1980 (1) TMI 55 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Tribunal was justified in law in refusing registration to the firm.

Issue-Wise Detailed Analysis:

1. Refusal of Registration to the Firm:
The primary question referred to the court under Section 256(1) of the Income Tax Act, 1961, was whether the Tribunal was justified in refusing registration to the firm. The relevant assessment year was 1968-69, with the previous year being Deewali Samvat, 2023. The assessee-firm filed an application in Form No. 11 on October 30, 1961, and a subsequent application in Form No. 11A on June 28, 1969, along with a memorandum of agreement dated October 30, 1967, seeking condonation of delay.

Partnership Deed and Minor's Attainment of Majority:
The partnership, constituted of four partners and a minor admitted to the benefits of the partnership, specified profit and loss sharing in clause 9 of the partnership deed. The minor, Ved Prakash Sarmah, attained majority on August 31, 1967. The Income Tax Officer (ITO) held that although Ved Prakash attained majority during the relevant previous year, he only became a full partner from November 1, 1967. The ITO refused registration, deeming the firm not genuine, as Ved Prakash remained a minor for the whole previous year.

Appellate Authorities' Findings:
The Appellate Assistant Commissioner (AAC) reversed the ITO's decision, granting registration based on Section 30(5) of the Indian Partnership Act, noting that Ved Prakash continued as a minor within the six-month period of attaining majority. However, the Income Tax Appellate Tribunal restored the ITO's order, holding that Ved Prakash did not opt to become a partner during the period from September 1, 1967, to October 31, 1967, and thus registration could not be granted.

Legal Provisions and Supreme Court Observations:
The court examined Sections 184 and 185 of the Income Tax Act, noting that strict compliance with these provisions is necessary to prevent bogus firms from benefiting from registration and to precisely locate individual partners' shares. The Supreme Court's observations in Ravulu Subba Rao v. CIT highlighted that registration confers significant benefits, such as lower tax rates for individual partners.

Conditions for Registration:
For registration under Section 185, the firm must lodge an application before the end of the accounting year, be evidenced by an instrument specifying individual shares, and be valid and genuine. The ITO's jurisdiction is limited to verifying compliance with these conditions and the firm's existence, not rejecting genuine applications.

Tribunal's Oversight:
The Tribunal did not find the firm to be bogus or non-compliant with the Act and Rules. The refusal was based solely on Ved Prakash's attainment of majority and his subsequent actions. The court noted that under Section 30 of the Indian Partnership Act, a minor admitted to the benefits of a partnership has six months from attaining majority to elect to become a partner or repudiate the partnership. If no public notice is given, the minor becomes a partner by default.

Conclusion and Directions:
The court found that the Tribunal overlooked the provisions of Section 30 of the Partnership Act and did not consider whether the firm was bogus or had no legal existence. The refusal of registration was beyond the Tribunal's jurisdiction. The court answered the question in the negative, against the revenue, and directed the Tribunal to reconsider the case within its jurisdiction, focusing on the application's conformity with the Rules and the firm's genuineness.

The judgment was to be sent to the Appellate Tribunal for necessary orders, and the assessee was entitled to costs assessed at Rs. 300.