Commissioner of Income Tax vs Nathalal Karsandas

J.N. Bhatt, J.—The Income Tax Appellate Tribunal, Ahmedabad Bench B, has referred the following three questions for our opinion, arising out of I.T.A. No. 394/Ahd of 1982, relating to the assessment year 1979-80.

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the assessee was entitled to registration of the firm u/s 185 of the Income Tax Act, 1961 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in cancelling the order passed by the Commissioner of Income Tax u/s 263 of the Income Tax Act, 1961 ?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the Gujarat High Court in the case of Laxmichand Hirjibhai v. CIT [1981] 128 ITR 747 was not applicable to the assessee''s case though the assessment of the partners were completed when the Commissioner of Income Tax passed his order ?"

The first two questions came to be referred by the Tribunal, at the instance of the Revenue, whereas, the third question has been referred, at the instance of the assessee.

As could be seen from the statement of the case of the Tribunal, the Commissioner of Income Tax in exercise of his power, cancelled the order of the Income Tax Officer granting registration to the firm with a direction to enquire into the genuineness and validity of the firm and pass a fresh order in accordance with law. During the accounting period Samvat year 2034, i.e., November 12, 1977, to August 30, 1978, a minor, Gopalbhai Shah, attained majority on August 9, 1978, and a new partnership deed was executed on August 14, 1978, admitting the said Gopalbhai to a partnership and the partnership was given effect from November 12, 1977.

The Commissioner of Income Tax took the view that a valid partnership deed under the Partnership Act could not be said to have been in existence from November 12, 1977, onwards and hence no registration could have been granted. He has relied on a decision of the honourable apex court in P.R. Chowdhary and S. Gangoli Vs. The State of U.P., , which according to him, covers the case where a partnership had been brought into existence by an oral agreement between the parties, which may, subsequently, be reduced to writing and the instrument would naturally record all the terms and conditions of the contract between the parties at the initial stages which had not been reduced to writing. Accordingly, the Commissioner of Income Tax in the relevant assessment year held that it could not be said that the deed of August 14, 1978, reduced to writing all the terms and conditions of the contract between the parties from November 12, 1977, since one of the parties was a minor up to August 8, 1978, and in his view, the minor could not have legally entered into a partnership or agreed to share the losses. In this context, he came to the conclusion that, had the firm incurred any loss during the accounting year the proportionate loss up to August 8, 1978, on which date Sri Gopalbhai became a major could not have been allocated to him u/s 30(7) of the Indian Partnership Act, 1932, whereas, a strict application of the partnership deed would have made that possible. In short, it was his view that the fact that actually there was no loss during the year was not a relevant criteria for determining the status or legal issue involved.

Being aggrieved by the order of the Commissioner of Income Tax, the matter was taken to the Tribunal, wherein, it was held that the decision of this court in Laxmichand Hirjibhai v. CIT [1981] 128 ITR 747 was not applicable to the facts of the case because in that case the question of validity of the partnership deed which goes to the root of the matter was not involved.

As per the facts on record, Gopalbhai, who was a minor, when he became a major entered into a partnership and the effect thereof was that he would take on liabilities, if any, during the period of his minority. A major is capable of taking on liabilities and, therefore, there should not be any objection on the part of the authority as to why he should not be made a regular partner. The whole purpose of not allowing a minor to be made a partner is to prevent liabilities from being imposed upon him. Therefore, when there were no liabilities, there would be no objection to the validity of the partnership deed. The learned advocate, Mr. Talati, while appearing for the assessee, in the course of his submissions placed reliance on the decisions reported in Commissioner of Income Tax, Gujarat Vs. Ashokbhai Chimanbhai, and in the case of P. N. Sarmah v. CIT [1980] 125 ITR 553 (Gauhati), which, in our opinion, are not material as the ratio propounded therein is not attracted to the factual scenario emerging from the record of the present case.

After having heard the learned advocates appearing for the parties and considering the facts and circumstances and the relevant proposition of law and the case law, as well, we are of the opinion that on the facts and in the circumstances of the case, the Tribunal was right in holding that the decision of this court in Laxmichand Hirjibhai v. CIT [1981] 128 ITR 747 was not applicable to the assessee''s case though the assessment of the partners were completed when the Commissioner of Income Tax passed the order. Therefore, question No. 1 is decided in the negative, in favour of the Revenue and against the assessee.

Since question No. 2 is corollary and ancillary to question No. 1 in our opinion, it is also required to be decided in consonance with our opinion in respect of question No. 1. Thus, question No. 2 at the instance of the Revenue is decided in the negative, against the assessee and in favour of the Revenue.

Obviously, that would take us to question No. 3. In our opinion, this question is required to be decided in the affirmative, in favour of the Revenue and against the assessee. Accordingly, question No. 3 is decided in the affirmative, in favour of the Revenue and against the assessee.

In the result, the reference shall stand disposed of accordingly, without any order as to costs.