INCOME TAX OFFICER v. GWALIOR TEXTILES
[Citation -1984-LL-0531-1]

Citation 1984-LL-0531-1
Appellant Name INCOME TAX OFFICER
Respondent Name GWALIOR TEXTILES
Court ITAT
Relevant Act Income-tax
Date of Order 31/05/1984
Assessment Year 1973-74 TO 1977-78
Judgment View Judgment
Keyword Tags cancellation of registration • benefit of registration • benefits of partnership • renewal of registration • grant of registration • registration of firm • full-fledged partner • prescribed period • show-cause notice • technical mistake • partnership act
Bot Summary: Namely, Abu Bakar and Imtiaz Ahmad had been admitted with the mutual consent of the partners to the benefits of the partnership under s. 30 of the Indian Partnership Act, 1932. The question whether a partnership is valid in law is distinct and separate from the question whether a genuine partnership exists in fact. The partnership deed provided that each partner would have equal share in the partnership business and the profits and losses of the firm would be divided equally between the partners. The agreement of partnership was contrary to the relevant provisions of the Indian Contract Act and Indian Partnership Act and was invalid. If such a deed of partnership is invalid in law offending any of the provisions of the Indian Contract Act or the Indian Partnership Act, 1932, the ITO may legally hold that the registration was obtained without there being a firm in existence and such registration is liable to be cancelled in exercise of powers under r. 6B. In the second case a minor represented by his mother was admitted as a full-fledged partner in a firm and was made liable for losses. After we have held that the supplementary partnership deed was not a genuine document till 27th Nov., 1980, it is idle to think that it could remove any defect, if at all there was one, in the partnership deed dt. In a case, where the minors are admitted to the partnership and there is no clause in the deed of partnership specifying the proportion in which the adult partners are to share the losses, the firm would not be entitled to registration.


common contention in all these appeals is that AAC had erred in cancelling orders of ITO cancelling registration of firm earlier granted to it. assessee, which is firm, is constituted under partnership deed dt. 19th Jan., 1973. It consists of six partners, namely, Haji Jalaluddin, Ziauddin, Salahuddin, Alauddin, Mohd. Ansari and Km. Fatima Khatoon. Besides two minors, namely, Abu Bakar and Imtiaz Ahmad had been admitted with mutual consent of partners to benefits of partnership under s. 30 of Indian Partnership Act, 1932. Clause (3) of this partnership deed is relevant which is reproduced below: "That partners shall share profits and losses arising out of partnership business in ratios mentioned below: Haji Jalaluddin paise in rupee Ziauddin paise in rupee Salahuddin paise in rupee Alauddin paise in rupee Mohd. Ansari paise in rupee Km. Fatima Khatoon paise in rupee Abu Bakar (minor) paise in rupee, and Imtiaz Ahmad (minor) paise in rupee." assessee-firm filed application in Form No. 11/11A of IT Rules, 1962 for asst. yr. 1973-74 on 27th March, 1973. Its accounting year for above assessment year was to end on 31st March, 1973. ITO found that application had been filed within prescribed period of time and that all legal formalities had also been complied with. He, accordingly, passed order under s. 185(1) (a) of IT Act, 1961 ('the Act'), granting registration to assessee-firm. order was passed by him on 17th July, 1974. renewal of registration was also allowed under s. 184(7) of Act for all subsequent years now under appeal. ITO subsequently noticed, as would appear from cl. (3) of partnership deed quoted above, that even minors had been required to share in losses. Clause (30 stated share of all partners including minors both in profits and losses of firm. He was, therefore, of view that firm was not entitled to benefit of registration for asst. yr. 1973-74 and consequently also for renewal of registration for subsequent years. He, accordingly, issued show cause notice to assessee on 16th Oct., 1980, requiring it to show cause as to why registration already granted be not withdrawn. Apparently, he intended to proceed under s. 186(1) of Act. assessee filed detailed reply on 27th Nov., 1980 objecting to proposed action by ITO. It was submitted in this reply that all requirements for grant of registration of firm had been satisfied in present case. It was also submitted that, in any case, omission of shares of adults in losses in partnership deed dt. 19th Jan., 1973 was mere technical or typographical error, which did not justify withdrawal of registration already granted. In this connection, it was specifically pointed out that S/Shri A. Bakar and Imtiaz Ahmad had been admitted only to benefits of partnership as was clear from preamble of deed and, therefore, they could in law, be not required to share in losses of firm. It was finally submitted that mistake had already been rectified through supplementary partnership deed dt. 25th Jan., 1973. copy of this supplementary deed was also furnished to ITO. According to this deed, losses were to be shared by adult partners in following proportion: Haji Jalaluddin paise in rupee Ziauddin paise in rupee Salahuddin paise in rupee Alauddin paise in rupee Mohd. Ansari paise in rupee Km. Fatima paise in rupee Imtiaz Ahmad Abu Bakar ITO held that partnership deed dt. 19-1973 was invalid as it violated provisions of s. 30 of Partnership Act. He also observed that supplementary partnership deed dt. 25th Jan., 1973 was only afterthought and could not be acted upon. He also rejected assessee's claim that it was genuine firm, as, according to him, firm after having violated s. 30 could not be accepted as genuine firm. He, therefore, acting under s. 186(1) of 1961 Act cancelled registration already granted for asst. yr. 1973-74. By similar orders, he also withdrew renewal of registration granted for all subsequent years. assessee appealed to AAC. AAC accepted assessee's submissions that non-mention of share in losses to be suffered by adult partners was mere typographical or technical mistake, which could not lead to cancellation of withdrawal of registration, which hadalready been granted, after careful consideration by ITO. He was also of view that in any case, it was defect in partnership deed, which could be rectified under s. 185(2) within period of one month from date of its intimation to assessee. AAC on submissions of assessee held that show- cause notice dt. 16th Oct., 1980 issued by ITO was in nature of intimation to assessee and, therefore, rectification made on 27th Nov., 1980 through supplementary deed was well within time. Finally, he cancelled orders of ITO passed under s. 186(1) and restored original orders of ITO granting registration and renewal of registration for different years. Department is now in appeal before us. learned Departmental representative, in first place, attacked genuineness of supplementary partnership deed dt. 25th Jan., 1973. He pointed out that application for registration for asst. yr. 1973-74 was filed before ITO on 27th March, 1973, which was accompanied only by partnership deed 19th Jan., 1973 and not by any supplementary partnership deed. His contention was that if in fact supplementary partnership deed had been executed as claimed on 25th Jan., 1973 itself, there was no reason why it should not have been filed on 27th March, 1973 along with application for registration for above assessment year. He further submitted that there was no reason for not bringing this supplementary partnership deed to notice of ITO till 27th Nov., 1980 if it was existence. It was filed with him only when show-cause notice was issued by ITO on 16th Oct., 1980 calling upon assessee to show why registration already granted be not cancelled or withdrawn. He further submitted that once it was accepted that supplementary partnership deed was not in existence during assessment years under appeal, there was no question either holding that shares of adult partners in losses, had been stated either holding that shares of adult partners in losses, had been stated in partnership deed or that there was only mistake or defect in deed, which had been rectified within prescribed period of time in terms of s. 185(2). learned counsel for assessee, on other hand, submitted that s. 186(2) was not attracted to case. He pointed out that admittedly this section applied only to case where there was during previous year no genuine firm in existence as registered. He argued that finding of ITO was that partnership deed was invalid inasmuch as it did not specify share of adult partners in losses and not that firm itself was not genuine. He argued that genuine firm had come into existence amongst adult partners, who had also with mutual consent admitted two minors to benefits of partnership and merely because there was omission in deed it was not sufficient to hold that it was not genuine firm. In this connection, he referred to decision of Andhra Pradesh High Court in CIT vs. Badjanapara Salt Co. 1974 Tax LR 19. In this case, minors were made full-fledged partners of firm. It was in this connection that Court had made following observations: "Sec. 186 of Act no doubt provides for cancellation of registration; but this circumstance is certainly not sufficient to hold that ITO should act under this section alone and has no right to deny benefit of s. 184(7) of Act when once firm has been registered even if it should subsequently transpire that it was not entitled to be registered, not being firm in eye of law, as cancellation is only one of several methods by means of which action could be taken against erring firms. This apart, s. 186 can be called in aid if only ITO is satisfied that there was, during previous year, no genuine firm, as opposed to sham or bogus firm in existence as registered; and not when firm was in fact in existence though it is not valid in law. question whether partnership is valid in law is distinct and separate from question whether genuine partnership exists in fact. respondent firm, in instant case, is genuine not sham firm though it is not valid in law. It cannot, therefore, be said that only course open to ITO was to have cancelled registration of firm acting under s. 186 or that CIT was not correct in directing him to reasses firm treating it as unregistered-firm by denying benefits of s. 184(7) to it." (P. 24) contention of learned counsel for assessee, therefore, was that either because minors were treated full-fledged partners, as was case before Andhra Pradesh High Court or they were made liable to losses as was case before us, it could not be held that firm was not genuine or that it was sham or bogus firm. He contended that if it was genuine firm, s. 186(1) could not be applied even if registration may not have been correctly granted by ITO because of some technical infirmities. counsel for assessee next referred to decision of Allahabad High Court in case of Sheonath Prasad Motilal vs. ITO (1963) 47 ITR 493. It was held in this case that mere fact that instrument of partnership may not have existed during accounting period relevant to assessment year for which registration is granted is not ground for holding that no genuine firm was in existence and, therefore, r. 6 B of IT Rules, 1922 could not be applied for cancellation of registration. above rule corresponds to s. 186(1). On behalf of Department, among others, reference was made to decision of Gauhati High Court in Mahabir Prasad Kishanlal & Co. vs. CIT (1976) 102 ITR 466 CTR (Gau) 142 as also to decision of Andhra Pradesh High Court itself in CIT vs. Sri Ramakrishna Motor Transport (1983) 144 ITR 797. first case was of partnership firm, in which some minors were also admitted. partnership deed provided that each partner would have equal share in partnership business and profits and losses of firm would be divided equally between partners. Registration and renewal of registration were granted. Subsequently, ITO cancelled registration under s. 186(1). It was held that partnership deed had sought to make minors full partners. agreement of partnership was, therefore, contrary to relevant provisions of Indian Contract Act and Indian Partnership Act and was invalid. It was further held that ITO had jurisdiction to cancel registration of firm under s. 186(1). Court also observed as under: ".... To come to decision whether there is or is not genuine firm in existence ITO is required to consider validity of deed of partnership. If such deed of partnership is invalid in law offending any of provisions of Indian Contract Act or Indian Partnership Act, 1932, ITO may legally hold that registration was obtained without there being firm in existence and such registration is liable to be cancelled in exercise of powers under r. 6B." (P. 471) In second case minor represented by his mother was admitted as full-fledged partner in firm and was made liable for losses. ITO granted registration following earlier decision of Madras High Court in Jakka Devayya & Sons vs. CIT (1952) 22 ITR 264. This decision was subsequently overruled by Supreme Court in CIT vs. Dwarkadas Khetan & Co. (1961) 41 ITR 528. In view of decision of supreme Court, ITO initiated proceedings under s. 154 of Act and cancelled registration. It was held that since minor had been admitted as full-fledged partner, grant of registration to firm was illegal. Hence, order cancelling registration could be sustained even under s. 186(1). Court held that order of ITO cancelling registration was sustainable both under s. 154 as well as under s. 186. We have given our careful thought to entire matter. We agree with submissions of learned Departmental representative that genuineness of supplementary deed of partnership dt. 25th Jan., 1973 is open to grave doubt. If this deed had, in fact, been executed and come into existence on 25th Jan., 1973, there was no reason why it should not have been filed along with application for registration for asst. yr. 1973-74 on 27th March, 1973, or at least along with renewal of registration applications for subsequent years and assessee would not have waited to file it before ITO till 27th Nov., 1980 after receipt of show-cause notice from ITO on 16th Oct., 1980. It becomes clear that assessee became conscious only after receipt of above show-cause notice and somehow or other managed to draft supplementary deed with back date and filed it before ITO on 27th Nov., 1980. After we have held that supplementary partnership deed was not genuine document till 27th Nov., 1980, it is idle to think that it could remove any defect, if at all there was one, in partnership deed dt. 19th Jan., 1973 during previous years relevant for asst. yrs. 1973-74 to 1977-78. That will completely demolish arguments accepted by AAC in support of completely demolish arguments accepted by AAC in support of assessee's case. We also agree with submission of learned Departmental representative that s. 186(1) is applicable to case. It is no doubt correct that there are certain observations as quoted above in judgment of Andhra Pradesh High Court in case of Badjanapara Salt Co. (supra) which suggest that there is some difference between validity of partnership deed and genuineness of partnership. However, subsequent decision of same High Court in Sri Ramakrishna Motor Transport's case (supra) has clarified issue fully. It has laid down that in circumstances, order cancelling registration could also be sustained under s. 186(1). This was also view taken by Gauhati High Court in case of Mahabir Prasad Kishanlal & Co. (supra), which was followed by Andhra Pradesh High Court in above case. Both these cases are almost directly on point and cover issue before us. Supreme Court in case of Mandyala Govindu & Co. vs. CIT (1976) 102 ITR 1 (1975) CTR (SC) 20 has held that ITO must be in position to ascertain shares of partners in losses even if s. 26A of Indian IT Act, 1922 did not require shares in losses to be satisfied in instrument of partnership. In case, where minors are admitted to partnership and there is no clause in deed of partnership specifying proportion in which adult partners are to share losses, firm would not be entitled to registration. It is this principle which governs present case. We, therefore, hold that AAC had gone wrong in law in directing ITO to allow benefit of registration to assessee-firm for asst. yr. 1973-74 and renewal of registration for other years. At time of hearing, it was suggested by counsel for assessee t h t shares in losses of adult partners had been specified in application for registration submitted in Form No. 11. That application could not be placed before us by either side. However, that is entirely different issue, which does not arise out of facts placed before us. assessee will of course be free to approach ITO, if any such thing is found on facts and ITO will deal with matter in accordance with law. In result, all appeals are allowed. *** INCOME TAX OFFICER v. GWALIOR TEXTILES
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