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TMI Blog1939 (3) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... ered in the course of business by the assessee-firm, and whether such losses cannot be allowed in the course of assessment. (3) Whether the sum of ₹ 51,000 interest paid to Bihari Lal Ram Charan in the 'previous year' can, in law and in view of the assessee's account books, be taken into consideration in the assessment year. It is agreed on all hands that the present case is governed not by the provisions of the Indian Partnership Act of 1932 but by the Indian Contract Act and reference to the Partnership Act in question No. (1) is, therefore, erroneous. The facts that led to the reference are as follows:- The assessee firm carries on cloth business in the city of Cawnpore and its partners are:- Extent of share. (1)Messrs Behari Lal Ram Charan ... 7/16 (2)Chandrika Prasad Ram Swarup ... 4/16 (3)Mullan Dalal ... 4/16 (4)Mutsaddi Lal ... 1/16 It is stated in the reference that the first partner, Messrs. Behari Lal Ram Charan, is a firm and is the principal financier of the assessee firm. The assessee firm is a partner and owns a six annas share in another firm known as Bulaqi Das Ram Gopal, which firm also carries on cloth business. In response to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons, which it is unnecessary to state, was rejected by the Assistant Commissioner. Thereafter two applications, one for review under Section 33 and the other for statement of case to the High Court under Section 66 (2) of the Income-tax Act, were made by the assessee firm to the Commissioner of Income-tax who rejected both the applications. Then on May7 4, 1936, the assessee firm applied to this Court under Section 66 (3) of the Act praying that the Commissioner be called upon to state the case. This application was allowed by this Court with the result that the present reference has been made by the Income-tax Commissioner. Mass of case law has clustered round question No. (1) referred to this Court. "Partnership" is defined by Section 239 of the Indian Contract Act as "the relation which subsists between persons who have agreed to combine their property, labour or skill in some business, and to share the profits thereof between them," and it is further provided by that section that "persons who have" entered into partnership with one another are called collectively a firm." It is manifest from this provision that the partnership can be the ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as a contract entered into by the partners. A firm name is a mere alias for the collective names of the partners, and, as such, a contract entered into in the name of a firm is really a contract entered into by all the partners thereof. To this effect is the decision of this Court in Firm Brij Kishore Ram Sarup v. Sheo Charon Lal [1937] ALJ 1328. It was observed in that case that though a firm as such cannot enter into partnership with other individuals, "at the same time, it must be held that a firm is only an association of persons who have no corporate capacity and that if a partnership is in fact entered into and if all the partners of the firm are consenting parties to the agreement of partnership or are represented by a duly authorised person when the contract of partnership is concluded between the firm and others, or subsequently ratify it, a partnership will come into existence, though it will not be regarded as a partnership of which a firm as such is a partner, Such a partnership will have for its members all the partners of the partner firm and the others." To the same effect is the decision of the Calcutta High Court in Kader Bux Omer Hyat v. Bukt Behari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of that partnership. The mere illegality of the agreement relating to the larger partnership cannot entitle the income-tax department to ignore the fact that the assessee firm did as a matter of fact suffer loss in the transaction in question. The question of the legality or illegality of transactions entered into by a firm is totally irrelevent in calculating the net profits or the loss incurred by the firm in a particular year. For example if the assessee firm had entered into a wagering contract which resulted in huge loss, it would not have been open to the income-tax department to decline to take that loss into account simply because the contract by way of wager was void in law. The income assessable to tax is the actual income of an individual or of a firm irrespective of the manner in which the income was derived. Legality or illegality of transaction culminating in profiit or loss is, therefore, foreign to the scope of an enquiry into the income of an individual or of a firm for the purpose of taxing the same. I shall, therefore, answer the second question in the negative. In the view that I have taken as regards question No, (1) it must be held that the partners of Behar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 1 and that they will distribute profits and be responsible for losses in the same proportion. Say that they decide that it would be advantageous for them in some particular town to carry on their business in partnership with two other people D and E. Say that they decide that they will contribute to this new firm from the funds which they have jointly invested in their own partnership and say that the agreement entered into by them with D and E is that they will jointly receive one-third of the profits of the new firm and that D and E will each receive one-third of the profits. There is no legal bar to such an agreement. The result would be that one-third of the profits of the new firm would go to A, B and C jointly and according to the terms of the original contract between A, B and C those profits would be divided between them in the proportions of 3, 2 and 1. Under the law of partnership all property acquired out of the partnership assets becomes part of those assets. There can be no doubt then that the profits in the new firm would be part of the assets of the original firm of which A, B and C are partners, because those profits would accrue from the investment of the partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as Bulaqai Das Ramgopal, and the first question which we have got to decide is :- (1) Whether the partnership between Chandrika Prasad Ram Swarup and Bulaqidas Ramgopal was a valid a partnership in law in view of the provisions of the Partnership Act of 1932? On a discussion of the facts of the case it became clear that the reference to the Partnership Act of 1932 was inaccurate as the transactions with which we are concerned in the present case took place before the Partnership Act of 1932, and the Act with which we have to deal is the Indian Contract Act, 1872. There are, however, no provisions of the Partnership Act of 1932 which would bring about any material change in the answer which, I think, ought to be given in this connection. It has been held in a number of cases that a firm as such is not a person or a legal entity and therefore a firm as such cannot enter into a partnerehip with another firm as such, see Basanti Bibi's case (supra) , Jai Dayal Madangopal's case (supra) , Parbhu Lal Pearey Lal's case (supra), U.P. Naraindas Lachmanda's case (supra) , Hakmaji Meghaji's case ( supra), Sheodoyal Khemka's case (supra) , Ram Chand-Tirath Ram's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm invested some of its funds in the partnership with Bulaqi Das Ramgopal and sustained some losses in the year the income of which has got to be ascertained for the purposes of assessment. The question is whether such losses can in law be treated as the losses suffered in the course of business by the assessee firm and whether such losses can be allowed in the course of assessment. Sulaiman, C.J. in the matter of Jai Dayal Madan Gopal observed. "If………..the money belonged to the Benares firm and was invetsted by the Benares firm as such and profits on the amount had been received back by the Benares firm, the capital continues to belong to the Benares firm, and the income earned thereon is the property of the Benares firm, although the Benares firm cannot in the eye of the law have the status of a partner in the other firms." (P-852) In that case a certain firm of Benares had entered into partnership with some other firms and the learned Chief Justice was of the opinion that the income earned by the Benares firm in such a partnership could be a part of its own income, and if is clear that if the Benares firm had sustained certain losses the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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