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Petitioner: COMMISSIONER OF INCOME-TAX, WEST BENGAL VS Respondent: KHETAN & Co.Honorable Justice P. D. MUKHARJIAshoke Chandra Sen
1963 P T D 690
1963 P T D 690
[Calcutta India]
Before P. B. Mukharji and Law, JJ
COMMISSIONER OF INCOME‑TAX, WEST BENGAL
versus
KHETAN & Co.
Income‑tax Reference No. 76 of 1956, decided on 18th May 1961.
Firm‑Registration‑Partnership between adults and a minor represented by guardian‑Minor made liable for profits and losses- Deed signed by minor himself‑Validity of partnership‑Whether partnership can be registered‑Guardian's right to enter into partnership‑Income‑tax Act (XI of 1922), Ss. 26‑A, 66(1 )‑Income-tax Rules, rr. 2, 3, 5‑Contract Act (IX of 1872), Ss. 10, 11 & 23 Partnership Act (IX of 1932), S. 30‑Reference‑Power of High Court to consider question from all aspects.
A firm was constituted of A, B, C and D. The fourth partner D was described as a minor represented by his natural father and guardian E, but the deed of partnership was signed by A, B and C and the minor D himself. The deed provided that the minor was admitted to the benefits of partnership but it contained a further provision that "the profit and loss as may accrue from year to year . . . should be divided between and borne by the partners according to their shares". The question being whether the firm can be registered under section 26‑A of the Income‑tax Act, 1922
Held, that the signature of the minor D would not make it a contract binding on the minor and a minor cannot enter into a valid partnership with others; the fact that the minor was represented by his guardian would not make the agreement valid, as a minor could only be admitted to the benefits of a partnership under the law and could not be made a partner even by his guardian ; and the Income‑tax Authorities were, therefore, justified in refusing registration of the firm under section 26‑A.
[Legal incidents of a partnership to which minors are admitted and the object and scope of section 26‑A of the Act and rule 5 of the Income‑tax Rules discussed].
The right to apply for the registration of a firm under section 26‑A is to be determined exclusively by reference to the prescriptions laid down therein and it would be repugnant to the character of such a right to add to the terms of section 26‑A by reference to other laws.
While section 66, Income‑tax Act, 1922, only confers jurisdic tion on the High Court to permit a reference on a question of law arising out of the order of a Tribunal and does not confer juris diction on the High Court to decide a different question of law not arising from such order, nevertheless it is possible that the same question of law may involve different approaches for its solution, and the High Court , may amplify the question to take in all the approaches.
Commissioner of Agricultural Income‑tax v. Jagadesh Chandra Sahoo (1960) 64 C W N 876 ; Commissioner of Income‑tax v. Dwarkadas Khetan & Co. (1961) 41 I T R 528 ; Hunoomanper saud Panday v. Mst. Babooee Munraj Koonweree (1856) 6 M I A 393 ; Imambandi v. Mutsaddi (1918) A I R 1918 P C 11 ; Khimji Walji & Co. v. Commissioner of Income‑tax (1954) 25 I T R 462 ; Khorasany v. C. Acha (1928) A I R 1928 Rang. 160 ; Kondamudi Sriramulu v. Myneni Pundarikakshayya A I R (1949) F C 218 ; Kusumben D. Mahadevia v. Commissioner of Income‑tax (1960) 39 I T R 540 ; Miller & Sons v. Commissioner of Income-tax (1959) 36 I T R 194: Mohori Bibee v. Dharmodas Ghose (003) L R 30 1 A 114 ; New Jehangir Vakil Mills Ltd. v. Commissioner of Income‑tax (1959) 37 I T R 11 ; Rao Bahadur Ravalu Subba Rao v. Commissioner of Income‑tax (1956) 30 I T R 163 ; Sanyasi Clraran Mandal v. Krishnadhan Banerji (1922) L R 49 1 A 108 ; Srikuklam Subrahamanyam v. Kurra Subba Rao (1948) 52 C W N 706 ref.
STATEMENT OF CASE
By this application presented on 9th August, 1956, the Commissioner of Income‑tax, Calcutta, requires the Appellate Tribunal to refer to the High Court certain questions of law which are said to arise out of the Appellate Tribunal's order dated 31st May 1956, in 1. T. A. No. 6540 of 1954‑55.. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid order, we hereby draw up a statement of the case and refer it to the High Court of Judicature at Calcutta under section 66(1) of the Income‑tax Act. Copies of the draft statement were sent to the parties concerned. The assessee did not appear. The Commissioner of Income‑tax has no suggestion to make.
2. By an indenture of partnership dated 7th April 1940, the firm was constituted with four partners, namely, (1) Sagarmal Khetan, (2) Shankarlal Khetan, (3) Rameshwardas Agarwalla and (4) Shambhulal Khetan. The fourth partner, Shambhulal Khetan, was a minor son represented by his natural father and guardian, Ghasiram Khetan, and was admitted to the benefits of partnership. By clause 5 of the said partnership deed it was agreed that the profit or loss as may accrue from year to year including loss of capital should be divided between and born by the partners accord ing to their shares. The deed of partnership is made a part of the case and is Annexure "A". The Income‑tax Officer refused registration of the firm on the footing that one of the partners, Rameshwardas Agarwalla, was not genuine. On this point however the Tribunal held that he was a genuine partner and this being a question of fact no question of law arises.
3. In the appeal before the Appellate Assistant Com missioner he however held that as clause 5 requires the partners to share the losses and as one of the partners was a minor and under the law the minor partner could not be held to share the loss, he held that the partnership was void ab initio. On this question of law there was difference between the members of the Calcutta Bench. The Accountant Member held that the deed of partnership ex plicitly stated that the minor was admitted to the benefits of partnership as contemplated under section 30 of the Indina Partnership Act and that clause 5 of the said partnership deed was subjected to the earlier clause and the term that the profit or loss as might accrue from year to year, including the loss of capital, was limited in the case of the minor to the capital contributed by him and/or the amount credited to his account by way of his share in the profits of the firm. The Judicial Member however held that according to clause 5 of the partnership deed, the minor was made to bear the losses in the same manner as the other partners. The loss was not limited to his share of profits. Even if that should be accepted that by reason of section 30 being made to govern the instrument of partnership, the losses, if any, would have to be borne by the minor only to the extent of his share of profits and property of the firm and in the opinion of the Judicial Member, clause 5 of the deed offended the fundamental fact that he could be admitted only to the benefits of the partnership and not made liable to losses of the partnership except to a limited extent already stated. The point in difference was referred to the President under section 5‑A(7) and the President, as third Member, agreed with the Accountant Member and held that in the case of losses the minor's share of the loss of the year of account would be debitted to the minor's account and that the partners of the firm were precluded from suing the minor for the balance of the loss assuming that the firm was wound up at the end of the year, and that no outsider could make the minor personally liable because he was admitted to the benefits of partnership. He therefore agreed to the interpretation that the loss of the partnership would be shared by the minor to the extent of his share in the capital. The orders of three members of the Tribunal are parts of this case and are Annexures "B", "C" and "D".
4. From the above facts and circumstances the following question of law arises;
"Whether on a true construction of the partnership deed dated 7th April 1949, registration under section 26‑A of the Act can be granted to the asscssee?"
E. R. Meyer and B. L. Pal for the Commissioner.
Ashoke Chandra Sen for the Assessee.
JUDGMENT
P. D. MUKHARJI, J.‑This is a reference under section 66(1) of the Income‑tax Act by the Tribunal at the instance of the Commissioner of Income‑tax, West Bengal. The question of law on which the decision of this Court is sought is as follows:
"Whether on a true construction of the partnership deed dated 7th April, 1949, registration under section 26‑A of the Act can be granted to the assessee."
The assessee is a firm of partnership called Khetan & Company, Jalpaiguri. The assessment year out of which these proceedings started is the year 1950‑51. The deed of part nership is dated 7th April, 1949. It is expressly made between four parties, (1) Sagarmull Khetan, (2) Shankarlal Khetan, (3) Rameshwardas Agarwalla, and (4) Shambhulal Khetan. The first, second and the fourth parties are brothers, being sons of one Ghasiram Khetan. The fourth party, Shainbhulal Khetan, in the deed of partnership is described as a minor son of Ghasiram Khetan and represented by his natural guardian and father, Ghasiram. When this deed of partnership was presented to the Income‑tax Officer, the Income‑tax Officer refused registration of the firm under section 26A of the Income‑tax Act on the ground that appropriate interest in terms of the partnership deed was not charged and apportioned and, therefore, it was not properly acted upon and, secondly, that one of the partners, Rameshwardas, did not appear to be a genuine one.
The assessee appealed to the Appellate Assistant Com missioner who expressed the opinion that clause 5 of the partnership deed required the partners to share the losses and as one of the partners was a minor and under the law the minor could not be made liable to share the loss, the partnership was void ab initio. On this question of law there followed difference between the Members of the Calcutta Bench of the Appellate Tribunal. The Accountant Member of the Appellate Tribunal expressed the opinion that the deed of partnership expressly stated that the minor was admitted to the benefits of partnership and expressly mentioned that his case was subject to section 30 of the Indian Partnership Act and, therefore, he read clause 5 of the partnership deed as subject to section 30 of the Partnership Act with the result that he was of the view that clause 5 should be read, so far as the minor was concerned, as a liability for the loss for his share only without any personal liability for the minor. The Judicial Member of the Appellate Tribunal, on the other hand, expressed the contrary opinion holding that clause 5 of the partnership deed made the minor liable to bear the losses in the same manner as the other partners and was, therefore, bad and in breach of section 30 of the Partnership Act. The difference between the members was thereafter referred to the President under section 5A(7) of the Income‑tax Act and the President, as the third Member, agreed with the Accountant Member and held that in the case of losses the minor's share of the loss of the year of account would be debited to the minor's account and the partners of the firm would be precluded from suing the minor for the balance of the loss assuming that the firm was wound up at the end of the year, and that no outsider could make the minor personally liable because he was only admitted to the benefits of partnership. The order of the President, therefore, was to allow the appeal and. permit registration of this deed of partnership. This is the chequered history of the pro ceedings. The Tribunal, therefore, in this context rightly referred the aforesaid question of the law for determination by this Court.
A preliminary point on behalf of the assessee was taken to confine the answer to the question only to a consideration of clause 5 of the partnership deed because the difference in view and opinion arose on that point. Reliance was placed on the well known decision of the Supreme Court in New Jehangir Vakh Mills Ltd. v. Commissioner of Income tax ((1959) 37 I T R 11), lying down the principle that the only question of law which the' assessee or the Commissioner can require the Tribunal to refer to the High Court under section 66(1) of the Income‑tax Act is "any question of law arising out of an order of the Tribunal". On the strength of that decision it is contended that the order of the Tribunal shows that it proceeded only upon the construction of clause 5 of the partnership deed. The difficulty on behalf of the assessee so far as this point is concerned lies elsewhere. That is in the question already framed and sent to this Court for decision.
The question itself, quoted above, will show that it is not confined to any particular clause of the partnership deed but has been widely framed to depend on the construction of the whole deed of partnership. Therefore, the ambit of the question of law asked in this case will not justify us to limit ourselves to clause 5 of the partnership deed only but to have an entire view and conspectus of the whole deed of partnership in this case.
The assessee's argument on this point also suffers from a wrong approach of law under section 66(1) of the Income-tax Act. To indicate the fallacy of the assessee's argument it will be enough to refer to the latest Supreme Court decision in Kusumben D. Mahadevia v. Commissioner of Income‑tax ((1960) 39 I T R 540) where it is expressly laid down that while section 66 only confers jurisdiction on the High Court to permit a reference on a question of law arising out of the order of a Tribunal and does not confer jurisdiction on the High Court to decide a different question of law not arising from such order nevertheless it is possible that the same question of law may involve different approache3 for its solution, land the High Court may amplify the question to take in all the approaches. But certainly the question must still be one which was before the Tribunal and was decided by it. It must not be an entirely different question which the Tribunal never consi dered (see the observations of the Supreme Court at page 544 of that report). Applying those principles here it is plain that the whole question before the taxing authority was whether the parti cular deed of partnership could be registered under section 26A of the Income‑tax Act. The fact that according to the taxing authorities they put forward the reason of clause 5 of the partnership deed to dispose of the question, does not mean that other classes of the partnership deed cannot be examined by this Court. Indeed the Accountant Member himself refers also to clause 6 of the partnership deed and quotes it, as well as other parts of the deed. In the first place, as indicated above, the question itself that has been raised by the Tribunal is not at all limited to clause 5 but makes reference to the true construction of the whole deed of partnership, and, secondly, it is the same question of law whether this particular deed of partnership could be registered and the different approaches for its solution through the different clauses of the partnership cannot, therefore, be excluded.
Reverting back to the deed of partnership, which I propose to analyse clause by clause it will be necessary to see that the deed of partnership is signed by the minor as a fourth party although, as has already been said, he was being represented by his natural guardian, father. The order of the Accountant Member shows that the application was signed by three adult partners and by the minor partner also. In fact, therefore, one of the contentions raised was that the application had become void by the signature of the minor partner.
Large questions for determination arise on the Con tract Act, the Partnership Act and the Income‑tax Act including interpretation of the different clauses of the part nership deed.
The first questions is whether a minor can enter into a contract of partnership. It is necessary at the outset to mention that the English law is different from the Indian taw on this point and there is nothing in English law comparable to section 30 of the Indian Partnership Act, Before dealing with the provisions of section 30 of the Indian Partnership Act it will be necessary to dispose of shortly the argument about minor's capacity to enter into a contract of partnership under the Indian law.
Section 10 of the Contract Act provides that all agree ments are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. It is followed by section 11 of the Contract Act which lays down that every person is competent to con tract who is of the age of majority. It follows that a person who is not of the age of majority is not a person competent to contract and make a lawful contract within the meaning of section 10 of the Contract Act. The position formerly taken by certain Indian decisions was that because under the English law a minor's contract was only voidable at his option a minor's contract even under the Indian Contract Act was also to be regarded as such. Under the common law of England a minor's contract is not generally void but voidable at his option and if it appeared to the English Court to be for his benefit it should even be binding speci ally if the contract was for necessaries. But in 1903 the Privy Council in Mohori Bibee v. Dharmodas Ghose ((1903) I L R 30 Cal. 539,) emphasises the difference between the Indian law and the English law and clearly lays down that the Indian Contract Act makes it essential that all contracting parties should be competent to make a contract and a person who by reason of infancy is incompetent to contract, cannot make a contract within the meaning of the Act. Although this case relates to a mortgage by a minor, the Privy Council lays down the principles and construction of the Indian Contract Act. Following the same principle in this case, therefore, the signature by the minor to the partnership deed cannot make it a contract binding on the minor, just as the mortgage by the minor was held by the Privy Council not to bind the minor.
On the question of minority, section 26‑A of the Income‑tax Act and the Rules made thereunder are also relevant for this appeal. Section 26‑A of the Income‑tax Act lays down the procedure for registration of firms. It provides as follows;
"(1) Application nay be made to the Income‑tax Officer on behalf of any firm; constituted under an instrument of partner ship specifying the individual shares of the partners, for regis tration for the purposes of this Act and of any other enactment for the time being in force relating to income‑tax or super‑tax.
(2) The application shall be made by such person or persons, and at such times and shall contain such particulars and shall be in such form, and be verified in such manner as may be prescribed ; and it shall be dealt with by the Income‑tax Officer in such manner as may be prescribed."
This section 26‑A was inserted by section 5 of the Indian Income‑tax (Amendment) Act, 1930 (Act XXI of 1930). An analysis of this section shows that the application may be made on behalf of a firm. The firm is qualified by the expression "con stituted under an instrument of partnership". An instrument of partnership necessarily means a written agreement or deed of partnership. Now an actual instrument of partnership, which is itself an agreement of partnership and therefore a contract, cannot be signed by a minor who has not the capacity under the Contract Act to enter into any contract including a contract of partnership. This section itself does not speak of the minority of any partner expressly. But rules made under section 59 of the Income‑tax Act refer to minors. Before dealing with the rules it may be mentioned in passing that rules made under section 59 when published in the Official Gazette are expressly laid upon such publi cation to "have an effect as if enacted in this Act" by reason of subsection (5) of section 59 of the Income‑tax Act. The result, therefore, is that rules have the same effect now as if enacted in this Act. Rule 2 of the Indian Income‑tax Rules expressly provides that an application for registration "shall be signed by all the partners" (not being minors) personally. Rule 3 similarly provides that "if the Income‑tax Officer is satisfied that for some sufficient reason the original instrument of partnership cannot conveniently be produced he may accept a copy of it certified in writing by all the partners (not being minors)." Rule 3 also provides that the application for registration mentioned in rule 2 "shall be made in the form annexed to this rule". Form I is such a form that is annexed to the rule. There is a note attached to that form which expressly says "this application must be signed personally by all the partners (not being minors)." Particulars of the form containing the columns indicate in 1 only names of partners, and not other persons and not those who may not be partners but may be admitted to the benefits of partnership such as a minor under section 30 of the Partnership Act.
On a true interpretation of section 26‑A and the rules made thereunder having the effect that such rules are also enacted in the Act, it follows irresistibly for the reasons stated above that a minor cannot enter into a contract of partnership and that is why minors are not required (1) to sign the application for registration, (2) to certify the copy and (3) only partners and not minors who are only admitted to the benefits of partnership are included in the form to be filed in. The question whether the application for registration in this case was invalid merely because the minor put his signature is a small point compared with the larger question about his capacity to enter into such contract and the Accountant Member tried to dispose of the question, in our view wrongly, by only holding that such a signature was redundant in terms of rule 3 under section 26‑A and the whole application was not invalid.
The point that next arises for discussion is nowhere section 30 of the Partnership Act recognises a minor's position in a contract of partnership. Partnership belongs to the realm of contract and section 5 of the Indian Partnership Act expressly makes it clear by saying "the relation of partnership arises from contract and not from status." It is defined by section 4 of the Partnership Act to be the relation between persons who have "agreed" to share the profits of the business carried on by all or any of them acting for all. It is then said that such persons who have entered into partnership are individually called the partners and collectively called a firm. It follows from the definition of section 4 of the Partnership Act, by virtue of the word "agreed" that the persons must be competent to agree. A person who is not competent to agree or to make a contract is, therefore, outside the scope of persons within the meaning of section 4 of the Partnership Act. From these two sections alone it is a legitimate conclusion to draw that even under the Partnership Act, apart from the Con tract Act, the minor cannot be a partner. This conclusion is confirmed by section 30 of the Partnership Act which expressly says that a person who is a minor "may not be a partner in a firm." It begins, therefore, with the enunciation of the principle of the inability of a minor to be a partner in a firm. Then it goes on to provide the manner in which a minor may be recognised in a partnership. The crucial words in subsection (1) of section 30 of the Partnership Act on this point are "with the consent of all the partners for the time being he may be admitted to the benefits of the partnership." That means the adult partners may consent and agree between themselves and confer upon the minor "the benefits of partnership". Having first postulated the incapacity of a minor to be a partner in a firm this provision which follows to admit him to the benefits of partner ship must, therefore, be read subject to that disqualification. Admission to the benefits of partnership cannot therefore make a minor an actual partner in a firm. He does not by admission to the benefits of a partnership acquire the status of a partner. It is something less. The reason for making such provision is that the minor cannot enter and has not the capacity to enter into a contract of partnership. Therefore, section 30 (1) of the Partner ship Act cannot mean that there is a kind of contract by the minor to get the benefits of partnership. It indeed suggests that it is the adult partners who are conferring the benefits of partner ship upon the minor. From that point of view the minor is a kind of beneficiary admitted to "the benefits of partnership".
There are nine subsections of section 30 of the Indian Partnership Act. A scrutiny of the provisions of these various…
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