Andhra Pradesh H.C : There was no legal impediment to a major entering into a contractual relationship with others, respectively, from a point of time when he or she was a minor

Counsel Appeared

M.S.N. Murthy, for the Revenue : Y. Ratnakar, for the Assessee

B.P. JEEVAN REDDY, J. :

Three identical questions are referred in these references. The assessee is common. The questions referred are :

” (1) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that there was no legal impediment to a major entering into a contractual relationship with others, respectively, from a point of time when he or she was a minor ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the partnership agreement dated January 4, 1972, did not, in any case, have the effect of making Shashi Rani liable for losses occurring or arising during her minority, though the partnership was stipulated to commence from a point of time when she was a minor ?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the partnership was not opposed to any of the provisions of the Excise Act or the rules thereunder and was not violative of any of the conditions of the licence granted under the said Act and was, therefore, not illegal ? ”

RC No. 285 of 1980 pertains to the asst. yr. 1972-73, while RC No. 237 of 1980 relates to the asst. yr. 1973-74.

2. Two persons, Bishanlal and Jagatram, constituted a partnership called Three Aces which was running a restaurant and bar at Abid Road, Hyderabad. On November 21, 1971, Jagatram retired from the partnership, with the result that the partnership firm came to an end. Bishanlal took over the business. On January 4, 1972, a deed of partnership was executed between Bishanlal and his four daughters. The fourth and youngest daughter attained majority only on the previous day, i.e., on January 3, 1972. The partnership deed stated that after Jagatram retired, the business of Three Aces was taken over by Bishanlal along with its assets and liabilities as a going concern and that he has admitted his four daughters into the partnership with them w.e.f. November 22, 1971. The accounting year followed by the assessee happens to be the financial year. For the asst. yr. 197273, two returns were filed in the name of the partnership firm, Three Aces ; one pertained to the period April 1, 1971, to November 21, 1971, with two partners, namely, Bishanlal and Jagatram, and the other return was filed by the new partnership “Three Aces” consisting of Bishanlal and his four daughters. Registration under s. 184 was applied for the new partnership. For the next assessment year, i.e., 1973-74, the new firm submitted its return with an application to continue the registration for that year. The ITO granted and renewed the registration to the new firm.

Consequently, he made two separate assessments for the asst. yr. 1972-73 on the basis of the returns filed. However, the CIT revised the order of the ITO in exercise of his powers under s. 263. The Commissioner was of the opinion that what happened during the accounting year relevant to the asst. yr. 1972-73 is not a case of one partnership succeeding another but that it was merely a case of reconstitution of the firm. He was, therefore, of the opinion that a single assessment ought to have been made for the said assessment year on the firm ” Three Aces ” He was of the further opinion that the new partnership deed executed on January 4, 1972, suffered from a patent illegality inasmuch as the 5th partner, Sashi Rani, was admitted as a partner w.e.f. November 22, 1971, when she was still a minor (as stated above, she attained majority only on January 3, 1972). Moreover, under the partnership deed, Sashi Rani was made liable even for losses, if any, incurred in the business carried on from November 22,

1971, to January 3, 1972, i.e., during the period when she was a minor. This, the CIT held, was contrary to law.

He gave yet another reason against granting registration to the new firm, viz., that the exclusion of the partner, Jagatram, and induction of four new partners was contrary to r. 39 of the Andhra Pradesh Foreign Liquor and Indian Liquor Rules, 1970, and hence the new partnership cannot be said to be having a licence to carry on the excise business. For the above reasons, he was of the opinion that there is scope for doubting whether the formation of the new firm was genuine, and if genuine, whether it was lawful. Accordingly, he set aside the order of the ITO and remanded the matter to him to examine the genuineness of the new firm and also to examine whether it was a case where the licence under the excise law was obtained by one party and was actually used by the other party. It is evident that the reasons given by the CIT for setting aside the order of the ITO and the order of remand apply equally to both the assessment years.

The assessee appealed against the order of the CIT. Two appeals were filed for the two assessment years. The Tribunal considered both the appeals together and allowed them. The Tribunal was of the opinion that (i) it was not a case of reconstitution of the firm, but succession of one firm by another firm in the middle of the relevant accounting year, and hence a single assessment for the asst. yr. 1972-73 was unsustainable in law ; (ii) though the formation of an oral partnership on November 22, 1971, between Bishanlal and his four daughters (where under the minor, Sashi Rani, was admitted to the benefits of the partnership) is not established, yet in view of the fact that Sashi Rani, after attaining majority, entered into a partnership with others on January 4, 1972, and undertook to bear even losses, if any, incurred till then during that accounting year, there was no illegality in the deed of partnership or in the formation of the partnership. Since the profits or losses of a partnership do not arise on each day but only at the end of the accounting year, and because by March 31, 1972, Sashi Rani had become a major, there was nothing wrong in her undertaking to bear both profits and losses ; and (iii) the violation, if any, of r. 39 of the Excise Rules does not render the partnership illegal. On this ground, therefore, registration cannot be refused.

The Department applied for referring four questions, including the three questions now referred. (The firstquestion which they asked to be referred and which was not referred, pertained to the issue whether it was a case of reconstitution of the firm or one firm succeeding another. We are of the opinion that the Tribunal has rightly refused to refer the said question, because, clearly, it is not a case of reconstitution of a firm, but a case of one firm succeeding another firm). Of the three questions referred, questions Nos. 1 and 2 go together and pertain to the same aspect, whereas the third question is altogether different. We will first take up questions Nos. 1 and 2 for consideration.

The contention of Sri. M. Suryanarayana Murthy, learned standing counsel for the Revenue, is that the Tribunal having rightly negatived the assessee’s plea that an oral partnership was formed on November 22, 1971, between Bishanlal and his three major daughters, admitting the fourth minor daughter to the benefits of the partnership, it erred in holding that by virtue of the recitals in the partnership deed, a valid partnership came into existence between Bishanlal and his four daughters on January 4, 1972, with retrospective effect from November 22, 1971. Counsel submitted that this is an inconsistent finding and one which is not tenable in law inasmuch as Sashi Rani, being a minor on November 22, 1971, cannot become a partner.

It is true that the finding of the Tribunal is somewhat ambiguous. It rejected the contention of the assessee that an oral partnership was formed on November 22, 1971, admitting Sashi Rani to the benefits of such partnership, and also rejected the Department’s contention that Sashi Rani was admitted as a full-fledged partner on November 22, 1971, itself, when she was a minor. It, however, held, on the basis of the recital in the partnership deed dated January 4, 1972, that the partnership was indeed formed only on January 4, 1972, but with retrospective effect from November 22, 1971. The Tribunal further observed that the law permits an erstwhile minor to elect to become a full-fledged partner on attaining majority, and also to undertake to bear the losses relating to the period prior to his/her becoming a major, and if so, there is nothing wrong in law in a major entering into a contractual relationship with others retrospectively from a point of time when he/she was a minor. It may be noticed that this finding of the Tribunal is at variance with the case put forward by both the parties, viz., the assessee and the Revenue. We are of the opinion, on a consideration of the material placed before us, including the recital contained in the partnership deed dated January 4, 1972, that the assessee’s case ought to be and ought to have been accepted. The relevant clause in the partnership deed reads thus : ” AND WHEREAS the first party (Bishanlal) agreed to admit the second, third, fourth and fifth parties into partnership and to carry on business in partnership w.e.f. 22-11-1971 . . . . . . “

7. The expression ” fifth party ” refers to Sashi Rani. The said clause, reasonably construed, would mean that the fifth party was admitted to the benefits of the partnership on November 22, 1971. It need not necessarily be read to say that Sashi Rani was admitted as a full-fledged partner, thereby rendering the partnership illegal. If two interpretations are possible, the Court would adopt that interpretation which goes to effectuate and validate the partnership rather than the other one which goes to invalidate the partnership. In this connection, we may refer to the definition of the expression “partner” occurring in cl. (23) of s. 2 of the Act. It 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. “

8. When, therefore, the clause in the partnership deed speaks of the first party admitting the second, third, fourth and fifth parties into partnership, it must be understood in an appropriate manner. It must be understood that while the second, third and fourth parties were admitted as fullfledged partners, the fifth party who was only a minor on November 22, 1971, was merely admitted to the benefits of the partnership. Once we hold so, the matter would be squarely covered by a Bench decision of this Court in Modern Stores vs. CIT (1985) 48 CTR (AP) 8 : (1986) 157 ITR 589 (AP). In this decision, it is held that there is nothing in law to prevent a minor, admitted to the benefits of partnership, after attaining majority, from accepting responsibilities as a partner of a firm of which he had not been a partner until the date of such acceptance. It was held that such person is competent to enter into an agreement to share losses, assuming that, during the period of his minority, some losses accrued to the firm. It was also explained that in the case of a partnership firm, profits or losses do not accrue from day to day, but only at the end of the accounting year. Indeed, we must say that the facts of the said case are almost identical to the facts of the present case. Following the said Bench decision, we answer questions Nos. 1 and 2 in favour of the assessee and against the Revenue. In this view of the matter, it is unnecessary to refer to the decisions cited by learned standing counsel for the Revenue to the effect that a minor cannot become a partner and cannot be made liable for the losses.

9. Now, coming to the third question, the factual position is this : The licence under the Excise Act, i.e., FL-17 Licence, governed by the provisions of the A. P. Foreign Liquor and Indian Liquor Rules, 1970, was granted to the firm, Three Aces, consisting of Bishanlal and Jagatram. This partnership came to an end on November 22, 1971, with the retirement of Jagatram, inasmuch as there can be no partnership with one single person. It must, however, be noted that the business which was being run by the partnership, Three Aces, until November 22, 1971, was not confined to the business under the excise licence. The said partnership was running a restaurant and bar, the main business being the running of restaurant wherein the bar was located. After the dissolution of the firm on November 22, 1971, the business of the restaurant along with the bar was taken over by Bishanlal, who constituted an oral partnership along with his daughters on the very same day, to run the said business. The licence which was granted to the earlier partnership, i.e., “Three Aces”, was being availed of by the new firm, “Three Aces”. Indeed, it appears that, at no time, the new partnership intimated the excise authorities that there has been a change in the partnership, or that a new partnership had come into existence, much less was any application made to transfer the said licence in favour of the new partnership. The position continued even during the accounting year relevant to the asst. yr. 1973-74. Thus, it is evident that there has been an undoubted infraction of r. 39 of the A. P. Foreign Liquor and Indian Liquor Rules, which rule reads as follows : ” 39. Licence not to declare any person to be or not to be his partner.-No licensee shall, except with the prior permission of the licensing authority, get any other person included as a partner to his business or get an existing partner excluded : Provided that where there was dissolution of partnership, it shall be notified to the CIT.”

10. properly appreciating the scope of the above rule, it would be helpful to notice rr. 38 and 40 which read as follows : ” 38. No licensee shall, except with the prior permission of the CIT, transfer his licence in favour of any other person. The Commissioner may allow such transfer subject to the transferee binding himself to all the conditions of licence and such other conditions as the CIT may impose in a particular case Provided that instead of permitting a licence to be transferred, the CIT may require the transferee to take out a fresh licence on payment of fee.” ” 40. A licence issued under these rules shall be only to the person named therein and on his death, the licence shall abate. His next heir or legal representatives may apply for continuance of the licence in his name to the licensing authority within thirty days of the death of the licensee. If the licensing authority is satisfied he may, with the prior approval of the CIT, continue the licence in the name of the next heir or legal representative of the deceased licensee without collecting fresh licence fee for the unexpired period of licence.”

11. eading of this rule shows that this rule applies to both individuals, as well as firms. If the licensee is an individual, he is precluded from taking in a partner or partners, as the case may be, for doing business under the licence, without the prior approval of the authorities. If it is a partnership firm, it cannot induct another partner or partners, without such prior approval ; it is equally disentitled to exclude an existing partner and that only the person or the partnership firm to which the licence is granted should alone do the business, and that there should not be a change in the individual or in the composition/constitution of the partnership. But, the question is whether, on account of this infraction, the partnership is thereby disentitled to registration under ss. 184 and 185 of the IT Act? A number of cases have been cited before us on the question of the power of the ITO under the said provisions to go into the question of validity or otherwise of the business carried on by the partnership, where the formation of the partnership itself is not hit by any provision of law. We do not, however, think it necessary to go into this controversy, on which the decisions also do not appear to be uniform. We will confine ourselves to the facts of this case. The partnership deed in this case does not even speak of, or refer to, excise business, or bar. It only speaks of the restaurant business, which is the main business. The bar is incidental to it. Thus, even if it is held that the new firm, Three Aces, could not validly avail of the licence granted to the old firm, the illegality would be only in respect of the incidental business, and not the main business. In National Engineering Corporation vs. CIT (1973) 90 ITR 29 (All), it has been held that if, out of several activities of a firm, one activity turns out to be illegal, that would not render the constitution of the firm illegal or disentitie it to registration or renewal of registration under the IT Act. There is yet another and perhaps more significant way of looking at the matter, assuming again that so far as the business under the excise licence, i.e., FL-17, is concerned, there is certainly a violation of r. 39. But, the question, whether, on that account, the ITO would be justified in refusing registration ? It must be remembered in the first instance that the grant of original licence to the erstwhile firm, Three Aces, was, in effect and in truth, a grant to the two persons, Bishanlal and Jagatram, composing the said partnership. Jagatram went out, but Bishanlal continued, and he admitted his daughters as partners. It may be that, because of the infraction of r. 39, the conduct of the business is illegal vis-a-vis the excise authorities, i.e., under the Excise Act ; but so far as the question of grant or renewal of registration under the IT Act is concerned, it would not be an adequate ground for refusing registration. This is the decision of a Bench of this Court in CIT vs. Nalli Venkataramana, where the law on this question has been considered elaborately. In the said decision, this Court was concerned with r. 19(2) of the A. P. Excise (Lease of Right to Sell Liquor in Retail) Rules, which at the relevant time read as follows : ” 19(2) Where a licence is granted jointly, no licensee shall include or exclude any partner except with the previous permission of licensing authority. ” A reading of r. 19(2) and r. 39-which arises for our consideration-would immediately disclose that both the rules are almost identical, though the said Bench observed in passing that they are not similar. We do not find any material difference between r. 19(2) and r. 39 though they occur in different sets of rules.

In the said Bench decision, it was held that even though there is a violation of r. 19(2) and a partnership is formed contrary to the said rule, still such partnership would be entitled to registration, provided it fulfils the other conditions stipulated in s. 185 of the IT Act. It was also held that such partnership agreement does not violate any public policy, nor does it offend s. 23 of the Indian Contract Act. It was observed that may be such a partnership would not be cognized and would not be valid under the Excise Act ; but, that was said to be not a relevant or adequate ground for refusing registration under the IT Act. Learned standing counsel for the Revenue sought to contend that the said Bench decision is not correct and requires reconsideration. We are, however, not inclined to go into the said question. In the facts and circumstances of this case, we do not say that there is no force in what learned standing counsel contends. What all we say is that there is a Bench decision which, in the normal course, is binding upon us and, in the facts and circumstances of this case, we are not inclined to go into the question of correctness or otherwise of the said Bench decision. Following the said Bench decision, we hold that the violation of r. 39 cannot furnish a valid or adequate ground for refusing grant or renewal of registration to the new firm. Accordingly, we answer the third question as well in favour of the assessee and against the Revenue.

References answered accordingly.

No costs.

[Citation : 176 ITR 160]