Judgment:
These two appeals by the assessee are directed against order dated 24-11-1988 passed by the Commissioner (Appeals)-II, Jalandhar wherein the learned first appellate authority has upheld the order of the assessing officer in refusing registration to the firm under section 185 (1) (b) for the assessment year 1984-85 and refusal to grant continuation of registration for the assessment year 1985-86.
Briefly the facts are that the firm M/s. P.M.S. Enterprises applied for registration for the assessment year 1984-85 on the basis of partnership deed executed on 5-7-1983, which was given effect from 1-4-1983. As per clause 5 of the partnership deed, the profit and loss of the business was to be shared and borne by the partners as under:- In the partnership deed it was mentioned that Shri Ravi Sahdev had been admitted to the benefits of partnership with effect from 1-4-1983 and was only entitled to share of profit and not to the losses. The said Shri Ravi Sahdev S/o Shri Vasdev Sahdev had attained majority on 11-6-1983 and had elected to be a partner of the firm with effect from 1-4-1983.
On examination of the Partnership Deed the assessing officer found that for the period 1-4-1983 to 10-6-1983, the first 3 partners mentioned in clause 5 of the Partnership Deed were to share the profits as well as losses and the 4th partner being minor was to share only profits. The assessing officer came to the conclusion that in the above partnership deed there was nothing mentioned as to how the losses were to be shared between the partners for the period 1-4-1983 to 10-6-1983. Accordingly the assessing officer was of the opinion that since the partnership deed did not specify the manner in which losses were being shared amongst the partners concerned the firm was ungenuinely constituted in view of the ratio of decision of Hon'ble Supreme Court in the case of Mandyala Govindu & Co. v. CIT (1976) 102 ITR 1 (SC).
Besides this the assessing officer also asked the assessee-firm to produce Shri Ramesh Khanna and Shri Ravi Sahdev partners for examination. Shri Ramesh Khanna was not produced on the ground that he was an ex-partner and has shifted his residence to Rajkot. Shri Ravi Sahdev was produced and examined by the assessing officer on 20-2-1987 and since according to the assessing officer Shri Ravi Sahdev could not state his knowledge about certain material things relating to the affairs of the firm, like date when the partnership deed was executed, the investment made by the other partners in the firm and as to whether he had withdrawn any money from his account etc., he came to the conclusion that Shri Ravi Sahdev was not a genuine partner and this fact coupled with the important legal issue that there was no mention in the partnership deed as to how the losses for the period 1-4-1983 to 10-6-1983 were to be shared, the assessing officer refused registration to the firm and treated the same as unregistered firm.
Since registration was refused to the firm for the assessment year 1984-85, continuation of registration for the assessment year 1985-86 was also refused.
The assessee filed appeal against the order passed by the assessing officer and the learned Commissioner (Appeals) for the detailed reasons given in the impugned order dated 24-11-1988 upheld the action of the assessing officer and the assessee has come in second appeal before us.
Shri N.K. Sud, Advocate, learned representative of the assessee, submitted that the departmental authorities were not justified in refusing registration for the assessment year 1984-85 and continuation of registration for the assessment year 1985-86 to the assessee firm.
It was submitted that Shri Ramesh Khanna, who has since retired from the partnership, could not be produced before the assessing officer as he has shifted to Rajkot and Shri Ravi Sahdev who appeared before the assessing officer replied to the questions asked by the assessing officer to the best of his recollection and it is not expected of a partner to remember trivial details as to the date when the partnership deed was executed and as to how much was the capital of the other partners. But this alone will not make Shri Ravi Sahdev as a non-genuine partner. It was submitted that the answers given by Shri Ravi Sahdev to the various questions put by the assessing officer should be viewed in their proper perspective because factually the statement of Shri Ravi Sahdev that he did not withdraw any amount from his account was correct as no money was withdrawn for personal use by Shri Ravi Sahdev and the withdrawals were only for making payment of the income-tax, CDS and for purchase of NSCs. AS regards non-specification of the distribution of loss, for the period 1-4-1983 to 10-6-1983, it was submitted by Shri Sud that this was not material as Shri Ravi Sahdev had attained majority on 11-6-1983 and elected to be a partner of the firm and give retrospective effect to the profit sharing ratio as mentioned in the partnership deed. It was further submitted that in fact there was no loss for the period 1-4-1983 to 10-6-1983 and as such the question as to how it was to be distributed amongst the partners is of academic nature only and in any case if there was a loss it was to be distributed amongst the remaining 3 partners in accordance with their profit sharing ratio.
Shri Sud relied on the decision of Hon'ble Andhra Pradesh High Court in the case of Modern Stores v. CIT (1986) 157 ITR 589 (AP-HC). Reliance was also placed on the decision of Hon'ble Allahabad High Court in the case of Makhbu Lal Ayodhya Prasad v. CIT (1979) 120 ITR 346 (All-HC).
Shri Sud further submitted that assessment of the partners of' the assessee-firm have been completed, although, under section 143 (1) by taking the share from the firm and as such the department is precluded from treating the firm as unregistered and ought to have granted registration to the firm.
Shri S.S. Kanwal, learned Departmental Representative supported the order of the Commissioner (Appeals) and further submitted that a perusal of the statement of Shri Ravi Sahdev partner, who attained majority on 11-6-1983, clearly indicates that he was oblivious to the affairs of the firm insomuch so that he did not know the date on which the partnership deed was executed and the capital introduced by the partners and whether any withdrawals were made by him whereas actually withdrawals were made for the purpose of payment of income tax, CDS and purchase of National Saving Certificates by Shri Ravi Sahdev himself.
Shri Ravi Sahdev was also not aware about the profit sharing ratio of the other three partners who happened to be his father and two uncles.
It was further submitted by Shri Kanwal that the cases quoted by Shri Sud, learned representative of the assessee, of Andhra Pradesh and Allahabad High Courts have been distinguished by the Commissioner (Appeals) in the order and the case of the assessee is covered by the ratio of the decision of Hon'ble Supreme Court in Mandyala Govindu & Co.'s case (supra) and as such the departmental authorities were perfectly justified in refusing registration for the assessment year 1984-85 and also for refusing continuation of registration for the assessment year 1985-86.
With regard to Shri Sud's arguments that since the partners have been assessed in respect of share income from the firm, the firm ought to have been treated as a Regd. Firm, it was submitted by Shri Kanwal that the assessment of the partners were framed under section 143 (1) by taking the shares from the firm as declared subject to rectification and the assessing officer had not applied his mind to the question of registration while framing the assessment of the partners under section 143 (1) and as such this cannot be a bar for examining the question of genuineness of the firm and granting registration while framing the assessment of the firm itself.
We have considered the rival submissions. The learned Commissioner (Appeals) has discussed in detail the legal aspect as well as the factual aspect of the case in the impugned order dated 24-11-1988 for the assessment year 1984-85. The decision of Hon'ble Andhra Pradesh High Court in the case of Modern Stores (supra) has been rightly distinguished by the Commissioner (Appeals) because in that case it was specifically mentioned that in the event of loss the four adult partners agreed to share them equally whereas there was no such stipulation in the case under appeal as to how the losses for the period 1-4-1983 to 10-6-1983 were to be distributed. Similarly the decision of Hon'ble Allahabad High Court is also distinguishable as the same related to only continuation of registration and not fresh registration, which is the case before us for the assessment year 1984-85.
In our opinion the point in dispute is covered in favour of the revenue and against the assessee as per the ratio of decision of Hon'ble Supreme Court in the case of Mandyala Govindu & Co. (supra) , wherein it is held as under--- "Held (i) that the Income Tax Officer, before allowing the application for registration under section 26A of the Indian Income Tax Act, 1922, must be in a position to ascertain the shares of the partners in the losses even if section 26A did not require the shares in the losses to be specified in the instrument of partnership: (ii) that, since the partners had unequal shares, there could be no presumption that losses were to be shared equally and having regard to the scope of section 13 (b) of the Partnership Act, the section had no application. Further, the rule that where the shares in the profits were unequal, the losses must be shared in the same proportion as the profits also did not apply because, even if the adult partners were to bear the losses in proportion to their respective shares in the profits, there was no means of ascertaining how the amount of loss in the minor's share was to be apportioned.' Even, otherwise a close examination of the statement of Shri Ravi Sahdev partner, recorded by the assessing officer on 20-2-1987 indicates that he was oblivious of the affairs of the firm may be because at the relevant time he was studying for a Diploma in Mechanical Engineering from Ramgarhia Polytechnic. In the statement recorded Shri Ravi Sahdev has admitted that his date of birth was 11-6-1965 and he has done diploma in Mechanical Engg. from Ramgarhia Polytechnic in 1986 although he admitted that he was a partner in the firm before 1986 although he did not know the exact date from which he became a partner in the firm M/s. P.M.S. Enterprises. In answer to question No. 8, Shri Ravi Sahdev mentioned that his father and two uncles were partners in the firm but he was not aware of the share ratio of these partners. Shri Ravi Sahdev was also not aware of the date when the deed was executed and he stated that he has not withdrawn any amount from the firm whereas in fact there have been withdrawals from his capital account for the purchase of NSC, payment of income-tax and CDS. The other partner Shri Ramesh Khanna was not produced although specifically asked for by the assessing officer.
Thus taking into view the totality of facts and circumstances of the case, we are of the opinion that the departmental authorities were justified in refusing registration to the assessee firm for the assessment year 1984-85 and were also equally justified in refusing to grant continuation of registration for the assessment year 1985-86.
In the result, we have no hesitation in upholding the order of learned Commissioner (Appeals) for both the assessment years under consideration and the appeals filed by the assessee for both the assessment years are dismissed.
I have closely perused the order proposed by my learned brother but find myself unable to agree with the conclusion reached by him. Several judgments of the jurisdictional High Court of Punjab and Haryana and other courts cited at the very outset of the hearing by Shri. NK. Sud, Advocate, as direct authorities delivered under the Income Tax Act, 1961, hereinafter referred as the Act, have either completely escaped the notice of my learned brother or have been ignored by him.
The facts have been correctly recorded in para 2 of the proposed order.
It is evident that Shri Ravi Sahdev who was a minor on 1-4-1983, when he was admitted to the benefits of partnership constituted orally, had attained majority on 11-6-1983. Thus on 5-7-1983, when the partnership deed was executed, he was a major. Clause 1 of the Partnership Deed makes it absolutely clear that the firm as constituted under the said Deed is given effect from 1-4-1983. Clause 5 of the deed gives the profits and loss sharing ratio of the four partners. A combined reading of the two clauses clearly show that the partners had agreed to divide the profit and losses for the entire year viz. from 1-4-1983 to 31-3-1984 in the said ratio. In other words, Shri Ravi Sahdev also agreed to share the losses, if any, for the period 1-4-1983 to 11-6-1983 when he was a minor, in the same ratio. Thus the only issue for consideration is whether a minor admitted to the benefits of the partnership on attaining majority can agree to bear losses of a period when he was a minor. This issue has been considered by the Hon'ble jurisdictional Punjab and Haryana High Court in Jagadhri Electric Supply & Industrial Co. v. CIT (1987) 166 ITR 143 (P&H-HC). In the case before the High Court, the firm was constituted vide partnership deed dated 1-7-1966. The said deed was given effect to with effect from 1-4-1966. However, one of the partner Shri Chander Kant was a minor on 1-4-1966 but had attained majority on 4-6-1966 before the execution of the deed on 1-7-1966. In that case also the objection of the revenue was that Shri Chander Kant had become liable to losses for the period 1-4-1966 to 4-6-1966. At page 148 of the said report, the Hon'ble High Court held as under : "There is no bar for the minor on attaining majority during the currency of the year to take responsibility for the losses of a partnership firm which may have been suffered prior to the date his attaining in majority." The above view was followed by the Punjab and Haryana High Court in the case of CIT v. Jain Steel Rolling Mills (1989) 177 ITR 498 (P&H) and CIT v. Sonda Ram Ram Singh (1989) 180 ITR 227 (P&H). Reference was also invited by Mr. Sud to the following decisions: (ii) CIT v. Indian Timber Traders (1989) 176 ITR (St.) 238 whereby the Supreme Court dismissed SLP against the decision of Kerala High Court on similar issue. The judgment is by a Full Bench of the Hon'ble Supreme Court.
In view of the judgments of the jurisdictional High Court in the case of Jagadhri Electric Supply & Industrial Co. (supra) and others cited above, which fully covers the present controversy, I see no justification to hold that there was any legal infirmity in the Partnership Deed or the profit and loss sharing ratio of the partners.
I may add that my brother has wrongly relied on the decision of the Supreme Court in the case of Mandyala Govindu & Co. (supra) . The facts of the said case are clearly distinguishable as in the case before the Supreme Court the minor had not attained majority during the financial year under consideration. This important distinction has also escaped the notice of my learned brother.
I have gone through the statement of Shri Ravi Sahdev a copy of which has been placed at page 11-12 of the paper book. I find that in response to question Nos. 4 to 7 he had duly explained that he was a partner in M/s. P.M.S. Enterprises for 3 years having 15 per cent share and that he had retired in March, 1986. Thus it cannot be said that he did not know as to when he had become a partner. He also duly named the other three partners. In the light of these facts no adverse inference against the genuineness of the firm can possibly flow from his not being able to give exact date of execution of partnership deed or exact date and amount of capital investment. Such details could not possibly be remembered after four years especially when at the time of recording of the statement, he had already ceased to be a partner. The case of the assessee gets further fortified by the fact that Shri Ravi Sahdev duly stands assessed in respect of the share income as a genuine partner and the said assessment stands undisturbed. It is also to be kept in view that Shri Ravi Sahdev being a student was not an active partner.
I am also of the view that no adverse inference against the genuineness of the firm can flow from non-production of Shri Ramesh Khanna. The asessee vide para 12 of letter dated 18-2-1987 (copy at page 9 of the Paper Book) had duly pointed out to the Income Tax Officer that Shri Ramesh Khanna had retired from the partnership on 3-6-1985 and as such could not be produced. Shri Sud had rightly pointed out that thereafter the Income Tax Officer had not insisted on his production as is evident from the order-sheet entries. In fact, vide order-sheet entry dated 19-3-1987 the Income Tax Officer noted as under: "Shri Rakesh Gupta with Shri Surjit Sahdev present. All requirements met except copies of PMS Diesels." The counsel for the assessee has also correctly pointed out that the conduct of the Income Tax Officer in granting the status of URF for the purposes of assessment under section 143 (3) and assessing the partners in respect of their shares is in contradiction of his finding that no genuine firm had come into being. Reliance in this behalf was placed on the following decision :Prem Nath & Co. v. Income Tax Officer (1981) 11 TLR 603, (Chandigarh Bench, ITAT) to which I was a party.
The learned Advocate has also relied on the circular of the Central Board of Direct Taxes dated 24-8-1966 (extracted in Laxmichand Hirjibhai v. CIT (1981) 128 ITR 747, 751 (Guj) ) for the proposition that once partners were assessed in respect of the share income, the firm could not be refused the benefit of registration. For this the learned counsel drew our attention to the case of CIT v. K.Chandrasekaran (1989) 178 ITR (St.) 73 wherein the Supreme Court relying on the said circular dismissed the S.L.P. of the department against the decision of Madras High Court in the case of CIT v. Blue Mountain Engg. Corpn. (1978) 112 ITR 839, wherein the said principle was reiterated. Thus, it was argued, that this clearly established that even the Supreme Court was of the view that the circular of Central Board of Direct Taxes applied to such a situation. Thus registration could not be denied on this score as well.
Copies of the assessment order of two partners S/Shri S.K. Sahdev and Ravi Sahdev for the two relevant years have been placed at pages 15-16 and 19-20 of the paper book projecting that they have duly been assessed in respect of their respective shares. Thus as held by the Supreme Court, the Circular of the Central Board of Direct Taxes (supra) will govern the situation and registration could not be refused. The Patna High Court in a recent case in CIT v. Imperial Textiles (1993) 201 ITR 555 (Pat-HC) has also taken the same view.
In view of the aforesaid factual and legal position, I feel no other option but to hold that the assessee-firm is entitled to the benefit of registration for the assessment year 1984-85 and that of continuation of registration for assessment year 1985-86.
There being difference of opinion between the two Members, who heard the appeal, the following point of difference is reframed for reference to the President of the Income Tax Appellate Tribunal under section 255 (4) of the Income Tax Act, 1961 :- "Whether, on the facts and in the circumstances of the case, the proposed order of the Accountant Member dismissing the assessee's appeals can be said to be legally correct of the view taken by the Judicial Member that the assessee-firm. is entitled to the benefit of registration for the assessment year 1984-85 and that of continuation of registration for the assessment year 1985-86 is legally justified ?" The following difference of opinion has been referred to me for decision u/s 255 (4) of the Income Tax Act : "Whether, on the facts and in the circumstances of the case, the proposed order of the Accountant Member dismissing the assessee's appeals can be said to be legally correct or the view taken by (lie Judicial Member that the assessee firm is entitled to the benefit of registration for the assessment year 1984-85 and that of continuation of registration for the assessment year 1985-86 is legally justified ?' The facts are that the assessee-firm M/s. P.M.S. Enterprises applied for registration for the assessment year 1984-85 on the basis of partnership deed executed on 5-7-1983, which was given effect from 1-4-1983. As per clause 5 of the partnership deed, the profit and loss of the business was to be shared and borne by the partners as under:- In the partnership deed, it was mentioned that Shri Ravi Sahdev had been admitted to the benefits of partnership with effect from 1-4-1983 and was only entitled to share of profit and not to the losses. The said Shri Ravi Sahdev son of Shri Vasdev Sahdev had attained majority on 11-6-1983 and had elected to be a partner of the firm with effect from 1-4-1983.
On examination of the Partnership Deed, the assessing officer found that the deed was silent as to how the losses were to be shared between the partners for the period 1-4-1983 to 10-6-1983. He, therefore, held that the partnership deed was not genuinely constituted in view of the ratio of the decision of the Hon'ble Supreme Court in the case of Mandyala Govindu & Co. (supra) , and accordingly refused registration.
Aggrieved by the said order, the assessee took up the matter in appeal before the Commissioner (Appeals) , who however upheld the order of the assessing officer.
Still aggrieved the assessee took up the matter in appeal before the Tribunal. The learned Accountant Member considered the various sub-missions and came to the conclusion that the issue was covered in favour of the revenue by the decision of the Hon'ble Supreme Court in the case referred to by the assessing officer earlier in the case of Mandvala Govindu & Co. (supra) . Even otherwise it was his view that Shri Ravi Sahdev was not aware of his being a partner of the firm as also the affairs of the firm as at that time he was studying for Diploma in Mechanical Engineering from Ramgarhia Polytechnic. Taking in view the totality of facts and circumstances of the case, he was of the view that the revenue authorities were justified in refusing registration to the assessee-firm for the assessment year 1984-85 and equally justified in refusing to grant continuation of registration for the assessment year 1985-86.
The learned Judicial Member, however, was of the view that the assessee was entitled to the benefits of registration. According to him Shri Ravi Sahdev was minor on 1-4-1983 when he was admitted to the benefits of partnership deed constituted orally. He attained majority on 11-6-1983. Thus on 5-7-1983, when the partnership deed was executed he was a major. Clause 1 of the partnership deed makes it absolutely clear that the firm as constituted under the said deed is given effect from 1-4-1983. Clause 5 of the deed gives the profit and loss sharing ratio of the four partners. A combined reading of the two clauses clearly show that the partners had agreed to divide the profits and losses for the entire year. That means from 1-4-1983 to 31-3-1984 in the said ratio. Relying on the decision of the Honble Punjab & Haryana High Court in the case of Jagadhri Electric Supply &Industrial Co. (supra) , it was held by him that there is no bar for the minor on attaining majority during the currency of the year to take responsibility for the losses of a partnership firm which may even suffer prior to the date his attaining majority. The learned Judicial Member also cited other subsequent decisions in the case of Jain Steel Rolling Mills (supra) and Sonda Ram Ram Singh (supra) . Reference also was made to other decisions of the various High Courts. However, following the judgment of the jurisdictional High Court in the case of Jagadhri Electric Supply & Industrial Co. (supra) , it was held by him that there was no justification to hold that there was any legal infirmity in the partnership deed or the profit and loss sharing ratio of the partners.
The learned Judicial Member further held that the decision in the case of Mandyala Govindu & Co. (supra) was distinguishable as the minor had not attained majority during the previous year relevant to the assessment year under consideration. The learned Judicial Member further pointed out that once the partners were assessed in respect of the share income, the firm could not be refused the benefit of registration as per Circular of the Central Board of Direct Taxes dated 24-8-1966. In view of the aforesaid factual and legal positions, it was held by him that the assessee firm was entitled to the benefit of registration for the assessment year 1984-85 and that of continuation of registration for the assessment year 1985-86.
It is on this difference of opinion that the above question has been referred to me. At the hearing Shri V.P. Vijh, learned authorised representative appeared for the assessee. He vehemently supported the order of the learned Commissioner (Appeals) . According to him the assessee-firm in this case executed the deed of partnership after Shri Ravi Sahdev attained majority. The period of his minority was from 1st April to 10-6-1983. Shri Ravi Sahdev, however, agreed to share both the loss and profit for the entire accounting period, Even in any case, the accounts of the assessee firm were to be closed at the end of the financial year and there is no question of sharing the loss or profit for the period from 1-4-1983 to 10-6-1983. It is, therefore, no more relevant to consider the minority period of Shri Ravi Sahdev as the deed which was subsequently signed contemplated closing of the accounts at the end of the financial year and such profits and losses were to be distributed on the basis of the share ratio agreed upon. There is, therefore, no reason to deny the benefit of registration to the assessee on this flimsy technical ground. Since the learned Judicial Member has given proper reason for accepting the genuineness of the partnership firm, it is submitted that his order is liable to be upheld.On the other hand, Shri C.V. Rastogi, the learned Sr. Departmental Representative supported the order of the learned Accountant Member.
Keeping in view the fact that the firm allowed Shri Ravi Sahdev to be full fledged partner even during his minority period, the said firm was not genuinely constituted and the claim has been rightly rejected by the revenue and the learned Accountant Member in the light of the decision of the Hon'ble Supreme Court relied upon by them. There is, therefore, no reason to interfere in this regard.
On careful consideration of the rival submissions in the light of the material on record, I am of the view that the learned Judicial Member has rightly appreciated the issue and his view has to be upheld. Over and above the reasons given by him in the said order it is seen that the partnership deed was executed after Shri Ravi Sahdev attained majority. If Shri Ravi Sahdev agreed to share the losses for the minority period, it does not lie on the revenue to object to his personal decision. Even in any case the accounts of the assessee were to be closed at the end of the financial year and profit and loss had to be determined on the basis of the deed of partnership. Automatically Shri Ravi Sahdev will share the loss, if there is any. However, that itself has become academic in view of the fact that the assessee-firm was assessed on a total positive income. There is, therefore, no infirmity in the partnership deed and it will not be justified to refuse registration to the assessee-firm on this very flimsy technical ground. The learned Judicial Member is fully justified in allowing the claim of registration for the year under consideration and continuation of the same for the assessment year 1985-86. I fully concur with the learned Judicial Member.
The matter will now go back to the Division Bench for passing consequential order.