Registration of firm u/s 184(7) of Income Tax act 1961. - Income Tax - 1082/CBDT

INSTRUCTION NO. 1082/CBDT Dated : August 4, 1977 Section(s) Referred: 184(7) ,185 Statute: Income - Tax Act, 1961 Attention is invited to the Board's Instruction No.26 dated March 20, 1969 where in it was decided that the Allahabad High Court's decision in M/s.Ganeshi Lal Laxmi Narain vs. CIT(68-ITR-696) should not be followed in the States other than the U.P State and Board's instructions dated 3.1.62 would continue to be followed as before. The Board then felt and still feel that the execution of a fresh instrument of partnership on attaining the majority of a minor and opting to become a partner is merely a technicality. In such circumstances, there is no change in the constitution of the firm and the firm is entitled to the continued benefit of registration originally granted on the basis of the earlier partnership deed, provided it satisfies declaration in Form No.12 within the specified period, and there has not been a change in the shares of the partners as evidenced by the instrument of partnership on the basis of which the registration was granted. 2. The Board have now reconsidered the whole matter in the light of the Supreme Court's decision in Mandyala Govindu and Company vs. CIT. 102-ITR-1 and Allahabad High Court decision in addl. CIT vs Gauri Viswanath Dal Mills 1976-TLR-1060. In the case before the Supreme Court the three partners of the firm had unequal shares of 31%, 23% and 23% in the profits and a minor admitted to the benefits of partnership had a share of 23% in the profits. There was no clause in the deed of partnership specifying the proportion in which the three adult partners were to share the losses. The question was whether the firm was entitled to registration under section 26A of the Income-tax Act, 1922. The Supreme court held that the ITO before allowing the application for registration must be in a position to ascertain the shares of the partners in the losses even if section 26A did not require the shares in the losses to be specified in the instrument of partnership. The Court laid down two propositions of law:- (i) subject to contract between the partners, Section 13(b) of the partnership Act makes the partners liable to contribute equally to the losses only when they are entitled to share equally in the profits. and (ii) in the absence of any indication to the contrary, where the partners have agreed to share the profits in certain proportions or where the shares in the profits are unequal, the presumption is that the losses are also to be shared in like proportion. In the ease before the Supreme Court since the partners had unequal shares, there was no scope for application of the first proposition. Further the second proposition also did not apply, because, even if the adult partners were to bear the losses in proportion to their respective shares in the profits, the amount of loss in the minor's share would still remain undistributed. 'will the partners between them bear this loss equally, or to the extent of their individual shares?' To this the instrument of partnership did not even suggest an answer. Therefore, the firm was not entitled to registration under section 26A. 3. In this context the question may arise whether in a case of a firm when the minor attains majority and opts to become a partner in a year subsequent to the year of original registration the benefit of continuation of registration could be allowed under section 184(7) on the basis of original instrument of partnership. as provided under section 184(7) the firm has to satisfy negative conditions, i.e., there has not been a change in the constitution of the firm or in the shares of the partners as evidenced by the instrument of partnership on the basis of which the registration was granted. The first negative condition of there being no change in the constitution of the firm may be met by the concession given in the Board's Instruction No.26. The other one of no change in the shares of the partners could be satisfied only when the original deed suggests the manner in which losses should be allocated among the partners including the minor who has since become fulfledged partner. In other words, unless the shares of the partners in losses as a result of the minor becoming major could be ascertained from the instrument of partnership, the firm cannot be allowed continuation of registration on the basis of such deed, as there will be change in the shares of the partners. In such circumstances the execution of a fresh instrument of partnership is necessary under law and the assessee firm will have to file a fresh application for registration in Form No.-A under section 184(8). 4. The Board's Instruction No.26 stands explained and modified to the extent indicated above.