NATIONAL TRADING COMPANY Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference, under s. 66(1) of the Indian IT Act, 1922, has been made in the circumstances hereinafter related. The year of assessment, with which we are concerned, is 1958-59, the corresponding accounting year being the calendar year ending with December 31, 1957.

(2.) THE assessee is a firm of 11 partners, constituted by a deed of partnership, dated May 14, 1956. Out of the 11 partners, 9 were minors when the deed was executed. Of the minors, Ratish Kumar Agarwalla (party of the fourth part in the deed of partnership) attained majority during the relevant year of accounting. Registration under s. 26A of the Indian IT Act had been accorded to the assessee-firm on the basis of the partnership deed, dated May 14, 1956, for the asst. yr. 1957-58, which was the first year of the business. When renewal of this registration was asked for, in the asst. yr. 1958-59, the prayer was refused by the ITO. THE order of the ITO was confirmed by the AAC, on appeal by the assessee. THEreupon, the assessee took a second appeal before the Tribunal. At the time when the application for renewal of registration was refused by the ITO and the said order was confirmed by the AAC, the Supreme Court judgment in CIT vs. Dwarkadas Khetan and Co. (1961) 41 ITR 528 (SC) was holding the field. Before the Tribunal the assessee contended that the Supreme Court decision in Dwarkadas Khetan and Co.'s case (supra), had no application to the facts of the present case, inasmuch as, under the deed of partnership, dated May 14, 1956, the minors had been admitted only to the benefits of partnership and had not been made responsible for the losses. THE Tribunal overruled the contention with the following observations : "It is true that the deed recites in cl. 6 that the parties of the 2nd, 4th, 5th, 6th, 7th, 8th, 9th, 10th and 11th part, who were minors, shall not be liable or responsible for the losses, if any, and the entire loss shall be borne in equal shares by the major partners of the 1st and 3rd part. But apart from this privilege the minors have been treated as fullfledged partners in the deed. THE preamble to the deed mentions the names of all the eleven parties and then recites that 'the said eleven parties hereto agree between themselves to become partners and to carry on business in partnership under the following terms and conditions'. THE minor partners have been clothed with the same rights and liabilities as the major partners except, as stated above, the minors were not made responsible for the losses. By cl. 4 of the deed all the partners were required to contribute capital and under cl. 5 all the partners were required to sign the accounts after they were closed and adjusted. As the said nine minors were described as partners in the preamble to the deed it follows that they were also required to contribute capital and to sign the books of accounts when closed. Clause 7 of the deed of partnership recites that the 'bank accounts shall be operated on by any two of the partners for and on behalf of this partnership as may be decided by the partners'. Under this clause even the minors have to decide which of the two partners (including the minors) could operate the bank account. THE other clauses in the deed also make no distinction between the minor partners and the major partners to the deed, except as regards the sharing of the losses. THE deed was executed by all the parties, each minor partner signing the deed 'through the hand and pen of his father and natural guardian'. It will be evident from what has been stated above that the minors have been included in the deed as contracting parties executing it through the pen of their respective fathers and they have been made fullfledged partners with the only reservation that they were not to share the losses." In the view taken the Tribunal dismissed the appeal.

(3.) THE three Supreme Court decisions were considered by this Court in Jeewanram Gangaram vs. CIT (1967) 64 ITR 483 (SC). What happened in that case was that the partnership deed of the assessee firm, consisting of two minors represented by their guardian mother, specifically stated that the two minors were only admitted to the benefits of partnership. THE deed, however, provided that the profits and losses of the partnership shall be distributed amongst the partners in shares specified against their names, which included the names of the minors also. THE deed further provided that the responsibilities of the management of the partnership shall equally rest with each of the partners. THE Revenue had granted registration to the firm for the year 1947-48 and also renewed registration for all the subsequent years up to 1957-58. THE CIT, however, acting under s. 33B of IT Act, 1922, cancelled the registration for the year 1957-58 and directed the ITO to treat the firm as an unregistered firm and tax accordingly on the ground that the minors had been made full partners and that they had signed the application for registration. THE CIT was of the view that the grant of renewal of registration to the assessee-firm was prejudicial to the interests of the Revenue. On reference to this Court, it was held (i) that the various clauses in the partnership deed should be read in the context of the specific statement in the deed that the minors were only admitted to the benefits of the partnership; (ii) the clause in the partnership deed relating to sharing of losses can only mean that only the share of the minors in the partnership was intended to be made liable for losses but the minors were not to be personally liable for the losses; (iii) the responsibilities of the minors for mismanagement would also be limited only to their share in the partnership and not personally; (iv) the technical defect in the signature portion of the application for registration cannot be prejudicial to the interests of the Revenue; and (v) the firm was validly constituted under the deed and was entitled to registration. Bearing in mind the law as stated in the three Supreme Court decisions and in the decision of this Court referred to above, we have now to examine the reasons given by the Tribunal in support of non-registration. THE first ground given by the Tribunal was that the preamble recited that the parties, including the minors, agreed between themselves to become partners and to carry on the business of partnership. This ground, in our opinion, should not be over-emphasised, because in the deed of partnership in Shah Jethaji Phulchand case (supra), the preamble recited :