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Ashiyana Greens Vs. Commissioner of Agricultural Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference No. 88 of 1978
Judge
Reported in[1981]132ITR497(Ker)
ActsIncome Tax Act; Indian Partnership Act
AppellantAshiyana Greens
RespondentCommissioner of Agricultural Income-tax
Appellant Advocate V. Sivaraman Nair,; K. Kanakachandran and; R. Krishnan N
Respondent AdvocateGovt. Pleader
Cases ReferredBadri Narain Kashi Prasad v. Addl.
Excerpt:
.....individual shares had to be executed and produced alongwith application for registration - deed of partnership was sufficiently comprehensive and precise about constitution of firm and shares of partners including minors on their becoming majors in profits and losses - held, consequent on minors attaining majority there was no change in constitution of firm requiring execution of fresh partnership deed. - - that clause also provided that 'on attaining majority, each one of the minors is entitled to elect whether he or she would be a partner and in case he or she elects to be a partner, shall be a partner bound by the terms and conditions hereof'.clause 10 which is a residuary clause provided that 'in the other respects, not hereunder expressly provided for, the rights and..........is payable and under section 2(m) 'person' means, inter alia, a firm. section 2(k) states that 'firm' 'partner' and 'partnership' have the same meanings respectively as in the indian partnership act, 1932, and that the expression 'partner' shall also include any person who being a minor has been admitted to the benefits of the partnership. section 18(5)(a) provides that when the total income of a registered firm has been assessed, the sum payable by the firm itself shall not be determined but the total income of each partner of thefirm, including therein his share of its income, profits and gains of the previous year, shall be assessed, and the sum payable by him on the basis of such assessment shall be determined. the advantage, to the partners, of registration of the firm is.....
Judgment:

Balagangadharan Nair, J.

1. This is a reference at the instance of the assessee made by the Commissioner of Agricultural Income-tax, Trivandrum ('the Commissioner') under Section 60(2) of the Agrl. I.T. Act, 1950 ('the Act'). The assessee is a firm which was initially set up under a partnership deed dated April 1, 1955, with Sri A. K. Kunhalikutty Hajee and his wife, Smt. P. K. Ayisumma, as partners and with their four, minor children, P. K. Raizia, P. K. Saleem, P. K. Shamoon and P. K. Nazroom, being admitted to the benefits of the partnership. The capital of the firm was Rs. 60,000 shared equally by the partners and the minors, the shares of the minor having been contributed by the two partners. Under Clause 9 of the partnership deed the profits were divisible equally--1/6th--among the partners and minors while the loss, if any, was to be borne by the partners alone in equal shares. Clause 8 repeated the same provisions in respect of the minors and it further specifically exempted the minors from liability for the losses. That clause also provided that 'on attaining majority, each one of the minors is entitled to elect whether he or she would be a partner and in case he or she elects to be a partner, shall be a partner bound by the terms and conditions hereof'. Clause 10 which is a residuary clause provided that 'In the other respects, not hereunder expressly provided for, the rights and liabilities of the firm as well as among the partners inter se, shall be governed by the Indian Partnership Act'. The minors attained majority on December 26, 1963, August 28, 1966, August 14, 1967, and February 23, 1969, respectively, during the relative assessment years 1965-66, 1967-68, 1968-69 and 1969-70. On the attainment of majority by each minor a resolution was passed by the old partners and the erstwhile minor reciting that he or she having elected to become a partner of the firm by notice given to that effect was admitted as a full partner in the partnership and would be liable to share the losses of the firm equally along with the other adult partners of the firm and that the share of his or her profit would continue to be the same as before. The second part of the resolution also recorded that the partnership would be continued by the partners (including the quondam minor who has attained majority) 'along with the minors who are admitted to the benefits of the partnership in accordance with the terms and conditions of the deed of partnership dated 1st day of April, 1955, as modified by this resolution'. This was the purport and trend of the resolutions which were passed onJanuary 31, 1964, September 30, 1965, August 30, 1967, and February 28, 1969, except that in the second part of the last resolution passed after the fourth minor attained majority it was merely resolved (as there was no minor left) that the partnership be continued by all 'in accordance with the terms and conditions of the deed of partnership dated 1st day of April, 1955, as modified by this resolution'. This last resolution dated February 28, 1969, was signed by all the six partners, while each of the other resolutions was signed by the original two partners and the quondam minor or minors who had attained majority and had elected to become full partner (s).

2. The assessee had obtained registration of the firm under the Agrl. I.T. Act. For the assessment years 1969-70, 1970-71 and 1971-72, the assessee filed returns before the Agrl. ITO, Manantoddy, along with applications for renewal of registration of the firm. The applications which were signed by all the six partners certified that the constitution of the firm and the individual shares of the partners as specified in the partnership deed dated April I, 1955, remained unaltered and that the profits and losses were shared on an one-sixth basis, in terms of the deed, during the relative previous years. By separate but substantially identical orders dated March 30, 1973, the ITO granted renewal of registration of the firm and finalised the assessments for the three years assigning the assessee the status of a registered firm and assessing the share of the partners individually in the income of the firm.

3. On examining the records of the assessment, the Commissioner thought that the renewal of registration of the firm and assessment of the individual shares of the partners on that basis were irregular and improper. In exercise of his revisional powers under Section 34 of the Act, he issued a notice to the assessee dated July 19, 1977, to show cause why the grant of renewal of registration and the assessment on that basis should not be set aside. To this the assessee filed a detailed objection asserting its right to registration and justifying the orders of the ITO. The Commissioner, however, adhered to his initial view and by his order dated May 4, 1978, cancelled the registration granted to the firm and modified the status of the firm as an unregistered firm. As a corollary he directed the ITO to revise the assessments in the light of the revisional order and issue fresh assessment orders within three months.

4. Thereupon the assessee filed an application before the Commissioner under Section 60(2) of the Act to refer five questions with a statement of the case to this court as arising out of the order. The Commissioner was of the view that all the questions did not so arise but only the following three questions. He reframed these questions and made the reference. The questions are:

'(1) Whether, on the facts and in the circumstances of the case, was the Commissioner of Agricultural Income-tax justified in holding that when the minors become majors a fresh instrument of partnership specifying the individual shares has to be executed and produced along with the application for registration

(2) Whether, on the facts and in the circumstances of the case, was the Commissioner of Agricultural Income-tax justified in holding that the status assigned as registered firm is to be modified as unregistered firm for the years 1969-70, 1970-71 and 1971-72

(3) Whether, on the facts and in the circumstances of the case, was the Commissioner of Agricultural Income-tax justified in holding that the firm was not eligible for renewal of registration for the years 1969-70, 1970-71 and 1971-72?'

5. The grounds on which the Commissioner interfered with the orders of the ITO and cancelled the registration of the assessee-firm were that on the minors, who were admitted to the benefits of the partnership, becoming majors, the constitution of the firm and the shares of the individual partners had changed, that in that event a fresh instrument of partnership specifying the shares had to be executed and produced along with the application for registration and that in the absence of such records the firm was disentitled to renewal of registration as contemplated in Section 27 of the Act read with Rules 2 and 3 of the Rules framed under the Act. There was no such deed executed by the partners and the Commissioner took the view that the ITO, therefore, erred in registering the firm and assessing the partners on that basis. In taking the view the Commissioner followed Ganesh Lal Laxmi Narain v. CIT : [1968]68ITR696(All) , a decision of the Allahabad High Court under the Indian I.T. Act, 1922.

6. What falls to be considered is whether the view taken by the Commissioner is right with reference to the questions he has submitted.

7. Although the basic question involved in the case is whether, with the attainment of majority by the minors who had been admitted to the benefits of the partnership, there was a change in the constitution of the firm and the shares of the partners, it is convenient to start with a brief reference to the relevant provisions of the Act. Under Section 2(d) 'assessee' means a person by whom agricultural income-tax is payable and under Section 2(m) 'person' means, inter alia, a firm. Section 2(k) states that 'firm' 'partner' and 'partnership' have the same meanings respectively as in the Indian Partnership Act, 1932, and that the expression 'partner' shall also include any person who being a minor has been admitted to the benefits of the partnership. Section 18(5)(a) provides that when the total income of a registered firm has been assessed, the sum payable by the firm itself shall not be determined but the total income of each partner of thefirm, including therein his share of its income, profits and gains of the previous year, shall be assessed, and the sum payable by him on the basis of such assessment shall be determined. The advantage, to the partners, of registration of the firm is self-evident.

8. Section 27(1) provides that an application may be made to the Agrl. ITO on behalf of any firm, constituted under an instrument of partnership specifying the individual shares of the partners, for registration for the purposes of the Act. Sub-section (2) enacts that the application should be made and dealt with in the manner prescribed (by the Rules). Rules 2 and 3 lay down the manner in which registration of a firm has to be sought and they prescribe a form in which it has to be done. The application has to be signed by all the partners (not being minors) and it must contain, inter alia, the dates on which the partners were admitted to the partnership and their shares in the profits and loss and must be accompanied by the original instrument of partnership with a copy thereof. Rule 6 deals with application for renewal of registration and prescribes the details of such application.

9. Section 30 of the Partnership Act deals with minors who have been admitted to the benefits of a partnership. Sub-section (5) provides :

'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. From the facts narrated earlier it is obvious--and there is no finding to the contrary by the Commissioner--that within six months of their attaining majority the minors had elected to become partners with the requisite formality of notices as recited in the relative resolutions. Even without a notice they would have automatically become partners, in terms of the proviso to Sub-section (3) of Section 30, Partnership Act, at the expiry of the period of six months and the six month period expired long before the date of the applications for renewal in December, 1972. Yet again, by virtue of the definition in Section 2(k), the minors, having been admitted to the benefits of the partnership, were themselves partners for the purpose of the Act.

11. The question whether the attainment of majority by the minors operated to change the constitution of the firm and the shares of the partners as found by the Commissioner, turns primarily on the terms of the partnership deed of April 1, 1955. We have already noticed the material termsof the partnership deed and it is unnecessary to repeat them. The capital contributed by the minors--on their behalf by parents--suffered no change on their becoming majors. So also their shares--1/6th each--in the profits of the firm. This share, ensured in Clauses 8 and 9, while they are minors is to continue after they attain majority and elect to become partners, for, once they become such partners, they are governed by the provision in Clause 9 that 'in case, he or she elects to be a partner shall be a partner bound by the terms and conditions hereof' as the expression 'terms and conditions hereof' takes in profits and losses. Although Clause 8 exempts the minors from liability for loss the provision in Clauses 9 that 'the loss, if any, shall be borne by the partners equally' must operate once they elect to become partners on attaining majority. If these clauses are imprecise and admit of any vagueness, that is not fatal, for, Section 13(b) of the Partnership Act provides 3 'The partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm.' This, of course, is subject to contract between the partners but then there is no contrary contract in the instant case. The resolutions adopted by the partners expressly proceed on the above basis and provide for continuance of the firm in accordance with the terms and conditions of the partnership deed of April 1, 1955, as modified by the resolutions. The question can be viewed from another angle as well. For the purpose of the Act a minor admitted to the benefits of the partnership is a partner by virtue of Section 2(k). This means that in the instant case the four minors, apart from the two adult partners, were themselves partners, even before they exercised their option on attaining majority and that when they exercised their option there was no change in the constitution of the firm as set up in the deed of April 1, 1955. The deed itself, as noticed above, provides for the minors becoming partners, on exercising the option. Irrespective of Section 30 of the Partnership Act, the minors thus become partners without altering the constitution of the firm. The deed fixes the capital contribution of each and the distribution of profits. The deed, while exempting the minors from liability for losses is not silent about their sharing the liability for the losses on their attaining majority as explained above and it has made provision for that contingency as well. The instrument, therefore, evidences the change in this respect and there is no need for executing a fresh deed. We, therefore, find ourselves unable to agree with the reasoning or conclusion of the Commissioner.

12. Ganesh Lal Laxmi Narain v. CIT : [1968]68ITR696(All) was a case under Section 26A, Indian I.T. Act, 1922, and it supports the conclusion of the Commissioner. It was held in that case that while under the Partnership Act it was not necessary for a minor on attaining majority to execute a partnership deed along with the existing partners as he would be deemedto have become a full-fledged partner if he makes no election to opt out of the partnership, it would not satisfy the requirements of Section 26A. There is very little discussion and no reference even to the definition of 'partner' in the I.T. Act. It has also lost its precedential value, having been overruled by a Full Bench in Badri Narain Kashi Prasad v. Addl. CIT : [1978]115ITR858(All) . That case arose under the I.T. Act, 1961, and it contains a full discussion in the light of the I.T. Act and the Partnership Act. For our purposes, it is enough to extract the relevant parts of the head-note, which reads:

'For purposes of the Act, a minor admitted to the benefits of a partnership is deemed to be a partner entitled to all the benefits conferred on a partner by the Act. When an instrument of partnership evidences a constitution indicating that, apart from some partners, a minor has been admitted to ' its benefits the instrument of partnership will be deemed to evidence, for purposes of the I.T. Act, that the constitution of the firm was as if the minor was also a partner.

There can, therefore, be no change in the constitution of the firm by the mere fact of a minor admitted to the benefits of a partnership becoming a major and electing to remain a partner. He was already a partner and he continues as a partner. 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. A minor is not liable to share in the losses of a firm though he is entitled to share in the profits. The share of the loss relatable to the share of the minor has hence to be provided for. The redistribution of the shares in losses on the minor attaining majority has also to be ascertained. If, on a reasonable construction of the instrument of partnership, these matters cannot be ascertained, it will be a case where the instrument of partnership does not evidence the change in the shares. In case the original instrument of partnership envisages this change, the firm will be entitled to continuance of registration under Section 184(7).'

13. This decision has been followed by the same High Court in Makhbu Lal Ayodhya Prasad v. CIT : [1979]120ITR346(All) and by the Madhya Pradesh High Court in Ganesh Rice Mitts v. CIT : [1981]132ITR257(MP) . Badri Narain Kashi Prasad's' case : [1978]115ITR858(All) was followed by the Allahabad High Court in Bhagat Shyam and Company v. CIT : [1980]123ITR164(All) , although on the facts the learned judges held that the cancellation of the firm's registration in that case was proper.

14. The learned Govt. pleader relied on Rao Bahadur Ramlu Subba Rao v. CIT : [1956]30ITR163(SC) , where the Supreme Court observed (p. 172):

'Thus, registration confers on the partners a benefit to which they would not have been entitled but for Section 26A, and such a right beinga creature of the statute, can be claimed only in accordance with the statute which confers it, and a person who seeks relief under Section 26A must bring himself strictly within its terms before he can claim the benefit of it. In other words, the right is regulated solely by the terms of the statute, and it would be repugnant to the character of such a right to add to those terms by reference to other laws. The statute must be construed as exhaustive in regard to the conditions under which it can be claimed.'

15. The observation was made in the context of the question whether an application for renewal of registration signed by a partner for himself and again as the power-of-attorney for the other partner who was away would satisfy the requirements of Rules 2 and 6 that the 'application shall be signed by all the partners......personally'. What we have stated aboveis not against this observation ; what we have done is to read the partnership deed and find its impact on the constitution of the firm and the shares of the partners. Nor is there anything in CIT v. Krishna Mining Co. : [1980]122ITR362(AP) , a decision of a Full Bench of the Andhra Pradesh High Court that would assist the learned Govt. pleader in his contention for sustaining the view of the Commissioner.

16. The deed of partnership, as we have explained, is sufficiently comprehensive and precise about the constitution of the firm and the shares of the partners including the minors on their becoming majors in the profits and losses and we cannot agree with the Commissioner that consequent on the minors attaining majority there was a change in the constitution of the firm requiring the execution of a fresh deed of partnership. With respect we differ from Ganesh Lal Laxmi Namin v. CIT [1968] 68 ITR 686 and prefer to follow Badri Narain Kashi Prasad v. Addl. CIT : [1978]115ITR858(All) , and the cases which take the same view, as they accord with our reading of the partnership deed.

17. In the result, we answer the questions in the negative, i. e., in favour of the assessee and against the department. In the circumstances, we make no order as to costs in this reference.

18. A true copy of this judgment under the seal of this court and the signature of the Registrar will be sent to the Commissioner of Agricultural Income-tax, Trivandrum.


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