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Messrs Sahai Brothers v. Commissioner Of Income-Tax B. And O. Opposite Party.
Structured Summary of the Opinion
Factual and Procedural Background
The assessee is a firm constituted by Sri Kamleshwari Sahai and thirteen other family members. The assessment year in issue is 1950–1951 (accounting year 1949–1950). The firm applied for registration under Section 26-A of the Income-tax Act. The instrument of partnership is dated 22 May 1949 and was annexed to the statement of the case.
The Income-tax Officer refused registration on the ground that two of the named partners, Uma Shankar Sahai and Narendra Shankar Sahai, were minors and that the partnership document was invalid for that reason. The assessee appealed to the Appellate Assistant Commissioner, who dismissed the appeal. The Appellate Tribunal also held that because the minors were shown as full-fledged partners sharing profits and losses, the partnership could not be registered under Section 26-A.
The Appellate Tribunal framed a question of law under Section 66(1) of the Income-tax Act for the High Court's determination: whether, on a true construction of the deed and on the facts, there was any valid partnership registerable under Section 26-A of the Indian Income-tax Act.
Legal Issues Presented
- Whether, on a true construction of the deed of partnership dated 22 May 1949 and in the circumstances of the case, there was a valid partnership registerable under Section 26-A of the Indian Income-tax Act (i.e., whether the presence of two minors in the deed prevented registration or whether they were to be regarded as admitted to the benefits only).
Arguments of the Parties
Appellant's (Assessee's) Arguments
- Argued by Mr. Dutta: The Appellate Tribunal was in error. Inclusion of two minors in the partnership deed did not void the contract as between the adult partners.
- The deed should be construed so that a valid partnership existed among the adult partners, with the two minors admitted only to the benefits of that partnership rather than being full-fledged partners liable for losses.
Respondent's (Income-tax Department's) Arguments
- Argued by Mr. Shiveshwar Prasad Sinha: Relied on a Punjab High Court decision (Banka Mal Lajja Ram & Co. v. Commissioner of Income-tax) for the proposition that a minor cannot be a full-fledged partner under Section 30 of the Partnership Act and therefore a minor cannot enter into a partnership (even through a guardian).
- The Department also relied on two other authorities (Hoosen Kasam Dada v. Commissioner of Income-tax Bengal and P.A. Raju Chettiar and Brothers v. Commissioner of Income-tax) though the court considered those decisions not to have application to the precise question in the present case.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Jakka Devayya and Sons v. Commissioner of Income-tax, Madras (1952) 22 ITR 264 ; AIR 1953 Mad 315 | Cited as authority supporting the proposition that a deed may be construed as admitting minors only to the benefits of a partnership (i.e., minors may not be full-fledged partners liable for losses). | The court relied on this decision (Madras High Court) as consistent with its construction that the two minors in the present deed were admitted to benefits only. |
| P. Vincent v. Commissioner of Income-tax, Madras (1952) 22 ITR 285 ; AIR 1953 Mad 336 | Similarly cited as supporting the limited status of minors in partnership deeds (admission to benefits rather than full partnership liability). | Used to bolster the court's view that the deed should be interpreted as admitting the minors only to benefits and not as making them liable for losses. |
| Dwarkadas Khetan and Co. v. Commissioner of Income-tax, Bombay (1956) 29 ITR 903 ; AIR 1956 Bom 321 | Cited as a supporting authority (Bombay High Court decision) consistent with the proposition that minors may be admitted to benefits but are not full-fledged partners for liability purposes. | Applied by the court to confirm that the clause purporting to make minors liable for losses has no legal effect and that the minors are to be treated as admitted to benefits only. |
| Banka Mal Lajja Ram & Co. v. Commissioner of Income-tax, Delhi (1953) 24 ITR 150 ; AIR 1953 Punj 270 | Holds that a minor cannot be a full-fledged partner under Section 30 of the Partnership Act and that a minor cannot enter into a partnership through his guardian even if other partners consent. | The court observed that this decision did not consider the precise question in the present case (i.e., whether an otherwise valid partnership of adult partners could be registered when minors are described in the deed but are admitted to benefits). Thus the court found it of no direct bearing on the issue before it. |
| Hoosen Kasam Dada v. Commissioner of Income-tax Bengal (1937) 5 ITR 182 (Cal) | Addressed whether a wakf (under Muhammadan law) could be a partner and whether such purported partnership could be registered under Section 26-A; held no partnership in law where property vested in a non-personal entity. | The court concluded this authority concerned a wholly different question (wakf/property vesting) and therefore was not applicable to the factual and legal issue in the present case. |
| P.A. Raju Chettiar and Brothers v. Commissioner of Income-tax, Madras (1949) 17 ITR 51 ; AIR 1949 Mad 516 | Considered whether an Income-tax Officer could enquire into the genuineness of a partnership when registration was applied for; held the ITO could investigate genuineness and reject the application if the partnership was not genuine. | The court held this decision did not bear on the present question concerning whether minors described in a deed were to be treated as admitted to benefits for registration purposes. |
| Lindley on Partnership (treatise, 11th ed., p.87) | States the principle that agreements entered into between several persons, some of whom are by law incompetent to contract, are not wholly null and void but less effective in some respects; nothing prevents a person not sui juris from being a partner though consequences follow. | The court relied on this statement of principle to support the conclusion that the contract among the competent adult partners was valid notwithstanding the inclusion of minors, and that minors' incapacity affects only certain legal consequences. |
Court's Reasoning and Analysis
The court proceeded by applying statutory text and established principles to the construction of the partnership deed and the registration provisions:
- Statutory basis: The court invoked Section 30 of the Partnership Act, which permits a minor, with the consent of all existing partners, to be admitted to the benefits of a partnership (quoted in the opinion, including the minor's rights to share of profits, access to accounts, limitation on personal liability, and the six-month election period on attaining majority).
- Income-tax definition: Section 2(6-B) of the Income-tax Act was noted to include, for tax purposes, the expressions "firm", "partner" and "partnership" as in the Partnership Act, and specifically to include a person who, being a minor, has been admitted to the benefits of the partnership in the definition of "partner".
- Principled support: The court relied on the statement from Lindley on Partnership that agreements involving persons incompetent to contract are not wholly void, but less effective in certain respects; nothing prevents a non-sui juris person from being a partner, though consequences flow from incapacity.
- Construction of the deed: Applying the above, the court construed the deed dated 22 May 1949 to establish a valid partnership among the twelve adult partners, while treating the two named minors (Uma Shankar Sahai and Narendra Shankar Sahai) as admitted to the benefits only, not as full-fledged partners liable for losses.
- Effect of contractual clauses: Although the deed contained clauses (paras 8 and 17) purporting to make all partners, including minors, liable for losses, the court held that such clauses have no legal effect insofar as minors are concerned because the law does not permit a minor to be personally liable for the acts of the firm; the minor is only liable to the extent of his share in the property of the firm (as provided by Section 30).
- Precedential corroboration: The court found support for its construction in Madras High Court decisions (Jakka Devayya and Sons; P. Vincent) and a Bombay High Court decision (Dwarkadas Khetan and Co.), which the court said were consistent with the view that minors may be admitted to benefits without becoming fully liable partners.
- Distinguishing contrary authorities: The court considered the Punjab High Court decision (Banka Mal Lajja Ram & Co.) and determined it did not address the specific question whether a valid partnership of adult partners may be registered where minors are described in the deed but treated as admitted to benefits; similarly, the court considered Hoosen Kasam Dada and P.A. Raju Chettiar as addressing different legal questions (wakf/property vesting and genuineness inquiries respectively) and thus not applicable to the present issue.
- Conclusion of analysis: On the combined statutory provisions, textual construction, and authorities, the court concluded that the partnership was registerable under Section 26-A as a valid partnership consisting of the adult partners, with the minors admitted to benefits only.
Holding and Implications
Holding: The court answered the question of law referred by the Appellate Tribunal in favour of the assessee and against the Income-tax Department: on a true construction of the deed dated 22 May 1949 and on the facts, there was a valid partnership registerable under Section 26-A of the Indian Income-tax Act.
Implications and direct consequences:
- The partnership, as construed by the court, is registerable under Section 26-A; the minors named in the deed are to be regarded as admitted to the benefits of the partnership rather than as full-fledged partners personally liable for losses.
- The clauses in the deed purporting to make the minors liable for losses were held to have no legal effect as regards the minors' personal liability.
- The assessee was awarded the costs of the reference; the hearing fee was fixed at Rs. 250.
- The opinion does not purport to lay down a new general precedent beyond applying existing statutory provisions and authorities to the facts; it resolves the referred question in the particular circumstances presented.
Decision signer initials recorded in the opinion: R.G.D. (Answer recorded and delivered as stated.)
1. In this case the assessee is a firm constituted of Sri Kamleshwari Sahai and thirteen other family members. The assessment year is 1950–1951 and the corresponding accounting year is the financial year 1949–1950. During the assessment year the assessee applied for registration of the partnership under Section 26-A of the Income-tax Act. The instrument of partnership is dated 22nd May, 1949, and is annexure A to the statement of the case. The Income-tax Officer refused to register the partnership on the ground that two of the partners, namely, Uma Shankar Sahai and Narendra Shankar Sahai, were minors and the document of partnership was invalid on that account. The assessee took the matter on appeal to the Appellate Assistant Commissioner against the decision of the Income-tax Officer, but the appeal was dismissed. The Appellate Tribunal also took the view that the minors were shown as full-fledged partners in the partnership deed, sharing both profits and losses, and, therefore, the partnership could not be registered by the Income-tax Authorities under S. 26-A.
2. At the instance of the assessee the Appellate Tribunal has made a statement of the case under Section 66(1) of the Income-tax Act on the following question of law:
“Whether on a true construction of the deed of partnership and under the circumstances of this case, there was any valid partnership registerable under Section 26-A of the Indian Income-tax Act?”
3. On behalf of the assessee Mr. Dutta put forward the argument that the Appellate Tribunal has taken an erroneous view of the law and that the partnership constituted by the document dated 22nd May, 1949, should have been registered under Section 26-A of the Income-tax Act. It was submitted that merely because two minors were included in the partnership deed the contract of partnership as between the adult partners could not become invalid, and as a matter of construction it ought to be held that there was a valid partnership between the adult partners and the two minors were admitted to the benefits of that valid partnership.
4. The argument put forward by learned Counsel for the assessee is well founded and must be accepted as correct. Under Section 30 of the Partnership Act it is open to the partners to admit a minor to the benefits of the partnership. Reference may be made to Section 30 of the Partnership Act on this point. Section 30 enacts:
“30.(1) A person who is a minor according to the law to which he is subject may not be a partner in a firm, but, with the consent of all the partners for the time being, he may be admitted to the benefits of partnership.
(2) Such minor has a right to such share of the property and of the profits of the firm as may be agreed upon, and he may have access to and inspect and copy any of the accounts of the firm.
(3) Such minor's share is liable for the acts of the firm, but the minor is not personally liable for any such act.
(5) At any time within six months of his attaining majority, or of his obtaining knowledge that he had been admitted to the benefits of partnership, whichever date is later, such person may give public notice that he has elected to become or that he has elected not to become a partner in the firm, and such notice shall determine his position as regards the firm:
Provided that, if he fails to give such notice, he shall become a partner in the firm on the expiry of the said six months.”
5. Section 2(6-B) of the Income-tax Act is also relevant in this connection. Section 2(6-B) states that the expressions “firm”, “partner” and “partnership” have the same meanings respectively as in the Indian Partnership Act, 1932 (9 of 1932), provided that the expression “partner” includes any person who being a minor has been admitted to the benefits of the partnership.
6. It is also a well-established proposition that the agreements entered into between several persons, some of whom are by law incompetent to contract, are not wholly null and void, but are only less effective than if all the parties to them were competent to contract. That is the view expressed in Lindley on Partnership, 11th edition, on page 87, where the law on the point is stated as follows:
“Agreement entered into between several persons, some of whom are by law incompetent to contract, are not wholly null and void, but are only in some respects less effective than if all the parties to them were competent hence there is nothing to prevent a person who is not sui juris from being a partner. But if any such person is a partner, his or her want of capacity to contract will necessarily give rise to consequences deserving special notice.”
7. We are, therefore, of opinion that in the present case there was a valid contract of partnership as between the twelve adult partners constituted by the deed of partnership dated 22nd May, 1949, but as regards the two minor partners, Uma Shankar Sahai and Narendra Shankar Sahai, it must be held as a matter of construction of the deed of partnership that these two minor partners were admitted to the benefits of the partnership.
8. It is true that paragraph 8 and para-i graph 17 of the partnership deed states that all the partners, including the minor partners, would be liable for the loss borne by the partnership. But this clause has no legal effect so far as the minor partners are: concerned, because in the eye of law the minor cannot become a partner or become liable for losses but he is only entitled to the benefit of profits according to his share. As a matter of construction, therefore, we consider that the deed of partnership dated 22nd May, 1949, should be interpreted only as admitting the two minor partners, Uma Shankar Sahai and Narendra Shankar Sahai, to the benefit of the partnership and not as making them full fledged partners liable for the losses incurred by the partnership. This view of the law is borne out by two decisions of the Madras High Court, Jakka Devayya and Sons v. Commissioner of Income-tax, Madras, (1952) 22 ITR 264 : (AIR 1953 Mad 315) (A) and P. Vincent v. Commissioner of Income-tax, Madras, (1952) 22 ITR 285 : (AIR 1953 Mad 336) (B), which are the decisions of Satyanarayana Rao and Rajagopalan JJ., and also by a decision of the Bombay High Court pronounced by Chagla, C.J and Tendolkar, J. in Dwarkadas Khetan and Co. v. Commissioner of Income-tax, Bombay City, (1956) 29 ITR 903 : ((S) AIR 1956 Bom 321) (C).
9. On behalf of the Income-tax Department Mr. Shiveshwar Prasad Sinha referred to a decision of the Punjab High Court in Banka Mal Lajja Ram & Co. v. Commissioner of Income-tax, Delhi, (1953) 24 ITR 150 : (AIR 1953 Punj 270) (D). But this decision is only to the effect that a minor cannot be a full-fledged partner in a partnership firm under Section 30 of the Indian Partnership Act and, therefore, a minor cannot enter into a partnership through his guardian even when the other partners consented.
10. But the learned Judges did not consider the question whether the partnership should be taken as a valid partnership consisting of the adult partners excluding the minor on the ground that no such question was referred to the High Court. This case has, therefore, no bearing on the question presented for determination in the present case, namely, the question whether the Income-tax Authorities could register a partnership in which a minor is described as a partner as a valid partnership consisting of adult partners excluding the minor who may be regarded as having been admitted to the benefits of the partnership.
11. This question was not examined in the Punjab case. Counsel on behalf of the Income-tax Department also referred to two other cases, Hoosen Kasam Dada v. Commissioner of Income-tax Bengal, (1937) 5 ITR 182 (Cal) (E) and P.A Raju Chettiar and Brothers v. Commissioner of Income-tax, Madras, (1949) 17 ITR 51 : (AIR 1949 Mad 516) (F). We do not consider that the ratio of these two cases has any application to the present case.
12. In 1937-5 ITR 182 (Cal) (E), the question for determination was whether a wakf created under the Muhammadan Law could enter into a partnership with other persons and whether such a partnership would be registered as a firm under Section 26-A of the Indian Income-tax Act. It was held in that case that a partnership which purported to exist with a wakf represented by the Mutwalli as a partner was no partnership in law because right of property under the Muhammadan Law had passed out of the wakf and vested in the Almighty being which is not a personal entity and so the requirement of Section 4 of the Indian Partnership Act was not satisfied.
13. It is obvious that the question at issue in the present case is wholly different. In the other case, namely, (1949) 17 ITR 51 : (AIR 1949 Mad 516) (F), the question for determination was whether it is open to an Income-tax Officer to make an enquiry into the genuine character of the partnership in an application made by the partnership for registration under Section 26-A of the Income-tax Act.
14. It was held by the Madras High Court that when an application for registration is made, the Income-tax Officer was entitled to examine whether the partnership was genuine; and if he found that there was no genuineness about the partnership, it was open to him to reject the application on the ground that there was no genuine partnership brought into existence by the deed. We do not consider that this case has any bearing upon the question we are examining in the present case. For the reasons we have already expressed, we hold that upon a true construction of the deed of partnership dated the 22nd May, 1949, and in the circumstances of the case, there was a valid partnership which could be registered under S. 26 A of the Indian Income-tax Act. We accordingly answer the question of law referred by the Income-tax Appellate Tribunal in favour of the assessee and against the Income-tax Department. The assessee is entitled to the costs of this reference. Hearing fee Rs. 250/-.
R.G.D
15. Answer accordingly.
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