Abdul Aziz and Co. vs Commissioner of Income Tax

Jaswant Singh, J.—The Income Tax Appellate Tribunal, Chandigarh Bench, hereinafter referred to as the ""Appellate Tribunal"", has at the

instance of M/s. Abdul Aziz & Co. of Sona Masjid, Srinagar, hereinafter referred to as ""the assessee"", referred the following question of law for

opinion of this court u/s 256(1) of the Income Tax Act, 1961, hereinafter referred to as ""the Act "" :

Whether, on the facts and in the circumstances of the case, the registration claimed on the basis of the partnership deed dated October 6, 1966,

was rightly refused by the Tribunal ?

The material facts leading to this reference as they appear from the statement of the case drawn up by the Appellate Tribunal are as follows:

On February 25, 1967, the assessee filed for the assessment year 1967-68 an application for registration u/s 184 of the Act before the Income

Tax Officer, Projects Ward, Srinagar, on the basis of an instrument of partnership executed on October 6, 1966, which showed the constitution of

the firm as under :

Abdul Aziz Rah, son of Kh, Sona Ullah.

Ch. Nabi Rah, son of Kh. Mohd. Sultan Rah.

Haji Mohd Sidiq Rah, son of Mohd. Rah.

Abdul Salam Darial, son of Kh. Muawar Joo Darial.

Mst. Zuhra Bibi, w/o Abdul Gaffar Darial.

Hamida Parveen, d/o Kh. Ali Mohd. Rah (minor).

Salima Parveen, d/o Kh. Ali Mohd. Rah (minor).

Shamim Parveen, d/o Kh. Ali Mohd. Rah (minor).

Mubarak Iqbal Rah, son of Kh. AH Mohd. Rah (minor).

Ajaz AH Rah, son of Kh. Ali Mohd. Rah (minor).

Though the above-mentioned minors were admitted only to the profits of the partnership the instrument of partnership was signed by some of them

personally as also on their behalf by their paternal uncle, Kh. Abdul Aziz Rah, a partner in the firm. This application was rejected by the Income

Tax Officer on the ground that since a minor was incapable of entering into a contract and could not under the Partnership Act be a full-fledged

partner in a firm, the partnership sought to be registered was invalid and could not, therefore, be registered. This refusal was made by the Income

Tax Officer, vide his order dated November 6, 1966. Against this order the assessee went up in appeal, u/s 185(1)(b) of the Act, before the

Appellate Assistant Commissioner, who by his order dated March 17, 1969, confirmed the order of the Income Tax Officer refusing registration

of the firm. On further appeal, the Appellate Tribunal affirmed the orders of the authorities below holding that the partnership entered into by the

paternal uncle as the natural guardian of the minors was not valid. The operative portion of the brief order passed by the Appellate Tribunal runs as

follows I

It was urged before us by the learned counsel for the assessee that the father of the minor is an old man of 70 years and, therefore, the uncle has

been rightly substituted as natural guardian. Under the Mohammedan law, the father is the only natural guardian and the father happens to be

carrying on independent business in the name and style of M/s. Abdul Gaffar, Ali Mohd. Rah. He is not in any way incapacitated from being the

natural guardian and, therefore, under the Mohammedan law, only the father and the mother are capable of acting as natural guardian. The uncle

does not come into the picture as a natural guardian. Therefore, the partnership entered into by the uncle as the natural guardian of the minors is not

valid. Hence, the claim has been rightly rejected and we confirm the orders of the authorities below.

Aggrieved by this order the assessee moved the Appellate Tribunal for reference of the aforesaid question to this court.

Appearing on behalf of the assessee, Mr. Kaul has urged that the Income Tax authorities were not justified in refusing registration of the firm as

the minors, namely, Miss Hamida Parveen, Miss Salima Parvecn, Miss Shamim Parveen, Khawaja Mubarak Iqbal Rah and Khawaja Ajaz Ali

Rah, were not taken as full-fledged partners but had been merely admitted to the profits of the partnership.

Mr. Bhan, standing counsel for the Income Tax department, has on the other hand urged that the partnership instrument having been executed

by all the ten parties including the aforesaid minors was invalid and that the minors having been admitted not only to the profits of the partnership

but having also been made to share the losses equally with the major partners as is evident from the application for registration, the prayer for

registration was rightly refused.

We have given our thoughtful consideration to the submissions made by the learned counsel for the parties.

For a proper determination of the question it is necessary in the first instance to find out the essential requirements of the application for

registration and then proceed to see whether they are satisfied in the present case or not. A reference to Sections 184 and 185 of the Act would

show that the following conditions are essential for the registration of a firm:

An application u/s 184 of the Act on behalf of the firm to the Income Tax Officer before the end of the accounting year relevant to the

assessment year for which registration is sought signed by all partners (excepting the minors).

The firm should be evidenced by an instrument of partnership, the original as well as a copy whereof should accompany the application.

The instrument should specify the individual shares of the partners.

The disclosure of the particulars of the apportionment of the income in the previous year between the partners as required by the prescribed

form. It is, however, to be noted that under the prescribed form of application it is enough to certify that profits will be divided amongst the

partners in their profits-sharing ratio.

The partnership should be valid and genuine and should actually be constituted as specified in the instrument.

On receipt of the application the Income Tax Officer is required to go into the genuineness of the firm and its constitution as specified in the

instrument of partnership. After being satisfied about the genuineness of the firm and its constitution he has to see if the other conditions set out

above are fulfilled. If they are satisfied he is bound to register the firm. He cannot reject an application for registration merely on the ground that the

application is not in order, but has to intimate the defect to the firm and give it an opportunity to rectify the defect in the application within a period

of one month from the date of such intimation. If the defect is not rectified within such time, the Income Tax Officer may reject the application,

Thus, it is clear that an Income Tax Officer cannot reject the application on the mere ground that the application is signed by a minor or a guardian

on his behalf if he is admitted only to the benefits of partnership and is not made to bear the losses personally. This view is in accord with Section

30 of the Partnership Act whereunder it is open to the adult partners to admit a minor to the benefits of the partnership as also with Section 2(23)

of the Act which provides, inter alia, that the expression ""partner"" shall also include any person who, being a minor, has been admitted to the

benefits of partnership. It will also be advantageous in this connection to refer to the following passage occurring at page 87 of Lindley on

Partnership, 11th edition :

Agreements 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.

Now the essential conditions for registration of a firm as set out above were amply satisfied in the present case in that there was an application for

registration before the end of the relevant year signed by all the major partners personally, there was an instrument of partnership evidencing the

constitution of the firm, a copy of which was produced and there is nothing to show that the partners declined despite a demand by the Income

Tax Officer to produce the original instrument of partnership, and the instrument also clearly specified the individual shares of the partners. A

reference to the application for registration on which great stress has been laid by Mr. J.N. Bhan to show that the minors were admitted not only to

the benefits of partnership but were also made liable for losses, would make it clear that the assessee, wanted registration of the partnership firm on

the basis of the aforesaid instrument of partnership. Accordingly, the application has not to be read in isolation but in conjunction with the said

instrument, the dominant clause whereof is clause 3 which runs as follows :

That the firm shall maintain proper accounts wherein all transactions shall be entered. Trading cum profit and loss account along with the balance-

sheet shall be prepared by the end of March every year, and

(a) profits shall be credited to the personal account of each partner ;

(b) loss, if any, shall be borne by the partners (excluding minors) equally, viz., the minors are entitled to the benefits of profits only and the loss shall

be debited to the personal accounts of the partners (excluding minors).

A plain reading of the clause would show that the aforesaid minors were not made full-fledged partners but were merely admitted to the benefits of

the business. So far as the losses were concerned, it was specifically mentioned in the clause that they would be borne by the major partners. The

fact that the partnership deed was signed by Abdul Aziz Rah on behalf of the minors as also by some of them personally could not deprive the firm

of its right to be registered specially when the legal formalities prescribed by the Income Tax Act were duly complied with. What was material to

be seen in a case of the present nature, in view of the decision of the Orissa High Court in Simhadri Narasingh Prusty and Others Vs.

Commissioner of Income Tax, , was whether a genuine partnership had come into existence by means of the instrument of partnership or the entire

matter was a subterfuge resorted to for the evasion of Income Tax. There is nothing on the record to indicate that the Income Tax. Officer was not

satisfied about the genuineness of the existence of the firm or about the constitution of the firm as contained in the deed of partnership. There is also

nothing to show that there was no disclosure of the apportionment of the income or, despite being asked to do so, the particulars of the

apportionment of the income were not disclosed or that despite being asked to rectify any other defect the firm did not do so or that the minor

partners were included in the partnership as full-fledged partners or that the arrangement arrived at by means of the aforesaid instrument of

partnership was not genuine but was a subterfuge resorted to for the evasion of the tax.

In Commissioner of Income Tax, Mysore Vs. Shah Mohandas Sadhuram, where the partnership consisting of four partners, two of whom were

minors, was constituted to do the business of banking and commerce and to deal in automobiles, and the major partners had agreed to admit the

minor members to the benefits of partnership but not to the liabilities thereof, but the instrument of partnership was on behalf of the minors executed

by their guardian for the purpose of admitting them to the benefits of partnership and where it was contended on behalf of the Income Tax

department that the deed of partnership was void as : (1) the minors had been made full-fledged partners, and (2) the guardian had contracted on

behalf of the minors which he was not entitled to do, it was held repelling these contentions that the partnership deed must be construed

reasonably. It was further held by their Lordships that as long as the partnership deed does not make a minor a full-fledged partner, the deed

cannot be regarded as invalid on the ground that the guardian had purported to contract on behalf of the minors if the contract is for the purpose

mentioned in Section 30 of the Partnership Act. Their Lordships further went on to observe that if a guardian can accept benefits of partnership on

behalf of the minor he must have the power not only to scrutinise the terms on which such benefits are received by the minor but he must also have

the power to accept the conditions on which the benefits of partnership are being conferred and that a guardian can do all that is necessary to

effectuate the conferment and the receipt of the benefits of the partnership. It was further remarked by their Lordships in that case that the

partnership deed reasonably construed conferred only benefits of partnership on the two minors and did not make them partners and that their

guardian had agreed to certain clauses in order to effectuate the decision of major partners to confer benefits of the partnership on the minors.

Accordingly, agreeing with the High Court, their Lordships held that the Income Tax authorities ought not to have declined to register the firm.

Again in Commissioner of Income Tax v. Shah Jethaji Pulchand [1965] 57 ITR 538, where under the main clauses of the partnership deed the

minor was not made a working partner but was admitted to the benefits of partnership and was not to bear any loss, their Lordships, after

reiterating that a partnership deed must be construed reasonably and that the guardian of a minor is entitled to do all things necessary for

effectuating the conferment of the benefits of partnership on the minor, held that a guardian can agree on behalf of the minor to contribute capital

for the business of the firm in which the minor is admitted to the benefits of partnership and that there is no bar in law to the guardian of a minor

agreeing on behalf of the minor to the starting of the business and the constitution of a firm on the condition that the minor shall not be a full partner

but shall be entitled to the benefits of the partnership for he is only securing thereby the conferment of the benefits of partnership on the minor.

In Sahai Brothers Vs. Commissioner of Income Tax, , where the two minors were included in the partnership and paragraph 17 of the

partnership deed provided that all the partners including the minors should be liable for the losses sustained by the partnership, their Lordships after

an exhaustive review of the case law held that merely because the two minor partners were included in the partnership deed, the contract of

partnership as between adult partners could not become invalid and that paragraph 17 which stated that all the partners including the minor

partners would be liable for the losses borne by the partnership had no legal effect so far as the minor partners were concerned and that as a

matter of construction the deed of partnership should be interpreted only as admitting the two minor partners to the benefits of partnership and not

as making them full-fledged partners liable for the losses incurred by the partnership.

In Chiman Lal Umaji and Sons Vs. Commissioner of Income Tax, , it was held that the instrument of partnership should be construed

reasonably. It was further held that if a valid and genuine firm is constituted by the instrument of partnership which specifies the individual shares of

the partners and also declares how the losses relating to the minors' shares would be borne, the registration could not be refused.

The decision in Commissioner of Income Tax, Bombay Vs. Dwarkadas Khetan and Co., is clearly distinguishable. In that case, as pointed out

by their Lordships themselves in Commissioner of Income Tax v. Shah Mohandas Sadhuram, no distinction was made between the adult partners

and the minor. The minor 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. He was further required to attend to the business to give his consent in writing, if so required, was entitled to manage the affairs of the

firm including inspection of account books and was given the right to vote if a decision on votes had to be taken.

In the present case, as already stated, the aforesaid five minors were not made full-fledged partners. They were admitted merely to the benefits

of partnership. The partnership deed besides specifying the shares of the partners expressly declared that the losses would be borne by the major

partners. It is thus clear that the minors had no liability in respect of the debts and obligations of the firm and they were not made full-fledged

partners. The Income Tax Officer and the appellate authorities were not, therefore, in our opinion, justified in refusing registration sought by the

assessee. The defects pointed out by the Appellate Assistant Commissioner in the penultimate paragraph of his order about the form or the

incorporation therein of the shares or the copy of the instrument of partnership were not fatal. They could easily be rectified if a demand in that

behalf had been made in terms of Section 185(2) of the Act. Moreover, the Income Tax Officer does not seem to have attached any importance

to them as he does not appear to have refused the registration in view of any of these so-called defects.

For the foregoing reasons, we would answer the question referred to us by the Income Tax Appellate Tribunal in the negative.

Wasi-Ud-Din, J.

I agree.