Srinivasa Stainless Steel and Moulding Works Vs. Commissioner of Income-tax - Court Judgment

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direct taxation - registration - sections 184 and 185 of income tax act, 1961 and rule 22 of income tax rules, 1962 - assessee was firm constituted under instrument of partnership - minors were admitted to benefits of partnership - firm applied for registration - income tax officer refused registration on ground that guardian of minor partners did not sign deed of partnership - court observed that no requirement in law obligating guardian of minor to sign partnership deed on behalf of minor - failure to do so would not vitiate registration of firm. - - 733) :from the above provisions, an inference can legitimately be drawn that a minor, for all practical purposes, when admitted to the benefits of a partnership, becomes a partner but does not enjoy the rights or suffer the liabilities of a partner till he attains majority. failure to do so will give a valid cause of action to the minor within three years of his attaining majority to bring an action against the person who failed to render an account. merely because someone acting as a guardian of the minor happens to be a signatory to the application for registration under section 185 of the income-tax act, no inference flows or is deducible that the interests of the minor would be safe. failure to do so would not vitiate registration of a firm under the income-tax act.m.n. rao, j. 1. at the instance of the assessee, the following question has been referred to this court by the income-tax appellate tribunal under section 256(1) of the income-tax act, 1961 : 'whether, on the facts and in the circumstances of the case, the tribunal was justified in law in refusing to grant registration to the assessee-firm on the ground that the guardian of the minor admitted to the benefits of partnership did not sign the deed of partnership dated april 15, 1971 ?' 2. the assessee was a firm constituted under an instrument of partnership dated april 15, 1971. it consisted of two majors and three minors who were admitted to the benefits of the partnership. one of the minors attained majority on october 23, 1973, just two days before the accounting year relevant to the assessment year 1974-75 came to an end. the firm applied for continuation of registration in form no. 12 on june 10, 1974, and that application was signed only by the two major partners. the income-tax officer found that the application was defective inasmuch as it was not signed by all the major partners on the date of the application. he also further found that the consent of the guardian in respect of the other minors admitted to the benefits of the partnership was not obtained. he, therefore, called upon the firm to take immediate steps for curing the defects pointed out by him. but the firm did not respond to the notice. it appears there were some differences and misunderstandings amongst the partners. the income-tax officer refused to grant continuation of registration. the appellate assistant commissioner, on appeal, confirmed the order of the income-tax officer. an additional ground was also pointed out by the appellate assistant commissioner : the claim for registration as originally granted could not continue with the same terms in view of the change in the constitution of the firm and, therefore, the declaration made in form no. 12 was defective. reliance was placed for this view on the judgment of the allahabad high court in addl. cit v. uttam kumar pramod kumar : [1974]97itr730(all) . in the second appeal before the income-tax appellate tribunal, it was conceded that the minors did not sign the partnership deed nor had anyone acting on their behalf done so. relying on the above decision of the allahabad high court, the tribunal held that the omission to obtain the signatures of the guardians acting on behalf of the minors vitiated the partnership deed. on august 22, 1975, the firm was dissolved. it was conceded on behalf of the department before the income-tax appellate tribunal, in a miscellaneous petition filed by the assessee, that the income-tax officer did not give any opportunity to the assessee to obtain the signature of the minor, premalata, who attained majority two days before the closure of the accounting year relevant to the assessment year 1974-75. 3. the only ground, therefore, based on which the registration was refused for the assessee-firm was that the deed of partnership was not signed by the guardians of the minors who were admitted to the benefits of the partnership on april 15, 1971. sri ratnakar, learned counsel for the assessee, contends that there is no obligation cast under the law that the natural guardian should sign the deed of partnership on behalf of the minors. there is no provision to that effect either in the income-tax act or in the rules made thereunder or in the partnership act. the ruling of the allahabad high court in addl. cit v. uttam kumar pramod kumar : [1974]97itr730(all) , according to learned counsel, essentially turned on the question of the validity of admitting minors not only to the benefits but also to the losses of the partnership and, therefore, that ruling is not an authority for the proposition that the omission on the part of the natural guardian of the minor to sign an instrument of partnership would vitiate the registration. in support thereof, sri ratnakar relies on a decision of the calcutta high court in cit v. associate industrial distributors : [1982]138itr304(cal) . sri murthy, learned counsel for the revenue, on the other hand, contends that when a minor is admitted to the benefits of a partnership, his property is dealt with by the partnership business and, therefore, someone must act on behalf of the minor. the interest of the minor, in the absence of his being represented by a natural guardian, would be in jeopardy. 4. it is necessary to notice whether there is any provision in the law obligating the natural guardian of a minor to sign an instrument of partnership. section 30 of the partnership act deals with minors admitted to the benefits of a partnership. sub-section (1) lays down in that a minor may not be a partner in a firm; but, with the consent of all partners for the time being, he may be admitted to the benefits of partnership. the minor has a right, by sub-section (2), to such share of the property and the profits of the firm as may be agreed upon and he can have access to and inspect the accounts of the firm. the minor's share, by sub-section (3), is liable for the acts of the firm but he is not personally liable for any such acts. the minor has no right to sue the partners for an account or payment of his share of the property or profits of the firm except when severing his connections with the firm and in such a case, sub-section (4) lays down that the amount of his share shall be determined on valuation made as far as possible in accordance with the contained in section 48. under sub-section (5), the minor, at any time within six months of his attaining majority, or of his obtaining knowledge that he had been so admitted to the benefits of the partnership, whichever is later, may give public notice that he has elected to become or that he has not elected to become a partner in the firm and such notice shall determine his position as regards the firm. it is, therefore, very clear that a minor cannot be fastened with any liabilities in respect of a partnership but he may be admitted to the benefits of the partnership. for such admission, the consent of all the partners is a necessary pre-condition. the agreement is not between the minor and the other partners by the agreement should be amongst the partners. by section 11 of the contract act, 1872, only persons who attained majority and are not of unsound mind and not disqualified from contracting by any law, are competent to enter into a contract. 5. section 184 of the income-tax act deals with application for registration of a firm for the purpose of the act. sub-section (1) says that an application for registration of a firm may be made to the income-tax officer if (i) the partnership is evidenced by an instrument; and (ii) the individual shares of the partners are specified in that instrument. such application, by sub-section (2) may be made either during the existence of the firm or even after its dissolution. sub-section (3) obligates that the application shall be made to the income-tax officer and shall be signed by all the partners (not being minors) personally or in the case of a dissolved firm by all the persons (not being minors) who were partners in the firm immediately before its dissolution. the application shall be accompanied by the original instrument evidencing the partnership together with a copy thereof (sub-section (5)). the application shall be made in the prescribed form and shall contain the prescribed particulars (sub-section (6)). rule 22 of the rules made under the income-tax act contains the procedure. sub-rule (5) of rule 22, which is relevant, says that the application shall signed personally by all the partners (not being minors) in the firm as constituted at the date of the application and in the case of a dissolved firm, the application should be signed personality by all persons (not being minors) who were partners immediately before the dissolution of the firm. form no.11a is the prescribed form incorporating application for registration. it contemplates, inter alia, a declaration that none of the partners of the firm at any time during the previous year up to the date of the date of the application, in relation to the whole or any part of his share in the income or property of the firm, is a benamidar of any other partner to whom he is not related as a spouse or minor child. the signature of all the partners on this form no.11a is mandatory. there is no column in form no.11a requiring either the signature of the minor or that of a natural guardian of the minor. the procedure on receipt of application is contained in section 185 of the income-tax act. sub-section (2) of section 185, which is material says that where the income-tax officer considers that the application for registration is not in order, he shall intimate the defect to the firm and afford an opportunity to the firm to rectify the defect within a period of one month from the date of such application and if the defect is not rectified within that period, the officer shall, by order in writing, reject the application. 6. from the aforesaid provisions of the relevant law, it is clear that no obligation is cast on the minor to sign on the application seeking registration for the purposes of the income-tax act; nor is there any such obligation on the natural guardian of a minor to append his signature for and on behalf of the minor. wherefrom has such a requirement come to be insisted upon both the appellate assistant commissioner and the income-tax appellate tribunal insisted upon such a requirement relying on the decision of the allahabad high court in addl. cir v. uttam kumar pramod kumar : [1974]97itr730(all) . in that case, the assessee was constituted by a deed of partnership dated november 15, 1961, with two major partners. two minors were also alleged to have been admitted to the benefits of the partnership. the minors were not only admitted to the benefits of the partnership but were made full-fledged partners and, therefore, the income-tax officer came to the conclusion that the agreement was not registrable under section 185 of the income-tax act. on appeal, the appellate assistant commissioner confirmed the view taken by the income-tax officer. the tribunal allowed the appeal and reversed the view taken by the appellate assistant commissioner and the income-tax officer. according to the tribunal, the partnership deed had created a valid partnership between the major partners and the two minors were only admitted to the benefits of partnership. at the instance of the department, the question whether the tribunal was legally justified in its conclusion that the partnership deed dated november 15, 1961, admitted the minors only to the benefits of the partnership and that they were not full-fledged partners, was referred to the allahabad high court. a division bench of the allahabad high court, on an examination of the clauses in the partnership deed, found that the minors were not only admitted to the benefits of partner-ship but they have been made liable even for the losses. while examining the legal position flowing from the provisions of section 30 of the partnership act, the division bench of the allahabad high court observed (p. 733) : 'from the above provisions, an inference can legitimately be drawn that a minor, for all practical purposes, when admitted to the benefits of a partnership, becomes a partner but does not enjoy the rights or suffer the liabilities of a partner till he attains majority. 'we are in respectful agreement with the aforesaid statement of law. but the division bench further observed (at p. 733) : 'this leads to the further inference that even for admission of the minor to the benefits of partnership, an agreement is required between him and the existing partners.' 7. with great respect to the learned judges of the allahabad high court, we express our regret to agree with the aforesaid view. as already noticed there is no provision in section 30 of the partnership act requiring an agreement either between the minor or between the natural guardian acting for and on behalf of a minor and other partners. when a minor is not required by law to be admitted as a partner of a firm, the question of an agreement between him and the other partners does not arise. it must also be remembered that a minor is incapable, under the law, to enter into a contract. the reasoning of the allahabad high court is that if a minor is admitted to the benefits of a partnership, by the unilateral act of partners, a situation may arise where the partners may refuse to give the benefits to the minor if the minor's guardian is not a party to the agreement. the minor may not be in a position to claim the profits of the partnership because of absence of privity of contract. the view of the division bench of the allahabad high court was approved by the full bench in addl. cit v. uttam kumar pramod kumar : [1978]115itr796(all) . we are unable to agree with this reasoning. whosoever receives benefits on behalf of the minor is bound to render an account to the minor. failure to do so will give a valid cause of action to the minor within three years of his attaining majority to bring an action against the person who failed to render an account. merely because someone acting as a guardian of the minor happens to be a signatory to the application for registration under section 185 of the income-tax act, no inference flows or is deducible that the interests of the minor would be safe. as the minor is incapable of entering into a contract, the law confers only benefits on him and absolves him from liabilities. 8. a division bench of the calcutta high court, consisting of sabyasachi mukharji and sudhindra mohan guha jj., in cit v. associate industrial distributors : [1982]138itr304(cal) , considered the question whether a deed of partnership need not be signed by the guardians of minors when they were admitted to the benefits of partnership. after noticing the provisions of the partnership act and the income-tax act and reviewing the case law on this aspect, the calcutta high court disagreed with the view of the allahabad high court and held that there is no provision either in the income-tax act or in the partnership act requiring the signature of either the minor or his natural guardian for the purpose of registration under the income-tax act. the calcutta high court observed (at page 307) : 'even under the provisions of the income-tax act, there was no provision that a complete instrument only was valid for registration, that is, an instrument not requiring a supplementation by other evidence but solely operating and containing in itself the complete agreement constituting the partnership.' 9. we are in respectful agreement with the view taken by the calcutta high court. in the case on hand, the question whether there is any other evidence leading to the inference that some one acted as a natural guardian of the minors to receive the benefits of the partnership, is outside the scope of the present reference. 10. the signature of either the minor or a person acting as guarding of the minor is a neutral circumstance. it neither fastens any liability nor creates any rights which are not otherwise conferred by law. where a partnership deed stated that a minor was admitted to the benefits of partnership and the natural guardian of the minor signed on behalf of the minor in the deed of partnership, the question arose before the bombay high court in cit v. s. moonalal & co. : [1976]104itr688(bom) , whether the minor was a contracting party to the document. the income-tax officer in that case held that the minor was a party to the document and, therefore, it was vitiated. the appellate assistant commissioner, on appeal, expressed the view that the minor was only admitted to the benefits of the partnership and that the deed was signed by the guardian of the minor only as a witness. the tribunal confirmed the view of the appellate assistant commissioner. the matter was referred to the bombay high court at the instance of the commissioner of income-tax. after examining the recitals in the partnership deed, the high court held that (at pages 690 and 691) : 'in view of the aforesaid recital and aforesaid provisions, which are to be found in the operative part of the documents, it is more than clear that the minor was merely admitted to the benefits of the partnership and was not made a full-fledged partner. the mere fact, therefore, that the document was signed or executed by the minor's natural guardian and mother cannot run counter to the true and proper effect of the recital and the operative part.' 11. for the forgoing reasons, we are of the view that there is no requirements in law obligating the guardian of a minor to sign the partnership deed on behalf of a minor. failure to do so would not vitiate registration of a firm under the income-tax act. the question is accordingly answered in favour of the assessee and against the revenue. there shall be no order as to costs.