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TMI Blog2023 (1) TMI 1462X X X X Extracts X X X X X X X X Extracts X X X X ..... as exempt income. As relying on case of Radha Krishna Jalan [ 2007 (8) TMI 42 - HIGH COURT , GAUHATI] we hold that the assessee is eligible for exemption u/s 10(2A) of the Act from the share of profit received from the partnership firm. No much weightage on the case law relied by the ld. DR. Accordingly, allow the appeal of the assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the judgement is as under;- 3. Petitioner claims that a partnership along with an LLP is not prohibited under the Partnership Act and that LLP is a legal entity, as defined under the LLP Act and it is separate from its partners. It has perpetual succession and is having a common seal. Under Section 14 it is capable of suing and being sued, on its registration. It is also capable of acquiring, developing or disposing of movable or immovable properties. Therefore, petitioner claims that the LLP is liable to be treated as a person and there cannot be any objection for registering a partnership with an LLP which is a person. It is stated that the said LLP has been given Ext.P4 Certificate of Incorporation. 4. The respondent has filed a statement reiterating his stand in the impugned order. It is stated that some of the provisions of the Limited Liability Partnership Act 2008 are inconsistent with that of the Indian Partnership Act, 1932, pertaining to the liability. According to the respondent, Section 25, 26 and 49 of the Indian Partnership Act, 1932 makes the partners to be jointly and severally liable with all the other partners and also severally liable for the acts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained in the Partnership Act and the definition of 'person' in Section 3(42) of the General Clauses Act arrived at a conclusion that a partnership cannot be formed between 3 firms, a Hindu Undivided Family and an individual. It was found that a firm is not a legal entity. 10. When the judgment in Duli Chand Laxmi Narayanan's case (supra) was rendered or when this Court rendered the judgment in Pulimood's case the Limited Liability Partnership Act had not come into force and hence there was no occasion to consider whether LLP can be a partner in a firm. Therefore, in order to examine the contentions raised by the learned Government Pleader it is necessary to have a look at the relevant provisions contained in the Indian Partnership Act, 1942 as well as in the LLP Act. Section 4 of Indian Partnership Act defines "partnership", "partner", "firm" and "firm name" which reads as follows: 4. Definition of "partnership", "partner", "firm" and "firm name".-"Partnership" is the relation between persons who have agreed to share the profit of a business carried on by all or any of them acting for all. Persons who have entered into partnership with one another are called ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its partners. (2) A limited liability partnership shall have perpetual succession. (3) Any change in the partners of a limited liability partnership shall not affect the existence, rights or liabilities of the limited liability partnership. The provisions of the Indian Partnership Act, 1932 (9 of1932) shall not apply to a limited liability partnership. But as per Section 4 of the Partnership Act, partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. 15. In the present case an individual agreed with an LLP to share the profits of the business. LLP is a body corporate, independent legal entity having a common seal and perpetual succession, capable of suing and of being sued. Once a partnership is formed the LLP, which is a partner would have to abide by the partnership Act. The respondent's objection is based on the liability of the partners of LLP, stating that the same is confined to the terms in the agreement. The extent of liability of limited liability partnership given in Section 27 reads as follows: 27. Extent of liability of limited liability partnership.-(1) A limited li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act done by any of them which would have been an act of the firm if done before the dissolution, until public notice is given of the dissolution: Provided that the estate of a partner who dies, or who is adjudicated an insolvent, or of a partner who not having been known to the person dealing with the firm to be a partner, retires from the firm, is not liable under this section for acts done after the date on which he ceases to be a partner. (2) Notices under sub-section (1) may be given by any partner. 18. The liability of partners of LLP and liability of the LLP as a partner under the Partnership Act would be different. The liability of partners in an LLP cannot have any relevance when the LLP itself becomes a partner, when it would be bound by the provisions in the Partnership Act. The liability of the LLP would be as in the case a company which joins a firm after entering into a partnership. 19. In the judgment in Dhuli Chand's case, the Apex Court was considering a case where the Income Tax Officer rejected an application submitted under Section 26A of the Income Tax Act on the ground that the deed of partnership consisted of three firms, one Hindu undivided family ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the assessee is not eligible to claim exemption u/s 10(2A) of the Act because it will amount to double deduction, first in the hands of the assessee as well as in the hands of the assessee's partners. He strongly relied on the judgment of coordinate bench of the Tribunal of Guwahati bench in the case of M/s Hotel Centre Point, Shillong vs. ITO in ITA No. 348-350/ Gau/2018, M.P. No. 3 to 5/Gau/2016 order dated 13.09.2019. 6. On the rejoinder the ld. AR submitted that there is no double deduction claimed by the assessee and case law relied by the ld. DR. is not applicable in the present facts of the case. 7. Considering the rival submissions and facts of the case, I notice that the assessee (LLP) is a partner in M/s. M.S. Enterprises and assessee has claimed exemption u/s 10(2A) of the Act on the share of profit received from M/s. M.S. Enterprises. The section 10(2A) of the Act grants exemption to a person being a partner of firm which is separately assessed as such, his share in the total income of the firm. The firm has been defined in section 2(23) of the Act, which includes LLP also. The Act is very clear that the LLP is to be treated as a firm. A firm can be a partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the firm. It is, therefore, clear that under the provisions of the 1922 Act, neither the unregistered firm nor the registered firm was subjected to double taxation. After the amendment in 1956, till 31-3- 1993, the unregistered firm continued to be assessed to tax as distinct entity as before and tax was levied on it. The partners though not liable to pay tax to their income had to include his income from the partnership in computing his total income for the purpose of determining the rate of tax to be applied in determining his tax liability on his other income. In the case of income of registered firm, there was double taxation. Firstly, tax on a nominal rate had to be paid by the registered firm and the Partners thereof were also taxed in their individual assessments as before in respect of their share of income from the firm. This position continued till 31-3-1993. The Finance Act, 1992, introduced wide changes in respect of assessment of income of the firms with effect from 1-4-1993. The changed position applicable to the assessment years 1996-97 and 1997-98 recognizes two kinds of firms, i.e., firm, assessed as firm under section 184 and firm assessed as association of pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n common ownership was not intended by Parliament to result in the misfortune of one being visited on the other. The legislative intention was to give to the meritorious its full reward...." (p. 324) 16. Again in Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 1882 the Supreme Court held as follows : "...A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally. In Broach District Cooperative Cotton Sales, Ginning & Pressing Society Ltd. v. CIT [1989] 177 ITR 418 (SC), the assessee, a co-operative society, claimed that the receipts from ginning and pressing activities was exempt under section 81 of the Income-tax Act. The question for interpretation was whether the co-operative society which carried on the business of ginning and pressing was a society engaged in 'marketing' of the agricultural produce of its members. The court held that the object of section 81(1) was to encourage and promote growth of co-operative societies and consequently, a liberal construction must be given to the operation of that provision. And since ginning and pressing was incidental or ancillary to the activities mentioned in section 81(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court held as follows : "A sub-partnership is, as it were, a partnership within a partnership ; it presupposes the existence of a partnership to which it is itself subordinate. An agreement to share profits only constitutes a partnership between the parties to the agreement. If, therefore, several persons are partners and one of them agrees to share the profits derived by him with a stranger, this agreement does not make the stranger a partner in the original firm. The result of such an agreement is to constitute what is called a sub-partnership, that is to say, it makes the parties to it partners inter se ; but it in no way affects the other members of the principal firm. Since the decision of the House of Lords in Cox v. Hickman [1860] 8 HL Cas 268, a sub-partner could not before the Partnership Act, 1890, be held liable to the creditors of the principal firm by reason only of his participation in the profits thereof, and there is nothing in that Act to alter the law in this respect." (p. 329) 20. The above judgment of the Apex Court lends support to the contention of Shri R.P. Agarwalla that sub-partnership has been recognized in India and registration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partnership with his share in the main partnership. Whereas in the former case, in view of section 29(1) of the Indian Partnership Act, the assignee gets no right or interest in the main partnership, except, of course, to receive that part the profits of the firm referable to the assignment and to the assets in the event of dissolution of the firm in the latter case, the sub-partnership, acquires a special interest in the main partnership. The case on hand cannot be treated as one of a sub-partnership, though in view of section 29(1) of the Indian Partnership Act, the trust as an assignee, becomes entitled to receive the assigned share in the profits from the firm not as a sub-partner because no sub-partnership came into existence but as an assignee of the share of income of the assignor-partner." (p. 17) 21. From the decisions referred to above, we may cull out the following principles relating to diversion of share of income of a partner at source by overriding title : (1)A sub-partnership is a partnership within a partnership in respect of the share of a partner in the main partnership. Formation of a sub-partnership does not affect the position of the partner in the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 535 (SC) has taken the view that the provisions of section 10(2A) is not applicable in the case of income diverted to the appellant-firm. The Tribunal was of the view that section 10(2A) is applicable only in case of a partner of the firm and the appellant-firm not being a partner of M/s. Rock International cannot get the exemption under section 10(2A). But the Tribunal failed to notice that the judgment in Dulichand Laxminarayan's case (supra), was rendered in the context of rule 2 of the Indian Income-tax Rules, 1922, which required that all the partners of a firm must sign the application for registration. Since a firm is not a partner under the Indian Partnership Act, 1932, the Tribunal held that going by the definition of "partnership" in the Partnership Act, the sub-partnership in the instant case could not enter into any partnership for the reason that one partner of such firm signing on behalf of the firm would not meet the requirement short of compliance with rule 2. The following situations better clarify the position : (1)A Hindu undivided family cannot be partner per se in a firm under the Partnership Act, though a "karta" representing it can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds and the said B.K. Rohatgi did not contribute anything out of his personal funds if any. In the circumstances, we are clearly of the opinion that the managing director's remuneration received by B.K. Rohatgi was, as between him and the Hindu undivided family, the income of the latter and should be assessed in its hands. . . ." (p. 130) Charandas Haridas' case (supra) : "In our opinion, here there are three different branches of law to notice. There is the law of partnership, which takes no account of a Hindu undivided family. There is also the Hindu law, which permits a partition of the family and also a partial partition binding upon the family. There is then the income-tax law, under which a particular income may be treated as the income of the Hindu undivided family or as the income of the separated members enjoying separate shares by partition. The fact of a partition in the Hindu law may have no effect upon the position of the partner, insofar as the law of partnership is concerned, but it has full effect upon the family insofar as the Hindu law is concerned. Just as the fact of a karta becoming a partner does not introduce the members of the undivided family ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the income-tax authorities. The effect thereof, according to Shri Agarwalla, is that for the purpose of assessment, the sub-partnership has to be deemed to be a partner of the main partnership. It is because once the sub-partnership becomes the real owner of the income for the purpose of assessment despite the provisions of the Partnership Act, it would be imperative to assume all those facts on which alone the fiction operates. In CIT v. S. Teja Singh [1959] 35 ITR 408 (SC) at page 413, it is held-"It is a rule of interpretation well-settled that in construing the scope of legal fiction it would be proper and even necessary to assume all those facts on which alone the fiction can operate". Similarly, in Assam Bengal Carriers Ltd. v. CIT [1999] 239 ITR 862, 886 (Gauhati) it is held-"When a legal fiction is created for an obvious purpose full effect of it is to be given-there is no half way house". 26. Let us consider the anomalous situation that would emerge in case a sub-partnership is not deemed to be a partner in respect of assessment of its income diverted from a partner in the main partnership by overriding title. With effect from April 1, 1993, the inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... partnership. But the total income of sub-partnership has been assessed at Rs. 2,89,09,158. 28. This anomalous and illogical consequence has arisen because of refusal to consider M/s. Radha Krishna Jalan, the appellant-firm as a partner of the main partnership firm M/s. Rock International for the limited purpose of section 10(2A) of the Income-tax Act, 1961. This is evidently not only contrary to the facts available on record, but also to the scheme of the Income-tax Act as well as the principles of diversion of income by overriding title. This refusal has ended in double taxation. The legal fiction created for nonapplication of the provisions of section 10(2A) on the ground that the appellant-firm is not a partner of the main partnership has ushered in an absurd situation contrary to the facts as well as the provisions of the Act. The note of discord has to be tuned with the legislative intent as reflected in the scheme of the Act. To obviate this absurdity, we hold that a sub-partnership which is in receipt of the share of profit of a partner in the main partnership, has to be deemed to be a partner in the main partnership for the limited purpose of section 10(2A). Else, the abs ..... X X X X Extracts X X X X X X X X Extracts X X X X
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