Income-tax---

----Firm---Registration---Validity of partnership---Admission to benefits of partnership--- Only a minor can be admitted to benefits of partnership-- Major who was deaf and dumb admitted to benefits of partnership-- Partnership not entitled to registration---Indian Income Tax Act, 1961, S.184---Indian Partnership Act, 1932. S.30.

Under the provisions of section 30 of the Indian Partnership Act, 1932, a minor alone can be admitted to the benefits of partnership, with the consent of all the partners. A deaf and dumb person cannot be admitted to the benefits of the partnership under the provisions of section 30 of the Partnership Act. Admitting a major to the benefits of partnership is impliedly prohibited under that provision.

A firm consisted of two partners each having a 121/2 per cent share in the profits and a 50 per cent share in the loss. G. R. and S were admitted to the benefits of the partnership with a 25 per cent share each in the profits. G was aged about 21 years. She had been treated as a minor because she was a deaf and dumb person. Since a minor alone can be admitted to the benefits of the partnership, the Income-tax Officer came to the conclusion that partnership was invalid and, accordingly, he refused to grant registration. The Tribunal held that the firm was entitled to registration. On a reference:

Held, that the firm was not entitled to registration under section 184 of the Income Tax Act, 1961.

CIT v. B. Pandaiak & Co. (1983.) 143 ITR 464 (AP) fol.

CIT v. R.S. Shoe Factory (1963) 47 ITR 917 (All.); Manohar Das Kedar Nath v. CIT (1950) 18 ITR 914 (All.) and Rejendra Nath v. CIT (1991) 188 ITR 753 (All.) ref.

C.V. Rajan for the Commissioner.

Nemo for the Assessee.

JUDGMENT

THANIKKACHALAM, J. ---As per the directions of this Court under section 256(2) of the Income Tax Act, 1961 (in short, "the Act"), the Tribunal referred the following two questions for the opinion of this Court:

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the admission of one Miss A. Gita, major, to the benefits of partnership would not make the partnership as 'illegal' or 'invalid' and, hence, the assessee's claim for registration of the firm cannot be denied by the Income-tax Officer? and

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in overlooking the fact that the partnership deed and Form No. II have not been signed either by the guardian of Miss Gita, or by Miss Gita herself even though she is a major and that this will vitiate the application for registration and rules 22(2)(1) and 22(5) of the Income Tax Rules, 1961?"

The assessee is a partnership-firm, called Shankar Cottons, Coimbatore. The assessee filed an application for registration of the firm for the assessment year 1975-76. The partnership was constituted under a deed, dated April 21, 1974, to carry on the business in partnership as brokers and agents for textile mills and such other business as agreed upon between them mutually. The partnership firm consists of two partners, viz., P.S. Ramacandran and S.N. Ramachandran, each having 121/2 per cent share in profit and .50 per cent in loss. Miss Gita, Master Ramani and Master Shankar were admitted to the benefits of the partnership with 25 per cent of share in profit for each of the minors. Miss A Gita is aged about 21 years. She has been treated as a minor because she was a deaf and dumb person. Since a minor alone can be admitted to the benefits of the partnership, the Income-tax Officer came to the conclusion that the partnership is invalid and, accordingly, he refused to grant registration and assess the entity as an association of person.

On appeal, the Appellate Assistant Commissioner held that the mere fact that the two partners, viz., P.S. Ramachandran and S.N. Ramachandran, by mutual consent agreeing to give a share in the profits to an adult, Miss Gita, who is incapable of entering into 'any contract would not make the partnership invalid and would not disentitle the partnership to the benefits of registration. Accordingly, direction was given to the Income-tax Officer to grant registration.

Aggrieved, the Department was in appeal before the Tribunal. The Tribunal agreed with the view taken by the Appellate Assistant Commissioner in granting registration to the assessee-firm, since, according to the Tribunal, there is no prohibition in the Indian Partnership Act. 1932, for admitting a major to the benefits of the partnership.

The point for consideration is as to whether a major can be admitted to the benefits of the partnership. In present case, one of the daughters of one Mr. Aghoram Iyer, Miss A. Gita, aged about 21 years, was admitted to the benefits of the partnership since she happens to be a deaf and dumb person. A deaf and dumb person cannot be admitted to the benefits of the partnership as per the provisions of section 30 of the Indian Partnership Act 1932. Section 6 of the Indian Partnership Act, 1932, determines the mode of existence of the partnership. Explanation 2 to section 6 of the Indian Partnership Act states, who are all the persons who can receive a share in the profit of the partnership business without making them as partners. Section 30 of the Indian Partnership Act states that a person who is a minor according to the law to which he is subject may not be a partner in a firm. But, with the consent of all the partners for the time being, he may be admitted to the benefits of the partnership. Therefore, section 40 of the Indian Partnership Act provides that a minor cannot be a partner in a firm, but a minor can be admitted to the benefits of the partnership with the consent of all the partners.

A similar question came up for consideration before the Andhra Pradesh High Court in the decision reported in CIT v. B. Pandaiah & Co. (1983) 143 ITR 464, wherein while considering the provisions of section 184 of the Income Tax Act, 1961, the Andhra Pradesh High Court held: "that X and Y admitted their brother, Z, who was a congenitally deaf and dumb person to the benefits of a partnership. The partnership deed, dated October 20, 1972, was executed giving one-third share to Z, only in the profits but making him not liable for losses, that the profits set apart for a deaf and dumb brother being one-third share, it cannot be said to be negligible portion set apart for charity, and that even though the object of the partners in admitting the deaf and dumb brother to the benefits was a laudable one, in view of the fact that the partnership deed itself was invalid, the firm was not entitled to registration". Before the Andhra Pradesh High Court, two decisions were relied upon, viz., (1) CIT v. R.S. Shoe Factory (1963) 47 ITR 917 (All.) and (2) Manohar Das Kedar Nath v. CIT (1950) 18 ITR 914 (All.) in order to support the contention put forward on behalf of the assessee that merely by giving a share in the profits the deaf and dumb person did not became a partner. According to the facts arising in Manohar Das Kedar Nath v. CIT (1950) 18 ITR 914 (All.) four brothers entered into a partnership and they together took 15 annas share gut of 16 annas. The Remaining one anna share was left for charity. The registration was refused by the Department on the ground that the charity cannot be taken as a partner. When the matter came up before the Allahabad High Court, it was held that: "the partnership deed merely provided that one-sixteenth share of the profits will not be distributed between the partners but would be kept in a separate charity fund". On a correct interpretation of the document, the High Court held that it is open to the partners of a business to agree not to taken the whole profits of the partnership for their personal use and to reserve a part of the profits for charitable purposes and that is exactly what the partners had done in that case. It was, therefore, held that the partnership was entitled to registration. But that is not the case here.

According to the facts arising in R.S. Shoe Factory's case (1963) 47 ITR 917 (All.) three persons had agreed to form a partnership out of whom C was not to invest any moneys, but was to be a working partner only. His share was fixed at three annas and he was liable to be dismissed by A and B in case of disobedience. The working partner was also not entitled to carry on the business or to interfere with the conduct of business. The registration was refused by the Department; but the Tribunal held that there was a genuine partnership. The High Court confirmed the said finding. But, it is not a case of admitting an adult member to the benefits of partnership. The working partner was equally liable for the losses alongwith profits. Therefore, the Andhra Pradesh High Court in CIT v. B. Pandaiah & Co. (1983) 143 ITR 464 came to such a conclusion. After considering the aforesaid two decisions, the Andhra Pradesh High Court was of the view that "the object of the two partner-brothers was laudable inasmuch as they wanted to provide some income to their deaf and dumb brother and that, therefore, the Tribunal's order is unsustainable for the reasons given above. Whether the share in the profits given to the deaf and dumb brother was in the nature of charity and whether such a charity should, in the circumstances, have been provided to the extent of one-third of the profits of the firm were all questions which have not been investigated at any stage. The Tribunal was in error in discovering the said ground at the stage of arguments and making it the basis for allowing the appeal".

Out attention was also drawn to another decision of the Allahabad High Court in Rajendra Nath v. CIT (1991) 188 ITR 753, wherein it was held that section 30 of the Partnership Act which provides for admission of a minor to the benefits of partnership, does not apply or extend to a person of unsound mind. There is no other provision of law whereunder a person of unsound mind can be admitted to the benefits of partnership If- he is admitted as a partner, he would also be liable for losses.

According to the facts arising in the case, the Tribunal was of the view that there is no provision in the Partnership Act, which makes a partnership illegal or invalid, when a major is admitted to the benefits of the partnership. A partnership becomes illegal when its object is forbidden by law or is immoral or opposed to public policy or if permitted it would defeat the provisions of any law. None of these features existed when the major was admitted to the benefits of partnership. So, the partnership could not be said to be illegal or invalid. But it remains to be seen that under the provisions of section 30 of the Indian Partnership., Act, 1932, a minor alone can be admitted to the benefits of partnership with the consent of all the partners. If a minor is admitted to the benefits of partnership, he would not be saddled with the losses of the firm. Section 6 of the Indian Partnership Act, 1932, particularly, Explanation 2 to section 6 of the Partnership Act says that the receipt by a person of share of the profits of a business, or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not of itself make him a partner alongwith the persons carrying on the business. It would mean that a major cannot be admitted to the benefits of partnership. Admitting a major as a partner to the benefits of partnership was impliedly prohibited under section 30 of the Indian partnership Act, 1932.

In view of the above said legal position, we are unable to subscribe to the view taken by the Tribunal in holding that the assessee-firm herein is also entitled to registration under section 184 of the Income Tax Act, 1961, even though a major was admitted to the benefits of partnership. Accordingly, we answer question No. 1 referred to us in the negative and in favour of the Department. In so far as question No.2 is concerned, it does not arise out of the order of the Tribunal. There will, however, be no order as to costs.

M.B.A./1559/FCReference answered.