Commissioner of Income Tax vs Bhawani Prasad Girdhari Lal and Co.

R.A. Sharma, J.—At the instance of the Revenue, the Income Tax Appellate Tribunal, Allahabad, u/s 256(1) of the Income Tax Act, 1961, has referred the following two questions of law for the opinion of this court :

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in taking the view that the assessee-firm (consisting of 17 adult partners and 4 minors admitted to the benefits of partnership) was not illegal in terms of Section 11 of the Companies Act, 1956 ?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the assessee-firm was entitled to registration under the Income Tax Act, 1961 ?"

The assessee-firm, consisting of 17 major partners and 4 minors who were admitted to the benefits of partnership, was constituted, vide partnership deed dated October 12, 1965, and was duly registered. It was assessed for the assessment years 1966-67 and 1967-68, in the status of a registered firm. The Income Tax Officer, however, in exercise of his powers u/s 186(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), cancelled the registration, vide orders dated March 24, 1975, on the ground that the assessee-firm consisted of more than 20 partners which is in contravention of Section 11(2) of the Companies Act, and the partnership deed was not signed by the guardian of the minors. The asses-see filed appeals against the aforesaid orders before the Commissioner of Income Tax (Appeals)-II, Kanpur, who upheld the cancellation of the registration on the ground of violation of Section 11(2) of the Companies Act as, in his opinion, the definition of the word "partner" u/s 2(23) of the Income Tax Act includes a minor who has been admitted to the benefits of partnership. However, the other ground of want of signature of the guardian of minors on the partnership deed was not accepted and a direction was issued that opportunity should be given to the assessee-firm to amend the partnership deed in view of the circular of the Central Board of Direct Taxes dated March 19, 1976. Tne assessee-firm thereafter had taken the matter in appeal before the Income Tax Appellate Tribunal, Allahabad, who allowed the appeals. The Appellate Tribunal held that a minor cannot become a partner although, with the consent of adult partners, he can be admitted to the benefits of the partnership and as such minors cannot be taken into consideration for finding out whether there has been contravention of Section 11(2) of the Companies Act, As observed earlier, the Appellate Tribunal has referred the aforesaid two questions at the instance of the Department for the opinion of this court.

The Act has adopted the definitions of "firm", "partner" and "partnership" given in the Indian Partnership Act. Section 2(23) of the Act is quoted below :

"(23) ''firm'', ''partner'' and ''partnership'' have the meanings respectively assigned to them in the Indian Partnership Act, 1932 (9 of 1932) ; but the expression ''partner'' shall also include any person who, being a minor, has been admitted to the benefits of partnership."

According to Section 4 of the Indian Partnership Act, partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The persons who have entered into partnership are individually called partners and collectively a firm and the name under which the business is carried on is called the firm name. Partnership is, as such, the result of a contract. A minor, not being competent to enter into a contract, is incapable of becoming a partner, although he can be admitted to the benefits of partnership. The Hon''ble Supreme Court, in Commissioner of Income Tax, Bombay Vs. Dwarkadas Khetan and Co., has laid down that in view of Section 30 of the Partnership Act, a minor cannot become a partner, although he may be admitted to the benefits of the partnership and a partnership deed, which makes a minor a full-fledged partner cannot be regarded as a valid document for the purpose of registration. Regarding the definition of "partner" given in Section 2(6B) of the Indian Income Tax Act, 1922, which is analogous to Section 2(23) of the Income Tax Act, 1961, according to which partner includes a minor who has been admitted to the benefits of partnership, the Hon''ble Supreme Court has observed that, (at page 533) "What the definition does is to apply to a minor admitted to the benefits of partnership all the provisions of the Income Tax Act applicable to partners . . . The definition is designed to confer equal benefits upon the minor by treating him as a partner ; but it does not render a minor a competent and full partner. For that purpose, the law of partnership must be considered, apart from the definition in the Income Tax Act."

Section 11(2) of the Companies Act prohibits the formation of a company, association or partnership consisting of more than 20 persons for the purpose of carrying on any business for gain unless it is registered as a company. Partnership being the result of a contract between the partners and a minor being incompetent to enter into a contract, only adult persons who constitute the partnership on. the basis of an agreement are to be taken into consideration for finding out whether a partnership consists of more than 20 persons and minors, not being partners, cannot be taken into account for the purpose of Section 11(2) of the Companies Act. As the assessee-firm consisted of 17 partners, it was legally entitled to be registered under the Act. In our opinion, the Appellate Tribunal was fully justified in allowing the appeals of the assessee.

Our answer to both the questions referred by the Tribunal in in the affirmative and in favour of the assessee.