BANERJEE J. - This reference, under section 66(1) of the Indian Income-tax Act, 1922, has been made in the circumstances hereinafter related.
The year of assessment, with which we are concerned, is 1958-59, the corresponding accounting year being the calendar year ending with December 31, 1957.
The assessee is a firm of 11 partners, constituted by a deed of partnership, dated May 14, 1956. Out of the 11 partners, 9 were minors when the deed was executed. Of the minors, Ratish Kumar Agarwalla (party of the fourth part in the deed of partnership) attained majority during the relevant year of accounting. Registration under section 26A of the Indian Income-tax Act had been accorded to the assessee-firm on the basis of the partnership deed, dated May 14, 1956, for the assessment year 1957-58, which was the first year of the business. When renewal of this registration was asked for, in the assessment year 1958-59, the prayer was refused by the Income-tax Officer. The order of the Income-tax Officer was confirmed by the Appellate Assistant Commissioner, on appeal by the assessee. Thereupon, the assessee took a second appeal before the Appellate Tribunal. At the time when the application for renewal of registration was refused by the Income-tax Officer and the said order was confirmed by the Appellate Assistant Commissioner, the Supreme Court judgment in Commissioner of Income-tax v. Dwarkadas Khetan & Co. was holding the field. Before the Appellate Tribunal the assessee contended that the Supreme Court decision in Dwarkadas Khetan & Co.s case had no application to the fact of the present case, inasmuch as, under the deed of partnership, dated May 14, 1956, the minors had been admitted only to the benefits of partnership and had not been made responsible for the losses. The Tribunal overruled the contention with the following observations :
'It is true that the deed recites in clause 6 that the parties of the 2nd, 4th, 5th, 6th, 7th, 8th, 9th, 10th and 11th part, who were minors, shall not be liable or responsible for the losses, if any, and the entire loss shall be borne in equal shares by the major partners of the 1st and 3rd part. But apart from this privilege the minors have been treated as fullfledged partners in the deed. The preamble to the deed mentions the names of all the eleven parties and then recites that the said eleven parties hereto agree between themselves to become partners and to carry on business in partnership under the following terms and conditions. The minor partners have been clothed with the same rights and liabilities as the major partners except, as stated above, the minors were not made responsible for the losses. By clause 4 of the deed all the partners were required to contribute capital and under clause 5 all the partners were required to sign the accounts after they were closed and adjusted. As the said nine minors were described as patners in the preamble to the deed it follows that they were also required to contribute capital and to sign the books of accounts when closed. Clause 7 of the deed of partnership recites that the bank accounts shall be operated on by any two of the partners for and on behalf of this partnership as may be decided by the partners. Under this clause even the minors have to decide which of the two partners (including the minors) could operate the bank account. The other clauses in the deed also make no distinction between the minor partners and the major partners to the deed, except as regards the sharing of the losses. The deed was executed by all the parties, each minor partner signing the deed through the hand and pen of his father and natural gurdian.
It will be evident from what has been stated above that the minors have been included in the deed as contracting parties executing it through the pen of their respective fathers and they have been made fullfledged partners with the only reservation that they were not to share the losses.'
In the view taken the Appellate Tribunal dismissed the appeal.
Aggrieved by the order of the Tribunal the assessee obtained reference of the following question of law to this court :
'Whether, on the facts and in the circumstances of the case, the applicant is entitled to renewal of registration as a firm under section 26A of the Indian Income-tax Act, 1922, for the assessment year 1958-59, on the basis of the deed dated the 14th May, 1956 ?'
Dr. Pal, learned counsel for the assessee, submitted that the statement of law in Commissioner of Income-tax v. Dwarkadas Khetan & Co. came up for explanation before the Supreme Court in Commissioner of Income-tax v. Shah Mohandas Sadhuram and again in Commissioner of Income-tax v. Shah Jethaji Phulchand. He submitted that if the statement of law in Dwarkadas Khetan & Co.s case be read with the explanation thereof in the two later Supreme Court decisions, it would be amply apparent that the refusal of the registration of the assessee-firm, on the grounds as stated in the judgment of the Tribunal, was clearly wrong. This argument necessitates an examination of the trilogy of decisions by the Supreme Court. In Dwarkadas Khetans case the Supreme Court held that the Income-tax Officer was only empowered to registered a partnership which was specified in the instrument of partnership and it was not open to him to registered a partnership different from that which was formed by the instrument. It was further held that section 30 of the Indian Partnership Act was designed to confer equal benefits upon the minor by treating him as a partner but it did not render a minor a competent and full partner, and any document which made a minor full partner could not be regarded as valid for the purpose of registration. It should be noticed that the instrument of partnership in Dwarkadas Khetans case described the minor as a full partner, entitled not only to share in the profits but also liable to bear all the losses including loss of capital. The deed also provided that all the four partners, were to attend to the business; and if consent was needed, all the partners, including the minors, had to give their consent in writing. Under the deed the minor was also entitled to manage the affairs of the firm including inspection of the account books and was given right to vote, if a decision on votes had to be taken. In these circumstances, Hidyatullah J. (as the Chief Justice then was) observed :
'In short, no distinction was made between the adult partners and the minor, and to all intends and purposes, the minor was a full partner, even though under the partnership law he could only be admitted to the benefits of the partnership and not as a partner.'
In the next case, viz., in Shah Mohandas Sadhurams case the Supreme Court explained the decision in Dwarkadas Khetans case and observed that a partnership deed must be construed reasonably. The Supreme Court further observed that, as long as the partnership deed did not make a minor a full partner, the deed should not be regarded as invalid on the ground that the guardian had purported to contract on behalf of the minor, if the contract was for the purpose of admitting the minor to the benefits of the partnership. The Supreme Court also observed that the guardian could accept benefits of partnership on behalf of a minor and had the power to scrutinise the terms on which such benefits were to be received by the minor and also the power to accept the conditions on which the benefits of partnership were being conferred. The Supreme Court said that the guardian could do all that was necessary to effectuate the conferment and receipt of the benefits of partnership on the minor. The Supreme Court made it clear that a guardian was entitled to agree to contribute capital on behalf of the minor. If contribution of capital was one of the terms on which benefits of partnership were being conferred, either the guardian must refuse to accept the benefits or he must accept the terms that such an agreement by a guardian may be avoided by the minor, if it was not entered into for his benefit, but the agreement would remain valid as long as it was not so avoided. Lastly, the Supreme Court observed that the guardian was entitled to asent to the mode of keeping accounts. The decision in Shah Mohandas Sadhurams case is also an authority for the proposition that the duration of the partnership had to be fixed between the major members, and the guardian on behalf of the minor might agree to accept the benefits of the partnership only if the duration was also to the benefit of the minor.
In the case of Jethaji Phulchand the Supreme Court followed the case in Shah Mohandas Sadhuram and repeated that the partnership deed must be reasonably construed. The Supreme Court further said that the guardian of a minor was entitled to do all things necessary for effectuating conferment of benefit of partnership to the minor. The Supreme Court also observed that a guardian might agree on behalf of the minor to contribute capital for the business of the firm in which the minor was admitted to the benefits of partnership. Lastly, the Supreme Court observed that there was no bar in law to the guardian of a minor agreeing to the starting of a business and the constitution of a firm on the condition that the minor shall not be a full partner but shall only be entitled to the benefit of partnership.
The three Supreme Court decisions were considered by this court in Jeewanram Gangaram v. Commissioner of Income-tax. What happened in that case was that the partnership deed of the assessee firm, consisting of two minors represented by their guardian mother, specifically stated that the two minors were only admitted to the benefits of partnership. The deed, however, provided that the profits and losses of the partnership shall be distributed amongst the partners in shares specified against their names, which included the names of the minors also. The deed further provided that the responsibilities of the management of the partnership shall equally rest with each of the partners. The revenue had granted registration to the firm for the year 1947-48 and also renewed registration for all the subsequent years up to 1957-58. The Commissioner of Income-tax, however, acting under section 33B of Income-tax Act, 1922, cancelled the registration for the year 1957-58 and directed the Income-tax Officer to treat the firm as an unregistered firm and tax accordingly on the ground that the minors had been made full partners and that they had signed the application for registration. The Commissioner of Income-tax was of the view that the grant of renewal of registration to the assessee-firm was prejudicial to the interests of the revenue. On reference to this court, it was held (i) that the various clauses in the partnership deed should be read in the context of the specific statement in the deed that the minors were only admitted to the benefits of the partnership; (ii) the clause in the partnership deed relating to sharing of losses can only mean that only the share of the minors in the partnership was intended to be made liable for losses but the minors were not to be personally liable for losses; (iii) the responsibilities of the minors for mismanagement would also be limited only to their share in the partnership and not personally; (iv) the technical defect in the signature portion of the application for registration cannot be prejudicial to the interests of the revenue; and (v) the firm was validly constituted under the deed and was entitled to registration.
Bearing in mind the law as stated in the three Supreme Court decisions and in the decision of this court referred to above, we have now to examine the reasons given by the Tribunal in support of non-registration. The first ground given by the Tribunal was that the preamble recited that the parties, including the minors, agreed between themselves to become partners and to carry on the business of partnership. This ground, in our opinion, should not be over-emphasised, because in the deed of partnership in Shah Jethaji Phulchand case the preamble recited :
'3. Whereas the above 5 parties have agreed to do business of cotton and kapas, purchases and sales and on commission basis, etc., after Deepavali, 1950, for the future periods also so long as they can possibly work together.
4. Now they agree between the above 5 parties as hereunder :
(1) That the above five parties shall establish cotton business, and carry on the same at Devangere with branches in the surrounding areas under the name and style Jethaji Phulchand.'
The 'five' mentioned in the preamble included the minors. In spite of this preamble the Supreme Court was pleased to hold that the partnership deserved registration.
The next ground relied on by the Tribunal was that by clause 4 of the deed of partnership all the partners were required to contribute capital. This ground, in our opinion, is again not of any consequence because in Jethaji Phulchand case the Supreme Court clearly observed that a guardian may agree, on behalf of the minor, to contributed capital for the business of the firm, in which the minor was admitted to the benefits. In the instant case, if we look to clause 4 of the partnership deed, we find that the same is couched in the following language :
'Capital as and when required by the partnership firm shall be contributed in as reasonably equal proportion as possible.'
The language of the clause does not exclude contribution of capital by the guardian of the minors, on behalf of the minors if participation in the benefits of the partnership by the minors necessitates such contribution.
The third ground relied on by the Tribunal was that clause 5 of the partnership deed required all the partners to sign the accounts after they were closed and adjusted. The material portion of clause 5 of the partnership deed, in the instant case, reads as follows :
'Records and accounts of this partnership firm shall be maintained regularly in course of business at the principal place of business and shall be open to inspection throughout the usual working hours by all or any other partners. Such accounts shall be finally adjusted and closed at the end of every English calendar year. On such closing and adjustment the accounts shall be signed by all the partners in token of the correctness thereof and the accounts as closed and signed by the partners shall be final and binding between the partners forever.'
First part of the clause, namely, the part which permits inspection of the accounts by the minor partners is covered by sub-section (2) of section 30 of the Indian Partnership Act, which reads as follows :
'Such minor has a right to such share of the property and of the profits of the firm as may be agreed upon, and he may have access to and inspect and copy any of the accounts of the firm.'
The last part of the clause which relates to adjustment and signature on adjustment must be deemed to be referable to the guardians of the minors through whom the minors are to act. This we hold on the strength of the observation of the Supreme Court in Jethaji Pulchand case to the effect that the guardian of a minor is entitled to do everything necessary for effectuating conferment of benefits of partnership upon the minor. If adjustment of account in a particular manner was necessary for determining the benefits receivable by the minors, the guardians of the minor were entitled to put their signature at the time of such adjustment if so required. Then again, the word 'partner', as used in the above clause, is referable to major partners, who could contract to become partners and not to minors admitted to the benefits of partnership.
The fourth ground, on which the Tribunal relied, was that clause 7 of the partnership deed recited that the bank accounts shall be operated on by any two of the partners for and on behalf of the partnership as may be decided by the partners. The Tribunal interpreted this clause to mean that even the minors would have to decide which of the two partners could operate the bank account. In our opinion, this view was wholly wrong. The partners mentioned here refer to the persons who could contract to become partners and not to those who became entitled to the benefits of the partnership.
The last ground, relied on by the Tribunal, was that the other clauses in the deed also made no distinction between the minor partners and the major partners to the deed, except as regards the sharing of the losses. In our opinion, in this conclusion also the Tribunal was not right. Whether the minors were made partners under a deed or whether they became only entitled to the benefits of partnership must depend upon the construction of the deed as a whole. Now, if the dominant clause of the deed indicates that the minors were only admitted to the benefits of partnership, then that dominant clause must be taken to colour the deed itself and must fix the extent of the liability and responsibility of the minors. In the instant case, the last portion of clause 6 of the deed was couched in the following language :
'The parties of the 2nd, 4th, 5th, 6th, 7th, 8th, 9th, 10th and 11th part shall not be liable or responsible for the losses, if any, and the entire loss shall be borne in equal shares by the major partners of the 1st and 3rd part.'
The clause fixes up the nature of the responsibility and liability of the minors. The law is that only the minors share in the partnership may be made liable for accounts of the firm but the minor cannot be made personally liable. The last part of the clause, which we have quoted above, does not fix any liability upon the minors for their management of the affairs of the partnership even if they cared to indulge therein.
On a proper interpretation of the deed it appears that the minors were only admitted to the benefits of the partnership and not to full partnership. This being the view that we take, we propose to answer the question referred to this court in the affirmative and in favour of the assessee.
But, before we do so, we need mention that Mr. Pal, appearing for the revenue, strongly relied on a Division Bench decision of this court in Commissioner of Income-tax v. Khetan & Co. in which a view some what contrary to the view that we have expressed in this judgment appears to have been taken. We have expressed our view guided by what the Supreme Court decided in the three cases hereinbefore referred to. We feel it safe to be guided by those decisions and not to be inspired by anything to the contrary, if any, contained in the judgment relied on by Mr. Pal.
In the result, the answer to the question is given in the affirmative and in favour of the assessee. The Commissioner of Income-tax must pay costs of this reference to the assessee.
K. L. ROY J. - I agree.