R.R. Rastogi, J.
1. The Income-tax Appellate Tribunal, Delhi Bench 'A', has referred the following question of law for the opinion of this court:
' Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the Income-tax Officer was justified in cancelling the registration granted to the assessee-firm under Section 186(1) for the assessment years 1965-66, 1966-67 and 1967-68 '
2. The facts leading to the present reference briefly stated are, that the applicant, M/s. Bhagat Shyam and Company, was a partnership concern constituted under a partnership deed executed on March 10, 1963. Mela Ram, Bhagat Ram and Govind Ram having Rs. 0-2-0, 0-3-0 and 0-3-0 shares, respectively, were the partners of the assessee-firm and Shyam Sundar and Radhey Shyam, minors were admitted to the benefits of the partnership and were given Rs. 0-4-0 share each in the profits of the firm. The minors were not to share the losses which were to be borne by the three partners as under:
Govind Ram and Bhagat Rarn 371/2 % each and Mela Ram 25% The assessee-firm followed the financial year as its year of accounting. It was granted registration for the assessment year 1963-64 and the benefit of continuance of registration for and up to the assessment year 1968-69. Subsequently, the Commissioner, by an order under Section 263 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'), dated October 22, 1972, cancelled the registration for the assessment year 1968-69. Thereafter, for the years under consideration, that is, 1965-66 to 1967-68, the ITO took action under Section 186(1) of the Act, because it had come to his notice that both the minors had attained majority in the previous year ended March 31, 1964, and thereafter no fresh partnership deed had been drawn up. The ITO was of the opinion that for the assessment year 1965-66 instead of claiming continuance of registration the assessee-firm should have applied for fresh registration and in the absence of such an application it could not be said that the assessee-firm had been constituted under a deed of partnership. He did not doubt the genuineness of the partnership. Relying on a decision of this court in Ganesh Lal Laxmi Narain v. CIT : 68ITR696(All) , he held that on the attainment of majority by the minors the firm was required to file a fresh application for registration and it was not entitled to continuance of registration. He, therefore, cancelled the registration for all these three years under Section 186(1) of the Act.
The assessee appealed to the AAC, who decided the three appeals by a common order. According to the AAC, since the genuineness of the firm had not been doubted by the ITO, the registration granted could not have been cancelled merely on the ground that there was no partnership deed in existence. In his opinion, the decision in Ganesh Lal Laxmi Narain : 68ITR696(All) , was under Section 185 of the Act and it had no relevance for purposes of Section 186(1). On the other hand, the decision in Sheonath Prasad Motilal v. ITO : 47ITR493(All) , applied to the facts of the case. What had been held in that case was that registration under Section 186 of the Act could not be cancelled merely on the ground of any omission or defect in the application or in the deed of partnership. In the result, the AAC restored the original orders of the ITO by which the benefit of continuance of registration had been granted to the assessee.
The department took the matter in three appeals for those years before the Income-tax Appellate Tribunal. In the opinion of the Tribunal, the decision in Sheonath Prasad Motilal's case : 47ITR493(All) , was of no assistance to the assessee since that was a decision rendered under r. 6B of the Indian I.T. Rules, 1922. The firm which was granted registration was constituted by three partners and, two minors had been admitted to its benefits. However, for the years under appeal the firm so constituted did not exist. In those years it was a firm of five partners. Thus, when the ITO discovered the mistake and found that there was no firm of three partners in existence during the three years under consideration, he cancelled the registration under Section 186(1) of the Act. Further, in the opinion of the Tribunal, the ITO rightly relied on the decisions in Ganesh Lal Laxmi Narain v. CIT : 68ITR696(All) and Ram Narain Laxman Prasad v. ITO : 84ITR233(All) . In the result/the order of the ITO cancelling the registration of the assessee for the three years under consideration was restored. Now, at the instance of the assessee, the question of law set out above has been referred to this court.
So far as the facts are concerned, there is no dispute about the same. The two minors became majors in the previous year ended March 31, 1964, and we were informed during the hearing of this reference that they became majors on different dates. The question which falls for our consideration is as to whether acting under Section 186(1) of the Act the ITO could cancel the registration which had been granted for the years under consideration Now, Section 186(1) provides as under : ' If, where a firm has been registered, or its registration has effect under Sub-section (7) of Section 184 for an assessment year, the Income-tax Officer is of opinion that there was during the previous year no genuine firm in existence as registered, he may, after giving the firm a reasonable opportunity of being heard and with the previous approval of the Inspecting Assistant Commissioner, cancel the registration of the firm for that assessment year.'
3. The proviso is not relevant for the present purpose. It would be seen that the ITO may cancel the registration, which is granted under Section 185(1)(a), for the first period of registration or he may cancel the registration for subsequent years, which is effective under Section 184(7). However, for doing so he has to form an opinion that during the previous year there was no genuine firm in existence as registered. This is the very sine qua non for exercising the power of cancellation. This power can be exercised only within eight years from the end of the relevant assessment year and further after giving the firm a reasonable opportunity of being heard. The scope of this sub-section came up for consideration before a Division Bench of this court in Setha Ram Dhanvir Singh v. CIT : 123ITR150(All) to which one of us (Hon'ble C. S. P. Singh J.) was a party. The view taken was that before exercising the powers conferred under Section 186(1), the ITO has to be satisfied as to the genuineness of the firm in the background as it was registered. It was observed that the firm should really be in existence and carrying on business. In addition, the identity of the partners as well as their shares ought to be as specified in the instrument of partnership, otherwise the firm will not be in existence as registered. The fact that the firm was actually carrying on business with the same partners as were specified in the instrument of partnership is not enough. The shares in the profits and losses must continue to be as specified in the instrument. Then alone it can be said that there is a genuine firm in existence as registered.
4. It follows, therefore, that the genuineness of the firm as registered is to be examined with reference to the specified constitution. That specification is to be seen in regard to the identity of the partners of the firm and their shares.
5. The view taken in Ganesh Lal's case : 68ITR696(All) and Ram Narain's case : 84ITR233(All) was that on a minor attaining majority a change takes place in the constitution of the firm and the firm must apply for fresh registration under Section 184(8) of the Act. Those decisions have now been overruled by a Full Bench of this court in Badri Narain Kashi Prasad v. Addl. CIT : 115ITR858(All) . The question whether a change takes place in the constitution of the firm on a minor attaining majority has been examined by the Full Bench with reference to the constitution of the firm and the shares of the partners as evidenced by the instrument of partnership. The phrase ' constitution of the firm ' or the ' shares of the partners ' has not been defined in the Act and the phrase ' constitution of the firm ' has been taken to refer to the identity of the partners of the firm. The identity of the partners as well as their shares ought to be such as evidenced by the 'instrument of partnership. It has been laid down (p. 862):
' If for any subsequent year there is a change either in the constitution of the firm or the shares of the partners and such change is not evidenced by the instrument, the original registration shall not have effect. But if it is found that the constitution of the firm or the shares of the partners continues to be evidenced by the instrument, then it will be a case where the conclusion will be that there has been no change.'
6. According to the decision in Badri Narain Kashi Prasad : 115ITR858(All) , when a minor becomes major and opts to become a partner within the meaning of the Partnership Act, no change occurs in the constitution of the firm under the Act. For ascertaining the constitution of the firm as also the shares of the partners the instrument of partnership is to be reasonably construed in the background of the general law. The first part of the enquiry is to be addressed with a view to find out whether the instrument of partnership provides that a minor who has been admitted to the benefits of the partnership will become a partner, if he so elects, on his attaining majority. If there is such a provision then there will be no difficulty, but if an instrument confers on a minor the benefits of partnership and then it is silent, the general law will apply ; and it will be deemed that in view of Section 30 of the Partnership Act, the instrument evidences that on the minor electing to remain a partner on his attaining majority, he will be a partner. It was observed (p. 863):
' The only situation where it can be said that the instrument does not evidence this development will be where it, on a reasonable construction, is held to provide to the contrary, namely, that a minor will have no right to continue even if he elects to do so.'
7. The second part of the enquiry is whether there has been a change in the shares of the partners as evidenced by the instrument of partnership. The instrument is to be examined to find out whether in the eventuality of a minor becoming a major, the provision for the distribution of the shares lias been provided for or not and if the ITO is unable to ascertain the shares from the instrument it will be a case where the instrument does not evidence the change.
8. We, therefore, turn to the instrument of partnership with a view to find Out whether it provides that the minors on becoming majors would become partners if they so elect and secondly in that eventuality what will be the distribution of the shares. So far as the first part of the enquiry is concerned, there is not much difficulty, because Clause (viii) of the deed provides:
' (viii) That on attaining majority, the above named minors will continue to remain as partners in the said firm each enjoying a share of 25 np. in the rupee in the net profits and losses of the said firm.'
9. However, when we come to the second part of the enquiry we find ourselves unable to ascertain the shares of the partners from the instrument on the minors' attaining majority. Clause (vi) of the deed provides that the shares of the partners and the minors admitted to the benefits of the partnership in the net profits will be divided as under:
Sri Govind Ram
18 p. in the rupee
12 p. '
18 p '
Shyam Sunder minor
25 p. '
Radhey Shyam minor
25 p. '
10. In the event of a net loss the adult partners were to share the loss as under:
Govind Ram37 1/2 p. in the rupeeMela Ram 5 p. 'Bhagat Ram37 1/2 p. '
11. The deed did not provide the proportion in which these three adult partners were to share the loss after the minors attained majority. There is yet another difficulty and it is that each of the two minors did not become a major on one and the same date. There occurred some interval between the dates the two minors attained majority. In other words, for the period when one of them attained majority and the other was a minor, there was no provision as to how the losses were to be shared. Thus we find ourselves unable to ascertain the shares of the adult partners in the losses in the event of the two minors, or either of them, attaining majority.
12. It will be useful to refer to a decision of the Supreme Court in this connection and that was rendered in Mandyala Govindu & Co. v. CIT : 102ITR1(SC) . It was held in that case that the ITO must be in a position to ascertain the shares of the partners in the losses even if the Act does not require the share in the losses to be specified in the instrument of partnership. In that case, as in the instant case, shares of the partners, as specified in the instrument of partnership, were unequal. One partner had 31 % share, while the other two had 23% share each and the minor had the remaining 23%. There was no clause specifying the proportion in which the three adult partners were to share the losses, if any; since the shares in the profits were unequal the general presumption under Section 13(b) of the Partnership Act that the losses must be shared in the same proportion as the profits was held not applicable. It was held that even if the adult partners bore the losses in proportion to their respective shares in the profits, the amount of loss in the minor's share will still remain undistributed. It was further observed (p. 7):
' Will the partners between them bear this loss equally, or to the extent of their own individual shares To this the instrument of partnership does not even suggest an answer. There is, therefore, no means of ascertaining in this case how the losses are to be apportioned.'
13. On these facts, it was held that the firm was not entitled to be registered on the basis of such an instrument. In the present case, the situation is almost similar because the instrument does not specify the proportion in which the losses were to be apportioned as between the adult partners, in the event of the minors attaining majority. Since the proportion of their shares in the profits was not equal, it cannot be said that they were to bear the losses equally, nor could it be presumed that they were to bear the losses to the extent of their own individual shares. Further, as has been noted above, no provision was made for the period when one of the minors attained majority and the other continued to remain a minor. For that period, in the event of a net loss occurring, there is absolutely no means of ascertaining how the same was to be apportioned. This being the position, it cannot be said that no change took place in the constitution of the firm necessitating the drawing up of a fresh instrument of partnership and moving an application for grant of a fresh registration. Thus we agree with the view taken by the Tribunal though for different reasons.
14. Before parting with this case we might like to observe that the decision of a learned single judge of this court in Sheonath Prasad Motilal v. ITO : 47ITR493(All) was on different facts and under a different provision of law, viz., Rule 6B of the Indian I.T. Rules, 1922, and it has no relevance to the instant case.
15. We, therefore, answer the question referred in the affirmative, in favour of the department and against the assessee. The department is entitled to its costs which we assess at Rs. 200.