MODERN STORES Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) This reference arise under section 256(1) of the Income-tax Act, 1961. The matter relates to the income-tax assessment year 1975-76. The assessee is a partnership firm constituted under a deed dated 20/08/1973. Prabhakar Gupta, a minor, was admitted to the benefits of this partnership. Apart from the minor, there are four other adult partners. All of them share profits equally. In the event of losses, the four adult partners agreed to share them equally. The assessees previous year relevant to the assessment year 1975-76 was the financial year 1974-75. On October 31, 1974, Prabhakar Gupta attained majority. It appears, he exercised the option under section 30(5) of the Indian Partnership Act, 1932, to become a partner in the firm. On 19/12/1974, a fresh deed of partnership was executed among all the partners including the minor, Prabhakar Gupta, who attained majority. The assessee made an application for registration of the firm evidenced by the deed of partnership dated 19/12/1974, for the income-tax assessment year 1975-76. The assessees claim for registration was rejected by the Income-tax Officer on the following grounds : (i) There was no operative deed from 1/04/1974, to 30/10/1974; (ii) The agreement dated 19/12/1974, could not have retrospective effect with effect from 1/04/1974; and (iii) If the partnership deed dated 19/12/1974, is given effect to from 1/04/1974, Prabhakar Gupta, who was a minor till 30/10/1974, would be obliged to share the losses of the firm during the period 1/04/1974, to 30/10/1974. In that event, the partnership deed which provided for sharing of loss by the minor is bad in law.

(2.) The assessee appealed unsuccessfully to the Appellate Assistant Commissioner against the order of the Income-tax Officer refusing the registration. A second appeal was also filed before the Income-tax Appellate Tribunal and the Tribunal upheld the order of the Income-tax Officer and rejected the assessees claim for registration. At the instance of the assessee, the Income-tax Appellate Tribunal referred the following question of law for the opinion of this court :

(3.) Sri M. Suryanarayana Murthy, learned standing counsel for the Revenue, reiterated the Revenues plea that there was no operative deed of partnership between 1/04/1974, and 30/10/1974. If clause 14 of the deed of partnership dated 19/12/1974 should be interpreted as giving retrospective effect to the partnership with effect from 1/04/1974, according to the learned standing counsel, the partnership would be invalid as it would amount to the minor partner being required to share losses during the period between 1/04/1974, and 30/10/1974. According to the learned standing counsel, a minor could not be burdened with losses arising to a partnership. Learned standing counsel further submitted that, although, in principle, profits or losses accrue on the date when the accounts are closed, it must be held that profits accrue from day to day and ascertainment is made only at the end of the year. Thus, the transactions between 1/04/1974, and 30/10/1974, when Prabhakar Gupta was a minor, could have resulted in losses and clause 14 of the partnership deed dated 19/12/1974, could not require the minor to share the loss arising prior to his attaining majority. As the effect of clause 14 of the partnership deed is to impose such a burden on the minor to share the loss up to 30/10/1974, learned standing counsel for the Revenue submitted that the partnership itself is void ab initio. On these grounds, the learned standing counsel supported the order of the Tribunal rejecting the assessees claim for registration of the firm.