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TMI Blog2002 (6) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... - - - - Dated:- 6-6-2002 - Judge(s) : S. R. NAYAK., S. ANANDA REDDY. JUDGMENT The judgment of the court was delivered by S.R. NAYAK J.-The Income-tax Appellate Tribunal, Hyderabad Bench-A (for short "the Tribunal"), has referred the following question under section 256(1) of the Income-tax Act, 1961 (for short, "the Act"), at the instance of the Revenue: "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that firm, Suleman Khan and Mahaboob Khan and Co., Tobacco Exporters, Guntur, was entitled to claim registration for the relevant assessment years 1975-76, 1976-77 and 1977-78?" The background facts leading to the above reference be noticed first and they are as follows: The respondent-assessee-firm, Suleman Khan and Mahaboob Khan and Co., Tobacco Exporters, Guntur, is a partnership firm and the assessment years involved are 1975-76, 1976-77 and 1977-78. According to the Commissioner of Income-tax (for short "the CIT"), the assessee-firm consisted of 23 partners (20 adults + 3 minors) during each of the above three assessment years and that since the total number of partners exceeded 20, the Commissioner of Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the definition of the words, "firm", "partner" and "partnership" in section 2(23) of the Income-tax Act, 1961, was designed to confer equal benefits upon minors, and it does not ipso facto and ipso jure follow from that definition that a minor can be treated as a full-fledged partner in the eye of the law. It was also contended that the definition of the word "person" as defined in the General Clauses Act cannot be imported into the Partnership Act, the provisions of which alone are relevant for finding as to who could join as partners. On behalf of the Revenue, it was contended that in view of section 11(2) of the Companies Act, once the Income-tax Officer comes to know that a minor has been admitted to the benefits of partnership, he must deem that the minor is also a partner of the partnership and on that basis he should find out whether the total number of partners including the minors has exceeded 20 or not and if he finds that the total number of partners including minors exceeds 20, the Income-tax Officer cannot register the partnership. In that view of the matter, the Revenue contended that the partnership of the assessee contravened section 11(2) of the Companies act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r" and "partnership" given in the Indian Partnership Act, 1932 (for short, "the Partnership Act"). Section 2(23) of the Act reads as follows: "(23) 'firm', 'partner' and 'partnership' have the meanings respectively assigned to them in the Indian Partnership Act, 1932 (9 of 1932); but the expression 'partner' shall also include any person who, being a minor, has been admitted to the benefits of partnership." According to section 4 of the Partnership Act, partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The persons who have entered into partnership are individually called partners and collectively a firm and the name in which the business is carried on is called the firm name. Partnership is, as such, the result of a contract. A minor, not being competent to enter into a contract, is incapable of becoming a partner, although he can be admitted to the benefits of the partnership. In CIT v. Bhawani Prasad Girdhari Lal and Co. [1990] 186 ITR 518 (All), the assessee-firm consisting of 17 major partners and four minors who were admitted to the benefits of partnership, filed returns for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partnership, the Supreme Court has, in the above judgment observed as follows: "What the definition does is to apply to a minor admitted to the benefits of partnership all the provisions of the Income-tax Act applicable to partners... The definition is designed to confer equal benefits upon the minor by treating him as a partner; but it does not render a minor a competent and full partner. For that purpose, the law of partnership must be considered, apart from the definition in the Income-tax Act." It is true that section 11(2) of the Companies Act prohibits 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 a partnership on the basis of an agreement are to be taken into consideration for finding out whether a partnership consists of more than 20 persons, and minors, not being partners, cannot be taken into account for the purpose of section 11(2) of the Companies Act. In the instant case, as the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... admitted as a full partner, the document is to be regarded as valid. What the definition does is to empower the authority concerned to apply to a minor admitted to the benefits of partnership all the provisions of the Income-tax Act. The definition, in other words, is designed to confer equal benefits upon the minor by treating him as a partner." In CIT v. Hotel Sriraj [1992] 198 ITR 570 (Karn), the assessee therein filed returns claiming the status of a firm. The claim was rejected by the Income-tax Officer on the ground that the number of persons who constituted the partnership exceeded 20 and, therefore, the partnership could not be recognised as such and treated the assessee as an "association of persons". On appeal, the Appellate Assistant Commissioner, accepted the contention of the assessee that the number of persons who constituted the firm was below 20 excluding the minors who were only admitted to the benefits of the partnership as per section 30 of the Partnership Act. The Tribunal affirmed the order of the Appellate Assistant Commissioner. On a reference, the Karnataka High Court held: "Under the provisions of the Indian Partnership Act, a minor cannot be a partne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The error in the Madras view is in using the definition to show that a deed including a minor as a competent partner is valid. What the definition does is to apply to a minor admitted to the benefits of partnership all the provisions of the Income-tax Act applicable to partners. The definition cannot be read to mean that in every case where a minor has, contrary to law, been admitted as a full partner, the deed is to be regarded as valid, because, under the law, a minor can be admitted to the benefits of partnership. The rules which have been framed under section 26A quite clearly show that a minor who is admitted to the benefits of partnership need not sign the application for registration. The law requires all partners to sign the application, and if the definition were to be carried to the extreme, even a minor who is admitted to the benefits of partnership would be competent to sign such an application. The definition is designed to confer equal benefits upon the minor by treating him as a partner; but it does not render a minor a competent and full partner. For that purpose, the law of partnership must be considered, apart from the definition in the Income-tax Act. Section ..... X X X X Extracts X X X X X X X X Extracts X X X X
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