TaxTMI 
TaxTMI 
1967 (1) TMI 84
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....ratan Mimani used to represent his undivided Hindu family in the partnership of Jewanram Gangaram. There was a partition in this family and Chandratan and his brother, Chhoganlal, separated. Consequent upon the death of Lachmandas Mimani and the separation between Chandratan and Chhoganlal, it became necessary to reconstitute the firm. So as to bring some of the legal representatives of Lachmandas and also Chandratan and Chhoganlal in their separated status, into the firm, a new partnership deed was executed on March 25, 1947. The parties to this deed were: (i) Kanayalal Mimani, (ii) Mulchand Mimani, (iii) Surajmal Mimani, (iv) Chandratan Mimani, (v) Lunkaram Mimani, (vi) Chaitandas Mimani, (vii) Chhoganlal Mimani, (viii) Gokuldas Mimani, minor by his guardian mother and next friend, Ram Piyari Devi, and (ix) Jamunadas Mimani, also a minor by his guardian mother and next friend, Ram Piyari Devi. The minors above-named were expressly admitted to benefits of the partnership. Clauses 6 (which should be 5), 7 and 8 of the deed provided as follows: "6. The profits and losses of partnership shall be distributed amongst the partners in shares as specified agains....
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.... 1962, the Commissioner of Income-tax sent a notice to the firm under section 33B of the Indian Income-tax Act, 1922, inter alia, couched in the following language: "I have examined your records in connection with the assessment year 1957-58, and have found that the order dated March 26, 1962, passed therein by the Income-tax Officer under section 26A of the Indian Income-tax Act, 1922, is erroneous in so far as it is prejudicial to the interest of the revenue. You are hereby given opportunity to show cause and to make your submissions by August 29, 1962, in that connection since I am of the opinion that the firm as constituted under the instrument of partnership dated March 25, 1947, consisting of 9 partners including 2 minors, which had been granted renewal of registration by the Income-tax Officer is not valid or legal and could not therefore be registered under the Act..." In showing cause, the assessee, inter alia, took a preliminary objection to the effect that the proceeding under section 33B was invalid, inasmuch as after the repeal of the Act of 1922 by the Income-tax Act of 1961, no proceeding could have been taken under the repealed Act. The Commissioner r....
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...., that the application for renewal of registration did not fulfil the technical requirements of the Act, had not been communicated to the assessee in the notice given under section 33B and the assessee was not given sufficient opportunity of showing cause against the same. The third contention was that the minors had not been taken as full partners under the partnership deed but merely admitted to the benefits of partnership--any finding contrary thereto was wrong both in fact and in law. The last contention was that inasmuch as the Commissioner came to the conclusion that the firm had not been lawfully constituted, with the minors as full partners, he should not have directed the assessment of the firm as an unregistered firm after the cancellation of the registration of the firm. The Tribunal repelled the first contention by relying on a decision of this court in Kalawati Devi Haralalka v. Commissioner of Income-tax [1964] 53 I.T.R. 314. The Tribunal also repelled the second contention with the observations that the firm was represented by a competent lawyer, all the records of the proceedings were disclosed to the lawyer and the lawyer himself made submissions on the applicatio....
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.... of partnership. If it is found that no valid firm came into existence under the instrument, no registration could be granted but the business might be carried on by a firm brought otherwise into existence and it would be assessed as an unregistered firm. That on cancellation of registration the assessee could be assessed in the status of an unregistered firm finds support from the decision of the Supreme Court in Commissioner of Income-tax v. Smt. Durgabati [1961] 43 I.T.R. 228 (S.C.)." On the prayer of the assessee the Tribunal referred the following questions of law to this court: "(1) Where, on the facts and in the circumstances of the case, the Tribunal was right in holding that after the repeal of the Indian Income-tax Act, 1922, by the Income-tax Act, 1961, the initiation of proceedings by the Commissioner under section 33B of the repealed Act was properly taken? If the answer to the above question is in the affirmative, then-- (2) Whether, on the facts and in the circumstances of the case, the order under section 33B was passed by the Commissioner of Income-tax in violation of the principles of natural justice? (3) Whether, on the facts and in the circums....
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....al Kesherdeo was entitled not only to a share in the profits but also liable to bear all the losses including loss of capital. It was also provided that all the four partners were to attend to the business and, if consent was needed, all the partners, including the minor, had to give their consent in writing. The minor was also entitled to manage the affairs of the firm, including inspection of the account books, and was given the right to vote, if a decision on votes had to be taken. No distinction was made between the adult partners and the minor, and to all intents and purposes, the minor was a full partner, even though under section 30 of the Partnership Act, he could only be admitted to the benefits of the partnership. The firm was registered with the Registrar of Firms and in the certificates obtained from the Registrar, Kantilal Kesherdeo was shown as a full partner and not as one entitled merely to the benefits of the partnership. Banks were also informed about the four partners, without any intimation that one of the named partners was a minor. For the assessment year 1947-48, a registration of the firm was sought under section 26A of the Indian Income-tax Act. The Income-....
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....gistration can only be granted of a document between persons who are parties to it and on the covenants set out in it. If the income-tax authorities register the partnership as between the adults only contrary to the terms of the document, in substance a new contract is made out. It is not open to the income-tax authorities to register a document which is different from the one actually executed and asked to be registered." In the view taken, the Supreme Court was pleased to answer the question in favour of the income-tax department. In the case of Commissioner of Income-tax v. Shah Mohandas Sadhuram [1967] 57 I.T.R. 415, 417 (S.C.), the partnership in question came into existence in the circumstances recited in the following passage in the deed of partnership: "Whereof the above four members were till this day members of a joint family, whereof yesterday that is on March 31, 1962, the said four members have become divided not only in interest but also by metes and bounds, each of the said members taking to his share one-fourth (?) of the said joint family assets and liabilities as detailed in the books of account as maintained by the firm known as Seth Mohandas Sadhu....
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....ision was affirmed by the Appellate Assistant Commissioner. The Tribunal, however, took a different view and held that the assessee-firm was entitled to registration. On reference, the High Court expressed the following opinion: "That an instrument of partnership entered into between persons, some of whom are by law incompetent to contract, as might happen, if one of them is a minor is not necessarily null and void, and in a case like the present one, where the execution of the instrument of partnership on behalf of the minor by his guardian was for the purpose of admitting the minor to the benefits of partnership, no question of invalidity of the instrument can properly arise." The High Court, therefore, agreed with the Tribunal. On further appeal before the Supreme Court, at the instance of the Commissioner of Income-tax, Sikri J. was pleased to notice that the decision of the Supreme Court in Dwarkadas Khetan's case [1961] 41 I.T.R. 528 ; [1961] 2 S.C.R. 821 stood on its special facts and observed [1965] 57 I.T.R. 415, 419, 420-21 (S.C.): "This court held in Commissioner of Income-tax v. Dwarkadas Khetan & Co. [1961] 41 I.T.R. 528 ; [1961] 2 S.C.R. 821, ....
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.... admitted to the benefits of partnership. This sub-section enables him to elect, on attaining majority, either to remain a partner or not or to become a partner in the firm. Thus it contemplates that a guardian may have accepted the benefits of a partnership on behalf of a minor without his knowledge. If a guardian can accept benefits of partnership on behalf of a minor he must have the power to scrutinise the terms on which such benefits are received by the minor. He must also have the power to accept the conditions in which the benefits of the partnership are being conferred. It appears to us that the guardian can do all that is necessary to effectuate the conferment and receipt of the benefits of partnership. It follows from the above discussion that as long as a partnership deed does not make a minor full partner a partnership deed cannot be regarded as invalid on the ground that a guardian has supported to contract on behalf of a minor if the contract is for the purposes mentioned above." In the light of the above principles, his Lordship examined the several clauses in the deed and held: "The recital set out above expressly states that it is the major members w....
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....C.), the facts were as hereinafter stated: "The deed of partnership was entered into between five parties: (1) Nathmul Jethaji, (2) Phulchand, (3) S. Babulal, minor son of Jethaji, (4) Sakalchand Thikmaji and (5) Jethibai." The relevant clauses of the agreement were: "3. Whereas the above five 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 five parties as hereunder: (1) That the above five parties shall establish cotton business, and carry on the same at Davangere with branches in the surrounding areas under the name and style of 'Jethaji, Phulchand'. (2) That the capital of the business shall be ₹ 2,75,000 contributed from the parties of the firm..." It was agreed by clause 9 that the profits and loss of the company shall be shared by the partners in the following proportion irrespective of the contribution of the capital, viz: "Ist party shall be entitled to ₹ 0-3-6 IInd party shall be entitled to ₹ 0-3-0 IIIrd party shall be e....
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.... this clause is a general clause usually found in partnership deeds and it cannot be said that this clause enables the minor partner to terminate the partnership itself, and in the context it only means, as far as the minor is concerned, that the guardian would be entitled to exercise his right of severance given to him by section 30 of the Partnership Act. Sub-clause (5) which enables partners to borrow money obviously has to be read along with sub-clause (16) by which only the three major partners have been designated as working partners. It seems to us that the minor has not been made a full partner but has only been given the benefits of partnership. But the final objection of Mr. Karkhanis requires serious consideration. He says that the guardian has by clause 3 and sub-clause 4(1) purported to agree to the starting of business and the constitution of a firm. This, according to him, he was not entitled to do and clauses 3 and 4(1) are void. The learned counsel for the respondent tried to sustain these clauses on the ground that the guardian must be deemed to have acted on his own behalf. But we are unable to sustain these clauses on this gound. Then the question arises: can ....
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....hat in the case of Dwarakadas Khetan [1961] 41 I.T.R. 528 ; [1961] 2 S.C.R. 821, the deed itself indicated that the minors were admitted to full partnership, although in law this could not be done. The Supreme Court, therefore, refused to make a new and a valid contract for the purpose, in place of the contract invalid in law. In the case of Shah Mohandas Sadhuram [1965] 57 I.T.R. 415 (S.C.), he submitted, it was expressly stated in the deed that "minors are admitted to the benefits of partnership and not to the liabilities thereunder." The Supreme Court interpreted the deed in the light of this dominant clause and held that the minors were intended merely to be admitted to the benefits of the partnership. In the case of Shah Jethaji Phulchand [1965] 57 I.T.R. 588 (S.C.), he admitted, there was an express indication that the guardian of the minor shall bear the losses of the partnership and the major partners alone would be the working partners of the business. The Supreme Court construed the other clauses in the deed in the light of those clauses and held that by the deed the minors were only admitted to the benefits of the partnership. Mr. Mukharji examined the partners....
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....ct. Thus clause 6 of the partnership deed, in the instant case, is explicable on the theory that 10? pies share in the partnership of each of the two minors was intended to be made liable for the losses, if any, but they were not, as they could not be made personally liable therefor. The deed of partnership, in the instant case, expressly admitted the minors to the benefits of the partnership. This dominant clause must be taken to colour the extent of the liability of the minors and their responsibility in the management of the partnership concern as in clause 10 of the deed. The law being that only the minor's share in the partnership would be burdened for acts of the firm and not the minor personally, the two facts relied upon by Mr. Mukharji, namely, that the minors were to bear the loss and to conduct the management of the business of the firm, are capable of an innocent interpretation, namely, that their share only would be burdened and the loss, if any, suffered by the firm and their responsibilities for mismanagement would also be limited to their share in the partnership. In other words, they would not individually be personally liable for the loss suffered for the acts....
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.... there is a good deal of substance in this contention of Mr. Roy. The proceedings were started against the assessee because the registration was granted to a partnership invalidly constituted with a minor as a partner. That was thought to be prejudicial to the interest of revenue. The defect in the signature portion of the application for registration, namely, the minors putting their signatures in their own hands and not by the hand of their guardian was not by itself prejudicial to revenue and this defect could be removed by calling upon the guardian to put in her signature on the application. We do not, therefore, think that the Commissioner of Income- tax was right in thinking that this defect was prejudicial to the interest of revenue and merited cancellation of the registration of the firm. We, therefore, overrule the contention advanced by Mr. Mukharji that the order of the Commissioner should be sustained on the ground of defect in the form of application for registration. In the view that we take, we are of the opinion that, on the facts and in the circumstances of the case, and on a proper interpretation of the partnership deed dated March 25, 1947, the taxing authoritie....