Jeevan Reddy J.
1. The Income-tax Appellate Tribunal, Hyderabad, has referred the following question for our opinion under s. 256(1) of the I.T. Act, 1961 :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in directing registration to the firm, M/s. B. Pandaiah and Co., for the assessment year 1973-74 ?'
2. The facts relevant to the question are. The appellant-firm consisting of two partners was carrying on business in kirana goods, etc. The two parties, who are brothers, admitted their brother who is congenitally deaf and dumb, to the benefits of the partnership. A partnership deed was executed an October 20,1972, giving one-third share in the profits to the said brother, but making him not liable for the losses. As application for registration under s. 184 of the Indian I.T. Act was made, signed only by the two partner-brothers. The ITO was satisfied that the application was in order and that the firm was genuine but refused registration on the ground that the admission of an adult member to the benefits of the partnership is not recognised by law; and therefore, such a partnership is invalid and cannot be registered under the I.T. Act. On appeal, the AAC affirmed the said view. On further appeal, the Tribunal agreed with the view taken by the lower authorities that an adult, even if he is a congenital idiot or is congenitally deaf and dumb, cannot be admitted to the benefits of the partnership but allowed the appeal on a difference ground altogether. The Tribunal observed :
'It is open to the partners of a business to agree not to take the whole of the profits of the partnership for their own personal use and to reserve part of the profits for same other purpose, so to say, for a charitable purpose. Herein the two partners, Sri B. Pandaiah and Shri B. Yadaiah, have evidently intended to set apart 1/3rd of the profit for the benefit of their brother, Shri B. Chandraiah, who is a deaf and dumb person. That is all they wanted to do on October 20, 1972, on which day the partnership deed was executed. It may be that they did not express themselves properly in the partnership deed. I our opinion, the firm is entitled to registration on the basis of the deed of the partnership executed by two component person.'
3. The Tribunal, therefore, directed the ITO to grant registration accordingly.
4. In this reference, it is contended by Shri. M. Suryanarayana Murthy, the learned standing counsel for the Department, that having rightly held that an adult person, notwithstanding that he is congenitally deaf and dumb, cannot be admitted to the benefits of the partnership, the Tribunal was in error in allowing the appeal on a ground not put forward by either party at any time. It is submitted that the partnership deed, on the basis of which registration was asked for under I.T. Act, is invalid in law, and therefore, the registration was rightly refused by the ITO. On the other hand, it is contended by Shri. G. V. R. Mohan Rao learned counsel for the assessee, that every person who is given a share in the profits of a firm does not necessarily become a partner, and that there are the shape of profits. He submitted that merely by giving a share in the profits, the deaf and dumb brother did not become a partner. Reliance is placed upon the decisions in CIT v. R. S. Show Factory : 47ITR917(All) and Manohar Das Kedar Nath v. CIT : 18ITR914(All) in this behalf.
5. The partnership deed dated October 20,1972, did not purport to create any charity. It admitted the deaf and dumb brother of the existing two partners to the benefits of the partnership. Admittedly, a partnership deed so admitting an adult member to the benefits of the partnership is not valid in law and could not, therefore, have been registered under the I.T. Act. Having conceded this position in law, there was no warrant for he Tribunal to allow the appeal on a ground not urged by either party at any time before the lower authorities or even before the Tribunal. Even before the Tribunal, the argument of the assessee was that, under s. 30 of the Indian Partnership Act, a congenitally deaf and dumb person can also be admitted to the benefits of a partnership, which argument was rejected. Here the profits which are set apart for the deaf and dumb brother are one-third of the profits of the firm. It is not any small portion of the profits set apart towards charity as in Manohar Das Kedar Nath's case : 18ITR914(All) . An equal share in the profits was provided to the deaf and dumb brother along with the other brothers.
6. Mr. Mohan Rao then sought to contend that the assessee-firm had taken over the assets of the business which was previously carried on by the HUF consisting of these three brothers and since the assets of the HUF were used by the firm the two brothers thought it appropriate to provide some profit to the other brother representing the interest on his share of assets used by the firm. This again is to a basis which was at any time urged before any authority or even before the Tribunal. There is no evidence to show what were the assets of the HUF business which were taken over by the present partnership. Similarly, the argument of Mr. Mohan Rao based upon by him, is out of place. Expln. 2 to s. 6 of particular, Expln. 2, relied upon by him, is out of place. Expln. 2 to s. 6 of the Partnership Act says that the receipt by a person of a share of the profits of a business does not by itself make him a partner along with the person carrying on the business. The Explanation particularises the cases of the servant or an agent receiving a share of profits as remuneration or receipt of profits by a previous owner or present owner of the business as consideration for the sale of the goodwill or share thereof. But these are legal contentions for which there is on factual basis in this case. The necessary facts to support such a contention were never adduced at any stage for the simple reason that this argument was not forward at any stage.
7. While we quite see that the object of the two partner-brothers was laudable inasmuch as they wanted to provide some income to their deaf and dumb brother, we are unable to sustaining the Tribunal's order for the reasons given above. Whether the share in the profits given to the deaf and dumb brother was in the nature of charity and whether such a charity should in the circumstances, have been provided to the extent of one-third of the profits of the firm were all question which have not been investigated at any stage. The Tribunal was in error in discovering the said ground at the stage of arguments and making it the basis for allowing the appeal.
8. At this stage, a brief reference to the case sited by Mr. G. V. R. Mohan Rao would be in order. Manohar Das Kedar Natha's case : 18ITR914(All) was one where four brothers entered into a partnership and they together took 15 annas share out of 16 annas. The remaining one anna share was left for charity. The registration was refused by the Department on the ground that charity cannot be taken as a partner. When the matter came up before the Allahabad High Court, it held that the partnership deed merely provided that 1/16th share of the profits will to be distributed between the partners but would be kept in a separate charity fund. On a correct interpretation of the document, the High Court held that it is open to the partners of a business to agree not to take the whole of the profits of the partnership for their personal use and to reserve a part of the profits for charitable purposes and that is exactly what the partners had done in that case. It was accordingly held that the partnership was entitled to registration. But that is not the situation here. As much as one-third of the profits equal to the share of the other working partners, is sought to be given to a person who is sought to be admitted to the benefits of the partnership. This situation cannot be equated to reserving a small portion of the profits for charity.
9. The next decision relied upon is R.S. Show Factory's case : 47ITR917(All) . That was a case where three persons agreed to form a partnership out of whom C was not to invest any moneys but was to be a working partner only. His share was fixed at three annas and he was liable to be dismissed by A and B in case of disobedience. The working partner was also not entitled to carry on the business or to interfere with the conduct of business. The registration was refused by the Department; but the Tribunal held on appeal that there was a genuine partnership. the High Court affirmed the said finding. It must, however, be remembered that this is not again a case of admitting an adult member to the benefits of partnership. The working partner was equally liable for the losses along with profits. This case, therefore, is of no assistance to Mr. G. V. R. Mohan Rao.
10. Another circumstances which we may mention in this behalf is that, under ss. 184 and 185 of the I.T. Act, a partnership must be a valid partnership in law for being registered under the I.T. Act. It has been held in several cases that where a minor is treated as full-fledged partner, such a partnership deed is invalid in law and is not entitled to be registered under the Act. Here, the partnership deed is invalid in law for the reasons stated hereinbefore and it must follow that it could not have been registered under the Act.
11. For the above reasons, we answer the question referred to using the negative and in favour of the Department and against the assessee. In the circumstances of the case, there shall be no order as to costs.