUF) percent percent 25 25 2. Sri Kailashchandra percent percent 20 20 3. Smt. Saraswati percent percent 4. Sri Rajendra Prasad 20 Nil (Minor) percent Mr. Ranka further submitted that in firm in immediately preceding year was granted registration. 3. Mr. Ranka submitted that ITO did not grant registration on couple of grounds. first being that no partnership could be constituted between HUF and coparceners of HUF. second being that Kailashchandra could not be examined in spite of opportunities provided. assessee could not at all state nature of work done by Smt. Saraswati Devi w/o Karta of Sri Bhagwandas HUF and Sri Kailashchander. Smt. Sawaswati Devi in her statement stated that she was sleeping partner, while partnership deed did not mention this fact that she was sleeping partner. 4. entire works, according to ITO, was done by Sri Bhagwandass alone and, therefore, he was of view that partnership was not genuine one. Mr. Ranka drew our attention to page 19 of paper book where Officer has granted registration of firm in which Shri Bhagwandass, Kailashchandra alongwith two others were partners for asst. yr. 1978-79. Mr. Ranka, therefore, submitted that it was admitted by Department that Sri Kailashchandra was partner in immediately preceding assessment year and merely because in present assessment year Sri Kailashchandra could not present himself cannot lead to conclusion that he was not partner in firm. 5 . Mr. Ranka further submitted that there is no requirements that all partners must work in firm. Merely because Smt. Saraswati Devi mentioned in her affidavit she was sleeping or dormant partner and this fact was not mentioned in partnership deed could not be ground for treating firm as non-genuine one. Mr. Ranka pointed out that Department is satisfied that Smt. Savitri Devi had contributed capital. For this purpose, he drew our attention to page 25 where capital account of partners have been filed. quantum of capital contribution is not very relevant one, though Smt. Saraswati Devi has contributed sum of Rs. 6,000 only, IT Department has been satisfied that she had, in fact, contributed this capital. grievance of Department is that fact that she was dormant partner was not mentioned in partnership deed. For proposition that any one partner can act on behalf of all partners, he relied on several judgment including in case of Subhash Medical Store vs. CIT (1984) 40 CTR (Raj) 54 : (1984) 147 ITR 480 (Raj) of Rajasthan High Court. He also relied on this judgment for paltry sum of contribution by some partners. Regarding dormant partners, he relied on United Patel Construction Co. vs. CIT (1966) 59 ITR 424 (MP) and in case of K. D. Kamath vs. CIT (1971) 82 ITR 680 (SC). 6. For proposition that there could be partnership between Karta of HUF and coparceners, Mr. Ranka relied on Lachhmandas vs. CIT (1948) 16 ITR 35 (PC), Ramchand Naval Rai vs. CIT (1981) 20 CTR (MP) 50 : (1981) 130 ITR 826 (MP), CIT vs. Gupta Brother (1981) 19 CTR (All) 342 : (1981) 131 ITR 492 (All), CIT vs. Gaekwade Vasappa & Sons (1983) 34 CTR (AP) 115 : (1983) 143 ITR 1 (AP). Mr. Ranka, therefore, stated that firm in which Bhagwandass HUF was partner was allowed registration in earlier years and in year merely because he carries on activity of business for and on behalf of partners, it cannot be said that he is acting as benamidar of partners. He, therefore, pleaded that in view of various submissions, firm is genuine one and registration must be granted. 7 . Mr. Ruhela, ld. Departmental Representative submitted that requirement of genuine firm has been elucidated in (1980) 12 1 ITR 361 (Bom). Mr. Ranka pointed out that para 16 of partnership deed mentions that Sri Kailashchandra shall have no criminal liability, Sri Kailashchandra had stated that he was away at Delhi and, therefore, could not produce himself before ITO. Mr Ruhela further stated that Shri Bhagwandas had capital contribution of Rs. 72,000, and Shri Kailashchandra Rs. 18,000 and Smt. Saraswati Devi contributed only Rs. 6,000. At end of year, balance in account of Sri Bhagwandass (HUF) was only Rs. 6,215 which only indicates that capital was not at all required for firm. As per partnership deed, Shri Bhagwandas shall be responsible for looking after day-to-day business of firm. According to Mr. Ruhela, since this has been provided, and in view of facts that Shri Kailashchandra remains in Delhi and Smt. Saraswati Devi is sleeping partner, it could only be concluded that there is genuine partnership amongst partners. Shri Bhagwandass is sole proprietor of concern. 8. We have heard parties. basis of refusing registration by ITO is : (a) that HUF and coparceners cannot form partnership firm; (b) Shri Kailashchandra was not produced; (c) Smt. Saraswati Devi states in her affidavit that she was dormant partner, but this fact was not mentioned in partnership deed; (d) control of business was with Sri Bhagwandass and, therefore, contribution of firm was only on paper. cases now we would deal with each of these issues in seriatim. 9 . decision relied upon by representative Mr. Ranka as also later decision of Madras High Court in case of CIT vs. K. T. S. Nagamanikkam Chettiar (1984) 39 CTR (Mad) 288 : (1984) 148 ITR 115 (Mad) goes only to indicate that valid partnership could be constituted between Karta of HUF and some of its coparceners. In this judgment their Lordships have referred to Privy Counsel's case in Lachhmandas vs. CIT (1948) 16 ITR 35 (PC). In case before Privy Council fact was that partnership firm was constituted between HUF and one of coparceners in his individual capacity. observation of Privy Council was reproduced in above judgment which is again reproduced here for easy reference : "After careful consideration, their Lordships cannot accept view and on general principles they cannot find any sound reason to distinguish case of stranger from that of coparcener who puts into partnership what is admittedly his separate property held in his individual capacity and unconnected with family funds. Whatever view of Hindu Joint Family and its property might have been at early stages of its development, their Lordships think that it is now firmly established that individual coparcener, while remaining joint, can possess, enjoy and utilise, in any way he likes, property which was his individual property, not acquired with aid of or with any detriment to joint family property. It follows from this that to be able to utilise this property at his will, he must be accorded freedom to enter into contractual relations with other, including his family, so long as it is represented in such transactions by definite personality like its manager. In such case he retains his share and interests in property of family, while he simultaneously enjoys benefit of his separate property and fruits of its investment. To be able to do this is not necessary for him to separate himself from his family. This must be dependent on other consideration, and result of separate act evincing clear intention to break away from family. This error of ITO lay in his view that, before such contractual relationship can validly come into existence, natural family relationship must be brought to end. This erroneous view appears to have coloured his and subsequent decisions of IT authorities. In this view, of Hindu Law, it is clear that if stranger can enter into partnership, with reference to his own property, with joint Hindu Family through its Karta, there is not sound reason in their Lordships' view to withhold such opportunity from coparceners in respect of his separate and individual property." Respectfully following Privy Council's decision (supra), we hold that partnership firm could be constituted between HUF and its coparceners in their individual capacity. 10. Shri Kailashchandra was one of partners of firm in 1978-79 and firm had been granted registration vide order of ITO dt. 8th Nov., 1979. Merely because in subsequent year, he could not produce himself before ITO, it could not be used against assessee for refusing registration. It is unimaginable that same partner could be partner in earlier year and accepted as such by Department, but in subsequent year it could be doubted that he was partner at all or not. capital contribution of this partner, is not in doubt. In view of fact that he was partner in 1978-79 and continues to be so in reconstituted firm, it could only be concluded that he was partner in firm for asst. yr. 1979-80 as well. 11. In case of Smt. Saraswati Devi Department is harping on fact that she had stated in affidavit that she was dormant partner. M. P. High Court decision reported inUnited Patel Construction Co. vs. CIT (1966) 59 ITR 424 (MP) is to effect that partnership may comprise some member known as dormant or sleeping partner who is not generally interested in conduct of business and who cannot be expected to aware of details of partnership business. But it cannot be reasonably inferred from her ignorance about details that partnership was not genuine. 12 . ITO is entitled to enquire whether instrument of partnership is intended by parties to be really effective as governing their rights and liabilities inter se in relation to business of whether it is only pretence to escape liability for tax. But conclusion that partnership is not genuine cannot be granted on suspicion. From above judgment it is patently clear that there could be dormant partner in business and merely because this fact has not been so mentioned in partnership deed does not make deed ungenuine one. 13. last ground on which registration was not granted was that Shri Bhagwandass was enjoying full control of business. issue of one partner entitled to full right of control and management of business, operated its bank account, came up for consideration before Supreme Court in case of K. D. Kamath & Co. vs. CIT (1971) 82 ITR 680 (SC). Their Lordships of Supreme Court observed : "that fact that exclusive power and control, by agreement of parties, was vested in one partner and further circumstance that only one partner could operate bank accounts or borrow on behalf of firm was not destructive of theory of partnership provided two essential conditions were satisfied, namely; (i) that there should be agreement to share profits and losses of business of firm; and (ii) that business must be carried on by all partners or any of them acting for all. Clause 5 read with other clauses showed that first condition, namely, all persons agreeing to share profits or losses, was satisfied. second condition was also satisfied even though vast powers of management and control had been given to K. business was being carried on by him on behalf of all partners. Both ingredients of partnership were satisfied and firm could be granted registration under s. 26A. Held also, that provision in cl. 9 of deed was only inter se arrangement entered into by partners in and by which working partners, had agreed not to raise loans or pledge firms interest. Not only was clause not destructive of theory of partnership but it indicated that theory of agency was recognised." above observation is, therefore, clearly supports case of assessee that mention in partnership deed, para 9 that first party shall be responsible for looking after day-to-day business of firm is only inter se arrangement between partners and is only recognising theory of agency. Each partner is agent of other partner as far as firm and outsiders are concerned. This has been clearly brought out by Supreme Court in above quoted order. This being so, Sri Bhagwandass having powers of control and management is only inter se arrangement between other two partners (the other being minor). Respectively following Supreme Court decision in K. D. Kamath vs. CIT (supra), ITO's action is not granting registration on this ground is incorrect and invalid. We therefore, direct ITO to grant registration to firm. 14. In result appeal is, therefore, allowed. *** BHAGWANDAS RAJINDER PRASAD v. INCOME TAX OFFICER