1964 PLP 529 (PTD)

(On appeal from the judgment and order of the High Court of East Pakistan, Dacca, dated the 20th July 1962, in Reference Case No. 2 of 1961). Income‑tax Act (XI of 1922)

S. 26‑A‑Registration of firm‑ Minors admitted to benefits of partnership‑Fact stated is instru ment of partnership itself executed between two adult partners Firm, held, lawfully registrable‑ Verbal consensus between would‑be partners always precedes execution of written instrument‑Such instrument, in fact, not essential to validity of partnership‑Agree ment of partnership may be given retrospective elect‑Partnership Act (IX of 1932), S. 30 provides no legal bar to admission of minors to benefits of partnership‑Admission of minors to benefits of partnership does not render constitution of firm itself invalid S. 26‑A only requires two conditions to be satisfied: (1) that firm has been constituted under an instrument of partnership, and (2) that instrument species shares of partners‑[Md. Rafiq v. Camar Din A I R 1922 Lah. 441 ; Deviditta Mall v. Firm Than mal Pariaram 142 I C 203 ; Barkatullah v. Hanif P L D 1955 Lah. 350 ; Jakka Devaya & Sons v. Commissioner of Income‑tax, Madras (1952) 22 I T R 264 ; Dawarkadas Khetan v. Commissioner of Income‑tax, Bombay (1956) 29 I T R 903 and Sahai Brothers v. Commissioner of Income‑tax, Bihar and Orissa (1958) 33 1 T R 40 mentioned]. JUDGMENT HAMOODUR RAHMAN, J.‑

This appeal by special leave arises out of a reference made by the Income‑tax Appellate Tribunal, Dacca Bench, under section 66 (1) of the Income‑tax Act, to the High Court of East Pakistan. The circumstances, in which the reference came to be made, may be briefly stated as follows :‑ On the 16th of January 1950, two persons, namely, Ismail Ahmad and Jusab Haji Tayub, executed a deed of partnership whereby they agreed to carry on business under the name and style of Amin Match Works at Dacca with effect from March 1949, in equal shares. Under this agreement they invested equivalent amounts of capital and agreed to share the profit and loss equally. This firm was duly registered under section 26‑A of the Income‑tax Act as a partnership firm, but on the death of Jusab Haji Tayub on the 25th of September 1954, the part nership stood dissolved and the firm came to an end. It was, therefore, decided in the interest of the proper conduct of the business of the firm to re‑constitute the partnership by taking in one A. Razzaq Ahmad, a brother of the surviving partner, as a partner in the existing business. Another deed of partnership was, therefore, executed by Ismail Ahmad, the surviving partner, and A. Razzaq Ahmad, the incoming partner, on the 11th of November 1954, which was to take effect from the 26th of September 1954, that is to say, the day following the death of Jusab Haji Tayub. According to the terms of this deed Ismail Ahmad was to have a seven annas share in the profits and A. Razzaq Ahmad a three annas share, but the losses were to be shared between them in the proportion of ten annas and six annas respectively. By this document itself three minors, who were the sons of the other brothers of the above two partners, were also admitted Into the benefits of the partnership and each of them was given a two annas share in the profits of the firm but they were not made liable for the losses. This document also provided that Ismail Ahmad would have the right to take "a new partner or partners out of the minors, who may elect to become a partner after attaining the age of majority with the consent of the other party". This agreement was amended by a supplementary agreement of the 26th of July 1955. But since the new terms added by the supplementary agreement are not material for the purposes of this case, it is not necessary to refer to them. The partnership created by the deed of the 11th of November 1954, as amended by the supplementary agreement of the 26th of July 1955, was sought to be registered under section 26‑A of the Income‑tax Act, but the Income‑tax Officer, declined to register the partnership, because, in his opinion, the constitution of the firm under the deed of part nership was not genuine, particularly, since the minors had contributed no part of the capital of the firm. Their admission to the benefit of the partnership was also held to be invalid, because, there was no consideration for the same. On an appeal being preferred against the said order the Appellate Assistant Commissioner took the view that the Income- tax Officer was labouring under some confusion in taking the view that the minors had not contributed any capital, for, according to the supplementary deed of the 26th of July 1955, and the ledger of the firm it would appear that the amounts standing to the credit of the minors in their ledger personal accounts in the books of the partnership were to be treated as the capital contributed by them. The order of the Income‑tax Officer was, therefore, set aside and registration was allowed. The Department appealed to the Income‑tax Appellate Tribunal which allowed the appeal on the ground that since the Appellate Assistant Commissioner had not considered the ques tion as to whether the constitution of the firm should precede the admission of‑the minors to the benefits thereof or the relevant case law on the subject, which appeared to be conflicting, the case should be remanded to the Appellate Assistant Commissioner for rehearing. Before the case came up for rehearing by the Appellate Assistant Commissioner, however, a Full Bench of the Income‑tax Appellate Tribunal had occasion to consider the same point in an other appeal brought before it, and held that in a case where two major partners had admitted a minor to the benefits of the partner ship from the very inception of the partnership, the firm could not be registered as a partnership firm under the Income‑tax Act until it was reconstituted between the major partners and the shares of profit and loss were re‑allocated. Being bound by the Appellate Tribunal's decision the Appellate Assistant Commissioner dismissed the appeal of the assessee and upheld the refusal of the Income‑tax Officer to register the firm under section 26‑A. The assessee again came up on appeal to the Appellate Tribunal which upheld its earlier decision relying on the decisions in the cases of Md. Rafiq v. Camar Din (A I R 1922 Lah. 441), Deviditta Mall v. Firm Thanmal Pariaram (142 I C 203) and Barkatullah v. Hanif (P L D 1955 Lah. 350), although in several other income‑tax cases there were decisions of the Madras, Bombay and Bihar High Courts to the contrary, vide Jakka Davaya & Sons v. Commissioner of Income‑tax, Madras ((1952) 22 I T R 264), Dawarkadas Khetan v. Commissioner of Income‑tax, Bombay ((1956) 29 I T R 903) and Sahai Brothers v. Commissioner of Income‑tax, Bihar and Orissa ((1958) 33 I T R 40). The assessee thereupon made three applications for referring the question of law arising from the order of the Appellate Tribunal to the High Court in respect of each of the assessment years 1955‑56, 56‑57 and 57‑

58. As there was a conflict of decisions, the Tribunal made a consolidated reference to the High Court of the following question: "Whether on the facts and circumstances of the case the Income‑tax Appellate Tribunal was right in holding that the minor partners' admission to the benefits of the firm simultan eously from the constitution of the firm tantamounts to an admission to the benefits of a non‑existing firm contrary to the provisions of section 30 of the Partnership Act ?" The High Court of East Pakistan took the view that none of the decisions relied upon by the Appellate Tribunal was, strictly speaking, relevant for the purposes of the decision of the question raised in this reference, for, in all those cases the minors had actually entered into contra‑is of partnership, as contracting parties, along with the adults. The Tribunal was, therefore, held to be wrong in taking the view that in the present case too the same principles could be applied. The document of the 11th of November 1954, as amended by the supplementary deed of the 26th of July 1955, clearly showed that the minors were neither made parties to the document nor did they join in the execution thereof as contracting parties nor did the document place them under any obligation of any kind whatsoever. They were only given certain benefits in the shape of a share of the profits and a right to elect to become full‑fledged partners on attaining majority. This was permissible under section 30 of the Partnership Act. Subsection (1) thereof provides as follows :‑ "30 (1) A person who is a minor according to the law to which he is subject 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." The observation in the judgment in the case of Barkatullah v. Hanif, to the effect that "in order that section 30 may apply there should . . . be a partnership already in existence and cases where a minor became a partner from the very inception of partnership are beyond the scope of section 30" only meant, that where there is from the very inception no valid partnership at all, the minors cannot be admitted to the benefits under the Partnership Act, as no partnership firm has at all legally come into existence. The facts recited in the judgment of the said case showed that upon the averments made in the plaint itself two of the plaintiffs, who were minors and were suing through their next friend, alleged that they had entered into a partnership with the defen dants in that suit for running an Ice‑cream Factory and that their share in the partnership business was to be one‑half and that of the defendants one‑half. On the allegations contained in the plaint, therefore, it was apparent that no valid contract had been entered into, because, the minors were incapable of contract ing as partners. In the present case, on the other hand, the contract itself is between two adult persons who, by their own agreement, have decided to forego certain shares of the profits and to make a gift of the same to the minors for their benefit. Besides, a written document is only evidence of the consensus already arrived at between the parties executing the same. The agreement, therefore, must precede the execution of the document and in this sense too the partnership comes into existence upon the mutual agreement of the partners at some point of time however brief it may be, before the execution of the document evidencing that agreement. A written document is not essential to the validity of a partnership, for the contract of partnership may be entered into without any particular formality. In the present case, the agreement was to take effect from the 26th of September 1954, a considerable period before the date of the execution of the document. This also indicates than the partnership came into being earlier and minors could be admitted to the benefits thereof. The High Court of East Pakistan was therefore, in our view, right in taking the view that "although both the constitution of the partnership and the factum of the admission of these minors to the benefits thereof arc embodied in the selfsame deed, there is no doubt that the former, in point of time, preceded the latter, however short the time lag may be between those two actions." Even otherwise we do not think that there is any legal bar under section 30 of the Partnership Act to the admission of minors to the benefits of a partnership firm under the same instrument which sets, up the firm, provided that a firm is thereby lawfully brought into being even without the minors. It is no doubt correct that a minor cannot create a partnership but it cannot be said that by being merely admitted to the benefits of a partnership he also becomes a partner. In any event, we fail to appreciate why the inclusion of the minors should have rendered the constitution of the firm itself invalid when there were at least two adult partners, besides the minors; who could lawfully have entered into the partnership. Under section 26‑A of the Income‑tax Act two conditions have only to be satisfied, firstly, that the firm has been constituted under an instrument of partnership, and, secondly, that the instrument has specified the shares of the partners. If these conditions are satisfied, the firm is entitled to registration. Both these conditions were fully satisfied in the present case. Therefore, even upon the principle enunciated in the case of Barkatullah v. Hanif the minors, in the present case, were only admitted to the benefits of a partnership which had validly come into existence and, as such, the firm was lawfully registrable under section 26‑A of the Income‑tax Act. For these reasons we do not think that there is any substance in this appeal which is dismissed with costs. A.H Appeal dismissed.