Punjab-Haryana High Court
Jagadhri Electric Supply And ... vs Commissioner Of Income-Tax on 14 July, 1986
Equivalent citations: [1987]166ITR143(P&H)
JUDGMENT S.P. Goyal, J.
1. The assessee, Messrs Jagadhri Electric Supply and Industrial Company, a partnership firm, was initially constituted on October 25, 1964, with ten partners and four minors, namely, Ghanshyam Gupta, Chander Kant, Dinesh Kumar and Lalit Kumar, who were admitted to the benefits of the partnership. The two minors, Ghanshyam Gupta and Chander Kant, attained majority on October 25, 1965, and June 4, 1966, respectively. A new partnership deed was executed on July 1, 1966, which was to take effect from April 1, 1966. In the new partnership, Brijmohan Lal, an earlier partner, was dropped whereas Ghanshyam Gupta and Chander Kant were shown as full-fledged partners. The firm was granted registration by the Income-tax Officer for the assessment year 1967-68, vide order dated March 28, 1972. However, subsequently, on May 24, 1973, the Income-tax Officer referred the case to the Commissioner of Income-tax proposing that action under Section 263 of the Income-tax Act (hereinafter called "the Act") be taken for cancellation of the registration. The Commissioner after issuing notice and hearing the assessee cancelled the registration in due course. On appeal by the assessee, the Tribunal set aside the order of the Commissioner on the ground that the finding that the order granting registration was prejudicial to the interest of the Revenue was based on no evidence. Relying on a Supreme Court decision in CIT v. Dwarkadas Khetan & Co. [1961] 41 ITR 528, the Tribunal rejected the contention of the assessee that the order of the Income-tax Officer granting registration was not erroneous. Both the Revenue as well as the assessee moved applications under Section 256(1) of the Act for referring certain questions to this court. Initially only one question in the application of the Revenue and two of the assessee were referred but, later on, on a mandamus issued by this court, instead of the question referred originally, two questions as framed by the Revenue have been referred. The four questions which stand referred now and are the subject-matter of Income-tax References Nos. 18 and 19 of 1985 and Nos. 65 and 66 of 1977 read as under :
2. I.T. Ref. Nos. 18 and 19 of 1985 :
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in giving effect to the plea of the assessees that the order of the Income-tax Officer granting registration to the assessee-firm for the assessment year 1967-68 was not prejudicial to the interests of the Revenue ?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in allowing the assessee's appeal, thus setting aside the direction of the Commissioner of Income-tax to the Income-tax Officer to frame the assessment of the assessee in the status of an unregistered firm ? "
3. I.T. Ref. Nos. 65 and 66 of 1977 :
"1. Whether the Tribunal has been right in law in suo motu holding that the Commissioner of Income-tax had in his mind the admission of Chander Kant to the partnership with effect from April 1, 1966, and consequently the Income-tax Officer's order erroneous ?
2. Whether, on the facts and circumstances of the case, the Tribunal was right in not finding it beyond the jurisdiction under Section 263, the action of the Commissioner of Income-tax in cancelling the registration on the plea of a loss of Rs. 876 having been debited to two minors who were carrying a credit of Rs. 2,250 each as capital and share of previous profits besides a share in surplus of compensation when there had been no invalidity in the partnership firm under the provisions of the Partnership Act ?"
4. A bare reading of the two questions referred at the instance of the Revenue would show that the answer to the second question depends entirely on the decision of question No. 1. So far as question No. 1 is concerned, the argument of learned counsel for the Revenue was that once it is found that the order granting registration by the Income-tax Officer is erroneous, it is bound to affect the interests of the Revenue prejudicially because the tax incidence is always more in the case of an unregistered firm than a registered one. Reliance for this contention was placed on the two decisions of the Supreme Court in CIT v. Amritlal Bhogilal & Co. [1958] 34 ITR 130, Dwarkadas Khetan & Co.'s case [1961] 41 ITR 528, and a decision of the Allahabad High Court in Badri Narain Kashi Prasad v. Addl. CIT [1981] 128 ITR 663. So far as the decisions of the Supreme Court are concerned, neither was any contention raised there nor any finding recorded that the order granting registration to the firm erroneously would ipso facto be prejudicial to the interests of the Revenue. However, a bald observation has been made in Badri Narain Kashi Prasad's case [1981] 128 ITR 663 (All), that the interests of the Revenue are prejudicially affected by such an erroneous order because if the firm is assessed in the status of an unregistered firm, the entire income is liable to be assessed in the hands of the assessee yielding larger revenue as compared to being assessed as a registered firm. No reason has been given for recording this finding and with due respect to the learned judges, we are unable to subscribe to this view. The contention raised is not of universal truth as is evident from the provisions of Section 183(b) of the Act itself which says that if in the opinion of the Income-tax Officer, the aggregate amount of the tax payable by the firm if it were assessed as a registered firm and the tax payable by the partners individually if the firm were so assessed would be greater than the aggregate amount of the tax payable by the firm under Clause (a) (that is unregistered firm) and the tax which would be payable by the partners individually, he may proceed to make the assessment under Sub-section (1) of Section 182 as if the firm were a registered firm. So the said provision visualises that the tax incidence can be sometimes more if assessed as a registered firm instead of as an unregistered firm. As the order of the Commissioner did not disclose any material on which the opinion was formed that the tax incidence would be more if the firm was assessed as an unregistered one, the Tribunal was fully justified in recording the finding that there was no material to support the finding of the Commissioner of Income-tax that the order of the Income-tax Officer granting registration was prejudicial to the interests of the Revenue. For the exercise of the jurisdiction under Section 263, it is not enough that the order passed by the Income-tax Officer was erroneous but it has further to be found that the order sought to be revised was prejudicial to the interests of the Revenue. As the second pre-requisite condition was wanting, the Tribunal was fully justified in reversing the order of the Commissioner of Income-tax. Consequently, both the questions are answered in the affirmative, that is, against the Revenue and in favour of the assessee.
5. As regards question No. 1 referred on the application of the assessee, learned counsel contended that the Commissioner never held the order of the Income-tax Officer erroneous on the ground that Chander Kant, minor, was shown as a full-fledged partner in the partnership deed executed on July 1, 1966, which was made effective from April 1, 1966, and as such the Tribunal was not justified in law in assuming that the Commissioner, in fact, had held the order erroneous on the said ground because a reference was made in the order of the Commissioner to the judgment of the Supreme Court in Dwarkadas Khetan and Co.'s case [1961] 41 ITR 528. The Commissioner had held that each of the two minors, Dinesh Kumar and Lalit Kumar, were debited with loss of Rs. 875.82 in the concerned year which showed that they were considered as full-fledged partners. It was after recording this finding that the Commissioner of Income-tax relied on the decision in Dwarkadas Khetan & Co.'s case [1961] 41 ITR 528 (SC) for holding that the firm being not validly constituted could not be granted registration. From the order of the Commissioner, therefore, it can never be assumed that the reason for holding the order of the Income-tax Officer erroneous was that Chander Kant, minor, was taken as a full-fledged partner in the partnership deed executed on July 1, 1966. Even on the reasons given by the Tribunal, the partnership could not be held to be not validity constituted. Chander Kant had become major on June 3, 1966, prior to the execution of the partnership deed. The profit and loss of a firm is not settled every month. Clauses 12 and 16 of the partnership deed make it abundantly clear that the profit and loss is to be settled annually. There is no bar for a minor on attaining majority during the currency of the year to take responsibility for the losses of a partnership firm which may have been suffered prior to the date of his attaining majority. In the present case, even that situation did not arise because Chander Kant had become major long prior to the close of the financial year when the profit and loss account was finalised and he was a full-fledged partner at that time. So, by no stretch of reasoning, can it be said in the present case that Chander Kant, minor, had been taken as a full-fledged partner in the partnership as a minor or that the deed of partnership executed was not validly constituted. Question No. 1 is accordingly answered in the negative, that is, in favour of the assessee and against the Revenue.
6. On the second question, again the finding of the Tribunal has to be reversed. The Tribunal held that if according to the instrument of partnership, a particular minor is merely admitted to the benefits of partnership, he is not to share the losses of the firm and debiting him with any portion of the losses of the firm would be suggestive of a constitution different from the one specified in such instrument of partnership. Though the assessee referred to Sub-section (3) of Section 30 of the Indian Partnership Act, 1932, for the contention that there is no bar in adjusting the losses of the firm towards the amount lying credited in the capital account of the minor, the Tribunal, except taking notice of the provisions of the section, did not give any reason for rejecting the contention of the assessee. A bare perusal of Sub-section (3) of Section 30 would show that the share of a minor who has been admitted to the benefits of the partnership is liable for the acts of the firm though the minor is not personally liable for any such act. Any amount lying in the capital account of the minor could, therefore, be legally utilised to meet the losses of the firm. Admittedly each of the minors had to their credit an amount of Rs. 2,250 in the account books of the firm against which the loss amount was adjusted. Even after the adjustment of the amount of the losses, the minors were credited with some profits in the balance-sheet prepared for the concerned year. In this situation, it cannot be said that the minors were made to share any losses against the provisions of the partnership deed or the provisions of Section 30 of the Indian Partnership Act. Reference in this regard may profitably be made to the Division Bench decisions respectively of the Calcutta and Kerala High Courts in Jeewanram Gangaram v. CIT [1967] 64 ITR 483 and Krishna and Brothers v. CIT [1968] 69 ITR 135. Question No. 2, is, therefore, also answered in the negative, that is, in favour of the assessee and against the Revenue.
7. All the four questions referred to us are thus answered in favour of the assessee and against the Revenue leaving the parties to bear their own costs.