1981 (9) TMI 69 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the partnership firm during the accounting year.
2. Jurisdiction of the Income-tax Officer (ITO) to rectify defects in the partnership deed.

Detailed Analysis:

1. Validity of the Partnership Firm During the Accounting Year

The primary issue is whether a valid partnership firm existed during the accounting year relevant to the assessment year 1967-68. The partnership firm, M/s. Singh Brothers and Company, initially constituted by an instrument dated October 31, 1962, was reconstituted by a deed dated January 7, 1967, following the death of a leading partner. The new deed admitted a minor, Girdhar, as a full-fledged partner with a 40% share in profits and losses. However, under Section 30 of the Indian Partnership Act, 1932, a minor cannot be a full-fledged partner but can only be admitted to the benefits of the partnership.

The Tribunal held that the partnership deed dated January 7, 1967, was invalid because it violated Section 30 by admitting a minor as a full partner. Consequently, there was no valid partnership during the accounting year, and the ITO was correct in refusing registration under Section 184 of the Income-tax Act.

2. Jurisdiction of the Income-tax Officer to Rectify Defects in the Partnership Deed

The second issue concerns whether the ITO has the jurisdiction to rectify defects in the partnership deed. The assessee argued that the ITO should have allowed them to rectify the defects in the partnership deed as per Section 185(2) of the Income-tax Act. However, the Tribunal held that Section 185(2) pertains to defects in the application for registration, not in the partnership deed itself.

The rectification deed dated December 2, 1969, which sought to correct the invalid partnership deed with retrospective effect, was not considered valid for the accounting year 1966-67. The Tribunal cited the Supreme Court's decisions in N. T. Patel & Co. v. CIT and Mandyala Govindu & Co. v. CIT, which held that a deed of rectification executed after the accounting year could not validate the original invalid deed. Therefore, the ITO could not register the firm based on the rectified deed.

Conclusion:

1. Invalidity of the Partnership Deed: The partnership deed dated January 7, 1967, was invalid as it violated Section 30 of the Indian Partnership Act by admitting a minor as a full partner. Consequently, there was no valid partnership during the accounting year 1966-67.

2. Rectification Beyond Accounting Year: The deed of rectification dated December 2, 1969, executed after the accounting year, could not validate the original invalid deed. Therefore, the ITO had no jurisdiction to register the firm based on the rectified deed.

3. Jurisdiction of the ITO: The ITO's jurisdiction under Section 185(2) is limited to rectifying defects in the application for registration, not in the partnership deed. Hence, the Tribunal was correct in upholding the refusal of registration for the assessment year 1967-68.

The judgment concludes in favor of the revenue, affirming that the assessee was not entitled to registration for the assessment year 1967-68.