COMMISSIONER OF INCOME-TAX VS BHAWANI PRASAD GIRDHARI LAL & CO.
1991 P T D 443
[Allahabad High Court (India)]
Before B.P. Jeevan Reddy, C.J. and R.A. Sharma, J
COMMISSIONER OF INCOME-TAX
versus
BHAWANI PRASAD GIRDHARI LAL & CO.
Income Tax Reference No.78 of 1983, decided on 30/07/1990.
Income-tax---
----Firm, registration of ---Assessee firm consisted of 17 major partners and 4 minor partners who had been admitted to the benefits of partnership---Firm was registered and assessed as such for the previous two assessment years-- Income-tax Officer, however, cancelled the registration of firm subsequently on the ground that firm consisted of more than 20 persons which was in contravention of the relevant provisions of Companies Act and guardians of minors had not signed the deed of partnership---Held, partnership being the result of a contract between the partners and a minor being incompetent to enter into a contract, only adult persons were to be taken into consideration for finding out whether a partnership consisted of more than 20 persons---Minors being not partners thus, could not be taken into account for the purposes of bar provided in the Companies Act.
The assessee-firm, consisting of 17 major partners and 4 minors who were admitted to the benefits of partnership, was constituted, and was duly registered. It was assessed for the assessment years 1966-67 and 1967-68, in the status of a registered firm. The Income-tax Officer, however, in exercise of his powers under section 186(1) of the Indian Income-tax Act, 1961, cancelled the registration, on the ground that the assessee-firm consisted of more than 20 partners which is in contravention of section 11(2) of the Indian Companies Act, and the partnership deed was not signed by the guardian of the minors.
The Appellate Tribunal found that a minor could not become a partner although, with the consent of adult partners, he could be admitted to the benefits of the partnership and as such minors could be taken into consideration for finding out whether there had been contravention of section 11(2) of the Companies Act. The Appellate Tribunal had referred the aforesaid two questions at the instance of the Department for the opinion of High Court.
Section 11(2) of the Companies Act prohibited the formation of a company, association or partnership consisting of more than 20 persons for the purpose of carrying on any business for gain unless it was registered as a company. Partnership being the result of a contract between the partners and a minor being incompetent to enter into a contract, only adult persons who constitute the partnership on the basis of an agreement were to be taken into consideration for finding out whether a partnership consisted of more than 20 persons and minors, not being partners, could not be taken into account for the purpose of section 11(2) of the Companies Act. As the assessee-firm consisted of 17 partners, it was legally entitled to be registered under the Act. The Appellate Tribunal was fully justified in allowing the appeals of the assessee against cancellation of registration of the firm.
C.I.T. v. Dwarkadas Khethan & Co. (1961) 41 ITR 528 (SC).
JUDGMENT
R.A. SHARMA, J.---At the instance of the Revenue, the Income-tax Appellate Tribunal, Allahabad, under section 256(1) of the Income-tax Act, 1961, has referred the following two questions of law for the opinion of this Court:--
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in taking the view that the assessee-firm (consisting-of 17 adult partners and 4 minors admitted to the benefits of partnership) was not illegal in terms of section 11 of the Companies Act, 1956?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the assessee-firm was entitled to registration under the Income-tax Act, 1961?
The assessee-firm, consisting of 17 major partners and 4 minors who were admitted to the benefits of partnership, was constituted, vide partnership deed dated October 12, 1965, and was duly registered. It was assessed for the assessment years 1906-67 and 1967-68, in the status of a registered firm. The Income-tax Officer, however, in exercise of his powers under section 186(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), cancelled the registration, vide orders dated March 24, 1975, on the ground that the assessee-firm consisted of more than 20 partners which is in contravention ofsection 11(2) of the Companies Act. and the partnership deed was not signed by' the guardian of the minors. The assessee filed appeals against the aforesaid orders before the Commissioner of Income-tax (Appeals)-II, Kanpur, who upheld the cancellation of the registration on the ground of violation of section 11(2) of the Companies Act as, in his opinion, the definition of the word "partner" under section 2(23) of the Income-tax Act includes a minor who has been admitted to the benefits of partnership. However, the other ground of want of signature of the guardian of minors on the partnership deed was not accepted and a direction was issued that opportunity should be given to the assessee-firm to amend the a partnership deed in view of the circular of the Central Board of Direct Taxes dated March 19, 1976. The assessee-firm thereafter had taken the matter- in appeal before the Income-tax Appellate Tribunal, Allahabad, who allowed the appeals. The Appellate Tribunal held that a minor cannot become a partner although; with the consent of adult partners, he can be admitted to the benefits of the partnership and as such minors cannot be taken into consideration for finding out whether there has been contravention of section 11(2) of the Companies Act. As observed earlier, the Appellate Tribunal has referred the aforesaid two questions at the instance of the Department for the opinion of this Court.
The Act has adopted the definitions of "firm", "partner" and "partnership" given in the Indian Partnership Act. Section 2(23) of the Act is quoted below:--
"23. `firm', `partner' and `partnership' have the meanings respectively assigned to them in the Indian Partnership Act, 1932 (9 of 1932); but the expression `partner' shall also include any person who, being a minor, has been admitted to the benefits of partnership."
According to section 4 of the Indian Partnership Act, partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The persons who have entered into partnership are individually called partners and collectively a firm and the name under which the business is carried on is called the firm name. Partnership is, as such, the result of a contract. A minor, not being competent to enter into a contract, is incapable of becoming a partner, although he can be admitted to the benefits of partnership. The Hon'ble Supreme Court, in C.I.T. v. Dwarkadas Khetan & Co. (1961) 41 I T R 528 has laid down that in view of section 30 of the Partnership Act, a minor cannot become a partner, although he may be admitted to the benefits of the partnership and a partnership deed, which makes a minor a full-fledged partner cannot be regarded as a valid document for the purpose of registration. Regarding the definition of "partner" given in section 2(6-B) of the Indian Income-tax Act, 1922, which is analogous to section 2(23) of the Income-tax Act, 1961, according to which partner includes a minor who has been admitted to the benefits of partnership, the Hod'ble Supreme Court has observed that, (at page 533) "What the definition does is to apply to a minor admitted to the benefits of partnership all the provisions of the Income-tax Act applicable to partners. The definition is designed to confer equal benefits upon the minor by treating him as a partner; but it does not render a minor a competent and full partner. For that purpose, the law of partnership must be considered, apart from the definition in the Income-tax Act".
Section 11(2) of the Companies Act prohibits the formation of a company, association or partnership consisting of more than 20 persons for the purpose of carrying on any business for gain unless it is registered as a company, Partnership being the result of a contract between the partners and a minor being incompetent to enter into a contract, only adult persons who constitute the partnership on the basis of an agreement are to be taken into consideration for finding out whether a partnership consists of more than 20 persons and -minors, not being partners, cannot be taken into account for the purpose of section 11(2) of the Companies Act. As the assessee-firm consisted of 17 partners, it was legally entitled to be registered under the Act. In our opinion, the Appellate Tribunal was fully justified in allowing the appeals of the assessee.
Our answer to both the questions referred by the Tribunal is in the affirmative and in favour of the assessee.
Z.S./1141/TQuestions answered in affirmative.