TMI Blog1984 (11) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee made an application for registration of the firm evidenced by the deed of partnership dated December 19, 1974, for the income-tax assessment year 1975-76. The assessee's claim for registration was rejected by the Incometax Officer on the following grounds: (i) There was no operative deed from April 1, 1974, to October 30, 1974 (ii) The agreement dated December 19, 1974, could not have retrospective effect with effect from April 1, 1974 ; and (iii) If the partnership deed dated December 19, 1974, is given effect to from April 1, 1974, Prabhakar Gupta, who was a minor till October 30, 1974, would be obliged to share the losses of the firm during the period April 1, 1974, to October 30, 1974. In that event, the partnership deed which provided for sharing of loss by the minor is bad in law. The assessee appealed unsuccessfully to the Appellate Assistant Commissioner against the order of the Income-tax Officer refusing the registration. A second appeal was also filed before the Income-tax Appellate Tribunal and the Tribunal upheld the order of the Income-tax Officer and rejected the assessee's claim for registration. At the instance of the assessee, the Income-tax Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o share losses during the period between April 1, 1974, and October 30, 1974. According to the learned standing counsel, a minor could not be burdened with losses arising to a partnership. Learned standing counsel further submitted that, although, in principle, profits or losses accrue on the date when the accounts are closed, it must be held that profits accrue from day to day and ascertainment is made only at the end of the year. Thus, the transactions between April 1, 1974, and October 30, 1974, when Prabhakar Gupta was a minor, could have resulted in losses and clause 14 of the partnership deed dated December 19, 1974, could not require the minor to share the loss arising prior to his attaining majority. As the effect of clause 14 of the partnership deed is to impose such a burden on the minor to share the loss up to October 30, 1974, learned standing counsel for the Revenue submitted that the partnership itself is void ab initio. On these grounds, the learned standing counsel supported the order of the Tribunal rejecting the assessee's claim for registration of the firm. The facts stated above unmistakably indicate that the assessee was requiring registration of the firm evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19, 1974, did not suffer from any infirmity, even if it should be assumed for the purpose of an argument that Prabhakar Gupta had agreed to share losses that may accrue to the partnership firm during the period April 1, 1974, to October 30, 1974, when he was a minor. We fail to see the relevance of the Revenue's argument that there was no operative deed during the period April 1, 1974, to October 30, 1974. On the facts above stated, it must be held that during this period, the earlier deed of partnership dated August 20, 1973, was operative. The partnership deed dated December 19, 1974, had the effect of altering the situation obtaining after Prabhakar Gupta attained majority on October 31, 1974. That partnership deed did not affect the operation of the earlier deed of partnership till October 30, 1974. This will have no relevance to the question whether the deed of partnership dated December 19, 1974, should be registered for purposes of income-tax or not. Undoubtedly, the deed of partnership dated December 19, 1974, was executed during the accounting year relevant to the assessment year under consideration and the assessee asked for the registration of the firm evidenced by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h every year. The net profits or losses so ascertained shall be shared and divided among the five partners in the following shares: Name of the partner Extent of shares 1. Dontamsetty Venkata Chalapathi Gupta ... 12/100 2. Dontamsetty Narasimha Rao ... 22/100 3. Dontamsetty Ragha Gupta ... 22/100 4. Dontamsetty Sreeramachandra Gupta ... 22/100 5. Dontamsetty Prabhakar ... 22/100 ---------------- Total ... 100 " ---------------- A perusal of the above clause would at once indicate that all that was stated therein was that accounts of the partnership from April 1, 1974, shall be closed to profit and loss for the first time on March 31, 1975, and the profits and losses ascertained and divided among the partners in the ratio specified therein. One cannot spell out that this clause had the effect of relating the provisions of the partnership deed back to April 1, 1974. The Revenue's plea regarding retrospective operation from April 1, 1974, is apparently based on the fact that the profits or losses arising from April 1, 1974, were required to be divided in the ratio specified in clause 14. This does not, in our opinion, make the partnership deed retrospective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kumar Ratilal v. CIT [1975] 100 ITR 564 (Guj) and the decision of the Bombay High Court in Arvind Bhogilal v. CIT [1976] 105 ITR 764 (Bom). While the learned standing counsel for the Revenue may be right in contending that, in the business transactions of every day is embedded some element of profit or loss, it would be wrong to say that a partner has right to demand for the share of such profit or be obliged to bear his share of the loss until the accounts are closed as per the covenant entered into between the parties. We may refer to the decision of the Kerala High Court in CIT v. P. M. Syed Mohammed Kannu Co. [1084] 149 ITR 441 (Ker). Dealing with an identical situation, the Kerala High Court held that clause 7 of the partnership deed under consideration in that case showed that it only provided for sharing of loss when accounts were closed at the end of the year. The minor in that case had attained majority on May 2, 1973, and the High Court held that it was open to the minor to agree to partake of losses ascertained by the end of 1973-74. The fact that, prior to May, 1973, during the accounting year, the partner was a minor was considered inconsequential by the Kerala High ..... X X X X Extracts X X X X X X X X Extracts X X X X
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