1995 (10) TMI 31 - HC - Income Tax

Change In Constitution Of Firm, High Court, Minor Admitted To Benefits Of Partnership, Partnership Deed

Summary

Issues Involved:
1. Whether the assessee was entitled to the continuation of registration for the assessment years 1976-77 and 1977-78.
2. Whether the change in the profit/loss sharing ratios due to a minor attaining majority and becoming a partner necessitates a fresh registration under section 185 of the Income-tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Entitlement to Continuation of Registration:
The primary question was whether the Appellate Tribunal was correct in holding that the assessee was entitled to the continuation of registration for the assessment years 1976-77 and 1977-78. The Tribunal had initially allowed the continuation of registration based on the declarations in Form No. 12, which certified no change in the constitution of the firm. However, the Commissioner of Income-tax argued that the amendment in the partnership deed due to a minor attaining majority and becoming a full partner amounted to a change in the constitution of the firm, thus requiring fresh registration under section 185 of the Income-tax Act.

2. Change in Profit/Loss Sharing Ratios:
The Commissioner of Income-tax contended that the change in profit/loss sharing ratios, as evidenced by the supplementary agreement dated January 6, 1974, constituted a change in the firm's constitution. According to section 187(2) and section 184(8) of the Income-tax Act, any change in the shares of the partners necessitates a fresh application for registration. The Tribunal, however, relied on Board's circulars and previous judgments, concluding that the Income-tax Officer was justified in granting continuation of registration.

The Tribunal's decision was influenced by the circulars issued by the Board on March 20, 1969, and August 4, 1977, which stated that a new partnership deed might not be necessary if there was no change in the profit/loss sharing ratios. The Tribunal also referred to the judgments in *Ganesh Lal Laxmi Narain v. CIT* [1968] 68 ITR 696 and *CED v. Smt. Ram Sumarni Devi* [1984] 147 ITR 233 (sic), which supported the view that such changes did not necessitate fresh registration.

However, the court noted that the Full Bench of the Allahabad High Court in *Badri Narain Kashi Prasad v. Addl. CIT* [1978] 115 ITR 858 clarified that a change in the shares of the partners, even if a minor attains majority and becomes a full partner, does constitute a change in the constitution of the firm. This interpretation was supported by other judgments, including *Durgaprasad Rajaram Adatiya v. CIT* [1982] 134 ITR 601 (MP), *CIT v. Ghanshyam General Stores* [1984] 147 ITR 110 (MP), and *CIT v. Jai Durga Rice Mill* [1986] 159 ITR 807 (MP).

The court concluded that the induction of Om Prakash Goyal as a partner upon attaining majority indeed amounted to a change in the constitution of the firm. Therefore, the assessee was required to apply for fresh registration under section 185 of the Income-tax Act, 1961, for the assessment years 1976-77 and 1977-78.

Conclusion:
The reference was answered in favor of the Revenue, holding that the induction of a minor partner, Om Prakash Goyal, as a member of the partnership firm, constituted a change in the constitution of the firm, necessitating fresh registration.