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I.T.A. No. 563/KB of 1979-80 and I.T.A. No. 603/KB of 1983-84, decided on 4th September, 1986.

---S. 26(A)--Partnership Act (IX of 1932), S. 30--Application for registration of firm--Income-tax Officer not doubting existence of firm to be genuine because of non-production of accounts books but thinking that there was change in constitution of firm in earlier years and that firm should have applied for fresh registration and as such concluding that a genuine firm was not in existence in previous years of assessment--Conclusion of Income-tax Officer repelled--Held, what happened in earlier year was not relevant at all for disposal of 'application of assessee moved for relevant assessment year.

---S. 26(A)--Partnership Act (IX of 1932), S. 30--Registration of firm- Fresh instrument of partnership, held was not necessary on a minor becoming a full-fledged partner after attaining age of majority- Income-tax Officer rejecting application for registration of appellant firm for assessment on ground that there were changes in its constitution earlier due to attaining majority by minors in firm and their becoming full-fledged members and since no application for fresh registration was filed, firm ceased to exist--Rights and liabilities of a minor continue uptodate on which he becomes a partner and he also becomes personally liable to third parties for all acts of firm done since he was admitted to benefit of partnership--Plea that there was a change in constitution of a partnership when a minor attains majority and elects to become full-fledged partner of a firm would be in conflict with provisions of personal liability of minor which was made operative from date when he was admitted to benefits of partnership under section 30(7) of Partnership Act--Officer below, held, erred in refusing to register appellant firm because in case of a -minor who attained majority and then elected to become full-fledged member of a partnership, constitution of partnership did not change--Income-tax Officer directed to register appellant firm under S. 26-A of repealed Income-tax Act, 1922.

The Commissioner of Income-tax v. Rajab Ali & Sons 1967 P T D 295 rel.

(1944) 12 I T R 199, Ram Narayan Laxmi Prashad v. Income-tax Officer (1972) 84 I T R 233, (1949) 17 I T R 282 and Makerwal Colliery's case (1942) 10 ITR 422 ref.

I.N. Pasha for Appellant.

Muhammad Farid, D.R. for Respondent.

Date of hearing: 31st August, 1986.

-These two appeals are directed against two separate orders of learned Appellate Assistant Commissioner, Hyderabad Range, Hyderabad, recorded by him on 25th September, 1979 and 15th August, 1983. The first order is confined to assessment year 1978-79, whereas the second order is regarding assessment years 1978-79, 1979-80 and 1980-81. The facts and law involved in both the appeals are same and we propose to dispose them of by this consolidated order.

2. The brief facts giving rise to these appeals are that the appellant claiming to be a partnership firm filed application, on 6-7-1979 under section 26-A on Form-A of the repealed Income-tax Act for registration of the firm. Alongwith it was attached a Partnership Deed effective from 1st April, 1977. Since the firm was treated as registered firm right from assessment year 1969-70 till assessment year 1977-78 on applications filed for renewal of registration, the Income-tax Officer got alarmed and issued notice to the applicant on 13th September, 1978 to produce account books. The notice was served on 19th September, 1978, whereas the account books were required to be produced on 21st September, 1978. The applicant attended the office of the Income-tax Officer and not only filed the balance sheet but also produced the separate accounts of partners, however, it did not produce the account it, therefore, failed to inspire confidence of the Income-tax officer and he came to the conclusion that as there were changes in its constitution twice earlier and no application for fresh registration was filed, the firm had ceased to exist with effect from 23rd December, 1968. Consequently, he rejected the application for registration of the firm for assessment year 1978-79. Before proceeding further let us state some more facts which emerge out of the material on record and which would facilitate the proper appreciation of the points of law to be discussed subsequently. It further appears that the original partnership which stood registered on 25th June, 1960, consisted of five partners namely (1) W. M. A., (2) J. A. A., (3) I. B. B., (4) R. A. A. B. and (5) H.WM. The partnership also admitted to the benefits of the firm three minors, namely, (1) A.B. s/o R.A., (2) H.W.M. s/o H. and (3) J.A. s/o R.A. It further appears that W.M. s/o H., who was admitted as a minor, attained majority on 10th January, 1964 and on 27-7-1964 elected to become full-fledged partner since the date he joined the firm. Similarly, R.A. the other minor also attained majority on 23rd March, 1964 and also elected to become full-fledged partner since he joined the firm. On 8th February, 1966 the constitution of the firm was allegedly altered inasmuch as the name of A.B. was struck off and M. H . s/o A.B., a minor was further admitted to the benefits of the partnership. On 15th May, 1967 the constitution of the firm again underwent an alleged change as B.B. died on 10th January, 1967 and his minor son M.A. was admitted to the partnership with effect from 12th January, 1967. On 5th March, 1969 M.A. son of B.B. attained majority and elected to become full-fledged partner since 23rd December, 1968. M.A. another minor attained majority on 17th February, 1972 and became full-fledged member of the partnership. This time also the constitution of the firm is alleged to have been altered. Subsequently, on 1st April, 1977, the last minor called R.A. also attained majority and elected to become the full-fledged member of the partnership. Thus, it is clear that on 1st April, 1977, when another partnership deed was executed, H.W.M.A., J.A.A., I.B.B., H.W.M., R.A.A.B. M.A.B.B M.H.A.B. and R.A.J.A. become partners and moved the application for registration of the partnership. It also appears from the perusal of the Partnership Deed, dated 1st April, 1977 that there were certain adjustments in the proportion of the shares of the partners. For example, previously W.M.A. had 12 share in the profit and loss but by virtue of aforementioned Partnership Deed it was brought down to 12% only. The shares of J.A.I. and R.A. were also reduced from 12 % to 12%. Let us now revert back to our previous discussion.

3. Having been aggrieved and dissatisfied by the order of the Income-tax Officer the appellant went up in appeal but the learned Appellate Assistant Commissioner by his impugned order confirmed the order of the Income-tax Officer. The appellant still felt aggrieved and has come up in second appeal before us.

4. Mr. Iqbal Naim Pasha, the learned counsel for the appellant submitted that the appellant sought renewal of registration in earlier years because there was no change in the constitution of the partnership, but, subsequently, the constitution of the partnership was changed inasmuch as there was re-adjustment in the shares of the partners and the appellant applied for registration. Placing reliance on 1967 P T D 295 The Commissioner of Income-tax v Rajab Ali & Sons the learned counsel argued that election of a minor to become partner after attaining majority did not change the constitution of the firm. According to him, the Income-tax Officer as well as learned Appellate Assistant Commissioner seriously erred in holding otherwise. Referring to (1944) 12 I T R 199, which was relied upon by the learned Appellate Assistant Commissioner Mr. Pasha argued that it did not apply under the facts and circumstances of this case. Mr. Muhammad Farid, the learned Departmental Representative, on the contrary, vehemently argued that both the officers below were very much fortified in their view by a decision of Allahabad High Court reported as (1972) 84 I T R 233, Ram Narayan Laxmi Prashad v Income-tax Officer. According to him, when a minor who was admitted to the benefits of a partnership attains majority and elects to become a partner of the firm, there is a change in the constitution of the firm and the firm is not entitled to the continued benefit of the registration previously granted to it. Referring to the renewal granted to the appellant in earlier years. Mr. Muhammad Farid, the learned Departmental Representative contended that it did not estop the department from adopting the true and proper construction of the provision of section 26-A of the repealed Income-tax Act.

5. We have heard both the learned, counsel for the appellant as well as learned Departmental Representative and have also perused both the assessment as well as impugned orders. To start with let us reproduce here provisions of section 26-A of the repealed Act of 1922, as amended upto 1978:

"26-A. Procedure in registration of firms.--(1) Application may be made to the Income-tax Officer on behalf of a firm constituted by any 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 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, in existence as genuine firm registered under Partnership Act, 1932 constituted as shown in the instrument, or instruments ' of partnership executed in writing and in force in the relevant previous year, he may be an order in writing passed within three months of the date on which the return of total income was filed or six months of the end of the previous year, whichever is the earlier, register the firm for the purposes of this Act and, subject to the provisions of subsection (4), such firm shall be treated as a registered firm for the assessment year for which it is first registered and -all subsequent years for so long as there is no change in the constitution of the firm and when he is not so satisfied he may, by an order in writing passed within the aforesaid period, refuse to register the firm:

Provided that when no such order is passed within the aforesaid provide the firm shall be treated as a registered firm and all the provision of this Act shall apply accordingly:

(4) If, after an order has been passed on the firm has been treated as a registered firm under subsection (3) the Income-tax Officer is satisfied that there was no genuine firm in existence constituted as shown in the instrument, or instruments of partnership executed in writing and in force in the relevant year, he may cancel the registration:

Provided that the registration for 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) No application under this section for registration in respect of the assessment for the year beginning on the first day of July, 1969, or for any year- thereafter shall be made unless the partnership has been registered under the Partnership Act, 1932 (XI of 1932) or application for registration under the Act has been made:

Provided that application for registration way to made by a firm which cannot be registered under the said Act for tire reason that the firm name contains any word or name mentioned in subsections (3) (3A) or (3B) of section 58 of the said Act."

6. It appears from perusal of this section that on an application for registration of a firm having been moved under section '16--A, it became- the duty of the Income-tax Officer to satisfy himself that there was in existence a genuine firm duly constituted under Partnership Act, 1932 as shown in the instrument or instruments of partnership executed in writing and in force in the relevant previous year. He, therefore, on receipt of the application for registration submitted on Form 'A' on 6th July, 1979 alongwith a carbon copy of the Partnership Deed signed by all the partners looked into it did not feel satisfied by the material produce before him that a genuine partnership in existence. He therefore, served a notice on the appellant to produce the account books. Mr. Pasha, the learned counsel for the appellant submitted before us that since the notice was served on the appellant on 19th September, 1979 and since the account books were in Karachi, the appellant could not produce them before the Income-tax Officer on 21st September, 1978, but balance sheet and separate statement of accounts of all the partners were, in any case, produced before the Income-tax Officer and he felt satisfied with genuineness of the partnership also. We think that the contention of the learned counsel has considerable force. From perusal of notice issued by Income-tax Officer on 21st September, 1978 as well as from the assessment order framed on 19th April, 1979 it does not emerge out at all that he doubted the existence of the genuine firm because of the non-production of the account books. On the other hard, it appears that he involved himself in the question as to whether there was a change in the constitution of the firm in earlier years and if so, whether the firm should have applied for fresh registration. He answered both the questions in the affirmative and came to the conclusion that a genuine firm was not in existence in previous year of assessment year 1978-79. In our judgment, what happened in the earlier year was not relevant at all for disposal of the application of the appellant moved for the relevant assessment year He doubted the existence of genuine firm and was very much with, his rights to ask for the production of the accounts books so as to ascertain the truth or otherwise of the statement of the appellant. But he has nowhere mentioned that he doubted genuineness of the firm because the accounts books did not support the case of the appellant the learned Appellate Assistant Commissioner also did not confine himself to the precise point involved before him and indulged himself in irrelevant academic discussion. Strangely enough both the officers have referred to the case of Rajab Ali in their academic discussion but have failed to appreciate its true import vis-a-vis the case of the appellant. Since the learned counsel for the appellant as well as Mr. Muhammad Farid, the learned Departmental Representative have addressed us on the question of the change of constitution of the partnership on election of a minor to become partner on attaining majority we feel obliged to dispose it of for the future guidance of the officer below.

7. Starting with Rajab Ali's case it appears that in that case the partnership consisted of two adult partners and a minor was admitted to the benefit of the partnership to the extent of 1/3rd share in the partnership firm. The firm was registered and thereafter renewal of registration was granted from year to year till assessment year 1959-60 when application was made for renewal of registration of the partnership signed by all the three partners. The application was signed because the minor had attained majority on 3rd September, 1957 and elected to become full-fledged partner of the firm. The Income-tax officer rejected the application on the ground that on attaining majority of the partner fresh partnership deed was required to be executed for the purpose of being registered under section 26-A of the Income-tax Act. On appeal, both the Appellate Assistant Commissioner and this Tribunal took the view that the original partnership deed was valid in law even after the minor attained the age of majority and the renewal of the registration should have been allowed to the assessee firm on the basis of the said original deed. On a reference to High Court the order of the Tribunal was affirmed. Their Lordships made the following pertinent. Observation at page 112:-----

"Under subsection (7) of section 30 of the Partnership Act a minor, after he has attained the age of majority becomes a full-fledged partner if he has given no notice within six months of attaining the age of majority of his intention that he has elected not to become a partner in the firm. The admitted position in the present case is that the minor Bahadur Ali on attaining the age of majority on 3rd of September, 1957, did not within six months, give a notice that he had elected not to continue as partner of the firm. Under these circumstances, Bahadur Ali would be construed to be a full-fledged partner under section 30 (7) of the Partnership Act.

It is not necessary under section 30 of the Partnership Act that a fresh instrument of partnership should be drawn out on a minor becoming a full-fledged partner after attaining the age of majority as in this case." I

This passage reproduced above has stated the law very clearly and in unambiguous and unmistakable terms. The Department itself accepted this proposition of law from the very beginning. We have already mentioned various dates on which the minor attained majority and the Department went on renewing registration without insisting on execution of the new partnership deed or without doubting genuineness of the partnership. In view of the passage quoted above which comes down to from a Division Bench of Karachi High Court and tile long-standing notice of the Department, the issue involved in these appeals should be set at rest. However, Mr. M. Farid, the learned Departmental Representative has relied upon before us on Ram Narain's case coming from Allahabad High Court. In that case also a minor who was admitted to the benefit of the partnership attained majority and elected to become a full-fledged partner of the firm. The precise question which came up before their Lordships was as to whether there was a change in the constitution of the firm. Dissenting from the decision of a Division Bench of Orissa High Court reported as (1949) 17-ITR-282 the learned Judges of Allahabad High Court answered the question in the affirmative and to fortify their conclusion reliance was placed on Makerwal Colliery's case reported as (1942) 10-ITR-422. We have given our careful consideration to Ram Narain's case. In our view the crux of the matter lies in the continuity of the partnership under subsection (7) of section 30, when a minor attains majority and elects to become the full-fledged member. If we read paragraph (a) of subsection (7) of section 30 of the Partnership Act, 1932, it appears that rights and liabilities of a minor continue upto 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 the Partnership. If it is held that there is a change in the constitution of a partnership when a minor attains majority and elects to become full-fledged partner of a firm. It would be in conflict with the provisions of personal liability of the minor which is made operative from the date when he was admitted to the benefits of the partnership under clause (a) of subsection (7) of section 30 of the partnership Act. With profound respect to the learned Division Bench of the Allahabad High Court we think that the view of Karachi High Court contained in Rajab Ali's case lays down the correct law.

8. Before parting with these appeals let us mention here that Makerwal Colliery's case was having its own peculiar facts and their Lordships of Allahabad High Court, with due respect to them, misplaced their reliance on it. In that case in the deed of pertnership the legal representative of the deceased partner was entitled to but was not bound by reason of a provision in the deed to come in as a partner in place of a deceased partner if he elected to do so. He elected to step into the shoes of the deceased partner but it was held that the constitution of the partnership was altered and fresh registration was required. In our judgment, the position of a minor attaining majority and electing to become full-fledged member of the partnership after attaining majority. In the later case, it is the continuity of the partnership which has been maintained by clause (a) of subsection (7) of section 30 of the Partnership Act, whereas there is no such provision to come to the rescue of the legal representative of a deceased partner stepping into his shoes.

9. To conclude, we are of the view that both the officers below erred in refusing to register the appellant under section 26A, for assessment year 1978-79 as well as for assessment years 1979-80 and 1980-81. We further hold that in case of minor who attains majority and then elects to become full-fledged member of a partnership the constitution of the partnership does not change. Both the appeals aye, therefore, allowed accordingly and the Income-tax Officer is directed to register the appellant under section 26-A of the repealed Income-six Act.

M. Y. H. Appeals allowed.

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