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Petitioner: ADDEPALLY NAGESWARA RAO VS Respondent: COMMISSIONER OF INCOME-TAX A.P.
1988 P T D 702
1988 P T D 702
[Andhra Pradesh High Court (India)]
Before Gopal Rao Ekbote and Ramachandra Raju, JJ
ADDEPALLY NAGESWARA RAO and brothers
Versus
COMMISSIONER OF INCOME-TAX A.P.
Case referred No.2 of 1966, decided on 16th September, 1969.
Income-tax Act (XI of 1922)--
---S. 26-A--Firm--Registration--Renewal of registration--Minor partners--Validity of partnership--Guardian who is himself a partner giving consent to admission of minor to the benefits of the partnership--Whether valid--Deed not incorporating clause regarding the distribution of losses--Validity--Contract Act (IX of 1872), Ss.40 & 44--Partnership Act, (IX of 1932), Ss.4 & 30.
In order to construe a partnership deed, the entire document must be read as a whole and a reasonable construction should be placed on it. In a document where several clauses appear, what clause dominates the document should be found out with a view to ascertain the real intention of the parties. When the intention of the executants of the document is clear from the dominant clause therein which states that the minor is admitted only to the benefits of the partnership, the other clauses of the document should be so read as to reconcile them with this manifestly brought out intention of the parties to the document.
A guardian who himself is a partner can, alongwith other major partners, give consent in regard to the admission of a minor to the benefits of the partnership and as a guardian on behalf of the minor can agree that the minor be admitted to the benefits of the partnership with or without certain conditions.
Even though the partnership deed does not incorporate any terms from which it is possible to deduce as to in what proportion the losses will be borne by the partnership, nevertheless the partnership deed will be valid in law.
If substantial compliance with S. 26-A read with Rule 3 is made, then registration of the firm should not be refused. Whether the partnership deed substantially complies with the said requirements or not depends upon the terms of the document and the facts and circumstances of each case.
Commissioner of Income-tax v. Dwarkadas Khetan & Co. (1961) 41 I T R 528 distinguished. Angadi (R.B.) and Sons v. Commissioner of Income-tax (1969) 73 I T R 93 (Mys.); Commissioner of income-tax v. Khetan and Co. (1962) 45 I T R 170 (Cal.); Commissioner of Income-tax v. Shah Jethaji Phulchand (1965) 57 I T R 588 (SC); Commissioner of Income-tax v. Shah Mohandas Sadhuram (1965) 57 I T R 415; Hiralal Jagannath Prasad v. Commissioner of Income-tax (1967) I T R 293 (All.); Hoosen Kasam Dada v. Commissioner of Income-tax (1937) 5 I T R 182 (Cal.); Jeewanram Gangaram v. Commissioner of Income-tax (1967) 64 I T R 483 (Cal.); Krishna and Bros. v. Commissioner of Income-tax (1968) 69 I T R 135 (Ker.); Lachhman Das v. Commissioner of Income-tax (1948) 16 I T R 35 (11Cj; Laxmi Trading Co. v. Commissioner of Income-tax (1966) 62 I T R 770 (All.); Meenakshi Achi v. Subramaniam Chettiar (P.S,m,) (1957) A I R 1957 Mad. 8; Mohan Lal Shyam Lal: In re (1942) 10 I T R 219 (All.); Mohori Bibee v. Dharmodas Ghose (1903) LR 30 I A 114; National Trading Company v. Commissioner of Income-tax (1969) 71' I T R 513 (Cal.); Palu (C.T.) and Sons v. Commissioner of Income-tax (1969) 72 I T R 641 (Ker.); Patel (N.T.) and Co- v. Commissioner .of Income-tax (1961) 42 I T R 224; Sannappa (R.) and Sons v. Commissioner of Income-tax (1967) 66 I T R 27 (Mys.) and Thacker and Co. v. Commissioner of Income-tax (1966) 61 I T R 540 (Guj.) ref.
D. Venkatappa Sastri for the Assessee.
P. Rama Rao for the Commissioner.
JUDGMENT
GOPAL RAO EKBOTE, J.--This is a reference made to .this' Court under section 66 (1) of the Indian Income-tax Act, 1922 (XI of 1922), hereinafter called the "Act", and raises the following three questions:
"(1) Whether, in the facts and circumstances of the case, the assessee is entitled to renewal of registration for the assessment year 1961-62?
(2) Whether' the Commissioner had jurisdiction under section 33-B of the Act to set aside the order granting registration in the facts and circumstances of the case?
(3) Whether the assessee was afforded a reasonable opportunity by the Commissioner to present his defence?"
The facts out of which these questions arise may briefly be mentioned.
The assessee is a firm known as Messrs Addepalli Nageswara Rao and Brothers, Palakole, which consists of three major partners and one minor; Nageswara Rao and his two brothers, Kasiviswanadham and Mareswara Rao, are the major partners; and Kamaraju, son of Nageswara Rao, is a minor. The firm was constituted under an instrument of partnership dated December 4 1959. It was registered under section 26-A of the Act for the year 1960-61. For the assessment year 1961-62, the assessee filed an application under section 26-A of the Act for renewal of registration. The Income-tax Officer having found that the firm is continuing in the same form and that the profits and losses were apportioned properly by his order dated September 12, 1961, granted the renewal of registration of the firm.
The firm registered itself with the Registrar of Firms by an application dated November 9, 1959. It was also registered under section 12 of the Andhra Pradesh General Sales Tax .Act with effect from September 7, 1959. The firm also opened a current account with the Indian Bank Ltd. Palakole, for the purpose of its business.
It appears that, in the course of the proceedings for the assessment year 1962-63 the Income-tax Officer had some information which led him to believe that one of the partners, A. Mareswara Rao, was not in fact a partner. An inspector of Income-tax seems to gave visited the premises of the firm somewhere in December, 1962, and obtained a statement from Mareswara Rao. The statement indicated that Mareswara Rao was unable to explain the source of the capital, which is claimed to have been contributed by him and in lieu of which he was given a six annas share in the firm. It also states that the said partner had very vague ideas about the capital contributions and in regard to the shares of the other partners. Mareswara Rao was stated to be the managing partner of the firm which factor highlighted the suspicion, which had arisen on account of this statement in the mind of the Income-tax Officer. Although, thereafter, in January, 1963, and May, 1963, Mareswara Rao made some attempts to explain and clarify the doubts, no final decision was taken on that matter and it was pending before the Income-tax Officer.
While the matter stood thus, the Commissioner of Income-tax found, on a scrutiny of partnership deed, that one of the parties thereto, that is to say, Kamaraju Gupta, was a minor and that the partnership deed was signed on his behalf by his father, Nageswara Rao, who himself was one of the partners. The Commissioner was of the opinion that the minor had been sought to be made a partner in the firm, which violated section 30 of the Partnership Act. He therefore, held the opinion that the partnership was invalid, The Commissioner, for this reason and also for the reason that Mareswara Rao might not be a genuine partner, thought that the order of the income-tax Officer dated September 12, 1961, be revised.
He, therefore, issued a notice on August 10, 1963 to the assessee under section 33-B of the Act calling upon it to show cause why the abovesaid order of the Income-tax Officer should not be set aside. The applicant received the notice and sought an adjournment. The Commissioner refused to give adjournment, but on the representation of the assessee, he posted the case for final hearing to August 30, 1963. According to this order, the Commissioner held that there was a doubt regarding not only the genuineness of the partnership but also in regard to its validity, He reached the conclusion that the partnership was vitiated as it purported to make the minor a full-fledged partner of the firm. He was of the opinion that the Income-tax Officer had provided a reasonable opportunity to the assessee to submit his explanations. He was also inclined to the conclusion that Mareswara Rao was not a genuine partner. Rejecting the contention that he has no jurisdiction to set aside the order of the Income-tax Officer dated September 12, 1961, he revised the said order of the Income-tax Officer with the result that the renewal of the registration of the firm was considered as rejected.
The assessee, dissatisfied with that order of the Commissioner preferred an appeal to the Income-tax appellate Tribunal. The Tribunal considered the contentions raised before it and held on a construction 4 the document and the preamble to the deed read with clause (31 (a) and 3 (c) that the min6r would be deemed to have been admitted is a partner. The Tribunal, therefore, held that the deed was not a valid one. It also found that the deed could not be a valid deed even on the basis that the guardian had entered into the partnership on behalf of the minor and gave two reasons for reaching that conclusion: firstly, that the guardian of the minor had no capacity to enter into a contract; and, secondly, the guardian would then be partner in two capacities which was not possible. It was further held that, since the partnership specifies the shares of the partners it reference to the profits only and not in the losses, in the event there are any, it disentitles the firm from being accorded registration. The Tribunal rejected the contention that the assessee was not afforded a reasonable opportunity of being heard. So far as the contention relating to Mareswara Rao being a partner was concerned, the Tribunal reached the conclusion that the Commissioner had not recorded any final conclusion on that aspect of the case. The contention regarding the competence of the Commissioner also was rejected.
On an application of the assessee, this reference has been made to us.
Taking the first question for consideration, the contention of Sri P. Rama Rao, the learned counsel for the department, was that on a construction of the document, it would be evident that the minor was in fact a full-fledged partner of the firm and was, not admitted only to the benefits of the partnership.
In order to appreciate the implications of the contentions it isnecessary to refer to some of the clauses on which reliance was, placed by the parties before us. The English translation of the partnership agreement, in so far as it is relevant, reads as follows:
"Partnership deed jointly executed by (1) Addepalli Nageswara Rao, aged 30 years, eldest son of late Kamaraju, native of Jinnur, (2) Addepalli Nageswara Rao on behalf of his minor son (aged 4 years), Kamaraju Gupta, as guardian and father, of the same village, (3) Addepalli Kasiviswanadham, second son of late Kamaraju Garu of the same village, and (4) 'Addepalli Mareswararao, son of late Kamaraju Garu, of the same village on 4th December, 1959.
(1) .....
(2) The capital required for this business can be brought by three of us at convenience excepting the minor. There is no condition that the capital is to be brought equally or in proportion to shares. There is no connection of these investments to the moneys of the Hindu undivided family represented by Addepalli Nageswara Rao. The credits coming from the joint family are to be treated as loans and the stipulated rate of interest is to be paid. The interest is to be accounted for at Rs. 0-12-0 per cent per month in relation to the withdrawals or investments of the partners.
(3)(a) It is decided to share the profits and losses in proportion to the under mentioned shares.
(1) Addepalli Nageswara Rao
Re.
0-3-0 in the rupee
(2) Addepalli Kamaraju Gupta (being -minor (by) guardian Nageswara Rao)
0-1-0 -do -
(3) Addepalli Kasiviswanadham
0-6-0 -do -
(4) Addepalli Mereswararao
0-6-0 -do-
Rs.1.0.0
(b) It is decided that because Addepalli Kamaraju Gupta being minor, the guardian should be his father and the minor is admitted to the benefits of the partnership.
(c) At the end of the (accounting) year the profits and losses of the business are to be apportioned among the partners in the above shares in the business books.
(d) Partners 3 and 4 are to conduct the routine management of the firm's business and are to be treated as managing partners.
(4) -------------
(5) The moneys required for the purpose of the business can be borrowed by partners 1,3 and 4 either individually or collectively and after duly registering the credits in the accounts the said moneys are to be paid back with the stipulated rate of interest.
(6) Before ascertaining profits or losses at the end of the year, the general mercantile principles in vogue are applicable: the interest, establishment lighting expenses, rents, bad debts and other losses, Kottu. Saddar, etc. all the expenses should be considered. The profits or losses thus ascertained are to be accounted for in the business books in the share of the partners.
(7) These is no time limit for this partnership. This comes under partnership at will (and) this firm will be dissolved by the issue of notice by the dissident partner declaring his dissent to be partner.
(8) ------------
(9) For the conduct of the affairs of the firm (and) for defining the rights and liabilities of the partnership as well as for dissolution, the current provisions of the Indian Partnership Act, 1932, will apply.
(1) (Signed) Addepalli Nageswara Rao,
(2) (Signed) Addepali Nageswara Rao.
(3) (Signed) Addepalli Kasiviswanadham.
(4) (Signed) Addepalli Mareswara Rao."
On a consideration of clauses (3) (b), (3) (c), (6) and (7) of this document, the Tribunal came to the conclusion that the minor in fact was a partner and was not merely admitted to its benefits.
In order to construe a partnership deed, it is now well settled that the entire document must be read as a whole and a reasonable construction should be placed on it. In a document where several clauses appear, what clause dominates the document should also be found out with a view to ascertain the real intention of the parties. In order, therefore, to find out whether Addepalli Kamaraju Gupta, the minor, was admitted as a partner, the dominant clause to which one must immediately pay attention is clause 3 (b). The said clause, in unequivocal and unambiguous language, states that "the minor is admitted only to the benefits of the partnership". When the intention of the executants of this document thus becomes abundantly clear and leaves no one in doubt, then the other clauses of the document should be so read as to reconcile them with this manifestly brought out intention of the parties to the document. Sub-clauses (a) and (c) of clause (3) no doubt speak as if the profits and losses would be shared by all the partners and would be apportioned according tot their shares mentioned in sub-clause (a). But if the said twos sub-clauses are read in conjunction with sub-clause (b), which is a 'dominant sub-clause, then it would be very clear that what the sub-clauses (a) and (c) mean is that, since the minor is admitted only to the benefits of the partnership, he would share the profits in proportion to the shares mentioned in sub-clause (a). But in so) far as the losses are concerned, it would be borne ultimately as stated hereinafter, only by the three major partners (i.e. partners 1, 3 and 4) in proportion to the shares which are mentioned against their names in sub-clause (a). How these two sub-clauses negative the idea, which is patently clear in sub-clause (b) is difficult to understand. Clause (3) of the document must be read as a whole; and if so read, it would be clear that the partnership consists of only three major partners while the fourth person, namely, the minor, is admitted by those three major partners with their consent only to the benefits of the partnership. Partners 3 and 4, who would be the managing partners, would conduct the routine management of the firm's business. The profits would be distributed according to the shares mentioned in sub-clause (a) and the losses also would gel borne by the partners in the proportion mentioned against their names We, therefore, fail to see how sub-clause (a) or sub-clause (c) would bring about any change in the explicit intention brought out in sub-clause (b) or even dilute its force.
Clause (6) is merely a projection of sub-clauses (a) and (c) of clause (3). It merely lays down the mode of ascertaining the profits or losses at the end of the year, and directs "that the profits or losses thus ascertained are to be accounted for in the business books in the shares of the partners". If it is remembered that the minor is admitted to the benefits of the partnership, then he is not d partner: and the word "partners" appearing in clause (6) would only refer to the three major partners who have admitted the minor to the benefits of the partnership. We do not, therefore, think that clause (6) in any manner militates against the express intention declared in clause 3 (b) of the deed.
Clause (7) likewise does not revolt against the dominant idea found in the document that the minor is admitted to the benefits of the partnership. The mere fact that the partnership is at will would hardly bring about any change in this real position of the minor. Similarly, the fact that the said clause authorises all the partners to bring about a dissolution of the partnership by the issue of a notice declaring his dissent to be a partner, would not affect the position of the minor in any way. First of all, the word "partner" appearing in the said clause would only refer to the major partners and not to the minor, because he is not a partner. It is true that while construing the document neither we can assume the minor to be a partner, nor assume that he is admitted to the benefits of the partnership. But taking the clause as it is and assuming that it also empowers the minor to bring about dissolution of the partnership at will, we do not think it is in any manner inconsistent with any provision of the law. In this connection, section 30 (4) of the Indian Partnership .act is relevant. According to that provision, a minor who is admitted to the benefits of the partnership may not sue the partners for an account of payment of his share of the property or profits of the firm during the subsistence of the partnership; but, if he wants to sever his connections with the firm, he can take necessary steps to do so and, in such a case, the amount of his share shall be determined by a valuation made as far as possible in accordance with the rules contained in section 48 of the Partnership Act. After all, the minor is not tied down to the partnership, be it a partnership at will or otherwise, for ever. If he can get in through his guardian, he can also get out of it whenever he desires to do so and that is what has been exactly provided in subsection (4).
It is also pertinent to note that under the proviso to that subsection, all the partners acting together or any partner entitled to dissolve the firm upon notice to other partners may elect in such suit to dissolve the firm. The suit referred to in this proviso relates to the step, which the minor can take under sub-section (4) in order to sever his connections with the partnership concern. In that case, such a suit would be proceeded with as if it was a suit for dissolution and for settlement of accounts between the partners and the amount of the share of the minor shall be determined along with the shares of the partners. It is thus clear from this provision that, since the minor is not tied down to the partnership, he can when he liked sever his connection. But as long as he continues as a partner drawing the benefits of the partnership, he cannot sue the partners for an account or payment of his share of the property or profits of the firm. He can ask for these reliefs only at the time when he wants to sever his connection with the partnership firm.
Section 32 of the Partnership Act, which relates to the retirement of a partner refers only to a case of a partner. Likewise under section 39 the dissolution of a firm can be brought about only by the partners. It is, therefore, only in the light of sub-section (4) of section 30 of the Partnership Act that clause (7) of the agreement has to be understood; and, in such a case, the minor can sever his connection with the firm by filing a suit for the reliefs of accounts and division of shares and if the other partners intended or desired to convert the character of the suit, they may do so under the proviso to section 30(4) making it a suit for dissolution of partnership and in that case the connection of the minor will also get automatically severed, and he will be entitled to the other reliefs referred to in that subsection. We are, therefore, clear that clause (7) of the deed, firstly, does not refer to the minor at all, but refers only to the partners, and secondly, assuming that it does so refer, the remedy which the minor has, to sever his connection with the partnership, is that which is provided in section 30(4) and it is to that remedy that the substance of clause (7) refers to. We do not, therefore think that because of the existence of clause (7), it can be said that the minor has become a partner. That would amount to flying in the face of an express clause like clause 3(b) which is not, in our view, permissible.
The last clause to which our attention was drawn is clause (9) of the deed. That clause merely states that the current provisions of the Indian Partnership Act of 1932 will apply for the conduct of the affairs of the company and for defining the rights and liabilities of the partnership as well as for its dissolution. We fail to see how this clause makes the minor a partner of the said firm. The result of this clause is to apply all the provisions of the Partnership Act to the conduct of the business of the said firm. Even if this clause were not to be there, it cannot be doubted that the provisions of the Partnership Act subject to the contract would have been attracted to the business of the said firm. The provisions applicable include the provisions of section 30' of the Partnership act according to which a minor may not be a partner in a firm, but he can certainly be admitted to the benefits of the partnership. Merely because these' provisions are made applicable, we fail to see how it can at all be contended that the minor thereby becomes a full-fledged partner in the firm.
It will thus be plain that whether we read the said clauses separately or read them cumulatively or read the document as a whole, there is no room for contending that the minor has not been admitted merely to the benefits of the partnership but is made or is intended to be made a full-fledged partner.
In this connection, it must be remembered that even if the word "losses" appearing in clauses (3)(a),' (3)(c) and (6) is to be attributed to the minor, even then section 30 permits the losses incurred by the firm to be shared by the minor in so far as the profits to which he would be entitled to from the said firm are concerned. Section 30(3) enjoins that a minor's share in a firm is liable for acts of the firm. This share of the minor may be in the form of capital or may be in the form of profits, which the firm makes. But in view of the subsequent portion of the said sub-section that a minor is not in any case personally liable for any such act, no one can be left in doubt that what is affected by sub-section (3) of section 30 is not the person of the minor or his other property not brought in the assets of the firm but only the share of the minor in the firm. From that point of view also,, clauses 3(a) and 3(c) and clause (6) do not militate in any manner against the concept of admitting the minor only to the benefits of the partnership.
In this connection, the word "only" appearing in clause 3(b) assumes importance and being a significant word, it stresses the importance, of that clause and makes it dominant over the other two sub-clauses; and it is only subject to this dominant idea that the whole document has to be read; and if read thus, it becomes patently clear that there is no whisper anywhere in the document which would compel us to disregard the dominant clause or outweigh it by conveying an idea of making a minor. a full-fledged partner in the firm. We are, therefore, satisfied -that the minor has not 'been admitted as a partner, but is admitted only to the benefits of the partnership and, consequently, the partnership deed is not violative of section 30 or any other provision of the Partnership Act. The contract is valid and binding upon the partners of the firm.
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