NANAVATI, J. - (1.) THE appellant in these three appeals is M/s. Progressive Financers, a partnership firm. It came into existence with execution of a partnership deed on 1-7-67. It consisted of five partners. Out of them Sunitha Pratap was a minor and, therefore, she was admitted to benefits of partnership. THE capital of the partnership was fixed at Rs. 5 lacs and each partner had to contribute as follows : JUDGEMENT_79_3_1997Html1.htm
(2.) FOR the assessment year 1967-68 it applied for registration to the Income-tax Officer (for short the 'ITO') under Section 184 of the Income-tax Act, 1961 (for short the 'Act') on 31-3-68. FOR the assessment years 1969-70 and 1970-71 it applied for renewal of registration. The ITO rejected the application for registration on 30-6-71. On the same day, he passed an assessment order for the assessment year 1968-69 treating the status of the appellant as Association of Persons. Applications for renewal of registration for the assessment years 1969-70 and 1970-71 were rejected on 13-3-72 and the assessment orders for those years were again passed treating the appellant as Association of Persons. The appellant's application for registration was rejected by the ITO on the ground that though in the opening paragraph of the partnership deed it was mentioned that Sunitha Pratap, a minor, was admitted to the benefits of partnership, the relevant clauses in the partnership deed indicated that she was taken as a full partner and, therefore, the contract of partnership was void ab initio. The ITO arrived at this conclusion as he noticed that the partnership deed was signed by Mrs. Sridevi Pratap, the guardian of minor Sunitha Pratap; that Sunitha had contributed the maximum capital; that it was not stated in the partnership deed how i.e. the manner in which, the loss, if any, was to be apportioned; that all partners were entitled to operate bank accounts individually; that all matters of importance were to be decided by majority of partners holding more than 75 Per Cent of capital; and, that on dissolution, all the assets of the firm including goodwill were to be converted into money and distributed amongst the partners in proportion to their shares in the capital. Against this order of the ITO the appellant preferred an appeal to the Appellate Assistant Commissioner. Following the decision of the Andhra Pradesh High Court in Addepally Nageswara Rao and Brothers v. Commr. of Income-tax, (1971) 79 ITR 306, the Appellant Assistant Commissioner held that the instrument of partnership was required to be construed harmoniously and as the minor was admitted only to the benefits of partnership there was no question of her being made liable for the losses. He, therefore, allowed the appeal holding that the firm was entitled to registration. The Revenue went in appeal to the Income-tax Appellate Tribunal.
(3.) CONSTRUING the partnership deed in the light of the decisions of this Court in Commr. of Income-tax, Mysore v. Shah Mohandas Sadhuram, 57 ITR 415 : ( AIR 1966 SC 15) and Commr. of Income-tax, Mysore v. Shah Jethaji Phulchand, (1965) 57 ITR 588 and the decision of the Andhra Pradesh High Court in Addepally Nageswara Rao (supra) the Tribunal held that minor Sunitha was admitted merely to the benefits of partnership and it was not correct to say that she was made a fullfledged partner. The Tribunal also held that the minor was not to be burdened with losses and they were to be borne by the other partners. It further held that though the instrument of partnership did not specifically provide how the losses were to be borne by the partners the rule that in such cases losses are to be shared in the same proportion as profits became applicable and since the partnership deed was capable of being construed in that manner, the firm was entitled to registration. It, therefore, dismissed the appeal. The Revenue sought a reference to the High Court and the Tribunal thought it fit to refer the following question to the High court for its decision :- "Whether, on the facts and in the circumstances of the case and on a true construction of the terms of the partnership deed, the assessee is entitled to the benefit of registration under Section 185 of the Income-tax Act, 1961, for the assessment year 1968-69 ?" ;