1. This is a reference under sub-section (1) of section 66 of the Indian Income-tax Act and the question referred to us is in the following terms :
'Whether, on the facts and circumstances of the case, the assessee firm was rightly registration under section 26A of the Act of the assessment years 1955-56 and 1956-57 ?'
2. The assessee is partnership firm, carrying on the business of manufacture and sale of slat at Bhiwandi in Thana District, under the name and style of Messrs. Mohamed Khalid Faquih & Co. We are here concerned with the assessment years 1955-56 and 1956-57, the relevant accounting period for these years being January 1, 1954, to October 26, 1954, and Samvat year 2011, i.e., from October 27, 1954, to Diwali of 1955. The partnership that commenced on January 1, 1954, is evidenced by a deed, annexure 'A', to the case. The deed purports to be a deed of partnership between ten persons. Two of them, namely, Party No. 5 and party No. 10 to the deed, were at that time minors. They are shown to be represented by their guardian, party Nos. 2. The deed is signed by the eight adult members on their own behalf and also by party No. 2 on behalf of both the minors. It appears that by January 1, 1954, one of the ten partners had retired from the partnership and one of the two minors had attained majority. Another instrument of partnership, therefore, was drawn up and that is annexure 'B' to the record. This instrument purports to be a deed of partnership between all the nine persons including one minor. The deed, however, is signed only by the eight adult members. It is not signed been by the guardian of the minor on behalf of the minor. It may be mentioned that, in both the deeds, there is a provision that the losses would be shared by the adult members only. On the strength of these two deeds, the assessee firm made two applications for registration of their firm in the two respective years for the purpose of the Income-tax Act under section 26A of the Act before the Income-tax Officer. Both these applications were filed within time. The Income-tax Officer took the view that both these instruments conferred the right of full-fledged partners on those minors and, therefore, the partnership fought to be registered was invalid in law. The deed has not the effect of bringing into existence a valid partnership. In this view of the matter, the Income-tax Officer rejected both these applications. The assessee took two appeals to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner, relying on a decision in Sahai Brothers v. Commissioner of Income-tax, held that the partnership created by the instruments was a valid partnership and, on a true construction of these deeds, it had to be held that the minors were admitted only to the benefits of the partnership and not as full-fledged partners. In this view of the matter, both these appeals were allowed and a direction was issued to register the partnership for both these years. The Income-tax Officer preferred appeals against the said decisions of the Appellate Assistant Commissioner before the Income-tax Appellate Tribunal. The Tribunal also, following the decision in Sahai Brothers v. Commissioner of Income-tax, as well as the decision of this court in Dwarkadas Khetan & Co. v. Commissioner of Income-tax, dismissed those appeal. On an application by the Commissioner under section 66(1) the aforesaid question of law has arisen.
3. Mr. Joshi contends before us that the view taken by this court in Dwarkadas Khetan & Co. v. Commissioner of Income-tax has now been over-ruled by the decision of the Supreme Court in Commissioner of Income-tax v. Dwarkadas Khetan & Co. According to Mr. Joshi, on a true construction of the deed, it is clear that the minors have been admitted to the partnership as full-fledged partners and all the three elements that go to constitute a partnership, viz., (1) agreement to enter into partnership; (2) agreement to share the profits of the business of the firm; and (3) agreement allowing one of the partners to conduct business acting on behalf of all the partners, are present. The mere fact that the losses of the firm are shared only by the adult members cannot militate against the formation of the partnership between all the partners which include two minors. In support of his contentions, he referred to certain terms of these two deeds. We would advert to these terms when we proceed to deal in detail with those two deeds.
4. On the other hand, it is the content of Mr. Palkhivala that the decision of the Supreme Court has no application to the facts of the present case. According to him, what has been ruled by their Lordships is that if an instrument of partnership contains clauses which in express terms transcend or contravene the provisions of section 30 of the Partnership Act, then it is invalid in law; but, when there is no such contravention in express terms by any of the clauses of the instrument of partnership, then the court must see whether the construction leading to the validity of the deed is possible and, if such a construction is possible, the court must hold that the deed is a valid deed admitting the minors only to the benefits of the partnership and not admitting them as full-fledged partners. According to Mr. Palkhivala, the contravention of section 30 consists on fastening the losses on minors or permitting the minors to carry on the business of the firm, or participate in the business of the firm on behalf of the other partners or permitting a partner or partners to confuse business on behalf of the minors or conferring a right on a minor partner to dissolve the firm. It is his contention that there is not clause in both these deeds which has expressly contravened section 30 of the Partnership Act in any of the aforesaid manner. The preamble to these deeds no doubts describes the minors as partner in the firm. But a description of a party in the instrument of partnership is not conclusive in the matter of construction of the deed. The preamble itself has made its clear that some of the partners are minors. The deed further provides that the losses would be shared only by the adult partners. There being these two factors and there being no express term in any of the deeds contravening the provisions of section 30 of the Partnership Act, the aforesaid decision of the Supreme Court had no application to the facts of the present case. It would, at this stage, be convenient to consider the decision of this court on which reliance was placed by the Tribunal and the decision of the Supreme Court on appeal from the said decision of this court.
5. The facts of that case in brief were : On 12th February, 1946, one Dwarkadas Khetan obtained the selling agency of the Seksaria Cotton Mills Limited. On 27th March, 1946, he entered into partnership with three others, viz., Viswanath Purumal, Govindram Khetan and Kantilal Keshardeo, by an instrument executed on that day. Dwarkadas's share in the partnership was seven annas in the rupee and the remaining nine annas share was divided equally among the other three partners. Kantilal was a minor at that time. He, however, was admitted as a full-fledged partner and not merely to the benefits of the partnership. The instrument of partnership was signed by Kantilal Keshardeo also, though immediately after his signature there was the signature of one Keshardeo Rungta, the natural guardian of the minor. In the instrument Kantilal Keshardeo 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. It was also provided that 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 affairs 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. On the basis of this instrument of partnership, registration of the firm was sought under section 26A of the Income-tax Act. The registration was refused by the income-tax authorities. In the appeal before the Tribunal the Accountant Member agreed with the income-tax authorities, while the Judicial Member differed. The President of the Tribunal agreed with the Accountant Member and that resulted in the dismissal of the appeal. On a reference, the matter came before this court. Disagreeing with the Tribunal, this court held that assuming that type partnership purported to make the minor a partner, in law, the minors had not become a partner or become liable to bear losses. He would only be entitled to the profits accruing to his hare. Therefore, on a proper construction of the partnership deed, in law, the three major signatories became partners and the minor signatory was only admitted to the benefits of the partnership. The partnership deed created a valid partnership between the three adult partners and, therefore, the firm should be registered in the name of the three adult partners, showing the minor admitted to the benefits of the partnership. From the decision of their court, an appeal was taken to the Supreme Court at the instance of the Commissioner. Their Lordships noted the distinct cleavage of opinion among the High Court on this point. The view taken by the Bombay, Madras and Patna High Courts was that, where a minor is admitted as a full partner by other partner, the document could be registered after interpreting it to mean that the minor has been admitted to the benefits of the partnership and not as a full partner. The view taken by the Calcutta. Allahabad and Punjab High Courts was contrary to it. The contrary view taken by the Calcutta, Allahabad and Punjab High Courts was accepted by their Lordships. It has been held that the definition of 'partner' contained in section 2(6B) of the Income-tax Act cannot be read to mean that in every case when 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 only be admitted to the benefits of partnership. In the opinion, of their Lordships, the definition is designed to confer equal benefits upon the minor by treating him as a partner; but it dies 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. Now, the entire position has been summarised thus :
'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 partnership. Any document which goes beyond this section cannot be regarded as valid for the purpose of registration. Registration can only be granted of a document been 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 a document which is different from the one actually executed and asked to be registered.'
6. The first question, therefore, that arises in this case is whether the instruments of partnership of date January 1, 1954, and January 1, 1955, or any of them goes beyond section 30. Sub-section (1) of section 30 reads :
'(1) A person who is a minor according to the law it which he is subject may not be a partner in firm but, with the consent, of all the partners for the time being, he may be admitted to the benefits of partnership.'
7. It is not necessary to reproduce the other sub-sections. By these sub-sections it has been provided that a minor so admitted to the benefits of partnership is entitled to this agreed share and can inspect books of accounts of the firms he will not be personally liable for the debts and obligations of the firm, though his share in the property and the profits of the firm will be liable for the same; he can being a suit for accounts and for his distributive share when he intends to sever his connection with the firm but no otherwise; and within six months of his attaining majority or when he comes to know of his being admitted to the benefits of partnership (whichever date is later), he has to elect whether he wants to become a partner in the firm or want to terminate his connection with the firm. He has accordingly to give a public notice discussing his option. If he elects to become a partner, then he would be liable for all the debts and obligations of the firm incurred by the firm since the date of his admission to the benefits of partnership. Now, it has to be seen whether the instruments of partnership run counter to these provisions. We would first consider the deed of date January 1, 1954. The material part runs as follows :
'This indenture made this first day of January, One Thousand Nine Hundred and Fifty-four, between (the deed gives 10 names, Nos. 5 and 10 are minors, No. 2 is shown as their guardian).... all Muslim inhabitants of Bhiwandi of the Thana District, witnesseth, that they agree to become partners in the business of 'salt merchants' hitherto carried on by Mr. Abdul Razak H. S. Faquih at Bassein and who died on 28th December, 1953, at Bhiwandi, as per terms, conditions and stipulations, hereinafter expressed, that is to say :
That this Indenture shall have effect from the 1st day of January 1954.
That the duration of the firm is 'at will'....
That the name and style of the firm of partnership shall be 'M/s. Mohamed Khalid Faquih & Co.' and that the business shall be conducted from Bhiwandi or at such other place or places as the partners may from time to time agree upon.
That the partner of the third part, Mr. Mohamed Khalid A. R. Faquih, shall be in charge of the business management and shall conduct the business, in consultation with partners, in the best interest of the firm.
That the net profits, after providing for the relevant business expenses or such other contingencies, with regard to business, from time to time hereinafter, shall be divided by and between the partners in the following proportions; (The deed then deceits the names of the ten persons showing their respective shares).
And the losses of the business shall be shared in the following proportions : (The deed then mentions the names of the eight adult partners only).
It witness whereof the parties hereto have hereunto set and subscribed their respective hands and seals the day and year first herein written.'
8. The deed is signed by the eight adult partners on their own behalf and any the guardian of the two minors on the behalf of those two minors. On the reading of the document, in our opinion the deed has gone beyond section 30 of the Partnership Act and, therefore, cannot be regarded as a valid deed for the proposes of registration. Now, sub-section (1) of section 30 prohibits a minor from becoming a partner in the firm. All that is permitted in law is that, with the consent of all the partners, a minor may be admitted to the benefit of partnership. Now, 'partnership' is the relation between persons, who had 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' and the name under which their business is carried on is called the 'firm name'. This definition shows that persons who enter into an agreement with one another to do a business in partnership and share its profits are partners. Reading the deed as a whole, there cannot be any doubt that all the members including the minor members have entered into a an agreement to carry on business in partnership and share its profits. It is true that the action on the part of the minors entering into an agreement to do business in partnership with others is not valid in law. But that does not affect or change the position that factually he had through his guardian entered into that agreement. Further, the deed provides that the duration of the firm is at will. Now, this is a term of the agreement between all the members and, that beings the position, a right has also been conferred to the equal extent on the minor to dissolve the partnership if he chooses to do so. Mr. Palkhivala argued that the term does not expressly mention that the duration of the firm is at will and can be dissolved by any of its members if he so desires. We are unable to accept this contention of Mr. Palkhivala. As already stated, this is a term agreed to by all the members and, therefore, the right conferred by this term is conferred on all the members who have signed the instrument of partnership. Similarly, the deed contains a term where under Mr. Mohamed Khalid A. R. Faquih has been authorised to conduct business in the best interests of the firm, that is, on behalf of all the partners; the other partners' right is of being consulted by the managing partner. There is no qualification contained in this clause and that means that the minor has also an equal right along with other partners to participate in the discussion relating to the affairs of the firm. It is true that the losses of the business are shared only by the adult members. But sharing of losses is not an essential ingredient of the constitution of a partnership and this factor alone is, therefore, not sufficient to negative the conclusion to which we have arrived at, that the minor had been accepted as a full-fledged partner in the partnership. The deed, therefore, is not a valid deed.
9. As regards the other deed of partnership of date 1st January, 1955, we do not consider it necessary to reproduce it. The terms of this deed are very similar to the deed of 1st January, 1954. There is, however, a very material difference between this deed and the first deed of January, 1, 1954. In this deed, though in the preamble the names of all the nine persons including the minor are mentioned as partners of the firm, the deed is not signed by all of them. The deed is signed only by the eight adult members and, that being the position, it is clear that the agreement arrived at is only between the eight adult members who are signatories to the deed. The minor is not a party to the agreement. In other words, the deed does not show that the minor member has entered into an agreement to do business in partnership. The deed further provides that the minor member would not be sharing any losses. Reading the deed, as a whole, there cannot be any doubt that the only right which is conferred on the minor is to share in the profits of the firm. In other words, the minor has been admitted to the benefits of the partnership. It is true that in the preamble the minor has been mentioned as a partner of the firm. But mere description in the deed would not make the minor a partner in the firm in the absence of his entering into an agreement of partnership and signing the instrument of partnership. As already stated, to constitute a partnership, an agreement between all the partners with one another to do business in partnership is an essential ingredient and that ingredient is absent in this case so far as the minor is concerned. In our opinion, therefore, the deed dated 1st January, 1955, does not go beyond section 30 of the Partnership Act.
10. It is next to be considered whether registering this partnership between the eight adult members would involve registration of a firm contrary to the terms of the instrument of partnership. In our opinion, registering the firm of the eight adult partners as constituted by the second deed does not involve registering a firm contrary to this deed of partnership. As already stated, on a true construction of the deed, the partnership is only between the eight adult members, the minor having been admitted to the benefits of partnership. A mere description of a minor as a partner in the preamble does not and cannot have the effect of making him a full partner in the firm.
11. For the reasons stated above, in our opinion the answer to the question referred to us will have to be that the assessee firm was rightly granted registration under section 26A of the Act of the assessment year 1956-57, but not for the assessment year 1955-56. We answer it accordingly. In the circumstances, we make no order as to costs.
12. Question answered accordingly.