2002 (6) TMI 30 - HC - Income Tax

Firm - Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that firm, Suleman Khan and Mahaboob Khan and Co., Tobacco Exporters, Guntur, was entitled to claim registration for the relevant assessment years 1975-76, 1976-77 and 1977-78? - The provisions of section 11(2) of the Companies Act must be read in the context of and in harmony with sections 4 and 30 of the Partnership Act. The assumption of the department that the word person occurring in section 11(2) of the Companies Act takes in a minor also as a partner in a partnership was based on erroneous view of the law. As pointed out supra, the provisions of section 184(3) of the Act which provide that the application for registration should be signed by all the persons (not being minors), clearly suggests that under the Income-tax law, no minor can be a partner in a partnership firm as such. - we answer the question referred to us in the affirmative in favour of the assessee and against the Revenue.

Issues Involved:
1. Whether minors admitted to the benefits of a partnership should be considered as partners for determining the total number of partners under Section 11(2) of the Companies Act.
2. Whether the assessee-firm was entitled to claim registration for the relevant assessment years 1975-76, 1976-77, and 1977-78.

Detailed Analysis:

1. Consideration of Minors as Partners:

The primary issue was whether minors admitted to the benefits of a partnership should be counted as partners under Section 11(2) of the Companies Act, 1956. The Commissioner of Income-tax (CIT) argued that since the total number of partners exceeded 20, including minors, the firm was not validly constituted and should not have been granted registration. The CIT relied on Section 11(2) of the Companies Act, which prohibits the formation of a partnership consisting of more than 20 persons unless registered as a company.

The Tribunal, however, concluded that minors cannot be considered full-fledged partners. According to Section 30 of the Indian Partnership Act, a minor cannot be a partner but can be admitted to the benefits of the partnership. This interpretation was supported by several judicial precedents, including the Supreme Court's decision in CIT v. Dwarkadas Khetan and Co. [1961] 41 ITR 528, which held that a minor cannot become a partner, although he may be admitted to the benefits of the partnership.

The Tribunal's view was that the definition of "partner" in Section 2(23) of the Income-tax Act, 1961, which includes minors admitted to the benefits of a partnership, does not make minors full-fledged partners. This view was supported by precedents such as CIT v. Bhawani Prasad Girdhari Lal and Co. [1990] 186 ITR 518 (All), which held that 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.

2. Entitlement to Claim Registration:

The second issue was whether the assessee-firm was entitled to claim registration for the assessment years 1975-76, 1976-77, and 1977-78. The Tribunal held that the genuineness of the appellant-firm had never been doubted by the Income-tax Department, and the prescribed conditions for registration had been fulfilled. The Tribunal noted that the partnership was validly formed as the law did not prohibit competent individuals from entering into a contract of partnership.

Section 184 of the Income-tax Act, as it existed till March 31, 1993, required that the partnership be evidenced by an instrument and that the individual shares of the partners be specified in the instrument. The Tribunal concluded that the assessee-firm met these requirements and was therefore entitled to registration.

The Tribunal's decision was further supported by judicial precedents, including CIT v. Chandrika Enterprises [1992] 198 ITR 548 (Ker) and CIT v. Hotel Sriraj [1992] 198 ITR 570 (Karn), which held that minors admitted to the benefits of a partnership should not be counted as partners for the purpose of Section 11(2) of the Companies Act. These precedents reinforced the principle that a minor cannot be a partner but can be admitted to the benefits of the partnership, and thus should not be included in the count of partners.

Conclusion:

The High Court upheld the Tribunal's decision, agreeing that minors admitted to the benefits of a partnership should not be considered as partners for determining the total number of partners under Section 11(2) of the Companies Act. Consequently, the assessee-firm was entitled to claim registration for the relevant assessment years. The High Court answered the question referred to it in the affirmative, in favor of the assessee and against the Revenue, and disposed of the reference accordingly with no order as to costs.

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