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Oswal Fertilizers Corporation Vs. Commissioner of Income Tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIT Ref. No. 133 of 1981
Judge
Reported in[1995]215ITR433(Bom)
ActsIncome Tex Act, 1961 - Sections 28 and 185
AppellantOswal Fertilizers Corporation
RespondentCommissioner of Income Tax
Appellant AdvocateK.M.L. Majele, Adv.
Respondent AdvocateDeokinandan, Adv.
Excerpt:
- - it is well settled law that the partnership deed must be construed reasonably and read as a whole. 26a of indian it act, 1922. this case is clearly distinguishable. 185 of the it act, 1961. in our opinion, this case is clearly distinguishable as there was no provision in the deed of partnership there to the effect that the minor was admitted to the benefits of partnership as in our case......partnership and not on the basis of assumption that the minors concerned were partners of the said firm. clause 18 of the deed of partnership cannot be interpreted to mean that the concerned minors were entitled to exercise all the rights of a partner in respect of business of the said firm on par with adults. clause 18 of the deed does not say so. we cannot stretch cl. 18 of the deed so as to nullify cl. 9 thereof. 5. we shall now refer to the relevant case law on the subject. 6. in cit vs . shah mohandas sadhuram : [1965]57itr415(sc) the supreme court held that the partnership deed must be construed reasonably. sikri, j. speaking for the apex court observed that the guardian could accept benefit of partnership on behalf of the minors concerned and even agree to contribute capital on.....
Judgment:

D.R. Dhanuka, J.

1. This is a reference under s. 256(2) of the IT Act, 1961. The following five questions are referred by the Tribunal to this Court for its opinion :

'1. Whether, on the facts and in the circumstances of the case and on a proper interpretation of the deed of partnership dt. 21st November, 1970, the Tribunal ought to have held that the assessee-firm was entitled to registration

2. Whether, on the facts and in the circumstances of the case, the Tribunal had erred in law in holding that the minors had been made full fledged partners under the deed of partnership dt. 21st November, 1970

3. Whether, the Tribunal erred in law in accepting the contention of the Revenue that the AAC had erred in directing the ITO to register the firm under s. 185 of the IT Act, 1961 and to treat the assessee's status as a registered firm for the asst. yr. 1972-73

4. Whether, the Tribunal should have upheld the order of the AAC directing the registration of the firm under the IT Act, 1961;

5. Whether the Tribunal erred in law in upholding the non-granting of registration to the assessee-firm on a ground different from that on the basis of which ITO had declined to grant the registration ?'

2. M/s. Oswal Fertilizers Corpn. is the assessee in this reference. The assessee carries on business in fertilizers at Baramati. The reference relates to the asst. yr. 1972-73. The said firm was reconstituted by a deed of a partnership dt. 21st November, 1970. The assessee applied for registration of the assessee-firm as a registered firm for the asst. yr. 1972-73 relying on the above referred deed of partnership. The ITO rejected the application of the assessee for registration of the firm and passed an order to the effect that the assessee be assessed in the status of unregistered firm. In appeal the AAC took the view that the assessee-firm was entitled to be registered as a firm and assessed as a registered firm as contemplated under IT Act, 1961. The basic controversy between the assessee and the Revenue centered throughout around the question as to whether minors (1) Prakash son of Dalichand Oswal (2) Champalal son of Mulchand Raichand Oswal were merely admitted to benefits of partnership or whether the said minors were made full-fledged partners in the firm in breach of provisions of law contained in Indian Partnership Act, 1932. The AAC held that the above referred minors were merely admitted to benefits of partnership and the partnership deed did not suffer from any infirmity. The AAC directed the CIT to grant registration to the assessee-firm as contemplated under s. 185 of the IT Act. The Tribunal reversed the decision of the AAC and held that the assessee was not entitled to status of being treated as a registered firm as in view of the Tribunal the said deed of partnership dt. 21st November, 1970 was not valid. The Tribunal took the view that the minors concerned were taken as full-fledged partners in the said firm and were and admitted merely to the benefits of the partnership.

3. The basic controversy arising in this reference is as to whether the above referred minors were merely admitted to the benefits of partnership or whether the said minors were taken as full-fledged partners in the said firm. It is well settled law that the partnership deed must be construed reasonably and read as a whole. Clause 9 of the said deed of partnership in specific terms provides that the said minors were merely admitted to the benefits of the firm and that the said minors shall not be liable to bear any loss. Clause 9 of the above referred deed of partnership in terms provided that the adults alone shall be liable to bear the loss including loss of capital. Clause 9 of the deed of partnership is one of the crucial clauses for the purpose of deciding the controversy which is the subject-matter of this reference. The said clause reads as under :

'9. That the net profits of the business shall be divided between the partners, in the following proportions and those partners excluding the parties of third and fourth part who are the minor partners admitted to the benefits of firm shall bear the losses including the loss of capital in the following proportions : Name of partners Sharing of profit Sharing losses1. Shri Ramanlal Mulchand Oswal 25% 38.50%2. Shri Parasmal Dalichand Oswal 15.75% 30.75%3. Shri Prakash Dalichand Oswal 15% Nil4. Shri Champalal Mulchand Oswal 13.50% Nil5. Shri Bhurmal Tulsaji Oswal 15.75% 15.75%6. Shri Sakalchand Sonmal Oswal 15% 15%Total 100% 100%'

While construing the above referred partnership deed as a whole, due weightage will have to be attached to cl. 9 thereof as the said clause is the most crucial clause for determination of the controversy.

4. Sec. 30(1) of Indian Partnership Act, 1932 provides that a minor may be admitted to the benefits of partnership. All the benefits can be conferred on a minor on par with adults. Sec. 30(2) of the Act provides that a minor who is admitted to the benefits of the partnership shall have a right to share in the property and profits of the firm as may be agreed upon. The said section further provides that the minor may have access to and inspect and copy any of the accounts of the firm. The right of inspection of the books of accounts of the firm has necessarily to be exercised by the guardian of the minor. Sec. 30(3) of the said Act provides that the minor shall not be personally liable for the acts of the firm but the minor's share shall be liable for the same. Sec. 30(4) of the Act provides that the 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. If the guardian of the minor decides to severe the connection of the minor with the firm, he is entitled to do so. We find that cl. 9 of the dead as extracted in judgment of the Tribunal is not a complete clause and some of the crucial words as appearing in the clause are missing from the clause as extracted in the judgment of the Tribunal. No discussion is to be found in the judgment of the Tribunal in respect of legal effect of specific provision in cl. 9 of the deed to the effect that the minors were admitted merely to benefits of firm with no liability to bear the loss including the loss of capital. The learned counsel for the Revenue has supported the reasoning and the conclusion of the Tribunal concerning the subject matter of construction of partnership deed. We are not convinced. There is nothing material in the preamble or other clauses of partnership deed to nullify cl. 9 of the deed or its full legal import. Clause 9 of the partnership deed consists of at least two important parts. The first part of cl. 9 of the deed in terms declares that above referred minors were merely admitted to the benefit of the firm. The second part of the said clause provides in conjunction with the first part of the clause that the said minors shall not be liable to bear any loss including loss of capital. The said clause further specifies the ratio in which the adults will bear the loss. The Tribunal did not consider first part of cl. 9 of the deed of partnership at all. We have, therefore examined the deed of partnership in its entirety for the purpose of construing the same reasonably with due emphasis on cl. 9 of the deed in light of the principles laid down by the judgments of the Supreme Court and High Courts. It is permissible in law to authorise guardians of the minors concerned to inspect the books of accounts and exercise certain rights to protect the minors. The guardians of the minors concerned may place their signature on partnership deed as guardians of minors admitted to benefit of partnership. Mere description of the minors as 'partners' in cl. 9 of the deed by itself did not make the minors as partners in the firm when the same very clause in terms provided that the minors were merely admitted to benefits of the firm. It is also necessary to refer to cl. 18 of the deed of the partnership in view of the submissions made by the learned counsel for the Revenue at the Bar. Clause 18 of the partnership deed reads as under :

'18. That the partners or their survivors or legal heirs shall be bound by the provisions of Partnership Act, 1932 and the rules framed thereunder from time to time.'

The learned counsel for the Revenue interpreted this clause to mean that by virtue of this clause, all the rights of full-fledged partners were conferred on minor concerned. We do not agree. This clause is too general in its nature and content. Clause 18 of the deed is liable to be read in conjunction with cl. 9 of the deed declaring that the minors were merely admitted to benefits of partnership and not on the basis of assumption that the minors concerned were partners of the said firm. Clause 18 of the deed of partnership cannot be interpreted to mean that the concerned minors were entitled to exercise all the rights of a partner in respect of business of the said firm on par with adults. Clause 18 of the deed does not say so. We cannot stretch cl. 18 of the deed so as to nullify cl. 9 thereof.

5. We shall now refer to the relevant case law on the subject.

6. In CIT vs . Shah Mohandas Sadhuram : [1965]57ITR415(SC) the Supreme Court held that the partnership deed must be construed reasonably. Sikri, J. speaking for the Apex Court observed that the guardian could accept benefit of partnership on behalf of the minors concerned and even agree to contribute capital on behalf of the minor. In this case the Court held that a guardian may severe connection of the minor with the firm in which the minor was admitted to the benefits of partnership. Merely because the deed of partnership is executed by a guardian on behalf of the minor, it does not follow therefrom that the minors were not admitted to the benefits of partnership. In the case before the Supreme Court, the guardian concerned did execute the deed of partnership for the purposes of getting the minor admitted to the benefits of partnership. So long as the partnership deed does not make the minor or minors partner in full and complete sense of the said expression as used in Indian Partnership Act, the partnership deed cannot be treated as invalid merely because the partnership deed confers certain powers on the guardian of the minor concerned. Some times conferring of such powers on the guardian of the minor concerned becomes necessary for protecting and safeguarding interest of the minor admitted to benefits of partnership.

7. The learned counsel for the Revenue relied on the case of CIT vs . Dwarkadas Khetan & Co. : [1961]41ITR528(SC) . In this case, the minor had himself executed the instrument of partnership. In this case it was in terms provided by the deed of partnership that the minor will be liable to bear all the losses including the loss of capital. Such a clause was forbidden by s. 30(3) of Indian Partnership Act. In view of such an objectionable clause, it was held by the Court in this case that the minor was not admitted merely to the benefits of partnership but was admitted as a full fledged partner of the firm. In this view of the matter, it was held by the Court that such a partnership could not be registered under s. 26A of Indian IT Act, 1922. This case is clearly distinguishable. In the case before us, cl. 9 of the deed of partnership in terms provides that the concerned minors were merely admitted to the benefits of the partnership and that the minors shall not be liable to bear any loss including in respect of the loss of capital.

8. The learned counsel for the Revenue also relied upon the judgment of the Supreme Court in the case of Sri Ramamohan Motor Service vs . CIT : [1973]89ITR274(SC) . In this case, the registration of the firm was refused on the ground that the application for registration and application for renewal of registration did not comply with the relevant rules. The ratio of this case has no relevance whatsoever for our purpose.

9. We shall now refer to the two judgments of this Court relied upon by the learned counsel for the Revenue. In Rajendra Trading Co. vs . CIT : [1976]104ITR39(Bom) this Court took the view that having regard to the provision contained in the partnership deed before the Court in that case, minors were given all the rights of a full-fledged partner and the assessee was not entitled to registration of the firm under s. 185 of the IT Act, 1961. In our opinion, this case is clearly distinguishable as there was no provision in the deed of partnership there to the effect that the minor was admitted to the benefits of partnership as in our case. Kantawala, C.J. speaking for the Division Bench of our High Court in terms observed at page 55 of the judgment as under :

'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.'

Presence of specific clause in the deed of partnership under consideration in this reference to the effect that the concerned minors were merely admitted to the benefits of partnership makes all the difference for the purposes of construing the deed of partnership. The ratio of the above referred case cannot be applied to this case by analogy when the material clauses of the two deeds of partnership are materially different. In the case of Rajendra Trading Co. (supra) Kantawala, C.J. speaking for the Division Bench further observed that a provision in the deed of partnership to the effect that the minor shall not be entitled to bear the loss did not automatically indicate that the minor was only admitted to the benefits of the partnership. Even adults may not be liable to bear the loss if the partnership deed so provides. In the case before us, cl. 9 of the deed of partnership supports the construction of partnership deed as canvassed for and on behalf of the assessee. At page 59 of the same very judgment, the Division Bench further observed as under :

'Primarily, the question whether Rajendrakumar has become a full-fledged partner or was admitted to the benefits of partnership has to be decided upon scrutiny of the provisions of the indenture of partnership dt. 17th February, 1960. .....'

We have construed the deed of partnership dt. 21st November, 1970 in this case as a whole after attaching due weightage to cl. 9 of the said deed of partnership and arrived at the conclusion in the instant case that the minors concerned were merely admitted to the benefits of the partnership and not made full-fledged partners. In our opinion, the deed of partnership is valid and does not contravene any of the provisions of Partnership Act.

10. In CIT vs . Md. Khalid Faquih & Co. : [1963]47ITR383(Bom) Tambe, J. speaking for Division Bench of our High Court in terms held that the mere description of minor as a partner in the preamble to the deed would not make the minor a partner in the firm and invalidate the deed. In this case, the Division Bench was concerned with interpretation of two different deeds of partnership. We are concerned with interpretation of second deed of partnership as construed by the Court in the above referred case. Relevant observations are to be found at pages 392 and 393 of the above referred judgment. After attaching due weightage to the relevant clause in the deed of partnership dt. 1st January, 1955, to the effect that the minor concerned would not be liable to bear any loss, the Division Bench of our High Court arrived at the conclusion that the minor concerned had been merely admitted to the benefits of the partnership and the deed of partnership was valid. It was argued before the Division Bench that in the preamble of the deed of partnership in question the minor concerned was described as a partner of the firm and such a provision invalidated the deed. On this aspect, Tambe, J., speaking for the Court observed as under :

'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.'

'In our opinion, therefore, the deed dt. 1st January, 1955, does not go beyond s. 30 of the Partnership Act.'

In our opinion, the ratio of this decision does not assist the learned counsel for the Revenue. In our opinion, all the authorities cited at the Bar assist the assessee and not the Revenue.

11. In light of the above discussion, we have reached the conclusion that the assessee was entitled to be assessed in status as a registered firm and the Tribunal ought to have upheld the order of the AAC directing the registration of the assessee under the IT Act, 1961.

12. In this view of the matter, we answer question Nos. 1, 2, 3 and 4 in the affirmative and in favour of the assessee. Having regard to our answer to question Nos. 1 to 4, it is not necessary to answer question No. 5 as the said question has become academic.

13. Having regard to the facts and circumstances of the case, there shall be no order as to costs.


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