Commissioner of Income Tax vs Kikani and Co.

R. Jayasimha Babu, J.—At the instance of the Revenue, the question that has been referred to us which is common to the assessment years

1974-75 and 1975-76, is as to whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the

continuation of registration granted to the firm for the assessment years 1974-75 and 1975-76 cannot be cancelled on the ground that on the

attainment of majority by one of the minors admitted to the benefits of partnership, no new deed of partnership was drawn by the partners.

The firm, Kikani and Company, Coimbatore, was constituted under the partnership deed dated June 8, 1963, and had, inter alia, admitted one

Yogeshkumar Kikani, at that time a minor, to the benefits of partnership. The said minor attained the age of majority on March 14, 1973. The firm

had been registered and the registration of the firm had continued from year to year. After the erstwhile minor attained majority, he did not give any

public notice that he has elected to become a partner nor opted out of the partnership firm, and consequently at the expiry of six months from

March 14, 1973, he became a partner of the firm by virtue of the proviso to Section 30, Sub-section (5) of the Partnership Act. The date on

which he attained the age of majority as also the expiry of a period of six months therefrom occurred in the accounting year of the firm which ended

on October 25, 1973. In that year no new deed for partnership was drawn up. The firm, however, initially filed Form No. 11 prescribed under

Rule 22 of the Income tax Rules. The assessee having later realised that it was an inappropriate form as that form has to be used only in case there

was no change in the constitution of the firm and in the shares of the profits and losses among the partners in the firm and as in the books of the

firm, the erstwhile minor was shown as having two per cent. share in the losses and two of the partners, Arvind K. Kikani and Vasantlal K. Kikani,

were shown as having a reduced share in the losses at 11 per cent. each while according to the partnership deed they had 12 per cent. share in the

losses and the erstwhile minor had no share in the losses, Form No. 11A was filed duly signed by all the partners and in which this change in the

losses sharing ratio was set out. The Income Tax Officer initially granted registration to the firm in which these three persons had altered the ratio in

which they were to share the losses. The order registering the firm was passed on November 29, 1975. However, subsequently on March 14,

1980, the registration was cancelled on the ground that the firm was not genuine. The cancellation was effected u/s 186 of the Act.

Against that order of cancellation, the assessee appealed to the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax

(Appeals) allowed the appeal after observing that the cancellation had been effected on the basis of the Revenue audit objection and that in the

experience of the Commissioner of Income Tax (Appeals) the Revenue audit has all too frequently been introducing variations of its own invention

into the taxing statute, and that after the Commissioner of Income Tax (Appeals) had gone through Sections 184 and 186 with a fine toothed

comb, so to speak, he could not find anything in either provision to even remotely suggest that when a minor partner admitted to the benefits of the

partnership comes of age and elects to continue as a partner, a fresh instrument of partnership has to be drawn up or that in the absence of such an

instrument, the firm which has already been allowed registration for the year in which the change took place, such registration should be cancelled.

The Tribunal to whom the Revenue carried an appeal against the order of the Commissioner of Income Tax (Appeals) concurred with the view of

the Commissioner of Income Tax (Appeals) and also pointed out that several circulars issued by the Department also showed that when an

erstwhile minor becomes a partner of a firm, after attaining the age of majority it was not essential that a fresh deed should be drawn up for the

continuance of the registration of the firm.

That view of the Tribunal has been objected to before us by learned counsel for the Revenue. Learned counsel submitted that though u/s 2(23)

of the Act for the purpose of Income Tax even a minor has to be regarded as a partner in the firm unless the context requires that they should not

be so treated and when the minor who is admitted to the benefits of the partnership attains the age of majority, and becomes a partner by reason of

his inaction for a period of six months after attaining the age of majority, though it cannot be said that there is any change in the constitution of the

firm, nevertheless it is essential that such a partner must have a share in the losses and that share must be ascertainable from the terms of the

partnership deed, in order to permit the continuance of that firm as a registered firm. Counsel further submitted that, if any change in the losses

sharing ratio is brought about by an agreement of parties, such a change should be reflected in and form part of a new partnership deed, and it is

only on the basis of such a new partnership deed that fresh registration can be granted to that new firm.

In this case, it was pointed out by counsel admittedly, that the original partnership deed showed that the two adult Kikanis were to have 12 per

cent. share each in the losses while the erstwhile minor Yogeshkumar Kishandas was not to have any share in the losses and the position remains

unaltered in the deed, even though all the partners including the Kikani who was the erstwhile minor had signed and filed Form No. 11A reporting

change in the loss sharing ratio. Consequently, it was submitted, it cannot be said that there was any deed of partnership which reflected the loss

sharing ratio set out in Form No. 11A and in the absence of any such document, registration could not have been validly granted and it could not

be said that there was any genuine firm in existence. The cancellation of registration on the ground that it was not genuine, it was submitted by

counsel, was, therefore, fully justified and was in accordance with the terms of Section 186 of the Act.

Learned counsel for the Revenue, in support of his submission, referred to the decision of the Full Bench of the High Court at Allahabad in the

case of BADRI NARAIN KASHI PRASAD Vs. ADDL. COMMISSIONER OF INCOME TAX. FANCY STORES v. COMMISSIONER

OF INCOME TAX. R. C. GUPTA and SONS v. COMMISSIONER OF INCOME TAX. BENI PD. SIDGOPAL v. COMMISSIONER OF

INCOME TAX., , wherein it was held by the court that on the minor attaining the age of majority and electing to become a partner, the

redistribution of the shares of the losses was necessary and should be ascertainable from a deed of partnership, and that in cases where the original

deed itself provided as to how the share in the loss of the firm of the erstwhile minor should be determined drawing up a new deed of partnership

was unnecessary and even in the absence of such a fresh document registration could be granted. Counsel also referred to the decision of the

Madhya Pradesh High Court, in the case of Commissioner of Income Tax Vs. Hiralal Agrawal, , wherein after referring to the aforementioned

judgment of the Allahabad High Court, it was held that even a minor modification in the loss sharing ratio in a partnership on the minor attaining the

age of majority would amount to change in the constitution of the firm. Counsel also referred to the judgment of the Allahabad High Court in the

case of Raj Stores Vs. Commissioner of Income Tax, , wherein it was held that no oral agreement could be pleaded regarding the sharing of losses

after the minor attained majority, as a loss sharing ratio specified in the deed of partnership could not be altered by oral agreement, and in the

absence of a written deed of partnership specifying the share of the erstwhile minor who had since become a partner, in the losses of the firm, it

could not be said that the firm was in existence which could be registered. It was also observed therein that a genuine firm for the purpose of

Section 186 of the Act could not be equated with a legally constituted firm and that the concept of a genuine firm for registration purposes under

the Act is that the firm must continue with identity of partners and the share ratio in the profits and losses, as specified in the deed.

Learned counsel for the Revenue, fairly invited our attention to the recent decision of the Supreme Court in the case of M/s. Progressive

Financers Vs. Commissioner of Income Tax, Madras, . The court after review of the decisions of the High Courts and the earlier decisions of the

Supreme Court in the case of Mandyala Govindu and Co. Vs. The Commissioner of Income Tax, Andhra Pradesh, Hyderabad, and Kylasa

Sarabhiah, Bombay Cloth Shop, Secunderabad Vs. Commissioner of Income Tax, Andhra Pradesh, held that the Assessing Officer cannot reject

an application for registration of a firm merely because in the deed of partnership the shares of the partners are not expressly specified, and that

even if the shares of the partners were not expressly specified in the instrument of partnership deed, if they could be ascertained by the Income Tax

Officer from the application and the required information supplied therewith, then the requirements of the law could be said to have been satisfied.

The court also held that where the shares of the partners in the profits of the firm are unequal, the losses must be shared in the same proportion as

the profits, if there is no agreement as to how the losses are to be apportioned.

For deciding the case on hand, we must take guidance from this judgment of the Supreme Court which has laid down with its reasonableness

that must be the guiding style in order to construe the sufficiency of the documentation produced by the applicant for the registration of a firm.

Minor omissions in the document or the statement of the same in a separate document of matters which could have been stated in the principal

document are not factors which would deprive the firm of the benefit by registration. If it is necessary to construe the documents and reasonable

construction permits an inference which would help to supply what had not been expressly stated in the document, such an exercise is permissible,

as where the share in the profits are mentioned and the share in the losses are not mentioned in the instrument of partnership. Also, if in another

document which is reliable and is capable of binding the firm and the partners, are to be found declarations or statements, which construed along

with the original document of partnership, would entitle the firm to registration, such registration is not to be denied only on the ground that all that

is required to be stated has not been stated in a single document, namely, the deed of partnership.

In the instant case undoubtedly a partnership deed was drawn up in the year 1963. The firm had been registered. The registration had been

continued from year to year. Even after one of the minors admitted to the benefits of the partnership had attained the age of majority, the firm with

the erstwhile minor as full-fledged partner with a specified share in the losses was recognised and registered in the year 1975. It is only five years

later in 1980, the registration so granted was cancelled on the ground that the firm was not genuine. The Income Tax Officer held that the absence

of a registration of a partnership deed incorporating therein all the terms of the partnership including the one relating to the share in the losses of the

firm of the erstwhile minor and the consequent marginal reduction in the share in the losses by two of the partners, was decisive on the question of

the existence and the genuineness of the firm. It is not the cage of the Revenue that there was any change in the firm other than a change in the

proportion in which the loss was to be shared among these Kikanis. The only change being the reduction from 12 per cent. each to 11 per cent.

each in the extent to which the two adult Kikanis were to share in the losses, and the share of the erstwhile minor in the loss being now fixed at two

per cent., while earlier he was not required to share in the loss as a minor. No other change had taken place in the firm. In this background what

was required was ascertainment of the substance of the matter, rather than mere form namely, the existence or otherwise of a new document

setting out all the terms of the partnership. It is necessary to restate here that all the partners including the erstwhile minor had signed Form No.

11A filed before the Income Tax Officer in which this change in the loss sharing ratio was set out. It is always open to the partners by agreement

among themselves to alter the terms of the partnership deed. The filing of Form No. 11A duly signed by all the partners, in the circumstances

should have been, as in fact, it was initially, regarded, as an amendment to the partnership deed which admittedly had been drawn up and was in

existence for several years from 1963.

Although after the change in the loss sharing ratio, the registration granted to the old firm could not have been continued, the registration of the

firm with the new loss sharing ratio, however, could not have been denied. The Income Tax Officer had rightly registered the firm, but erred in

cancelling the same five years later. The ground on which cancellation was effected, namely, that the firm was not genuine, in the circumstances, is

wholly unsustainable. The only reason given for holding that the firm is not genuine is the absence of a separate partnership deed. Form No. 11A

read along with the original partnership deed shows that the firm is genuine.

The Appellate Tribunal, in our view, was right in holding that the continuation of registration granted to the firm for these assessment years

could not have been cancelled on the ground that, on the attainment of majority by one of the minors admitted to the benefits of partnership, no

new deed of partnership was drawn up by the partners.

We, therefore, answer the question referred to us in the affirmative, against the Revenue and in favour of the assessee.

Having regard to the circumstances of the case, we direct the parties to bear their respective costs.