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PETITIONER: COMMISSIONER OF INCOME-TAX, BANGALORE

       Vs.

RESPONDENT: SHAH MOHANDAS SADHURAM

DATE OF JUDGMENT: 15/04/1965

BENCH: SIKRI, S.M. BENCH: SIKRI, S.M. SUBBARAO, K. SHAH, J.C.

CITATION:  1966 AIR   15            1965 SCR  (3) 771

ACT:      Indian  Income-tax Act (11 of 1922), s. 26A--Minors  as partners    of a firm--Guardian, if can contract on  minor’s behalf--Whether such partnership could be registered.

HEADNOTE:     The  assessee-firm claimed registration under s. 26A  of the  Indian Income Tax Act on the strength of a  partnership deed  executed  between  four partners  of  which  two  were minors.  The Income Tax Officer refused registration on  the ground  that the minors were made parties to a  contract  by the eldest brother acting on their behalf and the minor  had actually been debited with a share of loss. This was  upheld by  the Appellate Assistant Commissioner, but the  Appellate Tribunal, on a further appeal. construed the deed as  having admitted the minors only to the benefits of the partnership, and  accordingly held that the assessee was entitled  to  be registered.  In  reference,  the  High  Court  answered  the question in favour of the assessee. In appeal by certificate to this Court, the Revenue contended that (i) a guardian  is not  entitled to contract on behalf of a minor and the  deed was  consequently void, and (ii) the partnership  deed  made the minors as full partners.     HELD:  The assessee-firm was entitled to  be  registered under the Income-tax Act.  [776 H]     (i) As long as a partnership deed does not make a  minor full  partner  a  partnership deed  cannot  be  regarded  as invalid   on   the ground that a guardian has  purported  to contract  on  behalf of a minor. A guardian can do all  that is  necessary  to effect the conferment and receipt  of  the benefits  of  partnership.  So he must  have  the  power  to scrutinse  the terms on which such benefits are received  by the  minor.  He  must  also have the  power  to  accept  the conditions  on which the benefits of partnership  are  being conferred. [775 G-H]     (ii)  The  Partnership deed reasonably  construed.  only conferred benefits of partnership on the two minors and  did not make them full partners. Case law referred to.

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JUDGMENT:     CIVIL APPELLATE JURISDICTION:Civil Appeals Nos.  144-145 of 1964.     Appeals  from the order dated November 16, 1960  of  the Mysore High Court in Income-tax Reference No. 3/1959.     N.D. Karkhanis and R.N. Sachthey, for the appellant  (in both the appeals). K. Ganapathy lyer, for the respondent (in both the appeals). 772 The Judgment of the Court was delivered by     Sikri,  J. These two appeals pursuant to  a  certificate granted by the High Court of Mysore under s. 66-A(2) of  the Income-tax  Act,  1922, are directed  against  its  judgment answering  the  question  referred to it in  favour  of  the respondent-assessee. The question referred to is:                  "Whether  the assessee, Mohandas  Sadhuram,               can be granted registration under Section 26-A               of  the Indian Income Tax Act on the basis  of               the  partnership deed made on 1-4-1952 for the               assessment  year 1953-54 and on the  basis  of               the said deed read with the supplementary deed               on 1-4-1953 for the assessment year 1954-55".     The respondent, M/s Shah Mohandas Sadhuram,  hereinafter referred to as the assessee, is a firm. The assessee claimed registration under s. 26-A of the Indian Income- Tax Act  on the  strength  of a Partnership Deed executed on  ’April  1, 1952.  As  the answer to the question in part turns  on  the construction  of the deed, the relevant Clauses may  be  set out  here. The Partnership Deed first describes the  parties and then recites:                  "Whereof  the above four members were  till               this  day members of a Joint  Family,  whereof               yesterday  that is on 31-3-1952 the said  four               members  have  become  divided  not  only   in               interest but also by metes and bounds, each of               the  said  members  taking to  his  share  one               fourth  (1/4) of the said joint family  assets               and  liabilities as detailed in the  books  of               account  as  maintained by the firm  known  as               Seth  Mohandas  Sadhuram and  whereof  we  the               first  and  second  members  have  decided  to               constitute  all  the said four  members  as  a               partnership  admitting  the third  and  fourth               members  thereof to the benefits of  the  said               partnership   but  not  to   the   liabilities               thereunder".                   The  first and second members referred  to               in the recital are Atmaram and Doulatram, both               majors.               The other relevant clauses are as follows:                  "(4) The said firm is agreed to do business               of  Banking and Commerce (which term  includes               all   that  is  usually  and  customarily   is               understood to be done thereunder) and also  to               deal in Automobiles business. The  Automobiles               business having been started by the said first               and second members under the name and style of               Vijaya  Automobiles,  Mysore, when  they  were               members   of  the  said  joint  family  as   a               partnership   venture  apart  from  the   said               family,  it is agreed between us now that  the               said  Automobiles business shall hereafter  be               continued to be done under the name and  style               of  Vijaya  Automobiles as part  of  the  said

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             firm.               773                  (7)   It   is  agreed  that   the   capital               contribution of each member will be equal  and               the accounts to be maintained to. indicate the               said capital contribution. will show what each               member  has  so contributed  in  the  personal               capital ledger account.                  (8)   It  is  further  agreed  that   after               debiting  all  working expenses  inclusive  of               those referred to in para 6 supra. the profits               of the firm less six pies per every rupee  of’               profits  which  will be reserved  for  Charity               Fund will be distributed pro rata according to               the   proportion  of  capital  investment   as               detailed of each member. all to be paid to his               account  in the books of account.  from  where               each member can draw. The losses are agreed to               be shared by the members in the like manner.                  The  share of profits for the 3rd  and  4th               member   will   be.  paid to  them.  the  said               profits to be credited to theft accounts,  and               from there their maintenance charges and other               expenses of necessities if any may be drawn by               the said Guardian from the said accounts.                  (10) It is agreed that the duration of this               partnership will be for a period of one  year,               i.e.  from 1st of April, 1952 to  31st  March,               1953, and the members might agree  to continue               the  said partnership even  thereafter   under               these terms or on terms to be determined then.               (11) It is agreed that the profits and  losses               of the Bombay branch and other branches if any               outside the State of’ Mysore will be  credited               or debited separately in the books of  account               of these branches and final allocation made in               those  books of account, as distinct from  the               profits  and  losses of the firm in  State  of               Mysore.                  (12)  It is agreed that the first  and  the               second members do maintain proper accounts  as               is customarily to be maintained".     For the assessment year 1953-54. the Income Tax  Officer rejected the application for registration on the ground that "in the case of the assessee. the minors are made parties to a contract by the eldest brother acting on their behalf. The minor has actually been debited with a share of loss. Taking these facts into account. I hold that the partnership is not entitled   to  the  benefits  of  registration".   For   the assessment  year 1954-55, he also rejected  the  application but added this further ground that "a supplementary deed  of partnership  extending  the life of the  partnership  beyond 1-4-1953 for a further period at the will of the partners is filed.  This is on 10 annas stamp paper. (The  supplementary deed  rests  on  clause. 10 of the original  deed.)  I  have already held that the original deed is not registerable. The supplementary  deed  cannot confer any fresh rights  in  the matter". 774     The Appellate Assistant Commissioner, on  appeal, upheld the orders of the Income Tax Officer in respect of both  the assessment years.     On further appeal, the Appellate Tribunal, following the decision of the Madras High Court in Jakka Devayya and  Sons v. Commissioner of Income-tax, Madras(1) construed the  deed

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as  having admitted the minors only to the benefits  of  the partnership.  It  accordingly  held that  the  assessee  was entitled to be registered for both the years.     At  the instance of the Commissioner of Income Tax,  the Tribunal  referred the question already set  out  above   to the  High Court. The High Court, following its  judgment  in Income  Tax Reference No. 2 of 1959, which is  the  subject- matter of appeal before us in The Commissioner of Income Tax Madras  v.  M/s  Shah Jethaji   Phulchand(2)   answered  the question in favour of the assessee. The main reason given in that judgment  of  the High Court is "that an instrument  of partnership  entered into between persons, some of whom  are by  law incompetent to  contract, as might happen if one  of them is a minor, is not necessarily null and void, and in  a case  like  the  present one, where  the  execution  of  the instrument  of  partnership  on behalf of  a  minor  by  his guardian  was for the purpose of admitting the minor to  the benefits  of partnership, no question of the  invalidity  of the instrument can properly arise".     Mr.  Karkhanis,  the learned counsel for  the  appellant contends  that  on a proper construction of the deed  it  is clear that the minors have been made partners, and therefore the deed is not valid. He relies on clauses 4, 7, 8, 10,  11 and 12 of the Partnership deed, set out above, to  establish that  the minors were admitted as full partners. He  further urges that a guardian is not entitled to contract on  behalf of a minor and the deed is consequently void.     This Court held in Commissioner of Income Tax, Bombay v. Dwarkadas  Khetan & Co.(3) that the income tax  officer  was only empowered to register a partnership which was specified in the instrument of partnership and it was not open to  the Department  to  register a partnership different  from  that which was formed by the instrument. It further held that  s. 30  of  the Indian Partnership Act was  designed  to  confer equal benefits upon the minor by treating him as a  partner, but it did not render a minor a competent and full  partner, and  any document which made a minor full partner could  not be  regarded as valid for the purpose of  registration.  But the  facts  in  that case were that  in  the  instrument  of partnership  Kantilal  Kasherdeo  was described  as  a  full partner entitled not only to a share in the profits but also liable to bear all the lossess including loss of capital. It was also provided that "all the four partners (1) 22 I.T.R. -26t (2)  Civil Appeals Nos. 146-147 of 1964; judgment  delivered on April 15, 1965. (3) (+ ) 41 I.T.R. 528. 775 were  to attend to the business, and if consent was  needed, all  the  partners  including the minor had  to  give  theft consent  in writing. The minor was also entitled  to  manage the affairs of the firm, including inspection of the account books,  and’ was given the right to vote, if a  decision  on votes  had  to be taken". As Hidayatullah J.  observed,  "in short,  no distinction was made between the   adult  partner and the minor and to all intents and purposes, the minor was a  full  partner, even though under the partnership  law  he could  only be admitted to the benefits of  the  partnership and not as a partner".     Does  this  deed then make the minors full  partners  or does it only confer benefits of partnership on them? Is  any clause  of the deed void? Before we discuss these  questions it is necessary to consider what are the incidents and  true nature  of ’benefits of partnership’ and what is a  guardian of  a minor competent to do on behalf of a minor  to  secure

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the  full  benefits of partnership tO a minor. First  it  is clear from sub-s.(2) of s. 30 of the Partnership Act that  a minor  cannot  be made liable for losses. Secondly,  s.  30, sub. s (4) enables a minor to sever his connection with  the firm  and if he does so, the amount of his share has  to  be determined  by  evaluation  made, as  far  as  possible,  in accordance with the rules contained in s. 48, which  section visualises  capital  having been  contributed  by  partners. There is no difficulty in holding that this severance may be effected  on behalf of a minor by his  guardian.  Therefore, sub-s.(4)   contemplates   that  capital   may   have   been contributed on behalf of a minor and that a guardian may  on behalf of a minor sever his connection with the firm. If the guardian  is entitled to sever the minor’s  connection  with the  firm, he must also be held to be entitled to refuse  to accept  the benefits of partnership or agree to  accept  the benefits of partnership for a further period on terms  which are in accordance with law. Sub-Section (5) proceeds on  the basis  that the minor may or may not know that he  has  been admitted  to the benefits of partnership.  This  sub-section enables  him  to  elect, on attaining  majority,  either  to remain  a  partner or not to become a partner in  the  firm. Thus  it contemplates that a guardian may have accepted  the benefits  of a partnership on behalf of a minor without  his knowledge. If a guardian can accept benefits  of partnership on  behalf of a minor he must have the power  to  scrutinise the terms on which such benefits are received by the  minor. He  must  also have the power to accept  the  conditions  on which  the benefits of partnership are being  conferred.  It appears to us that the guardian can do all that is necessary to effectuate the conferment and receipt of the benefits  of partnership.     It  follows from the above discussion that as long as  a partnership  deed  does  not make a  minor  full  partner  a partnership deed cannot be regarded as invalid on the ground that  a  guardian has purported to contract on behalf  of  a minor if the contract is for the purposes mentioned above. 776     Let us then examine the partnership deed in the light of these  principles.  It  need  hardly  be  stated  that   the partnership  deed must be construed reasonably. The  recital set out above expressly states that it is the major  members who had decided’ to constitute the partnership and admit the minors to the benefits of the said partnership, The rest  of the clauses must be construed in the light of this  recital. Clause  4 only states the business to be carried on and  the name of the business. It seems to us that the expression ’it has  been agreed between us’ has reference to the  agreement mentioned  in the recital. Regarding clause 7,  which  deals with  capital contribution, it is urged that a  guardian  is not  entitled to agree to contribute capital. We are  unable to  agree.  If it is one of the terms on which  benefits  of partnership  are  being conferred either the  guardian  must refuse  to accept the benefits or he must accept this  term. In some cases such an agreement by a guardian may be avoided by  the minor, if it was not entered into for  his  benefit, but  the  agreement will remain valid as long as it  is  not avoided by the minor.     Regarding  clause  10, Mr. Karkhanis submits  that  this embodies  a clear agreement enabling the minor  to  continue the said partnership even thereafter under these terms or on terms  to be determined then, and therefore this  clause  is void. We can find no defect in this clause. The duration  of a partnership has to be fixed between-the major members, and the  guardian on behalf of a minor may agree to  accept  the

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benefits  of the partnership only if the duration is to  the benefit  of  the minor. Clause 10 enables  the  guardian  to accept  the benefits of partnership under these   terms   or under  such other terms as may be determined. If  the  terms determined in future are similar, no objection can be taken; if  on  the  other hand the terms determined  later  are  in contravention  of law, the partnership deed will be held  to be  bad.  Clause 11 has reference to the manner  of  keeping accounts and a guardian is entitled to assent to the mode of keeping accounts.     In   our  opinion,  the  partnership  deed,   reasonably construed,  only confers benefits of partnership on the  two minors  and does not make them full partners.  The  guardian has  agreed  to certain clauses in order to  effectuate  the decision of the major members to confer the benefits of  the said partnership to the minors. Accordingly we hold that the Income Tax authorities should not have declined to  register the  firm. We may mention that the supplementary deed  dated April 1, 1953, has not been included in the statement of the case,  but it is common ground that nothing turns on any  of the clauses in the supplementary deed.     Accordingly, agreeing with the High Court, we hold  that the  firm is entitled to be registered under s. 26-A of  the Income  Tax Act, and the answer to the question referred  is in the affirmative. The  appeals  are dismissed with costs, one set  of  hearing fees. Appeals dismissed. 777