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TMI Blog2002 (6) TMI 446X X X X Extracts X X X X X X X X Extracts X X X X ..... s (20 adults + 3 minors) during each of the above three assessment years and that since the total number of partners exceeded 20, the Commissioner thought that the firm was not validly constituted and the ITO had committed a serious illegality in granting registration. So opining, the Commissioner issued notice to the assessee-firm to show cause why the orders passed by the ITO under section 185(1)( a ) of the Act and assessment orders passed under section 143(3) of the Act for the relevant assessment years should not be cancelled under section 263 and why the ITO be directed to redo assessment for the aforementioned three years. The assessee-firm responded to the above notice and in its reply it raised a number of contentions including the contention that the Commissioner has no jurisdiction to cancel registration granted by the ITO. The main question that arose for consideration before the Commissioner was whether the minors admitted to the firm as partners should be taken into consideration for determining whether the assessee-firm had more than 20 partners during the relevant assessment years. The Commissioner concluded that the assessee-firm had more than 20 partners including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eness of the appellant-firm has never been doubted by the Income-tax Department. It has never been the contention of the department in the course of this litigation that the prescribed conditions have not been fulfilled. Hence, the partnership must be held to have been validly formed as the law did not at the relevant time prohibit any one, otherwise competent to contract, from entering into a contract of partnership. The application made for registration complies with the requirements of section 185 of the Income-tax Act and the rules framed thereunder." In view of the above opinion, the Tribunal concluded that the ITO was bound to register the partnership for the relevant assessment years. In that view of the matter, the Tribunal quashed the orders of the Commissioner for the three assessment years. 5. We have heard Sri J.V. Prasad, the learned standing counsel for the Income-tax Department and Sri A. Satyanarayana, the learned counsel for the respondent-assessee. The learned counsel reiterated the same contentions that were urged before the Tribunal noticed above before us also in this reference. 6. Section 184 of the Act, as existed till 31-3-1993, laid down that an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isted of more than 20 partners in contravention of section 11(2) of the Companies Act and the partnership deed was not signed by the guardian of the minors. On appeal by the assessee-firm, the Commissioner (Appeals)-II, Kanpur, upheld the cancellation of the registration by the ITO and dismissed the appeals. The assessee-firm took the matter in appeal to the Tribunal. The Tribunal allowed the appeals holding that a minor cannot become a partner although, with consent of the adult partners, he can be admitted to the benefits of the partnership, and as such minors cannot be taken into consideration for finding out whether there has been contravention of section 11(2). On reference, the Allahabad High Court held "Section 11(2) of the Companies Act prohibits the formation of a company, association or partnership consisting of more than 20 persons for the purpose of carrying on any business for gain unless it is registered as a company. Partnership being the result of a contract between the partners and a minor being incompetent to enter into a contract, only adult persons who constitute the partnership on the basis of an agreement are to be taken into consideration for finding out w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92] 198 ITR 548 1 (Ker.), the assessee-firm consisted of 14 partners and 7 minors who were admitted to the benefits of partnership. The ITO took the view that the minors admitted to the benefits of the partnership, in view of the definition of partner in section 2( 23 ), were also full-fledged partners and so the partnership must be held to consist of more than 20 persons as partners and since section 11(2) of the Companies Act prohibited formation of a partnership consisting of more than 20 persons, the application filed by the firm for registration under section 184, was not maintainable. The Commissioner (Appeals) reversed the order of the ITO and directed him to grant registration to the assessee-firm. The Tribunal affirmed the order of the Commissioner (Appeals). On reference, the Kerala High Court held "The common law principle that a minor, not being competent to enter into a contract, is incapable of becoming a partner, is not altered by the Income-tax Act. On the other hand, that the said principle has been recognized by that Act is clear from the provisions contained in sub-section (3)( a ) of section 184. This sub-section says that the application for registration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... number of minors who have been admitted to the benefits of the partnership will have to be excluded. . . ." (p. 571) 14. In Dwarkadas Khetan Co. s case ( supra ), on 27-3-1946, an instrument of partnership was executed by four persons, one of them being a minor. The minor was admitted as a full partner and he was a signatory to the instrument though his natural guardian also signed it. Not only was he entitled to a share in the profits, he was also liable to bear all the losses including the loss of capital. All the four persons were to attend to the business and if consent was needed, all the persons including the minor, had to give their consent in writing. The minor was also entitled to manage the affairs of the firm, including inspection of the books of account and was given right to vote, if a decision on votes had to be taken. In the background of the facts of that case, the Supreme Court held that the partnership deed, in which the minor was admitted as a full partner, was not valid and could not be registered under section 26A of the Income-tax Act. The Supreme Court having found divergent opinions between the Bombay, Madras and Patna High Courts on one hand and Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out in it. If the income-tax authorities register the partnership as between the adults only contrary to the terms of the document, in substance a new contract is made out. It is not open to the income-tax authorities to register a document which is different from the one actually executed and asked to be registered. In our opinion, the Madras view cannot be accepted." (p. 533) 15. Further, it needs to be emphasized that section 184(3) provided, inter alia, that the application for registration should be signed by all the partners (not being minors) personally. This provision shows that a minor who is admitted to the benefits of a partnership need not sign the application for registration and if the Commissioner s reasoning were to be carried to the logical ends, even a minor who is admitted to the benefits of a partnership would be competent to sign such an application. Since a minor is not competent to sign the application for registration, the view taken by the Commissioner runs counter to the provisions of section 184(3). This reasoning also strengthens the conclusion that under the Act no minor can be a partner in a partnership as such. 16. The provisions of section ..... X X X X Extracts X X X X X X X X Extracts X X X X
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