1997 (11) TMI 71 - HC - Income Tax

Summary

Issues Involved:
1. Consideration of evidence and material other than the partnership deed for ascertaining the shares of partners when a minor becomes major.
2. Binding nature of Instruction No. 1161 issued by the Central Board of Direct Taxes on the Commissioner of Income-tax while passing an order under section 263.
3. Legality of the Tribunal's modification of the Commissioner of Income-tax's order and direction to the Income-tax Officer for fresh inquiry based on the Board's instructions and the Allahabad High Court decision in Badri Narain Kashi Prasad v. Addl. CIT.

Detailed Analysis:

1. Consideration of Evidence and Material Other Than the Partnership Deed:

The court examined whether the Tribunal was legally correct in holding that evidence and material other than the partnership deed dated January 20, 1973, could be considered for ascertaining the shares of partners in profits and losses when a minor becomes major. The Tribunal relied on the Full Bench decision in Badri Narain Kashi Prasad [1978] 115 ITR 858 (All), which clarified that the phrase "constitution of the firm" refers to the identity of the partners as evidenced by the instrument of partnership. The court emphasized that upon a minor attaining majority and electing to continue as a partner, no change occurs in the constitution of the firm if the identity and number of partners remain the same. Therefore, no fresh partnership deed is required unless there is a change in the share ratio of profits and losses. The Tribunal concluded that other relevant materials could be considered to determine whether the minor agreed to share the losses upon attaining majority, thus affirming that the inquiry should not be confined to the original partnership deed alone.

2. Binding Nature of Instruction No. 1161:

The court addressed whether Instruction No. 1161, dated April 4, 1973, issued by the Central Board of Direct Taxes, was binding on the Commissioner of Income-tax. It was affirmed that instructions issued by the Central Board of Direct Taxes are binding on departmental authorities unless contrary to the statute. The Tribunal held that the instruction requiring the Assessing Officer to satisfy himself whether the minor upon attaining majority agreed to share losses and whether the share ratio had changed was not contrary to the provisions of the Act. This inquiry is necessary to safeguard public interest and ensure the correct application of the law regarding the continuation of registration.

3. Legality of Tribunal's Modification and Direction for Fresh Inquiry:

The court examined whether the Tribunal was correct in modifying the Commissioner of Income-tax's order and directing the Income-tax Officer to make a fresh inquiry. The Tribunal followed the Full Bench decision in Badri Narain Kashi Prasad and Instruction No. 1082 dated August 4, 1977, which stated that if a minor upon attaining majority agrees to share losses, it must be evidenced by a fresh partnership deed. The Tribunal directed the Assessing Officer to determine whether the minor agreed to share losses and if the share ratio had changed. The court upheld the Tribunal's view that the inquiry should consider the totality of circumstances and not be restricted to the original partnership deed alone.

Conclusion:

The court answered all three questions against the Revenue. It held that:
- Evidence and material other than the partnership deed could be considered for ascertaining the shares of partners when a minor becomes major.
- Instruction No. 1161 issued by the Central Board of Direct Taxes was binding on the Commissioner of Income-tax.
- The Tribunal was correct in modifying the Commissioner of Income-tax's order and directing the Income-tax Officer to make a fresh inquiry based on the Board's instructions and the decision in Badri Narain Kashi Prasad.