Commissioner of Income-Tax, Bangalore
Vs. Shah Mohandas Sadhuram  INSC 108 (15 April 1965)
15/04/1965 SIKRI, S.M.
CITATION: 1966 AIR 15 1965 SCR (3) 771
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.
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
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
Case law referred to.
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 there under) 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 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
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
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 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
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 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
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 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.