Law:

Section:

Section 185 of the Income-tax Act, 1961 - Firm - Position prior to 1-4-1993 - Assessment year 1986-87 - Whether, where two of partners of a firm representing trusts had minor beneficiaries, sharing of profits by such minor beneficiaries would not make them full-fledged partners of firm and, therefore, it would not affect genuineness of firm - Held, yes - Whether, therefore, such a firm would be entitled to registration - Held, yes FACTS The assessee-firm came into existence in the assessment year 1985-86 and obtained the registration. As there was a change in the constitution of the assessee-firm in the assessment year 1986-87, inasmuch as four partners, two of them representing their HUF's and the remaining two representing their trusts having minor beneficiaries were introduced, the firm applied for registration in Form No. 11A under section 187 and filed its return of income in the status of a registered firm. The ITO issued notice to the firm under section 186 calling upon it to explain why the registration should not be cancelled. Thereupon, in the notice issued under section 148, the ITO stated that during the course of the assessment proceedings, it had been noticed that a genuine firm was not in existence because the minors were the beneficiaries in the two trusts which were represented by the trustees in the firm and that was why the firm was called upon to file the return in the status of an AOP. On reference by the assessee under section 144A, the IAC, took the view that the firm resorted to the device to admit minors as full-fledged partners in the firm which was not permitted under the Partnership Act and the Income-tax Act and that, therefore, the correct status of the firm would be an AOP. He, however, directed the ITO to completed 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 AOP. The assessee filed writ petition challenging directions of the IAC and the two notices issued by the ITO. However, it was stated by the revenue that ultimately, the minors would be saddled with the losses, which would be in contravention of the Indian…

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