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TMI Blog1969 (9) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... viswanadham and Mareswara Rao, are the major partners; and Kamaraju, son of Nageswara Rao, is a minor. The firm was constituted under an instrument of partnership dated December 4, 1959. It was registered under section 26A of the Act for the year 1960-61. For the assessment year 1961-62, the assessee filed an application under section 26A of the Act for renewal of registration. The Income-tax Officer having found that the firm is continuing in the same form and that the profits and losses were apportioned properly by his order dated September 12, 1961, granted the renewal of registration of the firm. The firm registered itself with the Registrar of Firms by an application dated November 9, 1959. It was also registered under section 12 of the Andhra Pradesh General Sales Tax Act with effect from September 7, 1959. The firm also opened a current account with the Indian Bank Ltd., Palakole, for the purpose of its business. It appears that, in the course of the proceedings for the assessment year 1962-63, the Income-tax Officer had some information which led him to believe that one of the partners, A. Mareswara Rao, was not in fact a partner. An inspector of income-tax seems to hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lanations. He was also inclined to the conclusion that Mareswara Rao was not a genuine partner. Rejecting the contention that he has no jurisdiction to set aside the order of the Income-tax Officer dated September 12, 1961, he revised the said order of the Income-tax Officer with the result that the renewal of the registration of the firm was considered as rejected. The assessee, dissatisfied with that order of the Commissioner, preferred an appeal to the Income-tax Appellate Tribunal. The Tribunal considered the contentions raised before it and held on a construction of the document and the preamble to the deed read with clauses (3)(a) and 3(c) that the minor would be deemed to have been admitted as a partner. The Tribunal, therefore, held that the deed was not a valid due. It also found that the deed could not be a valid deed even on the basis that the guardian had entered into the partnership on behalf of the minor and gave two reasons for reaching that conclusion: firstly, that the guardian of the minor had no capacity to enter into a contract ; and, secondly, the guardian would then be partner in two capacities which was not possible. It was further held that, since the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ararao 0-3-0 in the rupee 2. Addepalli Kamaraju Gupta (being minor (by) guardian Nageswararao) 0-1-0 do. 3. Addepalli Kasiviswanadham 0-6-0 do. 4. Addepalli Mareswararao 0-6-0 do. ----------- Re. 1-0-0 ----------- (b) It is decided that because Addepalli Kamaraju Gupta being minor, the guardian should be his father and the minor is admitted to the benefits of the partnership. (c) At the end of the (accounting) year the profits and losses of the business are to be apportioned among the partners in the above shares in the business books. (d) Partners 3 and 4 are to conduct the routine management of the firm's business and are to be treated as managing partners. (4) ...... (5) The moneys required for the purpose of the business can be borrowed by partners 1, 3 and 4 either individually or collectively and after duly registering the credits in the accounts, the said moneys are to be paid back with the stipulated rate of interest. (6) Before ascertaining profits or losses at the end of the year, the general mercantile principles in vogue are applicable : the interest, establishment, lighting expenses, rents, bad debts and other losses, kottu, saddar, etc., all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in so far as the losses are concerned, it would be borne ultimately, as stated hereinafter, only by the three major partners (i.e., partners 1, 3 and 4) in proportion to the shares which are mentioned against their names in subclause (a). How these two sub-clauses negative the idea which is patently clear in sub-clause (b) is difficult to understand. Clause (3) of the document must be read as a whole ; and if so read, it would be clear that the partnership consists of only three major partners while the fourth person, namely, the minor, is admitted by those three major partners with their consent only to the benefits of the partnership. Partners 3 and 4, who would be the managing partners, would conduct the routine management of the firm's business. The profits would be distributed according to the shares mentioned in sub-clause (a) and the losses also would be borne by the partners in the proportion mentioned against their names. We, therefore, fail to see how sub-clause (a) or sub-clause (c) would bring about any change in the explicit intention brought out in sub-clauses (b) or even dilute its force. Clause (6) is merely a projection of sub-clauses (a) and (c) of clause (3). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he can also get out of it whenever he desires to do so and that is what has been exactly provided in subsection (4). It is also pertinent to note that under the proviso to that sub-section, all the partners acting together or any partner entitled to dissolve the firm upon notice to other partners may elect in such suit to dissolve the firm. The suit referred to in this proviso relates to the step which the minor can take under sub-section (4) in order to sever his connections with the partnership concern. In that case, such a suit would be proceeded with as if it was a suit for dissolution and for settlement of accounts between the partners and the amount of the share of the minor shall be determined along with the shares of the partners. It is thus clear from this provision that, since the minor is not tied down to the partnership, he can when he liked sever his connection. But as long as he continues as a partner drawing the benefits of the partnership, he cannot sue the partners for an account or payment of his share of the property or profits of the firm. He, can ask for these reliefs only at the time when he wants to sever his connection with the partnership firm. Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e made applicable, we fail to see how it can at all be contended that the minor thereby becomes a full-fledged partner in the firm. It will thus be plain that whether we read the said clauses separately or read them cumulatively or read the document as a whole, there is no room for contending that the minor has not been admitted merely to the benefit of the partnership but is made or is intended to be made a full-fledged partner. In this connection, it must be remembered that even if the word " losses " appearing in clauses (3)(a), (3)(c) and (6) is to be attributed to the minor, even then section 30 permits the losses incurred by the firm to be shared by the minor in so far as the profits to which he would be entitled to from the said firm are concerned. Section 30(3) enjoins that a minor's share in a firm is liable for the acts of the firm. This share of the minor may be in the form of capital or may be in the form of profits which the firm makes. But in view of the subsequent portion of the said sub-section that a minor is not in any case personally liable for any such act, no one can be left in doubt that what is affected by sub-section (3) of section 30 is not the person o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of Income-tax v. Khetan Co. but that decision has been dissented to by the Calcutta High Court in National Trading Company v. Commissioner of Income-tax. It is not, therefore, necessary for us to consider the decision relied upon by the Tribunal. We have, therefore, no hesitation in answering the first question that, since the partnership is not void and as the minor is not admitted to the membership of the firm, the registration of the firm cannot be denied on that account. It was then contended that the partnership deed is void because the father, Addepalli Nageswara Rao, who himself is a partner, could not have entered into a partnership with others on his own behalf and on behalf of his minor son, Kamaraju Gupta, representing him as the guardian. It was contended that the father cannot act in two capacities and bring about the constitution of a firm. In support of this contention, reliance was placed upon the following decisions : Hoosen Kasam Dada v. Commissioner of Income-tax, Mohan Lal Shyam Lal, In re, Commissioner of Income-tax v. Dwarkadas Khetan and Meenakshi Achi v. P. S. M. Subramanian Chettiar. It was further contended in this connection on the basis of the obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... body's case that the minor himself entered into a contract. It is common ground that on his behalf his father, who is his natural guardian, has entered into an agreement. Though the minors themselves are incompetent to contract, there is nothing to prevent their guardians from contracting on their behalf. It is of course true that the minor may avoid such a contract on his attaining majority if he has reasonable and sufficient grounds for getting the contract avoided. But it would not be correct, as the Tribunal has said, that the guardian cannot enter into a contract on behalf of a minor. It would make the minor's position worse in the eye of law if minors are even precluded from entering into contracts through their guardians. We do not know from where the Tribunal has got this idea that a minor cannot enter into a contract even through his guardian. We are, therefore, satisfied that the guardian can enter into a contract on behalf of the minor. In this connection, it is relevant to note the language of section 4 of the Indian Partnership Act. It says that, " Partnership " is the relation between persons who have agreed to share the profits of a business carried on by all or an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the minor. That privilege does not make a minor a partner, but only enables him to obtain a certain position in the firm, the exact scope of which is mentioned in detail in the said section. The minor thus is placed in a favoured position and, although entitled in almost all respects to the rights of a partner, he is not made subject to all the liabilities of a partner. It is unnecessary for our purpose to analyse section 30 or deal with it elaborately. It is sufficient to mention that the words which appear in subsection (1) of that section, namely, " all partners " and " partnership " suggest, firstly, that there must be two partners at least in the partnership to which a minor can be admitted. Secondly, the minor cannot be one of these partners and, finally, by his admission to the benefits of the partnership, he does not become a partner and that the partnership becomes dissolved as soon as the number of partners is reduced to one. What is clear is that a minor cannot himself enter into a contract and become a partner of the firm ; nor a guardian on his behalf can enter into and agreement so as to make the minor a full-fledged partner of the firm. There cannot thus be any pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , after observing that a partnership deed must be construed reasonably, it was held that : " The guardian of a minor is entitled to do all things necessary for effectuating the conferment of the benefits of partnership to the minor. A guardian can agree on behalf of the minor to contribute capital for the business of the firm in which the minor is admitted to the benefits of partnership. There is no bar in law to the guardian of a minor agreeing to the starting of a business and the constitution of a firm on the condition that the minor shall not be a full partner but shall only be entitled to the benefits of partnership, for he is only securing thereby the conferment of the benefits of partnership on the minor. " In that case, the father was himself a partner, nevertheless in the position of a guardian represented the minor and consented to his being admitted to the benefits of the partnership firm. It is also seen from that case that a clause which provided that the partnership would be terminated at the will of the partners was taken to mean, in the context, in so far as the minor was concerned, that the guardian would be entitled to exercise his right of severance given t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proper cases the guardian cannot act on behalf of the minor. In the said case, since there were only two partners, one the major and the other a minor, the minor could not have become a partner even when he was represented by his guardian who happened to be the other partner. The minor, as stated earlier, can be admitted only to the benefits of a partnership and that can be possible only when, apart from the minor, there are two or more persons who constitute the partnership firm, and it is only such persons acting in concert that can admit the minor to the benefits of the partnership. It is in the context of the peculiar facts that their Lordships observed at page 226 : " There is, therefore, no document from which any agreement by an authorised person could be spelt out on behalf of the minor sons of Shyam Lal, and it is impossible to hold that there was a firm constituted under an instrument of partnership which made the application for registration before the Income-tax Officer. " We do not, therefore, think that this decision decides anything which can be said to be contrary to our view. Commissioner of Income-tax v. Dwarkadas Khetan Co. has already been considered in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more than two or three persons. In the case to which a reference is made, Meenakshi Achi v. P. S. M. Subramanian Chettiar, since there was no partnership at all, no question of admitting the minor to its benefits could arise and as a minor cannot be a partner either purporting to act by himself or through his guardian acting for him. In either case it will be invalid in view of section 30 of the Partnership Act. It is, however, pertinent to note that the reference made to Lachhman Das v. Commissioner of Income-tax in that case is somewhat misleading. In fact, the said decision of the Privy Council does not decide anything which can be said to be contrary to our view. On the other hand, it explains Hoosen Kasam Dada's case. We are, therefore, satisfied that a guardian who himself is a partner can, along with other major partners, give consent in regard to the admission of a minor to the benefits of the partnership and as guardian on behalf of the minor can agree that the minor be admitted to the benefits of the partnership with or without certain conditions. In that view of the matter, the partnership contract cannot be said to be invalid or void and registration of the firm canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son or persons, and at such times and shall contain such particulars and shall be in such form and be verified in such manner, as may be prescribed ; and it shall be dealt with by the Income-tax Officer in such manner as may be prescribed. " Rule 3 of the rules framed under the Act enjoins that the application referred to in rule 2 shall be made in the form annexed to this rule and shall be accompanied by the original instrument of partnership under which the firm is constituted together with a copy thereof. According to the form of application for registration of a firm prescribed in that rule, it is necessary to fill in all the seven columns mentioned in the Schedule. We are here concerned only with column 6, which reads as follows : " Share in the balance of profits (or loss) (annas and pies in the rupee). " Note 2, which is relevant, reads as follows : " If any partner is entitled to share in profits but is not liable to bear a similar proportion of any losses, this fact should be indicated by putting against his share in column 6 the letter 'P'. " On a reading of section 26A together with the above said rules and column 6 of the prescribed application form, it will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be confused with each other. The Tribunal obviously went wrong in holding that since the proportion of loss to which the partners are made liable is not mentioned in the document, the document is invalid. Firstly, factually it is not correct ; and, secondly, even if it were to be true, the document, does not become thereby void or invalid. In this case it was nobody's case that while filing the application form for registration, column 6 of the application was not properly filled. In any case, the Tribunal or the lower income-tax authorities have not declined the registration or its renewal upon that ground. We have, therefore, to consider what is the effect of the omission in the partnership deed regarding the loss which may be attributable to the share of the minor, who is not supposed to bear it, would be shared by the other partners. It must, however, be made clear at the outset that the assumption that the document omits to mention it is not correct. Clause (3)(a) of the deed brings out the shares of the major partners in the profits and losses representing of course 15 annas in a rupee as the one anna share in profits allotted to the minor. In so far as sharing the loss, if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the application. If that is required to be given in the application by a necessary corollary, it must find place in the partnership deed. It may be that absence of any such provision may not make the partnership contract invalid. But since there is a possibility of its being rejected in so far as the Act is concerned, the firms which wish to take advantage of section 23(5)(a) would naturally be inclined to mention the share of profits or losses in the partnership deed itself so that it may facilitate the mention of the same in column 6 of the prescribed application form. Column 6, in our view, should not be read too rigidly. The letter of that column should not be allowed to kill the spirit of section 26A read with the rules. If the partnership deed and the application reasonably give the share of profit or loss of the partners in substance, that should be enough to satisfy the requirements of section 26A and the rules made thereunder. It would be reasonable to insist upon the compliance of the form to its last letter. The share of profit or loss may, therefore, be given treating one rupee as the unit and then denoting the shares in annas and pies ; or hundred may be taken as a u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be deemed to have come into effect on December 1, 1960, and treated as part of the deed of December 1, 1960. The assessee filed a declaration under section 184(7) of the Income-tax Act, 1961, for renewal of registration for the assessment year 1963-64. The Tribunal refused registration on the ground that the clarification deed did not provide who should bear 25 per cent. of the loss, and that, as the clarification deed brought about a change in the shares of the profit and loss of the firm, there was a change in the constitution of the firm and, therefore, an application for registration of the firm was necessary. On a reference, the High Court held that : " The firm was not entitled to renewal of registration as the clarification deed did not provide for sharing of 25 per cent. of the loss and, as the firm had been refused registration for the earlier year, an application for registration was necessary. " While we are not concerned with the second ground on which the High Court upheld the rejection of renewal, with due respect to the learned judges of the Kerala High Court, we find ourselves unable to agree with the view on the first point. From the facts as they are narrated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a firm in which some minors are admitted to the benefits of the partnership without any liability to share the losses, the shares of the partners in the profits would not be the same as their shares in the loss, an application for registration of such a firm cannot be refused merely because shares in profits of all the partners including those admitted merely to the benefits of the partnership are specified and there is no separate specification of shares of the major partners in the losses. " This observation, however, was made while considering the question of the validity of the partnership deed in which such a clause relating to losses is not found. That is why it is observed that : " No deed of partnership has been held to be invalid, merely because shares in profits are specified of all the partners including those admitted merely to the benefits of the partnership, and there is no separate specification of shares of the remaining partners who are to share the losses indicating their separate shares in the losses. A similar view is held by the Mysore High Court in R. B. Angadi Sons v. Commissioner of Income-tax. The decision follows the earlier decision of that High ..... X X X X Extracts X X X X X X X X Extracts X X X X
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