9911796707
TMI Blog1997 (12) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... ome of the assessee ?" The assessee is a partnership firm carrying on a number of businesses including sale and purchase of various commodities as well as mining. The partners of the firm were : (1) Popatlal Devram, (2) Jayantilal Jagmal, (3) Pragji Devram, (4) Ratilal Odhavji, (5) Rashiklal P. Rathor. Popatlal is Rashiklal's father. On April 1, 1957, there was an oral partition of the share of Popatlal in the firm amongst Popatlal, his wife and his two sons including Rashiklal. The assets of Rashiklal continued to be invested in the partnership firm. Rashiklal was the karta of a smaller Hindu undivided family. On October 17, 1978, there was an agreement between Rashiklal and the firm, Rashiklal and Company, that Rashiklal will receive 37 paise per tonne of mineral sold by the firm. In the assessment year 1980-81, Rashiklal received a sum of Rs. 28,579 as commission. The firm claimed deduction of this amount from its income. The claim was negatived by the Income-tax Officer. The Appellate Assistant Commissioner allowed the appeal holding that the commission was paid to Rashiklal in his individual capacity and not as karta of the smaller Hindu undivided family, which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the firm to a non-partner or a partner who had joined the firm in a representative capacity, will not fall within the mischief of section 40(b). We are unable to uphold this contention for a number of reasons. A firm is a compendious way of describing the individuals constituting the firm. A Hindu undivided family directly or indirectly cannot become a partner of a firm because the firm is an association of individuals. In the case of Dulichand Laxminarayan v. CIT [1956] 29 ITR 535, it was held by a Bench of three judges of this court that a firm is not a " person " and as such was not entitled to enter into a partnership with another firm or a Hindu undivided family or an individual. In that case, an individual, a joint family and three firms purported to enter into a partnership. The agreement of partnership was signed by the individual partner, the karta of the joint family and one partner each of the three firms. The firm applied for registration under section 26A of the Indian Income-tax Act. The application was signed by the aforesaid five individuals. This court held that there could be no question of granting registration to a partnership purporting to be one between t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oregoing discussion that the law, English as well as Indian, has, for some specific purposes, some of which are referred to above, relaxed its rigid notions and extended a limited personality to a firm. Nevertheless, the general concept of partnership, firmly established in both systems of law, still is that a firm is not an entity or ' person ' in law but is merely an association of individuals and a firm name is only a collective name of those individuals who constitute the firm." The view of this court was that when section 4 of the Partnership Act spoke of " persons " who had entered into partnership with one another it could only be individuals and not a body of persons. A body of persons like a firm could not enter into partnership with other individuals. A Hindu undivided family cannot be in a better position than a firm in the scheme of the Partnership Act. The reasons that led this court to hold that a firm cannot join a partnership with another " individual " will apply with equal force to a Hindu undivided family. In law, a Hindu undivided family can never be a partner of a partnership firm. Even if a person nominated by the Hindu undivided family joins a partnership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... minee of a Hindu undivided family, the commission is not paid to the Hindu undivided family. It is paid by the firm to one of its individual partners. The partner may have to account for the monies received from the firm to another person or another firm or an association of persons or a Hindu undivided family. But that will not alter the fact that commission was paid by the firm to one of its partners. The Partnership Act contains various provisions regulating the relationship between partners. The partners are bound to carry on the business of the firm to the greatest common advantage, to be just and faithful to each other and to render true accounts and true information of all things affecting the firm to any partner or his legal representative. Every partner has a right to take part in the conduct of the business. Every partner is bound to attend diligently to his duties in the conduct of the business. Any differences arising as to ordinary matters connected with the business may be decided by a majority of the partners and every partner shall have the right to express his opinion before the matter is decided. No change can be made in the nature of the business without the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here is such a special contract. Any commission paid by a firm to its partner will not be permitted as deduction from the business income of the firm. If a claim is made by a partner that he is representing a Hindu undivided family or any other body of persons then the position in law will not be any different. The Hindu undivided family is not and cannot be a partner in a partnership firm. The remuneration or the commission that is paid to the partner cannot be claimed to be a remuneration or commission paid to the Hindu undivided family. The partner may be accountable to the family for the monies received by him from the partnership. But in the assessment of the firm, the partner cannot be heard to say that he has not received the commission as a partner of the firm but in a different capacity. We were referred to two decisions of this court on this point, Brij Mohan Das Laxman Das v. CIT [1997] 223 ITR 825 and Suwalal Anandilal Jain v. CIT [1997] 224 ITR 753. Both the cases dealt with payment of interest to a partner who had joined the firm in a representative capacity. Section 40(b) prohibits deduction on account of payment of interest, salary, bonus or remuneration by a firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anger, become partners. The manager, no doubt, is accountable to the family, but the partnership is exclusively one between the contracting members including the manager and the stranger. Such a partnership would be governed by the provisions of the Indian Partnership Act, 1932, with the result that if the manager died, the partnership would be dissolved on his death." Under the Income-tax Act, 1961, " firm ", " partner " and " partnership " have been given the same meaning as assigned to them in the Partnership Act. But the expression " partner " has been extended to include any person who, being a minor, has been admitted to the benefits of a partnership. Therefore, there is no scope for any argument, that even though under the Indian Partnership Act, a Hindu undivided family not being a " person " cannot be a partner, the payment of commission to the nominee partner will be tantamount to payment to the Hindu undivided family and, therefore, such payment will not come within the mischief of section 13 of the Partnership Act or section 40(b) of the Income-tax Act. To repeat what has been stated in Mulla's Hindu Law, only the members who have entered into partnership are to be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rights against the other partners nor the other partners can do so against the said third parties." This judgment given by a Bench of three judges of this court is a complete answer to the argument advanced on behalf of the assessee. A partner does not act in a representative capacity in the partnership. He functions in his personal capacity like any other partner. The provisions of the Partnership Act and the Income-tax Act relating to partners and partnership firms will apply in full force in respect of such a partner. If any remuneration is paid or a commission is given to a partner by a partnership firm, section 40(b) will apply even if the partner has joined the firm as a nominee of a Hindu undivided family. The Hindu undivided family or its representative does not have any special status in the partnership Act. Although the partnership firm is not a legal entity, it has been treated as an independent unit of assessment under the Income-tax Act. The assessment of a firm will have to be made strictly in accordance with the provisions of the Income-tax Act. The law has to be taken as it is. Section 40(b) applies to certain payments made by a firm to its partners. Neither the f ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
