1. This is an appeal filed by the revenue against the order of the AAC, Special Range, Kanpur.
2. The assessee was formerly a registered firm. However, there was a change in the constitution of the firm with effect from 1-4-1978 (vide partnership deed dated 13-4-1978) whereby Shri Jamshed Iqbal and Miss Shamimul Ummat were admitted to the benefits of partnership. Besides, three other minors, Rafat Qaiyum, Faisal Ayub and Firoz Ayub, were also admitted to the benefits of partnership. There was another change in the constitution of the firm on Shri Jamshed Iqbal and Miss Shamimul Ummat becoming majors and electing to become full-fledged partners with effect from 2-7-1978 by instrument of partnership dated 11-8-1978.
There was an application for registration of the firm. The ITO, however, was of the view that since Clauses 6 and 8 of the instrument of partnership not only fixed the capital of the three minors, Rafat Qaiyum, Faisal Ayub and Firoz Ayub, at Rs. 6,000, Rs. 7,500 and Rs. 6,500, respectively, but also made them liable to losses to the extent of 3 per cent, 6 per cent and 6 per cent of the losses, the instrument of partnership did not bring into existence a valid firm.
The ITO also observed that in the earlier years the firm never did any business of commission agency in hides and skins and, therefore, the mention in Clause 3 that the business of partnership shall continue to be that of commission agency in hides and skins was a mis-statement and, therefore, the instrument of partnership also appeared to be dubious. The ITO, therefore, came to the conclusion that there was no genuine firm in existence. The claim of registration was, therefore, refused.
3. When the matter went up in appeal, the AAC not only held that the firm as valid but also held that the claim of registration was wrongly refused by the ITO. The AAC, therefore, held that the assessee was entitled to registration if the other conditions prescribed therefor were satisfied. Aggrieved by this order of the AAC, the revenue has come up in the present appeal before us.
4. The learned departmental representative, Shri Upadhyay, submitted to us that there were three grounds on which the ITO had refused to register the firm, firstly, that the three minors, Shri Rafat Qaiyum, Faisal Ayub and Firoz Ayub, were saddled with the liability of contribution of capital, secondly, they were made liable to share of loss and thirdly, that the instrument of partnership referred to the continuation of business of commission agency in hides and skins when in the earlier years there was no such business and the only income of the firm was from interest on investments. Elaborating on his argument, Shri Upadhyay, relying on the ruling of the Gauhati High Court in the case of Mahabir Prasad Kishanlal & Co. v. CIT [1976] 102 ITR 466 submitted to us that if an instrument of partnership offended or was contrary to the relevant provisions of the Indian Partnership Act or the Indian Contract Act, the partnership was not valid and such a partnership was not entitled to claim registration. Proceeding further, our attention was invited to the ruling of the Bombay High Court in the case of Rajendra Trading Co. v. CIT [1976] 104 ITR 39, wherein their Lordships laid down that if a minor was made a full fledged partner of a firm, on a reasonable construction of the instrument of partnership, the partnership cannot be regarded as a valid partnership in law and the claim of registration of such a partnership cannot be allowed. Shri Upadhyay read to us Clause 8 of the instrument of partnership dated 11-8-1978, which was as follows : That the profits and/or losses of the business of partnership (including the profit and loss of the capital) which shall be ascertained after accounting for all the working expenses, shall be divided between and borne by the parties hereto and the minors in the following proportion : Provided that losses including the loss of capital, if any, shall be borne by the parties hereto and the said minors in like proportion, provided, however, that the losses falling to the shares of minors shall be limited to the extent of the accumulated profits credited to the account of the minors in the books of partnership and in no case the losses in excess of such accumulated profits standing to the credit of the minors shall be borne personally by the minors.
Losses, if any, falling to the share of Rafat Qaiyum, Faisal Ayub and Firoz Ayub minors, in excess of accumulated profits shall be borne by Shri Audul Qaiyum, the party hereto of the 3rd part.
and submitted to us that this clause made the three minors liable to losses of the business of the partnership (including the profit and loss of the capital to the extent of 3 per cent, 6 per cent and 6 per cent respectively), which was against the requirements of Section 30 of the Indian Partnership Act. Another point made out by Shri Upadhyay was that for purposes of income-tax, each year of assessment was separate and self-contained and, therefore, once a share of profit was credited to the account of a partner in an earlier year, it became a part of the minor's capital and this could not be made liable to share of losses of the business of the firm in the subsequent years. He also submitted that the condition in the instrument of partnership requiring the minors to contribute capital was also contrary to the provisions of the Indian Contract Act and the Indian Partnership Act and made the partnership deed invalid. Reference was also made by him to Clause 3 of the instrument of partnership where there was a mention of continuance of the business of commission agency in hides and skins when no such business was carried on earlier and according to Shri Upadhyay this mis-statement of facts in the instrument of partnership made the whole instrument of partnership dubious. He also relied on the order of the ITO refusing the claim of registration. Summing up, Shri Upadhyay vehemently argued before us that the claim of registration was not admissible and was wrongly allowed by the AAC.5. On the other hand, the assessee's learned counsel, Shrt Gulati, read to us in extenso the ruling of the Supreme Court in the case of CIT v.Shah Mohandas Sadhuram [1965] 57 ITR 415, wherein, their Lordships laid down that even if there was a condition of capital contribution in the minor being admitted to the benefits of partnership, it is one of the terms on which the benefits of partnership was being conferred and it was for the guardian of the minor either to accept this term or to refuse to accept the benefits of partnership and even if in some cases such an agreement by guardian may be avoided by the minor if it was not entered into for his benefit, the agreement will remain valid so long as it was not avoided by the minor. He, therefore, submitted that the condition of contribution of capital for the minor being admitted to the benefits of partnership did not militate or offend either the provisions of the Indian Partnership Act or the Indian Contract Act and on this account the partnership deed cannot be said to be invalid.
Proceeding further Shri Gulati read to us the various portions of the partnership deed which, for facility of reference, are reproduced below : And whereas as mutually agreed upon, Rafat Qaiyum, minor son of Shri Abdul Qaiyum and Faisal Ayub and Firoz Ayub, minor softs of Shri Mohd. Ayub continue to be admitted to the benefits of the partnership as hithertofore ; And whereas Shri Abdul Qaiyum, as father and natural guardian of Rafat Qaiyum and Shri Mohd. Ayub, as father and natural guardian of Faisal Ayub and Firoz Ayub have given their respective consents for the admission of the said minors to the benefits of the partnership as aforesaid ; And whereas the parties hereto of the 1st to 1 lth part are carrying on since 2-7-1978 and hereby agree to continue the business in partnership under the same name and style of Muzaffar Husain Iqbal Husain with Rafat Qaiyum, Faisal Ayub and Firoz Ayub, all minors, admitted to the benefits of partnership : 1. That the parties hereto of the 1st to 11th part are partners and Rafat Qaiyum, Faisal Ayub and Firoz Ayub all minors, are admitted to the benefits of the partnership in accordance with the provisions of the Indian Partnership Act.
In confirmation of these presents and in token of acceptance of the benefits conferred hereinabove on the aforesaid minors, the aforesaid Shri Abdul Qaiyum, as father and natural guardian of and on behalf of the aforesaid minor Rafat Qaiyum and the aforesaid Shri Mohd. Ayub, as father and natural guardian of and on behalf of the aforesaid minors, Faisal Ayub and Firoz Ayub, have set their respective hands on this the 11th day of August in the year 1978.
in order to show that the dominant clauses of the instrument of partnership clearly showed the intention of the executants of the document that the three minors, Rafat Qaiyum, Faisal Ayub and Firoz Ayub, were admitted to the benefits of the partnership and were not made full-fledged partners and their guardians signed the partnership deed on behalf of and as natural guardians in token of having accepted the conferment of the benefits of partnership on the three minors.
According to Shri Gulati, the dominant clauses of the instrument of partnership and the intention of the executants of the document as found therefrom will govern the other clauses of the agreement, i.e., in other words, the other clauses of the document should be so read as to reconcile with the manifestly brought out intention of the parties to the document. Proceeding further, Shri Gulati submitted that reading out Clause 8 of the instrument of partnership without reading the proviso thereof was not correct or justified and if the proviso to Clause 8 is also read, it is very clear that the liability of the minors was limited to the accumulated profits standing to the credit of the minors and the excess losses, if any, were to be borne by Shri Abdul Qaiyum. He, therefore, submitted that there was no question of the minors being saddled with the liability for losses or being made full-fledged partners. Reference was also made by him to the rulings of the Kerala High Court in the case of Krishna & Bros. v. CIT [1968] 69 ITR 135 and Andhra Pradesh High Court in the case of Addepally Nageswara Rao & Bros. v. CIT [1971] 79 ITR 306 wherein their Lordships laid down the proposition that the only restriction placed by Section 30 of the Indian Partnership Act ('the Act'), was that a minor cannot be held personally liable for the losses in the partnership and it was argued that where in the present case, the liability of the minors was limited only to the accumulated profits standing to the credit of the account in the books of the partnership, there is no question of the partnership deed violating the provisions of Section 30. Our attention was also invited to another ruling of the Calcutta High Court in the case of Jeewanram Gangaram v. CIT [1967] 64 ITR 483 wherein their Lordships laid down that where the liabilities of the minors in the share of losses of the firm was only limited to their share in the partnership and not personally the partnership deed cannot be said to be invalid. Shri Gulati further argued before us that the discrepancy appearing in Clause 3 of the instrument of partnership regarding the continuance of business of commission agency in hides and skins when no such income was shown in the earlier years, was a minor mistake of description and this will have no effect on the validity of the partnership. Summing up Shri Gulati vehemently argued before us that the AAC rightly directed the ITO to register the firm provided the other conditions in this connection are satisfied.
6. We have carefully considered the rival submissions. In view of the authority of the Supreme Court in the case of Shah Mohandas (supra), we have no hesitation in coming to the conclusion that the condition of contribution of capital for the minor being admitted to the benefits of the partnership will not make the partnership deed invalid. It is by now well settled principle of construction, which does not admit of any dispute that in determining the question whether the minors were made partners under the instrument of partnership or whether they were only admitted to the benefits of the partnership, the question must depend upon the construction of the deed as a whole and if the dominant clauses of the deed indicate that the minors were admitted to the benefits of partnership, then that dominant clause must be taken to colour the deed itself and the other clauses should be so read as to reconcile with the manifest intention of the parties brought out by the dominant clauses. Viewed in this context, there can be no element of doubt, reading the instrument of partnership as a whole and on a reasonable construction of the entire document, that the intention of the executants of the document was to admit the three minors only to the benefits of partnership and not to make them full-fledged partners and that their liabilities in the event of losses was limited only to the extent of their accumulated profits in the earlier years, which were credited to their accounts. It is true that there is a minor discrepancy in Clause 3 of the instrument of partnership, which speaks of continuance of the business of commission agency in hides and skins, when no such business was shown in the earlier years, but this could only mean two things, either that the income from this business, even though carried on in the earlier years was not shown in the returns or in the course of the assessment proceedings of the earlier years, or that such a business was not carried on in the past. If such a business was carried on in the earlier years, there is no mis-statement or inconsistency between what was mentioned in Clause 3 of the instrument of partnership and the actual state of affairs. If, on the other hand, no such business was carried on in the earlier years, this will have no effect on the business carried on by the firm evidenced by this instrument of partnership because it is not under dispute that for the year under consideration such a business was carried on. Thus, from whatever angle the matter is looked into, the recitation in Clause 3 of the instrument of partnership regarding the continuance of the business of commission agency in hides and skins will have no effect on the validity or otherwise of the partnership under consideration here.
Considering all this and looking to the totality of the facts and circumstances we have no hesitation in coming to the conclusion that the AAC rightly held that the assessee-firm was valid and genuine and should be granted registration if the other conditions for this purpose were satisfied.