JUDGMENT OM PRAKASH, J. :
Following the direction given by this Court under s. 256(2) of the IT Act, 1961 (briefly, the Act), the Tribunal referred the following questions relating to the asst. yr. 1976-77 for the opinion of this Court :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the evidence and material other than the partnership deed dt. 20th January, 1973 could be considered for ascertaining the shares of partners in profits and loss on the minor becoming major ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the Instruction No. 1161 dt. 4th April, 1973 issued by the CBDT was binding on the CIT while passing the order under s. 263 ?
3. Whether, on the facts and in the circumstances of the case in view of the Allahabad High Court decision in Badri Narain Kashi Prasad vs. Addl. CIT & Ors. (1978) 115 ITR 858 (All) (FB) the Tribunal was legally correct in modifying the order of the CIT dt. 7th September, 1978 under s. 263 and in directing the ITO to make enquiry whether there was a change in the shares in the partners as evidenced by the partnership deed dt. 20th February, 1973 on the lines indicated in the Boards instructions and to decide the issue of continuance of registration afresh ?"
2. Undisputed facts are that for the asst. yr. 1973-74, the assessee-firm was granted registration vide order dt. 30th October, 1973. The assessment on the assessee - a firm - for the asst. yr. 1976-77 came to be completed on 14th September, 1976 and on the basis of a declaration filed under s. 184(7) of the Act, the continuation of registration was allowed. In the said declaration, one Munavvar Hussain, a minor who was admitted to the benefits of the partnership, was declared as a partner.
During the security of the case for the asst. yr. 1977-78, the ITO noticed that Munavvar Hussain was shown as major. It came to the notice of the ITO that the Munavvar Hussain had attained majority on 13th June, 1975, that is, during the previous year ending 31st March, 1976, relevant to the asst. yr. 1976-77.
Following the decision of a Division Bench of this Court in the case of Ganesh Lal Laxmi Narain vs. CIT (1968) 68 ITR 696 (All) , the CIT took the view that when the minor admitted to the benefits of the partnership, attained majority and elected to continue as a partner in the firm, there was a change in the constitution of the firm within the meaning of s. 184(7)(i) of the Act, which according to the CIT should have been evidenced by a fresh partnership deed.
The CIT being of the view that the grant of continuation of registration on the basis of the declaration furnished by the assessee was erroneous insofar as that was prejudicial to the interests of the Revenue, initiated proceedings under s. 263 of the Act.
Relying on the Full Bench decision of this Court in the case of Badri Narain Kashi Prasad vs. Addl. CIT (supra), the CIT was of the view that "...... The redistribution of the shares in the loss on minor attaining majority has also to be ascertained". He further held as follows : (para 6 p. 16 of the paper book).
"......... Applying to the ratio of the Full Bench, referred to above, it is, therefore, clear that the partnership deed dt. 20th January, 1973 did not provide as to how the profits or loss would be divided amongst the partners after any of the partners becomes major. In this case, therefore, there was a change in the constitution of the firm when Sri Munavvar Hussain (minor) attained majority and, therefore, the assessee was not entitled the continuation of registration under s. 184(7)".
This is how the CIT held that the ITOs order granting continuation of registration is erroneous and prejudicial to the interests of Revenue. He thus cancelled the order of the ITO granting continuation of registration for the asst. yr. 1976-77 and directed the ITO to treat the assessee in the status of unregistered firm for the purposes of assessment for the asst. yr. 1976-77.
3. The Tribunal relying on the Full Bench decision in the case of Badri Narayan Kashi Prasad (supra) held that when the minor admitted to the benefits of the partnership, attained majority and elected to continue as a partner of the firm that did not amount to a change in the constitution of the firm and, therefore, the assessee-firm was entitled to the grant of continuation of registration on the basis of the declaration, provided the AO was satisfied in view of Instruction No. 1082 dt. 4th August, 1977, issued by the Central Board of Direct Taxes (CBDT) that the minor upon attaining majority did not agree to share the losses and the major partners of the assessee-firm continued to share the losses the same way, as they agreed to share the losses before the minor attained majority. The Tribunal in view of the aforesaid Instruction was of the view that it was the duty of the AO to make inquiry into the fact whether the minor upon attaining majority agreed to share the losses and, if so, whether the shares in losses as agreed upon in the original partnership deed, have undergone change and that if upon such inquiry the AO comes to the conclusion that the minor upon attaining majority did not agree to share the losses and the liability to share the losses of the major partners as evidenced by the original partnership deed, remained unaltered, then no fresh partnership deed was required to be executed. The Tribunal taking the view that the aforesaid Instruction of the CBDT was binding on the Departmental authorities, modified the order of the CIT and directed the ITO "to hold an inquiry as to whether there has been a change in the shares of the partners as evidenced by the instrument of the partnership ...... and then decide the issue of continuance of registration afresh in accordance with law".
4. Clear finding recorded by the CIT is that "there was a change in the constitution of the firm, when Munavvar Hussain (minor) attained majority and, therefore, the assessee was not entitled to the continuation of registration under s. 184(7)." Such finding was given by the CIT, because one of the minors admitted to the benefits of the partners, attained majority during the previous year, relevant to the asst. yr. 1976-77. The Tribunal was clearly of the view that, on the facts and in the circumstances of the case, there was no change in the constitution of the firm. However, the Tribunal relying on Instruction No. 1082 dt. 4th August, 1977 issued by the CBDT was of the view that it was the duty of the AO to satisfy himself whether the minor upon attaining majority agreed to share the losses and if so whether the shares in losses as evidenced in the original partnership deed has undergone change. The Tribunal was of the view that if the minor after attaining majority agreed to share the losses with other partners then there would be a change in the share ratio of losses and that would require to be evidenced by a fresh partnership deed.
5. The first question for consideration is whether on the facts and circumstances of the case, there was a change in the constitution of the firm.
6. In Badri Narayan Kashi Prasad (supra), the Full Bench enunciated the legal position as follows :
"The phrases "constitution of the firm", or for the matter of that "the shares of the partners" has not been defined by the IT Act. In the context, the phrase "constitution of the firm" refers to the identity of the partners of the firm. Thus, the identity of the partners as well as their shares ought to be such as is evidenced by the instrument of partnership. If for any subsequent year there is a change either in the constitution of the firm or the shares of the partners and such change is not evidenced by the instrument, then it will be a case where the conclusion will be that there has been no change.
A change in the constitution, that is, in the identity of the partners, may take place when a person is introduced as a partner or a partner retires, or is expelled, or ceases to be a partner on his becoming insolvent, or dies or a minor becomes major ............
Under s. 30(1) and (2) of the Indian Partnership Act, a minor cannot be a partner. He can be admitted to the benefits of the partnership. On attaining majority, if he so elects, he, under s. 30(5), becomes a partner. His share is the same to which he was entitled as a minor vide s. 30(7). He shares in looses also.
When the partners agree to admit a minor to the benefits of a partnership, they are deemed to agree that if the minor on attaining majority so elects, he will become a partner, without a fresh agreement. That is why no fresh agreement or instrument is needed.
The IT Act makes a departure in the treatment of minors qua partnership. Sec. 2(23) of the Act says :
"2. (23) firm, partner and partnership have the meanings respectively assigned to them in the Indian Partnership Act, 1932 (IX of 1932); but the expression partner shall also include any person who, being a minor, has been admitted to the benefits of partnership".
For purposes of the IT Act a minor admitted to the benefits of the partnership is to be deemed to be a partner, entitled to all the benefits conferred on a partner by the Act. .................. When a minor becomes major, and on his option becomes a partner within the meaning of the Indian Partnership Act, no change occurs in the constitution of the firm under the IT Act. The instrument of partnership evidences the same number and identity of partners as before.
In view of the fact that the IT Act deems a minor to be a partner, there can be no change in the constitution of the firm by the mere fact of his attaining majority and electing to remain a partner. He was already a partner, and he continues as a partner".
The Full Bench concludingly said :
"The important thing is not that there should be no change at all, but that if there is a change, it must be evidenced by the original instrument".
7. From the above reproduced findings of the Full Bench, it is amply clear that upon the minor attaining majority, no change occurred in the constitution of the firm, because the number of partners remained the same what it was before. The minor attained majority and he opted to continue as a partner in the firm. Where there was no change in the constitution of the firm upon the minor attaining majority, no fresh deed was required to be executed. The Tribunal in coming to the conclusion that there was no change in the constitution of the firm, fully relied upon the Full Bench decision, which has to be respectfully followed.
The Tribunal then relied upon Instruction No. 1082 dt. 4th August, 1977 issued by the CBDT; modified the order of the CIT and directed the ITO to make inquiry into the fact whether the minor upon attaining majority agreed to share the losses and whether for that reason, the share ratio in losses as evidenced by the original partnership deed, stood altered, and, if so, whether that was evidenced by a fresh partnership deed.
8. The law requires that when there is a change in the constitution of the firm or in the share ratio of the profit and loss then that change should be evidenced by a fresh partnership deed. But if there is no change in either of the two, no fresh deed is required to be executed and the continuation of registration will be granted merely on the basis of the declaration furnished by an assessee that there was neither change in the constitution of the firm nor in the share ratio of the profit/loss.
There are two stages in a case in which a minor is admitted to the benefits of the partnership. The first stage is pre-attaining majority and the second stage is post-attaining majority. In the instant case, we are not concerned with the pre-attaining majority stage, because at that stage, the AO under the original partnership deed continued to grant continuation of registration on the basis of declaration given to the effect that there was no change in the constitution of the firm and in the share ratio of profit/loss of the partners.
Coming to the stage of post-attaining majority, the question for consideration was whether there was change in the share ratio of profit and loss. The possibility of change in the constitution of the firm has to be ruled out in the situation when a minor attains majority in view of the Full Bench decision. Sec. 30(7)(b) of the Partnership Act says that where a minor becomes a partner, his share in the property and profits of the firm shall be the share to which he was entitled as a minor. The share of the minor in the original partnership deed is well defined. Under the original partnership deed, the major partners agreed to share the entire losses. The law is that every partner is not required to share the loss and some of the partners only can agree to share the loss. Thus, share ratio in profit and loss is well defined under the original partnership deed. The only question for consideration was whether the minor upon attaining majority agreed to share the losses. If the minor agrees to share the losses after attaining majority, then ratio to share the losses as evidenced in the original partnership deed will certainly undergo change and that requires to be evidenced by a fresh partnership deed. To take care of such a situation, the CBDT stated in Instruction No. 1082 dt. 4th August, 1977 as follows :
"However, if it is decided among the partners that the minor on attaining majority should share in losses also, then and only then a fresh deed of partnership effecting the change would be necessary. Therefore, before the firm is allowed continuance of registration for the relevant assessment year, the ITO should satisfy himself on the basis of either an affidavit of the partner who attained majority or his statement on oath that he is not sharing in losses and that the shares in profits and losses as specified in the instrument of partnership admitting him to the benefits of the partnership earlier remained unchanged".
9. The Tribunal was not concerned with the stage of pre-attaining majority in this case, because the view taken by the CIT is that there was a change in the constitution of the firm when the minor attained majority. The question before the Tribunal was whether the assessee was entitled to continuation of registration on the basis of the declaration after the minor attained majority and it is in this context the Tribunal following Instruction No. 1082 dt. 4th August, 1977 directed the AO to satisfy himself and record a clear finding whether the minor upon attaining majority agreed to share the losses. If a fresh agreement is made upon attaining majority, then that would disturb the share ratio of losses, as evidenced by original partnership deed. It is in that backdrop, the Tribunal following the instruction issued by the CBDT observed as under :
"...... The Partnership Act, 1982 nowhere lays down that a minor on attaining majority must share in losses. It depends on the terms agreed between the partners at the time the minor attains majority and becomes a full-fledged partner. There is no bar to the partners agreeing amongst themselves to share the losses amongst the earlier adult partners only. Therefore, the second part of the enquiry as to whether there has been a change in the shares of the partners, as evidenced by the instrument of partnership is not restricted to the partnership deed, but has to be on the basis of the totality of the circumstances of the case".
So it is with regard to the post-attaining majority stage that the Tribunal held that the enquiry at that stage will not confine to the original partnership deed alone, but other relevant materials may also be looked into.
10. Question No. 1 is, therefore, answered against the Revenue.
11. Then the question is whether the Tribunal was right in holding that the aforesaid instruction of the CBDT was binding on the CIT. It is trite that instructions issued by the CBDT unless they are held contrary to the statute, are binding upon the departmental authorities. There is nothing on the record to show that the aforesaid instruction issued by the CBDT that at the post-attaining majority stage, the AO should satisfy himself whether the partner who attained majority, agreed to share the losses and whether the shares in losses as evidenced by the original partnership have undergone change, is contrary to the provisions of the Act. Rather, such inquiry is to safeguard the public interest. If there is a change in the share ratio then also continuation of registration as per the declaration cannot be granted and, therefore, it is but necessary to make inquiry into the fact whether the share ratio remained intact upon the minor attaining majority. This being so, the instruction are binding on the Departmental authorities.
There is no conflict in the view taken by the Tribunal and the decision rendered in Badri Narain Kashi Prasad (supra) and, therefore, the Tribunal was right in modifying the order of the CIT and in directing the ITO to make inquiry whether upon attaining majority, the minor who elected to continue as a partner, agreed to share the losses.
We, therefore, answer questions No. 2 and 3 against the Revenue.