Commissioner of Income-Tax, Bombay vs M/S. Dwarkadas Khetan and Co

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 328 of 1959

Decision Date: 1 December 1960

Coram: M. Hidayatullah, J.L. Kapur, J.C. Shah

The case was titled The Commissioner of Income‑Tax, Bombay versus M/S Dwarkadas Khetan & Co and was decided on 1 December 1960 by the Supreme Court of India. The judgment was authored by Justice M Hidayatullah, who sat with Justices J. L. Kapur and J. C. Shah. The petitioner in the proceeding was the Commissioner of Income‑Tax for Bombay, while the respondent was the partnership firm M/S Dwarkadas Khetan & Co. The official date of the judgment was 01 December 1960. The citation for the decision is reported in 1961 AIR 680 and in 1961 SCR (2) 821. The case is also referenced in later citators as E 1966 SC 15 (8) and MV 1966 SC 1490 (23). The legal provisions in issue were Section 26A of the Indian Income‑Tax Act, 1922 (Eleventh Amendment) relating to registration of partnership firms for tax purposes, and Section 30 of the Indian Partnership Act, 1932 concerning the capacity of a minor to become a partner.

According to the headnote, one of the individuals who entered into the partnership was a minor. In the partnership instrument the minor was described as a full partner possessing the same rights and obligations as the adult partners. The deed of partnership, which bore the minor’s signature, was produced before the Registrar of Firms for registration, and the registrar issued a certificate that showed the minor as a full partner rather than merely a beneficiary of the partnership. Nevertheless, the Income‑Tax Officer refused to register the firm under Section 26A of the Income‑Tax Act. That refusal was affirmed by the income‑tax authorities and subsequently upheld by the Income‑Tax Appellate Tribunal. The Bombay High Court, however, disagreed with the tribunal’s view and held that the firm ought to be registered.

On appeal by the Commissioner of Income‑Tax, the Supreme Court examined the rules framed under Section 26A. The Court observed that those rules make it clear that a minor who is admitted only to the benefits of partnership need not sign the application for registration. The law, however, requires that all partners sign the registration application, and if that requirement were interpreted strictly, a minor who is admitted only to the benefits would be deemed competent to sign, which is not the legislative intention. The Court explained that the definition in the Income‑Tax Act is intended to give a minor equal benefits by treating him as a partner, but it does not transform the minor into a competent full partner. Consequently, the partnership law must be consulted independently of the Income‑Tax definition. Section 30 of the Indian Partnership Act states expressly that a minor cannot become a partner, although, with the consent of the adult partners, the minor may be admitted to the benefits of partnership. Any document that goes beyond this statutory limitation cannot be regarded as valid for registration purposes. Registration may be granted only on the basis of a document executed by the actual parties and on the covenants contained therein. If the Income‑Tax authorities were to register the partnership as being between the adult partners only, contrary to the terms of the executed deed, they would in effect be creating a new contract. The Court held that it is not open to the Income‑Tax authorities to register a document that differs from the one actually executed and submitted for registration.

The judgment referred to several earlier decisions, including Commissioner of Income‑tax, Bengal, [1937] 5 I.T.R. 182; Hardutt Ray Gajadhar Ram v. Commissioner of Income‑tax, [1950] 18 I.T.R. 106; Banka Mal Lajja Ram and Co. v. Commissioner of Income‑tax, [1953] 24 I.T.R. 150, which were approved, and Jakka Devayya and Sons v. Commissioner of Income‑tax, [1952] 22 I.T.R. 264, which was disapproved. The matter arose in the civil appellate jurisdiction as Civil Appeal No. 328 of 1959. The appeal was taken by special leave against the judgment and order dated 23 February 1956 of the Bombay High Court in Income‑tax Reference No. 34 of 1955. Counsel for the appellant were K….N. Rajagopala Ayyangar and D. Gupta, while counsel for the respondent were Rameshwar Nath, S. N. Andley, J. B. Dadachanji and P. L. Vohra. The judgment was delivered on 1 December 1960 by Hidayatullah, J.

The Commissioner of Income‑tax filed the appeal against the High Court’s decision, which had answered two questions in favour of the respondents, Messrs. Dwarkadas Khetan & Co., Bombay. The first question asked whether the partnership instrument dated 27 March 1946 created a deed of partnership. The second question, contingent on an affirmative answer to the first, inquired whether the absence of a firm on 1 January 1946 would defeat the application for registration of the firm under Section 26A of the Indian Income‑tax Act, or whether the firm could be registered with effect from 26 March 1946 if it was held to be genuine. The factual background was that a firm named Dwarkadas Khetan & Co. had existed prior to 1 January 1945, but it ceased to exist on that date because the other partners had withdrawn, leaving the business as the sole proprietorship of Dwarkadas Khetan. On 12 February 1946, Dwarkadas Khetan obtained the selling agency of Seksaria Cotton Mills, Ltd. Subsequently, on 27 March 1946, he entered into a partnership with three individuals—Viswanath Purumul, Govindram Khetan and Kantilal Kasherdeo—by executing an instrument of partnership on that day. Dwarkadas Khetan’s share was seven annas in the rupee, while the remaining nine annas were divided equally among the three other partners. Although Kantilal Kasherdeo was a minor, the instrument admitted him as a full partner rather than merely as a beneficiary of the partnership, contrary to Section 30 of the Indian Partnership Act. The instrument bore Kantilal Kasherdeo’s signature followed immediately by the signature of his natural guardian, Kasherdeo Rungta. The document described Kantilal Kasherdeo as a full partner entitled to a share of profits and liable for all losses, including loss of capital. It required that all four partners, including the minor, give written consent for any decision, and it permitted the minor to manage the firm’s affairs, inspect accounts and exercise voting rights, thereby making no distinction between the adult partners and the minor.

In the partnership deed, the minor Kantilal Kasherdeo was given the same rights as the adult partners. He could use the books and accounts, was allowed to vote when a decision required a vote, and there was no separation made between him and the adult partners. Thus, for all practical purposes, the minor functioned as a full partner even though partnership law permitted a minor only to be admitted to the benefits of the partnership and not as a partner. The deed of partnership was filed with the Registrar of Firms, listing the four partners. The Registrar issued a registration certificate that recorded Kantilal Kasherdeo as a full partner rather than merely as a beneficiary. The banks dealing with the firm were also informed of the four partners, and there is no indication that the banks were told that one of the named partners was a minor. Although the partnership was formally created on 27 March 1946, the firm claimed a retrospective commencement date of 1 January 1946. The firm’s accounting year followed the calendar year, and the dispute concerned the accounts for the year 1946, which corresponded to the assessment year 1947‑48. For that year, the firm applied for registration under section 26A of the Indian Income‑tax Act. The Income‑tax Officer denied registration on the ground that a minor had been admitted as a partner in contravention of the law, rendering the deed invalid for registration. The appellant’s appeal to the Appellate Assistant Commissioner was also rejected; the Commissioner held that registration could be granted only for a document that was legal and valid, not for one that was void. The matter was then taken to the Tribunal, where the contention was that the deed should be interpreted to show that the minor was admitted only to the benefits of the partnership, not as a full partner. The Accountant Member of the Tribunal upheld the Appellate Assistant Commissioner’s order, giving two reasons: first, the proposed construction of the deed was not open to interpretation, and second, the retrospective start date could not be accepted because the firm did not exist on 1 January 1946, so registration could not be granted. The Judicial Member disagreed, adopting the view that the deed merely indicated the minor’s admission to the benefits of the partnership. The President of the Tribunal, however, agreed with the Accountant Member, and the refusal to register the firm under section 26A was maintained. Consequently, two questions were presented to the High Court. The High Court departed from the Tribunal’s decision and answered both questions in favour of the assessee. Regarding the second question, the High Court’s decision has since been settled by the Supreme Court in B C Mitter & Sons v. Commissioner of Income‑tax.

The Court observed that the judgment of the High Court on the first question was erroneous, and that a correct answer to that question would also resolve the second question, leaving it no longer open for consideration. The Court noted that the various High Courts are divided on this point. The Bombay, Madras and Patna High Courts have held that when a minor is admitted as a full partner by adult partners, the partnership deed may be registered if it is interpreted to show that the minor has been admitted only to the benefits of the partnership and not as a full partner. In contrast, the Calcutta, Allahabad and Punjab High Courts have taken the opposite view. The case under appeal originates from Bombay, and the Patna High Court followed that Bombay decision as well as two earlier decisions of the Madras High Court. Those Madras decisions were delivered by the same Divisional Bench on the same day.

The leading authority supporting the respondents is the Madras decision reported in Jakka Devayya and Sons v. Commissioner of Income‑tax (1). That case alone requires consideration because it contains all the reasons relied upon by the courts on that side of the jurisdictional split. In that case there were three partners, one of whom was a minor. The three persons formed a Hindu undivided family and subsequently executed a deed of partnership in which the minor was represented by his father‑in‑law. The Court held that the inclusion of the minor as a partner did not render the partnership between the two adult partners invalid, and that the minor must be deemed to have been admitted to the benefits of the partnership by the two adult partners. The learned Judges referred to section 2(6‑B) of the Income‑tax Act, which provides that “Partner” includes any person who being a minor has been admitted to the benefits of partnership; they observed that, in view of this definition and of the provision in section 30 allowing a minor to be admitted to the benefits of partnership, the deed was not invalid but had to be read as conferring on the minor the rights prescribed by the Partnership Act. The Judges further warned that an unduly rigid construction should not be imposed on the deed and they cited the authority of Lindley on Partnership, 11th edition, page 87, and the case of A. Khorasany v. C. Acha and Others (2). The Court indicated that other authorities, such as Vincent and Others v. Commissioner of Income‑tax (1) [1952] 22 I.T.R. 264 and Sahai Brothers v. Commissioner of Income‑tax, need not be examined.

The Court also referred to a decision of the Calcutta High Court reported in Hoosen Kassam Dada v. Commissioner of Income‑tax, Bengal (3), where Judges Costello and Panckridge held that, under section 26A of the Income‑tax Act and the accompanying Rules, the Income‑tax Officer is empowered only to register a partnership that is specified in the instrument of partnership and for which registration is sought. Accordingly, the Department is not authorised to register a partnership that differs from that which is created by the deed.

It was held that a partnership may be registered only if the instrument of partnership that is presented for registration specifies exactly the partnership that is to be recorded. Consequently, the tax department cannot register a partnership that differs from the one created by the deed. In the case of Hardutt Ray Gajadhar Ram v. Commissioner of Income‑tax, the judges observed that when a minor is taken in as a full partner with the same rights and duties as adult partners, the partnership deed is void. The court noted that English law on this point is different, but in the present Indian case an additional reason for invalidity was that the minor had been adopted into another family, so his natural father, who had signed as his guardian in the deed, no longer possessed the authority to act as guardian. Although the English position differs, the decision nevertheless supports the position of the Commissioner.

The Court also referred to Banka Mal Lajja Ram and Co. v. Commissioner of Income‑tax, where it was held that a minor cannot be a partner and that a partnership admitting a minor as a full partner cannot be registered. The High Court in that case did not examine whether the adult partners alone could constitute a valid partnership, because that issue was not raised before it. Nonetheless, the judgment was adverse to any claim for registration of a deed that included a minor as a full partner. In the present opinion the view of the Calcutta High Court was preferred to the view taken by the Madras High Court. The Madras Court’s error lay in using the definition of “partner” to conclude that a deed that named a minor as a competent partner was valid. The definition merely extends to a minor admitted to the benefits of partnership all the provisions of the Income‑tax Act that apply to partners; it does not transform a minor into a fully competent partner.

The Rules framed under section 26A clearly state that a minor who is admitted only to the benefits of partnership is not required to sign the application for registration. The law requires every partner to sign the application, and if the definition were interpreted to its extreme, even a minor who is only entitled to benefits would be deemed competent to sign, which is contrary to legislative intent. The definition is intended to give the minor the same tax advantages as a partner, but it does not make the minor a full partner under the Partnership Act. Section 30 of the Indian Partnership Act expressly provides that a minor cannot become a partner, although, with the consent of the adult partners, the minor may be admitted to the benefits of partnership. Any instrument that attempts to go beyond this statutory limitation cannot be regarded as valid for registration purposes. Registration may be granted only for a document that reflects the actual parties and the covenants they have executed. If the Income‑tax authorities were to register the partnership as if it involved only the adults, contrary to the terms of the deed, they would effectively be creating a new contract, which they are not authorized to do. Accordingly, the view of the Madras High Court could not be accepted, and the order of the lower court was set aside.

In the factual situation before the Court, the Indian Partnership Act stipulated that a minor could not become a full partner, although, with the consent of the adult partners, the minor might be admitted to the benefits of the partnership. Consequently, any instrument that attempted to accord to a minor powers or rights that went beyond those permitted by the Act could not be treated as a valid document for the purpose of registration. The Court explained that registration could be granted only for a document that was executed between the persons who were parties to it and that reflected the covenants actually set out in that document. When the tax authorities registered a partnership as being between the adult partners alone, while the terms of the deed allowed the minor to enjoy certain benefits, the authorities in effect created a new contract that differed from the one that had been executed and presented for registration. The Court held that the tax authorities were not empowered to register a document that was different from the one actually signed and submitted. Accordingly, the Court rejected the view advanced by the Madras High Court, describing it as untenable. The judgment that had been appealed had adopted the Madras view and, in the Court’s opinion, repeated the same error previously identified by the Madras High Court. On that basis, the Court concluded that the answer to the first question should have been in favour of the Department, and therefore it set aside the decision of the High Court, vacating its answer and answering the question in the negative. The Court observed that there was no necessity to consider the second question because that issue did not arise. The appeal was allowed, and costs were awarded both in the present proceedings and in the High Court. The appeal was consequently allowed.