Patna H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the declaration filed by the firm was incorrect and defective ?

Counsel Appeared

Bharuka, Navaniti Prasad Singh, M.M. Chaturvedi & O.P. Goshe, for the Assessee : K.K. Vidhyarthi & S.K. Sharan, for the Revenue

K. SEN, C.J. :

The material facts and the proceedings leading up to this reference are, inter alia, that Vijoy Cloth Stores, Ranchi, the assessee, is a partnership firm constituted under a deed of partnership dated November 17, 1969. The assessee- firm, at its inception, consisted of two major partners, namely, Jag Narain Prasad and Smt. Kamla Devi Jaiswal, and a minor, named, Rajendra Prasad Jaiswal, was also admitted to the benefits of the partnership. The said deed provided, inter alia, that the profits of the said partnership would be divided amongst the two major partners and the said minor as one-third share each and the losses of the said partnership would be borne by the two major partners in equal shares. It was further provided that unless the minor declined to continue to be a partner in the said firm within six months from the date of his attaining majority, he would automatically be treated as a partner therein and the profit and loss of the partnership would be divided among the three partners in equal shares.

The said partnership was duly registered under s. 184 of the IT Act, 1961, and continued to be so registered till the assessment year involved, namely, asst. yr. 1975-76, the accounting year ending on November 11, 1974.

The said minor, Rajendra Prasad Jaiswal, attained majority on August 11, 1974. On November 20, 1974, a fresh deed of partnership was executed by and amongst the said Jag Narain Prasad, Kamla Devi Jaiswal and Rajendra Prasad Jaiswal, where it was, inter alia, recorded that the said Rajendra Prasad had exercised his option to become a partner in the assessee firm w.e.f August 11, 1974, and that the said partnership business commenced w.e.f. August 11, 1974. The shares of the three partners in the profits and losses of the assessee continued to be one-third each.

5. On June 30, 1975, a declaration in an obsolete Form No. 12, which had since been revised, was filed on behalf of the assessee under s. 184 of the said Act.

The ITO took the view that as the minor who had been admitted to the benefits of partnership had attained majority during the previous year relevant to the said asst. yr. 1975-76, there had been a change in the constitution of the firm, and, therefore, the assessee was required to execute a fresh deed of partnership recording such change and to file a fresh application for registration in Form No. 11A. By his letter dated December 22, 1975, the ITO called upon the assessee to file a declaration in proper form, with the fresh deed of partnership by January 6, 1976.

In compliance with the aforesaid, the assessee filed a fresh declaration in revised Form No. 12 on January 6, 1976. This declaration form was signed by one of the partners, Jag Narain Prasad, for himself and also on behalf of the other original partner, Kamla Devi Jaiswal.

It was contended before the ITO on behalf of the assessee that filing of a declaration in the obsolete form should be treated as a defect and now that the said defect has been removed by filing a declaration in the new form, the same should be treated as valid.

The ITO did not accept the contentions of the assessee. He held that the declaration should have been filed in the correct Form No. 12 by June 30, 1975. The assessee had committed delay in filing its declaration in the correct Form No. 12 by over six months without any reasonable cause and, therefore, such delay could not be condoned by filing a declaration in the correct form out of time.

The ITO held further that even the declaration filed in the correct Form No. 12 had not been signed by Kamla Devi Jaiswal, one of the partners, who, it was stated on behalf of the assessee, was out of India from November 11, 1974, and that the said form had been signed on behalf of the said Kamla Devi Jaiswal by the said Jag Narain Prasad. The ITO held that no material evidence had been produced on behalf of the assessee to show or prove that the said Kamla Devi Jaiswal was absent from India at the relevant time or that she had authorised the said Jag Narain Prasad to sign the declaration on her behalf. He held that it was possible for the assessee to obtain the signature of the said Kamla Devi Jaiswal in the said declaration form either in India or abroad and that there was no reasonable cause which prevented the said Kamla Devi Jaiswal from signing the said declaration.

The ITO held further that under the IT Act and the rules framed thereunder, when a minor admitted to the benefit of a partnership attained majority during a particular previous year and became a partner, a fresh deed of partnership was required to be executed during the previous year and an application for fresh registration in Form No. 11A had to be filed within the prescribed time, as there had been change in the constitution of the firm. Neither of the aforesaid was done by the assessee. Following the decision of the Allahabad High Court in Ram Narain Laxman Prasad vs. ITO (1972) 84 ITR 233 (All), the ITO held that in the instant case, there was a change in the constitution of the assessee, during the relevant previous year, and that it was not entitled to the continued benefit of the original registration on the basis of the original partnership deed.

On the grounds as aforesaid, the ITO refused registration to the assessee for the said asst. yr. 1975-76 and held that the assessee should be treated as having the status of an unregistered firm.The assessee filed an appeal from the order of the ITO to the AAC. It was contended before the AAC on behalf of the assessee, inter alia, that as the said Rajendra Prasad Jaiswal, the erstwhile minor, had elected to become a full- fledged partner from August 11, 1974, there was no change in the constitution of the assessee and, therefore, the declaration in Form No. 12 filed by the assessee was proper and that the assessee was entitled to be allowed continuation of registration. It was submitted further that in any event, the subsequent declaration in the correct Form No. 12 filed on behalf of the assessee should be treated as having been filed within time and that the benefit of registration should be granted to the assessee.

The AAC noted that as Rajendra Prasad Jaiswal had expressed his desire to become a partner of the assessee firm w.e.f. August 11, 1974, the partnership business under the said subsequent deed could be deemed to have commenced on and from August 11, 1974. From the aforesaid, the AAC concluded that there was a change in the constitution of the assessee from August 11, 1974, in the relevant previous year, not only with reference to the partners but with reference to their respective shares and, therefore, the filing of the declaration by the assessee in Form No. 12 was not valid and proper. The assessee should have executed the deed of partnership and applied for registration in Form No. 11A which was not done within the prescribed time.

The AAC noted further that the original declaration had been filed on behalf of the assessee in an obsolete form and the same was not verified and signed by all the partners of the firm as required under the rules. In spite of the opportunity given by the ITO, the declaration filed subsequently in the correct form was not signed by Kamla Devi Jaiswal, one of the partners, and was not in conformity with the proviso to s. 184(7) of the IT Act, 1961. It was held that both the declarations filed by the assessee were invalid and improper and that the assessee was not entitled to the benefits of a registered firm. The order of the ITO was affirmed.

Being aggrieved by the aforesaid, the assessee preferred a further appeal before the Tribunal. It was contended before the Tribunal on behalf of the assessee that there was no change in the constitution of the assessee and, as such, the continuation of registration of the assessee should have been allowed for the said assessment year. Though the first declaration had not been signed by Rajendra Prasad Jaiswal, the declaration filed subsequently had been signed by him. It was contended that the assessee was a genuine firm and the registration granted to it in the earlier years should have been continued for this year also.

It was contended on behalf of the Revenue before the Tribunal that there was a change in the constitution of the assessee as after August 11, 1974, there was a change in the ratio of sharing in the loss between the partners and as such a fresh deed recording the same should have been filed with a fresh application for registration in Form No. 11A within the prescribed time. The declaration filed subsequently was not proper as the same had been signed by only one partner, namely, Jag Narain Prasad, and there was no evidence that Jag Narain Prasad had any authority to sign the same on behalf of Kamla Devi Jaiswal. The decision of the Allahabad High Court in Ram Narain Laxman Prasad’s case (supra), was cited and relied on.

The Tribunal held that from August 10, 1974, the sharing of loss between the partners changed. This constituted a change in the constitution of the assessee within the meaning of s. 187 (2) of the said Act. As such, the assessee was required to apply for fresh registration in the assessment year involved, before the end of the previous year in question. The declarations filed in Form No. 12 on behalf of the assessee were invalid and incorrect and in any event, there was no evidence on the record to show that Jag Narain Prasad had authority to sign the said declaration on behalf of the other partner, Kamla Devi Jaiswal. The Tribunal accepted the contentions of the Revenue and dismissed the appeal of the assessee.

19. On an application by the assessee under s. 256(1) of the IT Act, 1961, the Tribunal has referred the following questions as questions of law arising out of its order for the opinion of this Court :

” 1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the declaration filed by the firm was incorrect and defective ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that there was a change in the constitution of the firm by applying the provisions of s. 187(2) of the IT Act and also in holding that the registration of the firm could not be continued for this assessment year ? “

20. The learned advocate for the assessee drew our attention to the relevant provisions of the IT Act, 1961, and the Rules thereunder as they stood at the relevant time. It will be convenient at this stage to refer to the material provisions thereof. Sec. 184 : ” (1) An application for registration of a firm for the purposes of this Act may be made to the ITO on behalf of any firm, if- (i) the partnership is evidenced by an instrument ; and (ii) the individual shares of the partners are specified in that instrument . . . (3) The application shall be made to the ITO having jurisdiction to assess the firm, and shall be signed(a) by all the partners (not being minors) personally ; or . . . Explanation.-In the case of any partner who is absent from India or is a lunatic or an idiot, the application may be signed by any person duly authorised by him in this behalf, or, as the case may be, by a person entitled under law to represent him. (4) The application shall be made before the end of the previous year for the assessment year in respect of which registration is sought :

21. Provided that the ITO may entertain an application made after the end of the previous year, if he is satisfied that the firm was prevented by sufficient cause from making the application before the end of the previous year . . . (6) The application shall be made in the prescribed form and shall contain the prescribed particulars. (7) Where registration is granted to any firm for any assessment year, it shall have effect for every subsequent assessment year : Provided that- (i) there is no change in the constitution of the firm or the shares of the partners as evidenced by the instrument of partnership on the basis of which the registration was granted ; and (ii) the firm furnishes, before the expiry of the time allowed under sub-s. (1) or sub-s. (2) of s. 139 (whether fixed originally or on extension) for furnishing the return of income for such subsequent assessment year, a declaration to that effect, in the prescribed form and verified in the prescribed manner, so, however, that where the ITO is satisfied that the firm was prevented by sufficient cause from furnishing the declaration within the time so allowed, he may allow the firm to furnish the declaration at any time before the assessment is made. (8) Where any such change has taken place in the previous year, the firm shall apply for fresh registration for the assessment year concerned in accordance with the provisions of this section.” Sec. 185 : ” (3) Where the ITO considers that the declaration furnished by a firm in pursuance of sub-s. (7) of s. 184 is not in order, he shall intimate the defect to the firm and give it an opportunity to rectify the defect in the declaration within a period of one month from the date of such intimation ; and if the defect is not rectified within that period, the ITO shall, by order in writing, declare that the registration granted to the firm shall not have effect for the relevant assessment year. ” Sec. 187 : ” (1) Where, at the time of making an assessment under s. 143 or s. 144, it is found that a change has occurred in the constitution of a firm, the assessment shall be made on the firm as constituted at the time of making the assessment : . . . (2) For the purposes of this section, there is a change in the constitution of the firm- (a) if one or more of the partners cease to be partners or one or more new partners are admitted, in such circumstances that one or more of the persons who were partners of the firm before the change continue as partner or partners after the change ; or (b) where all the partners continue with a change in their respective shares or in the shares of some of them.”

22. IT Rules, 1962 : Rule 22 : ” 22. Application for registration of a firm.-(1) An application for registration of a firm for the purposes of the Act shall be made in accordance with the provisions of sub-rules (2) to (5). (2) Where the application is made before the end of the relevant previous year – . . . (ii) and where any change or changes in the constitution of the firm or the shares of the partners have taken place during the previous year before the date of the application- (a) the application shall be made in Form No. 11 A ; and (b) it shall be accompanied by the original instrument or instruments evidencing the partnership as in existence from time to time during the previous year up to the date of the application together with copies thereof. A certified copy of the instrument or instruments together with a duplicate copy thereof may be attached to the application if, for sufficient reason, the original instrument or instruments cannot be produced. ” Rule 24 : ” 24. Declaration for continuation of registration. -The declaration to be furnished under sub-s. (7) of s. 184 shall be in Form No. 12 and shall be verified in the manner indicated therein and shall be signed by the persons concerned in accordance with sub-rule (5) of r. 22. “

Learned advocate for the assessee submitted that the Tribunal erred in holding that on the facts of the instant case, there was a change in the constitution of the assessee in view of the change in the ratio of sharing loss between the partners, that a fresh deed should have been executed recording the same and that the assessee should have applied afresh for registration in Form No. 11 A.

It was submitted that the decision of the Allahabad High Court in Ram Narain Laxman Prasad’s case (supra) was no longer good law inasmuch as a Full Bench of the same High Court, in a subsequent decision, overruled the same and other High Courts had taken the same view as that of the Full Bench of the Allahabad High Court. Learned advocate for the assessee cited the following decisions : Badri Narain Kashi Prasad vs. Addl. CIT 1978 CTR (All) 390 (FB) : (1978) 115 ITR 858. In this case, a Full Bench of the Allahabad High Court, construing ss. 2(23), 184 and 185 of the IT Act, 1961, as also s. 30 of the Indian Partnership Act held, inter alia, that a partnership firm had to apply for fresh registration, if there was any change in its constitution or the shares of the partners therein, which was not evidenced by the instrument of partnership in the assessment year involved. It was held further that under the Indian Partnership Act, a minor admitted to the benefits of a partnership would not be a partner thereof but the position was different under the IT Act, 1961, and under s. 2(23), the expression ” partner ” included a minor who had been admitted to the benefits of partnership. For the purposes of the IT Act, a minor was as much a partner as a major and the expression ” partner ” in ss. 184 and 185 of the IT Act would have the same meaning as that in s. 2(23). As such, when a minor partner attained majority and opted to remain in partnership, he became a full-fledged partner under the Indian Partnership Act, but during the period of his minority, he would also be considered as a partner within the meaning of the IT Act. There will be no change in the constitution of the firm when a minor who was a partner within the meaning of the IT Act attains majority as the minor was already a partner and he would continue to be a partner. It was specifically held that the decision in Ram Narain Laxman Prasad’s case (supra) did not lay down the law correctly.

In one of the references before the Full Bench, it was found that an instrument of partnership specifically provided that when a minor attained majority, he would be liable for the loss to the extent of his share in the profit and construing the said instrument, it was held that it was possible to ascertain the share of a minor in the loss both during the period of his minority as also after the said minor attained majority and that the instrument specified and evidenced the change in the shares which would occur when the minor partner would become a major. In such a case, there was no need to require the partners to execute a fresh document merely to ascertain their shares after the minor had become major. Ganesh Rice Mills vs. CIT (1980) 15 CTR (MP) 250 : (1981) 132 ITR 257 (MP). In this case, the Division Bench of the Madhya Pradesh High Court, following the Full Bench decision of the Allahabad High Court in Badri Narain Kashi Prasad (supra), held that when a minor admitted to the benefits of a partnership attained majority and became a partner in the real sense and it could be construed from the deed of partnership the distribution of loss amongst the partners, including the minor who had attained majority, it could not be said that in such a case there occurred any change in the shares of the partners which was not evidenced by the instrument of partnership or that there was any change in the constitution of the firm. Durgaprasad Rajaram Adatiya vs. CIT (1981) 21 CTR (MP) 4 : (1982) 134 ITR 601 (MP). In this case, another Division Bench of the Madhya Pradesh High Court following its earlier decision in Ganesh Rice Mills’ case (supra), held that inasmuch as under s. 2(23) of the IT Act, 1961, a partner included a minor admitted to the benefits of partnership, the fact that during the continuance of the partnership, the minor became a major would not result in any change in the identity of the partners and as such a change in the constitution of the firm. It was held further that if the instrument of partnership was comprehensive and could be construed to provide the manner in which the losses would be shared on the minor becoming a major, then in the happening of such an eventuality, it also could not be said that there was a change in the shares of the partners as evidenced by the instrument of partnership. Besant Behari Gopal Behari vs. CIT (1983) 36 CTR (All) 70 : (1984) 145 ITR 96 (All). In this case, another Division Bench of the Allahabad High Court, following Badri Narain Kashi Prasad’s case (supra), held that where a minor admitted to the benefits of the partnership did not repudiate the partnership after attaining majority and the instrument of partnership provided for his share both in the profits as well as in the losses of the firm, after he attained majority, there would be no change in the constitution of the firm when a minor partner attained majority and the firm would be entitled to continuation of registration.

30. CIT vs. J. B. Coal Traders (1986) 51 CTR (Pat) 369 : (1987) 164 ITR 450 (Pat). In this case, a Division Bench of this Court, following its earlier decisions in Ganga Motor Service vs. CIT (1975) CTR (Pat) 46 : (1977) 106 ITR 132 (Patna) and Alankar Jewellers vs. CIT (1979) 8 CTR (Pat) 104 : (1979) 116 ITR 89 (Patna), as also of the decision of the Allahabad High Court in Brij Rattan Lal Bhoop Kishore vs. CIT (1982) 31 CTR (All) 199 : (1982) 136 ITR 722 (All), held that under sub-ss. (2) and (3) of s. 185 of the IT Act, 1961, the ITO could not refuse registration on the ground that the application for registration was not signed by one partner and that the ITO had to give an opportunity to the assessee to correct the defect in the application.

Learned advocate for the Revenue, on the other hand, contended that even assuming that there was no change in the constitution of the assessee during the relevant assessment year and that no change in the shares of the partners was evidenced by the instrument of partnership, the assessee firm was not entitled to continuance of its registration inasmuch as it had not filed its declaration in the prescribed form in terms of the proviso to sub-s. (7) of s. 184 within the prescribed time. The assessee filed the declaration in an obsolete Form No. 12 on June 30, 1975. The ITO was justified in not accepting the said declaration filed in an obsolete form. The subsequent declaration in the revised Form No. 12 was filed by the assessee long after June 30, 1975, the prescribed date, on January 6, 1976. Even then the form was not filed properly as one of the partners, Kamla Devi Jaiswal, had not signed the same and as such the ITO was justified in not accepting the said declaration. No evidence was furnished by the assessee as to why the said Kamla Devi Jaiswal was prevented from signing the said form nor any authority from the said Kamla Devi Jaiswal in favour of the said partner, Jag Narain Prasad, empowering the latter to sign the declaration on behalf of Kamla Devi Jaiswal was produced. The ITO was, therefore, justified also in rejecting this declaration filed subsequently and refusing registration to the assessee.

In support of his contention, learned advocate for the Revenue cited CIT vs. Jugsalai Electric Supply Co. (1987) 63 CTR (Pat) 368 : (1987) 165 ITR 740 (Pat). In this case, the assessee-firm was required to file its declaration for continuance of its registration by September 30, 1971, which was, in fact filed on December 3, 1971. The contention of the assessee that it had applied for extension of time in Form No. 6 was not accepted by the ITO as the records relating to the said application were not available in the office of the ITO nor was any evidence adduced to establish that such an application was, in fact, made. The ITO did not pass any order extending the time for filing of the return and rejected the application of the assessee for continuance of registration. On a reference, it was held that the assessee was not entitled to assume that any prayer for extension of time would be granted or that the ITO was bound to grant extension of time if asked for. As the Act provided the prescribed time for filing a declaration, the same could have been done within such time and, in any event, the prayer for extension should have been made before the expiry of such prescribed time. Overruling the decision of the Tribunal, it was held that the assessee was not entitled to continuance of registration.

On a consideration of the facts and circumstances as on record and the respective submissions made on behalf of the parties, it appears to me that the authorities below erred in following the decision of the Allahabad High Court in Ram Narain Laxman Prasad’s case (supra), which cannot be held to be good law in view of the subsequent decision of the Full Bench of the same High Court in Badri Narain Kashi Prasad’s case (supra). The said Full Bench decision has been followed in the subsequent decisions of the Allahabad High Court. The Madhya Pradesh High Court has also expressed the same view as will appear from the decisions noted hereinabove. I see no reason to take a different view and, with respect, I agree with the view of the Allahabad High Court as expressed in Badri Narain Kashi Prasad’s case (supra).

In my view, s. 187 of the IT Act, 1961, is not relevant for the purpose of continuance or discontinuance of registration of a partnership firm within the meaning of s. 184 of the said Act. In s. 187, the expression “change in the constitution of a firm” has been given a particular definition only for the purpose of the said section and such definition and meaning cannot be imported in construing the expression “change in the constitution of a partnership” under s. 184.

During the relevant assessment year, the minor, Rajendra Prasad, who had been admitted to the benefits of the partnership, attained majority. A copy of the original deed of partnership dated November 17, 1969, has been brought on record before us. The same must have been in the records of the earlier proceedings. The said deed clearly provides for the shares of profits and losses of the said Rajendra Prasad both during the period of his minority and after he attained majority. It cannot be held that there was any change in the constitution of the assessee by reason of the minor attaining majority as such nor can it be said that there was any change in the shares of the partners of the assessee which was evidenced from the said deed.

We note further that the assessee filed its original declaration under s. 184(7) of the said Act of 1961, before the ITO on June 30, 1975, within the time prescribed for furnishing such declaration. It has been found that the said declaration had been filed in an obsolete form and ought to have been filed in a revised form which was not done. It has also been found by the AAC that the said form was not verified and signed by all the partners of the assessee. The only defect in the subsequent declaration form filed under the revised Form No. 12 was that it had not been signed by the said Kamla Devi Jaiswal.

For the above reasons, we answer question No. 1 in the affirmative and in favour of the Revenue but we make it clear that the defects in the first declaration form filed by the assessee were that the same had been filed in an obsolete form and that it had not been verified and signed by all the partners. The only defect in the second declaration form filed by the assessee was that the same had not been signed by the said Kamla Devi Jaiswal and that no authority from the said Kamla Devi Jaiswal had been produced in favour of the partner of the firm who had signed the declaration on her behalf. The said defects were curable within the period prescribed under s. 185 of the IT Act, 1961.

We answer question No. 2 in the negative and in favour of the assessee. We hold that the Tribunal was not justified in holding that there was a change in the constitution of the firm and also in holding that the registration of the firm could not be continued for the said assessment year on that ground.

The Tribunal is directed to dispose of the matter on the basis of the answers aforesaid and, in particular, to determine whether the assessee had been given an opportunity to rectify the defects in the declaration form submitted by it in terms of s. 185 of the Act and also whether, in the facts and circumstances of the case, the assessee was prevented by sufficient cause from furnishing its declaration within the prescribed time. If necessary, the Tribunal will be entitled to take further evidence and hear the parties afresh.

S. ALI AHMAD, J.

I agree.

[Citation : 176 ITR 50]