1961 (8) TMI 61 - HC - Income Tax

Summary

Issues Involved
1. Entitlement to registration under section 26A of the Indian Income Tax Act.
2. Legality of a firm being a partner in another firm.
3. Specification of individual shares of partners in the instrument of partnership.
4. Liability of minors admitted to the benefits of the partnership.

Detailed Analysis

1. Entitlement to Registration under Section 26A of the Indian Income Tax Act
The primary question referred for decision was whether the assessee is entitled to registration under section 26A of the Indian Income Tax Act. The assessee had applied for renewal of registration, which was rejected by the Income Tax Officer, and the rejection was upheld by the Appellate Assistant Commissioner and the Income Tax Appellate Tribunal. The High Court examined whether the partnership deed dated December 12, 1953, fulfilled the conditions stipulated under section 26A.

2. Legality of a Firm Being a Partner in Another Firm
The court noted that the partnership deed in question purported to create a partnership between "Kylasa Sarabhaiah," a firm, and two individuals, Kolluri Sathaiah and Veeravalli Narayana. The Supreme Court in Dulichand Laxminarayan v. Commissioner of Income Tax had established that a firm is not an entity or "person" in law and cannot enter into a partnership with another firm or individual. Therefore, the court held that the partnership evidenced by the instrument dated December 12, 1953, is illegal and cannot be recognized under the Indian Partnership Act or the Indian Income Tax Act.

3. Specification of Individual Shares of Partners in the Instrument of Partnership
Section 26A requires the instrument of partnership to specify the individual shares of the partners. The court observed that the partnership deed did not specify the individual shares of the partners constituting the firm "Kylasa Sarabhaiah." The shares of the two adult partners, Kylasa Veeresalingam and Kylasa Nagendra Rao, were shown, but the shares of the five minors admitted to the benefits of the partnership were not specified. The court cited Kannappa Naicker & Co. v. Commissioner of Income Tax, which held that a partnership cannot be registered if the instrument does not specify the individual shares of the partners.

4. Liability of Minors Admitted to the Benefits of the Partnership
The court also addressed the issue of minors admitted to the benefits of the partnership. The partnership deed stipulated that profits or losses would be divided among the partners, including minors, which is not permissible under law. The Supreme Court in Commissioner of Income Tax v. Dwarkadas Khetan & Co. held that a minor cannot become a partner and can only be admitted to the benefits of the partnership. Any document that goes beyond this cannot be valid for registration under section 26A. Therefore, the court concluded that the firm could not be registered as the partnership deed did not comply with this legal requirement.

Conclusion
The High Court concluded that the assessee was not entitled to registration under section 26A of the Indian Income Tax Act for several reasons:
1. The partnership deed purported to create a partnership between a firm and individuals, which is not permissible.
2. The individual shares of the partners were not specified in the partnership deed.
3. The partnership deed improperly included minors as liable for losses, contrary to legal provisions.

The court answered the question referred to it against the assessee and held that the firm could not be registered under section 26A of the Indian Income Tax Act. The court also noted that the facts in R.C. No. 34/59 were similar and reached the same conclusion, denying registration under section 26A. No order as to costs was made in R.C. No. 34/59, but in R.C. No. 37/59, the assessee was ordered to pay the costs of the reference.