1. P.M. Adima Kannu was one of the partners of the firm P. M. Syed Mohammed Kannu & Co., carrying on business in agency items. The firm was dissolved on March 31, 1973, and with effect from April 1, 1973, another firm of the same name was constituted with Adima Kannu and his two sons Mohammed Noohu and Liaquat Ali as partners. A third son Mohammed Ismail, a minor at that time, was also admitted to the benefits of the partnership. Ismail attained majority on May 2, 1973. On May 3, 1973, a deed was executed making Ismail a full partner. The deed recited that Ismail was opting to become a full partner of the firm and was ratifying the actions of the other partners, right from April 1, 1973, which was to be treated as the date on which the deed had come into force. Clause (7) of the deed provided :
' The accounts shall be closed at the end of every financial year and the resulting profits and losses shall be divided equally. '
2. The above firm applied for registration for the assessment year 1974-75, and the ITO granted the request, after satisfying himself that a genuine firm was in existence. In proceedings under Section 263, however, the Commissioner took the view that registration should not have been granted. The assessee appealed. The Income-tax Tribunal disagreed with the Commissioner and held that the firm was entitled to registration. At the instance of the Commissioner, therefore, the following question has been referred to this court, in I.T.R. No, 204 of 1979 :
'Whether, on the facts and in the circumstances of the case, the assessee is entitled to registration for the assessment year 1974-75 '
3. The question in I.T.R. No. 80 of 1982, is connected, and it is whether the assessee is entitled to continuation of registration for the assessment year 1976-77.
4. The Commissioner's objection to grant of registration were these :
(i) there was no proper deed evidencing the partnership whichexisted during the period from April 1, 1973 to May 2, 1973; the recitalsin the deed dated May 3, 1973, regarding retrospectivity were insufficient tocure this defect ;
(ii) even if retrospectively could be recognised, the deed wasdefective as Clause (7) had made Ismail liable for losses during the periodof his minority ; and
(iii) it had also failed to specify how the losses were to be sharedduring the period prior to May 2, 1973.
5. The Tribunal overruled these objections by observing that the genuineness of the partnership was never in doubt and that it was possible to reasonably construe the deed as one which provided for sharing of losses by the major partners for the period till May 2, 1973, on the footing that during the relevant period, there was a genuine partnership consisting of the said majors with the minor admitted only to the benefits of the partnership.
6. Mr. Ravindranatha Menon for the Revenue contends that the Tribunal's approach is opposed to the principles of partnership law, as understood by the Supreme Court in CIT v. Dwarkadas Khetan & Co. : 41ITR528(SC) . He would suggest that inasmuch as Clause (7) of the deed provided for sharing of losses by all the four partners for the whole of the accounting year 1973-74, the scheme from its very inception, was one where the minor was to be held liable for the losses sustained during the period of his minority (April 1, 1973, to May 2, 1973) also; and if there was any doubt in this regard, the recitals in the deed providing for retrospective effect from April 1, 1973, were conclusive.
7. Before examining this contention and the decision cited in support thereof, it will be useful to refer briefly to some of the provisions of the Partnership Act. Under Section 4 of the Act, partnership is a relation betweenpersons arising from agreement or contract. Section 6 provides that in determining whether a group of persons is a firm or not, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together. Section 11 stipulated that it is the contract between the parties, expressed or implied, that should determine the rights and duties of the partners, and that the contract can be varied by consent of all the partners. Subject to the contract, every partner has a right to take part in the conduct of the business, and to have access to and inspect the books of the firm. Section 25 lays down that every partner shall be jointly and severally liable for all the acts of the firm during the period he is a partner. Section 30 deals with the rights and liabilities of minors admitted to the benefits of partnership, and reads :
'30. Minors admitted to the benefits of partnership.--(1) 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.
(2) Such minor has a right to such share of the property and of the profits of the firm as may he agreed upon, and he may have access to and inspect and copy any of the accounts of the firm.
(3) Such minor's share is liable for the acts of the firm, but the minor is not personally liable for any such act.
(4) Such minor may not sue the partners for an account or payment of his share of the property or profits of the firm, save when severing his connection with the firm, and in such case the amount of his share shall be determined by a valuation made as far as possible in accordance with the rules contained in Section 48:
Provided that all partners acting together or any partner entitled to dissolve the firm upon notice to other partners may elect in such suit to dissolve the firm, and thereupon the court shall proceed with the suit as one for dissolution and for settling accounts between the partners, and the amount of the share of the minor shall be determined along with the shares of the partners. (5) 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. (6) Where any person has been admitted as a minor to the benefits of partnership in a firm, the burden of proving the fact that such person had no knowledge of such admission until a particular date after the expiry of six months of his attaining majority shall lie on the persons asserting that fact.
(7) Where such person becomes a partner, --
(a) his rights and liabilities as a minor continue up to the date on which he becomes a parner, but he also becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership ; and
(b) his share in the property and profits of the firm shall be the share to which he was entitled as a minor.
(8) Where such person elects not to become a partner,---
(a) his rights and liabilities shall continue to be those of a minor under this section up to the date on which he gives public notice;
(b) his share shall not be liable for any acts of the firm done after the date of the notice ; and
(c) he shall be entitled to sue the partners for his share of the property and profits in accordance with sub-section (4).
(9) Nothing in Sub-sections (7) and (8) shall affect the provisions of Section 28. '
8. Section 31 deals with the introduction of new partners and the liabilities of those so introduced. Section 40 provides that a firm may be dissolved with the consent of all the partners or in accordance with the contract. And subject to contract, a firm will also stand dissolved by the expiry of the term fixed, on the completion of the adventure or the undertaking, by the death of a partner or by the adjudication of a partner asinsolvent (Section 42).
9. Under Section 11 of the Contract Act, a minor's contract is void. Section 30of the Partnership Act, however, permits a minor being admitted to the benefits of partnership. There is probably some anomaly in fitting a minor, incompetent to contract, into a scheme of things which essentially rests on contract, but the specific provisions of Section 30 relating to the rights and liabilities of such a minor are intended to take care of practical difficulties that may arise. A minor has a right to a share of the property and the profits of the firm. He can have access to and inspect the accounts. His share is liable for the acts of the firm, but he is not personally liable. He cannot sue for account and payment of his share, save when severing connections with the firm. Within six months of attaining majority, he can elect to become a partner ; and when he does so, he becomes personallyliable for all the acts of the firm from the time he was admitted to the benefits of partnership.
10. When a partnership commences with some major members and a minor admitted to its benefits, and when the minor attains majority and elects to become a full partner, is there any change in the constitution of the firm Is it possible to split up the arrangement into two different partnerships, one as it existed before the election, and another, after the election These questions seem to be important for the purposes of registration under the I.T. Act, because under Sections 184 and 185 of the said Act, what is to be registered is a firm with a constitution evidenced by the instrument of partnership. And on a reading of Section 30 of the Partnership Act, we are inclined to take the view that no reconstitution of a firm is involved when the erstwhile minor elects to become a partner. While Sub-sections (1) to (4) of Section 30 deal with the rights and liabilities of a minor admitted to benefits of a partnership Sub-section (5) recognises in him a right, on attaining majority, either to become or not to become a full member of the partnership. Election only 'determines his position as regards the firm,' i.e., the firm which is already there. It is into that firm that he is admitted as a full partner, and the change in position does not bring about a change in constitution. As has already been noticed, Section 11 of the Act provides that the mutual rights and duties of the partners of a firm are determined by contract, the terms of which may be varied by consent; and such a variation does not necessarily involve a change in the constitution of the firm. Sub-sections (5) and (7) of a. 30 are in effect an exception to the rule in Section 11 that rights and duties of partners can be varied only by consent and contract; they are designed to achieve statutorily, in favour of the minor who becomes a full partner, a change in position without the consent of the other partners. The provision in the latter part of Section 30(7)(a) which makes the incoming partner liable for all the acts of the firm during his minority also shows that its constitution remains unchanged, for it would not have been the intention of the Legislature to make a partner of a reconstituted firm liable for the acts of a different firm which was in existence earlier. Some kind of ratification by a major, of what had happened during his minority, is implicit in this provision. The circumstance that Section 31 is subject to Section 30 also shows that the election made by an erstwhile minor under Sub-section (5) of Section 30 to become a partner is not to be treated as inclusion of a new partner involving a reconstitution. The election does not also involve a dissolution of the old group, within the meaning of Sections 40 and 42,
11. In Bhogilal Laherchand v. CIT : 28ITR919(Bom) , Chagla C.J. said (p. 923):
'Let us look at what the position in law is with regard to a minor who has been admitted to the benefits of a partnership and who attains majority. It is a commonplace that a minor can never become a partner but he can be admitted to the benefits of a partnership, and Section 30 of the Partnership Act regulates the rights of a minor who has been admitted to the benefits of a partnership, and broadly speaking the rights of a minor, when he attains majority, are that ho has the option either to retire from the partnership or to continue in the partnership and a locus penitentiae of six months is given to him to make up his mind. If he elects to continue as a partner then the partnership does not come to an end, the partnership continues, and Sub-section (7)(a) of Section 30 expressly provides that his rights and liabilities as a. minor continue up to the date on which he becomes a partner but he also becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of the partnership. On the other hand, if he elects not to become a partner, then he is entitled to claim whatever amount was due to him as computed at the date when he gives the public notice provided in Sub-section (5) of Section 30. Further, his share is not to be liable for any acts of the firm done after the date of the notice and he also becomes entitled to sue the partners for his share of the property and profits in accordance with Sub-section (4) which gives certain rights to the minor to sue the partners for an account of payment of the share of the minor when the minor severs his connection with the partnership. Therefore, it is clear that if a minor son attaining majority elects to continue as a partner, the partnership does not come to an end. The partnership continues, and the minor having become a partner, he is entitled to his profits as computed at the end of the year regulated by the partnership deed. On the other hand, if the minor elects not to be a partner, it is equally clear that he severs all his connection with the partnership and he becomes entitled to whatever amount is due to him at the date when he makes the election not to become a partner. Therefore, whereas in the first case there is no break in the continuity of the partnership and there is no need to make up any accounts otherwise than in the ordinary course, in the latter case there is a break in the partnership and accounts have to be made up as of a particular date because the minor who has become a major has the right to claim a specific amount as due to him on a particular date. '
12. It is because of the above position that a minor admitted to the benefits of a partnership is sometimes called a 'dormant partner', and the other partners of such a firm are called 'full partners'. The transformation of the dormant partner into a full-fledged partner as the result of his election does not, in law, amount to dissolution of one firm and creation of another.
13. Keeping in mind the above principle, and examining the facts of the case for the purposes of Sections 184 and 185 of the I.T. Act, the position disclosed is this :
(i) P.M. Syed Mohammed Kannu & Co. was in existence from the commencement of the accounting year 1973-74 as a genuine partnership;
(ii) the partnership was evidenced by an instrument, though executed only on May 3, 1973, specifying the individual shares of the partners ;
(iii) the profits and losses for the accounting year were to be divided or credited in accordance with the terms of the instrument;
(iv) the application for registration was made in accordance with the requirements of the Act and the Rules, and within the time prescribed ; and
(v) the identity of the firm was the same throughout According to the decision of the Supreme Court in R.C. Mitter & Sons v. CIT : 36ITR194(SC) , a firm could be registered under the I.T. Act if the above conditions are satisfied. In CIT v. Joseph & George : 77ITR292(Ker) , this court had clarified that it was enough if the document evidencing the partnership was in existence at the time of the application for registration ; it was not necessary that it was in existence at the beginning of the year or was in force throughout the accounting year.
14. Turning to the decision in CIT v. Dwarkadas Khetan and Co. : 41ITR528(SC) , all that was said there was that a minor could not be made a full partner in a firm with equal rights and liabilities as adult partners. The position was clarified by the Supreme Court; in CIT v. Shah Mohandas Sadhuram : 57ITR415(SC) , by observing that the true approach would be to reasonably construe the document to ascertain the intention of the parties. In Krishna & Bros. v. CIT : 69ITR135(Ker) , this court considered both the decisions and said (p. 137):
'A number of decisions have been relied on by counsel appearing on either side. We do not think that it is necessary to refer to all these decisions in view of the fact that similar, if not identical, cases have been dealt with by the Supreme Court. The range within which the cases of this nature can fall, we think, is indicated in the two decisions of the Supreme Court in Commissioner of Income-tax v. Dwarkadas Khetan and Co. : 41ITR528(SC) and Commissioner of Income-tax v. Shah Mohandas Sadhuram : 57ITR415(SC) . In the former case, registration was refused and in the latter case, registration was granted. The point of distinction, as we see it, seems to be the fact that on a construction of the document it was possible to come to the conclusion that the minors wereadmitted to the benefits of the partnership in the case in Commissioner of Income-lax v. Shah Mohandas Sadhuram : 57ITR415(SC) and in the other case, in Commissioner of Income-tax v. Dwarkadas Khetan and Co. : 41ITR528(SC) , it was held that the minors were also sought to be made full partners by the deed of partnership......
The document that was construed by the Supreme Court in the earlier decision in Commissioner of Income-tax v. Dwarkadas Khetan and Co. : 41ITR528(SC) , did not contain any clause which indicated that the minors were only admitted to the benefits of the partnership. The court came to the conclusion that no distinction whatever has been made between the minors who were sought to be made partners and the other adult members. It seems to us that the case before us is one which would fall within the ambit of the rule enunciated by the Supreme Court in Commissioner of Income-tax v. Shah Mohandas Sadhuram  37 ITR 415. Though clause 8 of the document that was construed by the Supreme: Court did contain a provision for sharing the losses, their Lordships came to the conclusion that the document read as a whole indicated that the minors were only admitted to the benefits of the partnership and there is no reason for refusing the registration sought for. '
15. In the case before us, it is not disputed that Ismail was only a minor entitled to the benefits of the partnership during the period of his minority ; he had not been made a full partner before May 3, 1973. It cannot, therefore, be said that the firm was an illegal one from its commencement, as was the case in Dwarkadas Khetan : 41ITR528(SC) .
16. The only other question is whether Clause 7 of the deed, coupled with the provision for retrospectivity from April 1, 1973, would alter the position. The clause, extracted earlier, shows that it only provided for sharing of loss when accounts were closed at the end of the year 1973-74. Taken along with the recital that Ismail was only entitled to the benefits of the partnership during his minority, this provision cannot reasonably be construed as attempting to impose liability on him for losses which might or might not have been sustained during the earlier part of the year when he was only a minor. He had attained majority on May 3, 1973, and it was certainly open to him to agree to partake of the losses ascertained and disclosed by the end of 1973-74. The provision can also be construed, as was done by this Court in Krishna & Bros. : 69ITR135(Ker) , an an arrangement for making the minor's share liable for losses, a course permissible under Section 30(3) of the Partnership Act, and. distinct from making him personally liable.
17. Chhotelal Ratanlal v. Rajmal Milapchand, AIR 1951 Nag 448, only laid down that no partnership could come into existence with only one adult partner and a minor ; a partnership requires at least two persons competent to contract. That does not mean that two or more adults could not form a partnership with a minor admitted to its benefits, as was contended for on behalf of the Department.
18. We, therefore, answer both the questions referred to us in favour of the assessee, and against the Department. There will be no order as to costs.
19. Office will forward a copy of this judgment to the Tribunal.