COMMISSIONER OF INCOME TAX Vs. ASSOCIATE INDUSTRIAL DISTRIBUTORS

JUDGEMENT

(1.) In this reference under Section 256(1) of the I.T. Act, 1961, at the instance of the Commissioner of Income-tax, West Bengal, Calcutta, the following question has been referred to this court :

(2.) This reference relates to the assessment year 1964-65. The assessee claimed that it was a registered firm constituted under an instrument of partnership deed dated 6th September, 1963, but was assessed as an association of persons. According to the instrument of partnership dated 6th September, 1963, there were ten partners including a private limited company, M/s. Charat Ram Shri Dhar Private Ltd. Besides, ten minors were admitted to the benefits of the partnership. The ITO took objection to the clause, in the instrument of partnership deed, providing for the contribution of capital or in default the liability to pay interest by the minors who were admitted to the benefits of the partnership. According to the ITO, the terms and conditions for the minors being admitted to the benefits of the partnership had not been assented to by the guardians in the instrument of partnership itself or by separate agreement at the time the partnership came into existence and these made the partnership invalid. Another objection of the ITO was that 49.80% of the profits were for the minors who had been admitted to the benefits of the partnership even though none of the guardians of the minors had contributed any capital on behalf of the minors and the minors were also incapable of doing any work in the conduct of the business of the firm. He, therefore, also held that the firm was not genuine. The assessment was, therefore, made in the status of an association of persons and the assessee's claim for registration was refused.

(3.) Against this action of the ITO, two appeals were filed before the AAC, one against the refusal to grant registration and another against the assessment made in the status of an association of persons. On the basis of the affidavits filed by the guardians of the minors, the AAC came to the conclusion that the guardians were fully aware of the terms and conditions under which the minors were admitted to the benefits of the partnership and they had assented to these terms and conditions. He further held that the mere fact that there was no contribution of capital on behalf of the minors, who were admitted to the benefits of the partnership, did not militate against the genuineness of the firm or the genuineness of the minors being admitted to the benefits of partnership. He, therefore, directed the ITO to grant registration to the firm and also directed that the assessment should be made in the status of a registered firm.