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Commissioner of Income-tax Vs. Kesarimal Hirachand - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 27 of 1966
Judge
Reported in[1971]81ITR693(AP)
ActsIncome Tax Act, 1922 - Sections 26A
AppellantCommissioner of Income-tax
RespondentKesarimal Hirachand
Appellant AdvocateP. Rama Rao, Adv.
Respondent AdvocateK.B. Krishnamurthy and ;K.B. Ratnasastry, Advs.
Excerpt:
direct taxation - registration of partnership - section 26a of income tax act, 1922 - application seeking reference in relation to registration of partnership firm having minors as partner - partnership deed signed by guardian on behalf of minor partners - as per partnership deed minor not liable for loss beyond capital - registration cancelled by commissioner and declared as illegal - minors admitted as partners through guardians for benefit of partnership - held, cancellation of registration by commissioner not tenable. - - in a very lengthy judgment, after reviewing a good number of cases cited before the bench, held that there were no defects in the deed, which disentitled the firm from obtaining registration under the income-tax act......8. for those reasons, the commissioner of income-tax was of the view that the registration of the partnership firm for both the assessment years was not only illegal, but also invalid, as it contravened section 30 of the indian partnership act, in that view the learned commissioner of income-tax cancelled the registration for both the assessment years as stated above by relying upon the decision in commissioner of income-tax v. md, khalid faquihi & co., [1963] 47 i.t.r 383 (bom.) .9. aggrieved by the separate orders passed by the commissioner of income-tax cancelling the registration of the firm for both the assessment years 1960-61 and 1961-62, the assessee filed appeals to the appellate tribunal. for the assessment year 1960-61, the tribunal accepted the assessee's appeal and allowed.....
Judgment:

Sriramulu, J.

1. At the instance of the Commissioner of Income-tax for the assessment year 1960-61, and the assessee-firm for the assessment year 1961-62, the following two questions of law have been referred to this court by the Income-tax Appellate Tribunal under Section 66(1) of the Income-tax Act of 1922.

2. For the assessment year 1960-61:

'Whether on a proper construction of the deed dated December 12, 1958, the assessee is entitled to registration for the assessment year 1960-61?'

3. For the assessment year 1961-62 :

'Whether, on a proper construction of the deed dated December 10, 1959, the assessee is entitled to registration for the assessment year 1961-62?'

4. The material facts, which give rise to the above questions of law, are stated below :

Consequent upon the exit of one of the partners, the assessee-firm was reconstituted as evidenced by the instrument of partnership dated December 12, 1958. The reconstituted firm consisted of five partners. Two minors, Champalal and Baboothmal were admitted to the benefits of the partnership.

5. The firm was further reconstituted on one of the partners, Maniklal, leaving the firm on November 1, 1959. The reconstitution of the firm was evidenced by the instrument of partnership dated December 10, 1959,with effect from November I, 1959. This reconstituted firm consisted of five members. Two minors, Champalal and Baboothmal, were admitted to the benefits of the partnership.

6. The former reconstituted firm applied for registration to the Income-tax Officer for the assessment year 1960-61 and the latter for the assessment year 1961-62. The Income-tax Officer allowed registration to the assessee-firm for the assessment years 1960-61 and 1961-62 under Section 26A of the Indian Income-tax Act, 1922.

7. Finding that the order passed by the Income-tax Officer granting registration to the assessee-firm for both the assessment years erroneous and prejudicial to the interests of the revenue, the Commissioner of Income-tax under Section 33B of the Income-tax Act, 1922, called for the files and, after due notice to and hearing the assessee, cancelled the registration for both the assessment years. The reasons given by him for the cancellation of the registration are :

(1) a reading of Clause 8 of the instrument of partnership shows that all the minors could determine or dissolve the partnership by giving a written notice ;

(2) that the minors are made parties to the contract and their respective guardians have signed the instrument; and

(3) the minors are made full-fledged partners, although, under Clause 6, the loss, if any, has to be borne only by the major partners ; still a reading of the document as a whole shows that no distinction was made between the major partners and the minors admitted to the benefits of the partnership in this behalf.

8. For those reasons, the Commissioner of Income-tax was of the view that the registration of the partnership firm for both the assessment years was not only illegal, but also invalid, as it contravened Section 30 of the Indian Partnership Act, In that view the learned Commissioner of Income-tax cancelled the registration for both the assessment years as stated above by relying upon the decision in Commissioner of Income-tax v. Md, Khalid Faquihi & Co., [1963] 47 I.T.R 383 (Bom.) .

9. Aggrieved by the separate orders passed by the Commissioner of Income-tax cancelling the registration of the firm for both the assessment years 1960-61 and 1961-62, the assessee filed appeals to the Appellate Tribunal. For the assessment year 1960-61, the Tribunal accepted the assessee's appeal and allowed registration to the firm. For the assessment year 1961-62 the Tribunal accepted the view of the Commissioner of Income-tax and dismissed the appeal of the assessee.

10. At the instance of the Commissioner of Income-tax for the first year and the assessee for the second year, the questions stared above havebeen referred to this court by the Tribunal under Section 66(1) of the Indian Income-tax Act, 1922.

11. On a proper construction of the relevant instruments of partnership, the minors, according to the assessee, were only admitted to the benefits of the partnership and were not made full-fledged partners. The department contended otherwise.

12. In order to find out which of the two rival contentions is correct, it is necessary to read the relevant clauses of both the instruments of partnership dated December 12, 1958, and December 10, 1959.

13. The relevant clauses of the instrument of partnership dated December 12, 1958, read as follows:

' .... .whereas..... .minors, Baboothmal and Champalal, are admittedto the benefits of the partnership with the free consent of all the other partners. . . .

The net profits shall be divided between the partners as per the shares noted below, but the loss in the business, if any, shall be borne only by the major partners. The minors are entitled only to the benefits of the partnership and they are not liable to any loss in the business.

(1) Hirachand Kesarimal0-5-0(2) Seshmal Kesarimal0-5-0(3) Manchalal0-2-9(4) Devichand0-2-3(5) Baboothmal Seshmal (minor)0-2-0(6) Champalal Hirachand (minor)0-2-0(7) Manikyachand0-1-6(8) Charity0-0-9

1-5-3

Partners except the minors shall attend to the business when need arises. The partnership shall be determined or dissolved whenever any partner at is will gives notice in writing. Each partner can cease to be a member of the partnership on giving one month's notice in writing to the remaining partners and the out-going partner's account shall be settled including the proportionate share of profits up to the date of dissolution and adjusting both debits and credits to his account accumulated or advanced and the repayment shall be made at once in accordance with the signed accounts of the firm and while settling the account of the outgoing partner, all the contracts of the partnership firm, pending on the date of the written notice of the retiring partner (sic). '

14. The said instrument of partnership was signed by all the major partners and also by the guardians of the minors admitted to the benefits of the partnership.

15. The relevant clauses of the instrument of partnership dated December 10, 1959, read as follows:

' The capital required for the business shall be contributed by Hira chand, Seshmal, Baboothmal and Champalal.

The profits of the business shall be divided among the partners as follows :

(1)Hirachand0-5-6(2) Seshmal0-5-6(3) Nathmal0-3-0(4) Devichand0-2-6(5) Maneklal0-2-0(6) Babhoothmal0-2-0(7) Champalal0-2-0(8) Charity0-0-9

1-7-3

The partnership shall be carried on as long as possible and, if any partner intends to retire from the partnership, can retire at the close of the Deepavali year after closing the accounts. '

16. This instrument of partnership was signed by all the major partners and also by the guardians of the minors.

17. On a reading of both the instruments of partnership, it is evident that the minors, Champalal and Baboothmal are only admitted to the benefits of the partnership with the free consent of all the other partners. The profits of the partnership will be shared by the partners as per their shares but losses will be borne only by the major partners. Under the deed dated December 10, 1959, the minors are required to contribute capital. Both the instruments of partnership are signed by the guardians acting on behalf of their minor sons.

18. Would these factors vitiate the partnership agreement and make the minors, full-fledged partners in contravention of Section 30 of the Partnership Act This very question came up for decision in R. C. No. 2/66 before a Divison Bench of this High Court to which one of us (Gopal Rao Ekbote J.) was a party. In his judgment, speaking for the Division Bench, my learned brother, Gopal Rao Ekbote J. in a very lengthy judgment, after reviewing a good number of cases cited before the Bench, held that there were no defects in the deed, which disentitled the firm from obtaining registration under the Income-tax Act. We have gone through that judgment carefully and we entirely agree with the correctness of the reasons given therein by the Bench for coming to the above conclusion.

19. In this case there is no difficulty with regard to one matter. In both the deeds it is absolutely clear that both the minors are admitted to the benefits of the partnership and not made liable for the losses. A person can become a partner only by an act of consent, (a) on the part of himself ; and (b) on the part of ail the other partners. Since a minor is incapable of giving consent he cannot become a partner, but with the consent of all others, he can only be admitted to the benefits of the partnership. In both the instruments of partnership only the major partners have agreed to share the losses and that the minors are not liable for such losses. That clause establishes the dominant intention of the parties that the minors were admitted to the benefits of the partnership with the consent of the major partners. Under the instrument of partnership dated December 12, 1958, the partners alone could determine and dissolve the partnership. Since the minor, who has been admitted to the benefits of the partnership, is not a partner, he cannot determine or dissolve the partnership by himself by issuing a written notice. That clause, therefore, does not, in our opinion, vitiate the partnership and disentitle it from getting registration.

20. We will then consider the effect of the guardians signing the deed on behalf of the minors and agreeing to contribute capital. The question is whether such a clause would militate against the validity of the instrument of partnership.

21. There is nothing in law which prevents a guardian from entering into a partnership contract on behalf of his minor ward. What is prevented under law is that the guardian cannot contract on behalf of his minor ward as to make him a full-fledged partner. If a guardian enters into a contract of partnership on behalf of his minor, he may agree to contribute capital on behalf of a minor. If the minor does not contribute the capital in compliance with that clause, the other partners cannot enforce that clause against the minor. However, the guardian who has entered into that contract on behalf of the minor is bound by that clause and he is liable to contribute, the capital and that capital, which is contributed on behalf of the minor, will also become liable for loss. The minor is only exempted from personal liability. His share is always liable for such loss. We are, therefore, of the opinion that the clause in the instrument of partnership which stipulates contribution of capital by minors would not militate against the validity of the partnership.

22. In this connection, it is important to know the distinction and difference between the capacity to contract and authority to contract. Capacity to contract means power to bind oneself by the contract and authority to contract means the authority to bind another by the contract. Capacity is part of law of status, while the authority is part of law of principal and agent. Contracts made by agents and representatives, who have noauthority from their principal to make them are not void, but merely voidable and may be ratified. They bind the agents and representatives in any case, if not adopted or ratified by their principal. Thus, if guardians on behalf of minors entered into contracts for their minor wards, such contracts would not bind the minors unless and until they adopted or ratified the same on becoming majors. However, such contracts are always binding on the guardians who made those contracts on behalf of their minor wards. Thus, the instruments of partnership which are now under consideration do not disclose any legal flaw which vitiates them or which contravenes the provisions of Section 30 of the Partnership Act. The reconstituted partnership firms as evidenced by both the instruments of partnership dated December 12, 1958, and December 10, 1959, are, therefore, entitled for registration and the Commissioner of Income-tax was wrong in cancelling the registration for both the assessment years, and the Tribunal in upholding the cancellation of registration for the assessment year 1961-62. For the above reasons, we answer both the questions in the affirmative and in favour of the assessee. The department will pay the costs to the assessee.


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