I.S. Nigam, Accountant Member -
(1.) THIS is an appeal filed by the revenue against the order of the AAC, Special Range, Kanpur.
(2.) The assessee was formerly a registered firm. However, there was a change in the constitution of the firm with effect from 1-4-1978 (vide partnership deed dated 13-4-1978) whereby Shri Jamshed Iqbal and Miss Shamimul Ummat were admitted to the benefits of partnership. Besides, three other minors, Rafat Qaiyum, Faisal Ayub and Firoz Ayub, were also admitted to the benefits of partnership. There was another change in the constitution of the firm on Shri Jamshed Iqbal and Miss Shamimul Ummat becoming majors and electing to become full-fledged partners with effect from 2-7-1978 by instrument of partnership dated 11-8-1978. There was an application for registration of the firm. The ITO, however, was of the view that since Clauses 6 and 8 of the instrument of partnership not only fixed the capital of the three minors, Rafat Qaiyum, Faisal Ayub and Firoz Ayub, at Rs. 6,000, Rs. 7,500 and Rs. 6,500, respectively, but also made them liable to losses to the extent of 3 per cent, 6ï¿½ per cent and 6ï¿½ per cent of the losses, the instrument of partnership did not bring into existence a valid firm. The ITO also observed that in the earlier years the firm never did any business of commission agency in hides and skins and, therefore, the mention in Clause 3 that the business of partnership shall continue to be that of commission agency in hides and skins was a mis-statement and, therefore, the instrument of partnership also appeared to be dubious. The ITO, therefore, came to the conclusion that there was no genuine firm in existence. The claim of registration was, therefore, refused.
When the matter went up in appeal, the AAC not only held that the firm as valid but also held that the claim of registration was wrongly refused by the ITO. The AAC, therefore, held that the assessee was entitled to registration if the other conditions prescribed therefor were satisfied. Aggrieved by this order of the AAC, the revenue has come up in the present appeal before us.
(3.) THE learned departmental representative, Shri Upadhyay, submitted to us that there were three grounds on which the ITO had refused to register the firm, firstly, that the three minors, Shri Rafat Qaiyum, Faisal Ayub and Firoz Ayub, were saddled with the liability of contribution of capital, secondly, they were made liable to share of loss and thirdly, that the instrument of partnership referred to the continuation of business of commission agency in hides and skins when in the earlier years there was no such business and the only income of the firm was from interest on investments. Elaborating on his argument, Shri Upadhyay, relying on the ruling of the Gauhati High Court in the case of Mahabir Prasad Kishanlal & Co. v. CIT  102 ITR 466 submitted to us that if an instrument of partnership offended or was contrary to the relevant provisions of the Indian Partnership Act or the Indian Contract Act, the partnership was not valid and such a partnership was not entitled to claim registration. Proceeding further, our attention was invited to the ruling of the Bombay High Court in the case of Rajendra Trading Co. v. CIT  104 ITR 39, wherein their Lordships laid down that if a minor was made a full fledged partner of a firm, on a reasonable construction of the instrument of partnership, the partnership cannot be regarded as a valid partnership in law and the claim of registration of such a partnership cannot be allowed. Shri Upadhyay read to us Clause 8 of the instrument of partnership dated 11-8-1978, which was as follows :
That the profits and/or losses of the business of partnership (including the profit and loss of the capital) which shall be ascertained after accounting for all the working expenses, shall be divided between and borne by the parties hereto and the minors in the following proportion :
Provided that losses including the loss of capital, if any, shall be borne by the parties hereto and the said minors in like proportion, provided, however, that the losses falling to the shares of minors shall be limited to the extent of the accumulated profits credited to the account of the minors in the books of partnership and in no case the losses in excess of such accumulated profits standing to the credit of the minors shall be borne personally by the minors. Losses, if any, falling to the share of Rafat Qaiyum, Faisal Ayub and Firoz Ayub minors, in excess of accumulated profits shall be borne by Shri Audul Qaiyum, the party hereto of the 3rd part.
and submitted to us that this clause made the three minors liable to losses of the business of the partnership (including the profit and loss of the capital to the extent of 3 per cent, 6ï¿½ per cent and 6ï¿½ per cent respectively), which was against the requirements of Section 30 of the Indian Partnership Act. Another point made out by Shri Upadhyay was that for purposes of income-tax, each year of assessment was separate and self-contained and, therefore, once a share of profit was credited to the account of a partner in an earlier year, it became a part of the minor's capital and this could not be made liable to share of losses of the business of the firm in the subsequent years. He also submitted that the condition in the instrument of partnership requiring the minors to contribute capital was also contrary to the provisions of the Indian Contract Act and the Indian Partnership Act and made the partnership deed invalid. Reference was also made by him to Clause 3 of the instrument of partnership where there was a mention of continuance of the business of commission agency in hides and skins when no such business was carried on earlier and according to Shri Upadhyay this mis-statement of facts in the instrument of partnership made the whole instrument of partnership dubious. He also relied on the order of the ITO refusing the claim of registration. Summing up, Shri Upadhyay vehemently argued before us that the claim of registration was not admissible and was wrongly allowed by the AAC.;