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HIGH COURT OF ALLAHABAD
OM PRAKASH, J.
Shubham Fabrics - Appellant
Versus
Inspecting Assistant Commissioner Of Income-Tax And Another. - Respondent
Civil Miscellaneous Writ No. 626 of 1988
Decided on : May 09, 1988
INCOME TAX - REGISTRATION OF FIRM - MINOR BENEFICIARIES OF TRUSTS REPRESENTED BY TRUSTEES IN FIRM - WHETHER FULL-FLEDGED PARTNERS - DIRECTIONS ISSUED BY INSPECTING ASSISTANT COMMISSIONER UNDER SECTION 144A OF THE ACT - VALIDITY.
Fact of the Case:
The petitioner, a firm, applied for registration under section 187 of the Income-tax Act, 1961, as there was a change in its constitution during the assessment year 1986-87. The Income-tax Officer issued notices under sections 186 and 148 of the Act, calling upon the firm to explain why the registration should not be cancelled and to file a return in the status of an association of persons, respectively. The Inspecting Assistant Commissioner, on a reference by the firm under section 144A of the Act, directed the Income-tax Officer to complete the assessment on a protective basis in the status of a registered firm and to initiate separate proceedings to assess the income substantively in the status of an association of persons.
Finding of the Court:
The court held that the notices issued by the Income-tax Officer and the directions given by the Inspecting Assistant Commissioner were not legally sustainable. The court found that the firm was a genuine partnership and that the minor beneficiaries of the trusts represented by the trustees in the firm were not full-fledged partners. The court also held that the Income-tax Officer could not go behind the partnership deed to determine the beneficial interest in the shares of the partnership.
Issues: 1. Whether the minor beneficiaries of the trusts represented by the trustees in the firm were full-fledged partners? 2. Whether the Income-tax Officer could go behind the partnership deed to determine the beneficial interest in the shares of the partnership?
Ratio Decidendi: 1. The court held that the minor beneficiaries of the trusts represented by the trustees in the firm were not full-fledged partners. The court reasoned that a partner may be the karta of a joint Hindu family, a trustee, or a representative of a group of persons, and that in all such cases, the partner occupies a dual position. Qua the partnership, the partner functions in his personal capacity, but qua the third parties, the partner functions in a representative capacity. The court further held that the sharing of profits by minor beneficiaries would not make them full-fledged partners in the firm. 2. The court held that the Income-tax Officer could not go behind the partnership deed to determine the beneficial interest in the shares of the partnership. The court reasoned that the ingredients of a genuine partnership are to be tested by the partnership agreement and that it is not relevant for the Income-tax Officer to see what is the arrangement between the representative partner and the members whom he represents in the Hindu undivided family or the beneficiaries in the trust.
Final Decision: The court allowed the writ petition and quashed the notices issued by the Income-tax Officer and the directions given by the Inspecting Assistant Commissioner. The court also directed respondent No. 2 to grant registration to the petitioner for the assessment year 1986-87 and complete the assessment proceedings for that year in the status of a registered firm.
OM PRAKASH, J.
1. The petitioner in this writ petition prays for quashing the notice dated February 16, 1988, issued under section 148 of the Income-tax Act, 1961 (briefly "the Act, 1961"), the notice dated February 8. 1988, issued under section 186 of the Act and directions issued by the Inspecting Assistant Commissioner, "C" Range, Kanpur, under section 144A of the Act, which are annexures "2", "1andquot; and "6", respectively, to the writ petition.
2. The brief facts are that the firm, Shubham Fabrics, Swarup Nagar, Kanpur, engaged in the business of manufacturing, processing, dyeing, bleaching, printing ready-made or semi ready-made garments and having allied business, came into existence in the assessment year 1985-86 and the same obtained registration. As there was a change in the constitution of the said firm in the assessment year 1986-87, which is relevant to the instant writ petition, inasmuch as four partners, two of them representing their Hindu undivided families and the remaining two representing their trusts having minor beneficiaries were introduced, the petitioner (hereinafter referred to as "the firm" applied for registration in Form No. 11A under section 187 of the Act and filed its return of income in the status of a registered firm for the assessment year 1986-87. Thereupon, respondent No. 2 issued notice to the firm under section 186 (annexure "1" to the writ petition), calling upon the firm to explain why the registration should not be cancelled. In the notice issued under section 148 (annexure "2" to the writ petition), the Income-tax Officer stated that during the course of the assessment proceedings, it had been noticed that a genuine firm was not in existence. He had this doubt, because the minors were the beneficiaries in the two trusts which were represented by the trustees in the firm. That was why the firm was called upon to file the return in the status of an association of persons. Thereafter, the firm made a reference to the Inspecting Assistant Commissioner under section 144A(1) seeking his directions for the guidance of the Income-tax Officer on the questions :
"(i) Whether the firm is not entitled to registration on the ground that two partners joined the firm representing the two trusts having minors as beneficiaries ?
(ii) Whether the minor beneficiaries of the two trusts are full-fledged partners in the firm ?"
On this reference, the Inspecting Assistant Commissioner, relying on an order of the Commissioner of Income-tax (Appeals), Kanpur, in the case of Amar Brothers for the assessment year 1984-85 and on a decision of the Supreme Court in the case of McDowell and Co. Ltd., [1986] 154 ITR 148 took the view that the firm resorted to the device to admit minors as full-fledged partners in the firm which is not permitted under the provisions of the Partnership Act and the Income-tax Act and that therefore, the correct status of the firm would be an association of persons. He, however, directed the Income-tax Officer to complete the assessment on a protective basis in the status of a registered firm and to initiate separate proceedings to assess the income substantively in the status of an association of persons.
3. As the contention of the firm that, in law, it should be treated as a genuine registered firm was rejected, it has challenged the directions given by the Inspecting ASsistant Commissioner as well as the two notices issued by the Income-tax Officer.
4. A counter-affidavit has been filed on behalf of respondent No. 2 stating in paragraph 11 that, ultimately, the minors shall be saddled with the losses, which shall be in contravention of the Indian Partnership Act and the Contract Act, because in the partnership deed nothing has been mentioned for the share of the two partners representing the trusts in the firm.
We have heard Sri Upadhyaya, learned counsel for the petitioner, and Sri Vinod Rastogi learned additional chief standing counsel for the respondent, at the admission st
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