assessment of firm, Income Tax

[Ritesh Jha]

can individual,firm and company be partners???as firm cannot be partner ,still there are two persons(which are considered for the purpose of partnership act as partners) in this case in ratio of 3:2:1.the 1/6 share is for partnership firm ,so whther this body can be assessed as firm??????

Posts / Replies

[ROHAN THAKKAR]

Dear Sir,

As per section 4 of Indian Partnership Act, 1932, 'partnership' is the relation between  two or more persons who have agreed to share the profits of a business carried on by all or any one of them acting for all. - - Under partnership law, a partnership firm is not a legal entity, but only consists of individual partners for the time being. It is not a distinct legal entity apart from the partners constituting it - Malabar Fisheries Co. v. CIT (1979) 120 ITR 49 = 2 Taxman 409 (SC).

The partnership is a relation between two or more persons - the person can be either natural person or a legal person. Thus, individual is a natural person and company is a creature of statue ie., legal person. Hence, a partnership is possible with an individual and a company.

However, partnership firm is not a seperate entity in the eyes of the law.

Thus, whether the assessee may be assessed as a firm or not depends on the test of mutality. It may be assessed as a firm or may also be assessed as AOP. It depends on the constitution.

 

Regards,

Rohan Thakkar

[Ritesh Jha]

Thank u Sir,but i didnt get your point on "it depends upon constitution".please elaborate on the same with an example.In my above example there are two persons :1)individual and 2)company sharing profits carrying on business in some ratio ,can it be firm under income tax ????thank you

 

Regards,

Ritesh Jha

 

[ROHAN THAKKAR]

Dear Sir,

The same can be assessed as a firm. However, please check whether the test of partnership called 'mutual agency' is satisfied or not. If individual can bind the company as well as company can bind an individual, then yes it can be assessed as a firm.

If the test of partnership gets satisfied, then yes, it can be assessed as a partnership becuase it contains two persons

• Individual - Natural person &
• company - Legal Person

Regards,

Rohan Thakkar

[Ritesh Jha]

Sir I m completely getting your point but in my example there is also a firm which is a partner in a body consisting of (individual,company and a firm),firm cannot be partner but the remaining two (individual and company )can be partners .so as per sec 4 of indian partnership act ,the minimum persons required to form partnership is two,so just because firm is also sharing profits along with company and individual ,will it be assessed otherwise than as firm???Thank You

Regards,

Ritesh Jha

[ROHAN THAKKAR]

Dear Sir,

It will be assessed as a firm with individual and company as a partners. However, the interest and remuneration paid to so called firm partner (not recognised in the eyes of the law) will not be allowed read with section 40(b) of the Income Tax Act

Regards,

Rohan Thakkar

[Ritesh Jha]

Thank you very much Sir .NOw i m clear on the point also i wanted to know 1)Will transfer of income from firm by partner to an assignee be treated as subpartnership and thus,will the same be exempt in hands of assignee???

2) Suppose the partnership firm(comprising of three partners A,B,C ; PSR=1:1:1) has profit of 330000 in py2010-11,cf loss is 300000(PSR =1:1:1),one of them retired in the current year on 31/12/2010,so his share of profit for the current year becomes 82500.Now loss of the retired partner cant be carried forward but can the excess loss of retired partner i.e. 17500(100000-82500) of other partners be set off against profit of other remaining partners in the current year???????

3..Also whether sec 78 would apply to change in constitution due to change in psr as the wordings used in sec 78 is retired or deceased partner??

All the above questions are independent.

Regards,

Ritesh Jha