1984 (11) TMI 53 - HC - Income Tax

Summary

Issues Involved:
- Validity of the partnership deed dated December 19, 1974
- Retrospective effect of the partnership deed
- Minor's liability for partnership losses
- Entitlement to registration under section 185 of the Income-tax Act, 1961

Issue-wise Detailed Analysis:

Validity of the Partnership Deed Dated December 19, 1974:
The court examined whether the partnership deed executed on December 19, 1974, was legally valid. The deed included Prabhakar Gupta, who had attained majority by the date of execution. The court held that, since Prabhakar Gupta was a major and competent to contract, there was nothing illegal about the deed. The court referenced the Bombay High Court decision in CIT v. R. Dwarkadas & Co., which supported the view that a major could undertake responsibilities retroactively for the period he was a minor. Consequently, the court concluded that the partnership deed dated December 19, 1974, did not suffer from any legal infirmity.

Retrospective Effect of the Partnership Deed:
The court addressed whether clause 14 of the partnership deed dated December 19, 1974, had a retrospective effect from April 1, 1974. The clause stated that the accounts of the partnership from April 1, 1974, shall be closed to profit and loss for the first time on March 31, 1975. The court clarified that this did not imply that the partnership deed had retrospective effect. Instead, it merely specified the accounting period for profit and loss ascertainment. The court rejected the Tribunal's finding that the partnership deed should be deemed effective from April 1, 1974.

Minor's Liability for Partnership Losses:
The court examined whether Prabhakar Gupta, as a minor, could be held liable for partnership losses incurred between April 1, 1974, and October 30, 1974. It was argued that profits or losses accrue only when accounts are closed, which in this case was on March 31, 1975. The court held that, since Prabhakar Gupta was a major on March 31, 1975, he was competent to share any losses. The court cited the Supreme Court decision in CIT v. Ashokbhai Chimanbhai, which established that profits or losses accrue when accounts are closed, not from day to day. Therefore, the question of the minor bearing any losses during his minority did not arise.

Entitlement to Registration under Section 185 of the Income-tax Act, 1961:
The court evaluated whether the firm was entitled to registration under section 185 of the Income-tax Act, 1961. It was noted that the Income-tax Officer's jurisdiction was limited to verifying the genuineness of the firm and its constitution as specified in the instrument. The court found no dispute regarding the genuineness of the firm or its constitution as per the deed dated December 19, 1974. The Income-tax Officer's reasoning that the deed was invalid because it retrospectively imposed losses on a minor was rejected. The court held that the firm was bound to be registered under section 185, and the Tribunal erred in rejecting the assessee's claim for registration.

Conclusion:
The court concluded that the partnership deed dated December 19, 1974, was valid, did not have retrospective effect, and did not impose any illegal obligations on the minor. Consequently, the assessee-firm was entitled to registration under section 185 of the Income-tax Act, 1961. The question referred was answered in the affirmative, in favor of the assessee and against the Revenue. The Revenue was directed to pay the costs of the assessee, with an advocate's fee of Rs. 500.