I. T. A. NO. 1562 OF 1982-83, DECIDED ON 3RD JULY, 1985. Versus I. T. A. NO. 1562 OF 1982-83, DECIDED ON 3RD JULY, 1985.
ORDER
1. This is an appeal filed by an assessee against refusal to grant registration to the firm and assignment of status of U.R.F. The assessee filed an application for registration of the firm on 23-6-1981 which was accompanied by the partnership deed which was executed on 24-7-1980, but was given effect from 1st of July, 1980. In the partnership deed the names of five persons were mentioned as partners in the preamble of the deed, two of whom were minors. The preamble of the deed reads as under:-
2. "This deed of partnership is made at Gujranwala this 24th day of July, 1980 by and between:-
(1) Sh. Mohammad Aslam son of Sh. Fateh Mohammad of the first part.
(2) Dildar Hussain son of Muhamma,. Sharif of the, second part. .
(3) Tariq Mahmood son of Sh. Abdullah .of the third part.
(4) Mohammad Saeed son of Sh. Mohammad Aslam of the fourth part (minor).
(5) Mohammad Amjad son of Sh. Mohammad Aslam of the fifth part (minor).
3. The registration was refused on the ground that the minors had been fully allowed to participate in laying down the terms and conditions of their partnership deed and in determining the profit and loss of the firm and under the law a minor cannot contract any obligation. It was further observed by the learned assessing officer that the minors could only be admitted to the benefits of partnership after the major partners had, by mutual consent, agreed to do so. Thus, partnership deed was held to be legally defective, and consequently the registration of the firm was refused and status of U.R F was assigned. The learned A. A. C. dismissed the appeal and contained the order of the assessing officer, hence this appeal.
4. The learned counsel for the assessee contended that the partnership deed should be read as a whole. It was submitted that mere fact that in the preamble of the deed the minors have been mentioned as partners would invalidate neither the instrument of partnership nor the constitution of the firm between the major part n' It was further submitted that from reading the deed as a whole it is clear that the minors have been only admitted to the benefits of the partnership. It could not, therefore, be said that the minors have been allowed to participate in laying down the terms and conditions of the partnership deed.
5. The precise question which arises in this case, is as to whether the partnership deed was incomplete or invalid because of the fact that in the preamble of the deed the minors have been described as partners; and whether because of the infirmity of the minors to contract, the entire partnership deed is vitiated even in regard to the major partners.
6. Before proceeding further it will be convenient and proper to reproduce the relevant provisions of law. Section 2(22) of the Income-tax Ordinance, 1979 defines the words 'firm' 'partners' and 'partnership' which is reproduced below: "'firm', 'partner', and 'partnership' have the meanings respectively assigned to them in the Partnership Act, 1932 (IX of 1932); and the expression 'partner' includes any person, who being a minor, has been admitted to the benefits of partnership."
7. It may be noticed that under subsection (2) of section 68 of the Income-tax Ordinance there are three requirements which are to be fulfilled before a firm is to be registered:-
(1) That the firm is constituted by an instrument of partnership.
(2) The said instrument specifies, among other things, the shares of the partners; and
8. (3)' The firm has been registered under the Partnership Act, or an application for registration under the said Act has been made.
9. Subsection (3) of section 68 lays down the procedure for making an application in the prescribed harm. Then, if the I.T.O. after making an enquiry, is satisfied that the requirements of subsections (2) and (3) have been fulfilled, the procedure laid down under subsection (3) has been followed and the three requirements provided under subsection (2) have been complied with then the I.T.O. has to register the firm if it is genuine.
10. If we closely examine the above provisions we find that there is no objection by the assessing officer that procedure has not been followed as prescribed in subsection (3) nor there is any objection that any of the requirements mentioned in subsection (2) have not been complied with. Even this is not the finding of the assessing officer that the genuine firm did not exist, nor there is any objection that the firm as constituted is not in accordance with instrument of the partnership. Here it may be pointed out that the assessee firm is an old firm, which was first registered in 1968-69.
11. In the assessment year 1980-81 there were four partners namely:-
(1) Mohammad, Aslam
12. 35% share
(2) Mst. Janat Bibi
13. 20% "
(3) Shamim Bugum
14. 15% "
(4) Dildar Hussain
15. 30% "
16. In the assessment year 1981-82 the firm was re-constituted and Mst. Janat Bibi and Shamim Begum were eliminated and in their place Tariq Mohammad, Mohammad Saeed and Mohammad Mujahid were added under clause (vii) of the partnership deed. Mohammad Saeed and Muhammad Mujahid are minor sons of Mohammad Aslam share allocation was made as under:-
(1) Mohammad Aslam
17. Profit 30%
18. Loss 65%
(2) Dildar Hussain
19. Profit 20%
20. Loss 20%
(3) Tariq Mohammad
21. Profit 15%
22. Loss 15%
(4) Mohammad Saeed
23. (minor)
24. Profit 20%
25. Loss Nil
(5) Mohammad Mujahid
26. (minor)
27. Profit 15%
28. Loss Nil
29. It will, therefore, be seen that minors have not been assigned any share in the loss of the firm, and their portion of the loss has been assigned to their father Mohammad Aslam. From perusing this clause it is abundantly clear that the intention of the partners was to admit the minors only to the benefits of partnership and their names were invertently mentioned in the preamble only because of lack of drafting skill. The mischief, which has caused the confusion, appears to have been caused by the defective description of the parties in the preamble, which has included the names of the minor sons of partner No.1. However, this confusion has been cleared up. When we find that their share of the loss has been assigned to one of the major partners, who happens to be the father of the two minors. There is no dearth of case-law which lays down that while reading an instrument it has to be read as a whole and the intention of the parties has to be ascertained. In the case of Addepally Nageswara Rao and others v. C.I.T. reported as (1972) 26 Tax page 68, Andhra Paradesh High Court held as under:-
30. "In order to construe a partnership deed, it is now well-settled that the entire document must be read as a whole and a reasonable construction should be placed on it. In a document where several clauses appear, what clause dominates the document should also be found out with a view to ascertain the real intention of the parties."
31. It was further observed in the report,
32. "When the intention of the executants of this document thus becomes abundantly clear and leaves no one in doubt, then the other clauses of the document should be so read as to reconcile them with this manifestly brought out intention of the parties to the document."
33. Even otherwise since minor's father was also a partner in the firm therefore, he could, as a natural guardian, even give a consent on behalf of the minors to make an agreement of partnership. The I.T.O. in this case has refused to grant registration on the sole ground that the minors did not have the capacity to contract. He has however ignored the fact that the partnership deed constituting the firm, was not signed by the minors but was signed by their father. Now the capacity to contract must be distinguished from authority to contract.
34. 'Capacity' means capability to contract by himself while 'authority' means the power of another to contract on behalf of a person having legal disability to contract. While capacity is part of law of status and usually is a question of law, authority is a question of fact. While it is true that a minor cannot enter into an agreement of partnership because of his legal disability, he can certainly draw the' benefits of partnership and the father of the minor can represent him without affecting the validity of partnership.
35. It is well-settled that under section 11 of the Contract Act, at purported contract made by a minor is void and not merely vidable. Section 11 of the Contract Act puts a complete embargo on a minor to enter into a contract. This principle was enunciated by the Privy Council as far back as in 1903 in Mohiri Bibi v. Dharamdas Shore ILR 30 Cal. 955 (P.C.) Thus a contract with a minor does not create a legal contractual relationship between the parties. But this embargo is only on the minor to contract by himself. There is nothing in law to prevent the guardian of a minor from contracting on his behalf though, the minor may avoid a contract on his attaining majority on reasonable and sufficient grounds. It would make minors' position worse if he is precluded to contract even through his guardian.
36. Dealing with this issue the Andhra Pradesh High Court in Addepally's case (supra) 26 Tax observed.
37. "What is clear is that a minor cannot himself enter into a contract and become a partner of the firm;' nor a guardian on his behalf can enter into an agreement so as to make the minor a full-fledged partner of the firm. There cannot thus be any partnership between an individual and a minor represented even by a person as guardian of minor, with the consent of other person who, constitute the firm. The minor however, can be admitted to the benefits of the partnership. It is also clear from the language of section 30 that the minor can contribute his share of capital in the firm; but in spite of such contribution the minor would be entitled only to the share of the profits and will not personally be liable for any loss. He can enter into an agreement through his guardian whereby he can get only the benefits of the partnership without even contributing capital. In case he contributes capital or is` entitled to get benefit in the profits of the firm, it is to that extent that the liability can be fastened on the minor. But in no case the person of the minor or his other property which l has not been brought into the assets of the partnership cant be held liable. That is the purport and scope of section 30(3) of the Partnership Act.
38. Here it may be relevant to reproduce subsection (1) of section 30 of the Partnership Act:-
39. "30. Minors admitted to the benefits of partnership ..-- (1) A person who is a minor according to the law to which he is subject may not be a partner in a firm, but, with the consent of all the partners for the time being, he may be admitted to the benefits of partnership.
(2) Such minor has a right to such share of the property and of the profits of the firm as may be agreed upon, and he may have access to and inspect and copy any of the accounts of the firm.
(3) Such minor's share is liable for the acts of the firm, but the minor is riot personally liable for any such act.
(4) Such minor may not sue the partners for an account or payment of his share of the property or profits of the firm, save when severing his connection with the firm, and in such case the amount of his share shall be determined by a valuation made as far as possible in accordance with the rules contained in section 48."
40. Under section 30(1) of the Partnership Act, a minor though cannot be made a partner in a firm yet can be admitted to the benefits of the partnership, the reason being his incapacity to contract due to age. It is his infirmity, which has been overcome by section 30 of the Partnership Act, so that, notwithstanding the legal infirmity of a minor, he still can take all the benefits of partnership as any other major partner. The consequences of such an admission to the benefits of partnership are that he has a right to such share of the property and the profits of the firm as may be agreed. He may have access to the accounts books of the firm 'which may be inspected by him; his share in the firm is liable for the acts of the firm though minor would not be personally liable. The only difference between a partner and the minor who has been admitted to the benefits of the partnership, is that the latter cannot be made liable to the loss of the firm though in some circumstances he, even has to bear loss as well. The minor's share is liable for the acts of the firm but this liability does not extend to his person. This view was taken by the Privy Council as back as in 1928 in the case of Jafar Ali reported as A I R 1928 PC 135.
41. Section 30 of the Partnership Act appears to have -been introduced to remove the effects of the Privy Council's decision in Mohri Bibi v. Dharmadas (supra). Here section 2(22) of the Income Tax Ordinance may be referred where the same definitions of the words 'firm', 'partner' and 'partnership' have been adopted as has been given in the Partnership Act, with the exception that when a minor has been admitted to the benefits of partnership, he has to be treated as a partner for the purposes of the Income Tax Ordinance. Here a distinction must be kept in mind between the benefits of the partnership and the profits of the firm. Section 30 of the Partnership Act, does not lay down that a minor can be admitted to 'profits' of the partnership. It lays down that the minor can be admitted to the 'benefits' of partnership. These two expressions do not carry the same meaning. The benefits of the partnership are not the same, thing as profits of the partnership. The importance of the distinction in these two phrases is that the minor has also to share the losses of the partnership because the benefits cannot be confined only to the profits of the partnership.
42. The leading case on the issue under consideration is that of C.I.T. v. Dwarka Dass Khwetan 1961 3 Tax 247. The facts of this case were that in the partnership deed the minors were also made partners alongwith the other three major partners. They were full-fledged partners although it was laid down that they would not be liable or responsible for loss and the entire losses would be borne by the major partners. The minors were not only to share the profits but were also liable to bear all the losses including loss of capital. The minors were also required to contribute capital and were to sign the books of accounts as well. The Tribunal in that case held that since no distinction between minor and major partners was made and each minor partner had also signed the partnership deed through their father as guardian, the deed was invalid. When the case was referred to the High Court it reversed the view taken by the Tribunal (reported as 1956-29 I T R Bombay page 903). The Supreme Court reversing the order of the High Court maintained the view taken by the Tribunal. The Supreme Court while taking this view also dissented from earlier decision of Madras High Court in Jakka Devayya and Sons v. C.I.T. Madras reported as (1952) 22 I T R Mad. 264. The Supreme Court's case was being followed by Indian Courts as well as the Pakistan Courts. However, subsequently the Pakistan Courts as well as the Indian Courts expressed doubts on the correctness of the decision of the Supreme Court in Dawarka Dass Khewetan's case. The Supreme Court of India in the case of C.I.T. v. Shah v. Mohan Dass Sadharam reported as 1965-57 I T R 415 and again in C.I.T. v. Shah Jethaji Phoolchand reported as 1965 I T R 588 explained the Dawarka Dass Khewetan's case. It was explained that in Dawarka Dass Khewetan's case the Supreme Court held a view because no distinction was made between the adult persons and minors and the minor was made full partner although he could only, be admitted to the benefits of the partnership and could not be made a partner. Consequently in the two cases referred to above, the Supreme Court observed that the partnership deed must be construed reasonably and as long as partnership deed does not make a minor as full-fledged partner the partnership deed should not be recorded as invalid on the ground that the guardian had purported to have contracted on behalf of the minor, if the contract was only for the purpose of admitting the minor to the benefits of the partnership. It was further observed by the Supreme Court that a guardian could accept the benefits of partnership on behalf of a minor and has also the powers to accept the conditions on which the benefits of partnership were being conferred. In a later case similar issue came into consideration of Calcutta High Court in the case of National Trading Company, 1971-72 Tax 73. In that case in the preamble of the partnership deed the minors were described as partners alongwith the major partners (exactly as in the present case). While dealing with the objections of the Tribunal, the Calcutta High Court observed.
43. "The first ground given by the Tribunal was that the preamble recited that the parties, including minors, agreed between themselves to become partners and to carry on the business of partnership. This ground in our opinion, should not be overemphasised
44. Then the Calcutta High Court referred to the Supreme Court's judgment in Shah Jethaji Phulchand case reported as 1965-57 I T R 588 (SC) in which preamble was recited as under:-
(3) Whereas the above 5 parties have agreed to do business of cotton and Kapas purchases and sales and on commission basis, etc. after Decepavali, 1950, for the further periods also so long as the they possibly work together.
(4) Now they agree between the above 5 parties as under:-
45. "That the above five parties shall establish cotton business, and carry on the same at Devangere with branches in the surrounding area under the name and style 'Jethaji Phulchand'
46. After quoting this preamble the Calcutta High Court observed:-
47. "The 'five' mentioned in the preamble included the minors. In spite of this preamble the Supreme Court was pleased to hold that the partnership deserved registration."
48. While examining the deed, the Calcutta High Court in the aforementioned case observed:-
49. "Whether the minors were made partners under a deed or whether they became fully entitled to the benefits of the partnership must depend upon the construction of a deed as a whole."
50. Thus, if the dominant clause of the deed indicates that the minors were only admitted to the benefits of the partnership, then the dominant clause must be taken to colour the deed itself and must fix the extent of liability and responsibility of the minors. In Pakistan the same issue, and in particular the Dwarka Dass Khewetan's case, was examined by a full Bench of Lahore High Court in Ittehad Textile Mills v. C.I.T. reported as 1969 P T D 105. Since there was conflicting judicial opinion, the case was referred to a Full Bench to examine the issue. The judgment was delivered by Mr. Justice Late A.S. Farooqi who eminently discussed the entire case-law on the issue and set at rest the controversy. While discussing the issue as to whether the deed was to be read as a whole it was observed at page 114 of the report:-
51. "It would be wholly immaterial whether the minor is described as a partner instead of saying that he was of the benefits of the partnership."
52. In the Lahore case the facts were that the application for registration of the assessee was rejected on the ground that a minor had been associated in the partnership and was also made liable to losses. On appeal the learned A.A.C., following the Madras High Court's case (1952) 22 I T R 269 set aside the I:T.O.'s order, but on appeal by the Revenue the A.A.C.'s order was reversed by the Tribunal. The Tribunal held that in spite of the fact that minor had entered into partnership through his father as his legal guardian, the fact that he had been made liable for losses invalidated the entire partnership. The Tribunal's view was that the registration could not be granted because if the minor was not treated as partner it would be necessary to reshuffle the shares amongst the remaining partners which was not permissible under section 26-A of the Income-tax Act.
53. When a reference was made to the High Court the Revenue heavily relied upon Dwarka Dass Khewetan's case. Dealing with this case, the High Court observed:-
54. "With great respect to the learned Judges, who decided this case in Supreme Court, the error as assumed to exist in the judgment of the Madras High Court with reference to the interpretation of section 2(6-B) of the Act was not really there. Their Lordship of the Madras High Court had nowhere said that the definition as contained in section 2(6-B) rendered a minor a competent and full partner. What they had said was that it was open to the adult partners to admit a minor to the benefits of the partnership.
55. In doing so they had relied upon section 30 of the Partnership Act. They had used definition contained in section 2(6-B) of the Income Tax Act only for the purpose of showing that when a minor was so admitted to the benefits of the partnership he became partner for the purpose of the Income-tax Act, that is he will be liable to the incidence of tax as any other partner and this is precisely what section 2(6-B) was intended to achieve. The true ratio of their decision was that the fact that the minor was included in the contract would not make the partnership as between the adults invalid and, therefore, the minor might be deemed to have been admitted to the benefits of the partnership between the adults. With regard to this ratio which was elaborated in the Bombay case, their Lordships of the Supreme Court of India did not have anything to say."
56. "Here it may be interesting to note that under section 68 of the Income-tax Ordinance what is to be registered is the firm and not the partnership deed. In the Income-tax Ordinance originally the words used in section 68(2), clause (c) were:
57. The said instrument had been registered-------"
58. The word 'instrument' has been replaced by the word 'firm' by the Finance Ordinance, 1980. Thus, the assessing officer has not to go into the technicalities of the instrument of partnership but he has to see whether the firm is genuinely constituted and the requirements of law provided by section 6% have been fulfilled. In order to achieve this end he has to look into the object of the executants, which can only be clear by reading the whole of the partnership deed. In the present case the assessing officer as well as the learned A. A. C. have merely relied upon the preamble of the partnership deed and without looking into the deed itself have ignored the dominant clause of the deed in which it is specifically mentioned that the minors were only to share profits and not the losses of the firm. The preamble of the deed does not revolt against the dominant idea in the relevant clause, which specifies the shares of the partners and under which the minors have been only admitted to the benefits of partnership. In the case of Ittehad Textile Mills, after quoting the concluding paragraph from the judgment of the Supreme Court in the case of Dwarka Dass Khewetan's case their Lordships of the Lahore High
59. Court observed at page 116:-
60. "It would be seen and we say so with great respect to Judges who decided the case that the impression of their Lordships was that it was document of partnership which required to be registered under section 26-A. This is not what the I.T.O. does under that section. What he registers is the firm and not the partnership deed, and the terms 'constituted under an instrument of partnership' relate to the persons constituting the firm and not the delineation of shares in the instrument."
61. The last case I would like to quote would be that of Commissioner of Income-tax, East Pakistan v. Amin Match Works decided by the Supreme Court and reported as P L D 1964 SC 377. In that case it was observed
62. "Even otherwise we do not think that there is any legal bar under section 30 of the Partnership Act to the admission of the minors to the benefits of partnership of the firm under the same instrument which set up the firm, provided that a firm is thereby lawfully brought into being even without the minors."
63. It was further observed in that case:-
64. "It is no doubt correct that a minor cannot create partnership, but it cannot be said that by being merely admitted to the benefits of partnership he also becomes a partner. In any event, we fail to appreciate why inclusion of the minor should have rendered constitution of the firm itself invalid when there were at least two adult partners besides the minors, who could lawfully have entered into partnership. Under section 26-A of the Act two conditions have only to be satisfied, firstly, that the firm has been constituted under an instrument of partnership and, secondly that the instrument has specified the shares of the partners. If these conditions are satisfied the firm is entitled to registration."
65. The above discussion makes it clear that mere fact that two minors have been mentioned in the preamble would not invalidate the constitution of the firm under partnership deed duly executed by the adult partners. The mentioning of the minors in the preamble of the deed or even inclusion of the minors as a partner does not invalidate the partnership amongst the adult partners. From reading of the partnership deed as a whole it is clear that the intention of the executants of the partnership deed was only to admit the minors to the benefits of the partnership. Therefore, unless the genuineness of the firm was doubted, the registration of the firm could not be refused by the' I.T.O. I, therefore, direct that the firm should be granted registration unless there is some other legal defect, The appeal is, therefore, accepted.
66. M.B.A./488/T Appeal accepted.