JUDGMENT Prakash Krishna, J.
The Income Tax Appellate Tribunal, Allahabad, has referred the following question for the opinion of this court at the instance of the Commissioner of Income Tax, Allahabad, for the assessment year 1977-78 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in directing the Income Tax Officer to grant registration to the assessee-firm?"
The facts of the case are as follows :
The assessee -respondent filed an application for registration of the firm for the year 1974-75 along with the instrument of partnership deed dated 22-9-1973. In the partnership deed the following persons are partners :
(1) Badri Prasad 19 paise in a rupee (2) Ganga Ram 25 paise in a rupee (3) Shankar Lal 19 paise in a rupee (4) Jamuna Prasad 25 paise in a rupee (5) Gopi Nath 06 paise in a rupee Besides the above partners one Lakhan Lal (minor) was admitted to the benefits of partnership to the extent of six paise in a rupee and has been made liable to the losses of the firm although his liability was limited to the extent of his share. The Income Tax Officer refused to grant registration to the firm on the ground that the minor Lakhan Lal was made liable for the losses of the firm to the extent of his share therein. He was of the opinion that the minor admitted to the benefits of partnership cannot be made liable to the losses of the firm. Consequently, the order rejecting the registration was passed under section 185(1)(b) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"). The said order was set aside in appeal by the Appellate Assistant Commissioner. He was of the view that the assessee-firm was formed in accordance with the provision of section 30(3) of the Partnership Act while making the minor liable to share the losses of the firm. The Tribunal has confirmed this order.
Heard Sri A. N. Mahajan, learned counsel for the department, and Sri S. B. L. Srivastava, learned counsel for the respondent.
It was submitted that the partnership being in violation of section 30 of the Partnership Act cannot be registered under the Income Tax Act. It was further submitted that the minor was also made liable to the extent of his share in the firm, which is violative of section 30 of the Partnership Act. Therefore, registration cannot be granted to the partnership deed.
In contra, learned counsel for the assessee submitted that the minor was admitted to the benefits of partnership and he was entitled to get the benefit of partnership of six paise in a rupee and the partnership is in consonance with the spirit of section 30 of the Partnership Act.
Both learned counsel for the parties have referred to paragraph 5 of the partnership deed, which is re-produced below :
"(5) That at the close of each year the accounts of the firm shall be prepared after adjusting all the business expenses and in the case of profit the amount of profit shall be credited to the respective account of each partner according to their shares as specified in para 3 and in the case of loss the same shall be borne by the partners and the amount of loss shall be debited to their respective accounts according to their shares.
Besides this Shri Lakhan Lal, minor shall get the benefits of partnership as specified in para. 3 and shall also be liable for the loss to the extent to his share according to section 30 of the Indian Partnership Act."
In the preamble to the partnership deed it is mentioned that Lakhan Lal, the minor son of Sri Badri Prasad, shall continue to get the benefits of partnership according to section 30 of the Indian Partnership Act. Learned counsel for the department has placed reliance upon the following cases in support of his argument that as in the present case the minor has also been made liable to share the losses to the extent of his share, according to section 30 of the Indian Partnership Act, the firm is not entitled for grant of registration.
(1) CIT v. Oriental T. Maritime (1997) 227 ITR 244 (AP) (2) Addl. CIT v. Uttam Kumar Pramod Kumar (1978) 115 ITR 796 (All) (FB);
(3) CIT v. Dwarkadas Khetan and Co. (1961) 41 ITR 528 (SC);
(4) Sri Ramamohan Motor Service v. CIT (1973) 89 ITR 274 (SC).
On the other hand, learned counsel for the assessee has placed reliance upon the following two judgments :
(1) CIT V. Vijai Kumar Rajesh Kumar (1998) 231 ITR 625 (All) ; and (2) CIT v. Nand Lal Jagdish Prasad (1997) 226 ITR 312 (All).
The provisions of the Income Tax Act require that the partnership deed must specify the manner in which profits and losses of the firm are to be distributed amongst the partners. The case of the parties is that the partnership deed in question provides that the minor would be entitled to share six paise per rupee in the profit and loss of the firm. The contention of the revenue is that since the minor has been made liable to share the losses also, the minor has been admitted as full-fledged partner in the firm and, as such partnership agreement being void, no registration can be granted to such firm under the Income Tax Act. At this stage it is apt to notice the relevant provision of section 30 of the Partnership Act. Section 30(1) of the Partnership Act provides that a minor may not be a partner in a firm but with the consent of all the partners for the time being, he may be admitted to the benefits of partnership. Sub-section (3) of section 30 of the aforesaid Act provides that such minor's share is liable for acts of the firm, but the minor is not personally liable for any such act. The Assistant Commissioner of Income-tax held that the partnership deed is valid as it is in consonance with sub-section (3) of section 30 of the Act. The question which immediately arises in the present case is as to whether losses of partnership can be regarded as an act of the firm and such a partnership is valid.
In order to construe a partnership deed it is well settled that the entire document must be read as a whole and a reasonable construction should be placed on it. In a document where several clauses appear, what clause dominates the document is also to be found out with a view to ascertain the real intention of the parties. Therefore, to find out whether Lakhan Lal, the minor, was admitted to the benefits of partnership or he has to share the losses also to the extent of his share, attention is immediately attracted to clause (5) of the deed. In the opening part of the partnership deed it is provided that the minor has been admitted to the benefits of partnership, but the said preamble is subject to clause (5) of the deed. It has been specifically mentioned that the minor shall also be liable to share the loss to the extent of his share, according to section 30 of the Indian Partnership Act. The last portion of clause (5) of the deed that the minor shall also be liable for the loss to the extent of his share is in the nature of an exception to the earlier part of the said clause. The provision to share the loss by the minor being specific will prevail over the general provisions contained in the deed. Thus in the deed in question the minor has been made liable to share the loss to the extent of his share.
The decision in CIT v. Oriental T. Maritime (1997) 227 ITR 244 (AP) lays down that section 30 of the Indian Partnership Act provides that a minor cannot be made liable for the losses of the partnership. If at all a minor should be admitted into the partnership, he should be admitted for the purpose of profits only. In that case the minors were clearly admitted to share in the profit and loss of the firm. In that view of the matter it was held by the Andhra Pradesh High Court that the assessee was not entitled for registration of the firm.
In Addl. CIT v. Uttam Kumar Pramod Kumar (1978) 115 ITR 796 it was held by this court that where a minor is admitted as a full partner the deed is invalid. Under the general law of partnership a minor cannot be a full partner liable to share in the losses. He can only be admitted to the benefits of the partnership. In other words he can only be entitled to share in the profits and not losses. The relevant paragraph is quoted below (page 798) :
"Under the general law of partnership a minor cannot be a full partner liable to share in the losses. He can only be admitted to the benefits of the partnership. In other words, he can only be entitled to share in the profits, and not losses. Under the partnership deed in question the minors were to share losses as well. This partnership was illegal, and was not entitled to be registered."
The aforesaid Full Bench judgment of this court has been subsequently affirmed by the Apex Court in the case of Uttam Kumar Pramod Kumar v. CIT (1990) 186 ITR 188. The Full Bench has followed the law as laid down by the Apex Court in the case of CIT v. Dwarkadas Khetan and Co. (1961) 41 ITR 528. In that case the Apex Court noticed the divergent views amongst the High Courts on the point that where a minor is admitted as full partner by adult partners, the partnership document can be registered after interpreting it to mean that the minor has been admitted to the benefits of partnership and not as a full partner. Approving the view of the Calcutta High Court and the Punjab High Court it was held, that the income-tax authorities cannot make out a new contract between the parties and register document which is different from the one actually executed and ask to be registered. The Apex Court thus disapproved the view of the Madras High Court holding that the document must be construed as showing only that the minor was admitted not as full partner but to the benefits of partnership. The relevant para. reads as follows (page 533) :
"Section 30 of the Indian Partnership Act clearly lays down that a minor cannot become a partner though with the consent of the adult partners he may be admitted to the benefit of partnership. Any document which goes beyond this section cannot be regarded as valid for the purpose of registration. Registration can only be granted of a document between persons who are parties to it and on the covenant set out in it. If the Income-tax authorities register the partnership as between adults only contrary to the terms of the document, in substance a new contract is made out. It is not open to the income-tax authorities to register a document, which is different from the one actually executed and asked to be registered. In our opinion the Madras view cannot be accepted."
Now we venture to examine the ruling relied upon by learned counsel for the assessee. Strong reliance was placed upon CIT v. Vijai Kumar Rajesh Kumar (1998) 231 ITR 625. This is a Division Bench judgment of our court. Clause (5) of the partnership deed involved in that case has been quoted in the body of the judgment. On the construction of the said clause this court was of the view that so far as losses are concerned, up to 40 per cent. it is well defined to be borne out by the adult partners of the firm. The question in which ratio they shall share 60 per cent. losses falling to the share of the minors, in the absence of any agreement to the contrary, it was held that it will be inferred that the partners share in losses falling to the share of minors in the same ratio in which they agreed to share the losses up to 40 per cent. Thus it is crystal clear that in that case there was no specific provision that minor would also be liable to share losses in the firm. Therefore, the facts of that case are not parallel to the facts of the present case. In the case in hand there is a specific provision in clause (5) of the deed that minor would be liable to share the losses of the firm also to the extent of his share with the rider that he shall not be personally liable. Therefore, the aforesaid case is distinguishable on facts and has no application to the facts of the present case. The controversy involved presently was not involved therein. For the same reason the case of CIT v. Nand Lal Jagdish Prasad (1997) 226 ITR 312 (All) is distinguishable. In that case it was provided in the deed that minor shall be entitled to share the profit of the firm but shall not be liable for the losses except as defined under the Indian Partnership Act. The court on the interpretation of clause (2) of the partnership deed of that case came to the conclusion that loss has to be fully distributed amongst the three adult partners. In the absence of any specific conditions that the minor would be liable to share the loss to the extent of his share in the partnership this court held that a minor is not a partner and is only admitted to the benefits of partnership and, therefore, the losses were to be shared amongst the adult partners.
It has been held by the Privy Council in Jafferali Bhalao Lakha v. Standard Bank of South Africa Ltd., AIR 1928 PC 135, that minors who are admitted to the partnership are liable to the extent of their share in partnership deed for the acts of the firm but they are not personally liable. Sub-section (3) of section 30 of the Indian Partnership Act makes the minor's share liable for the acts of the firm, should be construed accordingly for the debts of the firm in which a minor is admitted to the benefit of partnership. This sub-section in our opinion, has nothing to do with sub-section (1) of section 30 of the Indian Partnership Act, which provides that a minor can be admitted to the benefits of partnership. Section 2(a) of the Partnership Act defines an "act of a firm" means any act or omission by all the partners, or by any partner or agent of the firm, which gives rise to a right enforceable by or against the firm. It will not include sharing of losses by a partner or minor.
The Appellate Commissioner while allowing the appeal lost sight of the fact that sub-sections (1) and (3) of section 30 of the Indian Partnership Act operates in different fields.
In view of the above discussions, we are of the opinion that the order of the Tribunal granting registration to the assessee-firm under the Income Tax Act, 1961, is legally not correct. We answer the aforesaid question in the negative, i.e., in favour of the revenue and against the assessee.
OPEN