TMI Blog1978 (5) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... egistration of firms. It consists of ss. 184 to 186. Under s. 184(1) an application for registration is to be made if the consti tution of the partnership is evidenced by an instrument and the individual shares of the partners are specified in that instrument. The application for registration is to be signed by all the partners (not being minors) personally. It has to be made before the end of the previous year for the assessment year in respect of which registration is sought. . The application is to be accompanied by the original instrument evidencing the partnership. Last, but not the least, the application is to be made in the prescribed form and is to contain the prescribed particulars. S. 185(1) provides the procedure. It says : " 185. (1) On receipt of an application for the registration of a firm, the Income-tax Officer shall inquire into the genuineness of the firm and its constitution as specified in the instrument of partnership, and-- (a) if he is satisfied that there is or was during the previous year in existence a genuine firm with the constitution so specified, he shall pass an order in writing registering the firm for the assessment year ; (b) if he is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and such change is not evidenced by the instrument, the original registration shall not have effect. But if it is found that the constitution of the firm or the shares of the partners continues to be evidenced by the instrument, then it will be a case where the conclusion will be that there has been no change. A change in the constitution, that is, in the identity of the partners, may take place when a person is introduced as a partner, or a partner retires, or is expelled, or ceases to be a partner on his becoming insolvent, or dies or a minor becomes major. The provisions in ss. 184 and 185 of the Act are intended to protect the interests of the revenue. The idea is to see that the tax may not be evaded by surreptitiously changing the partners or their shares in a manner which is not evidenced by the instrument. So long as the interests of the revenue are safeguarded, there seems no justification to interpret these provisions from a theoretical or technical viewpoint. If the changes, either in the constitution or the shares which are specified or evidenced by the instrument were not intended to be recognised without a fresh instrument, then cl. (i) of the prov. should hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dian Partnership Act, the instrument evidences that on the minor electing to remain a partner on his attaining majority he will be a partner. The only situation where it can be said that the instrument does not evidence this development will be where it, on a reasonable construction, is held to provide to the contrary, namely, that a minor will have no right to continue even if he elects to do so. In view of the fact that the I.T. Act deems a minor to be a partner, there can be no change in the constitution of the firm by the mere fact of his attaining majority and electing to remain a partner. He was already a partner, and he continues as a partner. The second part of the enquiry is whether there has been a change in the shares of the partners as evidenced by the instrument of partnership. Where the instrument foresees the eventuality of a minor becoming major and makes provision for the distribution of the shares at that time, the instrument evidences the change in the shares. But if the ITO is unable to ascertain the shares from the instrument, it will be a case where the instrument does not evidence the change. A minor is not liable to share in the losses though he is en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e partners between them bear this loss equally, or to the extent of their own individual shares ? To this the instrument of partnership does not even suggest an answer. There is, therefore, no means of ascertaining in this case how the losses are to be apportioned." It was held that the firm was not entitled to be registered on the basis of such an instrument. As an illustration, let us take the facts of I.T.R. No. 637 of 1972. The firm was constituted under a deed of partnership dated 8th April, 1960. It consisted of four adult partners and two minors were admitted to its benefits. One of the minors, Chandi Prasad, attained majority on 21st June, 1964. He opted to continue as a partner. Cl. (4) of the document provided, that the four adults as well as the two minor partners were to have two annas eight pies share in a rupee each. It further provided that the profits shall be shared in proportion to the shares mentioned above, but in case of loss it will be shared by the four partners in equal proportion, that is, one-fourth each. Cl. 11 of the deed provided that on majority Chandi Prasad and Ashvini Kumar will become full-fledged partners shouldering all the responsibilitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Lal Gupta the three major partners it would share the losses equally, while on the minor attaining majority their share of losses will be one-fourth each. In this case, it is possible to ascertain the shares in loss both during Shyam Manohar's minority as well as after he attained majority. The instrument of partnership, therefore, specifies and evidences the change in shares that is to occur when Shyam Manohar Lal Gupta attains majority and he elects to continue as a partner. In this case the instrument of partnership evidences the effect of the minor partner becoming major. There is hence no need to require the partners to execute a fresh document merely to ascertain their shares after the minor had become major. In I.T.R. No. 378 of 1974 the firm was constituted under a partnership deed dated 24th June, 1963. It consisted of two adult partners. Three minors were admitted to its benefits. One of the minors, Ashok Kumar, attained majority on 11 th July, 1965. He opted to continue as a partner. Cl. (4) of the deed provided that the net profit or loss of the firm will be shared by the partners in proportion to the shares mentioned below against each 1. Gur Saran Lai four annas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the constitution of the firm, and the firm must apply for fresh registration under s. 184(8) of the Act. In these cases, it was held that the definition of partnership in s. 4 of the Indian Partnership Act envisages an agreement between the parties. A minor lacking contractual capacity cannot enter into a contract. A partnership in which a minor is admitted to its benefits consists only of major partners, while the minor is only admitted to its benefits. The minors could not bind themselves during their minority to become partners on their attaining majority, and the option could be exercised by the minors only after they attain majority. Beyond admitting them to the benefits of the partnership, the partnership deed could not make them partners. The constitution of the firm evidenced by the partnership deed consisted only of major partners. It could not in law contemplate that the minors admitted to the benefits of the partnership would necessarily and automatically become partners. The conclusion was that when the minor attains majority a change takes place in the constitution because the minor then becomes a partner. The declaration in the deed that on attaining majority the mino ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as a partner. When he becomes a major, the minor is free to exercise his option. The crux of the matter is whether there is any change in his position under the I. T. Act when he opts to remain in, on attaining majority. Since he was already a partner, he continues as a partner. If the instrument of partnership contemplates and provides for such a situation, there is no change in the constitution of the firm as evidenced by it. In our opinion, Ganesh Lal's case [1968] 68 ITR 696 (All) and Ram Narain's case [1972] 84 ITR 233 (All) do not lay down the law correctly. The next class of cases is of death of a partner. It is settled law that on the death of a partner the constitution of the firm changes. But this does not solve the problem. It has further to be seen whether the change is adequately provided for by the instrument of partnership. If an instrument provides that on the death of a partner his legal representatives shall become partners, it evidences the consent of the existing major partners to the heirs of the deceased partner coming in without execution of a fresh agreement. A legal representative is, of course, not bound by this agreement, but if he elects to becom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inor was to be distributed amongst the other partners. Cl. (5) of the instrument gives the shares of various parties. They vary from 304 pies out of 3,072, that is in a rupee, to 84 pies. The nineteen partners have varying shares. Cl. (12) provided that on retirement or death of a partner, the firm shall not be dissolved and the business may continue to be carried on by the remaining partners. Cl. (13) said that on retirement or death of a partner, the remaining parties may carry on the business with an altered share of profits and losses. If they may agree to admit any other person as a partner in place of the outgoing partner or in the sharing of profits or losses, it shall not affect the continuance of the partnership. Under cl. (14) on the death of a partner his legal representative was entitled to the same rights as have been specified in various clauses of the deed in relation to the retiring partner, provided that on the death of a partner the remaining partners may admit his successor legal representative as a new partner on the same terms on which the deceased was a partner. It is obvious that the partnership deed does not provide for redistribution of the share in los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench of this court held that s. 187 merely makes a new firm liable to be assessed in respect of the income derived by the old firm. But this section, even by implication, does not create a fiction that the income derived by the old firm becomes the income of the reconstituted firm. The income of the old firm cannot be clubbed with the income of the reconstituted firm. After reconstitution the firm becomes a distinct assessable entity, different from the firm before its reconstitution. Therefore, two different assessment orders have to be passed against the reconstituted firm--one in respect of the income derived by it before reconstitution, and the other in respect of the income derived by it after reconstitution. The Bench drew support for this view from the decision of the Mysore High Court in Bharat Engineering Co.'s case [1968] 67 ITR 273. We find ourselves in agreement with the view expressed in Shiv Shanker Lal's case [1977] 106 ITR 342 (All). I.T.R. No. 637 of 1972, I.T.R. No. 378 of 1974 and I.T.R. No. 510 of 1974 relate to minors. The problem is whether there is a change when a minor attains majority. Our answer to the question referred for our opinion is, " Where ..... X X X X Extracts X X X X X X X X Extracts X X X X
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