1. This appeal by the department is directed against the AAC's order directing the ITO to allow registration to the assessee-firm for the assessment year 1982-83.
2. The facts in brief are that the assessee is a partnership firm which was evidenced by a deed dated 22-3-1982. It was recited in the deed that the partnership was formed by an oral agreement with effect from the 1st day of January, 1981 for carrying on business of manufacture of veneers used in plywood industry. There were five partners, having the following shares : The ITO found that on the date of commencement of the partnership business as also during a major part of the accounting year (1981-82 financial year), the partner at S1. No. (5) above remained a minor even though on the date the partnership deed was executed Km. Sangita Devi Chamaria was a major. The assessee's application for registration under Form No. 11 which was submitted on 24-3-1982 before the ITO was signed by all the partners including Km. Sangita Chamaria. The ITO refused to entertain the assessee's application for registration as he found on enquiry that in the Admit Card issued by the Board of Secondary Education, the age of Km. Sangita was shown as 15 years 2 months as on 20-4-1979 and, therefore, she was a minor when the partnership business was formed on 1-1-1981. He held that "a minor cannot legally enter into an agreement" and, therefore, the firm was not legally constituted w.e.f. 1-1-1981.
3. The AAC held that on the date the deed was executed the parties were competent to enter into the contract of partnership and that "the various clauses of the deed of partnership construed as a whole would bear evidence of a genuine partnership being in existence". He accordingly directed the ITO to allow registration to the firm.
4. We have considered the submissions of both the rival parties. The Departmental Representative stated that a minor in no case can on attaining majority ratify a contract entered into by him during her minority. It has been argued that even if there is an implied agreement to admit the partner on attaining majority, the partnership was not entitled to registration as it makes the minor liable for the losses during the period Km. Sangita remained a minor. In this context, he referred to Mukherjee's Indian Partnership Act, 1976, Edition, pages 249-251.
5. In reply, the assessee's learned counsel supporting the AAC's order brought to our notice the recitation made in the deed that an oral agreement was entered into by the parties concerned for carrying on business w.e.f. 1-1-1981. The contracting parties, it has been pointed out, could only be the persons who were legally entitled to enter into an agreement. It was stated that the parties competent to enter into the agreement for carrying on business intended to admit Km. Sangita as a partner on her attainment of majority. According to the learned counsel, Km. Sangita was admitted to the benefits of partnership and as soon as she attained majority, the partnership deed was executed for which registration was sought by submission of an application in Form No. 11 within the time stipulated. It has been pointed out that for the period 1-1-1981 to 31-3-1981, i.e., for the assessment year 1981-82, the firm was treated as URF as no deed of partnership was in existence during the relevant year. It has been stated that the firm being genuine and the application for registration having been found to be in order, the requirements of Section 185(1)(a) of the Income-tax Act, 1961 ('the Act'), had been satisfied.
6. The partnership deed as available from the ITO's records reveal that as per oral agreement a partnership was formed w.e.f. 1-1-1981. The recital to that effect reads as follows : Whereas the partners hereto to the First Part to Fifth Part made an oral agreement and formed a partnership between themselves with effect from the First day of January, 1981 for the purpose of carrying on business of manufacturing of Veneers for plywood etc.
under the name and style of "MESSRS TULI VENEER AND PLYWOOD INDUSTRIES (LESSEE)" at Tuli, Nagaland with Head Office of the partnership at Tinsukia....
The learned Departmental Representative has taken objection to the aforesaid recital made in the deed and pointed out that the agreement itself was void ab initio as at the material time Km. Sangita was a minor. The question before us is whether there was a valid partnership in existence during the assessment year 1982-83 when at the time of commencement of the business as also during the major part of the accounting year one of the partners remained a minor 7. The Hon'ble Gauhati High Court in the case of P.N. Sarmah v. CIT [1980] 125 ITR 553 considered the question whether a firm in which a minor admitted to the benefits of partnership and attaining majority during the relevant previous year but electing to become partner w.e.f.
1st day of previous year next after the date of attaining majority could be granted registration under Section 185(1)(a). It was held that under the provisions of the Partnership Act, a minor admitted to the benefits of partnership had two options open to him on attaining majority ; (i) he should either elect to become a partner in the firm, or (ii) he should repudiate or elect not to become a partner. It has been observed at page 559 that "the cumulative effect of Sections 184 and 185 of the Act read with the relevant rules is that if the application for registration made by a firm gives the requisite particulars prescribed by Sections 184 and 185 of the Act and the rules, the ITO cannot reject the prayer, if there is a firm in existence ; a firm may be said to be not in existence if it is a bogus or in other words not a genuine one, or if in law, the constitution of the partnership is void". There was an oral agreement to form the partnership business. Km. Sangita Devi Chamaria at the time of commencement of the business was a minor and, therefore, she could not enter into an agreement. The firm has not been considered as a bogus one as for the assessment year 1981-82 it has been treated as unregistered firm. The learned counsel's submission that Smt. Sangita was admitted to the benefits of partnership appears to be plausible as she exercised her option to join the partnership by signing the partnership deed on attaining majority. This fact was, however, not recorded in the partnership deed. That itself, in our opinion, cannot invalidate the partnership deed as on the date the deed was executed the parties to the contract were legally entitled to enter into a valid agreement. The right to receive the share of profit arising from the partnership deed accrued only at the end of the accounting year on which date the accounts have been drawn up by the partnership firm. In this context, we may refer to the Hon'ble Supreme Court decision in the case of E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27. The allocation of the profits was, therefore, in order and in accordance with the partnership deed. In the case of CIT v. Phair Laboratories [1985] 154 ITR. 141 (Ker.) (FB), it was held that a firm which was created by word of mouth but the constitution of which was subsequently reduced in writing could very well qualify for registration. All the requirements was that there should be a valid instrument of partnership at the relevant time, i.e., during the year previous to the assessment year when registration was sought. In that case, one C.V. Cyriac was a minor at the time of execution of the partnership deed dated 10-12-1963. He reached the age of majority on 26-7-1964. For the assessment year 1966-67, an application in form No. 11 was filed which was signed by all the partners including Shri C.V. Cyriac. On these facts, the question arose whether the assessee was entitled to registration. It was held that though Shri C.V. Cyriac was a minor on the date of execution of the original partnership deed, he had become a major in the previous years relevant to the assessment year 1965-66 and 1966-67 and was under no disqualification to be a partner at any time during the year previous to the assessment year when registration was sought and granted on the basis of an instrument containing the names of all the partners and, their particulars as well as the full details regarding their individual shares. In the instant case, at the time of commencement of the business Km. Sangita was a minor. She became a major at the time the deed was executed. The learned counsel's submission that she was admitted to the benefits of the partnership in terms of an oral agreement by the contracting parties appears to us to be plausible as the fact that there was an oral agreement to constitute a partnership business has been recorded in the instrument. In our opinion, therefore, the firm is entitled to registration. We, accordingly, do not find any ground to interfere with the AAC's order.