2017 (2) TMI 543 - AT - Income Tax

Disallowance on claim made under Section 40(b) - whether the partnership was one formed between the HUF and two trustees or between three individuals? - Whether a valid partnership could be formed between three persons in representative capacity? - Held that - It is not in dispute that the assessees were granted the status of registered firm by virtue of provisions of Section 185(1) of the Act since assessment year 1991- 92. The position continued for a period of twenty years and it was after such twenty years, the Assessing Officer attempted to disturb this. When a set of facts which permeates from earlier years, is consistently the same, it would not be appropriate to disturb the conclusions reached based on such facts. No doubt, rule of res judicata may not be applicable to the income-tax proceedings, but the rule of consistency demands that a position consistently taken shall not be disturbed unless there were significant change in facts. Insofar as reliance placed on Section 40(b) of the Act by the A.O. is concerned, there is nothing in that section to conclude that a partnership could not be formed by a karta of an HUF in his individual capacity with other persons. The same, in our opinion, would also apply where an individual who joins partnership in a representative capacity. It can always be considered that he was doing so in his individual capacity. This position has been reiterated by Hon ble Apex Court in the case of Bagyalakshmi & Co. (1964 (11) TMI 11 - SUPREME Court ), which has also been relied on by the Ld. CIT(Appeals). Considering the facts of the case, we are inclined to uphold the orders of the CIT(Appeals). - Decided against revenue

Summary

Issues:
- Disallowance under Section 40(b) of the Income-tax Act, 1961 for partnership firms with partners as legal entities.
- Validity of partnerships formed by individuals representing Hindu Undivided Family (HUF) and trusts.

Analysis:
1. The Revenue appealed against the deletion of disallowance under Section 40(b) of the Act for partnership firms with partners as legal entities. The Assessing Officer contended that only individuals could be partners in a partnership firm, not entities like HUF. This led to disallowance of interest and remuneration paid to partners. The CIT(Appeals) disagreed, citing judgments allowing HUF kartas to be partners. He held the firms as genuine and deleted the disallowance.

2. The main issue was whether partnerships formed by individuals representing HUF and trusts were valid. The Revenue argued that partnerships required at least one natural individual, relying on the Rashik Lal & Co. case. The assessees maintained that partnerships were genuine, having obtained registration in 1991-92. The ITAT Chennai examined the partnership deeds and relevant clauses. They noted that even if a person represented an HUF, they could be considered a partner in their individual capacity. The ITAT upheld the CIT(Appeals) decision, emphasizing the long-standing registration status and consistency in partnership formation. The appeals of the Revenue were dismissed.

3. The judgment highlighted that the partnership firm's formation between individuals representing HUF and trusts was valid. The ITAT Chennai emphasized the importance of individual capacity in partnerships, even when representing entities like HUF. The decision rested on the interpretation of relevant clauses in the partnership deeds and established legal precedents allowing such formations. The ITAT's ruling upheld the genuineness of the partnerships and rejected the Revenue's disallowance claim under Section 40(b) of the Act. The judgment reaffirmed the significance of individual capacity in partnership formations, ensuring consistency and adherence to legal principles.