Kishore Chand Ramji Dass Vs. Commissioner of Income-tax - Court Judgment

Mehar Singh, C.J.

1. This will dispose of Income-tax References Nos. 5, 6 and 7 of 1964, Kishore Chand-Ramji Das of Ludhiana v. Commissioner of Income-tax.

2. The assessee-firm was a partnership constituted under the partnership deed of December 3, 1947, effective and operative from October 25, 1947, in the preamble of which the description of the partners given was '(1) Kishore Chand, (2) Ramji Das, (3) Dayal Chand, (4) Roshan Lal, (5) Mohinder Paul, Harish Chander and Romesh Chander, minor sons of Balbir Chand, through Kishore Chand, their uncle, (6) Surrender Kumar, minor son of Balbir, Chand, through Kaushalya Devi, his mother, and (7) Kaushalya Devi, wife of Balbir Chand.' So there were seven partners. The first four and the seventh partners were majors whereas the fifth partner consisted of three brothers, namely, Mohinder Paul, Harish Chander and Romesh Chander, minors, and the sixth partner, another minor. Surrender Kumar. The deed stated the shares of the partners as below :

(1)

Kishore Chand.

1/5th

(2)

Ramji Das.

1/5th

(3)

Dayal Chand.

1/5th

(4)

Roshan Lal.

1/5th

(5)

Mohinder Paul, Harish Chander,and Romesh Chander.

1/10th

(6)

Surrender Kumar.

1/20th

(7)

Kaushalya Devi.

1/20th

3. So the fifth partner consisting of three minor brothers had one-tenthshare and the sixth partner, Surrender Kumar, minor, had one-twentiethshare. The partnership deed was executed and signed on behalf of thethree minors, partner 5 by their uncle Kishore Chand, partner 1, and onbehalf of minor, partner 6, by his mother Kaushalya Devi, partner 7.

4. The assessee-firm had been registered under Section 26A of the Indian Income-tax Act, 1922 (Act 11 of 1922), for and up to the assessment year 1952-53, but when an application for registration for the assessment year 1953-54 was made on behalf of the firm on June 8, 1953, to the Income-tax Officer, it was signed by partners 1 to 4 and 7, but not by Mohinder Paul out of the three minor brothers as partner 5, though Mohinder Paul had attained majority on September 1, 1951, and the finding of the Income-tax Officer that he had elected to become partner of the assessee-firm on attainment of majority by him has been endorsed by the Income-tax Appellate Tribunal in its order of July 26, 1962. It is a finding of fact which is not open to question in these references and has in fact not been questioned, The copy of the partnership deed is annexure 'A' to Income-tax Reference No. 5 of 1964, After the preamble describing the partners, as has been given above, of the terms and conditions of partnership between the parties, as given therein, Nos. 4, 8 and 9 are material for the present purpose, and those are :

'4. That partners 5 and 6 have been admitted to the benefits of partnership,

8. All outgoings and expenses of the partnership and all losses including interest shall be payable first out of the profits, next out of the capital, and in the case of further deficiency by the partners in the shares in which they are entitled to the net profits or losses of the business.

9. The partners are entitled to the net profits or losses of the business in the following shares--Kishore Chand l/5, Ramji Das 1/5, Dayal Chand 1/5 Roshan Lal 1/5, Mohinder Paul, Harish Chander, Romesh Chander 1/10, Surrender Kumar 1/20, Kaushalya Devi 1/20.'

5. The Income-tax Officer refused to register the partnership under Section 26A of Act 11 of 1922, on various grounds including-

(a) the four minors, partners 5 and 6, having been made full-fledged partners under the deed of partnership, thus making that deed void, (b) the individual shares of three minors of partner 5 not having been specified in the deed of partnership, and (c) the application for registration not having been signed by Mohinder Paul out of partner 5.

On appeal the Appellate Assistant Commissioner did not accept these grounds in support of the refusal of registration pointing out with regard to the third ground that the absence of the signature of Mohinder Paul on the application was a mere technicality which could have been met by obtaining his signature subsequently. On the other two grounds he found that the minors were not full-fledged partners and the individual shares of minors of partner 5 were given. On further appeal, the learned Tribunal restored the order of the Income-tax Officer, and on an application under Section 66(1) of the Act has referred these three questions for consideration to his court:

'(1) Whether, on a true construction of the instrument of partnership, dated December 3, 1947, the Tribunal was right in holding that minors. Mohinder Paul, Harish Chander and Romesh Chander, were made full-fledged partners and as such the instrument of partnership was void and was not entitled to registration ?

(2) Whether the assessee's claim was rightly rejected on the ground that the individual shares of partners, Mohinder Paul, Harish Chander and Romesh Chander, were not specified in the instrument of partnership ?

(3) Whether registration was rightly rejected on the ground that the application for renewal of registration was not signed by Mohinder Paul ?'

6. This, as stated, arises out of registration of the assessee-firm sought in regard to the assessment year 1953-54.

7. The assessee-firm was reconstituted on October 1, 1953, under the partnership deed, annexure 'B' to Income-tax Reference No. 6 of 1964, The only detail that is necessary for the purpose of this reference is that an application was moved by the assessee-firm for registration in regard to the assessment year 1954-55 under Section 26A of the Act on the basis of the new partnership evidenced by the deed of October 1, 1953, though its financial year (accounting year) ended on March 31, 1954. Harish Chander of partner 5 had become major on November 1, 1953, but he had not signed the application for registration of the assessee-firm. This was the ground which prevailed in the end with the Tribunal for maintenance of the order of the Income-tax Officer in this respect and on an application by the assessee-firm under Section 66(1) of the Act in Income-tax Reference No. 6 of 1964 the Tribunal has referred this question :-- 'Whether, in the facts and circumstances of the case, registration was rightly refused?'--for consideration of this court. An exactly similar question in this form--' Whether in the facts arid circumstances of the case, registration was rightly refused to the firm on the ground that the application was not signed by Harish Chander?'--has been referred by the Income-tax Appellate Tribunal in Income-tax Reference No. 7 of 1964, which concerns the assessee-firm's application for registration for the assessment year 1955-56 and which application was not signed by Harish Chander of partner 5 though he had attained majority on November 1, 1953.

8. It is apparent that the third question in the first reference and the only question in the other two references raise only one matter for consideration, and that is whether the omission by a major partner to sign an application under Section 26A of the Act for registration of the assessee-firm rendered that application defective so that the registration could be refused. In Sub-section (2) of Section 26A of the Act it. is provided that 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. There are the Indian Income-tax Rules, 1922, in which Rule 2, so far as relevant here, read:

''Any firm constituted under an instrument of partnership specifying the individual shares of the partners may, under the provisions of Section 26A of the Indian Income-tax Act, 1922 (hereinafter in these rules referred to as 'the Act'), register with the Income-tax Officer, the particulars contained in the said instrument on application made in this behalf.

Such application shall be signed by all the partners (not being minors) personally, and shall be made-

(a) before the income of the firm is assessed for any year under Section 23 of the Act, or ...

(c) with the permission of the Appellate Assistant Commissioner hearing an appeal under Section 30 of the Act, before the assessment is confirmed, reduced, enhanced or annulled, or ...'

9. This rule was amended by Notification No. S. R. 0. 1953 of November 20, 1952, of the Central Board of Revenue, and in the amended form this rule reads-

'2. Any firm constituted under an instrument of partnership specifying the individual shares of the partners may, under the provisions of Section 26A of the Indian Income-tax Act, 1922 (hereinafter in these rules referred to as 'the Act'), register with the Income-tax Officer, the particulars contained in the said instrument on application made in this behalf.

10. Such application shall be signed by all the partners (not being minors) personally, or in the case of dissolved firm by all persons (not being minors) who were partners in the firm immediately before dissolution and by the legal representative of any such partner who is deceased, and shall, for any year of assessment up to and including the assessment for the year ending on the 31st day of March, 1953, be made before the 28th February, 1953, and for any year of assessment subsequent thereto, be made-

(a) where the firm is not registered under the Indian Partnership Act. 1932 (IX of 1932), or where the deed of partnership is not registered under the Indian Registration Act, 1908 (XVI of 1908), and the application for registration is being made for the first time under the Act,--

(i) within a period of six months of the constitution of the firm or before the end of the 'previous year' of the firm whichever is earlier, if the firm was constituted in that previous year,

(ii) before the end of the previous year in any other case;

(b) where the firm is registered under the Indian Partnership Act, 1932 (IX of 1932), or where the deed of partnership is registered under the Indian Registration Act, 1908 (XVI of 1908), before the end of the previous year of the firm, and

(c) where the application is for renewal of registration under Rule 6 for any year, before the 30th day of June of that year : Provided that the Income-tax Officer may entertain an application made after the expiry of the time-limit specified in this rule, if he is satisfied that the firm was prevented by sufficient cause from making the application within the specified time.'

11. It is clear from Rule 2(c) of these Rules that an application for registration by the assessee-firm had to be made for the year 1953-54 by June 30, 1953, for the year 1954-55 by June 30, 1954, and for the year 1955-56 by June 30, 1955. The application is required to be signed by all the partners, leaving out the minors, and this is an imperative requirement. In these cases the application, in each case, was not signed by one of the partners who had become major by the time the application came to be made. If Rule 2 before its amendment by Notification No. S.R.O.1953 of November 20, 1952, was applicable, such an application could be made under Rule 2(a) at any time before assessment was made, and even at a later stage with the permission of the Appellate Assistant Commissioner before the assessment was confirmed, reduced, enhanced or annulled according to Rule 2(c), but the amendment of this rule operative with the said notification altered both these provisions in the rule. The first has been altered to require the making of the application before June 30 of the year for which renewal of registration is sought, and the second has been completely deleted. The effect of deletion of the old Rule 2(c) has been that the Appellate Assistant Commissioner has now completely lost power to give permission for the making of an application under Section 26A of the Act.

12. In the new rule there is a proviso which gives power to the Income-tax Officer to entertain an application made out of time if he is satisfied that the applicant-firm was prevented by sufficient cause from making the application within time. In the present cases the minors who had become majors did not sign the applications so far as these references are concerned for registration of the assessee-firm until some time in 1957. The Income-tax Officer has not found any sufficient cause for entertaining those applications according to the proviso to Rule 2 of the Indian Income-tax Rules of 1922. This finding of the Income-tax Officer has never been questioned by the assessee-firm at any stage and it is not the subject-matter of consideration in any of these references. It is true that in the first reference the Appellate Assistant Commissioner was of the opinion that the omission of the signature of Mohinder Paul of partner 5 was a mere technicality and he permitted him to sign the application, but that was after the old Rule 2(c) had been repealed and its place had been taken by the new Rule 2 which has taken away the power of the Appellate Assistant Commissioner that previously resided in him under the old Rule 2(c). The learned counsel for the assessee-firm has contended that the original power in the Income-tax Officer must be taken to continue with the appeal in the Appellate Assistant Commissioner as soon as the matter becomes pending in appeal. Whatever may have been the force of this contention otherwise, now in view of the present shape of Rule 2 this argument cannot prevail, because this present shape of Rule 2 has come about after such power in the Appellate Assistant Commissioner, which was with him under the old Rule 2(c), has been taken away altogether under the new Rule 2. So this argument cannot prevail. The learned counsel for the assessee-firm is unable to further the argument on this aspect of the matter. The consequence then is that so far as each one of the three references is concerned, the application for registration of the assessee-firm was rightly refused because of it not having been signed by one of its partners. The answer to the third question in Income-tax Reference No. 5 of 1964 is in the affirmative and so also to the only question in each one of the remaining two Income-tax References Nos. 6 and 7 of 1964. This disposes of completely Income-tax References Nos. 6 and 7 of 1964, and also in substance Income-tax Reference No. 5 of 1964, rendering it really unnecessary to provide an answer to the other two questions referred to this court.

13. However, it may be stated, so far as Income-tax Reference No. 5 of 1964 is concerned, that the answer to the first question has to be in the affirmative because while Clause 4 of the partnership deed says that partners 5 and 6 have been admitted to the benefits of the partnership, Clause 8 makes them liable for all losses payable not only out of profits and capital, but in the case of further deficiency by the partners in the shares in which they are entitled to the net profits or Josses after the profits and capital should not meet the total losses. It is this personal Liability of the minors, partners 5 and 6, who were admitted only to the benefits of the partnership according to Clause 4, that supports the conclusion of the learned Tribunal that the minors were in fact made substantial partners contrary to Section 30 of the Indian Partnership Act, 1930, and thus the registration of the partnership was rightly refused as being void because it was hit by Section 30 of the said Act.

14. In so far as question No. 2 is concerned, it is already answered by a decision of a Division Bench of this court with regard to the very assessee-firm and is reported as Commissioner of Income-tax v. Kishore Chand Ramji Dass, [1962] 44 I.T.R. 622, in which the learned judges had held with regard to the partnership deed of December 3, 1947, that the mere fact that the shares of some minors in a firm were shown collectively and the share of each one of them was not separately stated in express words, is not a sufficient ground for refusing registration of the firm, if it is clear from the context beyond doubt that the minors took the shares allotted to them collectively, in equal shares, and the learned judges observed that this was so in the case of the assessee-firm under the partnership deed of December 3,1947. aS against this, the learned counsel for the Commissioner of Income-tax has relied upon the case of Commissioner of Income-tax v. Shivlal Dayaram Panchal, [1966] 62 I.T.R. 298, in which the learned judges of the Gujarat High Court held that, where a partnership deed did not specify the individual shares of minors admitted to the benefits of partnership but merely specified the collective shares of the minors, the firm was not entitled to registration. The learned judges considered the case of Kishore Chand Ramji Dass decided by a Division Bench of this court, but distinguished it on facts. In the first place, we are bound by the decision of a Division Bench of this court, and, secondly, the learned judges of the Gujarat High Court themselves distinguished the case before them from the case decided by the Division Bench of this court as referred to above. So the answer to the second question is in the negative.

15. In these references applications have been moved by the assessee-firm praying that the applications made before the Income-tax Officer under Section 26A of the Act in the year 1957 and that made before the Appellate Assistant Commissioner be called for and made part of the case so far as each reference is concerned, but at this stage it is not denied on the side of the assessee-firm that no such application was competent to the Appellate Assistant Commissioner in view of new Rule 2 of the Indian Income-tax Rules, 1922, and it cannot be denied that no useful purpose could possibly be served by calling for the applications made to the Income-tax Officer under Section 26A of the Act in any one of these cases, because, as stated, at no stage has the finding of the Income-tax Officer been challenged by the assessee-firm that there was not sufficient cause with the assessee-firm for not having those applications signed by all the partners within the time prescribed by the new Rule 2 of the said Rules. So those applications are dismissed.

16. The references are answered in the manner as above and so far as costs are concerned, the assessee-firm shall pay the costs of the Commissioner of Income-tax in all the three references, counsel's fee in Income-tax Reference No, 5 of 1964 being Rs. 250, and in either of the other two references, Rs. 1,000.

Bal Raj Tuli, J.

17. I agree.