Durgaprasad Rajaram Adatiya v. Commissioner Of Income-Tax, M.P-Ii.

1. This is a reference under Section 256(1) of the I.T. Act, 1961, made by the Income-tax Appellate Tribunal referring for our answer the following questions of law:

" 1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in dismissing the appeals filed by the assessee as not maintainable ?

2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that there was a change in the constitution of the firm during the two previous years relevant to the assessment years 1967-68 and 1968-69, respectively ?

3. If the answer to question No. 2 is in the negative and in favour of the assessee, whether the assessee-firm is entitled to the benefits of continuation of registration under Section 184(7) or Section 185(1)(a) of the Income-tax Act, 1961, for the assessment years 1967-68, 1968-69 and 1969-70 ? "

2. The reference relates to the assessment years 1967-68, 1968-69 and 1969-70. The accounting years corresponding to these assessment years are, respectively, 24th October, 1965, to 11th November, 1966, 12th November, 1966, to 31st October, 1967, and 1st November, 1967 to 28th August, 1968. The assessee is a partnership firm which was constituted by a partnership deed executed on 10th November, 1961. The firm consisted of four adult partners. Each of them had 1/7th share in profits and 1/4th share in losses. Three minors, namely, Awadhbihari, Prakashchandra and Subhashchandra were admitted to the benefits of the partnership and they were to receive 1/7th share each in profits. The firm was granted registration for the earlier assessment years. Prakashchandra attained majority on 4th June, 1966, and elected to become a full-fledged partner. Subhashchandra attained majority on 27th May, 1967. No fresh deed of partnership was executed. For the three relevant years, the assessee filed declarations in Form No. 12 along with the returns claiming a continuation of the registration of the firm. The assessee also applied for a fresh registration in Forms Nos. 11 and 11A for the three years on 30th October, 1971, 21st November, 1971, and 17th January, 1972, respectively. Applications were also made for a condonation of the delay in making the applications for fresh registration. These applications for a fresh registration were dismissed on the ground that they were barred by time under Section 184(4) of the Act. The appeals against these orders were dismissed by the AAC on the ground that the appeals were not maintainable under Section 246. Similar view was taken by the Tribunal in further appeals. Question, No. 1 relates to this aspect. As regards the question whether the assessee was entitled to a continuation of registration, the ITO held that there was a change in the constitution of the firm because of the minors attaining majority and, therefore, the continuation of registration could not be granted. The same view was taken by the AAC and the Tribunal. Questions Nos. 2 and 3 relate to this aspect of the case.

3. Section 184(4) requires that an application for registration should be made before the end of the previous year for the assessment year in respect of which registration is sought. The proviso to this section empowers the ITO to entertain an application made after the end of the previous year if he is satisfied that the firm was prevented by sufficient cause from making the application before the end of the previous year. Section 185(1) then provides that on receipt of an application for the registration of a firm, the ITO shall inquire into the genuineness of the firm and its constitution as specified in the instrument of partnership. It further provides that, (a) if the ITO is satisfied that there is or there was during the previous year in existence a genuine firm with the constitution so specified, he shall pass an order in writing registering the firm, and (b) if he is not so satisfied, he shall pass an order in writing refusing to register the firm. Section 246 gives a list of appealable orders and one of the orders appealable is an order under Clause (b) of Section 185(1), i. e., an order in writing refusing to register the firm. The Madras High Court in Chandrasekaran v. CIT [1974] 96 ITR 711, held that an order dismissing an application for registration on the ground that it is barred by time is not an order under Section 185(1)(b) refusing to register the firm and, therefore, is not appealable. The Gujarat, Allahabad, Andhra Pradesh and Punjab & Haryana High Courts have, however, taken a different view : [See CIT v. Dineshchandra Industries [1975] 100 ITR 660 (Guj), ITO v. Vinod Krishna Som Prakash [1979] 117 ITR 594 (All), Addl. CIT v. Chekka Ayyanna [1977] 106 ITR 313 (AP) and CIT v. Beri Chemical Industries [1980] 121 ITR 87 (P & H)]. The reasoning of the majority High Courts is that when the ITO after finding that the application is barred by time does not go into the question regarding the genuineness of the firm and its constitution, still it can be said that he refuses registration as he is not satisfied on these questions. In other words, the delay beyond the prescribed period in filing the application prevents the ITO in being satisfied on the relevant questions which lead to the refusal of the application and, therefore, a case where the application is dismissed on the ground of limitation is also a case falling under Section 185(1)(b). This view, in our opinion, appears to be reasonable and should be accepted. A statutory provision conferring a right of appeal should, in case of doubt, be liberally construed. Moreover, in the matter of construction of a statute like the I.T. Act, which is of all India application, it is necessary that there should be uniformity as far as possible amongst the different High Courts. For these reasons, we fall in line with the majority High Courts and we hold that the orders dismissing the assessee's applications for registration were appealable.

4. As regards the question relating to continuation of registration, it is first contended by the learned counsel for the assessee that there was no change in the constitution of the partnership or in the shares of the partners during the accounting year relevant to the assessment year 1967-68, as Prakashchandra became major within six months before the end of the accounting year. It is argued that Prakashchandra who became major on 4th June, 1966, could have elected to go out of the partnership or to become a partner within six months and that in case he did not elect to become a partner within this period, he would be deemed to become a partner under Section 30(5) of the Partnership Act after the expiry of six months from the date he became major. It is pointed out that the period of six months from the date when Prakashchandra became major expired after the close of the accounting year relevant for the assessment year 1967-68, and, therefore, the old position continued and there was no change whatsoever in the constitution of the firm or the shares of the partners. The contention so raised before us proceeds upon the assumption that Prakashchandra did not elect to become a partner within the accounting year. The statement of the case as also the finding recorded by the Tribunal in the order is to the effect that Prakashchandra " attained majority on 4th June, 1966, and elected to become a full-fledged partner ". The finding, on a proper reading, means that Prakashchandra became a partner by election from 4th June, 1966, or, in other words, Prakashchandra elected to become a partner on 4th June, 1966. The contention of the learned counsel which is opposed to the finding of fact contained in the statement of the case and the order of the Tribunal cannot be considered by us. Further, the contention is against the assessee's own case argued before the Tribunal that when Prakashchandra became a major there was an oral agreement that he will become a partner but he would not share losses. For these reasons, we are unable to consider the case on the hypothesis that Prakashchandra did not become a partner before the close of the accounting year relevant to the assessment year 1967-68.

5. It was then contended by the learned counsel that even assuming that Prakashchandra elected to become a partner during the accounting year relevant to the assessment year 1967-68, that would not make any change in the constitution of the firm or as to the shares specified in the deed of partnership and that the shares in the profits and losses of the respective partners will have to be worked out in accordance with Section 30(7)(b) read with Section 13(b) of the Partnership Act.

6. An application for a continuation of the registration of a firm is made under Section 184(7) of the I.T. Act. As expressly provided therein such an application is maintainable only when there is no change in the constitution of the firm or in the shares of the partners as evidenced by the instrument of partnership on the basis of which the registration was granted. A change in the constitution of the firm refers to a change in the identity of the partners. '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 there is no change in "the identity of the partners for purposes of the I.T. Act, when a minor on attaining majority becomes a partner in the firm. But the minor after becoming a real partner as defined by the Partnership Act, starts sharing losses and the question then arises is whether, as a result of it, there is a change in the shares of the partners as evidenced by the instrument of partnership. If the instrument of partnership does not on a proper construction disclose how the losses would be shared on the minor becoming a major, it can be said that 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 shared on the minor becoming a major, it cannot be said that there is a change in the shares of the partners as evidenced by the instrument of partnership. The whole question is whether the instrument of partnership foresees the eventuality of the minor becoming a major and makes a provision for the distribution of shares in losses at that stage. If the instrument provides for such an eventuality and it is possible on its reasonable construction to ascertain the redistribution of shares in losses on the minor attaining majority, it would not be possible to say that there is a change in the constitution of the firm or in the shares of the partners as evidenced by the instrument of partnership within the meaning of the first proviso to Section 184(7). But if the instrument of partnership does not foresee the contingency of the minor becoming major and does not provide for the redistribution of shares in losses at that stage, it could be said that the instrument does not evidence the change in shares and continuation of registration cannot be granted : [See Badri Narain Kaski Prasad v. Addl. C1T [1978] 115 ITR 858 (All) [FB] and Ganesh Rice Mills v. CIT [1981] 132 ITR 257 (MP)]. It is in the light of these principles that the question relating to the continuation of registration has to be examined.

7. Clause 5 is the relevant clause in the instrument of partnership, which reads as follows:

"25. That the net profits or losses of the firm, as the case may be, shall be divided or borne by the parties or adjusted in their respective accounts in the following manner:

In profits In loss

1. Rajaram Adatiya 0-2-3 0-4-0

2. Hiralal 0-2-3 0-4-0

3. Hanuman Pd. Adatiya 0-2-3 0-4-0

4. Ramchandra Adatiya 0-2-3 0-4-0 0-9-0 1-0-0 and the partners also agree to admit the following minors to the benefits of the partnership and further agree to allot the shares in only profits of the firm in the following manner :

1. Awadhbihari, minor, aged about 9 years, guardian--Shri Hiralal Adatiya 0-2-3

2. Prakashchandra, minor, aged 14 years, guardian--Shri Hanuman Prasad Adatiya 0-2-3

3. Subhaschandra, minor, aged about 10 years, guardian--Shri Hanuman Prasad Adatiya 0-2-3 The above minors shall not be responsible for any loss of the firm. "

8. A perusal of Clause 5 quoted above shows that the four adult partners were to share the losses equally, i. e., four annas each, although their share in profits was only 2 annas 3 pies each. The instrument does not provide as to how the losses would be distributed after any one or more of the three minors who were admitted to the benefits of the partnership become a major and elect to become a partner. The learned counsel for the assessee relied upon Section 30(7)(b) and Section 13(b) of the Partnership Act, to contend that the minor becoming a major would be entitled to the same share in profits to which he was entitled as a minor and that he will share the losses equally with the remaining partners. In other words, the learned counsel argues, that after Prakashchandra became a major and became a partner, he shared the losses equally with the other four adult partners and each one of them became responsible for losses to the extent of 20%, i. e., 20 paise in a rupee. In our opinion, this argument is misconceived. It is true that Section 30(7)(b) does raise a presumption that the share of a minor, who after attaining majority elects to become a partner in the property and profits of the firm, will be the share to which he was entitled as a minor. But the second limb of the argument of the learned counsel flowing from Section 13(b) is not sustainable. As held by the Madras High Court in Pitchiah Chettiar v. Subramanian Chettiar [1935] ILR 58 Mad 25, with reference to Section 253(2) of the Indian Contract Act, 1872, which was identically worded as Section 13(b) of the Partnership Act, there are two presumptions clubbed together in that provision. The first is that if no specific contract is proved, the shares of the partners must be presumed to be equal, and the second presumption is that where the partners are to participate in the profits in certain shares they should also participate in the losses in similar shares. This construction of Section 253(2) of the Indian Contract Act, adopted by the Madras High Court, was approved and applied for construing Section 13(b) of the Partnership Act by the Supreme Court in Mandyala Govindu & Co. v. CIT [1976] 102 ITR 1, 6, 7 (SC). Now, let us apply the second presumption which flows from Section 13(b) in the instant case. Here the share of the partners including that of the minors is 2 annas and 2 pies each. At the time the instrument of partnership was executed, there were four adult partners. Under the second presumption they should have contributed towards the losses to the extent of 2 annas 3 pies each. But that would not have met the losses in respect of the shares to the benefit of which the minors were admitted. It was for this reason that the deed provided that the adult partners will each be sharing the losses to the extent of four annas. The second presumption arising under Section 13(b) was from the very nature of the partnership inapplicable here. Now, when Prakashchandra became a major the presumption under Section 30(7)(b) would be that he started sharing the profits to the extent of 2 annas 3 pies which was his share in the benefits of the partnership when he was a minor. If the second presumption under Section 13(b) is applied at this stage, Prakashchandra would start sharing the losses to the extent of his share in the profits, i. e., to the extent of 2 annas 3 pies. How then the losses in respect of the other two minors would be distributed cannot be solved by applying the second presumption under Section 13(b). The mode in which the losses were to be distributed after each minor became a major is thus neither foreseen by the instrument of partnership nor it can be ascertained by applying Section 30(7)(b) or Section 13(b) of the Partnership Act. In such a situation, it is clear that when each minor became a major there was a change in the shares as evidenced by the instrument of partnership within the meaning of the first proviso to Section 184(7). The facts of the instant case are similar to the facts of I.T.R. No. 637 of 1972, which was one of the references decided by the Full Bench of the Allahabad High Court in Badri Narain Kashi Prasad's case [1978] 115 ITR 858, and it was held that the instrument of partnership did not evidence the change in shares where one of the minors attained majority. In our opinion, the Tribunal was right in holding that when Prakashchandra and Subhashchandra became majors and thus partners in the firm there was a change in the shares of the partners as evidenced by the instrument of partnership within the meaning of prov. (1) to Section 184(7) and the assessee was not entitled to a continuation of registration.

9. For the reasons given above, our answers to the questions referred are as follows:

(1) The Appellate Tribunal was not right in law in dismissing the appeals as not maintainable.

(2) The Appellate Tribunal was right in holding that there was a change in the shares as evidenced by the instrument of partnership during the two previous years relevant for the assessment years 1967-68 and 1968-69.

(3) The assessee is not entitled to the benefit of continuation of registration for the assessment years 1967-68, 1968-69 and 1969-70, There will be no order as to costs.