Withdrawl of instruction No.1161-Status of partnership in eventuality of minor becoming major. - Income Tax - 1426/CBDT

INSTRUCTION NO. 1426/CBDT Dated: November 16, 1981 Attention is drawn to the Board's Instructions No.1082 dated 4-8-77 wherein it was clarified that the execution of a fresh instrument of partnership on attaining majority of a minor and opting to become a partner is merely a technicality and that the firm is entitled to the continued benefit of registration originally granted on the basis of the earlier partnership deed, provided there has not been a change in the shares of the partners as evidenced by the said instrument of partnership. In para 3 thereof it was further clarified that the condition of no change in the shares of the partners could be satisfied only when the said deed of a partnership suggested the manner in which losses should be allocated among the partners including the minor who has since become a full fledged partner. In other words unless the shares of the partners in losses as a result of the minor becoming major could be ascertained from the instrument of partnership the firm cannot be allowed continuation of registration on the basis of such deed as there will be change in the share of the partners. The said instruction was explained subsequently vide Instruction No.1161 dated 4-4-78 . It was clarified subsequently vide Instruction No.1161 dated 4-4-78. It was clarified therein that there is no presumption under any provisions of the Partnership Act under which a minor electing to be a full fledged partner on ataining majority ipso facto becomes liable to share in losses also and that in case losses are borne in entirety by only some of the partners the partnership deed would still be a valid one. Reasoning for that was that section 30(7)(b) of the Partnership Act read with sec.4 thereof makes it clear that when a minor elects to continue as a partner he shares in profits only unless it is agreed among the partners that the minor on attaining majority should share in loses also. 2. Instruction No.1161 has been reconsidered in the light of the decisions of the Allahabad High Court in Badrinarayan Kashi Prasad Vs. Addl.CIT(115 ITR 858) and of Madhya Pradesh High Court in Durga Rajaram Aratia Vs. CIT [(1981) 21 CIR (MP)4]. The relevant observations of the Allahabad High Court are extracted hereunder: Under S.30(1) and (2) of the Indian Partnership Act, a minor cannot be a partner. He can be admitted to the benefits of the partnership. On attaining majority if he so elects, he u/s.30(5) becomes a partner. His share is the same to which he was entitled as a minor-vide S.30(7)(b). He shares in losses also. The second part of the enquiry is whether there has been a change in the shares of the partners as evidenced by the instrument of partnership. Where the instrument foresees the eventuality of a minor becoming major and makes provision for the distribution of the shares at that time, the instrument evidences the changes in the shares. But if the ITO is unable to ascertain the shares from the instrument it will be a case where the instrument does not evidence the change. A minor is not liable to share in the losses though he is entitled to share in the profits. The share of the loss relatable to the share of the minor has hence to be provided for. The redistribution of the shares in loss on the minor attaining majority has also to be ascertained. If on a reasonable construction of the instrument of partnership these matters cannot be ascertained it will be a case where the instrument of partnership does not evidence the change in the shares. 3. In view of the above decision the legal position now is that the minor on his election to become the full-fledged partner would start sharing losses also. Accordingly Instruction No.1161 is withdrawn. The revised instruction will apply in relation to the change in the constitution of the firm as a result of a minor becoming major during the previous year relevant to the assessment year 1982-83 and later assessment years. 4. The instructions may be brought to the notice of all the officers working in your charge.