ORDER
J. Kathuria, Accountant Member
1. This is an assessee’s appeal directed against the order dated 6-3-1986, passed by the CIT, Meerut, under Section 263 of the Income-tax Act.
2. The facts of the case are these. For the assessment year 1981-82, the assessee’s accounting period was from 1-7-79 to 30-9-80. The assessee firm was constituted under a partnership deed dated 1-7-76. The firm consisted of Smt. Prem Goel, Shri Girish Kumar and Shri Vipin Goel as partners. Shri Barun Kumar Adarsh was, however, admitted to the benefits of the partnership. The profits and losses were to be divided as under: –
Sl. Name of the partner Profits Losses No. 1. Smt. Prem Goel 17 1/2% 25% 2. Smt. Girish Kumar 35% 50% 3. Shri Vipin Goel 17 1/2% 25% 4. Shri Barun Kumar (minor) 30%
3. Shri Baran Kumar attained majority on 26-7-79. No fresh partnership deed was executed. The ITO treated the firm as registered firm without any discussion. While scrutinizing the assessment records, the CIT found that the assessee firm had been wrongly given the status of a registered firm. He, accordingly, issued a show-cause notice and after giving an opportunity of hearing to the assessee, held that the order of the ITO, treating the firm as registered firm for the assessment year 1981-82, was erroneous, inasmuch as, it was. prejudicial to the interests of Revenue. He, accordingly, directed the ITO to modify his order and treat the firm as URF. It is against this order of the CIT that the assessee has come in appeal before the Tribunal.
4. At the time of hearing, Shri J.D. Singhal, the learned counsel for the assessee made two submissions. The first submission was that the learned CIT had not appreciated the Board’s Circular No. 76/l/67-IT (AH dated 20/3/69). The second submission was that, in this very case, for the assessment year 1981-82, the CIT (Appeals) had already passed his order on 23/7/84 and in that view of the matter, the ITO’s order had merged with that of the CIT(Appeals) and so the CIT could not invoke jurisdiction under Section 263 of the Income-tax Act.
5. The learned Departmental Representative strongly supported the order of the CIT.
6. We have carefully considered the rival submissions and perused the record. The facts of the case have already been noted. It may further be mentioned that there was no clause in the Partnership Deed dated 1-7-76 as to what would be the proportion in which the losses would be shared in the event of the minor attaining majority. It is also an undisputed fact that, during the accounting year relevant to the assessment year 1981-82, no fresh partnership was executed. The Board’s Circular on which much reliance has been placed by the learned counsel for the assessee, stands reproduced at page 3503 of the Income-tax Law (3rd Edition), Volume IV by Chaturvedi and Pfthisaria. The said Circular was issued by the Board after the Allahabad High Court gave its decision in the case of Ganesh Lal Laxmi Narain v. CIT [1968] 68 ITR 696. In that case, the minor who was previously admitted to the benefits of the partnership, attained majority and no new deed of partnership was executed. The Allahabad High Court was of the view that since Section 26A of the Indian Income-tax Act, 1922 provided for the registration only of a firm constituted under an instrument of partnership specifying the individual shares of the partners, refusal to renew registration of a firm was not illegal. The Board issued the above circular by way of a concession to the effect that if the firm was otherwise genuine, registration need not be denied simply because the minor hitherto admitted to the benefits of the partnership firm became a full-fledged partner on attaining majority. It was, however, made clear in the circular that the Allahabad High Court decision in the case of Ganesh Lal Laxmi Narain (supra) was, however, to be followed-so far as Uttar Pradesh was concerned. The assessee firm is from Meerut and its case, therefore, falls in the State of U.P. and as such the concession, by virtue of the aforesaid Circular, does not extend to the assessee firm. The Allahabad High Court in the Full Bench decision in Badri Narain Kashi Prasad v. Addl. CIT [1978]115 ITR 858, however, overruled the decision in the case of Ganesh Lal Laxmi Narain (supra). It held that there is no change in the constitution of the firm by the mere fact of a minor admitted to the benefits of partnership becoming major and electing to remain a partner. He was already a partner and he continued as a partner. In the instant case also, the minor had attained majority on 26-7-79. The 6 months’ period during which he could exercise the option of becoming a partner or quitting the firm, as provided under Section 32(5) of the Indian Partnership Act ended on 25-1-1980. No option appears to have been exercised one way or the other by Shri Barun Kumar till 25-1-1980. The proviso to Sub-section (5) of Section 32 of the Partnership Act, however, prescribes that, in case such a minor fails to give a notice that he has elected to become or he has elected not to become a partner in the firm, then he shall become a partner in the firm on the expiry of the said 6 months period. As mentioned above, 6 months period expired on 25-1-80 and the assessee firm closed its books of account for the assessment year 1981-82 on 30-9-80. In that view of the matter, the minor became a partner on the expiry of 6 months period. But, as held by the Full Bench of the Allahabad High Court, in Badri Narain Kashi Prasad’s case (supra), there can be no change in the constitution of the firm by the mere fact of a minor admitted to the benefits of partnership, becoming a major and electing to remain a partner. He was already a partner and he continued as a partner. Renewal of registration could not, therefore, be refused merely because the minor attained majority during the year. The real difficulty arises not because he attained majority and there was no fresh partnership deed, but because after the attainment of majority and in the absence of the provision to share losses in the original partnership deed, it was necessary to execute a fresh partnership deed which was not done in this case. As a minor, Shri Barun Kumar was not to share any losses though he was entitled to a share in the profits. The share of loss relatable to the share of the minor had, therefore, to be provided for. The redistribution of share in loss on the minor attaining majority had also to be ascertained. Had the original partnership deed made provision for such an eventuality, there would have been no difficulty in granting continuation of registration to the assessee firm. The original partnership deed was, however, silent on this point. Under these circumstances, execution of a fresh partnership deed became an unavoidable necessity. It is also significant to note that, as per the profit and loss account of the assessee firm for the assessment year 1981-82, there was a loss of Rs. 10,071 which had to be distributed amongst the four partners. In the absence of the clause under which the loss could be distributed, the loss could not be apportioned to Shri Barun Kumar. So even if the Board’s Circular were to apply in this case, the assessee would not be entitled to continuation of registration for the assessment year 1981-82. The scope of the circular is limited and the circular only says that registration need not be denied simply because the minor hitherto admitted to the benefits of the partnership becomes a full-fledged partner on attaining majority and no new partnership deed has been drawn up to give effect to that change. That, however, does not contemplate a situation where the minor’s share of loss is unascertainable. This hurdle has to be crossed, which has not been crossed in the instant case. In that view of the matter, the CIT was right in saying that the ITO had wrongly allowed the continuation of registration to the assessee firm for the assessment year 1981-82.
7. Coming now to the question, whether the order of the ITO had merged with that of the CIT(Appeals), when he decided the quantum appeal on 23-7-84. It was held by the Supreme Court in the case of State of Madras v. Madurai Mills Co. Ltd. [1967] 19 STC 144, as under: –
The doctrine of merger is not a doctrine of rigid and universal application and it cannot be said that wherever there are two orders, one by an inferior tribunal and the other by a superior tribunal, passed in an appeal of revision, there is a fusion or merger of the two orders irrespective of the subject-matter of the appellate or revisional order and the scope of the appeal or revision contemplated by the particular statute.
The question of renewal of registration was not before the learned CIT (Appeals) in this case. He could not, therefore, give his finding on that when the assessee had preferred appeal before him. The following decisions favour the view that, that part of the ITO’s order, which has not been considered by the appellate authority, does not merge with the order of the appellate authority: –
(i) Hindustan Aluminium Corporation Ltd. v. CIT [1989] 178 ITR 74 (Cal.)
(ii) CIT v. R.S. Banwarilal [1983] 140 ITR 3 (MP) (FB)
(iii) Alok Paper Industries v. CIT [1983] 139 ITR 1064 (MP)
(iv) HM. Raja Agit Singh of Jhabua v. CIT [1983] 140 ITR 138 (MP)
(v) Jaora Sugar Mills Ltd. v. Union of India [1982] 134 ITR 385 (MP)
(vi) CIT v. Buildwell Assam (P.) Ltd [1982] 133 ITR 736 (Gauhati)
(vii) CIT v. Sakseria Cotton Mills Ltd. [1980] 124 ITR 570 (Bom.)
(viii) Karsandas Bhagwandas Patel v. G.K Shah, ITO [1975] 98 ITR 255 (Guj.)
(ix) Poonjabhai Vanmalidas v. WTO [1978] 114 ITR 38 (Guj.)
(x) CIT v. R.S. Banwarilal
8. In view of the Allahabad High Court decision, in Badri Narain Kashi Prasad’s case (supra), continuation of registration in the instant case would have been illegal because there was no stipulation regarding the share of losses amongst, the partners including Shri Barun Kumar who attained majority during the year under consideration. On that basis, the ITO should have passed a separate order under Section 85(1)(b), which was separately appealable under Section 246 of the Income-tax Act. When the CIT(Appeals) was dealing with quantum appeal of the assessee, he could not have given his judgment on the issue of registration, which was an altogether separate and distinct issue. The point which the CIT(Appeals) could not have even dealt with in the appeal, filed by the assessee, can never be said to have merged with his order. We, therefore, hold that the theory of merger which has been advanced for the first time before us, has no legs to stand upon in the instant case.
9. Having regard to all the facts and circumstances of the case, we hold that the learned CIT was right in holding that the order of the ITO treating the firm as registered firm was erroneous inasmuch as it was prejudicial to the interests of the Revenue. He had rightly directed the ITO to treat the firm as URF.
10. In the result, the appeal is dismissed.