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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 ..... M/s Ashok Kumar Fomra (HUF) (PAN-AAAHA1354B) who is stated to be partner of the assessee firm holding 25% share, wherein learned PCIT was of the view that HUF cannot be partner in partnership firm and such payments of interest made to M/s Ashok Kumar Fomra (HUF) is liable to be disallowed owing to the fact that HUF cannot be partner in the firm. It was observed by learned PCIT that M/s Ashok Kumar Fomra (HUF) is partner in assessee firm and it is not the case that the karta of the said HUF namely Mr. Ashok Kumar Fomra is partner in assessee firm in his individual capacity. It was observed by learned PCIT that these payments made to aforesaid HUF by assessee firm cannot be allowed as business deduction as HUF cannot become partner in the firm. The learned PCIT observed that this aspect has not been inquired, verified and investigated by the AO while during the course of scrutiny assessment conducted by the AO u/s 143(3) read with Section 143(2) and claim of deduction of interest paid to HUF was allowed as business deduction by the AO without any inquiry, verification and investigation. Further, the learned PCIT also observed that whether the assessee firm will lose its status of p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dicial to the interests of the Revenue. It is accordingly cancelled. The AO shall verify the issue of payments made to the HUF in its capacity as partner of the firm insofar as provisions of section 40(b) of the Act are concerned. He shall also investigate and decide on the matter as to whether the assessee loses its status as a partnership firm. He shall then frame a fresh assessment order after giving due opportunity to the assessee". 2. The assessee has filed an appeal before the tribunal challenging the revisionary order dated 29.03.2019 passed by learned PCIT u/s 263 of the 1961 Act. The arguments are advanced by learned counsel for the assessee before the Bench that interest was paid by assessee firm to Karta of HUF and not to HUF. The learned counsel for assessee submitted that only share of profit was credited to HUF. It was submitted that no remuneration was paid to HUF or to Karta of HUF. The learned counsel for assessee also fairly submitted that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various commodities as well as mining. The partners of the firm were : (1) Popatlal Devram (2) Jayantilal Jagmal (3) Pragji Devram (4) Ratilal Odhayji (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 Rs. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 : "4. Definition of "p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 principle laid down in Dulichand's case (supra), it is not possible to hold that an HUF being a fluctuating body of individuals, can enter into a partnership with other individual partners. It cannot do in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 conduct of the business. The partners are entitled to share equally in the profits earned and shall contribute equally to the losses sustained by the firm. Where a partner is entitled to interest on the capital subscribed by him, such interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 firm representing his HUF and had made deposits in the firm in his individual capacity, the interest paid to him could not be disallowed by reason of the Explanation II added to Section 40(b) of Income Tax Act, 1961. It was further held that the explanation was only clarificatory. It is difficult to agree with that proposition b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n' 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 that instrument; (3) the application for registration shall he signed by all the partners. The very fact that individual shares of the partners have to be specified and that such partners must personally sign the partnership deed and also the application for registration go to show that even if a person joins a firm as a representative of an HUF or any other body or association, within the firm his position is that of an individual. He may have an agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 one of its partners. It cannot get any deduction in its assessment for that payment because of Section 40(b) of the Act expressly prohibits such deduction. 16. The basic principle that a firm is a compendious mode of describing the persons constituting the firm must not be overlooked. It is the individuals constituting the firm who are its partners. The partner may be under an obligation to hand over the monies received by him to somebody else by virtue of a sub- contract or any other arrangement. That will not change the character of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 view provision of Section 40(b) of the 1961 Act as well whether the assessee firm loses its status as partnership as rightly held by learned PCIT. it is pertinent to mention here that at this stage that Sec.263 of the 1961 was amended, wherein, Explanation 2 was inserted by Finance Act, 2015, w.e.f. 01.06.2015 and if the assessment order is passed by the AO without making any inquiries or verifications which should have been made, the said order shall be deemed to be erroneous so far as prejudicial to the interest of Revenue calling for revisionary intervention by learned PCIT. Thus, in our considered view, the revisionary order dated 24.11.2016 passed by ld.PCIT u/s 263 of the 196 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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