1969 PLP 105 (PTD)

FARUQUI, J.‑The following question of law which in substance was referred to the High Court under section 66 (1) of the Income‑tax Act has been referred by a Division Bench to this Full Bench: "Whether on the facts and in the circumstances of the case and on the proper construction and interpretation of the partnership deed dated the 19th May 1952, there was a valid partnership which should have been registered under section 26‑A of the Income‑tax Act ?" The reason for reference to Full Bench arose because of the conflict of judicial opinion which has been fully stated in the referring order.

2. The material facts are these: A business of calendaring and developing machine, which was owned by Molvi Ghulam Muhammad and two others, was acquired solely by Molvi Ghulam Muhammad by purchase of the shares of the other two partners and this was done by a deed of dissolution. As a result of this, Molvi Ghulam Muhammad became the sole owner of the aforesaid calendering and developing machine. He then entered into an agreement of partnership on 18th May 1952 by which he took 14 other partners. One of these Ghulam Mohiuddin was a minor and he was given 1/32 share in this business having contributed proportionately to its price which was fixed at Rs. 65,

000. The instrument of partnership is produced in the paper book and is marked Exh. E. The business was to be carried on under the old name of the Dyeing and Calendering Factory, Afghanpura, Multan. The accounts of the business were to be taken every month and the profit and loss divided according to the shares of each of these 15 partners. The allotment of land on which the workshop was situated was to be made in the name of all the 15 partners. The accounts were to be regularly maintained and each partner was entitled to examine the accounts at all times.

3. In the account year 1952‑53 the assessee concern made a profit of Rs. 52,281 and applied for the registration of the firm under section 26‑A the Income‑tax Act. The Income‑tax Officer rejected the application on the ground that a minor had been associated in the Partnership and had also been made liable for losses. On appeal by the assessee the Appellate Assistant Commissioner relying upon two judgments of Madras High Court set aside the order of the Income‑tax Officer and accepted the application of the firm for registration. The Commissioner of Income‑tax appealed to the Income tax Tribunal, which appeal was allowed by the Tribunal's order dated 10th September 1955. The Tribunal held that though the minor had entered into this partnership through his father, who was his legal guardian, the fact that he had been made liable for losses was fatal to the validity of partnership. It was, therefore, held that the instrument representing the partnership could not be registered because if the minor was not treated to be a partner it would be necessary to reshuffle the share amongst the remaining partners and that this was not permissible under section 26‑A of the Income‑tax Act. This, it was observed, would amount to substituting a new contract amongst the remaining partners. It was then that the reference under section 66 (1) of the Income‑tax Act was made to the High Court at the instance of the assessee. The Division Bench, which heard the reference, considered it fit to refer the question to a larger Bench in view of the conflicting judicial opinion on the main point arising in the case. It may be added that in the meantime some more references had come to this Court on the same point and these were also referred to this Full Bench.

4. The question which arises for consideration is whether having regard to the relevant provisions of the Partnership Act and the Income‑tax Act, when a minor is shown in the instrument of partnership as a partner and is not merely admitted to the benefits of partnership the Income‑tax Authorities should refuse the registration of such a firm or construe the document so as to constitute a partnership between the major partners and treat the minor as having been admitted to the benefits of the partnership which is what is permitted under section 30 of the Partnership Act. It would now be convenient to reproduce section 30 of the Partnership Act as well as section 2 (6) (b) and section 26‑A of the Income‑tax Act :‑ "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 . . . . . . . . (2) Such minor has a right to such share of the property and of the profits of the firm as may be agreed upon and he may have access to and inspect and copy any of the accounts of the firm. (3) Such minor's share is liable for the acts of the firm, but the minor is not personally liable for any such act. (4) Such minor may not sue the partners for an account or payment of his share of the property or profits of the firm, save when severing his connection with the firm, and in such case the amount of his share shall be determined by a valuation made as far as possible in accordance with the rules contained in section 48: Provided that all the partners acting together or any partner entitled to dissolve the firm upon notice to other partners may elect in such suit to dissolve the firm, and thereupon the Court shall proceed with the suit as one for dissolution and for settling accounts between the partners, and the amount of the share of the minor shall be determined along with the shares l of the partners. (5) At any time within six months of his attaining majority, or of his obtaining knowledge that he had been admitted to the benefits of partnership, whichever date is later, such person may give public notice that he has elected to become or that he has elected not to become a partner in the firm, and such notice shall determine his position as regards the firm : Provided that, if he fails to give such notice, he shall become a partner in the firm on the expiry of the said six months. (6) Where any person has been admitted as a minor to the benefits of partnership in a firm, the burden of proving the fact that such person had no knowledge of such admission until a particular date after the expiry of six months of his attaining majority shall lie on the persons asserting that fact. (7) Where such person becomes a partner,‑ (a) his rights and liabilities as a minor continue up to the date on which he becomes a partner, but he also becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership, and (b) his share in the property and profits of the firm shall be the share to which he was entitled as a minor. (8) Where such person elects not to become a partner: (a) his rights and liabilities shall continue to be those of a minor under this section up to the date on which he gives public notice, (b) his share shall not be liable for any acts of the firm done after the date of the notice, and (c) he shall be entitled to sue the partners for his share of the property and profits in accordance with subsection (4). (9) Nothing in subsections (7) and (8) shall affect the provisions of section 28." Sec. 2 (6‑B), Income‑tax Act :‑ "

2. In this Act, unless there is anything repugnant in the subject or context . . . . (6‑B) `firm', `partner' and `partnership' have the same meanings respectively as in the Partnership Act, 1932: provided that the expression `partner' includes any person who being a minor has been admitted to the benefits of partnership." "26‑A.‑(1) Application may be made to the Income‑tax officer on behalf of any firm, constituted by an instrument of partnership executed in writing before the end of the previous year for the year for which the assessment is to be made and specifying the individual shares of the partners for registration for the purposes of this Act and of any other enactment for the time being in force relating to income‑tax or super tax. (2) 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. (3) Where the Income‑tax Officer is satisfied that the application is complete and that there is, or was, as the case may be, a genuine firm in existence constituted as shown in the instrument, or instruments, of partnership executed in writing and in force in the relevant previous year, he may register the firm for the purposes of this Act, or where the firm has already been registered for the immediately preceding year, renew the registration. (4) If, after an order has been passed under subsection (3), the Income‑tax Officer is satisfied that such order was passed without there being a genuine firm in existence constituted as shown in the instrument, or instruments, of partnership executed in writing all in force in the relevant previous year, he may cancel the registration: Provided that the registration of a firm shall not be cancelled until fourteen days have elapsed from the issue of a notice by the Income‑tax Officer to the firm intimating his intention to cancel its registration.

5. Now, it may be noticed that section 30 (1) of the Partnership Act' states that a person who is a minor may not be a partner in a firm but with the consent of all the partners for time being he may be admitted to the benefits of partnership. The reason why he may not be a partner is because of the lack o competency in the minor to contract. But it will be noticed that the difficulty of section 11 of the Contract Act was attempted to be met by the innovation introduced by section 30 of the Partnership Act, because a minor was permitted to be admitted to the benefits of partnership. Now, let us see what are the consequences of such admission. Firstly, he has a right to such share of the property and the profits of the firm as may be agreed upon and he may have access to and inspect and copy any of the accounts of the firm. His share is then made liable for the acts of the firm and the only difference between him and the other partners is that the minor is not to be made liable personally. It is, therefore, not correct to say that the minor, who is admitted to the benefits of partnership, is not liable to bear the loss. The only difference is that his liability for the losses is limited to the extent of his share in the partnership property. It was held by the Privy Council in the case of Jafferali (A I R 1928 P C 135) that minors who are admitted to the benefits of partnership are liable for loss to the extent of their shares for partnership debts but they are not personally liable. It was also held by the Bombay High Court in the case of Ram Partap v. Fooli Bai (I L R 20 Bom. 767) that the minor's share in the firm's property is liable for its obligation whether he has derived benefits from the business or not. Then under clause (5) of section 30, the minor within 6 months of his attaining majority may give public notice that he has elected to become or not to become a partner in the firm provided that if he fails to give such notice he shall become a partner in the firm on the expiry of the said six months. Then under clause (7) of this section on such person becoming a partner, he becomes personally liable to third party for all acts of the firm done since he was admitted to the benefits of partnership.

6. From what has been said it would be seen that by reason of this innovation in the Partnership Act, which was introduced as a result of the provisions of the Contract Act and the decision of the Privy Council in Mohri Bibi's case, the minor on admission to the benefits of partnership derives most of the benefits which a partner does. He also becomes liable to bear the loss except that the liability does not become personal.

7. Let us next consider as to what are the requirements for the registration of firms under section 26‑A of the Income‑tax Act. The procedure provided in this section is firstly that an application has to be made to the Income‑tax Officer on behalf of the firm constituted under an instrument of partnership specifying the individual shares of the partners, for registration for purposes of this Act; and, secondly, the application shall be made in such form as may be prescribed. It is then provided by clause (3) that where the Income‑tax Officer is satisfied that the application is complete and that there is or was, as the case may be, a genuine firm in existence constituted as shown in the instrument or instruments of partnership . . . . . . he may register the firm. Clause (4) gives the Income‑tax Officer power to cancel the registration if he is satisfied that the order for registration was passed without there being a genuine firm in existence. It would, therefore, be seen that the satisfaction of the Income‑tax Officer is to bed with regard to the genuineness of the firm constituted as shown in the instrument of partnership and in making the application the procedure as stated above has to be followed. The result is that when there is a firm constituted by an instrument of partnership, in which the shares of the partners are specified, the firm' would have to be registered unless the Income‑tax Officer is not satisfied as to its genuineness.

8. It may next be noted that according to the definition clause of the Income‑tax Act, viz., section 2 (6‑B) `firm', `partner' and `partnership' have the same meaning respectively as in the Partnership Act provided that the expression `partner' includes any person who being a minor has been admitted to the benefits of partnership. It will, therefore, be seen that a person who has been admitted to the benefits of partnership in view of the provisions contained in section 30 of the Partnership Act is treated as a partner for the purpose of the incidence of tax under the Income- tax Act.

9. The question which has now to be considered is whether in a case where there is a genuine firm of several adult partners who have entered into an agreement of partnership specifying the shares of such partners but in the instrument a minor has also been described as a partner whose share is also specified, the registration of such a firm is to be refused by the Income‑tax Officer, in spite of all other formalities and requirements having been fulfilled, upon the ground that in the instrument of partnership instead of saying that the minor has been admitted to the benefits of partnership in such and such share he is erroneously described as a partner, or whether, when all the requirements are fulfilled the minor so described shall be deemed to have been really admitted to the benefits of partnership. In spite of our pointed question to Mr. Abdul Haq, the learned counsel for the Department, he was not able to tell us as to in what manner the Department's interest with regard to levying of tax in such case would be adversely affected. The assessing authority is really concerned with the profits made by the firm in which the minor has a share for the purposes of applying the incidence of tax. It would be wholly immaterial whether the minor is defectively described as a partner instead of saying that he was admitted to the benefits of the partnership. We will now proceed to examine the case‑law on the subject.

10. A Division Bench of the Madras High Court in the case of Jakka Devayya & Sons ((1952) 22 I T R 264), held that the fact that the minor was included in the contract having been described a partner would not make the partnership as between the adults invalid and the minor should be deemed to have been admitted to the benefits of the partnership. The same view was taken by the High Courts of Patna and Bombay. In the case of Dwarkadas Khetan & Co. v. Commissioner of Income‑tax, Bombay City ((1956) 29 I T R 903) a Division Bench of the Bombay High Court held that even where the partnership deed purported to make the minor a partner there being three other major partners, the proper construction of the partnership deed would be that the major partners would become partner and the minor would be deemed to have been admitted to the benefits of the partnership. It was further held that the partnership instrument created a valid partnership between the three adult partners, the minor having been admitted to the benefits of the partnership. In this case the agreement was executed by the major partners as well as by the minor and his father on his behalf. The registration of this partnership was refused, one of the grounds being that the deed was void as a minor was made a partner and liable for losses. Upon a reference to the High Court the question was answered in favour of the registration of the firm on the above facts. It was this case which went in appeal to the Indian Supreme Court, by which the judgment of the High Court was reversed and we propose to examine this decision at some length. Their Lordships did not examine or even advert to the reasons given by the Bombay High Court in their judgment but went on to consider the Madras decision in Jakka Devayya's cave considering it to be the leading case in support of the proposition expounded by the judgment under appeal and observed that this case alone needed to be considered. In that case, there were three partners, one of whom was a minor. They formed a Hindu undivided family later, a deed of partnership was executed, in which the minor was represented by his father‑m‑law. Their Lordships then went on to note the decision in the case which was that the fact that the minor was included as a partner did not make the partnership as between two adult partners invalid and that the minor must be deemed to have been admitted to the benefits of the partnership by the two adults. It was observed by Indian Supreme Court that the error in the Madras view was in using the definition contained in section 2 (6‑B) to show that a deed including a minor as a competent partner was valid. They went on to point out that what the definition does is to apply to a minor admitted to the benefits of partnership all the provisions of the Income‑tax Act applicable to partners. It was added that the definition could not be read to mean that in every case where a minor had been admit ted as a full partner the deed was to be regarded as valid because under the law a minor can be admitted to the benefits of partnership. With great respect to the learned Judges, who decided this case in the Supreme Court, the error as assumed to exist in the judgment of the Madras High Court with reference to the interpretation of section 2(6‑B) of the Act was not really there. Their Lordships of the Madras High Court had nowhere said that the definition as contained in section 2(6‑B) rendered a minor a competent and full partner. What they had said was that it was open to the adult partners to admit a minor to the benefits of the partnership. In doing so, they had relied upon section 30 of the Partnership Act. They had used the definition contained in section 2(6‑B) of the Income‑tax Act only for the purpose of showing that when a minor was admitted to the benefits of partnership he became partner for the "purposes of Income‑tax Act, that is, he will be liable to the incidence of tax as any other Partner and this is precisely that section 2(6‑B) was intended to achieve. The true ratio of their decision was that the fact that a minor was included in the contract would not make the partnership as bet ween the adults invalid and, therefore, the minor might be deemed to have been admitted to the benefits of the partnership between the adults. With regard to this ratio which was elaborated in the Bombay case their Lordships of the Supreme Court of India did not have anything to say. They referred to the decision of the Calcutta High Court in the case of Husain Qasim Dada ((1937) 6 I T R 182) and said that in their opinion the Calcutta view was preferable to the view taken by the Madras High Court. But the facts of the Calcutta case were so vastly different that the pronouncement in that case with regard to section 26‑A of the Income‑tax Act cannot be applied appropriately to a case such as the one with which we are dealing or with which the Madras or the Bombay High Courts were dealing. In the Calcutta case, the instrument of partnership was between 20 different parties including the Mutawalli of a Wakf and his four minor children. It was held that under the Mahomedan Law the moment a Wakf was created all rights of property passed out from the Wakif and vested in the Almighty, and, since a non‑personal being such as the Almighty is, cannot enter into a partnership with material persons; a partnership which purports to exist with a Wakf represented by the Mutawalli as a partner, is no partnership in law and cannot be registered as a firm under section 26‑A of the Income‑tax Act. Of course, it was also observed that where Mutawallis of Wakf or infants were partners in the firm which was sought to be registered, the partnership could not be treated as between the remaining partners and registered as such under section 26‑A. The statement of the case would show that the finding of the Department was that there was not in fact a genuine partnership. We are, therefore, of the opinion that the observation in the Calcutta case could not be made the basis of refusal for giving a beneficial construction to a partnership deed by holding the partnership to have been constituted by adult partners and the minor to be deemed to have been admitted to the benefits 'of the partnership in view of the provisions of section 30 of the Partnership Act and the definition clause in the Income‑tax Act.

11. We may then reproduce the conclusions of the Supreme Court of India which are contained in the last paragraph :‑ "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 benefits 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 covenants set out in it. If the income‑tax authorities register the partnership as between the 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." It would be seen and we say so with great respect to the judges who decided this case that the impression of their Lordships was that it was the document of partnership which required to be registered under section 26‑A. But that is not what the Income‑tax Officer does under that section. What he registers is the firm and not the partnership deed and the term "constituted under an instrument of partnership" relates to the persons constituting the firm and not the delineation of shares in the instrument. It was held by a Full Bench of the Calcutta High Court in the case of Moolji Sicka ((1938) 6 I T R 234) that the word change, in the constitution of a firm in section 26(1) of the Income‑tax Act means a change in the persons who are partners in the firm and not a mere change in the proportion 9n which the partners divide the profits. Therefore, when the Income‑tax Officer is required to register a firm it is difficult for us to see on what principle he can refuse to recognise the existence of partnership between the adult members of the firm. But the emphasis by their Lordships of the Supreme Court was with regard to the difficulty which they experienced and which they expressed thus: "If the Income‑tax Authorities registered the partnership as between the adults only contrary to the terms of the document, in substance a now contract is made out." But if the document was so construed as to constitute a partnership between the adult partners treating the minor to have been admitted to tire benefits of partnership, there was no change in the substance of the contract and no difficulties arose with regard to the full application of the incidence of taxation under the Income‑tax Act. Therefore, the supposed difficulty of substituting a new contract for the contract in the partnership deed did not really exist and it could not stand in the way of a beneficial construction of the document.

12. We may lastly refer to a Single Judge decision of the Lahore High Court in the case of Barkatullah v. Hanif and others (P L D 1955 Lah. 350). This was a suit by four plaintiffs, two of whom were minors for the dissolution of partnership and rendition of accounts. In this case, it was held that partnership was an agreement and an agreement with a minor was void. It was recognised that no doubt under section 30 of the Partnership Act, a minor can be admitted to the benefits of partnership but it was added 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. The prayer, however, for rendition of accounts was remanded for disposal on an equitable basis in accordance with principles of justice, equity and good conscience. His Lordship while taking the view, as earlier stated, had referred to two fairly old cases of the Lahore High Court and had said that they were judgments of Division Bench and were binding on him. This view, however, was not accepted by our Supreme Court in the case of Commissioner of Income‑tax, East Pakistan v. Amin Match Works (P L D 1964 S C 377). It was held that‑ " 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 as thereby lawfully brought into being even without the minor." It was added that `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 minor 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."

13. Our conclusion, therefore, is that where a partnership is constituted by partners who are adults, the inclusion of a minor as a partner does not invalidate the partnership and the correct construction of such a document would be to treat the minor as having been admitted to the benefits of partnership. In that view of the matter, unless the genuineness of the firm is doubted the registration of the firm under sec tion 26‑A cannot be refused upon the ground that there was a technical defect in the document whereby the expression used with regard to the minor was a partner and not that he had been admitted to the benefits of the partnership. In view of our conclusion our answer to the question formulated in the referring order of the D. B. is in the affirmative. It follows that our answer to the reference made by the Tribunal under section 66 (1) of the Income‑tax Act is in the negative. That reference was :‑ "Whether, in the facts and circumstances of the case, the Income‑tax Officer ‑had properly refused registration of the firm as constituted under the instrument of partnership dated the 19th May 1952 ?" Costs of this reference shall be borne as incurred. S. Q. Reference answered.