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income-tax Officer Vs. Ratti Ram Mohan Lal - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Chandigarh
Decided On
Judge
Reported in(1983)6ITD129(Chd.)
Appellantincome-tax Officer
RespondentRatti Ram Mohan Lal
Excerpt:
.....rai was 1-7-1959, he was minor till 1-7-1977 and since there is a mention in the partnership deed executed on 15-7-1977 that the partnership shall be deemed to have commenced from 1-4-1977, as on 1-4-1977 navneet rai was minor, agreement is invalid ab initio and the firm was non est in law on 1-4-1977. the ito held that the ratification of the oral agreement on 15-7-1977 by means of a written partnership deed does not lend legal and genuine garb to the firm and he, therefore, rejected the registration claim of the assessee.3. when the assessee carried the matter before the aac, he, reversing the action of the ito, accepted the claim of the assessee in respect of registration in the following words : 6. i have considered the submissions of the learned counsel for the appellant and.....
Judgment:
1. The sum and substance of all the grounds raised by the revenue in this appeal is that the A AC has erred in granting registration to the assessce-firm.

2. In order to appreciate the issue, the facts in the background may be stated, in brief, as under. The assessment year involved is 1978-79, for which the relevant 'previous year' ended on 31-3-1978. On 15-7-1977, Shri Mohan Lal son of Shri Ratti Ram and Navneet Rai son of Shri Mohan Lal, i.e., father and son, executed a deed of partnership.

In the said deed, one of the clauses was that the partnership shall be deemed to have commenced with effect from 1-4-1977 and it shall be a partnership at will. Navneet Rai on 15-7-1977 was major but on 1-4-1977, he was a minor. The assessee had claimed registration and filed application in Form No. 11 on 3-2-1978 along with the partnership deed in original. The ITO in the course of the assessment proceedings rejected the registration claim of the assessee under Section 185(1)(b) of the Income-tax Act, 1961 ('the Act') observing that since the date of birth of Navneet Rai was 1-7-1959, he was minor till 1-7-1977 and since there is a mention in the partnership deed executed on 15-7-1977 that the partnership shall be deemed to have commenced from 1-4-1977, as on 1-4-1977 Navneet Rai was minor, agreement is invalid ab initio and the firm was non est in law on 1-4-1977. The ITO held that the ratification of the oral agreement on 15-7-1977 by means of a written partnership deed does not lend legal and genuine garb to the firm and he, therefore, rejected the registration claim of the assessee.

3. When the assessee carried the matter before the AAC, he, reversing the action of the ITO, accepted the claim of the assessee in respect of registration in the following words : 6. I have considered the submissions of the learned counsel for the appellant and also gone through the assessment record. It appears that Shri Mohan Lal was carrying on business of kiryana and pansarat in partnership along with Shri Jagdish Rai uptill 31-3-1977. On that date, Shri Jagdish Rai retired from the partnership and Shri Mohan Lal decided to take Shri Navneet Rai as a partner with effect from 1-4-1977, and continue the same business, in the same name and style of Ratti Ram Mohan Lal. It is true that when they entered into an oral agreement on 1-4-1977, Shri Navneet Rai was a minor but when the partnership deed was executed on 15-7-1977, Shri Navneet Rai had attained majority and was competent to join the partnership as a full-fledged partner. In my opinion, the firm was genuinely constituted and, thus, entitled to registration. The ITO is directed to allow the registration.

4. It is the above action of the AAC which is disputed by the revenue in its appeal. The learned departmental representative, Mr. M.P. Singh, besides relying on the order of the ITO, submitted that the Gujarat High Court decision in the case of Bharat Prakashan v. CIT [1964] 54 ITR 109 goes to favour the revenue's stand and the Bombay High Court decision in the case of CITv. R. Dwarkadas & Co. [1971] 80ITR 283 is distinguishable as there were two major partners in the said case while in the instant case there was only one major partner on 1-4-1977 when the firm was started. He relied on the Supreme Court decision in the case of CIT v. Dwarkadas Khetan & Co. [1961] 41 ITR 528.

5. The learned counsel for the assessee, Mr. D.K. Gupta, on the other hand, besides relying on the order of the AAC, submitted that for the purpose of accounting, the period may be from 1-4-1977 but on 15-7-1977 when the partnership deed was executed, both the partners were majors and he relied on the Punjab High Court decision in the case of B.N.Dheer & Sons v. CIT [1958] 34 ITR 477. He, in the alternative, submitted that the registration be accorded from 15-7-1977 to 31-3-1978.

6. The learned departmental representative, in the rejoinder, submitted that the period cannot be bifurcated even for account purposes and relying on the Punjab and Haryana High Court decision in the case of Jupiter Foundry & Machines (Knives) v. CIT [1977] 109 ITR 92, he submitted that one assessment is to be framed and that too in the status of unregistered firm.

7. After taking into consideration the rival submissions and perusing the facts on record carefully, we are unable to interfere in the finding of the AAC to the extent that registration is to be accorded for the period from 15-7-1977 when the deed was executed on 31-3-1978.

There is no controversy about the facts that on 15-7-1977 when the partnership deed was executed, Navneet Rai was a major, as he attained majority on 1-7-1977, his date of birth being 1-7-1959. The only clause which is considered cancerous to the assessee's claim of registration is clause 2 in the partnership deed, which reads as under : 2. That the partnership shall be deemed to have commenced with effect from 1-4-1977 and it shall be a partnership at will.

Reliance of the AAC on the case of R. Dwarkadas & Co. (supra) is rightly placed. The distinction made by the learned departmental representative that in that case there were more than two majors whereas in the instant case there was only one major to start with, cannot be damaging to the claim of the assessee because on 15-7-1977 both the partners, Mohan Lal and Navneet Rai, were majors. In the case of R. Dwarkadas & Co. (supra), a partnership deed was executed between the three partners, one of whom was a minor on 21-8-1951. The minor was shown as a full-fledged partner and the partnership deed was signed on his behalf by power-of-attorney holder of his father. The abovesaid deed held the field for two years and the registration was refused for the assessment years 1953-54 and 1954-55 which covered the periods ending on Samvat Year 2009. Subsequently, on 7-11-1953, an endorsement was made on the partnership deed that the stipulation that the partnership was to be continued at will on the same terms and conditions. Though the minor in that case had attained majority on 20-6-1953 but the endorsement was not signed by him but was again signed by power-of-attorney holder of has father who signed the original partnership deed. Subsequently, on 24-2-1955, another document was executed whereby the minor who had attained majority on 20-6-1953, as above said, accepted and confirmed all the terms and conditions of the partnership deed and all the rights and obligations thereunder together with the benefits and liabilities thereof with effect from the date thereof. In the case of R. Dwarkadas & Co. (supra), registration for the assessment years 1954-55 and 1955-56 was again refused on the grounds that the original partnership was invalid because of a partner's minority ; that the endorsement made on 7-11-1953 on the original partnership deed had not been signed by the said partner himself, although he had become a major by then. For the subsequent assessment year 1956-57, registration was again refused on the ground that the original partnership deed and the further document executed on behalf of minor who had by then become major on 24-2-1955 did not constitute a valid partnership as the later document was a document of ratification and the minor was not competent to ratify what was illegal at its inception. The AAC in this case allowed the appeal by the assessee relying on the decision of the Bombay Hight Court in the case of Dwarkadas Khetan & Co. v. CIT1956] 29 ITR 903. On further appeal to the Tribunal, the decision of the AAC was confirmed. Before the High Court, it was contended by the revenue that, as the decision in Dwarkadas Khetan & Co.'s case (supra) had been reversed by the Supreme Court in Dwarkadas Khetan & Co.'s case (supra), the decision of the Tribunal must be reversed. On the basis of above facts, their Lordships of the Bombay High Court observed that ... What has got to be considered, however, is that the instrument of partnership, on the basis of which registration was asked for the year 1956-57, is the original partnership deed supplemented by the endorsement made thereon on 7th November, 1953, and for the later years the instrument of partnership, on the basis of which registration has been asked for, is the original deed of partnership and the subsequent document executed on 24th February, 1955, . ...

While dealing with the issue of registration for the assessment year 1955-56, their Lordships further observed as under, while accepting the claim of the assessee : ... For the partnership business, therefore, which was carried on and continued from and after 7th November, 1953, the three persons, who had agreed, were all three major and adult persons, who could competently agree to do so. For the assessment year 1955-56, therefore, which corresponded to the Samvat Year 2010 extending from November 7, 1953, to October 26, 1954, a partnership of three adult persons, who had agreed to carry on business, had continued to be in existence. The document constituting this partnership was the document of the old partnership with the addition of an endorsement thereon stating that it was continued on the same terms as contained in the original document. Now, in the partnership evidenced by the original document, one of the partners was a minor, but in the continued partnership there was no minor partner since the erstwhile minor had become a major by that time . . . .

Regarding the second assessment year, i.e., 1956-57 where original partnership deed vide document dated 24-2-1955 was adopted, their Lordships observed that the position was still stronger for the assessee for that assessment year and observed as under : ... At the date when he executed the document he was an adult person entitled to assume responsibility even afresh. There was nothing in law to prevent him even from undertaking the responsibilities as a partner of a firm of which he had not been a partner until the date of such acceptance. On the date on which he was accepting the responsibility and declaring himself as a full-fledged partner, he was a major. In the document executed by him on 24th February, 1955, he had declared himself as a full-fledged partner of the firm and had agreed to be treated as such a full-fledged partner for the entire earlier period. At any rate, for the period subsequent to his execution of this document, his position as a full-fledged partner of the firm did not suffer from any defect whatsoever. ...

In the instant case, the distinction pointed out by the learned departmental representative could not be fatal to the assessee's claim.

On the other hand, the case under consideration is on a stronger basis still. In the case of R. Dwarkadas & Co. {supra), there was a duly executed deed of partnership between two majors and a minor subsequently endorsed after the minor had attained majority through the two other partners and attorney of minor's father and still subsequently another document was executed duly signed by the three partners including the minor who had by then attained majority. In the instant case, there was nothing which was executed originally between Mohan Lal and Navneet Rai. The first deed of partnership which was executed was on 15-7-1977, when both the partners were majors. The mere fact that in one of the clauses on the said deed, partnership business was deemed to have commenced with effect from 1-4-1977 when Navneet Rai was minor, could not be fatal to the assessee's claim of registration.

8. Reliance of the learned departmental representative on the case of Dwarkadas Khetan & Co. (supra) is misplaced. Firstly, the said Supreme Court decision in the case of Dwarkadas Khetan & Co. (supra) was considered by the Bombay High Court in the case of R. Dwarkadas & Co.

(supra), with which we have dealt with above. To state, facts in the case of Dwarkadas Khetan & Co. (supra) are quite different. The minor in that case was admitted as a full-fledged partner and he was also a signatory to the instrument, though his natural guardian had also signed it. He was to bear losses and profits and was to attend to the business and manage its affairs. He was given the right to vote and was entitled to inspection of books. On the basis of those facts, their Lordships of the Supreme Court held that the partnership deed in which the minor was admitted as a full partner was not valid and could not be registered. On the other hand, it was observed in the said case that 'Registration can only be granted of a document between persons who are parties to it and on the covenants set out in it'. In the instant case, registration is claimed on the basis of partnership deed which is executed between the two majors.

9. Their Lordships of the Punjab High Court in the case of B.N. Dheer & Sons {supra) had occasion to deal with an issuew here recital of the previous oral partnership in the deed was a bar to the registration of the partnership as from the date of deed, and Justice Falshaw, as he then was, dealing with several other cases to which he was one of the parties such as Kalsi Mechanical Works v. CIT [1,953] 24 ITR 353 (Punj.) and Padorn Parshad Rattan Chandv. CIT [1954] 25 ITR 335 (Punj.) reproduced his observation from one of the cases as under : I do not think there can be any doubt about the correctness of the view of the Appellate Tribunal expressed in full in its judgment in the appeal M/s Ram Gulam Madan Lal v. ITO [1954] 25 ITR 339 which has been printed in full as part of this case that the words 'constituted under an instrument' mean 'created or formed by a formal deed', but whether the fact that the partners of a firm who jointly executed such a deed choose to allege therein that they have previously been partners for some time on the same terms as those embodied in the deed debars the firm from registration under Section 26A is another matter. Obviously, as we held in the case referred to above, the deed or instrument cannot possibly have retrospective effect as regards the income-tax assessment of the firm, but I cannot see any objection to the firm's being treated as constituted under the instrument as from the date of the instrument itself. It may be that the partners in these firms act foolishly in alleging the previous existence of the partnership on the same terms in the vain hope of securing retrospective concessions, and in the most literal sense of the words a partnership cannot be said to be consituted under an instrument when admittedly it has been in existence previously. On the other hand, the intention of the law is clear, that when partners do draw up an agreement by which their shares in the partnership profits are specified, they are entitled to have the partnership registered under the Act, and thus to have the individual shares of the partners assessed for income-tax, and it seems to me to be an unduly harsh interpretation of the law to say that because the partners say they have been partners previously, they should not be entitled to have the partnership registered even when they have embodied its terms in a deed. I am accordingly of the opinion that when a deed or instrument of partnership is presented for registration under Section 26A, even where the partnership is alleged in the deed to have existed previously on the same terms, this should not be a bar to the registration of the firm, and it should be treated as constituted under the instrument as from the date of the instrument.

10. The contention of the learned departmental representative that the Gujarat High Court decision in the case of Bharat Prakashan {supra) goes against the assessee, is incorrect. In that case, two brothers, one of whom was a minor, executed a deed of partnership signed by both of them on 25-7-1953. Second brother attained majority on 23-10-1953.

On 25-1-1955, the firm applied for registration, relying on the partnership deed of 25-7-1953, which was signed by two partners, one being a major and the other being a minor. Their Lordships of the Gujarat High Court on these facts held that since at the date when the deed of partnership was executed, one of the brothers was minor, no firm came into existence under the deed of partnership. The firm which came into existence after 'B' attained majority was an oral contract.

Since no deed was again executed when both the brothers became majors, the firm could not be considered as constituted under an instrument of partnership. This decision, though remotely, on the other hand, supports the case of the assessee, because here, the position is reverse. When one of the two partners was minor, there was no deed.

When both of them attained majority, they had executed a deed of partnership and on that basis they filed the registration application.

11. Reliance of the learned departmental representative on the case of Jupiter Foundry & Machines (Knives) (supra) is misplaced due to distinction in facts. This is the first year of accounting. There could not be any partnership between major and minor effected when one of the partners was minor, a question of reconstitution or succession is far-fetched a thought which was attempted to be adopted by the learned departmental representative.

12. In the light of above discussion and mainly relying on the case of B.N. Dheer & Sons {supra), the assessee's claim of registration for the period from 15-7-1977 to 31-3-1978, for the year under consideration, is directed to be accepted.


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