Commissioner of Income Tax vs Shankar Cottons

Thanikkachalam, J.—As per the directions of this Court under s. 256(2) of the IT Act, 1961 (in short, ""the Act""), the Tribunal referred the

following two questions for the opinion of this Court :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the admission of one Miss A. Gita, major, to

the benefits of partnership would not make the partnership as ''illegal'' or ''invalid'' and, hence, the assessee''s claim for registration of the firm

cannot be denied by the ITO ? and

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in overlooking the fact that the partnership deed and

Form No. 11 have not been signed either by the guardian of Miss Gita, or by Miss Gita herself even though she is a major and that this will vitiate

the application for registration and rr. 22(2) (i) and 22(5) of the IT Rules, 1962 ?

The assessee is a partnership-firm, called Shankar Cottons, Coimbatore. The assessee filed an application for registration of the firm for the

asst. yr. 1975-76. The partnership was constituted under a deed, dt. 21st April, 1974, to carry on the business in partnership as brokers and

agents for textile mills and such other business as agreed upon between them mutually. The partnership firm consists of two partners, viz., P. S.

Ramachandran and S. N. Ramachandran, each having 12-1/2 per cent share in profit and 50 per cent in loss. Miss Gita, Master Ramani and

Master Shankar were admitted to the benefits of the partnership with 25 per cent of share in profit for each of the minors. Miss A. Gita is aged

about 21 years. She has been treated as a minor because she was deaf and dumb person. Since a minor alone can be admitted to the benefits of

the partnership, the ITO came to the conclusion that the partnership is invalid and, accordingly, he refused to grant registration and assessed the

entity as an AOP.

On appeal, the AAC held that the mere fact that the two partners, viz., P. S. Ramachandran and S. N. Ramachandran, by mutual consent agreeing

to give a share in the profits to an adult, Miss Gita, who is incapable of entering into any contract would not make the partnership invalid and would

not disentitle the partnership to the benefits of registration. Accordingly, direction was given to the ITO to grant registration.

Aggrieved, the Department was in appeal before the Tribunal. The Tribunal agreed with the view taken by the AAC in granting registration to the

assessee-firm, since, according to the Tribunal, there is no prohibition in the Indian Partnership Act, 1932, for admitting a major to the benefits of

the partnership.

The point for consideration is as to whether a major can be admitted to the benefits of the partnership. In the present case, one of the daughters

of one Mr. Aghoram Iyer, Miss A. Gita, aged about 21 years, was admitted to the benefits of the partnership since she happens to be a deaf and

dumb person. A deaf and dumb person cannot be admitted to the benefits of the partnership as per the provisions of s. 30 of the Indian

Partnership Act, 1932. Sec. 6 of the Indian Partnership Act, 1932, determines the mode of existence of the partnership. Expln. 2 to s. 6 of the

Indian Partnership Act states, who are all the persons who can receive a share in the profit of the partnership business without making them as

partners. Sec. 30 of the Indian Partnership Act states that 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 the partnership. Therefore, s. 30

of the Indian Partnership Act provides that a minor cannot be a partner in a firm, but a minor can be admitted to the benefits of the partnership with

the consent of all the partners.

A similar question came up for consideration before the Andhra Pradesh High Court in the decision reported in Commissioner of Income Tax,

Andhra Pradesh Vs. B. Pandaiah and Company, , wherein while considering the provisions of s. 184 of the IT Act, 1961, the Andhra Pradesh

High Court held : ""that X and Y admitted their brother, Z, who was a congenitally deaf and dumb person to the benefits of a partnership. The

partnership deed, dt. 20th Oct., 1972, was executed giving one-third share to Z, only in the profits, but making him not liable for losses, that the

profits set apart for a deaf and dumb brother being one-third share, it cannot be said to be a negligible portion set apart for charity, and that even

though the object of the partners in admitting the deaf and dumb brother to the benefits was a laudable one, in view of the fact that the partnership

deed itself was invalid, the firm was not entitled to registration"".

Before the Andhra Pradesh High Court, two decisions were relied upon viz., (1) COMMISSIONER OF Income Tax U. P. Vs. R. S. SHOE

FACTORY., and (2) MANOHAR DAS KEDAR NATH Vs. COMMISSIONER OF Income Tax, ALLAHABAD., in order to support the

contention put forward on behalf of the assessee that merely by giving a share in the profits the deaf and dumb person did not become a partner.

According to the facts arising in Manohar Das Kedar Nath vs. CIT (supra), four brothers entered into a partnership and they together took 15

annas share out of 16 annas. The remaining one anna share was left for charity. The registration was refused by the Department on the ground that

the charity cannot be taken as a partner. When the matter came up before the Allahabad High Court, it was held that : ""the partnership deed

merely provided that one-sixteenth share of the profits will not be distributed between the partners, but would be kept in a separate charity fund"".

On a correct interpretation of the document, the High Court held that it is open to the partners of a business to agree not to take the whole profits

of the partnership for their personal use and to reserve a part of the profits for charitable purposes and that is exactly what the partners had done in

that case. It was, therefore, held that the partnership was entitled to registration. But that is not the case here.

According to the facts arising in R. S. Shoe Factory''s case (supra), three persons had agreed to form a partnership out of whom C was not to

invest any moneys, but was to be a working partner only. His share was fixed at three annas and he was liable to be dismissed by A and B in case

of disobedience. The working partner was also not entitled to carry on the business or to interfere with the conduct of business. The registration

was refused by the Department; but the Tribunal held that there was a genuine partnership. The High Court confirmed the said finding. But, it is not

a case of admitting an adult member to the benefits of partnership. The working partner was equally liable for the losses along with profits.

Therefore, the Andhra Pradesh high Court in CIT vs. B. Pandaiah & Co. (supra) came to such a conclusion. After considering the aforesaid two

decisions, the Andhra Pradesh High Court was of the view that ""the object of the two partner-brothers was laudable inasmuch as they wanted to

provide some income to their deaf and dumb brother and that, therefore, the Tribunal''s order is unsustainable for the reasons given above.

Whether the share in the profits given to the deaf and dumb brother was in the nature of charity and whether such a charity should, in the

circumstances, have been provided to the extent of one-third of the profits of the firm were all questions which have not been investigated at any

stage. The Tribunal was in error in discovering the said ground at the stage of arguments and making it the basis for allowing the appeal"".

Our attention was also drawn to another decision of the Allahabad High Court in Rajendra Nath Vs. Commissioner of Income Tax, , wherein it

was held that s. 30 of the Partnership Act which provides for admission of a minor to the benefits of partnership, does not apply or extend to a

person of unsound mind. There is no other provision of law whereunder a person of unsound mind can be admitted to the benefits of partnership. If

he is admitted as a partner, he would also be liable for losses.

According to the facts arising in the case, the Tribunal was of the view that there is no provision in the Partnership Act, which makes a

partnership illegal or invalid, when a major is admitted to the benefits of the partnership. A partnership becomes illegal when its object is forbidden

by law or is immoral or opposed to public policy or if permitted it would defeat the provisions of any law. None of these features existed when the

major was admitted to the benefits of partnership. So, the partnership could not be said to be illegal or invalid. But it remains to be seen that under

the provisions of s. 30 of the Indian Partnership Act, 1932, a minor alone can be admitted to the benefits of partnership, with the consent of all the

partners. If a minor is admitted to the benefits of partnership, he would not be saddled with the losses of the firm. Sec. 6 of the Indian Partnership

Act, 1932, particularly, Expln. 2 to s. 6 of the Partnership Act says that the receipt by a person of a share of the profits of a business, or of a

payment contingent upon the earning of profits or varying with the profits earned by a business, does not of itself make him a partner along with the

persons carrying on the business. It would mean that a major cannot be admitted to the benefits of partnership. Admitting a major as a partner to

the benefits of partnership was impliedly prohibited under s. 30 of the Indian Partnership Act, 1932.

In view of the abovesaid legal position, we are unable to subscribe to the view taken by the Tribunal in holding that the assessee-firm herein is

also entitled to registration under s. 184 of the IT Act, 1961, even though a major was admitted to the benefits of partnership. Accordingly, we

answer question No. 1 referred to us in the negative and in favour of the Department. In so far as question No. 2 is concerned, it does not arise

out of the order of the Tribunal. There will, however, be no order as to costs.