1979 (8) TMI 36 - HC - Income Tax

Summary

Issues Involved:
1. Justification of Income-tax Officer's (ITO) cancellation of registration under section 186(1) for assessment years 1965-66, 1966-67, and 1967-68.
2. Validity of the partnership deed after minors attained majority.
3. Applicability of previous legal precedents and decisions.
4. Interpretation of the term "genuine firm" under section 186(1).

Detailed Analysis:

1. Justification of Income-tax Officer's (ITO) cancellation of registration under section 186(1) for assessment years 1965-66, 1966-67, and 1967-68:
The ITO canceled the registration of the assessee-firm for the assessment years 1965-66 to 1967-68 under section 186(1) of the Income-tax Act, 1961. The reason for this action was that the minors, who were initially admitted to the benefits of the partnership, had attained majority by March 31, 1964, and no fresh partnership deed was executed thereafter. The ITO opined that the assessee-firm should have applied for fresh registration instead of claiming continuance of registration, as the firm was not constituted under a valid partnership deed after the minors attained majority.

2. Validity of the partnership deed after minors attained majority:
The partnership deed executed on March 10, 1963, included provisions for the minors to continue as partners upon attaining majority, each with a share of 25 np. in the rupee in the net profits and losses of the firm. However, the deed did not specify the proportion in which the adult partners were to share the losses after the minors became majors. Additionally, the minors attained majority on different dates, creating a period where one was a major and the other remained a minor, with no provision for loss sharing during this interval.

3. Applicability of previous legal precedents and decisions:
The Appellate Assistant Commissioner (AAC) relied on the decision in Sheonath Prasad Motilal v. ITO [1963] 47 ITR 493 (All), which held that registration under section 186 could not be canceled merely due to an omission or defect in the application or deed of partnership. However, the Tribunal found this decision inapplicable as it was rendered under rule 6B of the Indian I.T. Rules, 1922. The Tribunal instead relied on the decisions in Ganesh Lal Laxmi Narain v. CIT [1968] 68 ITR 696 (All) and Ram Narain Laxman Prasad v. ITO [1972] 84 ITR 233 (All), which required a fresh application for registration when a minor attains majority. These decisions were later overruled by a Full Bench in Badri Narain Kashi Prasad v. Addl. CIT [1978] 115 ITR 858 (All), which clarified that no change occurs in the constitution of the firm under the Act when a minor becomes a major and opts to become a partner.

4. Interpretation of the term "genuine firm" under section 186(1):
Section 186(1) allows the ITO to cancel the registration of a firm if he opines that no genuine firm existed during the previous year as registered. The term "genuine firm" requires the firm to be in existence, carrying on business, and the identity of the partners and their shares to be as specified in the instrument of partnership. The Supreme Court decision in Mandyala Govindu & Co. v. CIT [1976] 402 ITR 4 emphasized the necessity of specifying the shares in losses in the partnership deed. In the present case, the inability to ascertain the shares of the adult partners in the losses after the minors attained majority indicated that the firm was not constituted as registered, justifying the ITO's cancellation of registration.

Conclusion:
The court concluded that the ITO was justified in canceling the registration of the assessee-firm for the assessment years 1965-66, 1966-67, and 1967-68 under section 186(1) of the Income-tax Act, 1961. The partnership deed failed to specify the loss-sharing proportions after the minors attained majority, and the firm did not apply for fresh registration, leading to the conclusion that no genuine firm existed as registered. The question of law was answered in the affirmative, in favor of the department, and against the assessee. The department was awarded costs of Rs. 200.