TMI Blog1967 (1) TMI 84X X X X Extracts X X X X X X X X Extracts X X X X ..... sent his undivided Hindu family in the partnership of Jewanram Gangaram. There was a partition in this family and Chandratan and his brother, Chhoganlal, separated. Consequent upon the death of Lachmandas Mimani and the separation between Chandratan and Chhoganlal, it became necessary to reconstitute the firm. So as to bring some of the legal representatives of Lachmandas and also Chandratan and Chhoganlal in their separated status, into the firm, a new partnership deed was executed on March 25, 1947. The parties to this deed were: (i) Kanayalal Mimani, (ii) Mulchand Mimani, (iii) Surajmal Mimani, (iv) Chandratan Mimani, (v) Lunkaram Mimani, (vi) Chaitandas Mimani, (vii) Chhoganlal Mimani, (viii) Gokuldas Mimani, minor by his guardian mother and next friend, Ram Piyari Devi, and (ix) Jamunadas Mimani, also a minor by his guardian mother and next friend, Ram Piyari Devi. The minors above-named were expressly admitted to benefits of the partnership. Clauses 6 (which should be 5), 7 and 8 of the deed provided as follows: 6. The profits and losses of partnership shall be distributed amongst the partners in shares as specified against the name of ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ni, were admitted to the benefits of the partnership. Registration of partnership, under section 26A of the Act, had been granted to the firm, as reconstituted under the deed dated March 25, 1947, for the first time. for the assessment year 1947-48 and thereafter renewal of the registration was granted for every assessment year up to and including the assessment year 1957-58. On August 13, 1962, the Commissioner of Income-tax sent a notice to the firm under section 33B of the Indian Income-tax Act, 1922, inter alia, couched in the following language: I have examined your records in connection with the assessment year 1957-58, and have found that the order dated March 26, 1962, passed therein by the Income-tax Officer under section 26A of the Indian Income-tax Act, 1922, is erroneous in so far as it is prejudicial to the interest of the revenue. You are hereby given opportunity to show cause and to make your submissions by August 29, 1962, in that connection since I am of the opinion that the firm as constituted under the instrument of partnership dated March 25, 1947, consisting of 9 partners including 2 minors, which had been granted renewal of registration by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1961, repealed the Indian Income-tax Act, 1922, as from the 1st April, 1962, and the Commissioner was not justified in taking action under section 338 of the repealed Act in August, 1962. The second contention was that the order under section 33B was passed in violation of the principles of natural justice because one of the grounds on which the Commissioner cancelled the registration, namely, that the application for renewal of registration did not fulfil the technical requirements of the Act, had not been communicated to the assessee in the notice given under section 33B and the assessee was not given sufficient opportunity of showing cause against the same. The third contention was that the minors had not been taken as full partners under the partnership deed but merely admitted to the benefits of partnership--any finding contrary thereto was wrong both in fact and in law. The last contention was that inasmuch as the Commissioner came to the conclusion that the firm had not been lawfully constituted, with the minors as full partners, he should not have directed the assessment of the firm as an unregistered firm after the cancellation of the registration of the firm. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1947, was not a valid firm. He, therefore, argued that either there was a firm in existence under the deed which was entitled to registration or no firm came into existence under the deed in which case no assessment could be made of the unregistered firm. We are unable to accept the contention. The registration under section 26A is claimed on behalf of a firm constituted under an instrument of partnership. If it is found that no valid firm came into existence under the instrument, no registration could be granted but the business might be carried on by a firm brought otherwise into existence and it would be assessed as an unregistered firm. That on cancellation of registration the assessee could be assessed in the status of an unregistered firm finds support from the decision of the Supreme Court in Commissioner of Income-tax v. Smt. Durgabati [1961] 43 I.T.R. 228 (S.C.). On the prayer of the assessee the Tribunal referred the following questions of law to this court: (1) Where, on the facts and in the circumstances of the case, the Tribunal was right in holding that after the repeal of the Indian Income-tax Act, 1922, by the Income-tax Act, 1961, the initiation of proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e remaining 9 annas share was divided equally among the three others. Though Kantilal Kesherdeo was a minor, he was admitted into the partnership as a full partner and not merely to the benefits thereof. To the instrument of partnership, Kantilal Kesherdeo was a signatory, though immediately after his signature there was the signature of one Kesherdeo Rungta, his natural guardian. By the instrument, Kantilal Kesherdeo was 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. 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 section 30 of the Partnership Act, he could only be admitted to the benefits of the partnership. The firm was registered with the Registrar of Firms and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f partnership must be considered, apart from the definition in the Income-tax Act. 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 the view taken, the Supreme Court was pleased to answer the question in favour of the income-tax department. In the case of Commissioner of Income-tax v. Shah Mohandas Sadhuram [1967] 57 I.T.R. 415, 417 (S.C.), the partnership in question came into existence in the circumstances recited in the following passage in the deed of partnership: Whereof the above four memb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstituted as above, applied for its registration under section 26A of the Income-tax Act. The Income-tax Officer refused to register the firm on the theory that the minors had been made partners in the firm liable to share losses even; they had not been merely admitted to the benefits of partnership and, therefore, such a firm was not entitled to be registered under section 26A. This decision was affirmed by the Appellate Assistant Commissioner. The Tribunal, however, took a different view and held that the assessee-firm was entitled to registration. On reference, the High Court expressed the following opinion: That an instrument of partnership entered into between persons, some of whom are by law incompetent to contract, as might happen, if one of them is a minor is not necessarily null and void, and in a case like the present one, where the execution of the instrument of partnership on behalf of the minor by his guardian was for the purpose of admitting the minor to the benefits of partnership, no question of invalidity of the instrument can properly arise. The High Court, therefore, agreed with the Tribunal. On further appeal before the Supreme Court, at the instan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . If the guardian is entitled to sever the minor's connection with the firm, he must also be held to be 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 or 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 in which the benefits of the 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. It follows from the above discussion that as long as a partnership deed does not make a minor full partner a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an has agreed to certain clauses in order to effectuate the decision of the major members to confer the benefits of the said partnership to the minors. Accordingly, we hold that the income-tax authorities should not have declined to register the firm. In the case of Commissioner of Income-tax v. Shah Jethaji Phulchand [1965] 57 I.T.R. 588, 589, 590, 591-92 (S.C.), the facts were as hereinafter stated: The deed of partnership was entered into between five parties: (1) Nathmul Jethaji, (2) Phulchand, (3) S. Babulal, minor son of Jethaji, (4) Sakalchand Thikmaji and (5) Jethibai. The relevant clauses of the agreement were: 3. Whereas the above five parties have agreed to do business of cotton and kapas, purchases and sales and on commission basis, etc., after Deepavali 1950, for the future periods also so long as they can possibly work together. 4. Now they agree between the above five parties as hereunder: (1) That the above five parties shall establish cotton business, and carry on the same at Davangere with branches in the surrounding areas under the name and style of 'Jethaji, Phulchand'. (2) That the capital of the business shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 415 (S.C.), a guardian can agree to contribute capital. Sub-clause (3) of clause 4 of the partnership deed, which enables the partners to individually carry on the other business, cannot affect the validity of the deed. Mr. Karkhanis relies specially on sub-clause (4) which states that the partnership shall be terminated at the will of any of the partners. But this clause is a general clause usually found in partnership deeds and it cannot be said that this clause enables the minor partner to terminate the partnership itself, and in the context it only means, as far as the minor is concerned, that the guardian would be entitled to exercise his right of severance given to him by section 30 of the Partnership Act. Sub-clause (5) which enables partners to borrow money obviously has to be read along with sub-clause (16) by which only the three major partners have been designated as working partners. It seems to us that the minor has not been made a full partner but has only been given the benefits of partnership. But the final objection of Mr. Karkhanis requires serious consideration. He says that the guardian has by clause 3 and sub-clause 4(1) purported to agree to the starting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1961] 2 S.C.R. 821, he submitted, was on different facts and inspiration should not be drawn from that decision in interpreting the deed in the instant case. Mr. Sabyasachi Mukharji, learned counsel for the Commissioner of Income-tax, submitted that each deed of partnership must be interpreted reasonably on its own terms and as a whole. He further submitted that in the case of Dwarakadas Khetan [1961] 41 I.T.R. 528 ; [1961] 2 S.C.R. 821, the deed itself indicated that the minors were admitted to full partnership, although in law this could not be done. The Supreme Court, therefore, refused to make a new and a valid contract for the purpose, in place of the contract invalid in law. In the case of Shah Mohandas Sadhuram [1965] 57 I.T.R. 415 (S.C.), he submitted, it was expressly stated in the deed that minors are admitted to the benefits of partnership and not to the liabilities thereunder. The Supreme Court interpreted the deed in the light of this dominant clause and held that the minors were intended merely to be admitted to the benefits of the partnership. In the case of Shah Jethaji Phulchand [1965] 57 I.T.R. 588 (S.C.), he admitted, there was an express indication that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nor's share of loss shall be borne by one or more of the other major partners or by his guardian. If by the act of the firm the business suffers loss, the minor's shares become liable for the loss but the minor himself does not become personally liable therefor. This legal position is clear from sub-section (3) of section 30 of the Indian Partnership Act. Thus clause 6 of the partnership deed, in the instant case, is explicable on the theory that 10? pies share in the partnership of each of the two minors was intended to be made liable for the losses, if any, but they were not, as they could not be made personally liable therefor. The deed of partnership, in the instant case, expressly admitted the minors to the benefits of the partnership. This dominant clause must be taken to colour the extent of the liability of the minors and their responsibility in the management of the partnership concern as in clause 10 of the deed. The law being that only the minor's share in the partnership would be burdened for acts of the firm and not the minor personally, the two facts relied upon by Mr. Mukharji, namely, that the minors were to bear the loss and to conduct the management of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve emphasised upon this technical irregularity and might not have cancelled the registration on that ground. In any event, he might have given an opportunity to the assessee to remedy or to rectify this technical defect. The defect, Mr. Roy submitted, was more of form than of substance and on that ground the order of cancellation was not justified. In our opinion, there is a good deal of substance in this contention of Mr. Roy. The proceedings were started against the assessee because the registration was granted to a partnership invalidly constituted with a minor as a partner. That was thought to be prejudicial to the interest of revenue. The defect in the signature portion of the application for registration, namely, the minors putting their signatures in their own hands and not by the hand of their guardian was not by itself prejudicial to revenue and this defect could be removed by calling upon the guardian to put in her signature on the application. We do not, therefore, think that the Commissioner of Income- tax was right in thinking that this defect was prejudicial to the interest of revenue and merited cancellation of the registration of the firm. We, therefore, overrule th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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