Jeewanram Gangaram v. Commissioner Of Income-Tax, West Bengal

The Judgment of the Court was delivered by

Banerjee, J.:— This reference, under section 66(1) of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act), was made in the circumstances hereinafter stated in brief.

2. Under an instrument of partnership, dated March 15, 1938, the firm of Messrs. Jewanram Gangaram was constituted of seven partners, viz.,

(i) Kanayalal Mimani,

(ii) Mulchand Mimani,

(iii) Surajmal Mimani,

(iv) Chantratan Mimani,

(v) Lunkaram Mimani,

(vi) Chaitandas Mimani, and

(vii) Lachmandas Mimani.

3. This firm was granted registration, under section 26A of the Act. One of the partners, named Lachmandas Mimani died on February 24, 1947, leaving him surviving two minor sons, named Gokuldas Mimani and Jamnadas Mimani, and his widow, named Smt. Ram Piyari Devi. Partner Chandratan Mimani used to represent his undivided Hindu family in the partnership of Jewanram Gangaram. There was a partition in this family and Chandratan and his brother, Chhoganlal, separated. Consequent upon the death of Lachmandas Mimani and the separation between Chandratan and Chhoganlal, it became necessary to reconstitute the firm. So as to bring some of the legal representatives of Lachmandas and also Chandratan and Chhoganlal in their separated status, into the firm, a new partnership deed was executed on March 25, 1947. The parties to this deed were:

(i) Kanayalal Mimani,

(ii) Mulchand Mimani,

(iii) Surajmal Mimani,

(iv) Chandratan Mimani,

(v) Lunkaram Mimani,

(vi) Chaitandas Mimani,

(vii) Chhoganlal Mimani,

(viii) Gokuldas Mimani, minor by his guardian mother and next friend, Ram Piyari Devi, and

(ix) Jamunadas Mimani, also a minor by his guardian mother and next friend, Ram Piyari Devi. The minors above-named were expressly admitted to benefits of the partnership.

4. Clauses 6(which should be 5), 7 and 8 of the deed provided as follows:

“6. The profits and losses of partnership shall de distributed amongst the partners in shares as specified against the name of each of them given below:

1. Kanailal Mimani of the First Part … One anna nine pies. 2. Mulchand Mimani of the Second Part … Three annas. 3. Surajmal Mimani of the Third Part … Three annas. 4. Chandratan Mimani of the Fourth Part.. … One anna six pies. 5. Chhoganlal Mimani of the Fifth Part … One anna six pies. 6. Lunkaram Mimani of the Sixth Part … One anna nine pies. 7. Chaitandas Mimani of the Seventh Part.. … One anna nine pies. 8. Gokuldas Mimani, a minor by his guardian mother and next friend, Srimati Rampiyari Devi of the Eighth Part … Ten and half pies. 9. Jamunadas Mimani, a minor by his guardian mother and next friend, Srimati Ram Piyari Devi of the Ninth Part … Ten and half pies. Sixteen annas.

7. Accounts of partnership shall be adjusted once in every year on the day preceding the Ramnavami and all assets and liabilities shall be taken into consideration. The balance-sheet and the profit and loss account shall be prepared in the separate statement to be made up every year and shall be approved by the partners or by whoever of the partners be present at Calcutta at the time and shall be open to inspection by all the partners in person or by their duly authorised representatives at all reasonable times and the profit or loss of any year ending shall be duly credited or debited to the account of each of the partners in the books of accounts, in proportion to their respective shares hereinbefore specified.

8. The responsibilities of the management of the partnership concern shall equally rest with each of the partners hereto…”

5. The firm had been originally registered by the Registrar of Firms and the change in the constitution of the firm, consequent upon the execution of the deed dated March 25, 1947, was also recorded in the Register of Firms, showing that Lachmandas, one of the partners had died on the 24th February, 1947, and his two minor sons, Gokuldas Mimani and Jamunadas Mimani, were admitted to the benefits of the partnership.

6. Registration of partnership, under section 26A of the Act, had been granted to the firm, as reconstituted under the deed dated March 25, 1947, for the first time for the assessment year 1947-48 and thereafter renewal of the registration was granted for every assessment year up to and including the assessment year 1957-58.

7. On August 13, 1962, the Commissioner of Income-tax sent a notice to the firm under section 33B of the Indian Income-tax Act, 1922, inter alia, couched in the following language:

“I have examined your records in connection with the assessment year 1957-58, and have found that the order dated March 26, 1962, passed therein by the Income-tax Officer under section 26A of the Indian Income-tax Act, 1922, is erroneous in so far as it is prejudicial to the interest of the revenue.

You are hereby given opportunity to show cause and to make your submissions by August 29, 1962, in that connection since I am of the opinion that the firm as constituted under the instrument of partnership dated March 25, 1947, consisting of 9 partners including 2 minors, which had been granted renewal of registration by the Income-tax Officer is not valid or legal and could not therefore be registered under the Act…”

8. In showing cause, the assessee, inter alia, took a preliminary objection to the effect that the proceeding under section 33B was invalid, inasmuch as after the repeal of the Act of 1922 by the Income-tax Act of 1961, no proceeding could have been taken under the repealed Act. The Commissioner repelled the contention by holding that under the notification issued by the Central Government under the provisions of section 298 of the Act of 1961, all proceedings by way of appeals, references or revision in respect of any year made under the Act of 1922 should be disposed of as if the repealing Act had not been passed and as such the notice under section 33B of the repealed Act was duly and validly issued.

9. The assessee also disputed that the registration of the firm under section 26A of the Act, was prejudicial to the interest of the revenue. The Commissioner, however, held that under the partnership deed of March 25, 1937, the minors, Gokuldas Mimani and Jamunadas Mimani, were admitted as full partners in the firm, through their natural guardian and mother, and not merely admitted to the benefits thereof. Thus, no valid partnership, worthy of registration under section 26A of the Act, came into existence under the aforesaid deed. The Commissioner also found that the application for renewal of registration for the assessment year 1957-58, of which the original was missing and a duplicate was furnished by the assessee, was purported to be signed by Gokuldas Mimani and Jamunadas Mimani themselves. As the signatories were minors, the Commissioner expressed the opinion that the application did not fulfil the technical requirements of section 26A of-the Act. On these grounds the Commissioner held that the renewal of registration was wrongly allowed to the firm for the assessment year 1957-58, and that being an order prejudicial to the interest of the revenue, the registration of the firm under section 26A should be cancelled. He further directed that the Income-tax Officer shall treat the firm as an unregistered firm and tax accordingly.

10. Against the decision by the Commissioner of Income-tax, the assessee appealed before the Income-tax Appellate Tribunal. Four contentions were raised before the Tribunal. The first contention was that section 297 of the Income-tax Act, 1961, repealed the Indian Income-tax Act, 1922, as from the 1st April, 1962, and the Commissioner was not justified in taking action under section 338 of the repealed Act in August, 1962. The second contention was that the order under section 33B was passed in violation of the principles of natural justice because one of the grounds on which the Commissioner cancelled the registration, namely, that the application for renewal of registration did not fulfil the technical requirements of the Act, had not been communicated to the assessee in the notice given under section 33B and the assessee was not given sufficient opportunity of showing cause against the same. The third contention was that the minors had not been taken as full partners under the partnership deed but merely admitted to the benefits of partnership—any finding contrary thereto was wrong both in fact and in law. The last contention was that inasmuch as the Commissioner came to the conclusion that the firm had not been lawfully constituted, with the minors as full partners, he should not have directed the assessment of the firm as an unregistered firm after the cancellation of the registration of the firm.

11. The Tribunal repelled the first contention by relying on a decision of this court in Kalawati Devi Haralalka v. Commissioner of Income-tax [1964] 53 I.T.R 314.. The Tribunal also repelled the second contention with the observations that the firm was represented by a competent lawyer, all the records of the proceedings were disclosed to the lawyer and the lawyer himself made submissions on the application filed for the renewal. Thus, it could not be said that any principle of natural justice had been violated. On the third contention, which concerned the merits, the Tribunal agreed with the Commissioner of Income-tax and observed:

“The minors, Shri Gokuldas Mimani and Jamunadas Mimani, are described as parties of the 8 th and 9th parts represented by their guardian-mother and next friend, Smt. Ram Piyari Devi. Further, the parties so described, declared and mutually covenanted to become and be partners of the aforesaid business styled Jewanram Gangaram. In clause 5 of the deed the minors, Gokuldas and Jamunadas, were each given 10 pies share in the profits and losses of the firm and in clause 7 it was provided that the profits and losses of any year would be duly credited or debited to the account of each of the partners in the books of accounts. And lastly, the partnership, deed was signed by Smt. Ram Piyari Devi representing Shri Gokuldas Mimani and Jamunadas Mimani. These facts could leave no doubt in one's mind that Gokuldas and Jamunadas were being made parties to the agreement though they were being represented by their mother and they were being entitled to the shares of profits and also liable for the shares of the losses of the firm and, in view of this decision of the Supreme Court in Commissioner Of Income Tax, Bombay v. Dwarkadas Khetan & Co. [1961] 41 I.T.R 528; [1961] 2 S.C.R 821., it must be held that the partnership deed was not valid and could not be registered under section 26A of the Income-tax Act, 1922.”

12. The last contention was also repelled by the Tribunal with the following observations:

“It was lastly contended by the learned counsel for the appellant that as the Commissioner had directed the Income-tax Officer to make the assessment on the appellant as unregistered firm the Commissioner had accepted that the firm existed. This is in conflict with his decision that the firm brought into existence by the partnership deed dated 25th March, 1947, was not a valid firm. He, therefore, argued that either there was a firm in existence under the deed which was entitled to registration or no firm came into existence under the deed in which case no assessment could be made of the unregistered firm. We are unable to accept the contention. The registration under section 26A is claimed on behalf of a firm constituted under an instrument of partnership. If it is found that no valid firm came into existence under the instrument, no registration could be granted but the business might be carried on by a firm brought otherwise into existence and it would be assessed as an unregistered firm. That on cancellation of registration the assessee could be assessed in the status of an unregistered firm finds support from the decision of the Supreme Court in Commissioner of Income-tax v. Smt. Durgabati.”

13. On the prayer of the assessee the Tribunal referred the following questions of law to this court:

“(1) Where, on the facts and in the circumstances of the case, the Tribunal was right in holding that after the repeal of the Indian Income-tax Act, 1922, by the Income-tax Act, 1961, the initiation of proceedings by the Commissioner under section 33B of the repealed Act was properly taken?

If the answer to the above question is in the affirmative, then—

(2) Whether, on the facts and in the circumstances of the case, the order under section 33B was passed by the Commissioner of Income-tax in violation of the principles of natural justice?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the order of the Income-tax Officer granting registration to the assessee-firm was prejudicial to the interests of the revenue?

(4) Whether, on the facts and in the circumstances of the case, and on a proper interpretation of the partnership deed dated 25th March, 1947, the Tribunal was right in holding that no valid firm came into existence under the aforesaid instrument?

14. Mr. S. Roy, learned counsel for the assessee, in fairness, submitted that in view of several decisions of this court against the contention of the assessee, he would not press for an answer to questions Nos. 1 and 2 but would not, at the same time, give them up, so that the assessee may agitate the points before a higher Tribunal. We record this submission and confine ourselves to questions Nos. 3 and 4 only in this reference.

15. Mr. Roy contended, in the first place, that the decision of the Supreme Court in Commissioner Of Income Tax, Bombay v. Dwarkadas Khetan & Co. & Co. was distinguishable and explicable in the light of two other decisions of the Supreme Court later on pronounced, namely, Commissioner of Income-tax v. Shah Mohandas Sadhuram and Commissioner of Income-lax v. Shah fethaji Phulchand. This necessitates a close examination of the trilogy of decisions referred to above.

16. In the case of Dwarkadas Khetan3 the facts were as follows: Prior to January 1, 1945, there was a firm called Dwarkadas Khetan & Co. On that date, the firm ceased to exist and became the proprietary concern of Dwarkadas Khetan. Thereafter, on March 27, 1946, Dwarkadas entered into a partnership with three others by an instrument of partnership executed on that date, namely, Viswanath Purumal, Govindram Khetan and Kantilal Kesherdeo, a minor. Dwarkadas Khetan's share in the partnership was 7 annas in the rupee, while the remaining 9 annas share was divided equally among the three others. Though Kantilal Kesherdeo was a minor, he was admitted into the partnership as a full partner and not merely to the benefits thereof. To the instrument of partnership, Kantilal Kesherdeo was a signatory, though immediately after his signature there was the signature of one Kesherdeo Rungta, his natural guardian. By the instrument, Kantilal Kesherdeo was entitled not only to a share in the profits but also liable to bear all the losses including loss of capital. It was also provided that all the four partners were to attend to the business and, if consent was needed, all the partners, including the minor, had to give their consent in writing. The minor was also entitled to manage the affairs of the firm, including inspection of the account books, and was given the right to vote, if a decision on votes had to be taken. No distinction was made between the adult partners and the minor, and to all intents and purposes, the minor was a full partner, even though under section 30 of the i Partnership Act, he could only be admitted to the benefits of the partner- 1 ship. The firm was registered with the Registrar of Firms and in the certificates obtained from the Registrar, Kantilal Kesherdeo was shown as a full partner and not as one entitled merely to the benefits of the partnership. Banks were also informed about the four partners, without any intimation that one of the named partners was a minor. For the assessment year 1947-48, a registration of the firm was sought under section 26A of the Indian Income-tax Act. The Income-tax Officer refused to accord registration on the ground that a minor had been admitted as a partner contrary to law. An appeal against the order before the Appellate Assistant Commissioner also failed. On second appeal before the Tribunal, the decision of the Appellate Assistant Commissioner was ultimately affirmed. Thereupon, there was a reference made to the High Court, inter alia, on the question whether the instrument of partnership, dated March 27, 1946, created a valid partnership. The High Court differed from the Tribunal and answered the question in favour of the assessee. When the matter reached the Supreme Court, Hidayatullah J. was pleased to examine the cleavage of opinion on the point amongst different High Courts and also the definition of “partner”, in section 2(6B) of the Indian Income-tax Act, reading— “‘partner’ includes any person who being a minor has been admitted to the benefits of partnership” and was further pleased to observe:

“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 cannot be read to mean that in every case where a minor has, contrary to law, been admitted as a full partner, the deed is to be regarded as valid, because, under the law, a minor can be admitted to the benefits of partnership. The rules which have been framed under section 26A quite clearly show that a minor who is admitted to the benefits of partnership need not sign the application for registration. The law requires all partners to sign the application, and if the definition were to be carried to the extreme, even a minor who is admitted to the benefits of partnership would be competent to sign such an application. 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 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. Registration can only be granted of a document between persons who are parties to it and on the covenants set out in it. If the income-tax authorities register the partnership as between the adults only contrary to the terms of the document, in substance a new contract is made out. It is not open to the income-tax authorities to register a document which is different from the one actually executed and asked to be registered.”

17. In the view taken, the Supreme Court was pleased to answer the question in favour of the income-tax department.

18. In the case of Commissioner of Income-tax v. Shah Mohandas Sadhuram, the partnership in question came into existence in the circumstances recited in the following passage in the deed of partnership:

“Whereof the above four members were till this day members of a joint family, whereof yesterday that is on March 31, 1962, the said, four members have become divided not only in interest but also by metes and bounds, each of the said members taking to his share one-fourth (i) of the said joint family assets and liabilities as detailed in the books of account as maintained by the firm known as Seth Mohandas Sadhuram and whereof we the first and second members have decided to constitute all the said four members as a partnership admitting the third and fourth members thereof to the benefits of the said partnership but not to the liabilities thereunder.”

19. The first and second members referred to in the recital were Atmaram and Daulatram, both majors. The other relevant clauses of the deed were:

“Clause 4.………The automobiles business having been started by the said first and second members under the name and style of Vijaya Automobiles, Mysore, when they were members of the said joint family as a partnership venture apart from the said family, it is agreed between us now that the said automobiles business shall hereafter be continued to be done under the name and style of Vijaya Automobiles as part of the said firm.

Clause 7.—It is agreed that the capital contribution of each members will be equal and the accounts to be maintained to indicate the said capital contribution will show what each member has so contributed in the personal, capital ledger account.

Clause 8.—The share of profits for the third and fourth members will be paid to them, the said profits to be credited to their accounts, and from there their maintenance charges and other expenses of necessities if any may be drawn by the said guardian from the said accounts.

Clause 10.—It is agreed that the duration of this partnership will be for a period of one year, i.e, from 1st of April, 1952, to 31st March, 1953, and the members might agree to continue the said partnership even thereafter under these terms or on terms to be determined then.

Clause 11.—It is agreed that the profits and losses of the Bombay branch and other branches if any outside the State of Mysore will be credited or debited separately in the books of account of these branches and final allocation made in those books of account, as distinct from the profits and losses of the firm in the State of Mysore.”

20. This firm, as constituted as above, applied for its registration under section 26A of the Income-tax Act. The Income-tax Officer refused to register the firm on the theory that the minors had been made partners in the firm liable to share losses even; they had not been merely admitted to the benefits of partnership and, therefore, such a firm was not entitled to be registered under section 26A. This decision was affirmed by the Appellate Assistant Commissioner. The Tribunal, however, took a different view and held that the assessee-firm was entitled to registration. On reference, the High, Court expressed the following opinion:

“That an instrument of partnership entered into between persons, some of whom are by law incompetent to contract, as might happen, if one of them is a minor is not necessarily null and void, and in a case like the present one, where the execution of the instrument of partnership on behalf of the minor by his guardian was for the purpose of admitting the minor to the benefits of partnership, no question of invalidity of the instrument can properly arise.”

21. The High Court, therefore, agreed with the Tribunal.

22. On further appeal before the Supreme Court, at the instance of the Commissioner of Income-tax, Sikri J. was pleased to notice that the decision of the Supreme Court in Dwarkadas Khetan's case stood on its special facts and observed:

“This court held in Commissioner Of Income Tax, Bombay v. Dwarkadas Khetan & Co. & Co. that the Income-tax Officer was only empowered to register a partnership which was specified in the instrument of partnership and it was not open to the department to register a partnership different from that which was affirmed by the instrument……..the facts in that case were that in the instrument of partnership Kantilal Kesherdeo was described as a full partner entitled not only to a share in the profits but also liable to bear all the losses including loss of capital. It was also provided that “all the partners were to attend to the business, and, if consent was needed, all the partners including the minor had to give their consent in writing. The minor was also entitled to manage the affairs of the firm including inspection of the account books, and was given the right to vote, if a decision on votes had to be taken.' As Hidayatullah J. observed, ‘in short, no distinction was made between the adult partners and the minor, and to all intents and purposes, a minor was a full partner, even though under the partnership law he could only be admitted to the benefits of the partnership and not as a partner’.”

23. His Lordship then explained the incidence and the true nature of the expression “benefits of partnership” in the following language:

“First it is clear from sub-section (2) of section 30 of the Partnership Act that a minor cannot be made liable for losses. Secondly, section 30, sub section (4), enables a minor to sever his connection with the firm and if he does so, the amount of his share has to be determined by evaluation made, as far as possible, in accordance with the rules contained in section 48, which section visualizes capital having been contributed by partners. There is no difficulty in holding that this severence may be effected on behalf of a minor by his guardian. Therefore, sub-section (4) contemplates that capital may have been contributed on behalf of a minor and that a guardian may on behalf of a minor sever his connection with the firm. If the guardian is entitled to sever the minor's connection with the firm, he must also be held to be entitled to refuse to accept the benefits of partnership or agree to accept the benefits of partnership for a further period on terms which are in accordance with law. Sub-section (5) proceeds on the basis that the minor may or may not know that he has been admitted to the benefits of partnership. This sub-section enables him to elect, on attaining majority, either to remain a partner or not or to become a partner in the firm. Thus it contemplates that a guardian may have accepted the benefits of a partnership on behalf of a minor without his knowledge. If a guardian can accept benefits of partnership on behalf of a minor he must have the power to scrutinise the terms on which such benefits are received by the minor. He must also have the power to accept the conditions in which the benefits of the partnership are being conferred. It appears to us that the guardian can do all that is necessary to effectuate the conferment and receipt of the benefits of partnership.

It follows from the above discussion that as long as a partnership deed does not make a minor full partner a partnership deed cannot be regarded as invalid on the ground that a guardian has supported to contract on behalf of a minor if the contract is for the purposes mentioned above.”

24. In the light of the above principles, his Lordship examined the several clauses in the deed and held

“The recital set out above expressly states that it is the major members who had decided to constitute the partnership and admit the minors to the benefits of the said partnership. The rest of the clauses must be construed in the light of this recital. Clause 4 only states the business to be carried on and the name of the business. It seems to us that the expression ‘it has been agreed between us’ has reference to the agreement mentioned in the recital. Regarding clause 7, which deals with capital contribution, it is urged that a guardian is not entitled to agree to contribute capital. We are unable to agree. If it is one of the terms on which benefits of partnership are being conferred, either the guardian must refuse to accept the benefits or he must accept this term. In some cases such an agreement by a guardian may be avoided by the minor, if it was not entered into for his benefit, but the agreement will remain valid as long as it is not avoided by the minor.

Regarding clause 10, Mr. Karkhanis submits that this embodies a clear agreement enabling the minor to continue the said partnership even thereafter under these terms or on terms to be determined then, and, therefore, this clause is void. We can find no defect in this clause. The duration of a partnership has to be fixed between the major members, and the guardian on behalf of a minor may agree to accept the benefits of the partnership only if the duration is to the benefit of the minor. Clause 10 enables the guardian to accept the benefits of partnership under these terms or under such other terms as may be determined. If the terms determined in future are similar, no objection can be taken; if on the other hand the terms determined later are in contravention of law, the partnership deed will be held to be bad. Clause 11 has reference to the manner of keeping accounts and a guardian is entitled to assent to the mode of keeping accounts.

In our opinion, the partnership deed, reasonably construed, only confers benefits of partnership on the two minors and does not make them full partners. The guardian has agreed to certain clauses in order to effectuate the decision of the major members to confer the benefits of the said partnership to the minors. Accordingly, we hold that the income-tax authorities should not have declined to register the firm.”

25. In the case of Commissioner of Income-tax v. Shah Jethaji Phulchand, the facts were as hereinafter stated:

“The deed of partnership was entered into between five parties

(1) Nathmul Jethaji, (2) Phulchand, (3) S. Babulal, minor son of Jethaji, (4) Sakalchand Thikmaji and (5) Jethibai.”

26. The relevant clauses of the agreement were:

“3. Whereas the above five parties have agreed to do business of cotton and kapas, purchases and sales and on commission basis, etc., after Deepavali 1950, for the future periods also so long as they can possibly work together.

4. Now they agree between the above five parties as hereunder:

(1) That the above five parties shall establish cotton business, and carry on the same at Davangere with branches in the surrounding areas under the name and style of ‘Jethaji, Phulchand’.

(2) That the capital of the business shall be Rs. 2,75,000 contributed from the parties of the firm…”

27. It was agreed by clause 9 that the profits and loss of the company shall be shared by the partners in the following proportion irrespective of the contribution of the capital, viz:

“1st party shall be entitled to Rs. 0-3-6

IInd party shall be entitled to Rs. 0-3-0

IIIrd party shall be entitled to Rs. 0-3-3

IVth party shall be entitled to Rs. 0-3-0

Vth party shall be entitled to Rs. 0-3-3

Half an anna of the profits shall be credited to the charity fund. The portion of loss to be contributed by the 3rd party is to be borne by the first party and adjusted in the accounts.”

28. Clause 16 of the deed provided:

“That (1) Nathmal Jethaji, (2) Phulchand Nathmal, (3) Sakalchand Thikmaji shall be working partners. They shall have the right of doing business, borrowing moneys from banks and other persons, drawing cheques on the account of the firm in the banks and generally they shall have all the rights connected with the business.”

29. On an application for registration of the firm being made under section 26A of the Income-tax Act, 1922, the Income-tax Officer rejected the application. The Appellate Assistant Commissioner affirmed the decision of the Income-tax Officer. The Tribunal, however, differed and ordered registration of the firm. The High Court agreed with the Tribunal. In this background the Supreme Court observed:

“The question then arises whether the deed makes the minor a full partner or he has been admitted only to the benefits of partnership. There is no doubt that on a true interpretation of sub-clause (9), the minor is not to bear any losses; the losses are to be borne by Nathmal Jethaji. Subclause (16) does not make the minor a working partner. The only persons who were entitled to be the working partners are Nathmal Jethaji, Phulchand Nathmal and Sakalchand Thikmaji. It is in the light of these clauses that the other clauses should be construed.

Mr. Karkhanis drew our attention to sub-clause (2) requiring the third party to contribute Rs. 70,000. There is no provision that the minor will not be entitled to share in profits unless the capital is contributed, for under sub-clause (9) partners are entitled to share in profits irrespective of the contribution of capital. At any rate, as held in Shah Mohan Das's case, a guardian can agree to contribute capital. Sub-clause (3) of clause 4 of the partnership deed, which enables the partners to individually carry on the other business, cannot affect the validity of the deed. Mr. Karkhanis relies specially on sub-clause (4) which states that the partnership shall be terminated at the will of any of the partners. But this clause is a general clause usually found in partnership deeds and it cannot be said that this clause enables the minor partner to terminate the partnership itself, and in the context it only means, as far as the minor is concerned, that the guardian would be entitled to exercise his right of severance given to him by section 30 of the Partnership Act. Sub-clause (5) which enables partners to borrow money obviously has to be read along with sub-clause (16) by which only the three major partners have been designated as working partners. It seems to us that the minor has not been made a full partner but has only been given the benefits of partnership.

But the final objection of Mr. Karkhanis requires serious consideration. He says that the guardian has by clause 3 and sub-clause 4(1) purported to agree to the starting of business and the constitution of a firm. This, according to him, he was not entitled to do and clauses 3 and 4(1) are void. The learned counsel for the respondent tried to sustain these clauses on the ground that the guardian must be deemed to have acted on his own behalf. But we are unable to sustain these clauses on this gound. Then the question arises: can a guardian agree to the starting of a business and the constitution of a firm on the condition that the minor shall not be a full partner but only entitled to the benefits of partnership? In our opinion there is no bar in law to the guardian entering into such a contract, for he is only securing the conferment of benefits of partnership on a minor.”

30. Mr. S. Roy, learned counsel for the assessee, submitted that unlike the facts as in the case of Dwarakadas Khetan, the minors, in the instant case, were expressly admitted to the benefits of the partnership. That was the dominant clause in the partnership deed, in the light of which the other clauses in the deed should be examined. He further submitted that the provision for distribution of losses, as in clause 6 of the deed, merely meant that the share only of the minors would be liable for the acts of the firm resulting in loss but the minors would not be personally liable therefor. He relied upon sub-section (3) of section 30 of the Indian Partnership Act in support of this branch of his argument. The right of inspection of accounts even by the minors, as in clause 7 of the deed, he submitted, was merely the repetiton of the minors' rights as in sub-section (2) of section 30 of the Indian Partnership Act. The provision in clause 8 of the deed, conferring responsibility for management of the partnership concern upon all the partners, he submitted, necessarily had to be read in the light of the dominant clause that the minors were only admitted to the benefits of partnership and, although made parties to the deed, were excluded from active management of the business, not being partners but merely parties admitted to the benefits of the partnership. Mr. Roy, therefore, submitted that there was nothing contained in the deed which indicated that the minors were made full partners and not merely admitted to the benefits of the partnership. The decision in Dwarakadas Khetan's case, he submitted, was on different facts and inspiration should not be drawn from that decision in interpreting the deed in the instant case.

31. Mr. Sabyasachi Mukharji, learned counsel for the Commissioner of Income-tax, submitted that each deed of partnership must be interpreted reasonably on its own terms and as a whole. He further submitted that in the case of Dwarakadas Khetan, the deed itself indicated that the minors were admitted to full partnership, although in law this could not be done. The Supreme Court, therefore, refused to make a new and a valid contract for the purpose, in place of the contract invalid in law. In the case of Shah Mohandas Sadhuram, he submitted, it was expressly stated in the deed that “minors are admitted to the benefits of partnership and not to the liabilities thereunder.” The Supreme Court interpreted the deed in the light of this dominant clause and held that the minors were intended merely to be admitted to the benefits of the partnership. In the case of Shah Jethaji Phulchand, he admitted, there was an express indication that the guardian of the minor shall bear the losses of the partnership and the major partners alone would be the working partners of the business. The Supreme Court construed the other clauses in the deed in the light of those clauses and held that by the deed the minors were only admitted to the benefits of the partnership. Mr. Mukharji examined the partnership deed, in the instant case, with meticulous care and submitted:

(a) That the deed did not expressly state that the minors were excluded from the liabilities of the partnership as in Mohandas Sadhuram's case nor did the deed expressly state that the portion of the loss to be contributed by the minors would be borne by their guardian, as in Shah Jethaji Phulchand's case.

(b) On the other hand, clause 6 of the deed expressly provided that the profits and losses of the partnership would be distributed amongst the partners, the minors sharing each 10½ pies share in the profit and loss.

(c) The responsibility of management was made to rest equally on each of the partners, including the minors. This was unlike the provisions of the deed in Shah Jethaji Phulchand's case under which the major partners alone became the working partners.

32. What Mr. Mukharji submitted was that in the instant case there was no distinction maintained between the major partners and the minor partners, as in the cases of Mohandas Sadhuram and Shah Jethaji Phulchand and this made the ratio decidendi in Dwarkadas Khetan's case applicable to the instant case.

33. Mr. Mukharji is right in his contention to this extent that a deed which purports to admit a minor to the benefits of partnership but in reality makes him a partner in the fullest sense, certainly falls within the measure of condemnation as in Dwarkadas Khetan's case. But is the deed of partnership, in the instant case, of the type of the deed in Dwarkadas Khetan's case? In our opinion the answer should be in the negative. It is not necessary to add expressly that a minor partner is not responsible for the liabilities of the firm, if, in reality, he is admitted merely to the benefits of the firm. It is not also necessary expressly to state that the minor's share of loss shall be borne by one or more of the other major partners or by his guardian. If by the act of the firm the business suffers loss, the minor's shares become liable for the loss but the minor himself does not become personally liable therefor. This legal position is clear from sub-section (3) of section 30 of the Indian Partnership Act. Thus clause 6 of the partnership deed, in the instant case, is explicable on the theory that 10 pies share in the partnership of each of the two minors was intended to be made liable for the losses, if any, but they were not, as they could not be made personally liable therefor. The deed of partnership, in the instant case, expressly admitted the minors to the benefits of the partnership. This dominant clause must be taken to colour the extent of the liability of the minors and their responsibility in the management of the partnership concern as in clause 10 of the deed. The law being that only the minor's share in the partnership would be burdened for acts of the firm and not the minor personally, the two facts relied upon by Mr. Mukharji, namely, that the minors were to bear the loss and to conduct the management of the business of the firm, are capable of an innocent interpretation, namely, that their share only would be burdened and the loss, if any, suffered by the firm and their responsibilities for mismanagement would also be limited to their share in the partnership. In other words, they would not individually be personally liable for the loss suffered for the acts of partnership. We do not, therefore, think that the provisions in the deed, on which Mr. Mukharji relied, are such as unmistakably point to the fact that the minors were admitted to the full partnership and not merely to the benefits thereof.

34. Mr. Mukharji next contended that the Commissioner of Income-tax directed cancellation of the registration of the partnership also on the ground that for the years 1957-58 and 1960-61 to 1962-63 both the minors signed the application for registration in their own hands and their guardian did not sign for them; so did minor Gokuldas do also for the years 1958-59 and 1959-60, in contravention of the technical requirements of section 26A. This ground was at first challenged as violative of the rules of natural justice, because the notice under section 33B did not reveal this ground. This challenge was incorporated in question No. 2 referred to this court. Since Mr. Roy indicated that he would not press for an answer to this question, Mr. Mukharji contended that the order of cancellation of the registration of the assessee should be sustained at least on this ground.

35. Mr. Roy sought to meet this argument with the contention that the registration was sought to be cancelled only on the ground that the registration was erroneous in so far as it was prejudicial to the interest of revenue, meaning thereby that the order of registration was such as was not in accordance with the law and as a result thereof the lawful revenue due to the Government was not realised or was made incapable of realisation. The technical defect in the signature portion of the application, he submitted, was not and could not be prejudicial to the interest of the revenue and must be deemed never even to have been thought of when the notice under section 33B was issued to the assessee. He further submitted that this technical defect was a remediable defect and if the Commissioner of Income-tax had not arrived at the other wrong conclusion that the deed itself was an invalid deed, he might not have emphasised upon this technical irregularity and might not have cancelled the registration on that ground. In any event, he might have given an opportunity to the assessee to remedy or to rectify this technical defect. The defect, Mr. Roy submitted, was more of form than of substance and on that ground the order of cancellation was not justified. In our opinion, there is a good deal of substance in this contention of Mr. Roy. The proceedings were started against the assessee because the registration was granted to a partnership invalidly constituted with a minor as a partner. That was thought to be prejudicial to the interest of revenue. The defect in the signature portion of the application for registration, namely, the minors putting their signatures in their own hands and not by the hand of their guardian was not by itself prejudicial to revenue and this defect could be removed by calling upon the guardian to put in her signature on the application. We do not, therefore, think that the Commissioner of Income-tax was right in thinking that this defect was prejudicial to the interest of revenue and merited cancellation of the registration of the firm. We, there-fore, overrule the contention advanced by Mr. Mukharji that the order of the Commissioner should be sustained on the ground of defect in the form of application for registration.

36. In the view that we take, we are of the opinion that, on the facts and in the circumstances of the case, and on a proper interpretation of the partnership deed dated March 25, 1947, the taxing authorities were not right in holding that no valid firm came into existence under the aforesaid instrument. That being our opinion, the firm deserved registration under section 26A of the Income-tax Act and the order of the Income-tax Officer granting registration to the firm was not prejudicial to the interest of revenue. Mr. Roy sought to challenge the order of the Commissioner, which was affirmed by the Tribunal, that, after cancellation of the registration, the firm should be assessed as an unregistered firm. He submitted that, if no valid firm had come into existence, then the assessee could not be taxed as an unregistered firm, although it might be taxed as an association of persons or the so-called partners of the invalid firm might be taxed in their personal capacity. We are not satisfied with this criticism of Mr. Roy. An order granting registration to a firm, under section 26A, merely affects or governs the procedure in collecting or recovering the tax found due from a firm. Where registration has been illegaly or wrongly granted, collection and recovery of tax cannot be made as provided under section 26A. But, otherwise, if there be a de facto firm in existence, then that firm may be taxed in the ordinary way as an unregistered firm. The point, like the one argued by Mr. Roy, came up before the Supreme Court in the case of Commissioner Of Income Tax, Bombay v. Amritlal Bhogilal & Co.. It was conceded before the Supreme Court that, upon cancellation of an order of registration, the assessment upon the invalid partnership as an unregistered firm was not bad in law. To us it appears that the concession was rightly made and there is no substance in this branch of the contention of Mr. Roy. We need notice, in this context, that questions Nos. 3 and 4 referred to this court do not in terms accommodate this argument of Mr. Roy in the form made and we do not, therefore, make much of this argument. The answer to question No. 3 is really dependent upon the answer to question No. 4, because the grant of registration to an invalidly constituted firm was thought to be prejudicial to the interest of revenue. Since we are of the opinion that the firm was not invalidly constituted, our answers to questions Nos. 3 and 4 are:

Question No. 3—in the negative.

Question No. 4—also in the negative.

37. The point taken before us was a debatable point and we do not think that we should be justified in awarding costs in favour of the assessee in the instant case. We, therefore, make no order as to costs.

Masud, J.:— I agree.

38. Questions answered accordingly.