Skip to content


Commissioner of Income-tax Vs. Suleman Khan and Mahaboob Khan Tobacco Exporters - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 140 of 1991
Judge
Reported in[2002]257ITR170(AP)
ActsIncome Tax Act, 1961 - Sections 2(23) and 184(3); Companies Act, 1956 - Sections 11(2); Partnership Act - Sections 4 and 30
AppellantCommissioner of Income-tax
RespondentSuleman Khan and Mahaboob Khan Tobacco Exporters
Appellant AdvocateJ.V. Prasad, Adv.
Respondent AdvocateA. Satyanarayana, Adv.
Excerpt:
.....- commissioner opined that firm was not lawful as same was not registered under companies act - minors admitted to firm cannot be taken into consideration for determining whether assessee firm had more than 20 partners - minors cannot become partners although they may be admitted for benefits of partnership - tribunal quashed order of commissioner - high court affirmed order of tribunal. - specific relief act, 1963 [c.a. no. 47/1963]. sections 31 & 34: [bilal nazki, v.v.s. rao & g. chandraiah, jj] [per court] cancellation of registered sale deed inherent power of registering authority - fraudulent transfer of property sale taking place by reason of fraud played by transferor and transferee held, it is void. true owner can nullify the sale by executing and registering a..........has, in the above judgment, observed as follows :'... what the definition does is to apply to a minor admitted to the benefits of partnership all the provisions of the income-tax act applicable to partners.... the definition is designed to confer equal benefits upon the minor by treating him as a partner; but it does 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.' (p. 533)11. it is true that section 11(2) of the companies act prohibits formation of a company, association or partnership consisting of more than 20 persons for the purpose of carrying on any business for gain unless it is registered as a company. partnership, being the result of a contract between partners and a.....
Judgment:

S.R. Nayak, J.

1. The Tribunal, Hyderabad Bench-A, has referred the following question under Section 256(1) of the Income-tax Act, 1961 ('the Act'), at the instance of the revenue :

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that firm Suleman Khan & Mahaboob Khan & Co., Tobacco Exporters, Guntur, was entitled to claim registration for the relevant assessment years 1975-76, 1976-77 and 1977-78 ?

2. The background facts leading to the above reference be noticed first and they are as follows : The respondent assessee-firm, Suleman Khan & Mahaboob Khan & Co., Tobacco Exporters, Guntur, is a partnership firm and the assessment years involved are 1975-76,1976-77 and 1977-78. According to the Commissioner, the assessee-firm consisted of 23 partners (20 adults + 3 minors) during each of the above three assessment years and that since the total number of partners exceeded 20, the Commissioner thought that the firm was not validly constituted and the ITO had committed a serious illegality in granting registration. So opining, the Commissioner issued notice to the assessee-firm to show cause why the orders passed by the ITO under Section 185(1)(a) of the Act and assessment orders passed under Section 143(3) of the Act for the relevant assessment years should not be cancelled under Section 263 and why the ITO be directed to redo assessment for the aforementioned three years. The assessee-firm responded to the above notice and in its reply it raised a number of contentions including the contention that the Commissioner has no jurisdiction to cancel registration granted by the ITO. The main question that arose for consideration before the Commissioner was whether the minors admitted to the firm as partners should be taken into consideration for determining whether the assessee-firm had more than 20 partners during the relevant assessment years. The Commissioner concluded that the assessee-firm had more than 20 partners including the minors during the relevant assessment years and the same having not been registered under the Companies Act, 1956, such a partnership firm should be held to be an unlawful partnership firm. In other words, the Commissioner opined that the partnership of the assessee-firm was not lawful in view of the provisions of Section 11(2) of the Companies Act, 1956. The Commissioner, in view of that finding, set aside the order of the ITO and directed him to redo the assessments treating the assessee as an 'association of persons'.

3. The assessee, being aggrieved by the above order of the Commissioner, preferred appeals to the Tribunal under Section 263. Before the Tribunal, on behalf of the assessee, it was contended that according to Section 30 of the Indian Partnership Act, a minor cannot be a partner although he may be admitted to the benefits of a partnership. It was also contended on behalf of the assessee that provisions of Section 11(2) of the Companies Act cannot be so read as to militate against the accepted connotation of the word 'partnership' under Partnership Law. It was further contended that the definition of the words 'firm', 'partner' and 'partnership' in Section 2(23) of the Income-tax Act was designed to confer equal benefits upon minors, and it does not ipso facto and ipso jure follow from that definition that a minor can be treated as a full-fledged partner in the eye of law. It was also contended that the definition of the word 'person' as defined in the General Clauses Act cannot be imported into the Partnership Act, the provisions of which alone are relevant for finding as to who could join as partners. On behalf of the revenue, it was contended that in view of Section11(2), once the ITO comes to know that a minor has been admitted to the benefits of partnership, he must deem that a minor is also a partner of the partnership and on that basis he should find out whether the total number of partners including the minors have exceeded 20 or not and if he finds that the total number of partners including minors exceed 20, the ITO cannot register the partnership. In that view of the matter, the revenue contended that the partnership of the assessee contravened Section 11(2) of the Companies Act.

4. The Tribunal, on consideration of the rival contentions advanced on behalf of the department and the assessee held :

'The genuineness of the appellant-firm has never been doubted by the Income-tax Department. It has never been the contention of the department in the course of this litigation that the prescribed conditions have not been fulfilled. Hence, the partnership must be held to have been validly formed as the law did not at the relevant time prohibit any one, otherwise competent to contract, from entering into a contract of partnership. The application made for registration complies with the requirements of Section 185 of the Income-tax Act and the rules framed thereunder.'

In view of the above opinion, the Tribunal concluded that the ITO was bound to register the partnership for the relevant assessment years. In that view of the matter, the Tribunal quashed the orders of the Commissioner for the three assessment years.

5. We have heard Sri J.V. Prasad, the learned standing counsel for the Income-tax Department and Sri A. Satyanarayana, the learned counsel for the respondent-assessee. The learned counsel reiterated the same contentions that were urged before the Tribunal noticed above before us also in this reference.

6. Section 184 of the Act, as existed till 31-3-1993, laid down that an application for registration of a firm for the purposes of the Act might be made to the Assessing Officer on behalf of any firm if the following conditions are satisfied: (i) the partnership was evidenced by an instrument; and (ii) the individual shares of the partners were specified in the instrument. The application might be made either during the existence of the firm or after its dissolution. However, it had to be made before the end of the previous year for the assessment year in respect of which registration was sought. It needs to be emphasized that registration of a firm under the Act was optional and not compulsory. The significance of registration of a partnership firm under the Act lay in the fact that after the registration, the firm was liable to assessment of income-tax at a lower rate than what otherwise would be in the case of an unregistered firm. In other words, registration of a firm under the Act conferred a benefit which would not have been available otherwise.

7. The Act has adopted the definitions of 'firm', 'partner' and 'partnership1 given in the Partnership Act, 1932. Section 2(23) of the Act reads as follows:

'(23) 'firm', 'partner' and 'partnership' have the meanings respectively assigned to them in the Indian Partnership Act, 1932 (9 of 1932); but the expression 'partner' shall also include any person who, being a minor, has been admitted to the benefits of partnership.'

8. According to Section 2(4) of the Partnership Act, partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The persons who have entered into partnership are individually called partners and collectively a firm and name in which the business is carried on is called the firm name. Partnership is, as such, the result of a contract. A minor, not being competent to enter into a contract, is incapable of becoming a partner, although he can be admitted to the benefits of the partnership.

9. In CIT v. Bhawani Prasad Girdhari Lal & Co. : [1990]186ITR518(All) , the assessee-firm consisting of 17 major partners and 4 minors who were admitted to the benefits of partnership, filed returns for the assessment years 1966-67 and 1967-68 claiming the status of a registered firm. The ITO, however, cancelled the registration on the ground that the assessee-firm consisted of more than 20 partners in contravention of Section 11(2) of the Companies Act and the partnership deed was not signed by the guardian of the minors. On appeal by the assessee-firm, the Commissioner (Appeals)-II, Kanpur, upheld the cancellation of the registration by the ITO and dismissed the appeals. The assessee-firm took the matter in appeal to the Tribunal. The Tribunal allowed the appeals holding that a minor cannot become a partner although, with consent of the adult partners, he can be admitted to the benefits of the partnership, and as such minors cannot be taken into consideration for finding out whether there has been contravention of Section 11(2). On reference, the Allahabad High Court held--

'Section 11(2) of the Companies Act prohibits the formation of a company, association or partnership consisting of more than 20 persons for the purpose of carrying on any business for gain unless it is registered as a company. Partnership being the result of a contract between the partners and a minor being incompetent to enter into a contract, only adult persons who constitute the partnership on the basis of an agreement are to be taken into consideration for finding out whether a partnership consists of more than 20 persons and minors, not being partners, cannot be taken into account for the purpose of Section 11(2) of the Companies Act. As the assessee-firm consisted of 17 partners, it was legally entitled to be registered under the Act....' (p. 520)

10. The Supreme Court in CIT v. Dwarkadas Khetan & Co. : [1961]41ITR528(SC) , has laid down that in view of Section 30 of the Partnership Act, a minor cannot become a partner, although he may be admitted to the benefits of the partnership and a partnership deed, which makes a minor a full-fledged partner, cannot be regarded as a valid document for thepurpose of registration under Section 184 of the Act. Regarding the definition of 'partnership' given in Section 2(6B) of the Indian Income-tax Act, 1922, which is analogous to Section 2(23) of the Income-tax Act, 1961, according to which 'partner' includes a minor who has been admitted to the benefits of the partnership, the Supreme Court has, in the above judgment, observed as follows :

'... What the definition does is to apply to a minor admitted to the benefits of partnership all the provisions of the Income-tax Act applicable to partners.... The definition is designed to confer equal benefits upon the minor by treating him as a partner; but it does 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.' (p. 533)

11. It is true that Section 11(2) of the Companies Act prohibits formation of a company, association or partnership consisting of more than 20 persons for the purpose of carrying on any business for gain unless it is registered as a company. Partnership, being the result of a contract between partners and a minor being incompetent to enter into a contract, only adult persons who constitute a partnership on the basis of an agreement are to be taken into consideration for finding out whether a partnership consists of more than 20 persons, and minors, not being partners, cannot be taken into account for the purpose of Section 11(2). In the instant case, as the assessee-firm consisted of 20 adult members and three minor members as partners during the assessment years 1975-76, 1976-77 and 1977-78, it was legally entitled to be registered under the Act.

12. In CIT v. Chandrika Enterprises : [1992]198ITR548(Ker) , the assessee-firm consisted of 14 partners and 7 minors who were admitted to the benefits of partnership. The ITO took the view that the minors admitted to the benefits of the partnership, in view of the definition of 'partner' in Section 2(23), were also full-fledged partners and so the partnership must be held to consist of more than 20 persons as partners and since Section 11(2) of the Companies Act prohibited formation of a partnership consisting of more than 20 persons, the application filed by the firm for registration under Section 184, was not maintainable. The Commissioner (Appeals) reversed the order of the ITO and directed him to grant registration to the assessee-firm. The Tribunal affirmed the order of the Commissioner (Appeals). On reference, the Kerala High Court held--

'The common law principle that a minor, not being competent to enter into a contract, is incapable of becoming a partner, is not altered by the Income-tax Act. On the other hand, that the said principle has been recognized by that Act is clear from the provisions contained in Sub-section (3)(a) of Section 184. This sub-section says that the application for registration of a firm shall be signed by all the partners (not being minors) personally. In other words to apply for and obtain the registration underthe Income-tax Act, the partners shall sign the application for registration, personally. A reference in this connection to Section 30(1) of the Partnership Act is relevant. This section provides that a minor cannot become a partner although, with the consent of all the partners for the time being, he may be admitted to the benefits of partnership. Any deed of partnership which goes beyond this section cannot, therefore, be regarded as valid for the purposes of registration under the Income-tax Act. The definition section, Section 2(23) of the Income-tax Act, considered in the light of Section 30 of the Partnership Act, cannot be said to mean that, in a given case where a minor has, contrary to law, been admitted as a full partner, the document is to be regarded as valid. What the definition does is to empower the authority concerned to apply to a minor admitted to the benefits of partnership all the provisions of the Income-tax Act. The definition, in other words, is designed to confer equal benefits upon the minor by treating him as a partner....' (p. 551)

13. In CIT v. Hotel Sriraj : [1992]198ITR570(KAR) , the assessee therein filed returns claiming the status of a firm. The claim was rejected by the ITO on the ground that the number of persons who constituted the partnership exceeded 20 and, therefore, the partnership could not be recognized as such and treated the assessee as 'association of persons'. On appeal, the AAC accepted the contention of the assessee that the number of persons who constituted the firm were below 20 excluding the minors who were only admitted to the benefits of the partnership as per Section 30 of the Partnership Act. The Tribunal affirmed the order of the AAC. On reference, the Karnataka High Court held--

'Under the provisions of the Indian Partnership Act, a minor cannot be a partner because a minor is not competent to enter into any contract. A minor can only be admitted to the benefits of the partnership. Therefore, the law which enables the formation of apartnership, that is, the Partnership Act does not recognize a minor as a partner at all when a minor is admitted only to the benefits of the said partnership. Consequently, while computing the number of partners, the number of minors who have been admitted to the benefits of the partnership will have to be excluded....' (p. 571)

14. In Dwarkadas Khetan & Co.'s case (supra), on 27-3-1946, an instrument of partnership was executed by four persons, one of them being a minor. The minor was admitted as a full partner and he was a signatory to the instrument though his natural guardian also signed it. Not only was he entitled to a share in the profits, he was also liable to bear all the losses including the loss of capital. All the four persons were to attend to the business and if consent was needed, all the persons 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 books of account and was given right to vote, if a decision on votes had to be taken. In the background of the facts of that case, the Supreme Court held that thepartnership deed, in which the minor was admitted as a full partner, was not valid and could not be registered under Section 26A of the Income-tax Act. The Supreme Court having found divergent opinions between the Bombay, Madras and Patna High Courts on one hand and Calcutta, Allahabad and Punjab High Courts on the other hand on the point as to whether minor partners can be counted for the purpose of Section 11(2) of the Companies Act and on consideration of the decisions in Jakka Devayya & Sons v. CIT : [1952]22ITR264(Mad) , Khorasany v. Acha [1928] ILR 6 Ran 198 P. Vincent v. CIT : [1952]22ITR285(Mad) , Sahai Bros. v. CIT 0065/1958 : [1958]33ITR40(Patna) , Hoosen Kasam Dada v. CIT : [1937]5ITR182(Cal) . Hardutt Ray Gajadhar Ram v. CIT : [1950]18ITR106(All) and Banka Mal Lajja Ram & Co. v. CIT , opined that the view of the Calcutta High Court is preferable to the view taken by the Madras High Court and held--

'In our opinion, the Calcutta view is preferable to the view taken by the Madras High Court. The error in the Madras view is in using the definition to show that a deed including a minor as a competent partner is valid. What the definition does is to apply to a minor admitted to the benefits of partnership all the provisions of the Income-tax Act applicable to partners. The definition cannot be read to mean that in every case where 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 be admitted to the benefits of partnership. The rules which have been framed under Section 26A quite clearly show that a minor who is admitted to the benefits of partnership need not sign the application for registration. The law requires all partners to sign the application, and if the definition were to be carried to the extreme, even a minor who is admitted to the benefits of partnership would be competent to sign such an application. The definition is designed to confer equal benefits upon the minor by treating him as a partner; but it does not render a minor a competent and full partner. For that purpose, the law of partnership must be considered, apart from the definition in Income-tax Act.

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 between 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 which is different from the one actually executed and asked to be registered. In our opinion, the Madras view cannot be accepted.' (p. 533)

15. Further, it needs to be emphasized that Section 184(3) provided, inter alia, that the application for registration should be signed by all the partners (not being minors) personally. This provision shows that a minor who is admitted to the benefits of a partnership need not sign the application for registration and if the Commissioner's reasoning were to be carried to the logical ends, even a minor who is admitted to the benefits of a partnership would be competent to sign such an application. Since a minor is not competent to sign the application for registration, the view taken by the Commissioner runs counter to the provisions of Section 184(3). This reasoning also strengthens the conclusion that under the Act no minor can be a partner in a partnership as such.

16. The provisions of Section 11(2) of the Companies Act must be read in the context of and in harmony with Sections 4 and 30 of the Partnership Act. The assumption of the department that the word 'person' occurring in Section 11(2) takes in a minor also as a partner in a partnership was based on erroneous view of the law. As pointed out supra, the provisions of Section 184(3) which provide that the application for registration should be signed by all the persons (not being minors), clearly suggests that under the Income-tax Law, no minor can be a partner in a partnership firm as such. In taking this view we are fortified by the decision of the Supreme Court in Dwarkadas Khetan & Co.'s case (supra); of the Allahabad High Court in Bhawani Prasad Girdhari Lal & Co.'s case (supra); of the Kerala High Court in Chandrika En terprises case (supra); of the Karnataka High Court in Hotel Sriraj's case (supra) with which we are in respectful agreement. Further, it needs to be noticed that the view taken by the Allahabad High Court in Bhawani Prasad Girdhari Lal & Co.'s case (supra) was affirmed by the Supreme Court in S.L.P. No. 11821 of 1991 decided on 12-7-1991 in CIT v. Bhawani Prasad Girdhari Lal & Co.

17. In the result and for the foregoing reasons, we answer the question referred to us in the affirmative in favour of the assessee and against the revenue. The R.C. is accordingly disposed of with no order as to costs.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //