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Commissioner of Income-tax Vs. Mathura Prasad Annoolal - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 53 of 1974
Judge
Reported in[1978]115ITR372(All)
ActsIndian Partnership Act, 1932 - Sections 4, 5 and 30(5); Indian Contract Act, 1872 - Sections 11; Income-tax Act, 1961 - Sections 2(23)
AppellantCommissioner of Income-tax
RespondentMathura Prasad Annoolal
Appellant AdvocateAshok Gupta, Adv.
Respondent AdvocateA.N. Mahajan, Adv.
Excerpt:
.....not clearly said so, yet it appears that by the legal fiction incorporated in this provision, a minor continues to be a minor and does not become a partner. ito [1972]84itr233(all) .we have gone through the aforesaid two cases relied on by the learned counsel for the revenue but fail to find anything in them which can be said to be in conflict with the decision in national medical stores' case [1974] uptc 24 (all). it is no doubt true that these were also the cases where minors were admitted to the benefits of the partnerships but the main distinction lies in the fact that the minors admitted to the benefits of the partnerships in each of the two cases hadattained majority and the period of six months required by sub-section (7) of section 30 of the partnership act had expired before..........shri radhey lal attained majority and for that year his rights and liabilities continued under the deed of partnership dated april 15, 1967, and the firm was entitled to the benefit of continuation of registration under section 184(7) of the i.t. act, 1961, on the basis of that partnership deed ?'2. the assessee was a partnership firm originally constituted under a deed of partnership dated 15th april, 1967. it consisted of three partners. sheo kumar shah and radhey lal shah, who were minors at the time of the execution of the deed of partnership, were admitted to the benefits of partnership. the benefit of registration was continued thereafter under section 184(7) up to the assessment year 1968-69. radhey lal shah became major on 14th march, 1969. for the assessment year 1969-70, with.....
Judgment:

K.C. Agrawal, J.

1. At the instance of the CIT, U. P., Lucknow, the ITA Tribunal, Allahabad, has referred the following question of law under Section 256(1) of the I.T. Act, 1961, for the opinion of this court :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that no change took place in the constitution of the firm on March 14, 1969, in the previous year relevant to the assessment year 1969-70, when Shri Radhey Lal attained majority and for that year his rights and liabilities continued under the deed of partnership dated April 15, 1967, and the firm was entitled to the benefit of continuation of registration under Section 184(7) of the I.T. Act, 1961, on the basis of that partnership deed ?'

2. The assessee was a partnership firm originally constituted under a deed of partnership dated 15th April, 1967. It consisted of three partners. Sheo Kumar Shah and Radhey Lal Shah, who were minors at the time of the execution of the deed of partnership, were admitted to the benefits of partnership. The benefit of registration was continued thereafter under Section 184(7) up to the assessment year 1968-69. Radhey Lal Shah became major on 14th March, 1969. For the assessment year 1969-70, with which we are concerned in this reference application, a fresh application in Form No. XI-A was filed by the assessee-firm along with a new deed of partnership executed on June 12, 1969. The ITO rejected the application for registration as, in his opinion, the fresh partnership deed should have been executed before 31st March, 1969, and since it was executed on Juno, 12, 1969, the firm was not entitled to registration. Against the aforesaid order of the ITO, an appeal was filed by the assessee-firm before the AAC of Income-tax, Bareilly. Disagreeing with the view taken by the ITO, the AAC of Income-tax held that since the old deed of partnership was in force up to six months of the minor attaining majority, therefore, the assessee-firm was not required to execute a fresh deed of partnership before 31st March, 1968. He held that the old deed continued to have legal force for six months. Accordingly, the AAC of Income-tax allowed the appeal anddirected the ITO to treat the assessee-firm as a registered firm under Section 185 of the I.T. Act.

3. Aggrieved by the judgment and order of the AAC of Income-tax, the revenue preferred an appeal before the ITA Tribunal. The Tribunal upheld the judgment of the AAC and dismissed the appeal of the department. It was thereupon that an application was filed by the revenue under Section 256(1) of the I.T. Act for referring three questions framed by it in the application to the High Court. Having found that the question mentioned above was one of law and covered the entire controversy between the parties, the Tribunal referred the same to this court by its order dated 30th November, 1973. Hence this reference.

4. The question is whether there is a change in the constitution of the firm when a minor admitted to the partnership attains majority. Before dealing with this question, we may refer briefly to the relevant provisions of the I.T. Act as well as that of the Partnership Act. S. 4 of the Partnership Act gives the definition of partnership, a partner, firm and firm's name. Section 5 provides that, the relation of partnership arises from contract and not from status. Section 11 of the Contract Act says that a minor is incompetent to enter into a contract. Thus, a minor cannot be a partner in the firm. Section 30 of the Partnership Act, however, permits a minor to be admitted to the benefits of the partnership. Such a minor is, however, not a full-fledged partner. Sub-section (5) of Section 30 deals with a contingency when a minor attains majority. It lays down that at any time within six months of his becoming major or of his obtaining knowledge that he had been admitted to the benefits of the 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. The proviso to Sub-section (5), however, prescribes that in case such a minor fails to give notice provided for by Sub-section (5), then he shall become a partner in the firm on the expiry of the said six months. The other important provision is Sub-section (7) of Section 30 which lays down that the rights and liabilities of a minor continue as such up to the date on which he becomes a partner.

5. It would thus be seen that a minor admitted to the benefits of the partnership is not a partner and that he is only entitled to the benefits of the partnership and may also be liable to losses but not personally. Under Sub-section (5) he has, however, to indicate his choice in the prescribed manner, whether he wants to continue as a partner or not. The legislature, however, has given a period of six months to him to take a decision whether he wants to continue as a partner or not. During this period of six months he continues to enjoy the same status in the firm which he had earlier before attaining the majority. Although Sub-section (5) has not clearly said so, yet it appears that by the legal fiction incorporated in this provision, a minor continues to be a minor and does not become a partner. The court has to assume all those facts and consequences which are incidental or inevitable corollaries to the giving effect of this fiction.

6. In the instant case, it appears that Radhey Lal Shah had become a major on 14th March, 1969. The assessment year 1968-69 was closed on 31st March, 1969. Up to that date, the period of six months given to a minor to make his option about the joining of the firm as a partner had not expired. It was, therefore, not incumbent on the assessee-firm to either draw up a fresh partnership deed or to give any intimation in respect thereof to the ITO within this period. However, before this period expired a fresh partnership deed was entered into on June 12, 1969, and, thereafter, the application was filed for the registration of the firm before the ITO. The application filed by the assessee-firm for registration thus did not suffer from any deficiency and, therefore, the ground on which the ITO rejected the application for registration was not justified. In other words, he was not right in holding that since a new partnership deed had not been entered into before the expiry of 31st March, 1969, therefore, the assessee-firm could not be granted registration. As no change in the constitution of the partnership had been brought about merely because Radhey Lal Shah, one of the partners, had attained majority on 14th March, 1969, the ITO was not right in rejecting the application.

7. The view taken by us in this case is supported by a decision of this court in CIT v. National Medical Stores [1974] UPTC 24 (All). The view taken in this case also was that under Sub-section (7) of Section 30, the rights and liabilities of a minor continue as such up to the date on which he becomes a partner. Thus, till the date a minor gives notice of his election to become a partner, the position remains as before. There is no change in the constitution of the firm during this period. We are in respectful agreement with the view taken in this case.

8. Shri Ashok Gupta, counsel appearing for the revenue, however, contended that the view taken in National Medical Stores' case [1974] UPTC 24 (All) requires reconsideration inasmuch as a contrary view has been taken on the said question by two Division Benches of this court in Ganesh Lal Laxmi Narain v. CIT : [1968]68ITR696(All) and Ram Narain Laxman Prasad v. ITO : [1972]84ITR233(All) . We have gone through the aforesaid two cases relied on by the learned counsel for the revenue but fail to find anything in them which can be said to be in conflict with the decision in National Medical Stores' case [1974] UPTC 24 (All). It is no doubt true that these were also the cases where minors were admitted to the benefits of the partnerships but the main distinction lies in the fact that the minors admitted to the benefits of the partnerships in each of the two cases hadattained majority and the period of six months required by Sub-section (7) of Section 30 of the Partnership Act had expired before the end of the assessment year. The argument advanced was that the minors automatically became full-fledged partners on attaining majority and, therefore, no fresh partnership deeds were required to be registered. This argument was, however, repelled in the aforesaid two cases on the view that on attaining majority and becoming a partner of the firm there was a change in the constitution of the firm and the firms were not entitled to the continued benefit of registration originally granted on the basis of the' partnership deeds executed earlier. In the instant case, we have already mentioned above that under Sub-section (7) of Section 30 of the Partnership Act, the rights and liabilities of a partner continue as such till the expiry of six months from the date when he attains majority and his position remains as before. During this period no change in the constitution of the firm is brought about. Accordingly, no fresh deed of partnership is required to be entered into within the aforesaid period of six months.

9. Learned counsel for the revenue, however, relying on the definition of 'partner' as given in Sub-section (23) of Section 2 of the I. T. Act, 1961, contended that as a minor is a partner for the purposes of the Act, the question of waiting for six months as provided for in Section 30 of the Partnership Act does not arise inasmuch as the moment he becomes a major he becomes automatically a partner and thus the partnership deed is required to be drawn up afresh. The definition of partner given in Section 2(6B) of the old Act, which is same in Sub-section (23) of Section 2, as said by the Supreme Court in CIT v. Dwarkadas Khetan & Co. : [1961]41ITR528(SC) is designed to confer equal benefits upon the minor by treating him as a partner, it does not render a minor competent to be full-fledged partner. The Supreme Court further observed that for that purpose the law of partnership must be considered apart from the definition of the partner as given in the I. T. Act. In our opinion, the question whether a minor admitted to the benefits of partnership becomes a partner immediately on attaining the majority is to be decided with reference to the provisions of Section 30 of the Partnership Act.

10. For all these reasons we answer the question in the affirmative in favour of assessee and against the department. The assessee is entitled to costs, which we assess at Rs. 250.


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