1997 (2) TMI 12 - SC - Income Tax

Minor admitted to benefits of partnership - registration - held that firm is entitled to registration as in the schedule attached to the application of registration the ratio in which the major partners will bear the losses has been clearly mentioned

Summary

Issues Involved:
1. Validity of the partnership deed with a minor admitted to the benefits of partnership.
2. Entitlement to registration under Section 184 of the Income-tax Act, 1961.
3. Interpretation of the partnership deed regarding the sharing of losses.

Detailed Analysis:

1. Validity of the Partnership Deed with a Minor Admitted to the Benefits of Partnership:

The appellant, Progressive Financers, a partnership firm, was formed on July 1, 1967, with five partners, including a minor, Sunitha Pratap, admitted to the benefits of the partnership. The Income-tax Officer (ITO) rejected the application for registration, arguing that the partnership deed indicated Sunitha was a full partner, which would render the contract void ab initio. This conclusion was based on several points: the deed was signed by Sunitha's guardian, she contributed the maximum capital, and the deed did not specify how losses were to be apportioned.

2. Entitlement to Registration under Section 184 of the Income-tax Act, 1961:

For the assessment year 1968-69, the firm applied for registration under Section 184. The ITO rejected this application and treated the firm as an association of persons. The Appellate Assistant Commissioner (AAC), however, allowed the appeal, referencing the Andhra Pradesh High Court decision in Addepally Nageswara Rao and Brothers v. CIT, which held that the minor was only admitted to the benefits of the partnership and not liable for losses. The Income-tax Appellate Tribunal (ITAT) upheld this view, stating that the minor was not a full-fledged partner and the firm was entitled to registration.

3. Interpretation of the Partnership Deed Regarding the Sharing of Losses:

The High Court, however, referred to decisions from the Gujarat and Kerala High Courts, which required specific provisions for sharing losses in the partnership deed. It held that the decision in Mandyala Govindu and Co. v. CIT applied, and since it was not possible to determine how losses were to be shared among the remaining partners, the firm was not entitled to registration. The High Court thus ruled in favor of the Revenue.

Supreme Court's Reasoning and Judgment:

The Supreme Court examined the legal position and previous judgments, including Rao Bahadur Ravulu Subba Rao v. CIT and Patel (N. T.) and Co. v. CIT, which emphasized that the deed of partnership must be reasonably construed. The Court noted that the Assessing Officer should not reject an application merely because the shares of the partners are not expressly specified if they can be reasonably ascertained.

Referring to Mandyala Govindu and Co., the Court noted that even if the shares in losses are not specified, they could be inferred from the application and accompanying documents. The Court also referenced Parekh Wadilal Jivanbhai v. CIT, which allowed for a reasonable construction of the partnership deed in the context of relevant circumstances.

In this case, the partnership deed clearly stated the proportion of capital contribution and profit sharing, and the application for registration provided the necessary details. The Court found that the losses were to be shared among the major partners in proportion to their capital contributions, which was consistent with the legal principles and the details in the application.

Conclusion:

The Supreme Court held that the partnership deed, when reasonably construed, did provide for the sharing of losses among the major partners. The application for registration fulfilled the conditions of Section 184, and the ITO should have granted registration. The High Court's view was incorrect. The appeals were allowed, the High Court's judgment was set aside, and it was held that the appellant was entitled to registration for the assessment year 1968-69 and renewal/continuation of registration for the assessment years 1969-70 and 1970-71. Each party was to bear its own costs.