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TMI Blog2019 (10) TMI 1170X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of Sec.263 of the 1961 Act and rightly cancelled assessment order dated 24.11.2016 passed by the AO u/s 143(3) by holding the same to be erroneous so far as is prejudicial to the interest of Revenue as the AO did not made any inquiry,verifications and investigation before allowing interest payments paid to HUF as business deductions. PCIT has rightly invoked extraordinary revisionary powers as are enshrined in Section 263 as no inquiry, verifications and ivestiigations were made by the AO before allowing deduction of interest expenditure payments to HUF. It is not brought on record by the AO whether Karta is partner in his individual capacity albeit representing HUF or instead HUF is partner in the assessee firm directly - Decided against assessee. - ITA No.1648/Chny/2019 - - - Dated:- 24-10-2019 - Shri N.R.S. Ganesan, Judicial Member And Shri Ramit Kochar, Accountant Member For the Appellant : Mr. M.Abishek, CA For the Respondent : Ms.R.Anitha, JCIT ORDER PER RAMIT KOCHAR, ACCOUNTANT MEMBER: This appeal has arisen against the revisionary order dated 29th March 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments made to HUF are hit by Sec.40(b) of the 1961 Act and also whether the assessee firm has lost its status of the partnership firm by holding as under: 4. Decision - I have carefully considered the assessment order and the relevant miscellaneous record, apart from the oral and written submissions of the ARs. The fact that Shri Ashok Fomra (HUF) is a partner in the assessee-firm is not disputed, as a perusal of the return of income reveals the existence of the following partners: Sr.No. Name (S/Shri) Percentage of Share PAN 1 Ashok Kumar Fomra (HUF) 25% AAAHA1354B 2 Smt.Vijayshree Fomra 25% AAAPF2425L 3 Suderson Fomra 25% AAAPF242M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is true that the AO while framing scrutiny assessment u/s 143(3) of the 1961 Act did not specifically asked this question as to whether HUF is partner in assessee firm or Shri Ashok Kumar Fomra is partner in assessee firm in his individual capacity representing HUF, as no enquiry to that effect was made by the AO. The Ld.DR, on the other hand, submitted that the AO has not made any inquiry and no verification was done by the AO as to this vital aspect and hence, the assessment order dated 24.11.2016 passed by the AO is erroneous so far as is prejudicial to the interest of the Revenue. It is submitted by learned DR that learned PCIT rightly cancelled the assessment order passed by the AO and now enquiry can be made by the AO in pursuance to revisionary order passed by ld. PCIT, wherein speaking order can be passed by the AO. 3. We have considered rival contentions and perused the material on record. We have observed that the assessee is a partnership firm having four partners, the details are as under: Sr.No. Name (S/Shri) Percentage of Share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (5) Rashiklal P. Rathor Popatlal is Rashiklal's father. On 1.4.1967, 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 Karta of a smaller HUF. On 17.10.1978, there was an agreement between Rashiklal and the firm Rashiklal and Company that Rashikalal will receive 37 paise per tonne of mineral sold by the firm. In the assessment year 1980-81 Rashiklal received a sum of ₹ 28579 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 HUF which is the partner of the firm. Since the payment was not made to the partner, Section 40(b) of the Income Tax Act was not attracted. The amount of commission paid to Rashiklal could not be included in the income of the firm. On further appeal by the Revenue, the Tribunal held that Section 40(b) of the Income Tax Act clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cribing the individuals constituting the firm. An HUF directly or indirectly cannot become a partner of a firm because the firm is an association of individuals. 5. In the case of Dulichand Laxminarayan v. Commissioner of Income Tax, 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 an HUF 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 266 of the Income Tax Act. The application was signed by the aforesaid five individuals. This Court held that there could no question of granting registration to a partnership purporting to be one between three firms, an HUF and an individual. In coming to this conclusion, this Court relied on the provisions of Indian Partnership Act wherein, 'partnership', 'partner', 'firm' and 'firm name' were defined in the following manner : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xed 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. 7. An HUF 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 an HUF. In law, an HUF can never be a partner of a partnership firm. Even if a person nominated by the HUF joins a partnership, the partnership will be between the nominated person and the other partners of the firm. Having regard to the definition of partnership and partners and in view of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 account 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 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 consent of all the partners. Every partner has a right to have access to and to inspect and copy any of the books of the firm. All these provisions will apply to a partner who represents another body. The HUF who has a nominee partner in a firm has neither any right nor any obligation under the provisions of the Partnership Act. Section 13 provides that a partner is not entitled to receive remuneration for taking part in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be a remuneration or commission paid to the HUF. 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. 10. 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. Commissioner of Income Tax, (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 to any partner of the firm. Explanation II was added to Section 40(b) specifically providing that where an individual was a partner in a firm in a representative capacity for and on behalf of any other person, the interest paid by the firm to such individual shall not be taken into account for the purpose of Clause (b) of Section 40. 11. This Court held that in view of this Explanation, when a Karta of an HUF had joined a fir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... '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, an HUF not being a 'person' cannot be a partner, but the payment of commission to the nominee partner will tantamount to payment to the HUF 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 regarded as partners. The position of the other members is no higher than sub-partnership. 15. The application for registration of a firm has to be made under Section 184 of the Income Tax Act. It is specifically provided that: (1) the partnership must be evidenced by an instrument in writing; (2) the individual shares of partners must be specified in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive 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 an HUF. 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 firm nor its partners can evade the tax law on the pretext that although in law he is a partner but in reality he is not so. He may have to hand over the money to somebody else. That may be his position qua a third party. But the firm has nothing to do with it. It has paid the commission to o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate dispute between rival parties. Keeping in view entire factual matrix of the case before us, in our considered view, the ld.PCIT has rightly invoked his revisionary powers under provisions of Sec.263 of the 1961 Act and rightly cancelled assessment order dated 24.11.2016 passed by the AO u/s 143(3) by holding the same to be erroneous so far as is prejudicial to the interest of Revenue as the AO did not made any inquiry,verifications and investigation before allowing interest payments paid to HUF as business deductions. Thus, in our considered view, the ld.PCIT has rightly invoked extraordinary revisionary powers as are enshrined in Section 263 of the 1961 Act as no inquiry, verifications and ivestiigations were made by the AO before allowing deduction of interest expenditure payments to HUF. It is not brought on record by the AO whether Karta is partner in his individual capacity albeit representing HUF or instead HUF is partner in the assessee firm directly. As we have seen above vide Hon ble Supreme Court judgment in Rashik Lal Company(Supra), it will have significant bearing on allowability of claim of aforesaid expenses as business deduction keeping in vi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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