COMMISSIONER OF INCOME-TAX VS ORIENTAL T. MARITIME
1999 P T D 2233
[227 I T R 244]
[Andhra Pradesh High Court (India)]
Before Syed Shah Mohammed Quadri and B. S. Raikote, JJ
COMMISSIONER OF INCOME-TAX
Versus
ORIENTAL T. MARITIME
C. R. No. 104 of 1987, decided on 19/12/1996.
Income-tax---
----Firm---Registration---Minor---Minor made liable for losses also-Partnership was invalid---Minor attaining majority before end of accounting year and signing application for registration---Not sufficient-r-Partnership was not entitled to registration---Indian Income Tax Act, 1961, Ss.184 & 185---Indian Partnership Act, 1932, S.30.
Sections 184 and 185 of the Income Tax Act, 1961, contemplate a partnership deed which is valid as on the date the deed was executed. Section 30 of the Indian Partnership Act, 1932, provides that a minor cannot be made liable for the losses of the partnership. If at all such a minor should be admitted into the partnership, he should be admitted for the purpose of profits only.
The assessee-firm consisted of five adult partners and three minors. Of the three minors, two were admitted only to the benefits of the partnership. In respect of another minor by name P, the deed made no distinction between her and other adult partners and as per the partnership deed she had an interest of 20 per cent. in the profit and loss of the firm. In view of this fact, the Income-tax Officer refused registration to the firm. However, the Tribunal held that though the minor partner had not exercised her option as required under the Partnership Act, 1932, within six months of her attaining majority, by giving a public notice, yet from Form No. 11 it was clear that she had signed the application for registration after attaining majority; that this was a positive act, showing that she had exercised her option to continue as full-fledged partner; and that since the profit accrued only on the last day of the accounting year, i.e., June 30, 1979, and on that day P was a major, the firm was entitled to registration. On a reference:
Held, that the partnership deed as executed on July 5, 1962, was an invalid document and the same could not be registered under sections 184 and 185. The fact that the minor partner attained the age of majority during the accounting year and after attaining the age of majority she signed Form No. 11 as a major electing to continue an the partnership had no consequence.
CIT v. Dwarkadas Khetan & Co. (1961) 41 ITR 528 (SC) and Chaudry Bros. v. CIT (1986) 158 ITR 224 (AP) fol.
CIT v. Phair Laboratories (1985) 154 ITR 141 (Ker.) ref.
S. R. Ashok for the Commissioner.
JUDGMENT
B. S. RAIKOTE, J.---This is a reference made under section 256(1) of the Income-tax Act by the Income-tax Appellate Tribunal, vide its reference order, dated June 15, 1987, passed in 'R. A. No. 162/Hyd. of 1986.
This reference was made on the request of the Revenue The question referred is as under:
"Whether, on the facts and in the circumstances of the case and in law, the Appellate Tribunal was correct in holding that the assessee ?firm was entitled to registration?"
The undisputed facts are that the assessee, Oriental T. Maritimes, Visakhapatnam, filed an application under section 185(1)(b) of the Income? tax Act for registration The assessee-firm is constituted by five adult partners and three minors. Of the three minors, two were clearly admitted only to the benefits of the partnership. In respect of another minor by name Padmapriya, the, deed made no distinction between her and other adult partners and as per the partnership deed she had an interest of 20 per cent. in the profit and loss of the firm. In view of this fact, the Income-tax Officer refused the registration of the firm by holding that the partnership deed, was not valid and consequently registration would not be granted. He further opined that such a minor could have been admitted only to the benefits of the partnership and she could not be made a full-fledged partner responsible for the loss of the firm also. In an appeal preferred by the assessee, the Appellate Assistant Commissioner agreed with the Income-tax Officer. On a further appeal preferred by the assessee to the Income-tax Appellate Tribunal, the Income-tax Appellate Tribunal allowed the appeal, vide its judgment and order, dated January 17, 1986, on its file I.T.A. No.707/Hyd. of 1983. It is in those circumstances the Revenue sought six questions to be referred to this Court, but the Income-tax Appellate Tribunal referred only the question as extracted above.
The Income-tax Appellate Tribunal held that though the minor partner has not exercised her option as required under section 30(5) of the Partnership Act, within six months of her attaining majority, by giving a public notice, yet from Form No. 11, it is clear that she has already signed that form like a full-fledged partner, as expressing her desire to be considered as partner. It further held that the Partnership Act no doubt gives a minor six months' time but such a minor need not wait for six months to exercise his or her option and he or she can do so the very next day after attaining majority. In this view of the matter, the Tribunal held that Padmapriya signing the application for registration after attaining majority is a positive act showing that she has exercised her option to continue as a full? fledged partner. Since the profit accrued only on the last day of the accounting year, i.e., June 30, 1979, and on that day Padmapriya was a major and as such there is no question of a minor being saddled with a possible loss which may accrue to the firm. On these reasons, the Tribunal allowed the appeal. In our view, the Tribunal has misdirected itself in coming to the said conclusion. It has not considered the import of sections 184 to 185 of the Income-tax Act.
The matter in question relates to the assessment year 1980-81. During the relevant assessment year, the relevant provisions under sections 184 and 185 of the Income-tax Act read as under:
"184. Application for registration. ---(I) An application for registration of a firm for the purposes of this Act may be made to the Assessing Officer on behalf of any firm, if---
(i) the partnership is evidenced by an instrument; and
(ii) the individual shares of the partners are specified in that instrument.
(2) Such application may, subject to the provisions of this section, be made either during the existence of the firm or after its dissolution.
(3) The application shall be made to the Assessing Officer having jurisdiction to assess the firm, and shall be signed---
(a) by all the partners (not being minors) personally; or
(b) in the case of a dissolved firm, by all persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such partner who, is deceased."
"185. Procedure on receipt of application.----(1) On receipt of an application for the registration of a firm, the Assessing 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 so satisfied, he shall pass an order in writing refusing to register the firm."
From the combined reading of sections 184 and 185 of the Income ?tax Act it is clear that whenever a partnership is evidenced by an instrument it shall not be signed by the minor partners. As per section 30 of the Indian Partnership Act a person who is a minor may be admitted to a partnership firm to the benefits of the partnership and such a minor cannot be made liable for the loss of the firm unless he elects within six months of his attaining majority to become a partner of the firm by giving a public notice and such notice shall determine his position as regards the firm. It is further provided in the proviso to subsection (5) of section 30 of the Partnership Act that if he fails to give such a notice he shall become a partner in the firm on the expiry of the said six months. A combined reading of sections 184 and 185 of the Income-tax Act alongwith section 30 of the Indian Partnership Act gives us an indication as to the intention of the Legislature. Sections 184 and 185 of the Income-tax Act contemplate a partnership deed which is valid as on the date the deed was executed. Section 30 of the Indian Partnership Act provides that a minor cannot be made liable for the loss of the partnership. If at all such a minor should be admitted into the partnership he should be admitted for the purpose of profit only. From this it follows that, in the instant case, a minor could not have been admitted to both profit and loss as on the date the said partnership was executed, i.e., on July 5, 1962, and as such the partnership deed, dated July 5, 1962, was invalid and sections 184 and 185 of the Income-tax Act provide for registration of the firm based on a valid partnership deed. Section 184(3)(a) and (b) specifically provides that such a deed shall be signed only by the major partners but not by the minor partners and as such the said partnership firm was, not entitled to be registered on the basis of such an invalid instrument. To the same effect is the law declared by the Supreme Court in a decision in CIT v. Dwarkadas Khetan & Co. (1961) 41 ITR 528. In that case, the Supreme Court ruled as under (page 533):
?"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 under section 26A of the Indian Income-tax Act, 1922."
In this view of the matter, in our opinion, the fact that the said minor partner attained the age of majority during the accounting year and after attaining the age of majority she signed Form No. 11 as a major electing to continue in the partnership absolutely has no consequence. Moreover, the election of the minor to continue with the partnership within six months should necessarily be by a public notice and not by implication that he signed Form No.l1. Whatever it may be one thing is certain that the document as executed on July 5, 1962, was an invalid document and the same could not be registered under sections 184 and 185 of the Income-tax Act, However, it was brought to our notice a Full Bench judgment of the High Court of Kerala in CIT v. Phair Laboratories (1985) 154 ITR 141. It is no doubt true that in the said judgment the High Court of Kerala held that it is not necessary that a firm should have come into existence on the basis of a written instrument and a firm could be constituted on the basis of an oral agreement and hence all that is required is that there should be a valid instrument of partnership at the relevant time, i.e., during the previous year of assessment when the registration is sought. The facts of that case are distinguishable from the facts of this case in the sense that "she" had attained majority in the year previous to the assessment year 1965-66 and it was in those circumstances that the said High Court held that the partnership once registered could not have been cancelled by the Income-tax Officer. We are unable to read the said decision as laying down the law that a partnership based on an invalid instrument could be registered after a minor partner has attained majority without .his exercising the option specifically. In a Division Bench judgment of this Court in Chaudry Bros. v. CIT (1986) 158 ITR 224, which relates to the assessment year 1966-67, the assessee filed an application for registration of the firm and the Income-tax Officer rejected the same on the ground that the partnership deed dated July 5, 1962, was an invalid instrument, since under section 30 of the Indian Partnership Act a minor could only be admitted to the benefits of the partnership and he could not be made a full-fledged partner and accordingly he assessed the firm as an association of persons. The assessees' appeal being dismissed by the Appellate Assistant Commissioner they approached the Income-tax Appellate Tribunal. The Tribunal held that the minor signed the application in Form No.11 for the assessment year 1965-66 and also Form No.12 for the year 1966-67 clearly undertaking that he agreed to a partnership of the firm and as such the conduct of the minor cured the invalidity attached to the partnership deed and accordingly the assessee was entitled to registration under section 184 of the Income-tax Act. On an application filed by the Revenue the Tribunal referred the following three questions
"(1) Whether, on the facts and in the circumstances of the case, the assessment in the status of an association of persons is valid?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal can direct the assessee to file Form No. l l and comply with conditions under section 184 and direct the Income-tax Officer to pass orders thereon?
(3) Whether, on the facts and in the circumstances of the case, the assessee is entitled to the benefits of registration?"
It should be noted at this stage itself that question No.(1) was referred at the instance of the assessee and questions Nos.(2) and (3) were referred at the instance of the Revenue. This Court answered questions Nos.(2) and (3) in favour of the Revenue and consequently held on issue No. l that the assessment of the said firm as an association of persons was proper. While answering questions Nos. (2) and (3) in favour of the Revenue, this Court observed as under (page 227):
"The partnership deed is clearly contrary to the provisions of section 30, clause (1), of the Partnership .Act inasmuch as it is admitted that the abovementioned Sushilchand Choudary was a minor at the time of Constitution of the partnership. The partnership can only be brought into existence in accordance with the provisions of the Indian Partnership Act. Section 4 of the Indian Partnership Act defines 'partnership'. 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. Section 30 of Partnership Act declares that a person who is a minor may not be a full partner of the firm. In the partnership deed, dated July 5, 1962, it is admitted that the abovementioned Sushilchand Choudary is a minor. The partnership deed, dated July 5, 1962, is, therefore, incapable of constituting a relationship of a partnership among the persons mentioned in that deed. And that deed is void.
Now, for the purpose of earning the benefit of tax under the Income-tax Act, a firm has to be registered under section 184 of the Income-tax Act. For that purpose, an application has to be made to the Income-tax Officer accompanied by the instrument evidencing a partnership. If a partnership is legally recognised, the Income-tax Officer cannot decline registration of the firm under section 184 of the Income-tax Act. On the other hand, if the partnership is void, no registration can be granted. Prima facie no registration can be granted in this case. But learned counsel for the assessee argues that by the time Sushilchand Choudary had come to file Form No. 12, he had become a major and elected to be a partner of the firm.
It appears to us, that his election to be a partner alone is not sufficient to obtain registration under section 184 of the Income-tax Act. He made no application to the Income-tax Officer as required by section 184 of the Income-tax Act. According to the requirements of section 184 of the Income-tax Act, he ought to have made an application in Form No.11 for the grant of registration. Instead, he made an application in Form No. 12 which deals not with the granting of registration but with the renewal of registration-The assessee had not produced the instrument of partnership deed alongwith his application filed in Form No. 12. All this could possibly have been ignored if there was, in fact, a valid partnership. In fact, there was no instrument evidencing a legal partnership firm except the one constituting an unlawful firm on July 5, 1962. On the basis of such an instrument, which is void in law, no registration could be claimed under the Income-tax Act. But the argument of learned counsel for the assessee is that after. Sushilchand Choudary had become major, his election to be a partner of the firm cured the invalidity, if any, attached to the partnership deed dated July 5, 1962. We cannot accept this argument. The deed of partnership dated July 5, 1962, which described Sushilchand Choudary as a minor and admitted him as a minor, is a void document as being hit by section 30 of the Partnership Act. Such a void document cannot be revalidated by the subsequent act of ratification by Sushilchand Choudary. It follows that no registration can be granted on the basis of such a void document."
In view of the judgment of the Supreme Court in CIT v. Dwarkadas Khetan & Co. (1961) 41 ITR 528, and the judgment of the Division Bench of this Court in a decision in Choudry Bros. v. CIT (1986) 158 ITR 224, we hold that the assessee was not entitled for registration of the firm on the basis of the invalid partnership deed signed by a minor partner. We accordingly answer the question in the negative, that is, in favour of the Revenue and against the assessee. The reference is accordingly answered.
M.B.A./2052/FC ??????????????????????????????????????????????????????????????????????????????? Reference answered.