1982 (12) TMI 34 - HC - Income Tax

Summary

Issues:
Validity of partnership deed admitting an adult member to the benefits of the partnership under the Income Tax Act, 1961.

Analysis:
The case involved a partnership firm consisting of two partners engaged in a business of kirana goods. The partners admitted their congenitally deaf and dumb brother to the benefits of the partnership by executing a deed on October 20, 1972, granting him one-third share in profits but exempting him from losses. The Income Tax Officer (ITO) refused registration under the Income Tax Act, stating that admitting an adult member to the benefits of the partnership is not recognized by law, rendering the partnership invalid for registration. The Appellate Tribunal, although agreeing with the invalidity of admitting an adult to partnership benefits, allowed the appeal on the grounds of setting apart profits for charitable purposes. The Tribunal directed the ITO to grant registration based on the partnership deed executed by the two competent partners.

The Department contended that the partnership deed was invalid in law as it admitted an adult to partnership benefits, not recognized by law, making it ineligible for registration. The assessee's counsel argued that mere sharing of profits does not make one a partner, citing legal precedents. The court observed that the partnership deed did not create a charity but admitted the deaf and dumb brother to partnership benefits, which is legally invalid. The court rejected arguments based on the transfer of assets from a Hindu Undivided Family (HUF) and provisions of the Partnership Act, as they lacked factual support and were not raised earlier.

The court highlighted that the Tribunal erred in allowing the appeal on the ground of charitable intent, as the deed did not reserve a small portion of profits for charity but allocated an equal share to the deaf and dumb brother. Legal precedents cited by the assessee's counsel were distinguished based on the nature of partnership arrangements. The court emphasized that for registration under the Income Tax Act, a partnership must be legally valid, and a deed admitting an adult to partnership benefits is invalid. Consequently, the court ruled in favor of the Department, holding the partnership deed ineligible for registration under the Act.

In conclusion, the court answered the reference question in the negative, favoring the Department and rejecting the registration of the partnership deed. No costs were awarded in the case.