High Court Of Allahabad
CIT vs. Badri Nath Ganga Ram
Section 185, Partnership Act, 1932, ss. 2(a) & 30
Asst. Year 1977-78
R.K. Agrawal & Prakash Krishna, JJ.
IT Ref. No. 229 of 1984
10th November, 2004
Counsel Appeared
A.N. Mahajan, for the Applicant : S.B.L. Srivastava, for the Respondent
JUDGMENT
Prakash Krishna, J. :
The Tribunal, Allahabad, has referred the following question for opinion of this Court at the instance of CIT, Allahabad, for the asst. yr. 1977-78 :
“Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in directing the ITO to grant registration to the assessee-firm.”
2. The facts of the case are as follows : The assessee-respondent filed an application for registration of the firm for the year 1974-75 along with the instrument of partnership deed dt. 22nd Sept., 1973. In the partnership deed, following persons are partners: (1) Badri Prasad 19 paise in a rupee Besides the above partners, one Lakhan Lal (minor) was admitted to the benefits of partnership to the extent of 6 paise in a rupee and has been made liable to the losses of the firm although his liability was limited to the extent of his share. The ITO refused to grant registration to the firm on the ground that minor Lakhan Lal was made liable for the losses of the firm to the extent of his share therein. He was of the opinion that the minor admitted to the benefits of partnership cannot be made liable to the losses of the firm. Consequently, the order rejecting the registration was passed under s. 185(1)(b) of the IT Act (hereinafter referred to as the Act). The said order was set aside in appeal by the AAC. He was of the view that the assessee-firm was formed in accordance with the provision of s. 30(3) of the Partnership Act while making the minor liable to share the losses of the firm. The Tribunal has confirmed this order. Heard Sri A.N. Mahajan, learned counsel for the Department, and Sri S.B.L. Srivastava, learned counsel for the respondent. It was submitted that the partnership being in violation of s. 30 of the Partnership Act, cannot be registered under the IT Act. It was further submitted that minor was also made liable to the extent of his share in the firm, which is violative of s. 30 of the Partnership Act. Therefore, registration cannot be granted to the partnership deed. In contra, learned counsel for the assessee submitted that minor was admitted to the benefit of partnership and he was entitled to get the benefit of partnership of six paise in a rupee and the partnership is in consonance with the sprit of s. 30 of the Partnership Act. Both the learned counsel for the parties have referred para 5 of the partnership deed, which is reproduced below : “(5) That at the close of each year the accounts of the firm shall be prepared after adjusting all the business expenses and in case of profit, the amount of profit shall be credited to the respective account of each partner according to their shares as specified in para 3 and in case of loss the same shall be borne by the partners and the amount of loss shall be debited to their respective accounts according to their shares. Besides this, Shri Lakhan Lal, minor, shall get the benefits of partnership as specified in para 3 and shall also be liable for the loss to the extent of his share according to s. 30 of Indian Partnership Act.” In the preamble to partnership deed it is mentioned that Lakhan Lal, minor of Sri Badri Prasad, shall continue to get benefits of partnership according to s. 30 of the Indian Partnership Act. Learned counsel for the Department has placed reliance upon the following cases in support of his argument that as in the present case minor has also been made liable to share the losses to the extent of his share, according to s. 30 of Indian Partnership Act, the firm is not entitled for grant of registration. (1) CIT vs. Oriental T. Maritime (1998) 145 CTR (AP) 196 : (1997) 227 ITR 244 (AP) (2) Addl. CIT vs. Uttam Kumar Pramod Kumar 1978 CTR (All)(FB) 313 : (1978) 115 ITR 796 (All) (FB) (3) CIT vs. Dwarika Das Khetan & Co. (1961) 41 ITR 528 (SC) (4) Shri Rama Mohan Motor Service vs. CIT 1973 CTR (SC) 247 : (1973) 89 ITR 274 (SC).
7. On the other hand, learned counsel for the assessee has placed reliance upon following two judgments : (1) CIT vs. Vijay Kumar Rajesh Kumar (1998) 144 CTR (All) 582 : (1998) 231 ITR 625 (All) (2) CIT vs. Nand Lal Jagdish Prasad (1997) 137 CTR (All) 488 : (1997) 226 ITR 312 (All).
8. The provisions of IT Act require that partnership deed must specify the manner in which profit and losses of the firm are to be distributed amongst the partners. The case of the parties is that the partnership deed in question provides that minor would be entitled to share six paise per rupee in the profit and loss of the firm. The contention of the Revenue is that since the minor has been made liable to share the losses also, the minor has been admitted as full-fledged partner in the firm and, as such partnership agreement being void, no registration can be granted to such firm under IT Act. At this stage, it is apt to notice the relevant provision of s. 30 of the Partnership Act. Sec. 30(1) of the Partnership Act provides that minor may not be a partner in a firm but with the consent of all partners for the time being, he may be admitted to the benefits of partnership. Subs. (3) of s. 30 of the aforesaid Act provides that such minor’s share is liable for acts of the firm, but the minor is not personally liable for any such act. The Asstt. CIT held that the partnership deed is valid as it is in consonance with sub-s. (3) of s. 30 of the Act. The question which immediately arises in the present case is as to whether losses of partnership can be regarded as an act of the firm and such a partnership is valid. In order to construe partnership deed, it is well settled that entire document must be read as a whole and reasonable construction should be placed on it. In a document where several clauses appear, what clause dominates the document is also to be found out with a view to ascertain the real intention of the parties. Therefore, to find out whether Lakhan Lal, minor, was admitted to the benefits of partnership or he has to share the losses also to the extent of his share attention is immediately attracted to cl. (5) of the deed. In the opening part of the partnership deed it is provided that the minor has been admitted to the benefits of partnership; but the said preamble is subject to cl. (5) of the deed. It has been specifically mentioned that minor shall also be liable to share the loss to the extent of his share, according to s. 30 of the Indian Partnership Act. The last portion of cl. (5) of the deed that minor shall also be liable for the loss to the extent of his share is in the nature of exception to the earlier part of the said clause. The provision to share loss by the minor being specific will prevail over the general provisions contained in the deed. Thus, in the deed in question, the minor has been made liable to share the loss to the extent of his share.
The decision in CIT vs. Oriental T. Maritime (supra) lays down that s. 30 of the Indian Partnership Act provides that minor cannot be made liable for the loss of the partnership. If at all a minor should be admitted into partnership, he should be admitted for the purposes of profit only. In that case the minors were clearly admitted to share in the profit and loss of the firm. In that view of the matter, it was held by Andhra Pradesh High Court that the assessee was not entitled for registration of the firm. In Addl. CIT vs. Uttam Kumar Pramod Kumar (supra), it was held by this Court that where minor is admitted as a full partner and that actual right and obligation of the adult deed is invalid. Under general law of partnership, a minor cannot be a full partner liable to share in the losses. He can only be admitted to the benefits of partnership. In other words, he can only be entitled to share in the profits and not losses. Relevant paragraph is quoted below : “Under general law of partnership minor cannot be full partner liable to share in the losses. He can only be admitted to the benefits of partnership. In other words he can only be entitled to share in the profit and not losses. In the partnership deed in question the minors were to share losses as well. This partnership was illegal and was not entitled to be registered.” The aforesaid Full Bench judgment of this Court has been subsequently affirmed by apex Court in the case of Uttam Kumar Pramod Kumar vs. CIT (1991) 95 CTR (SC) 293 : (1990) 186 ITR 188 (SC). The Full Bench has followed the law as laid down by apex Court in the case of CIT vs. Dwarika Das Khetan & Co. (supra). In that case, the apex Court noticed the divergent views amongst the High Courts on the point that where minor is admitted as full partner by adult partner, the partnership document can be registered after interpreting it to mean that the minor has been admitted to the benefits of partnership and not as full partner. Approving the view of Calcutta High Court and Punjab High Court it was held that IT authorities cannot make out a new contract between the parties and register document which is different from one actually executed and asked to be registered. The apex Court thus disapproved the view of Madras High Court holding that the document must be construed as showing only that minor was admitted not as full partner but to the benefits of partnership. The relevant para reads as follows : “Sec. 30 of Indian Partnership Act clearly lays down that a minor cannot become partner though with the consent of adult partners he may be admitted to the benefits of partnership. Any document which goes beyond this section cannot be regarded as valid for the purposes of registration. The registration can only be granted of a document between the persons who are parties to it and on the covenant set out in it. The IT authorities registered the partnership as between adults only contrary to the terms of the document, but in substance a new contract is made out. It is not open to the IT authorities to register a document, which is different from one actually executed and asked to be registered. In our view Madras view cannot be accepted.” Now we venture to examine the ruling relied upon by the learned counsel for the assessee. Strong reliance was placed upon CIT vs. Vijay Kumar Rajesh Kumar (supra).
This is Division Bench judgment of our Court. Clause (5) of the partnership deed involved in that case has been quoted in the body of the judgment. On construction of the said clause, this Court was of the view that so far losses are concerned, upto 40 per cent, it is well defined to be borne by the adult partners of the firm. The question in which ratio they shall share 60 per cent losses falling to the share of the minors, in absence of any agreement to the contrary, it was held that it will be inferred that partners share in losses falling to the share of minor in the same ratio in which they agreed to share the losses upto 40 per cent. Thus, it is crystal clear that in that case there was no specific provision that minor would also be liable to share losses in the firm. Therefore, the facts of that case are not parallel to the facts of the present case. In the case in hand there is specific provision in cl. (5) of the deed that minor would be liable to share the losses of the firm also to the extent of his share with the rider that he shall not be personally liable. Therefore, the aforesaid case is distinguishable on facts and has no application to the facts of the present case. The controversy involved presently was not involved therein. For the same reason, the case of CIT vs. Nand Lal Jagdish Prasad (supra) is distinguishable. In that case it was provided in the deed that minor shall be entitled to share the profit of the firm but shall not be liable for the losses except as defined under Indian Partnership Act. The Court on the interpretation of cl. (2) of the partnership deed of that case came to the conclusion that loss has to be fully distributed amongst three adult partners. In absence of any specific conditions that minor would be able to share the loss to the extent of his share in the partnership, this Court held that a minor is not partner and is only admitted to the benefits of partnership and, therefore, losses were to be shared amongst adult partners. It has been held by Privy Council in Jafferali Lakha vs. Standard Bank of South Africa AIR 1928 PC 135 that minors who are admitted to the partnership are liable to the extent of their share in partnership deed for the acts of the firm but they are not personally liable. Sub-s. (3) of s. 30 of the Indian Partnership Act which makes minor’s share liable for the acts of the firm, should be construed accordingly for the debts of the firm in which minor is admitted to the benefit of partnership. This sub-section, in our opinion, has nothing to do with subs. (1) of s. 30 of Indian Partnership Act, which provides that a minor can be admitted to the benefit of partnership. Sec. 2 (a) of the Partnership Act defines an “act of firm” means any act or omission by all the partners or by any partner or agent of the firm, which gives rise to a right enforceable by or against the firm. It will not include sharing of losses by a partner or minor. The Appellate Commr. while allowing the appeal lost sight of the fact that sub-ss. (1) and (3) of s. 30 of the Indian Partnership Act operate in different field. In view of the above discussion, we are of the opinion that the order of the Tribunal granting registration to the assessee-firm under IT Act, 1961, is legally not correct. We answer the aforesaid question in negative, i.e., in favour of the Revenue and against the assessee.
[Citation : 273 ITR 485]
