P.N. Sarmah v. Commissioner Of Income Tax

1. The sole question referred to this court Under Section 256(1) of the I.T. Act, 1961, for eliciting the opinion of this court is :

" Whether, on the facts and in the circumstances of the case, the learned Tribunal was justified in law in refusing registration to the firm ? "

2. The assessee is a firm. The relevant assessment year is 1968-69, corresponding previous year being Deewali Samvat, 2023. The assessee-firm filed an application in Form No. 11 of the I.T. Rules seeking registration Under Section 185 of the Act on October 30, 1961, and annexed therewith the instrument of partnership executed on November 12, 1967. As an abundant caution the assessee made another application on June 28, 1969, in Form No. HA, along with a memorandum of agreement dated October 30, 1967 praying for condonation of the delay in filing the same by a separate application. The partnership was constituted of 4 partners, namely, Purnananda Sarmah, Omprakash Sarmah, Vijoy Kumar Sarmah and Krishna Kumar Sarmah. Shri Purnananda Sarmah is the father of the 3 other partners. The partnership was evidenced by a registered partnership deed, Shri Ved Prakash Sarmah, minor son of Shri Purnananda Sarmah, was admitted to the benefits of the partnership by mutual consent of the partners with effect from November 12, 1976. In so far as the sharing of profits and losses of the partners and sharing of profit by the minor admitted to the benefits of the partnership are concerned, they find place in Clause 9 of the partnership deed at page 7 of the paper book. It reads :

" 9. That the net profit or loss (as the case may be) of the firm in an year as mentioned above the share of the partners and the minor admitted to the benefits of the partnership shall be as under :

Partners Share in Profits Loss

1. Purnananda Sarmah 20% 25%

2. Omprakash Sarmah 20% 25%

3. Vijoy Kumar Sarmah 20% 25%

4. Krishna Kumar Sarmah 20% 25%

5. Ved Prakash Sarmah 20% Nil But as and when the minor above named attains majority and becomes also a partner in the firm, in accordance with the provisions of Section 30(5) of the Indian Partnership Act, 1932, the share of all the then partners shall be 20% both in profit as well as in loss (if any) with effect from the Deewali year next commencing after the attainment of majority by Shri Ved Prakash Sarmah and all references to a partner in this deed shall accordingly apply to him also,"

3. It will be seen that the profit and loss of the partners were clearly specified as well as the quantum of profit of the minor admitted to the benefits of the partnership. The clause also provides for the contingency when the minor admitted to the benefits of the partnership would attain majority. It provides that the minor on attainment of majority shall become a partner in the firm in accordance with the provisions of Section 30(5) of the Indian Partnership Act, 1932, and further provides that :

" The share of all the then partners shall be 20% both in profit as well as in loss (if any) with effect from the Deewali year next commencing after the attainment of majority by Shri Ved Prakash Sarmah and all references to a partner in this deed shall accordingly apply to him also.

The minor attained majority on August 31, 1967. The Income-tax Officer, hereinafter referred to as " the ITO ", held that though Ved Prakash attained majority on August 31, 1967, that is, during the relevant previous year, Clause 9 of the partnership deed made him a partner only from November 1, 1967 ; Ved Prakash entered into a memorandum of agreement along with the four partners of the firm and elected to be a full-fledged partner on and from November 1, 1967, that is, the beginning of the immediately succeeding year following his attainment of majority. The ITO observed that for all intents and purposes Ved Prakash remained as minor deriving the benefit of partnership for the whole previous year and the application in Form No. 11A was an attempt to induct Ved Prakash as a full partner in the previous year during which he attained majority. Mainly on these grounds, the ITO held that the firm was not genuine and refused to register the firm and passed the necessary order Under Section 185(1)(b) of the Act. The assessee-firm appealed before the AAC, who reversed the order of the ITO and allowed registration to the firm for the assessment year 1968-69. The AAC, relied on Section 30(5), of the Indian Partnership Act, and held that in the instant case six months had not expired from the date of attaining majority by Ved Prakash and that Ved Prakash continued to remain as minor getting the benefits of the partnership and that the firm was entitled to registration for the year 1968-69. The revenue preferred an appeal against the order of the AAC's decision and the Income-tax Appellate Tribunal, Gauhati Bench, Gauhati, by its order dated June 6, 1975, in I.T.A. No. 155 (Gau) of 1974-75, allowed the appeal and restored the order of the ITO. The Tribunal held that Shri Ved Prakash, a minor, was admitted to the benefits of the partnership with effect from November 12, 1966, and he was sharing 20% of the profits only but Ved Prakash attained majority on August 31, 1967, and continued to remain as a minor till the end of the accounting period of Deewali Samvat 2023 (November 12, 1966 to October 31, 1967), relevant to the assessment year 1968-69. It also noted that on attaining majority with effect from August 31, 1967, Shri Ved Prakash along with the other partners executed a memorandum of agreement dated October 31, 1967, wherein Ved Prakash consented to become a partner along with the 4 other partners with effect from Deepawali year Samvat 2024 (commencing from November 1, 1967) sharing profits and losses equally with the other 4 partners. Accordingly, the Tribunal posed the following question on the data :

" Thus during the period from 1-9-67, that is, after attaining majority by Ved Prakash to the end of the relevant previous year, that is, 31-10-67 Ved Prakash remained interested in the firm but without being supported by any document. Whether in such a circumtance the partnership firm could obtain registration in view of the provisions of Section 184(1) of the Income-tax Act, 1961 ? "

4. The Tribunal considered the provisions of Section 184(1) and held that Ved Prakash, after the attainment of majority, became a partner of the firm only from the beginning of the following previous year and he did not opt to become a partner of the firm during the period from September 1, 1967, to October 31, 1967, and, accordingly, registration could not be granted to the firm. It relied on the decision in Ganesh Lal Laxmi Narain v. CIT [1968] 68 ITR 696 (All) and Ram Narain Laxman Prasad v. ITO [1972] 84 ITR 233 (All) and held that it was a requisite for a minor, upon attaining majority, to execute a partnership deed afresh along with the existing partners for obtaining registration Under Section 184(1) of the I.T. Act. The Tribunal held that Ved Prakash, on attaining majority, elected to be a partner of the assessee-firm only from the beginning for the succeeding previous year, that is, November 1, 1967, but did not opt to become a partner during the period from September 1, 1967, to October 31, 1967, and, hence, the firm was not entitled to registration Under Section 185(1) of the Act.

5. Let us take the facts straight and thereafter go for the question to be answered. Ved Prakash was admitted to the benefits of the partnership with effect from November 12, 1966. He attained majority on August 31, 1967. Within the assessment year in question, that is, on October 31, 1967, Ved Prakash, on attaining majority, expressed his desire to become a full-fledged partner on and from November 1, 1967, that is, with effect from the commencement of the 1st day of Deewali year next commencing after attaining majority (vide page 11 of the paper book). The existing partners and Ved Prakash agreed to share in the profits and losses of the firms on and from November 1, 1967, at the rate of 20% (vide page 12 of the paper book). We find that the partnership deed envisaged that Ved Prakash would enjoy the benefits of the partnership as a minor and share only profits at the rate of 20%.

6. It will be seen on a perusal of Clause 9 of the partnership deed that the instrument of partnership took care in respect of the period commencing from September 1, 1967, to October 31, 1967, in so far as Ved Prakash was concerned. The instrument does not show any change in the share in profits and losses of the partners and/or Ved Prakash in the assessment year in question and also provides that Ved Prakash would become a major partner only from November 1, 1967, onwards. Ved Prakash also agreed to accept the position by a memorandum of agreement dated October 31, 1967, entered between him and the other partners.

7. The Tribunal held that Ved Prakash did not opt to become a partner of the firm during the period September 1, 1967, to October 31, 1967, after he had attained majority butinstead opted to become a full-fledged partner of the assessee-firm only from the beginning of the succeeding previous year and accordingly the Tribunal held that the assessee-firm was not entitled to registration under section 185(1)(a).

8. The Tribunal has held that the assessee-firm is not entitled to registration Under Section 185(1)(a) of the Act as Ved Prakash on attaining majority did not opt to become a partner of the firm during the period from September 1, 1967, to October 31, 1967. Is the learned Tribunal justified in law in refusing registration to the firm ?

9. In order to find out the answer to the question let us turn to the relevant provisions of the Act dealing with the registration of firms, namely, Sections 184 and 185 of the Act. On a scrutiny of the provisions we note that the strictness imposed on registration is primarily to achieve the twofold object : (1) to avert or preclude bogus and colourable firms reaping the benefits of registration, and (2) to enable the revenue to locate precisely the individual shares of the partners. In dealing with the effect of registration of firms under the I.T. Act, the Supreme Court in Ravulu Subba Rao v. CIT [1956] 30 ITR 163 has observed (p. 172) :

" Thus, if a firm is registered,--

(a) it ceases be a unit for purposes of taxation, and

(b) the profits earned by it are taken, in accordance with the general law of partnership, to have been earned by the individual partners according to their shares, and,

(c) they are taxed on their individual income including their shares of profits."

10. The advantages are obvious. The rate of tax chargeable will not be on the higher scale provided for incomes on the higher levels but on the lower one at which the income of the individual partner is chargeable and no tax is directly charged on the income of the firm. Registration confers special benefits on the partners. On securing registration, the partners derive certain rights which are the creatures of statute. The rights can be acquired only when the requisites of the statute have been strictly complied with.

11. A firm can claim registration Under Section 185 on fulfilment of the following conditions :

(i) An application is to be lodged with the ITO on the behalf of the firm before the end of the accounting year and the applicant or the applicants must comply with the requirements of Section 104 read with Rules 22 to 24 of the I.T. Rules, 1962 ;

(ii) the partnership must be evidenced by an instrument ;

(iii) the instrument should specify the individual shares of the partnership ; and

(iv) the partnership should-

(a) be valid and genuine, and,

(b) actually be constituted as specified in the instrument of partnership.

12. If the conditions alluded to are fulfilled, the ITO is bound to register the firm. It is settled law that if a partnership is a genuine and valid one and the provisions of the Act and the rules pertaining to registration are complied with, the I.T. authority has no jurisdiction to reject the claim for registration. The jurisdiction of the I.T. authority is confined to ascertain, (i) whether the application for registration is in conformity with the provisions of the Act and the rules framed thereunder, and (ii) whether the firm shown in the document is bogus or has no legal existence. Though the application for registration has strictly to be in conformity with the Act and rules, the deed of partnership has to be reasonably construed.

13. The cumulative effect of Sections 184 and 185 of the Act read with the relevant rules is that if the application for registration made by a firm gives the requisite particulars prescribed by Sections 184 and 185 of the Act and the Rules, the ITO cannot reject the prayer, if there is a firm in existence ; a firm may be said to be not in existence if it is a bogus or in other words not a genuine one or if, in law, the constitution of the partnership is void. Therefore, the limit of jurisdiction of the I.T. authorities is restricted to find out two facts : (1) whether the application is in due compliance with the provisions of the Act and the Rules, and (2) whether the firm, represented in the instrument of partnership, is a bogus one or has no legal existence. The discretion conferred on the authorities is a judicial one and ought not to be exercised in a capricious and impetuous way but in a disciplined and responsible manner. When an order refusing registration goes beyond the scope and ambit of the jurisdiction conferred on the authorities this court has jurisdiction to entertain the reference.

14. Now, turning to the statement of the case and on a perusal of the order of the learned Tribunal, we do not see any finding that the firm is bogus or has no legal existence. Nor is there any finding as to non-compliance of the provisions of the Act and the Rules either. In our opinion, a Tribunal cannot reject an application for registration unless it comes to the conclusion that the firm is not genuine or the instrument does not specify the precise shares of the individual partners and/or the application was not in conformity with the provisions of the law.

15. The sole reason for turning down the application was that the minor attained majority on and from September 1, 1967, and that the minor opted to become a full-fledged partner on and from November 1, 1967, but did not express anywhere his option to continue to remain as a partner on and from September 1, 1967, to October 31, 1967. The Tribunal has referred to some of the decisions which may be relevant for the purpose of renewal of registration but in our opinion the decisions do not deal with matters connected with disposal of an original application for registration.

16. It is well known that a minor is not a partner under the Partnership Act. But he may be admitted to the benefits of partnership Under Section 30 of the Act. However, Under Section 2(23) of the I.T. Act, the expression " partner " includes " any person who, being a minor, has been admitted to the benefits of partnership ". Therefore, a minor admitted to the benefits of partnership is a partner under the I.T. Act. Section 2(23) is designed to confer equal benefits on the minor by treating him as the partner, but it does not render a minor a competent and full-fledged partner. For that purpose, apart from the definition contained in the I.T. Act, the law of partnership must be considered.

17. There is no finding that the firm was not in existence. A firm is said to be not in existence if, (a) it was a bogus and not a genuine one, or (b) in law the constitution of the partnership was void--vide CIT v. Sivakasi Match Exporting Co. [1964] 53 ITR 204 (SC). However, we do not find anything in the order of the Tribunal that the firm was not in existence, on either of the counts set out above. There is no finding that the minor was treated as a full-fledged partner. On the other hand, we find that the minor was admitted to the benefits of partnership, as required under Section 30(1) of the Act, with a rider that when the minor would attain majority during the assessment year he would enjoy the benefits of partnership and could admit himself as a full partner on and from November 1, 1967. Ved Prakash, it is the common case of the parties, expressed in clear terms that he was a full-fledged partner on and from November 1, 1967, according to the prescriptions contained in the partnership deed.

18. Now, the only question is the effect of his attainment of majority during the assessment year in question. Was it absolutely necessary for " such person " to express clearly his intention to remain as a partner deriving benefits of partnership on and from September 1, 1967, to October 31, 1967 ? What would be the consequence if " such a person " does not express, on attaining majority or on obtaining knowledge that he had been admitted to the benefits of partnership ? All these consequences are expressed in Section 30 of the Indian Partnership Act, 1932. Section 30 lays down that :

(A) a minor cannot be a partner in a firm, but with the consent of all the partners he may be admitted to the benefits of the partnership--vide Section 30(1);

(B) such a minor has the right to a share of the property and profits of the firm and to have access to and to inspect and also to copy any accounts of the firm--vide Section 30(2) ;

(C) such minor's share is liable for the acts of the firm but the minor is not personally liable for any act of the firm--vide section 30(3) ;

(D) such minor cannot sue for an account or payment of his share of the property or profits of the firm except upon severing his connection with the firm and when ha severs his connection, the amount of his share must be determined as far as possible in accordance with the rules contained in Section 48 of the Partnership Act. However, if the partners or any one of them elect to dissolve the firm the amount of the share of the minor shall be determined along with the shares of the partners--vide Section 30(4) ;

(E) at any time within six months of his attaining majority or of his obtaining knowledge that he had been admitted to the benefits of the partnership, whichever date is later, " such person " may serve public notice that he has elected to become, a partner in the firm and such notice shall determine his position as regards the firm. If he fails to give such notice, he shall become a partner in the firm on the expiry of the said six months--vide Section 30(5) of the Act ; and (F) the burden of proof that " such person " had no knowledge of " such admission " until a particular date after the expiry of six months of his attaining majority shall lie on the person asserting that fact--vide Section 30(6).

19. Sub-sections (7) and (8) of Section 30 of the Partn"rship Act read as follows :

" (7) Where such a person becomes a partner,--

(a) his rights and liabilities as a minor continue up to the date on which he becomes a partner, but he also becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership, and

(b) his share in the property and profits of the firm shall be the share to which he was entitled as a minor.

(8) Where such person elects not to become a partner,--

(a) his rights and liabilities shall continue to be those of a minor under this section up to the date on which he gives public notice,

(b) his share shall not be liable for any acts of the firm done after the date of the notice, and

(c) he shall be entitled to sue the partners for his share of the property and profits in accordance with Sub-section (4)."

20. It will be seen that on attaining majority a minor admitted to the benefits of the partnership, has two options open to him : (1) he may elect to become a partner in the firm, or (2) he may repudiate or elect not to become a partner. If he elects to be a partner, he need not do anything nor give any public notice. On the expiry of the six months he becomes a partner of the firm. If a minor on becoming a major and knowing that he had been admitted to the benefits of a partnership keeps silent thereafter and fails to give the requisite public notice his inaction tantamounts to election to become a partner and he becomes liable for all the obligations of the firm " from the date of his admission to the benefits of partnership ". It follows, therefore, that he may, either by a consentient act on his part, become a partner or become so by his inaction for six months as allowed. On a perusal of Section 30(5) and (7) it becomes clear that if during the subsistence of the partnership a person who was admitted, at the time when he was a minor, to the benefits of partnership does not elect to become a partner within six months of his attaining majority would become a partner after the expiry of the said period (six months) and thereafter his rights and liabilities would be the same as those of the other partners as from the date of his admission to the benefits of the partnership.

21. The learned Tribunal has merely considered the document whereby Ved Prakash expressed his readiness and willingness to become a full-fledged partner on and from November 1, 1967. It has assumed that by expressing his intention Ved Prakash 'was silent as to his relationship with the firm during the period commencing from September 1, 1967, to October 31, 1967. The learned Tribunal has not considered the legal effect of Ved Prakash's intention to continue as a partner or whether it amounted to expressing his intention to continue as a partner all throughout. At any rate the learned Tribunal has completely overlooked the provisions of Section 30(5), (6), (7) and (8) of the Partnership Act, 1932. We do not find any material and/or finding of the learned Tribunal that Ved Prakash had on attaining his majority, served a public notice expressing his election " not to become a partner in the firm ". Ved Prakash had never repudiated the partnership nor did he sever his connections with the firm. In the absence of repudiation and severance of connection with the firm and/or inaction of " such person " for the period of six months to serve any public notice makes " such person " a partner under Section 30(5) and (7) of the Partnership Act. It is a mixed question of law and fact as to whether the execution of the memorandum of agreement (annex. A-2) amounted to a consentient act on the part of Ved Prakash to become a partner and/or on the facts and circumstances of the case Ved Prakash by his conduct or action became a partner for the interim period Under Sections 30(5) to 30(8) of the Partnership Act or not. It will be entirely for the Tribunal to consider these aspects of the matter. While considering the question of election by Ved Prakash the Tribunal shall also consider the effect of absence of repudiation of the partnership by Ved Prakash or his failure to sever connections with the firm. It will also be pertinent for the Tribunal to consider the proviso to Sub-section (5) of Section 30 of the Partnership Act. The Tribunal shall consider whether there is any material to show that Ved Prakash had given any public notice and the effect of his failure to serve any such notice within the period of six months from the date of his attaining majority. It is clear that the attention of the learned Tribunal was not drawn to the relevant provisions contained in Section 30 of the Partnership Act in consequence whereof the learned Tribunal has drawn a conclusion and decided the appeal without considering the pertinent provisions of Section 30 of the Partnership Act. In view of the non-consideration of the relevant provisions of the partnership act as alluded and in view of non-consideration by the Tribunal as to whether the firm was a bogus one or had no legal existence, we are constrained to hold that the refusal of registration by the Tribunal amounted to refusal of registration by it beyond its scope and ambit and the jurisdiction conferred on it by the I.T. Act. In the result, we have no hesitation in answering the question in the negative and against the revenue.

22. If the learned Tribunal considers that the decisions relied upon by it have any relevance it shall undoubtedly consider the said decisions but shall do well to consider that Ganesh Lal Laxmi Narain [1968] 68 ITR 696 (All), Ram Narain Laxman Prasad [1972] 84 ITR 233 (All), have been overruled in Badri Narain Kashi Prasad v. Addl. CIT [1978] 115 ITR 858 (All) [FB].

23. We, accordingly, answer the question in the negative and against the revenue. We consider that the Tribunal shall act within its jurisdiction and limit its decision on two factors relevant for the purpose of granting registration Under Section 184 read with Section 185 of the Act, namely, (1) whether the application for registration was in conformity with the Rules framed under the Act, and (2) whether the firm shown in the document presented for registration was a bogus one or had no legal existence.

24. Having decided the question of law aforesaid we direct that a copy of the judgment be sent under the seal of the court and the signature of the Registrar to the Appellate Tribunal which shall pass such orders as are necessary to dispose of the case conformably to the judgment. The assessee is entitled to costs, which are assessed at Rs. 300.

D. Pathak, J.

I agree.