1. At the instance of the assessee by this reference under section 256(1) of the Income-tax Act, 1961, the following question has been referred to us for our determination :
'Whether, on the facts and in the circumstances of the case, was the assessee-firm entitled to the grant of registration under section 185 of the Income-tax Act, 1961, on the basis of the instrument of partnership dated February 17, 1960 ?'
2. The question referred relates to the assessment year 1962-63 for which the corresponding financial year ends on March 31, 1962. Under an instrument of partnership date February 17, 1960, the assessee-firm was constituted as a partnership firm. The indenture of partnership is between Madangopal Damani, Brijgopal Damani and Rajendrakumar Bagri, a minor by his mother and natural guardian, Kamaldevi Devratan Bagri. We will refer to the other terms of this indenture of partnership in greater detail a little later. This partnership was registered under the Partnership Act on July 8, 1960, when the two major partners, Brijgopal and Madangopal, were shown as partners while Rajendrakumar was shown as being admitted to the benefits of the partnership with effect from February 1, 1960. On or about November 1, 1960, a further agreement was entered into between these parties as a result of which, inter alia, the shares of the partners, i.e., the parties to the original indenture of partnership were altered and some other alteration was made in the original deed. On November 14, 1962, a deed of rectification was entered into between Madangopal and Brijgopal, the two major partners. In the recital of this deed of rectification it is stated that the partnership agreement was entered into between the two majors, Madangopal and Brijgopal, while the minor was admitted to the benefits of the partnership. It also further recited that the parties were advised that the original indenture of partnership was defective inasmuch as the said minor has been made a party there to and thereafter the deed was executed with a view to show that Rajendrakumar, the minor, was never intended to be a partner and that he was shown as a partner through his mother by reason of ignorance of law. The next day, i.e., November 15, 1962, an application for registration of the firm was made for the assessment year 1962-63 to the Income-tax Officer. The Income-tax Officer refused registration to the assessee-firm, inter alia, on the ground that no valid instrument of partnership did in fact exist in the year of account. He pointed out that the deed of rectification executed long after the close of the accounting year could not be availed of by the assessee in getting registration for the period of its execution. This order of the Income-tax Officer was upheld in appeal by the Appellate Assistant Commissioner and was further upheld in second appeal by the Tribunal. In the first place, the Tribunal was pointed out that the facts in the present case were similar to those in the case of Commissioner of Income-tax v. Md. Khalid Faquih & Co. The Tribunal also scrutinised the terms of the indenture of partnership and pointed out that the partnership agreement was specifically entered into between the major partners and the minor acting through his guardian. The minor was described as a third party to the indenture of partnership and the deed was signed on behalf of the minor by his guardian. Under clause 2 the business of the partnership was, inter alia, to be carried on at such places as the parties may determine from time to time. Under clause 7, the parties including the minor was given liberty to determine the partnership by giving to the other or others one month's notice in writing of his intention in that behalf, Under clause 8, if any party was found guilty of contravening the provision of the deed, etc., the other parties were given the right to determine the partnership. Under the same clause powers were conferred upon the minor to determine the partnership. Under clause 9, opening of an account on behalf of the partnership was by mutual consent of all the partners including the minor. The Tribunal also referred to the relevant provision of the deed of rectification dated November 1, 1960, and, interalia, pointed out that the very recital therein that the parties were advised that the original indenture of partnership was technically defective inasmuch as the side minor had been made a party thereto. In the opinion of the Tribunal the partnership agreement contravened the provision of section 30 of the India Partnership Act and was not entitled to registration.
3. Mr. Dastur on behalf of the assessee-firm contended that where a question arises whether a partnership firm is entitled to registration under the Act, one has to look at the guiding or main clause of the indenture of partnership and in the light of such main or guiding clause, the other clauses of such indenture should be construed. For example, he referred to three guiding clauses, which would normally be found in an indenture of partnership. There may be a clause which indicate that the minor is admitted to the benefits of the partnership. There may be a clause that the minor is not liable to bear losses and is only entitled to a share in the profits and there may be a clause where the major partners were only entrusted with the management of the business. Ordinarily, he submitted, when the minor is not liable to bear losses, the existence of such a clause by itself will be enough to treat the indenture of partnership as admitting minor to the benefits of the partnership unless such a clause could not be reconciled with the other clauses of the indenture. Secondly, he submitted that it is a well-known canon of construction that every document must be construed so as to uphold its legality. He also submitted that mere existence of any illegality or irregularity in a deep of partnership will not by itself result in non-registration of the firm. The intention of the parties must always be borne in mind. On the other hand, Mr. Joshi on behalf of the revenue contended that the real question to be decided in such a case is whether upon the construction of the indenture of partnership the deed makes the minor a full-fledged partner or he has been admitted only to the benefits of the partnership. If on such a construction it is found that the minor has been made a full-fledged partner, then the mere fact that under the indenture of partnership the minor is not liable to bear losses will not be sufficient to come to the conclusion that he is only admitted to the benefits of the partnership. He also submitted that the intention of the parties has to be gathered from the words used in the indenture of partnership itself. What the partners did subsequently is entirely irrelevant. His submission was that the entry made by registering the firm under the Indian Partner ship Act indicating that the minor, Rajendrakumar, was admitted to the benefits of the partnership was irrelevant. According to his submission what was stated in the deed of rectification was equally irrelevant.
4. 'Partnership' is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called individually 'partners' and collectively 'a firm'. Thus, there are three essential elements in order to constitute a partnership within the meaning of the Partnership Act, namely, (1) there must be an agreement entered into by all the persons concerned; (2) the agreement must be to share the profits of a business; and (3) the business must be carried on by all or any of the persons concerned acting for all. All these three elements must be present before a group of persons can be held to be partners. A partner may be agreement by entirely excluded from the liability to share the losses. Sharing of losses is not an essential ingredient of the constitution of a partnership, and such a factor alone will, therefore, be not sufficient to negative a conclusion that a minor has become a full-fledged partner upon the proper construction of the provisions of the indenture of partnership.
5. Section 30(1) of the Partnership Act provides that a person who is a minor according to the law to which he is subject may not be partner in a firm, but, with the consent of all the partners for the time being, he may be admitted to the benefits of the partnership. Sub-section (2) thereof provides that such a 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. Under sub-section (3) such minor's share is liable for the acts of the firm, but the minor is not personally liable for any such act. Sub-section (4) provides that such minor may not sue the partners for an account or payment of his share of the property or profits of the firm, save when severing his connection with the firm, and in such a case the amount of his share shall be determined by a valuation made as far as possible in accordance with the rules contained in section 48.
6. On behalf of the revenue, Mr. Joshi has relied upon the decision of the Supreme Court in Commissioner of Income-tax v. Dwarkadas Khetan & Co., and the decision of a Division Bench of this court in the case of Commissioner of Income-tax v. Md. Khalid Faquih & Co. His submission is that if the test laid down by the Supreme Court in Dwarkadas Khetan & Co.'s case is applied, upon a proper construction of the present indenture of partnership, the minor, Rajendrakumar, is made a full-fledged partner. He, therefore, submits that the firm is not entitled to registration. He also submitted that the facts of this case are much stronger than those before the High Court in the case of Md. Khalid Faquih & Co. On the other hand, Mr. Dastur has strenuously urged that if regard be had to all the terms of the instrument of partnership, then Rajendrakumar can only be regarded as being admitted to the benefits of partnership and cannot be regarded as a full-fledged partner. He has invited our attention to the two decisions of the Supreme Court delivered on the same day in the case of Commissioner of Income-tax v. Shah Mohandas Sadhuram and Commissioner of Income-tax v. Shah Jethaji Phulchand. He has also invited our attention to a large number of other decisions of the various High Courts and has contended that if the test laid down in these two cases and that laid down by the other High Courts are applied, then Rajendrakumar can only be regarded as being admitted to the benefits of the partnership.
7. Under the Income-tax Act, 1961, a firm can be registered under section 184 thereof provided the following conditions are fulfilled :
(1) On behalf of the firm the application is to be made to the Income-tax Officer before the end of the accounting year and the applicant should comply with the requirements of section 184 and rules 22 to 24 of the Income-tax Rules, 1962;
(2) The firm should be evidenced by an instrument of partnership;
(3) The instrument should specify the individual shares of the partners; and
(4) The partnership should be valid and genuine and should actually be constituted as specified in the instrument.
8. If all the above conditions are fulfilled the Income-tax Officer is bound to register the firm. The only essential ingredient with which we are concerned in the present case is whether the partnership in the present case should be regarded as valid or not. The partnership will be valid if upon a proper construction of its terms, Rajendrakumar, a minor, is regarded as being admitted to the benefits of the partnership. On the other hand it will not be valid if it is held that upon a proper construction of the indenture of partnership he is treated as a full-fledged partner like every other major partner. In Md. Khalid Faquih & Co.'s case decided by this court the facts were that a partnership was entered into by ten persons of whom two were minors and the deed was signed by the eight the minors. The deed, inter alia, provided that all the members including the minor members entered into an agreement to carry on business in partnership and share its profits. It further provided that the duration of the firm will be at will. The deed also contained a term whereunder Mohamed Khalid A. R. Faquih had been authorised to conduct the business in the best interests of the firm, i.e., on behalf of the partners. The other partners' right is of being consulted by the managing partner. Under the deed the losses of the business were to be shared only by the adult partners. Upon analysis of these terms this court held that as the partnership deed made the minors also full partners, it was contrary to law and could not be registered under section 26A of the Indian Income-tax Act, 1922. The mere fact that, under the partnership deed, the minors were not made liable for losses would not make the partnership deed valid, since sharing of losses is not an essential ingredient of the constitution of a partnership. Even though losses of the partnership were to be borne entirely minors, the court held that such a clause by itself was not sufficient to negative the conclusion that the minor had been accepted as a full-fledged partner in the partnership. Thus, in one of the years when the deed was executed on behalf of the minors by the guardian the court held that there was no valid partnership. In the same case, a question arose about the subsequent year where the indenture of partnership was executed only on behalf of the major partners, and nobody had signed it on behalf of the minors. The court held that this instrument could be registered for the subsequent year on the ground that to constitute a partnership an agreement between all the partners with one another to decided on business in partnership is an essential ingredient and that ingredient is absent in that case so far as the minor was concerned. The court construing the provisions of the deed held that they did not go beyond section 30 of the Partnership Act. It was also stated that, reading the deed as a whole, there could not be any doubt that the only right which was conferred on the minor was to share in the profits of the farm. In other words, the minor ha d been admitted to the benefits of the partnership. So far as the other year was concerned as the minor was only admitted to the benefits of the partnership the firm was allowed to be registered.
9. So far as the Supreme Court is concerned, our attention has been invited to three cases where the question of registration of a firm has been considered. The first decision of the Supreme Court to which our attention is invited is that in Dwarkadas Khetan & Co.'s case. The facts of that case show that on March 27, 1946, an instrument of partnership was executed by four persons, one of them being a minor. The minor was admitted as a full partner and he was also a signatory to the instrument, though his natural guardian also signed it. Not only was he entitled to share in the profits but he was also liable to bear all the losses including loss of capital. All the four partners were to attend to the business, and if consent was needed, all the partners, including the minor, had to give their consent in writing. The minor was also entitled to manage the affair of the firm, including inspection of the account books and was given the right to vote, if a decision on votes had to be taken. It was held that the partnership deed in which the minor was admitted as a full partner was not valid and could not be registered under section 26a of the Income-tax Act. The attention of the Supreme Court in this case was invited to the cleavage of opinion among the High Courts on this point and the Supreme Court agreed with the view taken by the Calcutta High Court. After referring to the definition of the word 'partner' in section 2(6B) of the Income-tax Act to the effect that 'partner' includes any person who being a minor has been admitted to the benefits of a partnership, the Supreme Court points out that this definition cannot be read to mean that in every case where a minor has, contrary to law, been admitted as a full partner, the deed is to be regarded as valid, because, under the law, a minor can be admitted to the benefits of a partnership. The rules which have been framed under section 26A quite clearly show that a minor who is admitted to the benefits of a partnership need not sign the application for registration, and if the definition were to be carried to the extreme, even a minor who is admitted to the benefits of a partnership would be competent to sign such an application. The definition is designed to confer equal benefits upon the minor by treating him as a partner; but it does not render a minor a competent and full partner. For that purpose, the law of partnership must be considered apart from the definition in the Income-tax Act.
10. Section 30 of the Indian Partnership Act clearly lays down that a minor cannot become a partner, though with the consent of the adult partners he may be admitted to the benefits of a partnership. Any decided monument which goes beyond this section cannot be regard as valid for the purpose of registration. Registration can only be granted of a document between persons who are parties to it and on the covenants set out in it. If the income-tax authorities register the partnership as between the adults only contrary to the terms of the document, in substance a new contract is made out. It is not open to the income-tax authorities to register a document which is different from the one actually executed and asked to be registered. Thus, this division clearly lays down that if upon interpretation of the document it is found that a minor had been admitted as a full partner, then the partnership deed cannot be regarded as valid and cannot be registered. It is also pointed out that it is not open to the income-tax authorities to register a document which is different from the one actually executed between the parties. Mr. Dastur has not controverted the proposition laid down in this case but his submission is that, if regard be had to a proper canon of construction, then it will not be possible for us to take the view that Rajendrakumar, the minor, has been made a full partner in the partnership, but he submitted that he can only be regarded as one merely being admitted to the benefits of the partnership. The two other decisions of the Supreme Court are those delivered by their Lordships on the same day and they are in the case of Shah Mohandas Sadhuram and in the case of Shah Jethaji Phulchand. In Shah Mohandas Sadhuram's case the partnership deed first described the parities and then recited :
'Whereas the above four members were till this day members of a joint family, whereas yesterday, that is on March 31, 1962 the said four members have become divided not only in interest but also by metes and bounds, each of the said members taking to his share one-fourth (1/4) of the said joint family assets and liabilities as detailed in the books of account as maintained by the firm known as Seth Mohandas Sadhuram and whereof we the first and second members have decided to constitute all the said four members as a partnership admitting the third and fourth members thereof to the benefits of the said partnership but not to the liabilities thereunder.' Clause 8 of the partnership deed dealt with the share of profit and loss and it is as under :
'It is further agreed that debiting all working expenses inclusive of those referred to in paragraph 6, the profits of the firm less six pies per every rupee of profits which will be reserved for charity fund will be distributed pro rata according to the proportion of capital investment as detailed of each member, all to be paid to his account in the books of account, from where each members can draw. The losses are agreed to be shared by the members in the likes manmer.' Clause 10 provided for the duration of the partnership and it was as under :
'10. It is agreed that the duration of this partnership will be for a period of one year, i.e., from April 1, 1952, to March 31, 1953, and the members might agree to continue the said partnership even thereafter under these terms or on terms to be determined then.' After referring to the earlier decision in Dwarkadas Khetan & Co.'s case, it is pointed out that as long as a partnership deed does not make a minor full partner, a partnership deed cannot be regarded as invalid on the ground that a guardian has purported to contract on behalf of a minor if the contract is for the purposes mentioned above. While construing the terms of the deed before them their Lordship pointed out that the partnership deed must be construed reasonably. Great emphasis was laid upon the recital which expressly stated that it is the major members who had decided to constitute the partnership and admit the minors to the benefits of the said partnership. According to their Lordships the rest of the clauses must be construed in the light of that recital. When such express recitals like the one admitting the minors to the benefits of partnership existed, the other clauses of the deed were construed on the footing whether they were for the benefit of the minors. It is held that a guardian can accept benefits of partnership on behalf of a minor. He has power to scrutinise the terms on which such benefits are received by the minor. He has also the power to accept the conditions on which the benefits of partnership are being conferred. The guardian can do all that is necessary to effectuate the conferment and receipt of the benefits of partnership. A guardian is entitled to agree to contribute capital on behalf of the minor. If contribution of capital was one of the terms on which benefits of partnership are being conferred, either the guardian must refuse to accept the benefits or be must accept these terms. Such an agreement by a guardian may be avoided by the minor, if it was not entered into for his benefit, but the agreement will remain valid as long as it is not so avoided. A guardian is further entitled to assent to the mode of keeping accounts. As regards duration, it is pointed out that the duration of a partnership has to be fixed between the major members and the guardian on behalf of the minor may agree to accept the benefits of the partnership only if the duration is to the benefit of the minor. A guardian may on behalf of a minor sever his connections with a firm in which he is admitted to the benefits of the partnership. Where a partnership is for a definite of period and the deed enables the members to agree to continue the partnership beyond that period, he is also entiled to refuse to accept the benefits of partnership or agree to accept the benefits of the partnership for a further period on terms which are in accordance with law. Upon the construction of the terms of the partnership deed in the case the Supreme Court held that the partnership deed in that case, reasonably construed only conferred benefits of partnership on the minors and did not make them full partners. Their guardian had agreed to certain clauses in order to effectuate the decision of the major members to confer the benefits of the partnership on the minors. According to their Lordships, the firm was entitled to registration. Mr. Dastur has emphasised the fact that in Shah Mohandas Sadhuram's case, even though the minors were liable to bear losses and even though the losses were debited to their accounts in the firm, the partnership deed was regarded as valid and registration was directed to be ordered of the firm. Such a view was taken as their Lordships took the view that the major partners had decided to constitute a partnership and admit the minors to the benefits thereof. When such is the position, the rest of the clauses of the deed of partnership have to be construed in the light of such a recital.
11. The other case decided by the Supreme Court on the same day is the case of Shah Jethaji Phulchand. Some of the relevant clause contained in the indenture of partnership are reproduced in the judgment. In this case there was no recital on term to the effect that the minors were admitted to the benefits of partnership. The deed of partnership was entered into between five parties of whom one was a minor. Clause 3 provided 'whereas the above 5 parties have agreed to do business of cotton and kapas, purchases and sales on commission basis, etc., after Deepavali 1950 for the future periods also so long as they can possibly work together.' Sub-clause (9) of clause 4 of the partnership deed deals with sharing of profits and losses and it provides that 'the profits and loss of the company shall be shared by the partners in the following proportions irrespective of the contribution of capital.' Then the shares are prescribed of each individual partner. The clause further provides that 'half an anna of the profits shall be credited to the Charity Fund. The portion of loss to be contributed by the third party (who was a minor) is to be borne by the first party and adjusted in the accounts'. Sub-clause (16) of clause 4 of the partnership deed was as under :
'(16) That (1) Nathmal Jethaji, (2) Phulchand Nathmal, (3) Sakalchand Thikmaji shall be working partners. They shall have the right of doing business, borrowing moneys from banks and other persons, drawing cheques on the account of the firm in the banks and generally they shall have all the rights connected with the business.' The argument of Mr. Dastur is that even though in Shah Jethaji Phulchand's case there was no recital or term to the effect that the minor was admitted to the benefits of partnership, the fact that the minor partner was not liable to bear losses is treated as sufficient to come to the conclusion that the partnership was for the benefit of the minor. Such cannot be regarded as the ratio of the case. The Supreme Court has clearly pointed out that sub-clause (9) which dealt with sharing of profits and loss and subclause (16) which provided for business to be carried on, were to be interpreted and construed in the light of these who principle sub-clauses. Under sub-clause (5) of clause 4 of the partnership deed the partners were given a general right to borrow any money required for partnership business at prevailing rate of interest, but such general power was construed by reading along with sub-clause (16) by which the managing partners have been designated as working partners. It was upon the combined effect of sub-clause (9) which deals with sharing of profit and loss and sub-clause (16) which deals with management and carrying on business of the firm by the three named managing partners, that the Supreme Court took the view that the minor has not been made a full partner but has only been given the benefits of partnership. The Supreme Court undoubtedly has considered the recital that the five parties agreed to do business as therein mentioned. As regards such a recital they say that there is no bar in law to the guardian entering into such a contract, for he is only securing the conferment of benefits of partnership on a minor.
12. It was urged by Mr Dastur that in view of these decisions of the Supreme Court in Shah Mohandas Sadhuram's case and in Shah Jethaji Phulachand's case, the decision of the Bombay High Court in Md. Khalid Faquih & Co.'s case should be regarded as impliedly overruled. There is nothing in the ratio of any of the two decisions to support his contention. In Shah Mohandas Sadhuram's case, in view of a specific express recital that the minor was admitted to the benefits of partnership, the rest of the clauses in the deed were construed in the light of such a recital. In Md. Khalid Faquih & Co.'s case, there was no recital to the effect that the minors were admitted to the benefits of partnership, while in Shah Jethaji Phulchand's case, as there was no express recital to the effect that the minors was admitted to the benefits of partnership the two sub-clauses were emphasised, one dealing with sharing of profit and loss and the other giving power of management of the business to the three specified major partners designated as working partners. The other clauses were read in the light of these two sub-clauses. Undoubtedly, in Md. Khalid Faquih & Co.'s case the losses were not to be borne by the minor, but there was no clause by which management of the business was conferred upon partners who were designated as managing partners or working partners. Thus, it is not possible for us to accept the contention of Mr. Dastur that the decision in this Court in Md. Khalid Faquih & Co.'s case should be regarded as having been impliedly overruled by the Supreme Court either by the decision in Shah Mohandas Sadhuram's case or in Shah Jethaji Phulchand's case. In such a view of the matter the decision of the Division Bench of this court in Md. Khalid Faquih & Co.'s case will be binding on us irrespective of different views being taken by some other high Court on such a question.
13. It is a well-settled canon of construction that while determining the question whether the minors were made partners under a deed or whether they become only entitled to the benefits of the partnership, the question must depend upon the construction of the deed as a whole. If the dominant clause of the deed indicates that the minors were only admitted to the benefits of partnership, then that dominant clause must be taken to colour the deed itself and must fix the extent of the liability and responsibility of the minors. In order to construe a partnership deed, the entire document must be read as a whole and a reasonable construction should be placed on it. In a document where several clause appear, what clauses dominate the document should be found not with a view to ascertain the real intention of the partners. When the intention of the executants of the documents is clear from the dominant clause therein which state that the minor is admitted only to the benefits of the partnership, the other clause of the document should be so read as to reconcile with that manifestly brought out intention of the parties to the document.
14. Mr. Dastur has drawn our attention to the decision of the Calcutta High Court in the case of National Trading Company v. Commissioner of Income-tax and the decision of the Jammu and Kashmir High Court in the case of Abdul Aziz & Co. v. Commissioner of Income-tax. He has emphasised the fact that even though in one of these cases there was no recital or term to the effect that the minor was admitted to the benefits of the partnership, the term that the minor will not be liable to bear losses was regarded as sufficient to come to the conclusion that the minor has become a full partner but is only admitted to the benefits of partnership. He has also pointed out that in both the documents the other clauses which run counter to the effect of this clause were read only in the light of the dominant clause indicating the minor not being liable to bear the losses and the conclusion was reached that when such is the position the minor can only be regarded as being admitted to the benefits of the partnership. Such a view is undoubtedly taken in the decision of the Calcutta High Court. In that case a partnership deed was entered into between 11 partners of whom 9 were minors and the remaining 2 were majors. It is specifically that none of the 9 minor partners shall be liable or responsible for the losses, if any, and the entire loss shall be borne in equal shares by the two major partners, but the deed contained some other clauses to the effect that the parties to the deed had agreed to become partners; all the partners were required to contribute capital; that all the partners were required to sing the accounts and that the bank accounts shall be operated by any two of the partners, etc. Still it was held that the partnership deed, construed as a whole, was one merely admitting the minors to the benefits of the partnership and could be registered under section 26A. Such a view undoubtedly was taken by the Calcutta High Court, but we are bound by the decision of the Division Bench of this High Court in Md. Khalid Faquih & Co.'s case; it being a decision of a court of co-ordinate jurisdiction, it will not be possible for us to accept the view taken by the Calcutta High Court.
15. In the case before the Jammu & Kashmir High Court in Abdul Aziz & Co.'s case the expression 'benefit of profits' was equated with 'benefits of partnership' and the express clause in it that the losses should be shared by the adult partners was treated as showing that the minor partners were only admitted to be benefits of partnership even though the deed was signed by some of the minors and also by a paternal uncle of their acting as guardian. As we are bound by the decision taken by the Bombay High Court it will not be possible for us to consider whether the view taken by the Calcutta High court or the Jammu & Kashmir High Court can be regarded as erroneous or not. Reference to the other cases cited by Mr. Dastur is necessary because in Shah Mohandas Sadhuram's case and in each one of the cases so cited there was either an express term or recital to the effect that the minor was only admitted to the benefits of partnership.
16. This takes us to the relevant provisions of the indenture of partnership with which we are concerned. The indenture of partnership is made between three parties one of whom is a minor and on behalf of the minor his guardian has entered into the agreement. The recital in the indenture of partnership is an under :
'WHEREAS the parties hereto to commence and carry on business in partnership AND WHEREAS the parties desire to reduce to writing the terms and conditions under which they have agreed to carry on business in partnership and it is hereby mutually agreed between the parties that they shall carry on the said business in partnership upon the term and conditions hereinafter contained, viz.....'
17. The relevant clauses of the partnership deed are as under :
'1. The partnership business shall be of a art silk, woollen, cotton and other fabrics, cotton waste, etc., and such other business as the partners may from time to time agree upon.
2. That the business of partnership shall be carried on in Bombay and at such other place or places in India as the parties may determine from time to time....
5. The shares of the partners in the profits of the business shall be as under :
(1) Rajendrakumar Bagri 50%
(2) Madangopal Damani 40%
(3) Brijgopal Damani 10%
The said Madangopal and the said Brijgopal shall be responsible for the loss in equal shares in the partnership. The said Rajendrakumar shall not be liable and responsible for the loss of the partnership.
6. That the parties shall arrange such funds for running of the business as may be required from time to time at suitable terms. The capital of the firm for carrying on the said business shall consist of such sum or sum of moneys as shall be contributed by the parties and in such shares as may from time to time be agreed upon.
7. The duration of the partnership shall be at will. Each of the parties hereto shall be at liberty to determine the partnership by giving to the other one month's notice in writing of his intention in that behalf.
8. That in the event of any party found guilty of contravening any of the terms or of being adjudged insolvent or becoming physically or mentally unfit to attend to the business of the partnership the other party or parties shall be at liberty to determine the partnership within one calendar month after coming to know of any such event by notice in writing and in that case the other party or parties shall have the option to purchase the share of the said party in the capital and assets of the business after going into the accounts of the partnership.
9. The partnership shall by mutual consent of the parties open an account of the partnership business in the firm name of Messrs. Rajendra Trading Co., with any scheduled bank and the said account shall be operated upon by the said Madan Gopal only.
10. That the responsibility for maintaining day to day and proper accounts shall be that of the said Madangopal who shall furnish regular periodical statements to the partners as required by them and also submit the annual accounts of the firm within three months from the close of the accounting year to the partners. The accounts shall be got audited by a Chartered Accountant.
11. That each partner shall :
(a) punctually pay his separate debts and indemnify the other partners and the assets of the firm against the same and all expenses thereon :
(b) upon every reasonable request inform other partners of all the accounts, writing and other things which shall come to his hands or knowledge concerning the business of the partnership;
(c) render true and faithful accounts of all transactions and dealing done or entered into on behalf of the firm;
(d) be just and faithful to the others and give full information and true explanations for all matters relating to the affairs of the partnership and offer every assistance in his power in carrying on and promoting the business for their mutual benefit;.....
13. The accounts of the partnership shall be made up at the end of each March and the profits and losses, as the case may be, shall be respectively divided according to the shares set out above. However, Rajendrakumar, the minor, shall not be liable for the loss in the business but the losses shall be divided equally between the said Madangopal and the said Brijgopal. All the partners shall have equal shares in the goodwill of the business.
14. That on the determination of the partnership all the liabilities and assets of the firm shall be revalued including the goodwill of the business and divided among the partners according to their respective shares in the profits and after preparation of final statement of affairs up to the date of determination of the partnership-however, in case of losses, minor, Rajendrakumar Bagri, shall not be liable-the losses shall be divided equally between Madangopal and Brijgopal the first and second part.
15. In the event of any dispute or difference arising between the partners at any time in respect of the partnership account or dealings or any matter relating to or concerning the partnership business or the duration of the partnership or the interpretation of these presents the same shall be referred to the sole arbitration of Shri Surajratan Damani and the decision of the said arbitrator shall be final and binding. The arbitration shall be governed by the provision of the Indian Arbitration Act and of statutory modifications thereof.'
18. At the outset it may be observed that in the entire indenture of partnership there is neither a recital nor a term to the effect that the minor, Rajendrakumar, was only admitted to the benefits of partnership. The question to be considered is whether upon the scrutiny of the various clauses of the indenture of partnership Rajendrakumar is made a full-fledged partner or he is only admitted to the benefits of partnership. Great emphasis is laid by Mr. Dastur upon clause 5, 13 and 14 wherein it is expressly state that the minor, Rajendrakumar, shall not be liable to bear the losses and the entire losses that may be suffered by the firm will be divided equally between major partners, Madangopal and Brijgopal. His submission is that the existence of such a provision whereunder a minor is not liable to share the losses will automatically indicate that the minor is admitted to the benefits of partnership. Such a contention can only be accepted if sharing of losses is regarded as one of the essential elements for constitution of a partnership. As noted above, sharing of losses by a minor is not an essential element for constitution of a partnership and there can be a partnership valid and effective in law whereunder even a major partner may be excluded from the obligation to bear any share in the losses suffered by the firm. Thus, the mere fact that a party to an indenture of partnership is not liable to bear the losses will not by itself be decisive of the question whether he is a full-fledged parter or is a minor admitted to the benefits of partnership. If all the provisions of the indenture of partnership including the recitals and several terms are carefully scrutinised, then it is not possible to take the view that the provision in this indenture that Rajendrakumar, the minor, shall not be liable to bear the losses of the partnership should be treated as a dominant clause and the other clauses of the partnership deed should be construed in the light of such a provision. If the recitals and the various clauses of the indenture are carefully scrutinised it is quite evident that Rajendrakumar is clothed with a power to do everything, which the other partners are entitled to do and under some of the clauses he is also saddled with liability other than which can flow from the provisions of section 30 of the Partnership Act. In a case like this, it will not be appropriate to pick up insolated provisions of the indenture has to be taken into account in arriving at a proper conclusion. The very recitals in themselves show that the parties to the indenture including the minor desired to commence and carry on business in partnership and that they have agreed to carry on such business in partnership upon the terms therein laid down. Thus, the minor through his guardian is directly a party to such an agreement whereunder they not only have decided to commence and carry on business in partnership but they agreed to the terms upon which such partnership business is to be carried on. So far as the nature of the business and the place where it can be carried on are concerned, it is evident from clauses 1 and 2 of the indenture that the partners may from time to time agree upon such other business which may be carried on by the firm and they may also determine from time to time the place or place where such business can be carried on. Thus, the minor through his guardian will not only be entitled to have a voice as regards the place or places where the business I to be carried on but also as regards the nature of the business that could be carried on. It is undoubtedly true that from clauses 5, 13 and 14 it is quite evident that the profits are to be shared by the three parties, Rajendrakumar, Madangopal and Brijgopal, in the proportion therein mentioned and there is an express provision that Rajendrakumar shall not be liable to bear any loss but the entire losses will be shared equally between Madangopal and Brijgopal. Clause 6 provides for arrangement as regards funds for running the business and for contribution towards eapital. It is quite clear from the decision of the Supreme Court in Shah Mohandas Sadhuram's case that even though a minor is admitted to the benefits of partnership he thought his guardian may agree to contribute capital. So such a clause as regards contribution of capital by itself cannot be regarded as decisive. However, it should not be over looked that clause 6 does not stop there. Even the funds that may be required for running the business have to be arranged by the parties. So all the partners including the minor through his guardian will have power to participate in such an arrangement for funds including borrowing of funds. Under clause 7 the duration of the partnership is at will. In Shah Mohandas Sadhuram's case the Supreme Court has pointed out that such a clause only means that having regard to the provisions of section 30 of the Partnership Act the minor is entitled to server his connection with the firm. Clause 7, however, goes a little further and does not stop by merely providing that the duration of the partnership shall be at will. It further state that 'each of the parties hereto shall be at liberty to determine the partnership by giving to the other one month's notice in writing of his intention in that behalf'. Ordinarily, under section 30 of the partnership Act a minor through his guardian may decide to server his connection with the firm but he will have no right to enforce a dissolution of the firm upon the major partners. Under this clause such a thing is possible and Rajendrakumar through his guardian will always be at liberty to see that he does not merely sever his connection with the firm but the firm itself is entirely dissolved after giving the requisite notice. Clause 8 is rather very important. If the effect of this clause is scrutinised, then it is quite apparent that the right conferred thereby, inter alis, upon the minor, Rajendrakumar, cannot be regarded as one of those which are contemplated by section 30 of the Partnership Act. If either Madangopal or Brijgopal is guilty of any act mentioned therein and the other one gives a notice of his intention to determine the partnership, then even Rajendrakumar will be entitled to purchase the share of the party giving such notice. The result of such a provision is that the minor will be entitled not only to purchase the share of the party giving the notice to determine the partnership but the effect of such an act will be an automatic dissolution of the firm. When the share of either Madangopal or Brijgopal is purchased by anybody it is quite evident that thereafter there will be two partners, one a major and the other a minor, and in law there cannot be a partnership between a major and a minor. As there will be one major person left to carry on the business even the question of admitting a minor to the benefits of the partnership will not arise. Thus, the very wording of clause 8 indicates that as regards the powers therein conferred each of the three parties to the indenture has been given equal rights and is saddled with equal liabilities, and such powers cannot ordinarily be expected to be included in a deed where a minor is only admitted to the benefits of a partnership. Clause 9 deals with the opening of accounts. Such an account may be there even though a minor may be admitted to the benefits of partnership. Clause 10 is as regards the responsibility for maintaining proper accounts. That responsibility is cast upon Madangopal. There is nothing in clause 10 to indicate that Madangopal is clothed with power to carry on the business of the firm as was to be found, in the case before the Supreme Court, viz., Shah Jethaji Phulchand's case. This clause only relates to the keeping of accounts and furnishing information therefor. Madangopal under this clause has not been made a managing partner with a right to carry on business and to borrow funds and to do various things which may be necessary for the purpose of efficiently carrying on the business of the firm. Clause 11 is very important. There are four sub-clause in this clause and under this clause whatever the major can do the minor is clothed with a power to do. What only a major can be called upon to explain. By way of illustration we will merely refer to the provisions of sub-clause (c) with a view to find out the effect thereof. Under that sub-clause each partner shall render true and faithful accounts of all transactions and dealings done or entered into on behalf of the firm. If Rajendrakumar is anxious to call upon the other Partners, then he is entitled to do so under this provision. Section 30 of the Partnership Act does not contemplate such a thing. He is merely given a right of inspection of the accounts and a right to have accounts taken at the time of his severance. Further, the wording of clause 11 indicates that just as a major partner can act on behalf of the firm a minor can do so through his guardian and when such act is done through his guardian he can be called upon to render true and faithful accounts of all transactions and dealings done or entered into on behalf of the firm. Such a clause prima facie really goes to show that everything which a major partner can do Rajendrakumar, the minor, can do. Everything that a major partner can be called upon to do or explain a minor partner can be called upon to do or explain. The various sub-clauses of clause 11 do not merely confer right or benefit but they also involve corresponding liability even upon the minor, Rajendrakumar. Clause 15 of the partnership deed is an arbitration clause. Under section 30 the right of a minor admitted to the benefits of a partnership is to sue for an accounts or payment of his share only at the time of severance of his connection with the firm but the working of clause 15 indicates that a any time, i.e., even during the subsistence of the partnership a dispute or difference ma
19. y arise between the parties including the minor in relation to partnership business. Such a provision also runs counter to the provisions of section 30 which will be applicable where a minor is only admitted to the benefits of a partnership. Thus, if the various provision of the indenture of partnership including the recitals and sub-clauses are carefully scrutinised it will not be possible for us to accept the contention of Mr. Dastur that under this indenture Rajendrakumar, the minor, was only admitted to the benefits of a partnerhip. Upon a proper scrutiny of these provision, Rajendrakumar has been made a fullfledged partner even though at the time when the indenture true was entered into he was a minor and accordingly the partnership deed will not be a valid one.
20. Even the provisions of the deed of rectification entered into on November 14, 1962, clearly show that the parties felt that the initial indenture of partnership was technically defective. One of the recitals in terms says, 'whereas the parties have been advised that the said document (indenture of partnership dated February 17, 1960) is technically defective inasmuch as the said minor has been made a party thereto'. If the language of the original indenture of partnership and the deed of rectification is carefully compared it will be quit evident that whenever there was an intention to confer benefit of partnership upon the minor, Rajendrakumar, it has been done so by the use of appropriate language by, inter alia, saying that he is only admitted to the benefits of partnership. Such a deed of rectification was not operative at any time during the accounting period with which we are concerned and its provisions, therefore, will not be helpful to the assessee. Primarily, the question whether Rajendrakumar has become a fullfledged partner or was admitted to the benefits of partnership has to be decided upon scrutiny of the provisions of the indenture of partnership dated February 17, 1960, and, as pointed out above, upon such scrutiny he can be regarded as a fullfledged partner.
21. Reliance was placed by Mr. Dastur upon an entry when the firm was registered with the Registrar of Firms in July, 1960. In this entry it is mentioned that there are only two major partners, Brijgopal and Madangopal, and so far as minor, Rajendrakumar, is concerned, he is admitted to the benefits of partnership. In our opinion, such a provision in the entry will not be helpful to the assessee, because the question whether Rajendrakumar was admitted to the benefits of partnership or was made a fullfledged partner under the initial indenture of partnership has to be decided having regard to the terms of the original indenture. This is not a case where any ambiguity exists in the provisions of the original indenture and, therefore, other evidence will nor be of any use in deciding the question whether under the indenture of partnership dated February 17, 1960, minor, Rajendrakumar, was made a fullfledged partner or was merely admitted to the benefits of partnership. Such a question ha s to be decided on the terms of the indenture itself. Thus, in our opinion, the taxing authorities were right in taking the view that the partnership constituted under the indenture of partnership dated February 17, 1960, cannot be regarded as a valid partnership in law.
22. Thus, our answer to the question referred to us is in the negative. The assessee shall pay the costs of revenue.