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  • S.P Kotval, C.J
  • V.S Desai, J.
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Smart Summary

Judgment Summary — V.S. Desai, J.

Factual and Procedural Background

This reference arises under section 66(1) at the instance of the Commissioner and concerns registration under section 26A of the Income-tax Act, 1922 for the assessment years 1955-56 and 1956-57. The relevant accounting periods were S.Y. 2010 (7 November 1953 to 27 October 1954) and S.Y. 2011 (27 October 1954 to 14 November 1955).

A partnership existed until 6 July 1951 carried on by Premji, Kamalben and Ramankant. On 7 July 1951 a new firm was constituted with partners Ramankant Dwarkadas, Mulraj Jethabhai and Jaisingh Narandas; a deed of partnership was executed on 21 August 1951. Jaisingh was a minor at that time and was shown as a full-fledged partner, his signature being made by his father's power-of-attorney holder.

The 1951 partnership deed was for two years and expired on 6 November 1953. On 7 November 1953 an endorsement was made continuing the partnership at will on the same terms. By that date Jaisingh had attained majority (20 June 1953), but the endorsement was not signed by him personally; it was signed by his father's power-of-attorney holder as in the original deed. On 24 February 1955 Jaisingh executed another document accepting and confirming all terms, rights and obligations of the partnership with effect from the date of the original deed.

Registration for the assessment years (corresponding to S.Y. 2010 and S.Y. 2011 / assessment years 1955-56 and 1956-57) was refused by the Income-tax Officer on the ground that the original partnership deed was invalid because it purported to make a minor a full-fledged partner and therefore could not be the basis for a valid firm. The Appellate Assistant Commissioner allowed the assessee's appeals relying on certain High Court decisions. The Department appealed to the Tribunal, which dismissed the appeal relying on the same High Court authorities. The matter was then referred under section 66(1).

Legal Issues Presented

  1. Whether, on the facts and in the circumstances of the case, and on the basis of annexures "A" and "B", the respondent-firm is eligible for registration under section 26A of the Income-tax Act, 1922.
  2. Whether the instrument(s) presented to the Income-tax Officer — (a) the original partnership deed together with the endorsement dated 7 November 1953, and (b) the original deed together with the document dated 24 February 1955 — constituted a valid instrument of partnership for the assessment years in question.

Arguments of the Parties

Department's Arguments (as presented by Mr. Joshi)

  • The High Court decisions relied on below (Bombay, Madras, Patna) have been overruled by the Supreme Court in Commissioner of Income Tax, Bombay v. Dwarkadas Khetan & Co. [1961] 41 I.T.R. 528, which held that a partnership deed admitting a minor as a full-fledged partner was not valid and could not be registered under section 26A.
  • If registration is sought on the basis of the original partnership deed, the Supreme Court decision requires refusal.
  • The Nov 7, 1953 endorsement was not signed by Jaisingh personally (although he was a major by then) and was signed instead by his father's constituted power-of-attorney holder who had no authority to sign on Jaisingh's behalf; therefore the endorsement did not effectuate Jaisingh's assent and did not constitute a valid execution making him a partner of the continued partnership.
  • The document of 24 February 1955 was, in substance, a ratification by the erstwhile minor of the earlier partnership deed; because the original deed was invalid insofar as it purported to make a minor a full partner, the minor could not ratify what was illegal at its inception and therefore that document could not validate the earlier partnership.

Respondent-firm / Assessee's Position (as reflected in the opinion)

  • The Appellate Assistant Commissioner and the Tribunal relied on prior High Court decisions holding that where a minor was shown as a partner in a partnership deed the proper construction is that the major signatories became partners and the minor was admitted only to the benefits; consequently registration should not be refused merely because the minor was shown as a full-fledged partner.
  • For the year corresponding to S.Y. 2010 (assessment year 1955-56) the partnership continuing from 7 November 1953 comprised three adults (the erstwhile minor having attained majority on 20 June 1953) and the endorsement continued the partnership at will on the same terms.
  • Although the endorsement was not personally signed by Jaisingh, he assented to the continued partnership by joining and signing the registration application; the instrument presented therefore complied with the requirements of law for registration.
  • For the later year (assessment year 1956-57) the document executed by Jaisingh on 24 February 1955 expressly confirmed and accepted all terms and obligations of the partnership with effect from the date of the original deed, and thus rendered the partnership valid as from that document.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Dwarkadas Khetan & Co. v. Commissioner of Income-tax [1956] 29 I.T.R. 903 (Bombay High Court) Held that where a partnership deed purported to make a minor a partner, the minor did not become a partner or liable for losses but was entitled only to profits; the major signatories were partners and the minor was admitted to benefits — such a deed was a valid partnership deed for registration purposes. The Appellate Assistant Commissioner and the Tribunal relied on this decision to allow registration. The court noted this authority but also observed that it was later the subject of a Supreme Court decision that took a contrary view; nonetheless the present court distinguished the facts and upheld registration on other grounds.
Commissioner of Income Tax, Bombay v. Dwarkadas Khetan & Co. [1961] 41 I.T.R. 528 (Supreme Court) Held that a partnership deed in which a minor was admitted as a full-fledged partner was not valid and could not be registered under section 26A of the Income-tax Act. The Department relied on this decision to challenge earlier High Court precedents and the orders below. The court accepted the correctness of the Supreme Court decision but distinguished the present facts (continuation after the minor attained majority and subsequent documents) and therefore reached the result favourable to the assessee notwithstanding that Supreme Court authority.
Jakka Devayya & Sons v. Commissioner of Income-tax (Madras High Court) Adopted the view (similar to the Bombay High Court in Dwarkadas Khetan) that a partnership deed showing a minor as a partner did not invalidate registration. The Tribunal relied on this Madras High Court decision along with other High Court decisions in dismissing the department's appeal. The present court acknowledged this reliance but proceeded to determine the issue on the facts before it.
Sahai Brothers v. Commissioner of Income-tax [1958] 33 I.T.R. 40 (Patna High Court) Adopted the same view as the Bombay and Madras High Courts on the legal effect of showing a minor as a partner in a deed. The Tribunal relied on this decision. The present court noted the reliance and observed that those authorities were later faced with the Supreme Court ruling, but nonetheless held registration was proper on the facts before it.
Ramlal Murlidhar v. Commissioner of Income-tax Established that it is not necessary for every partner to sign the instrument of partnership; if an instrument is assented to by partners who have not signed and they join in putting it forward for registration, it may be admitted for registration under the Income-tax Act. The court applied this principle to hold that although the endorsement was not personally signed by Jaisingh, his assent (including joining and signing the registration application) made the instrument acceptable for registration purposes for the year corresponding to S.Y. 2010.

Court's Reasoning and Analysis

The court proceeded by analysing the chronology and the content of the instruments placed before the Income-tax Officer:

  1. The original partnership deed dated 21 August 1951 governed a two-year partnership that expired on 6 November 1953. The partners endorsed the deed on 7 November 1953 to continue the partnership at will on the same terms.
  2. By 7 November 1953 the partner who had been a minor (Jaisingh) had already attained majority (20 June 1953). Therefore, the partnership continuing from 7 November 1953 consisted of three adult persons competent to form a partnership.
  3. The court addressed the department's contention that the endorsement was ineffective because it was not signed personally by Jaisingh. The court observed that (i) it is not necessary for every partner to sign an instrument of partnership if those who did not sign assented to it and joined in presenting it for registration, as recognised in Ramlal Murlidhar v. Commissioner of Income-tax; and (ii) Jaisingh had manifested assent by joining and signing the registration application. The Income-tax Officer had also accepted that the partnership had continued with the three persons during the year of account.
  4. On that basis the court concluded that the instrument presented for the assessment year corresponding to S.Y. 2010 complied with the requirements of law and the Income-tax Officer was not entitled to refuse registration solely on the ground of invalidity of the earlier partnership deed.
  5. For the subsequent year (assessment year 1956-57) the court found the case even stronger: the document of 24 February 1955 executed by Jaisingh expressly confirmed and accepted all terms, rights and obligations of the partnership with effect from the date of the original partnership. The court emphasised that at the date of this document Jaisingh was an adult and entitled to assume the responsibilities of a partner afresh.
  6. The court rejected the department's argument that the 24 February 1955 document was merely a ratification within section 30(5) of the Partnership Act which would be ineffective because the original deed was invalid. The court found nothing in the document to show it operated only as a ratification; rather, Jaisingh, being an adult, declared himself a full-fledged partner and accepted responsibilities as such, and for the period subsequent to that document his position was free from defect.
  7. The court acknowledged that the earlier High Court decisions relied upon by the Appellate Assistant Commissioner and the Tribunal were disapproved by the Supreme Court decision in Commissioner of Income Tax, Bombay v. Dwarkadas Khetan & Co. but concluded that the present facts (continuation after attainment of majority and subsequent acceptance by the erstwhile minor) made the outcome below correct despite the changed authority.

Holding and Implications

Holding: The court answered the referred question in the affirmative — the respondent-firm was eligible for registration under section 26A for the assessment years in question.

Consequences and immediate implications:

  • The instrument(s) presented (original deed with the 7 November 1953 endorsement, and the original deed together with the 24 February 1955 document) were held to constitute a valid basis for registration for the relevant years on the facts found by the court.
  • The Commissioner was ordered to pay the costs of the assessee.
  • The court recognised the Supreme Court's ruling invalidating partnership deeds that admit a minor as a full-fledged partner, but distinguished the present case on the basis of (a) continuation of partnership after the minor attained majority and (b) the subsequent express acceptance by the erstwhile minor by the 24 February 1955 document. The result was that, although the legal basis of earlier favourable decisions below was undermined by the Supreme Court authority, the ultimate decision in favour of registration was sustained on the facts and documents in this case.

Disposition: Question answered in the affirmative. Costs to the assessee.

Show full summary ...

    Commissioner Of Income-Tax, Bombay v. R. Dwarkadas And Co.

    V.S Desai, J.:— The question raised on this reference under section 66(1) at the instance of the Commissioner relates to the assessment orders for the assessment years 1955-56 and 1956-57, for which the relevant previous years were S.Y 2010 and 2011 extending from November 7, 1953, to October 27, 1954, and October 27, 1954, to November 14, 1955, respectively, and is in the following terms:

    “Whether, on the facts and in the circumstances of the case, and on the basis of annexures “A” and “B” the respondent-firm is eligible for registration under section 26A of the Income-tax Act, 1922?”

    2. Up to the 6th of July, 1951, a business was carried on in partnership by three persons named Premji, Kamalben and Ramankant. On the 7th of July, 1951, a new firm was constituted having three persons named, Ramankant Dwarkadas, Mulraj Jethabhai and Jaisingh Narandas as partners. A deed of partnership relating to this partnership was executed on the 21st August, 1951. One of the three partners, Jaisingh Narandas, was a minor and had been shown as a full-fledged partner in the partnership and the deed of partnership was signed on his behalf by the power-of-attorney holder of his father. For the assessment years 1953-54 and 1954-55, registration was refused to the firm mainly on the ground that, since a minor had been made a full-fledged partner of the firm, the partnership was invalid. The partnership constituted on 7th July, 1951, and evidenced by the deed of 21st August, 1951, was for a period of two years, i.e, until the end of S.Y 2009 and, therefore, was to expire on the 6th of November, 1953.

    3. The partners, however, decided to continue the partnership after the expiry of the original term of two years and, consequently, on the 7th of November, 1953, made an endorsement on the partnership deed that the partnership was to be continued at will on the same terms as contained in the original partnership deed. It may be mentioned that the minor partner, Jaisingh Narandas, had attained majority on 20th June, 1953, that the endorsement made on the partnership deed continuing the partnership at will was signed not by Jaisingh himself, but by his father's constituted power-of-attorney holder as in the original partnership deed. Subsequently, on 24th February, 1955, another document was executed whereby Jaisingh accepted and confirmed all the terms and conditions of the partnership deed and all the rights and obligations thereunder together with the benefits and liabilities thereof with effect from the date thereof. The firm asked for its registration for the assessment years 1954-55 and 1955-56, but it was again refused on the grounds that the original partnership was invalid because of Jaisingh's minority; that the endorsement made on 7th November, 1953, on the original partnership deed had not been signed by Jaisingh himself although he had become a major and, therefore, there was not a firm constituted under a valid instrument of partnership during the relevant account year. For the subsequent year 1956-57, registration was again refused on the ground that the original partnership deed and the further document executed by Jaisingh on 24th February, 1955, did not constitute a valid partnership inasmuch as in the original partnership deed the minor was shown to be a full-fledged partner and, consequently, the said partnership was illegal and the latter document, being a document of ratification, the minor was not competent to ratify what was illegal at its inception. Against the refusal of registration for the years 1955-56 and 1956-57, the assessee appealed to the Appellate Assistant Commissioner, who relied on the decision of this court in Dwarkadas Khetan & Co. v. Commissioner of Income-tax [1956] 29 I.T.R 903 Bom.. and allowed the appeals. It was held in that case, that even if a partnership deed purported to make a minor, a partner in law, the minor did not become a partner or become liable for losses. He was only entitled to the profits according to his share and the proper legal construction of such a partition deed would be that the major signatories became the partners and the minor signatories were only admitted to the benefits of the partnership. Such a partnership deed, according to the said decision, therefore, would be a valid partnership deed and the Income-tax Officer will not be entitled to refuse registration to the partnership merely on the ground that in the partnership deed the minor was shown to be a full-fledged partner. Against the decision of the Appellate Assistant Commissioner the department went in appeal to the Income-tax Appellate Tribunal. The Tribunal relied on the Bombay High Court decision and the decision of the Madras High Court in Jakka Devayya & Sons v. Commissioner of Income-tax and of the Patna High Court in Sahai Brothers v. Commissioner of Income-tax [1958] 33 I.T.R 40 Pat.., which took the same view and dismissed the appeal.

    4. Now, what is contended before us by Mr. Joshi, learned counsel who appears for the department, is that the decisions of the Bombay, Madras and Patna High Courts, on which the Tribunal has relied, have been overruled by the Supreme Court in Commissioner Of Income Tax, Bombay v. Dwarkadas Khetan & Co. [1961] 41 I.T.R 528, which was an appeal from the decision of the Bombay High Court. It was held in that case that a partnership deed, in which a minor was admitted as a full-fledged partner, was not valid and could not be registered under section 26A of the Indian Income-tax Act. It is, therefore, contended on behalf of the department that the basis of the decision of the Appellate Assistant Commissioner and the Tribunal having been found to be wrong, their decisions must be set aside and the view taken by the Income-tax Officer must be upheld.

    5. Now, if the registration was asked of the firm as was constituted under the original partnership deed, the contention of Mr. Joshi would undoubtedly have to be accepted in view of the Supreme Court decision already referred to. What has got to be considered, however, is that the instrument of partnership, on the basis of which registration was asked for the year 1956-57, is the original partnership deed supplemented by the endorsement made thereon on 7th November, 1953, and for the later years the instrument of partnership, on the basis of which registration has been asked for, is the original deed of partnership and the subsequent document executed on 24th February, 1955, viz., exhibits A and B to the statement of the case together. It is no doubt true that until the end of S.Y 2009 the partnership, which existed, was constituted under the original partnership deed of 21st August, 1951. That partnership agreement, however, had a run for two years and came to an end on the 6th of November, 1953. The partnership was originally constituted of three persons, two of whom were majors and the third was a minor, At the end of the period of the said partnership, the said three partners decided to continue the partnership, which had existed in the prior two years. By that time the third person, who was so far a minor, had become a major. It may be pointed out that the business, which was carried on by the partnership, had been in existence even prior to the formation of the first partnership evidenced by the partnership deed of 21st August, 1951. The business which existed on that date was taken over by the said partnership and continued for two years under the new partnership. From 7th November, 1953, the said business was continued further in partnership of the same persons, who had been the partners thereof in the earlier two years, and that partnership business was to be carried on at will of these three persons. For the partnership business, therefore, which was carried on and continued from and after 7th November, 1953, the three persons, who had agreed, were all three major and adult persons, who could competently agree to do so. For the assessment year 1955-56, therefore, which corresponded to the S.Y 2010 extending from November 7, 1953, to October 26, 1954, a partnership of three adult persons, who had agreed to carry on business, had continued to be in existence. The document constituting this partnership was the document of the old partnership with the addition of an endorsement thereon stating that it was continued on the same terms as contained in the original document. Now, in the partnership evidenced by the original document, one of the partners was a minor, but in the continued partnership there was no minor partner since the erstwhile minor had become a major by that time. As to the other terms on which the old partnership was carried on, there was nothing to make it an invalid partnership. Whatever defect may have been in the old partnership, it lasted till the end of S.Y 2009 and in the subsequent partnership which continued in the S.Y 2010 and the subsequent years there was no such defect since all the three persons, who had agreed to be the partners thereof were all major persons and there was, therefore, nothing illegal or improper in the formation or constitution of the said partnership. What has been urged by the learned counsel appearing on behalf of the department is that the endorsement, not having been signed by Jaisingh, who had attained majority by that time, but having purported to be signed on his behalf by the constituted attorney of his father, who had no authority to sign on his behalf, there was not an effective execution of the endorsement by Jaisingh and, consequently, did not have the effect of Jaisingh himself agreeing to be a partner of the continued partnership for the year of account, viz., for the assessment year 1956-57. Now, if it was necessary for Jaisingh to have actually signed the endorsement himself in order to make himself a partner of the continued partnership or his signing of the endorsement was necessary and essential for the purpose of treating him as partner or that his signing the endorsement by himself was necessary to constitute the endorsement together with the original partnership a valid and legal instrument of partnership for the purpose of section 26A, Mr. Joshi would have been undoubtedly right. It has, however, been held that it is not necessary for every partner to sign the instrument of partnership and that, even though the instrument of partnership has been signed by only some of them, but if it had been assented to by the others, who had not signed it and they had joined in putting it forward along with other partners for registration, it was admissible for registration under the Indian Income-tax Act (see Ramlal Murlidhar v. Commissioner of Income-tax). There is no dispute here that the partnership of which the erstwhile minor was a partner, had continued in the year of account. The Income-tax Officer had accepted that the partnership had continued with the three persons including the erstwhile minor as a partner thereof in the year of account. There was no doubt whatsoever that the erstwhile minor, who had not himself signed the endorsement, had assented to the partnership inasmuch as in the application for registration, which had been made, he along with the others had joined and signed the same.

    6. In our opinion, therefore, the instrument presented before the Income-tax Officer complied with the requirements of law and the Income-tax Officer was not entitled to refuse registration on the ground that the instrument of partnership was invalid.

    7. As to the second year, viz., 1956-57, the position is still stronger for the assessee. The documents, which were presented before the Income-tax Officer as constituting the instruments of partnership, were the original partnership deed and the subsequent document executed on 24th February, 1955. By this document Jaisingh, the erstwhile minor partner shown in the first partnership deed, had in terms confirmed and accepted all the terms and conditions of the said partnership deed and all rights and obligations thereunder together with the benefits and liabilities thereof with effect from the date of the original partnership as if he had been a full and effective partner all along. Whatever might have been the defect in the original partnership as formed and whatever might have been the consequences of the said defect until the date of attaining majority by the minor or until the date of the latter document dated 24th February, 1955, there can be no doubt whatsoever that as and from the date of this document, viz., 24th February, 1955, Jaisingh had accepted all responsibilities of a full-fledged partner of the partnership firm and the firm which continued thereafter had accepted Jaisingh as a full-fledged partner thereof. For the account year corresponding to the assessment year 1956-57, therefore, the effective partnership, which existed and which was constituted under the two documents was a legal and valid partnership consisting of the three partners. Mr. Joshi has sought to argue that the document of 24th February, 1955, purported to be a ratification by the minor of the earlier partnership deed of 21st August, 1951, on the basis that the said partnership agreement had admitted the minor to the benefits of the partnership and was a legal and a valid partnership. Mr. Joshi's argument is that since that was not correct and the said partnership as constituted on 21st August, 1951, having shown the minor, Jaisingh, as a full-fledged partner, was an invalid and defective partnership and ratification thereof was not available to the minor on attaining majority and, consequently, the document of 24th February, 1955, could not have the effect of bringing into existence a legal and valid partnership by ratification.

    8. In our opinion, there is nothing in the document of 24th February, 1955, to show that the minor was only purporting to exercise the right of ratification under section 30(5) of the Partnership Act. At the date when he executed the document he was an adult person entitled to assume responsibility even afresh. There was nothing in law to prevent him even from undertaking the responsibilities as a partner of a firm of which he had not been a partner until the date of such acceptance. On the date on which he was accepting the responsibility and declaring himself as a full-fledged partner, he was a major. In the document executed by him on 24th February, 1955, he had declared himself as a full-fledged partner of the firm and had agreed to be treated as such a full-fledged partner for the entire earlier period. At any rate, for the period subsequent to his execution of this document, his position as a full-fledged partner of the firm did not suffer from any defect whatsoever. For the year of account, therefore, there was a validly constituted firm in operation and the documents presented before the Income-tax Officer could be regarded as an instrument under which the firm was validly constituted. In our opinion, therefore, although the basis on which the Appellate Assistant Commissioner and the Tribunal had decided in favour of the assessee no longer survived, in view of the decision of the Supreme Court in Commissioner Of Income Tax, Bombay v. Dwarkadas Khetan & Co. , for the reasons, which we have already discussed, their decision that the firm was entitled to registration was correct.

    9. In the result, therefore, the question referred to us must be answered in the affirmative. We answer it accordingly. The Commissioner will pay the costs of the assessee.

    10. Question answered in the affirmative.

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    Comments

    Commissioner Of Income-Tax, Bombay v. R. Dwarkadas And Co.
    (Dec 19, 1968)