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Ganesh Rice Mills, Bilaspur v. Commissioner Of Income Tax, M.P. Bhopal
Summary of the Opinion — Reference under s. 256(1), Income-tax Act, 1961
Factual and Procedural Background
The Income-tax Appellate Tribunal referred the following question of law under s. 256(1) of the Income-tax Act, 1961: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the firm was not entitled to continuation of registration for the period from Diwali 1963 to March 11, 1964?"
The reference related to assessment year 1965-66; the relevant previous year ran from Diwali 1963 to Diwali 1964. M/s. Ganesh Rice Mills was constituted by a partnership instrument dated October 25, 1956. The firm originally comprised two adult partners, Chandra Shekhar Trivedi and Shyam Manohar, each with 6 annas share in profits; a minor, Narayan Prasad, was admitted to the benefits of partnership with 4 annas share in profits only.
Registration had been granted up to assessment year 1964-65. An application for continuation of registration under s. 184(7) for assessment year 1965-66 was filed on July 1, 1965. That application was signed by Shyam Manohar and Narayan Prasad (who had become major on March 1, 1963). Chandra Shekhar retired on March 11, 1964 and died in March 1965. A subsequent partnership instrument dated April 15, 1964 (with effect from March 12, 1964) recorded a partnership between Shyam Manohar and Narayan Prasad.
The assessee contended that the original firm was dissolved on March 11, 1964 (on Chandra Shekhar's retirement) and that continuation of registration should be recognised up to that date; the Income-tax Officer refused continuation, that refusal was confirmed by the AAC, and the Tribunal also confirmed refusal on the grounds that (i) the minor becoming a major effected a change in the constitution of the firm, and (ii) registration could not be granted for a part of the previous year.
Legal Issues Presented
- Whether the Tribunal was correct in law in holding that the firm was not entitled to continuation of registration for the period from Diwali 1963 to March 11, 1964.
- Whether the minor (admitted to benefits) becoming a major and thereby liable for losses constitutes a "change in the constitution of the firm" or a change in "the shares of the partners as evidenced by the instrument of partnership" within the meaning of s. 184(7).
- Whether continuation of registration under s. 184(7) can be granted for a part of a previous year (a "broken period") where the firm is said to have been dissolved on a partner's retirement, or whether such continuation is precluded when the firm continues with a change in constitution not evidenced by the instrument of partnership.
Arguments of the Parties
Assessee's Arguments
- The firm was dissolved on the retirement of Chandra Shekhar on March 11, 1964, and a new firm was constituted from March 12, 1964 by the second partnership instrument executed on April 15, 1964; consequently, the assessee sought recognition of continuation of registration up to March 11, 1964.
- The assessee relied on clause (2) of Form No. 12 (the prescribed declaration under s. 184(7)) which permits a declaration that there has been no change in the constitution of the firm "up to the date (...) of dissolution of the firm." The assessee also relied on the Madras High Court decision in Addl. CIT v. Abdul Kareem and Co. (1979) 117 ITR 233 (Mad), where continuation for a broken period was recognised.
Department's Arguments
- The department pointed to authority (a Full Bench decision of the Allahabad High Court in Addl. CIT v. Gauri Vishwanath Dal Mills (1977) 107 ITR 274) where the instrument of partnership did not permit ascertainment of apportionment of losses after a minor attained majority — the implication being that a change in constitution or shares might exist when the instrument is silent on reallocation on majority.
- The Tribunal (as supported by the department) treated the change in the firm's constitution — whether by the minor becoming a major or by other changes — as a ground to refuse continuation of registration unless the change was evidenced by the instrument of partnership or the firm was dissolved (so that Form No. 12's dissolution clause would apply).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Badri Narain Kashi Prasad v. Addl. CIT (1978) 115 ITR 858 (All) | Where an instrument of partnership foresees the eventuality of a minor becoming major and provides for distribution of shares/losses at that stage, the instrument evidences the change; if the instrument does not permit ascertainment of redistribution on majority, the instrument does not evidence the change. | The court respectfully agreed with this Full Bench reasoning, found the instant instrument (clauses (2) and (3)) to be sufficiently comprehensive to provide for redistribution of losses when the minor became major, and held there was no change in constitution or shares not evidenced by the instrument. |
| Addl. CIT v. Gauri Vishwanath Dal Mills (1977) 107 ITR 274 (All) | Illustrates a situation where the instrument of partnership did not allow ascertainment of apportionment of losses after a minor became major; in such cases the instrument does not evidence the change. | The court treated this authority as distinguishable on the facts: in Gauri Vishwanath the instrument did not permit ascertainment of post-majority loss sharing, whereas in the present case the instrument did; therefore the precedent had no application here. |
| Addl. CIT v. Abdul Kareem and Co. (1979) 117 ITR 233 (Mad) | Recognised continuation of registration for a broken period (i.e., a part of a previous year) in appropriate circumstances. | The assessee relied on this decision to support continuation up to the date of alleged dissolution; the court noted the decision but held it inapplicable because the Tribunal had found that the firm had not been dissolved on retirement but had continued with a change in constitution. |
| CIT v. Kejriwal Trader (1969) 71 ITR 463 (Cal) | When a partner retires, whether a new firm comes into existence or the old firm continues is a question of fact to be determined on the circumstances of each case. | The court cited this principle to emphasise that the question of dissolution on retirement is one of fact; it upheld the Tribunal's factual conclusion that the firm continued after retirement (i.e., there was no dissolution), making Form No.12's dissolution clause inapplicable. |
Court's Reasoning and Analysis
The Court proceeded in a stepwise manner:
- It examined s. 184(7) which permits continuation of registration only if "there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership" and if a prescribed declaration (Form No.12) is furnished.
- The Court analysed the special definition in s. 2(23) of the Act which treats a minor admitted to the benefits of partnership as a "partner" for certain purposes. It considered whether the minor becoming a major (and becoming liable for losses) constitutes a change in the identity of partners or a change in the shares "as evidenced by the instrument of partnership."
- Applying the Full Bench reasoning in Badri Narain Kashi Prasad (1978) 115 ITR 858 (All), the Court stated that where an instrument reasonably and fairly provides for how losses should be shared on the minor's attaining majority, the instrument evidences any change and therefore there is no disqualifying change in constitution or shares within s. 184(7). Conversely, where the instrument does not permit such ascertainment, the instrument does not evidence the change.
- The Court examined clauses (2) and (3) of the partnership instrument in the present case. Clause (2) set out profit shares (Chandra Shekhar 6 annas, Shyam Manohar 6 annas, Narayan Prasad 4 annas) and included a note that Narayan Prasad (a minor) was "entitled to share profits only." Clause (3) provided for accounts to be divided between partners "as per their shares as above."
- On a fair construction, the Court held that while the minor was entitled to profits only during minority, upon attaining majority (and by operation of s. 30 of the Indian Partnership Act) the note ceased to be operative and the partner became liable for losses in accordance with the shares set out in clause (2). Thus the instrument did foresee and provide for distribution of losses on majority and evidenced the change; there was therefore no disqualifying change in constitution or shares.
- The Court then considered the Tribunal's second ground for refusal: that continuation of registration cannot be granted for a part of the year. The assessee argued the firm was dissolved on March 11, 1964 and thus continuation until that date was permissible under the dissolution clause in Form No.12. The Court emphasised (citing Kejriwal Trader) that whether retirement results in dissolution or a continuing firm is a question of fact. The Tribunal had found on the facts that the firm continued after retirement (i.e., was not dissolved), referring to the subsequent instrument which stated the remaining partners reconstituted and continued the partnership business.
- Because the Tribunal found the firm had continued with a change in constitution (not evidenced by a new instrument in time for continuation), the declaration in Form No.12 that the firm continued up to March 11, 1964 was incorrect. The Court observed that s. 184(7) and Form No.12 permit continuation for a part of the year where the firm stands dissolved, but do not permit continuation for a broken period where the firm continues after a change in constitution that is not evidenced by the instrument of partnership. In such cases registration must be sought under the new instrument of partnership.
- On these bases — acceptance of the Badri Narain reasoning as applicable to the facts regarding the minor's majority, and deference to the Tribunal's factual finding that the firm continued after retirement — the Court concluded that the Tribunal's refusal of continuation of registration could be sustained on the second ground (continuation for a part-year not being available where the firm continued with an unevidenced change in constitution).
Holding and Implications
Answer to the reference: in the affirmative — in favour of the department and against the assessees.
Direct effect on the parties:
- The Tribunal's order refusing continuation of registration of M/s. Ganesh Rice Mills for the period from Diwali 1963 to March 11, 1964 is upheld on the grounds analysed above.
- The Court held (1) that the partnership instrument, on a fair reading of clauses (2) and (3), did provide for redistribution of losses after the minor (Narayan Prasad) attained majority, so that the minor's becoming major did not result in a change in constitution or shares not evidenced by the instrument; but (2) the Tribunal's factual finding that the firm continued (rather than being dissolved) on the retirement of Chandra Shekhar meant that the Form No.12 declaration claiming continuation to March 11, 1964 was incorrect and continuation for that part-year could not be recognised.
- There shall be no order as to costs.
Broader implications: The Court followed the Full Bench principle (Badri Narain) that an instrument which reasonably provides for post-majority sharing of losses evidences the change; it also emphasised that continuation for part of a previous year is available only where the firm is dissolved (and not where the firm continues with a change in constitution not evidenced by the instrument). The opinion did not purport to lay down a new general rule beyond these applications to the facts before it.
- This reference is made under s. 256(1) of the I.T. Act, 1961, by the Income-tax Appellate Tribunal, referring for our answer the following question of law :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the firm was not entitled to continuation of registration for the period from Diwali 1963 to March 11, 1964 ?"
The reference relates to the assessment year 1965-66. The relevant previous year is from Diwali 1963 to Diwali 1964. M/s. Ganesh Rice Mills was constituted as a partnership firm by an instrument of partnership executed on October 25, 1956. The firm consisted of the adult partners, namely, Chandra Shekhar Trivedi and Shyam Manohar. The adult partners had each 6 annas share in the profits of the firm. The minor, Narayan Prasad, was admitted to the benefits of the partnership. He was given 4 annas share in the profits. The partnership was granted registration up to the assessment year 1964-65. An application was filed for allowing the continuation of the registration of the partnership under s. 184(7) on July 1, 1965, for the assessment year 1965-66. This application was signed by Shyam Manohar and Narayan Prasad, who had become major, on March 1, 1963. Chandra Shekhar, the other adult partner, retired on March 11, 1964, and thereafter died on March, 1965. Another instrument of partnership was executed on April l5, 1964, with effect from March 12, 1964, by Shyam Manohar and Narayan Prasad. The application filed on July 1, 1964 continuation of registration of the firm as constituted by the earlier instrument of partnership up to March 11, 1964, on the plea that the firm was dissolved on that date and new firm was constituted from March 12, 1964, by the second instrument of partnership executed on April 5, 1964. The ITO refused continuation of registration of the firm and his order was confirmed in appeal by the AAC. The Tribunal also confirmed the order refusing continuation of registration of the firm on the reasoning that the minor, having become a major, there was a change in the constitution of the firm and that no registration could be granted for a part of the previous year.
Section 184(7) of the Act which deals with continuation of registration of a firm for subsequent assessment years read as follows :
"184. (7) Where registrations granted to any firm for any assessment year, it shall have effect for every subsequent assessment year :
Provided that -
(i) there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the registration was granted; and
(ii) the firm furnishes along with its returns of income for the assessment year concerned, a declaration to that effect, in the prescribed form and verified in the prescribed manner."
The form of declaration prescribed under prov. (ii) to s. 184(7) is Form No. 12, which is as follows :
"Declaration under section 184(7) of the Income-tax Act, 1961, for continuation of registration.
To, The Income-tax Officer, .........
Re : Assessment year 19 -19 We, on behalf of........ declare that :
(i) our firm was granted registration for the assessment year 19..... -19......, vide order dated....... 19....., passed by the Income-tax Officer....... and -
(ii) there has been no change in the constitution of the firm or the shares of the partners since the last day of the previous year relevant to the assessment year 19..... -19..... up to the last day of the previous year relevant to the assessment year 19...... -19...... or to the date (........ 19.......) of dissolution of the firm; and
(iii) none of the partners of the firm, was, at any time during the previous year, in relation to the whole or any part of his share in the income or property of the firm a benamindar of any other partner to whom he is not related as spouse or minor child.
We further declare that the information given above is correct and complete.
Date Signature Address
1.
2.
3.
4. Section 187 provides that where, at the time of making an assessment under s. 143 or s. 144, it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as constituted at the time of making the assessment. Where a firm carrying on a business or profession is succeeded by another firm, and the case is not on covered by s. 187, s. 188 requires that separate assessments shall be made on the predecessor-firm and the successor-firm in accordance with the provisions of s. 170.
A perusal of s. 184(7) will show that an application for continuation of registration can be made only if there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership. A change in the constitution of the firm referred to a change in the identity of partner."Shares of the partners as evidenced by the instrument of partnership" refer to their shares in profit and loss as disclosed by the instrument of partnership. Section 2(23) of the Act defines a partner to include a minor admitted to the benefits of partnership. In view of this special definition, it cannot be said that when a minor admitted to the benefits of a partnership becomes a major and so becomes a partner in the real sense by becoming liable for losses also, there is any change in the identity of partners. The question that generally arises in such cases in whether when the minor becomes a major and becomes liable for losses also, there is any change in "the shares of the partners as evidenced by the instrument of partnership" ? If the instrument of partnership does not non a proper construction disclose how the losses would be shared on the minor becoming a major, it can certainly be said that on the minor becoming a major there occurs a change in the shares of the partners as evidenced by the instrument of partnership. But if the instrument of partnership is comprehensive and on a fair reading provides the manner in which the losses would be shares on the minor becoming a major, it cannot be said that there is a change in the share of the partners as evidenced by the instrument of partnership. This question was considered in detail by a Full Bench of the Allahabad High Court in Badri Narain Kashi Prasad v. Addl. CIT (1978) 115 ITR 858, in which some previous cases of that court were overruled. The Full Bench observed that where the instrument of partnership foresees the eventuality of a minor becoming a major and makes a provision for the distribution of the shares of profits at that time, the instrument evidences the change in the shares; but if it is not possible to ascertain the share from the instrument, at the stage, it will be case where the instrument does not evidence the change. It was further observed that if, on a reasonable construction of the instrument of partnership, the redistribution of the shares in losses on the minor attaining majority can be ascertained, it will be a case where the instrument of partnership evidences the changes in the shares and it would not be possible to say that there is a change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership within the meaning of the first proviso to s. 184(7). We respectfully agree with the view taken by the Allahabad High Court.
The question then is weather, in the instant case, the instrument of partnership on a reasonable construction can be said to provide for the reallocation of losses on the minor becoming a major. The relevant clause of the instrument of partnership are cls. (2) and (3) which read as follows :
"(2) That the share of the partners in accordance with which they shall be entitled for profits or be liable for losses shall be as below :
Serial No. Serial No. Name of partners Name of partners Extent of shares Extent of shares Chandra Shekhar 0-6-0 Shyam Manohar 0-6-0 Narayan Prasad (minor) admitted to benefits of partnership and thus entitled to share profits only 0-4-0 Total 0-16-0 (3) That proper accounts shall be maintained of the firms business under the mercantile system and the accounts shall be divided between the partners as per their shares as above."
Clause(2), to being with, provides that the partners shall be entitled for profits and losses as indicated in that clause, but there is a note against the name of Narayan Prasad (minor) that he was admitted to the benefits of the partnership and thus entitled to share profits only. On reading cl. (2) as a whole, it is clear that on a proper construction, the partners were not to shares losses in accordance with their shares in profits during the minority of Narayan Prasad. But after Narayan Prasad become a major and consequently a partner in accordance with s. 30 of the Indian Partnership Act, the note that Narayan Prasad was entitled to share profits only ceased to be operative and all the partners including Narayan Prasad became liable to share losses in accordance with the shares specified in cl. (2). In our opinion, therefore, cls. (2) and (3) of the instrument of partnership, on a fair construction, provide for distribution of losses amongst the partners on the minor attaining majority. It cannot, therefore, be said that on Narayan Prasads attaining majority there arose any change in the shares of the partners which was not evidenced by the instrument of partnership. The facts before is are similar to the facts in reference No. 510/74 decided by the Full Bench in Badri Narain Kashi Prasad v. Addl. CIT (1978) 115 ITR 858 (All). We hold that there was no change in the constitution of the firm or the share of the partners as evidenced by the instrument of partnership on the ground that the minor partner, Narayan Prasad, become major and started sharing losses after March 1, 1963. The learned counsel for the department drew our attention to another Full Bench judgment of the Allahabad High Court in Addl. Cit v. Gauri Vishwanath Dal Mills (1977) 107 ITR 274. In that case, however, the instrument of partnership was such that it was not possible to ascertain how the losses were to be apportioned after the minor became a major. The case is, therefore, distinguishable and has no application here. The first ground on which the Tribunal refused continuation of registration of the firm cannot, therefore, be supported.
The second ground on which the Tribunal confirmed refusal of continuation of registration is that a continuation of registration cannot be granted for a part of the year. The argument of the learned counsel of the assessee-firm is that the firm was dissolved on the retirement of Chandra Shekhar on March 11, 1964, when a new firm was constituted consisting of Shyam Manohar and Narayan Prasad by another instrument of partnership executed on April 5, 1964, and that as the firm stood dissolved on March 11, 1964, it was entitled to have a recognition of the continuation of registration till that date. In this connection the learned counsel relies on cl. (2) of From No. 12 which provides for a delectation that there has been no change in the constitution of the firm or in the shares of the partners up to the last date of the previous year relevant to the assessment year or up to the date of dissolution of the firm. The learned counsel also relies up Addl. CIT v. Abdul Kareem and Co. (1979) 117 ITR 233 (Mad), where continuation of registration for a broken period was recognized. The difficulty in accepting the argument of the learned causal is that in the instant case there is no finding given by the Tribunal that on the retirement of Chandra Shekhar there was a dissolution of the firm. The Tribunal has held that on the retirement of Chandra Shekhar there was a change in the constitution of the firm which was continued by the remaining partners. In this connection the Tribunal has referred to cl. (3) of the instrument of partnership executed on April 5, 1964, in which it is stated that on the retirement of Chandra Shekhar with effect from march 11, 1964, the remaining partners namely, Shyam Manohar and Narayan Prasad, reconstituted the firm and continued the partnership business. The question, whether, when a partner retires, a new firm comes into existence or the of firm continues, is always a question of fact to be determined on the circumstances of each case : See CIT v. Kejriwal Trader (1969) 71 ITR 463 (Cal). The question whether on the retirement of Chandra Shekhar the old firm continued or whether it was dissolved and a new firm came into existence has not been referred to use and we also do not find any flaw in the reasoning of the Tribunal and its conclusion that the same firm continued with a change in its constitution. On this finding the declaration given that the firm continued up to March 11, 1964, when it was dissolved as required by s. 184(7) in Form No. 12 was not correct. Section 184(7) read with Form No. 12 contemplates a continuation of registration for a part of the year when the firm stands dissolved but there is no question of continuation of registration for a part of the year when the firm continues after a change in its constitution which is not evidenced by an instrument of partnership. In such a case an application for registration has to be made in accordance with the new instrument off partnership. It is on this ground that the order of the Tribunal confirming refusal of recognition or continuation of registration for a part of the year can be upheld.
For the reasons given above, we answer the question referred to us in the affirmative, in favour of the department and against the assessees. There shall be no order as to costs.
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