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Akarapu Rajachanna Visweswara Rao Vs. Commissioner of Income-tax, Andhra Pradesh, Hyderabad and anr. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberWrit Petn. Nos. 117 and 118 of 1963
Judge
Reported inAIR1965AP1
ActsIncome-tax Act, 1922 - Sections 2(6-AA) and 35
AppellantAkarapu Rajachanna Visweswara Rao
RespondentCommissioner of Income-tax, Andhra Pradesh, Hyderabad and anr.
Appellant AdvocateW.V.V. Sundara Rao, Adv.
Respondent AdvocateC. Kondaiah, Standing Counsel for Income-tax Department
Excerpt:
.....participate in the conduct of business, his income is excluded form the definition of earned income. i am therefore satisfied that in both the writ petitions the common question which was posed, that is whether an income earned by a dormant minor partner is an earned income within the connotation of section 2 (6-aa), must be answered against the petitioner. consequently these two writ petitions must fail and are hereby dismissed......to the benefits as a partner cannot enter into a valid and binding contract. how could therefore a minor actively participate in the conduct of business? the business, vocation, or profession carried on involves series of contracts and agreements which a minor partner cannot certainly enter into. when that is excluded, i fail to see what other aspects of business, vocation or profession are left for him actively participate in. the conduct of business as a term embraces the entire business or vocation, and a partner actively engaging in the sort of business must naturally possess the minimum competence to carry on the business or vocation. in view of section 11 of the contract act, when a minor cannot enter into an agreement, it is perhaps not permissible to argue that a minor can be.....
Judgment:
ORDER

(1) These two writ petitions are filed under Art. 226 of the Constitution, and the central question involved in both the applications being common they can be deposed of by one common judgment. I would however mention for the purpose of appreciating the other points the facts of both the cases separately.

(2) In writ petition No. 117 of 1963, the petitioner, who is admittedly a minor but was admitted to the partnership firm for the purposes of benefit, was assessed for the years 1957 to 1960. The assessment however did not include the surcharge treating the income during that period as an unearned income. It makes difference because in cases of earned income, the surcharge is 5% while in cases of unearned income the surcharge is 15%. The Income-tax Officer, acting under Section 35 of the Income-tax Act, hereinafter called 'the Act', went into the record of the assessment for the year 1960-61 and as he thought that the record disclosed a mistake, inasmuch as the petitioner was not surcharged at the rate of 15% he corrected that mistake and demanded the difference of the surcharge from the petitioner which amounted to about Rs. 1600/- The petitioner therefore went in revision to the Commissioner of Income Tax under Section 33 A (2) The Commissioner, through his order dated 15-8-1962, confirmed the order of the Income-tax Officer. That view of the Commissioner as well as that of the Income-tax Officer is challenged in the said writ petition.

(3) In Writ Petition No. 118 of 1963, the petitioner was surcharged at the rate of 15% treating his income from the firm as an unearned income for the year 1961-62 to an amount of nearly Rs. 1500/- The petitioner approached the Appellate Assistant Commissioner, and then the Commissioner. He however could not succeed. These are the orders which are now challenged in the second writ petition.

(4) It is firstly urged by Mr. Sundara Rao, the learned counsel for the petitioner, that the minor's income, who is admitted to the benefits of partnership, is an earned income within the meaning of Section 2 (6-AA) of the Act and cannot therefore be taken to mean as an unearned income. In order to appreciate this contention, it is necessary to look into the definition of 'earned income'. Section 2 (6-AA), omitting the irrelevant portion, is as follows:

'earned income' means any income of an assessee who is an individual, Hindu undivided family, unregistered firm or other association of persons not being a company, a local authority, a registered firm or a firm treated as registered under clause (b) of sub-section (5) of section 23-

a)

b) which is chargeable under the head 'profits and gains of business, profession or vocation' where the business, profession or vocation is carried on by the assessee, or, in the case of a firm, where the assessee is a partner actively engaged in the conduct of the business, professing or vacation' or

.........................................'

(5) According to S. 2 (6-B) of the Act, the expression 'firm' 'partner' and 'partnership' bear the same meanings,, as in the Indian Partnership Act. It is however made clear in that definition that the expression 'partner' includes any person who being a minor has been admitted to the benefits of partnership. Thus, the firm can also include a partner who being a minor has been admitted to the benefits of a partnership. What I am therefore called upon to consider is whether in the case of a firm, a minor can be said to be actively engaged as a partner in the conduct of the business, profession or vocation of the firm. What is contended by Mr. Sundara Rao is that the Income Tax Officer did not make any enquiry in regard to the fact whether the minor was actively engaged in the conduct of business or not at the time when he originally made the assessments for the above-said years. It cannot therefore be considered as a mistake in exercising the power under Section 35 of the Act. His argument is that a mistake must not involve an elaborate enquiry into the facts, but the mistake should be apparent i.e. , patent from the record, and in exercise of the power under Section 35 should not deprive the petitioner of his right to appeal against the original assessment order. While it is true, and I will aver to it later on, that every mistake does not fall within the purview of Section 35 which entitles the concerned authority to correct it, nevertheless when it is conceded that the minor's income was not surcharged at higher rate because it was not considered as an unearned income, then in that case what has to be considered is whether the omission to consider whether a particular income is as unearned income or not could be called a mistake falling within the purview of Section 35 of the Act. That question can be answered in two ways. Firstly, if it is found that a minor cannot be considered to be a partner, who is actively engaged in the conduct of the business, then it is not in doubt that his income will not fall within the definition of Section 2 (6-AA) i.e. , 'earned income'. What is not an earned income would certainly be an unearned income. In order therefore to get the minor within the definition of Section 2 (6-AA), it has to be seen whether in law a minor can be a partner actively engaged in the conduct of the business. No direct authority is available on this point.

(6) Mr. C. Kondayya, relying upon Commissioner of Income-tax Madras v. Marimuthu Nadar : [1962]44ITR1(SC) argues that a minor cannot be a partner actively possible for him to act such. No doubt, at page 5, (of ITR) : (at p. 8 of AIR ) while making reference to the rival contentions advanced by the parties, it is stated:

'In the case of a minor, the position is clear, because a minor cannot be a partner actively engaged in the conduct of the business, and it is impossible that the section is meant to apply to a minor only when a minor is engaged actively in business as a partner.'

That does not however appear to be the conclusion reached by the Supreme Court. In fact, in the succeeding paragraph, this particular argument has not been dealt with at all, that is to say, whether it is impossible for a minor to actively engage in business. What Their Lordships referred to was :

'Cases of wives and minors actively engaged in the conduct of the business are very few indeed, whereas cases of fathers and husbands actively engaged in the conduct of business while their minor children or wives, as the case may be, are dormant, are very numerous and of common and natural occurrence. It is to be expected that the law is framed not for rare cases but for cases which one encounters daily in ordinary life'.

It cannot be said even from the above-said observation that Their Lordships were laying down any rule of law that it is impossible for a minor to actively engage in a business; nor could it be construed from the above-said observation that although such cases may be rare and few, they are legal. That decision therefore does not render any assistance to the Department as far as this question is concerned. I have therefore to see what is the true connotation of the expression used in Section 2 (6-AA) i. e., partner actively engaged in the conduct of business.

(7) I have no shred of doubt that no partner can actively engage himself in the conduct of business unless he is a partner who can for the purposes of Partnership Act competently enter into contract. Section 30 of the Indian Partnership Act admits minors to the benefit of partnership. The proposition enunciated in s. 30 that a minor may be admitted to the benefits of a partnership pre-supposes the existence or coming into existence of a partnership apart from the minor for the simple reasons that he cannot enter into a partnership with another and thereby form a partnership. That is why he can be admitted to the benefit of a partnership when there are at least two major partners who constitute a firm already or are going to form a partnership. The minor therefore does not become a full-fledged partner in the sense that he can actively engage himself in the conduct of business in the eye of law. For example, if he enters into a contract as a partner normally he is expected to enter into a binding contract both on the firm as well as on the party to the contract. It requires no further argument to state that the minor merely because he is admitted to the benefits as a partner cannot enter into a valid and binding contract. How could therefore a minor actively participate in the conduct of business? The business, vocation, or profession carried on involves series of contracts and agreements which a minor partner cannot certainly enter into. When that is excluded, I fail to see what other aspects of business, vocation or profession are left for him actively participate in. The conduct of business as a term embraces the entire business or vocation, and a partner actively engaging in the sort of business must naturally possess the minimum competence to carry on the business or vocation. In view of section 11 of the Contract Act, when a minor cannot enter into an agreement, it is perhaps not permissible to argue that a minor can be considered as actively engaged settled rule of law that a minor is incapable of entering rule of law that a minor is incapable of entering into a contract and if he does enter into a contract that contract and if he does enter into a contract that contract is altogether null and void. Since partnership is a relation resulting from an agreement or contract a person can become a partner only by an act of consent on his part and other partners and a minor being incapable to give such a consent cannot become a partner. In fact a partnership agreement in which the minor is described as a full-fledged partner cannot be accepted for the purposes of registration of such a firm under the Income Tax Act. If any authority is required for that purpose, Commissioner of Income Tax Bombay v. Dwarkadas Khetan and co., : [1961]41ITR528(SC) can be cited. It is thus clear that, in order to get himself included in the definition of S. 2 (6-AA), a partner must possess competence to transact the business as a full-fledged partner. If he does not possess competence to transact, it is impossible for him to say that he actively participate in the conduct of any business. He is merely a dormant partner admitted only to the benefits of the partnership.

(8) That being the true position of law, as I comprehend it, the minor's income in the partnership business as a partner would not certainly be an earned income.

(9) Now the only other question which survives for consideration is whether the omission to treat the income of a minor partner in a partnership firm as an unearned income is a mistake which falls within the ambit of Section 35 of the Act. What is stated in Section 35 is 'mistake apparent from the record'. It is not necessary that such a mistake must be displayed by the final order of assessment. The term 'record' would include the entire proceedings of assessment. It is therefore permissible for the Income-tax Officer to scrutinise the entire record in order to find out whether there is any error in making the assessment. It is true that it must be a mistake. If the Income-tax Officer has applied his mind to a particular problem and has given a wrong decision either misconstruing the facts of the law,. it cannot be said that he has committed a mistake within the connotation of S. 35 of the Act. Even in cases where the mistake can be found out only after making an elaborate enquiry into either the question of fact or law, in such a case also it may contended that such mistake is not apparent from the record. But in cases where omission is patent, it can hardly be argued that such an omission does not constitute a mistake within the meaning of Section 35 of the Act. What has happened in this case is that it was taken for granted by everybody concerned at the time of the original assessment that the income of a minor partner was earned income within the meaning of Section 2 (6-AA) and not an unearned income. On that basis, the minor partner was not surcharged at a higher rate. In order to find out whether this omission has occurred in the record or not, it does not involve any elaborate enquiry of either law or fact. it is, my opinion, an error which is apparent from the record. I do not therefore consider that the Income-tax Officer has exceeded his jurisdiction in trying to find it out in exercising the jurisdiction which undoubtedly vested in him under Section 35 of the Act.

(10) Before I consider the cases cited at the Bar, I must not omit to mention that neither at the time of the original assessment nor at the time when the mistake was tried to be corrected, any assertion was made by the minor partner that he was actively participating in the conduct of business as a fact. It is true, that, in the affidavit filed before this Court it is stated that such a representation was made but from the order, it is apparent that no such representation seems to have been made. Whether the minor was actually engaged in the conduct of business or not becomes irrelevant in the view which I have taken of Section 2 (6-AA) of the Act. Nevertheless, as a matter of fact also, it does not seem to have been urged before the Income-tax Officer. It scarcely lies therefore in the month of the petitioner to contend that the Income-tax Officer failed to make an enquiry in regard to the contention which the petitioner is now observed. In fact the Commissioner in his order observed, 'there is not dispute regarding the fact that the minor did not earn any income by his exertion . . . . . . . . . . .'

(11) Mr. Sundara Rao relies on the following three decisions, Arvind N. Mafatlal v. Income-tax Officer, North Satara, (S) : [1957]32ITR350(Bom) , Subbaraja Mudaliar v. Commissioner of Income-tax, : [1958]33ITR228(Mad) and Shantilal Rawji v. M. C. Nair : [1958]34ITR439(Bom) . In all these cases, the scope of Section 35 has been defined. There can be little quarrel with broad proposition laid down in the above-said cases particularly when this view finds sufficient support from a Supreme Court decision in Income-tax Officer v. S. K. Habibullah, : [1962]44ITR809(SC) .

(12) In the first case a Bench of the Bombay High Court decided that in ascertaining whether there is an apparent from the record the Income-tax Officer need not confine himself to the order of assessment of the assessee alone. All proceedings, which constitute evidence on which the assessment order is passed, must be regarded as record for the purposes of Section 35. The Income-tax Officer is not prohibited from looking at the evidence to ascertain whether an error has been committed. The second case was disposed of on the fact peculiar to that case. Whether a particular record discloses a mistake within the connotation of Section 35 or not would primarily be a question which has to be decided in view of the circumstances and facts of the individual case. In the third case another Bench of the Bombay High Court held that the error contemplated by Section 35 may be an error of either fact or law. If all the facts are on record and not further elucidation or ascertainment is necessary and if on these facts it is clear that the Income-tax Officer had made an error of law, that error can be rectified under Section 35. An error of law consist of deciding a particular point contrary to the clear provisions of a statute; it may equally be due to the ignorance or overlooking of the clear provisions of the statute. It was also observed that rectification proceedings are not intended for the making of an order which, is made, by the Income-tax Officer in the original assessment could have been challenged on appeal. The Legislature did not intend that the rectification order should act to the prejudice of the assessee in the sense that he should be deprived of a right of appeal by resorting to rectification proceedings because a particular order was not made in the original assessment. It will thus be seen that these broad principles have to be kept in view while considering a given case. In this case, as stated before, the assessing authority had omitted to consider the question whether an income earned by a dormant minor partner of a firm is an earned income or not. As I have already held that according to the existing law a minor cannot effectively participate in the conduct of business, his income is excluded form the definition of earned income. If this legal position has been ignored by the assessing authority, it is undoubtedly a mistake which even according to the above-said decisions falls within the ambit of section 35 and therefore in exercise of the powers vested in the relevant authority, such a mistake cane be corrected. I am therefore satisfied that in both the writ petitions the common question which was posed, that is whether an income earned by a dormant minor partner is an earned income within the connotation of Section 2 (6-AA), must be answered against the petitioner. I have no shred of doubt that it is not an earned income. The point in relation to Section 35 discussed above related only to writ petition No. 117/63 and in regard to that I have already held that it was a mistake falling within the meaning of Section 35 and the Officer concerned was therefore justified in correcting that error. Consequently these two writ petitions must fail and are hereby dismissed. There will be not order as to costs. Advocate's fee Rs. 100/- in both petitions.

(13) Petitions dismissed.


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