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Simhadri Narasingh Prusty and ors. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtOrissa High Court
Decided On
Case NumberS.J.C. No. 20 of 1967
Judge
Reported in[1971]79ITR219(Orissa)
ActsIncome Tax Act, 1922 - Sections 26A; Income Tax Act, 1961 - Sections 256(1)
AppellantSimhadri Narasingh Prusty and ors.
RespondentCommissioner of Income-tax
Appellant AdvocateRanjit Mohanty, Adv.
Respondent AdvocateStanding Counsel
Cases ReferredVijayakumar Motilal v. New Zealand Insurance Co. Ltd.
Excerpt:
.....india assurance co. ltd. v smt rita devi, 1997(2) glt 406, approved. new india assurance co. ltd. v birendra mohan de, 1995 (2) gau lt 218 (db) and union of india v smt gita banik, 1996 (2) glt 246, are not good law]. - whether, on the facts and circumstances of the case, the assessee-firm is entitled to registration ? '2. in the reference order, the tribunal has clearly stated the facts out of which the reference arises. it is now well-settled after the pronouncement of the privy council in mohori bibee v. clearly, the minor was charged with an obligation......the previous accounting year was excluded, as during that period the minor was the partner of the firm. the income-tax officer made an enquiry into the matter and asked the petitioner for proof of transfer of assets of the minor in his favour. in his cross examination, the petitioner admitted that the impugned promissory note was executed not on september 30, 1959 --the date which it purports to bear--but on a subsequent date after he was called upon to establish that he had paid the capital of the partnership to the tune of rs. 5,000. the income-tax officer having come to the conclusion that the promissory note was ante-dated and was not in existence on september 30, 1959, held that the entire arrangement creating a new partnership was a subterfuge for evasion of tax. the petitioner.....
Judgment:

G.K. Mishra, C.J.

1. The question referred to this court by the Income-tax Appellate Tribunal, under Section 256(1) of the Income-tax Act, 1961, runs thus:

' Whether, on the facts and circumstances of the case, the assessee-firm is entitled to registration '

2. In the reference order, the Tribunal has clearly stated the facts out of which the reference arises. Those facts may be stated, in order to appreciate the point in issue. Simhadri Narasingh Prusty and Chinnam Judhistir Patro constituted a partnership business. They carried on business from 1948-49 onwards. It had been granted registration under the Indian Income-tax Act, 1922, up to and including the assessment year 1959-60 Judhistir Patro was a partner in this firm representing a Hindu undivided family consisting of himself and his sons. On January 6, 1959, there was a partition in the family and the share of Judhistir Patro in the firm was allotted to his minor son, Budhibaman Patro. The partition was effected by a registered deed and was given effect to under Section 25A of the Indian Income-tax Act, 1922. From January 6, 1959, Budhibaman Patro was shown as a partner in the books of the firm and the capital standing to the credit of his father was credited in his name. Subsequently, it was realised that the partnership with the minor was contrary to law and as such Judhistir desired to constitute a fresh partnership with Simhadri Narasingh Prusty. Accordingly, a fresh partnership deed was executed and registered on October 1, 1959. In the partnership there was a recital that the second party's (Chinnam Judhistir Patro's) accounts, as they stood in the books on September 30, 1959, were brought in as capital into the firm. The assets and liabilities of the firm consisting of the minor partner and the first partner (Simhadri Narasingh Prusty) were taken over by this firm. No reference was made to the impugned promissory note dated September 30, 1959, in the partnership deed. After the new partnership came into existence an application was filed before the Income-tax Officer under Section 26A for registration of the firm for the period October 1, 1959, to March 31, 1960. A part of the previous accounting year was excluded, as during that period the minor was the partner of the firm. The Income-tax Officer made an enquiry into the matter and asked the petitioner for proof of transfer of assets of the minor in his favour. In his cross examination, the petitioner admitted that the impugned promissory note was executed not on September 30, 1959 --the date which it purports to bear--but on a subsequent date after he was called upon to establish that he had paid the capital of the partnership to the tune of Rs. 5,000. The Income-tax Officer having come to the conclusion that the promissory note was ante-dated and was not in existence on September 30, 1959, held that the entire arrangement creating a new partnership was a subterfuge for evasion of tax. The petitioner carried the matter in appeal before the Appellate Assistant Commissioner of Income-tax who confirmed the finding of the Income-tax Officer. The matter then came up before the Income-tax Appellate Tribunal at the instance of the petitioner.

3. The Tribunal did not examine the facts assailing the finding that the partnership was a subterfuge, but proceeded on the assumption that, even if the promissory note was genuine, it was void as a minor was a contracting party to the note. Accordingly, it dismissed the appeal. Being aggrieved by the order of the Tribunal, the petitioner asked for a reference which was made under Section 256(1) of the Income-tax Act, 1961. That is how the aforesaid question has been referred to this court.

4. The view of the Tribunal on the legal question in its bald form cannot be accepted. It is now well-settled after the pronouncement of the Privy Council in Mohori Bibee v. Dharmodas Ghose, [1903] L.R, 30 I.A. 114 ; I.L.R. 30 Cal. 539 (P.C.). that a contract by a minor whereby he is charged with obligations is void and not voidable. The Privy Council gave that decision on facts in which a minor executed a mortgage in favour of the mortgagee. Clearly, the minor was charged with an obligation. It was held that the minor was not sui juris and had no capacity to contract, and therefore, the contract was void.

5. The Privy Council decision led to serious difficulties. There were agreements executed in favour of a minor which were beneficial to their interest. The Privy Council decision was resorted to for attacking those agreements also. The question received the attention of the Indian courts and it has been uniformly held that, even though a minor has no capacity to contract, he can enforce agreements which are beneficial to his interest and which cast no obligation on him. In support of this view reference may be made to Vijayakumar Motilal v. New Zealand Insurance Co. Ltd., [1954] 24 Comp. Cas. (Ins.) 49 ; A.I.R. 1954 Bom. 347. In paragraph 13, the learned single judge has dealt with the implications of this concept and it is not necessary to multiply authorities on the point.

6. In the context of the aforesaid legal position, the view of the Tribunal, in the bald form in which it is put, cannot be supported. The Tribunal has not examined the question whether the execution of the promissory note by the father in favour of the minor was beneficial to the interest of the minor. In that connection, the Tribunal ought also to have examined what was the interest of the minor in the assets of the partnership. If, for instance, the assets of the partnership firm on September 30, 1959, were more than Rs. 5,000 at which it was valued and in respect of which the promissory note was executed, then obviously the promissory note is not beneficial to the interest of the minor. In the absence of findings on these questions, the view of the learned Tribunal cannot be accepted.

7. The Tribunal is the final authority to record findings of fact. It should have examined the question whether the promissory note was genuine. Admittedly it was ante-dated. The Tribunal should have examined whether, in fact, the recitals in the partnership were correct, after taking into consideration not only the promissory note but other surrounding circumstances and evidence. If after such examination it came to the conclusion that the entire matter was a subterfuge resorted to for evasion of tax, then the application for registration should have been rejected. If, on the other hand, the Tribunal was of opinion that the transfer of the assets was genuine, on the date of execution of the partnership deed--October 1, 1959--then the application for registration should have been allowed, even though the petitioner created the promissory no subsequent to the registration of the partnership deed. In other words, the essence of the matter that required consideration by the Tribunal was whether the arrangement arrived at on October 1, 1959, was genuine or was a subterfuge. In that connection, the question of non-passing of consideration for transfer of the rights of the minor would be a very relevant matter. The case cannot be disposed of finally without the Tribunal going into these questions of fact. It tried to rest its conclusion merely on legal views without recording findings on these matters.

8. On the aforesaid analysis we would answer the question thus :

Without recording a finding that the arrangement in the partnership deed dated October 1, 1959, was a mere subterfuge, the application for registration cannot be rejected. If the arrangement is found to be genuine and not a subterfuge, then the application for registration cannot be rejected unless there is a further finding that the arrangement was detrimental to the interest of the minor and cannot be given recognition by the court.

9. In the result, the reference is accepted. In the circumstances, there will be no order as to costs. Reference fee be refunded.

Acharya, J.

10. I agree.


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