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TMI Blog2009 (1) TMI 297X X X X Extracts X X X X X X X X Extracts X X X X ..... a net loss of Rs. 1,01,819 under the head profits and gains of business or profession. In respect of AO's query regarding applicability of provisions of s. 14A of the Act in regard to assessee's claim of set off of such expenses, it was contended that the major part of total expenditure of Rs. 14,27,819 was incurred as conferences, seminars and Court sessions abroad which were deductible from business income and since the assessee had business income as aforesaid and salary received from partnership firm was also assessable as a business income under s. 28(v) of the Act, hence, provisions of s. 14A were not applicable. The assessee also stated that the expenditure incurred had nothing to do with the tax-free income in the form of share of profit from the partnership firm and if the assessee would have earned only share of profit from the firm, perhaps, only then, provisions of s. 14A applied. The assessee also submitted that it had earned Rs. 15,075 for sessions of International Court of Arbitration at Paris and which has been offered as income. The AO, however, held that the explanations given by the assessee were not acceptable and since the assessee did not allocate expenses ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to the extent incurred by the partner, in the partner's hand. The assessee also contended that the tax on an income of the firm was by the partners as compendium and the firm on its income had paid taxes, hence, it could not be said that share of profit was exempt from tax. For this proposition, the assessee relied on the following judicial decisions: (i) Mafatlal Holdings Ltd. vs. Addl. CIT, ITA No. 2935/Mum/2002, dt. 23rd April, 2003 [reported at (2004) 85 TTJ (Mumbai) 821-Ed.]; (ii) Dy. CIT vs. S.C. Investments & Industries Ltd. (2004) 84 TTJ (Kol) 143 : (2004) 89 ITD 44 (Kol); (iii) Asstt. CIT vs. Premier Consolidated Capital Trust (I) Ltd. (2004) 83 TTJ (Mumbai) 843. The assessee also relied on the decision of the Hon'ble Bombay High Court in the case of Phiroze H. Kudianavala vs. CIT 1978 CTR (Bom) 374 : (1978) 113 ITR 873 (Bom). The learned CIT(A) however confirmed the action of AO. The relevant findings of the learned CIT(A) are as under: "I have considered the arguments of appellant and the contentions of the AO. The fact that appellant has earned the share of profit of Rs. 40,25,600 which is exempt under s. 10(2A) of IT Act is not disputed. It is also not disputed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be said that these incomes were exempt from tax. The learned counsel placed reliance on the decision of Hon'ble Supreme Court in the case of CIT vs. R.M. Chidambaram Pillai 1977 CTR (SC) 71 : (1977) 106 ITR 292 (SC) and contended that in this case the Hon'ble Supreme Court had held that salary paid to partners out of the portion of agricultural income of the firm was to be treated as of the nature of agricultural income as the firm was not a legal person even though it had some attributes of personality and even in income-tax law, the firm was a unit of assessment by special provisions but not a full person, hence, partnership firm was not independent from its partners and also salary received by a partner retained its character of profit of the firm. The learned counsel further contended that there was a difference between shareholder vis-a-vis company and partner vis-a-vis firm as far as legal personality was concerned, hence, in case of dividend declared by a company, it could be said that the dividend distribution tax paid by the company could not be said to have been paid by the shareholder whereas in case of partnership firm which was not a separate entity and the profit bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip firm was a separate entity under the provisions of s. 2(31) of the Act and, hence, tax paid by the firm on the profits could not be said to be an income which was not exempt from tax in the hands of the partner. He also contended that assessee received share in the profit which was exempt in its hands under the provisions of s. 10(2A) of the Act, hence, provision of r. 8D was applicable. The learned Departmental Representative further contended that the AO, in the assessment order, had observed that the assessee himself vide its letter dt. 22nd Jan., 2003 had stated that because of study tour undertaken by the assessee, the partnership firm had earned a sum of Rs. 1.07 crores, hence, the expenditure which was claimed by the assessee was directly connected with the income earned by the assessee from such firm and the AO rightly disallowed the same in the proportion of share of profit to the total income earned by the assessee from the firm. 7. We have considered the submissions made by both parties, material on record and orders of authorities below. The first question which is to be decided by us is whether partnership firm is merely a compendium of partners having no independ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Judge Bench decision of the Hon'ble Supreme Court in the case of CIT vs. A.W. Figgies & Co. & Ors. (1953) 24 ITR 405 (SC). In this case, the issue before the Hon'ble Supreme Court was that whether a firm which had been reconstituted due to change in partners on a number of occasions earlier was entitled to relief under s. 25(4) of Indian IT Act? The Tribunal, in this case had held that for the purposes of IT Act, the firm was to be regarded as having a separate juristic existence apart from the partners carrying on the business and that the firm could be carried on even if there was a change in its constitution. The Hon'ble Calcutta High Court also confirmed the decision of the Tribunal. The Hon'ble Supreme Court reviewed the provisions of s. 25(4) of the Act and observed that this section did not regard a mere change in the personnel of the partners as amounting to succession and disregarded such a change and, therefore, natural consequence of such provision was that a mere change in constitution of partnership did not necessarily bring into existence a new assessable unit or a distinct assessable unit and in such a case there was no devolution of the business as a whole. Therea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... humble opinion, the Hon'ble Supreme Court recognized the dichotomy between the general partnership law and IT Act and if a situation was taken care of by specific provisions of IT Act, then, such provisions were to prevail over the provisions of general law. 8.3 Again, in the case of Dulichand Laxminarayan vs. CIT (1956) 29 ITR 535 (SC), the Hon'ble Supreme Court (three Judge Bench) held that a firm was not a person and as such it was not entitled to enter into a partnership with another firm or HUF or individual, hence, a partnership purporting to be one between three firms, an HUF family business and an individual was not entitled for registration under s. 26A of Indian IT Act, 1922 read with r. 2. The relevant findings are as under: "Some of the mercantile usages relating to a firm have, however, found their way into the law of partnership. Thus, in keeping accounts, merchants habitually show a firm as a debtor to each partner for what he brings into the common stock and each partner is shown as a debtor to the firm for all that he takes out of that stock. But under the English Common Law, a firm, not being a legal entity, could not sue or be sued in the firm name or sue or b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an, be totally repugnant to the subject of partnership law as they know and understand it to be. It is in this view of the matter that it has been consistently held in this country that a firm as such is not entitled to enter into partnership with another firm or individuals. It is not necessary to refer in detail to those decisions many of which will be found cited in Jabalpur Ice Manufacturing Association vs. CIT, to which a reference has already been made. We need only refer to the case of Bhagwanji Morarji Goculdas vs. Alembic Chemical Works Co. Ltd. & Ors., where it has been laid down by the Privy Council that Indian law has not given legal personality to a firm apart from the partners. This view finds support from and is implicit in the observations made by this Court in CIT vs. A.W. Figgies & Co. & Ors. (1953) 24 ITR 405 (SC)." In this case, the Hon'ble Supreme Court found that as per s. 2(6B) of the IT Act, 1922, the terms "firm" and "partnership" had same meaning respectively as they had in the Indian Partnership Act, 1932 and, thereafter, the Hon'ble Supreme Court after considering the provisions of Indian Partnership Act, 1932 and the General Clauses Act, 1897, held tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pon dissolution. Counsel for the Revenue referred us to a decision of the Karnataka High Court in Addl. CIT vs. M.A.J. Vasanaik (1979) 116 ITR 110 (Kar), where that Court has taken the view that when individual assets are brought into a partnership firm so as to constitute the partnership property, there is a transfer of interest of the individual to the partnership property, and ss. 34(3)(b) and 155(5) of 1961 Act are attracted. In the first instance that. decision dealt with the converse case and it does not necessarily follow on a parity of reasoning that the distribution, division or allotment of partnership assets to the partners of a firm upon its dissolution would amount to a transfer of assets as was sought to be contended by the counsel for the Revenue. Secondly, it is unnecessary for us to express any opinion on the correctness or otherwise of the view taken by the Karnataka High Court in that case. There is yet another reason for rejecting the contention of the counsel for the Revenue and that is that the second condition required to be satisfied for attracting s. 34(3)(b) cannot be said to have been satisfied in the case. It is necessary that the sale or transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the firm; it is on that basis that the provisions of the tax law are structured into a scheme providing for the assessment of partnership income. We do not think the principle goes beyond the purposes of that scheme. It does not confer a corporate personality on the firm. Beyond the area within which that principle operates, the general law, that is to say, the partnership law, holds undisputed domain. Now, in every case when the assessee professes that it is a partnership firm and claims to be taxed in that status, the first duty of the assessing offer is to determine whether it is, in law and in fact, a partnership firm. The definition in the tax law defines an 'assessee' or a 'dealer' as including a firm. But for determining whether there is a firm, the assessing offer will apply the partnership law, subject, of course, to any specific provision in that regard in the tax law modifying the partnership law. If the tax law is silent, it is the partnership Law only to which he will refer. Having decided the Legal identity of the assessee that it is a partnership firm, he will then turn to the tax law and apply its relevant provisions for assessing the partnership income." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity. In that respect it is distinct even from its partners: CIT vs. A.W. Figgies & Co. & Ors. (1953) 24 ITR 405 (SC). As an assessable entity it is also distinct from a HUF, which in itself is regarded as a separate unit of assessment under s. 3: Raja Bejoy Singh Dudhuria vs. CIT (1933) 1 ITR 135 (PC). For the purposes of the question before us it recks little that the very individuals who constituted the HUF now constitute the appellant firm. Depreciation allowance was allowed to the HUF in its assessment proceedings, it was a step taken in determining the taxable income of the family. The depreciation allowed to the family cannot be regarded as depreciation allowed to the appellant. We must ignore entirely the circumstance that depreciation has been allowed to the HUF in the past." 8.12 Further, the Hon'ble Bombay High Court in the case of CIT vs. Kaluram Puranmal (1979) 12 CTR (Bom) 225 : (1979) 119 ITR 564 (Bom) while dealing with the issue of accessibility of profit arising from transfer of the shares by the firm to the partners, held as under: "It appears to us that it is not proper for us to go into the interesting questions raised by Mr. Desai as they do not arise from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of alleged notional profit as was done by the ITO. We are of the opinion that the transaction between the firm and its partners cannot be looked at as the Tribunal has done and that by itself is no ground for setting aside or striking down the additions made by the ITO. However, merely because shares having a market price higher than the purchase price have been distributed amongst the partners at the average purchase price it will not make the alleged notional or fictional profit automatically taxable in the hands of the assessee. This can only be done if there is necessary factual basis for coming to such conclusions as were urged by the Departmental Representative before the Tribunal or similar ones; and even then the contentions of the assessee earlier indicated would be required to be considered which we have not done since they do not arise from the order of the Tribunal. The same will be required to be considered by the Tribunal when the case goes back to it." From the perusal of the above observations, it is noted that the Hon'ble Bombay High Court, in principle, affirmed the position that partnership firm was to be treated independent of its partners and there could be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the firm on dissolution or otherwise there resulted no gain exigible to tax, however, by incorporating s. 45(2), 45(3) and 45(4), the legislature has declared its intention in clear terms that partners and the firm are two independent entities not only for the purposes of assessment but also for the purpose of determining the charge of income-tax on the transactions entered into between them. Similarly, from asst. yr. 1993-94 partnership firms have been given a corporate personality in a limited sense by making necessary amendments in the provisions of ss. 10(2A), 28(v), 40(b) and relevant procedural sections which also conclusively prove that partnership firm as such is independent from its partners as far as provisions of IT Act, 1961 are concerned. In this regard, we consider it to reproduce the relevant portions of Circular No. 636, dt. 31st August, 1992 [(1992) 107 CTR (St) 1 : (1992) 198 ITR (St) 1] wherein the CBDT explained the new procedure of taxation of firm's income: "48. Taxation of firm's income.-Before the changes made by the Finance Act, the system of levy of tax on firms involved double taxation. The firm as such was taxed in respect of its total income at rates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e only distinction between professional and non-professional firms will be in respect of slabs for allowing deduction to firms in respect of remuneration. 48.2 The share of the partner in the income of the firm will not be included in computing his total income. [Sec. 10(2A)]. However, interest, salary, bonus, commission or any other remuneration allowed by the firm to a partner will be liable to be taxed as business income in the partner's hand [s. 2(24)(ve) and s. 28 (v)]. An explanation has been added to the newly inserted cl. (2A) of s. 10 to make it clear that the remuneration or interest which is disallowed in the hand of the firm will not suffer taxation in the hands of the partner. In case any remuneration paid to a partner is disallowed in the hands of the firm or the amount is varied in subsequent proceedings, the partner's assessment can be rectified [s. 155(1A)]. 48.3 The gross total income of the firm is to be determined in the normal way under different heads as in the case of any taxable entity. The gross total income so computed is reduced by salary, bonus, commission or any remuneration payable or paid to a partner [s. 40(b)]. Remuneration due to or received by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner. Though the nature of salary received by a partner was held by the Hon'ble Supreme Court in the case of R.M. Chidambaram Pillai to retain the same character as of the income of partnership firm yet the legislature has treated it differently for the purpose of assessment. This may be explained with reference to the provisions of s. 10(2A) vis-a-vis s. 28(v) of the Act. The salary received by a partner from the firm, which is allowed as deduction in the hands of the firm, has to be taxed as business income of the partner in the hands of the partner. Sec. 10 (2A) of the Act provides for exclusion of share in the profit of a partnership firm from the total income in the hands of the partner but salary received by the partner from the firm is to be assessed as deemed business income in the hands of such partner in view of specific provisions of s. 28(v) and is taxable. Thus, in our view, the nature of salary vis-a-vis share of profit is of no significance now, hence, this contention of the assessee does not help the cause of the assessee in any manner. 8.19 The assessee has also pleaded that new scheme as applicable from asst. yr. 1993-94 was merely a scheme of assessment and it di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en used in its widest connotation in that chapter. The title of the chapter is 'deductions and assessment'. The section which deals with assessment merely as computation of income is s. 23; but several sections deal not with computation of income, but determination of liability, machinery for imposing liability and the procedure in that behalf. Sec. 18A deals with advance payment of tax and imposition of penalties for failure to carry out the provisions therein. Sec. 23A deals with power to assess individual members of certain companies on the income deemed to have been distributed as dividend, s. 23B deals with assessment in case of departure from taxable territories, s. 24B deals with collection of tax out of the estate of deceased persons, s. 25 deals with assessment in case of discontinued business, s. 25A deals with assessment after partition of Hindu undivided families and ss. 29, 31, 33 and 35 deal with the issue of demand notices and the filing of appeals and for reviewing assessment and s. 34 deals with assessment of incomes which have escaped assessment. The expression 'assessment' used in these sections is not used merely in the sense of computation of income and there i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a matter of convenience between the partners as to how they wish to distribute the profits. We are of the view that there cannot be any dispute in this regard but if a particular course of action is adopted, then, the legal consequences thereof have to be faced i.e., if no salary is paid, then, whole of the income by way of share in profit is exempt in the hands of the partner and consequently, provisions of s. 14A have to be applied in respect of any expenditure incurred by the assessee in relation to such income and when a partner receives salary, then, expenditure incurred for earning the same can be allowed as deduction as it is the net income which is to be taxed under the head income from profits and gains of profession or when a partner receives both salary as well as share in the profit, the logical course can be adopted by way of proportionate disallowance of expenditure incurred towards the same, if there exist no provision for such allocation. 8.21 The assessee, before us, has taken a new plea which was not before the lower authorities i.e., this expenditure was incurred to earn the fee from International Chamber of Commerce. We find that during the year under consid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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