1985 (6) TMI 90 - AT - Income Tax

Summary

Issues Involved:
1. Reconstitution of firms and registration under the Income Tax Act.
2. Validity of partnership deeds involving minors.
3. Interpretation of partnership deeds concerning minors' involvement.
4. Applicability of legal precedents and statutory provisions.

Detailed Analysis:

1. Reconstitution of Firms and Registration Under the Income Tax Act:
The firms underwent reconstitution twice in the accounting year relevant to the assessment year 1980-81. The first reconstitution occurred on 1st Jan 1979, and the second on 2nd July 1979. The governing partnership deeds for these firms were similar, and the appeals were filed against the orders of the CIT(A) Belgaum, who confirmed the refusal of registration by the ITO.

2. Validity of Partnership Deeds Involving Minors:
The ITO refused registration on the grounds that minors were made full-fledged partners under the latest partnership deeds. The ITO applied the ratio of the Calcutta High Court in CIT vs. Khetan & Co., which held that a minor cannot be a full-fledged partner as it is prohibited by law. The Karnataka High Court in CIT vs. Jagadish Jakati & Co. also adopted a similar view. The ITO's decision was based on the fact that the minors were made to share the losses, which is prohibited under the Partnership Act.

3. Interpretation of Partnership Deeds Concerning Minors' Involvement:
Clause 8 of the partnership deeds stipulated the profit and loss sharing ratios for partners 9 to 12, who were described as guardians of their respective wards. The deeds did not explicitly state that the minors would only share in the profits and not the losses. The CIT(A) confirmed the ITO's refusal of registration, stating that the deeds made it clear that the minors were responsible for the business results and that their insolvency would affect the firm's continuation. The CIT(A) concluded that the minors were made liable for both profits and losses, which is prohibited.

4. Applicability of Legal Precedents and Statutory Provisions:
The Tribunal considered various legal precedents, including Supreme Court decisions in CIT vs. Bhagyalakshmi & Co., CIT vs. A. Abdul Rahim & Co., and CIT vs. Dwarkadas Khetan & Co. The Tribunal noted that a partner might represent a minor as a benamidar, and the partnership deed should be interpreted to determine the actual partners. The Tribunal distinguished the present case from the Karnataka High Court decision, stating that the guardians were the partners, not the minors. The Tribunal held that the guardians, being majors, were the partners, and their responsibility to account for profits to their wards was outside the partnership arrangement.

Conclusion:
The Tribunal concluded that the assessee firms were entitled to registration because the guardians, who were majors, were the partners. The minors were not considered partners under law or fact. The appeals were allowed, and the orders of the lower authorities were set aside.