Skip to content


Ram NaraIn Laxman Prasad Vs. Income-tax Officer, d Ward and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberCivil Miscellaneous Writ No. 5801 of 1970
Judge
Reported in[1972]84ITR233(All)
ActsIncome Tax Act, 1961 - Sections 184(7) and 185
AppellantRam NaraIn Laxman Prasad
Respondentincome-tax Officer, "d" Ward and ors.
Appellant AdvocateR.K. Gulati, Adv.
Respondent AdvocateB.L. Gupta and ;R.R. Misra, Advs.
Excerpt:
.....us to examine this further..........to be executed.12. on ram mohan attaining majority and thereupon becoming a partner of the firm, a change took place in the constitution of the firm, andconsequently by reason of section 184(8) of the income-tax act, 1961, the firm was obliged to apply for fresh registration. the benefit of the original registration continuing to have effect by virtue of section of section 184(7) was no longer available, one of the prerequisites for such continued benefit being, as the proviso to section 184(7) declares, that there is no change in the constitution of the firm.13. we may point out that we see hardly any relevance in the reference made on, behalf of the petitioner-firm to section 187(2). and as regards form no. xii, even though it was signed by ram mohan also, it could be of no.....
Judgment:

Pathak, J.

1. The petitioner is a partnership firm carrying on business under the name and style of M/s. Ram Narain Laxman Prasad at Lucknow. It came into existence under a partnership deed dated April 20, 1964. According to the partnership deed, there were two partners, Laxman Prasad and Vinod Kumar. Two minors, Ram Mohan and Rajendra Prasad, were admitted to the benefits of partnership. Clause (2) of the partnership deed recited that on the minors' attaining majority they would automatically become full fledged partners, the existing deed would hold good and no fresh deed would be required to be executed.

2. Shortly after coming into existence the petitioner firm was granted registration under Section 185 of the Income-tax Act, 1961, and the benefit of registration was continued, thereafter, under Section 184(7) up to the assessment year 1966-67. For the assessment year 1967-68, a declaration in Form XII was filed by the petitioner-firm. It was a declaration made under Section 184(7) affirming that the firm had been granted registration and that there had been no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the registration was granted. Ram Mohan, one of the minors admitted to the benefits of partnership, had attained majority on June 24, 1966, during the previous year, relevant to the assessment year 1967-68, and the declaration in Form XII was signed by him also. Admittedly, on Ram Mohan attaining majority, no fresh partnership deed was executed. It is stated that he did not elect not to become a partner in the firm and that there was no change in the shares of the partners in the profits or losses of the business.

3. On July 29, 1968, the Income-tax Officer assessed the petitioner-firm as an unregistered firm holding that the constitution of the firm had suffered a change in view of Ram Mohan attaining majority and a fresh partnership deed should have been executed. The petitioner-firm appealed to the Appellate Assistant Commissioner, and the appeal was dismissed on October 22, 1969. The petitioner-firm then applied in revision, and on August 17, 1970, the Additional Commissioner of Income-tax rejected the revision application. The Additional Commissioner affirmed the view that upon Ram Mohan attaining majority there had been a change in the constitution of the firm, and he relied on the decision of this court in Ganesh Lal Laxmi Narain v. Commissioner of Income-tax, [1968] 60 I.T.R. 696 (All.). He held that a fresh partnership deed should have been executed and an application made for fresh registration. Besides, he pointed out, there was no clause in the partnership deed spelling out the shares of the individual partners in the event of a minor attaining majority.

4. The petitioner-firm now applies for relief under Article 226 of the Constitution.

5. At the very outset, learned counsel for the petitioner-firm assails the validity of the view taken by the revenue authorities that on Ram Mohan attaining majority there was a change in the constitution of the firm. It is urged that under the Income-tax Act a minor has been treated as a partner, and continues as such on his attaining majority and, therefore, it cannot be said that the constitution of the firm undergoes any change. It is also pointed out that the decision in Ganesh Lal Laxmi Narain was rendered in a case under Section 26A of the Indian Income-tax Act, 1922, and was not attracted in the present case which falls under Section 184 of the Income-tax Act, 1961. Alternatively, it is urged that the decision in that case calls for re-consideration, and we have been referred to a circular said to have been issued by the Central Board of Direct Taxes doubting the correctness of that decision. Our attention has also been invited to Section 187(2) which declares that there is a change in the constitution of the firm if one or more new partners are admitted, and, it is said, that as Ram Mohan is not a new partner admitted in the firm there is no change in the constitution of the firm.

6. We think it 'is first necessary to determine what is intended by the constitution of a partnership firm.. Section 4 of the Indian Partnership Act, 1932, defines a partnership as :

'... 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.'

7. Clearly, the definition envisages a contractual relationship between such persons, who, as Section 4 indicates, are called individually 'partners' and collectively a 'firm'. A firm consists of the partners related to each other contract and the constitution of a firm is determined by the number and identity of the partners. There is a change in the constitution of the firm when there is a change in the number and identity of the partners. Generally, such a change takes place when a person is introduced as a partner into an already existing firm or a partner retires or is expelled or ceases to be a partner on his becoming insolvent or dies, provided that the partners are agreed to the admission of a new partner or the contract of partnership stipulates that the firm will not dissolve on one of the partners ceasing to be so by reason of any of the events mentioned above. A change in the constitution of the firm must bedistinguished from the dissolution of the firm. The former assumes that the firm continues in existence, and that there is merely a change in the personnel of the firm. The latter contemplates the end of the contractual relationship between all the partners.

8. The question is whether there is a change in the constitution of a firm when a minor admitted to the benefits of partnership attains majority and elects to become a partner in the firm. A minor, lacking contractual capacity, cannot enter into a contract. In Mohori Bibee v. Dharmodas Ghose, [1903] L.R. 30 I.A. 114; I.L.R. 30 Cal. 539 (P.C.) the Privy Council pointed out that under the Indian Contract Act it was essential that all contractual parties should be competent to contract and that a person, who by reason of infancy was incompetant to contract, could not make a contract within the meaning of that Act. By Section 11 of the Act, a minor's agreement is altogether void and unenforceable. The definition of 'partnership' in Section 4 of the Indian Partnership Act necessarily envisages an agreement between the partners. A minor, being incapable of entering into an agreement, cannot enter into an agreement of partnership. As was pointed out in Sanyasi Charan Mandal v. Krishna Dhan Banerji, A.I.R. 1922 P.C. 237, a minor cannot be one of that group of persons called a firm. He cannot be a partner of the firm. But while he is incapable of being a partner under Section 30 of the Indian Partnership Act he may be admitted to the benefits of partnership. Section 30(1) declares :

' A person who is a minor according to the law to which he is subject may not be a partner in a firm, but, with the consent of all the partners for the time being, he may be admitted to the benefits of partnership.'

9. Those benefits are detailed in the several sub-sections of Section 30. On his attaining majority, he can elect to become or not to become a partner in the firm. Section 30(5) provides i

'At any time within six months of his attaining majority, or of his obtaining knowledge that he had been admitted to the benefits of partnership, whichever date is later, such person may give public notice that he has elected to become or that he has elected not to become a partner in the firm, and such notice shall determine his position as regards the firm :

Provided that, if he fails' to give such notice, he shall become a partner in the firm on the expiry of the said six months.'

10. Therefore, while a person during his minority cannot be a partner in a firm, he can be so if during his minority he has been admitted to the benefits of partnership and on attaining majority either gives public notice that he has become a partner in the firm or becomes such partner by operation of law on his failing to give public notice that he has elected not to become a partner. On behalf of the petitioner-firm, reference is made to Section 63, and it is pointed out that a case of a minor becoming apartner on attaining majority has not been treated as involving a change in the constitution of the firm, there being two separate provisions in Section 63 for the two classes of cases. Section 63(1) deals with cases of incoming and outgoing partners, contemplated in sections 31 to 34, while Section 63(2) refers to cases falling under Section 30. It will be noticed that Section 31, which deals with the introduction of a person as a partner in the firm only with the consent of all the existing partners, is subject to the provisions of Section 30. In other words, the prohibition imposed by Section 31 will not apply to the case of a minor who on attaining majority elects under Section 30 of the Act to be a partner of the firm. The requisite conditions of Section 30(5) being fulfilled, he becomes a new partner in the firm.

11. It is said that because of Clause (2) of the partnership deed no fresh partnership deed was necessary when Ram Mohan attained majority, and the partnership deed sufficiently evidenced a firm in which Ram Mohan was also a partner. A distinction is also sought to be drawn between Section 26A of the Indian Income-tax Act, 1922, which for the purposes of registration requires an instrument of partnership constituting the firm and Section 148(1)(i) of the Income-tax Act, 1961, which requires merely that the partnership be evidenced by an instrument. Assuming that a distinction exists, can it be said that the partnership deed of April 20, 1964, evidences a partnership consisting of Laxman Prasad, Vinod Kumar and Ram Mohan In our opinion, it cannot. All that it evidences is a partnership consisting of Laxman Prasad and Vinod Kumar as partners and Ram Mohan and Rajendra Prasad as minors admitted to the benefits of partnership. Clause (2) does provide that the minors would automatically become full-fledged partners. But that is a provision which is meaningless. The minors could not bind themselves during their minority to become partners on their attaining majority. Nor could Laxman Prasad and Vinod Kumar bind them. The law gave the minors an option in the matter and that option could be exercised only after they attained majority. Upon attaining majority, they would elect whether to become partners or not to become partners. Beyond admitting them to the benefits of partnership, the partnership deed could not make them partners. The constitution of the firm evidenced by the partnership deed envisaged only two partners. It could not in law contemplate that the minors admitted to the benefits of partnership would necessarily or automatically become partners. The partnership deed could not, on its existing terms, hold good for the change in the constitution of the firm notwithstanding any declaration therein that a fresh deed would not be required to be executed.

12. On Ram Mohan attaining majority and thereupon becoming a partner of the firm, a change took place in the constitution of the firm, andconsequently by reason of Section 184(8) of the Income-tax Act, 1961, the firm was obliged to apply for fresh registration. The benefit of the original registration continuing to have effect by virtue of section of Section 184(7) was no longer available, one of the prerequisites for such continued benefit being, as the proviso to Section 184(7) declares, that there is no change in the constitution of the firm.

13. We may point out that we see hardly any relevance in the reference made on, behalf of the petitioner-firm to Section 187(2). And as regards Form No. XII, even though it was signed by Ram Mohan also, it could be of no avail. The declaration contained in it that there had been no change in the constitution of the firm is incorrect and being a firm contemplated by Rule 24 of the Income-tax Rules, which in turn refers to Section 184(7) of the Act, was not attracted at all. It is Section 184(8) which applies, and the application for registration in accordance with Rule 22(2)(ii) has to be made in Form No. XI-A. Rule 22(2)(ii) further requires that the application should be accompanied by the instrument evidencing the partnership as in existence from time to time during the previous years.

14. As this stage, the contention on behalf of the petitioner-firm that a minor is a partner under the Income-tax Act, and, therefore Ram Mohan must be considered to have been a partner throughout can be disposed of shortly. There is no doubt that the expression 'partner' has, by Section 2(33) of the Income-tax Act, 1961, been defined to include a person who being a minor has been admitted to the benefits of partnership. But whether there was a change in the constitution of the firm for the purpose of applying the provisions of the Income-tax Act relating to the registration of firms cannot be decided by that definition. None of the sections from Section 184 to Section 186, which deal with the registration of firms, defines what is intended by the expression ' a change in the constitution of the firm ' used in different places in those sections. For that we must turn to the law contained in the Indian Partnership Act.

15. We may now examine the cases to which reference has been madebefore us. Reliance has been placed on behalf of the petitioner-firm onthe B. C. G. A. (Punjab) Ltd. v. Commissioner of Income-tax , but we seenothing there which is relevant to the issue before us. Our attention hasalso been drawn to Giridhari Lal Seetaram & Bros. v. Commissioner ofIncome-tax : [1949]17ITR282(Orissa) , where the Orissa High Court held that in consequence of aclause in the partnership agreement that the partnership business wouldnot stand dissolved on the death of a partner but would continue to becarried on by the surviving partners with the survivors or heirs orexecutors or administrators of the deceased partner, as the case may be, noalteration in the deed and no fresh deed was needed in order to constitutea partnership between the surviving partners and the heirs or successors of the deceased partner. It appears that the decision proceeded on the assumption that 'on the death of a partner the firm does not dissolve where the deceased partner's heir automatically, by virtue of the terms of the deed, becomes partner without any fresh agreement'. Upon the considerations which have appealed to us we are unable, with respect, to agree with the view taken in that case. We would prefer instead the observations of Monir J. in Makerwal Colliery, In re , that where under a deed of partnership the legal representative of a deceased partner is entitled, but not bound, by reason of a provision in the deed to come in as a partner in place of the deceased partner and if he elects accordingly the constitution of the firm is altered and the new firm cannot apply for registration of the original partnership as the applicants to the registration are not parties to the deed of partnership. He specifically pointed out that the only course open to the new partners, if they seek registration, is to execute a new deed of partnership and to apply for the registration of that deed.

16. Bhogi Lal Laherchand v. Commissioner of Income-tax : [1955]28ITR919(Bom) which was also referred to, is a case where a fresh partnership deed was executed when the minor attained majority and elected to become a partner of the firm. The question which arises before us did not arise there. We are unable to construe any of the observations made in that case as laying down that a minor is a partner of a firm during his minority. Nor do we find anything which sustains the case of the petitioner-firm in Tyresoles (India), Calcutta v. Commissioner of Income-tax : [1963]49ITR515(Mad) , Dilipsinhji P. Desai v. Commissioner of Income-tax : [1964]54ITR91(Guj) , Laxmi Trading Co. v. Commissioner of Income-tax : [1966]62ITR770(All) , Rampatmal Tirkha Ram v. Commissioner of Income-tax and R. Sannappa and Sons v. Commissioner of Income-tax : [1967]66ITR27(KAR) . In none of those cases did the question arise whether there was a change in the constitution of the firm when a minor, who was admitted to the benefits of partnership, attained majority and elected to become a partner of the firm.

17. Some doubt has been expressed on the correctness of the decision in Ganesh Lal Laxmi Narain, to which one of us was a party. We think it unnecessary to express any opinion in the matter, although it would appear that the principles and provisions of the law of partnership, to which we have adverted in this judgment, would also support the view taken in that case.

18. We hold, therefore, that when Ram Mohan attained majority and became a partner of the petitioner-firm, there was a change in the constitution of the firm and the petitioner-firm was not entitled to the continued benefit of the registration originally granted on the basis of the partnership deed of April 20, 1964.

19. It is next contended on behalf of the petitioner-firm that the Income-tax Officer should have afforded an opportunity to the assessee to file a fresh application for registration in compliance with Section 184(8). The Income-tax Officer, we think, was not bound to do so. He is bound to afford an opportunity only where there is a defect in an application for registration made under Section 184(1). Section 185 prescribes the procedure to be observed on receipt of such an application. Section 185(2) prohibits the Income-tax Officer from rejecting an application for registration merely on the ground that it is not in order and requires him to give an opportunity to the firm to rectify the defect. We may, however, observe that although the law does not specifically oblige the Income-tax Officer to afford an opportunity to a firm to comply with Section 184(8), there is every reason why such an opportunity should be given when, as in the present case, there is bona fide-doubt as to the requirements of the law. We think such an opportunity should be given so long as it can be afforded within the limitations set by the Income-tax Act and the rules.

20. It is further contended on behalf of the petitioner-firm that on Ram Mohan attaining majority there was no change in the shares of the partners as evidenced by the partnership deed. As we have already found that there was a change in the constitution of the firm and one of the prerequisites of Section 184(7) was not therefore satisfied, it is not necessary for us to examine this further contention.

21. The petition fails and is dismissed with costs.


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