TMI Blog1986 (3) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... the same and the only difference in them is in the amounts claimed as deduction. We need hardly say that the same does not make any difference to deal with them together. But, in order to appreciate the questions referred to us, it is necessary to notice the facts that are found by the Tribunal which are not also in dispute. Prior to July 15, 1972, a partnership firm called K. M. Ananda Prabhu and Sons, Mangalore (" the firm "), consisting of three partners, namely, K. M. Vishnudas Prabhu, K. M. Ramdas Prabhu and K. M. Shankar Prabhu, was, inter alia, engaged in the business of manufacturing and sale of beedis under the brand name " Mangalore Prakash Beedies ". On May 20, 1972, a private limited company called " Prakash Beedies Limited " (" the company "), which is the assessee before us, with its registered office at Mangalore was incorporated under the Companies Act, 1956 (Central Act I of 1956), inter alia, with the object of taking over the business of the firm. Under an agreement dated July 18, 1972, between the firm and the company (annexure B), the former sold its rights and assets to the latter on the terms and conditions set out therein. Clause 4(a) of the said agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has appeared for the assessee. Both sides in their full and able arguments have relied on certain rulings and we will refer to them at the appropriate stages. Sri Srinivasan has urged that the payments made by the assessee were for the benefit of the directors to which section 40(c) of the Act applied as in law there was no distinction and difference between a firm and partner. Sri Bhat has urged that the payments made were to a " firm ", separate, distinct and taxable entity under the Act and not to the directors and, therefore, section 40(c) of the Act, much less the ceiling limit stipulated therein, had no application. While the Income-tax Officer did not give reasons for allowing the deductions, the Commissioner examined the same in some detail and earnestness and, inter alia, expressed thus: " The assessee's argument in para. 8 is that the royalty was not paid to the directors but was paid to a firm. The assessee has overlooked the phrase 'directly or indirectly' occurring in section 40(c). The payment to a firm where all the three directors are the only three partners is to be treated as provision of an indirect benefit to the three directors... It is to be cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " Before us, both sides sought to sustain their respective cases on slightly different ground which, we have noticed earlier, does not appear to be concluded by a direct ruling of the Supreme Court or this court. We must, therefore, examine the question from general principles and the case law built around the same. The Partnership Act of 1932 (Central Act IX of 1932) ("the 1932 Act"), which was the earlier part of the Contract Act of 1872 has codified the law of partnership in the country. Section 4 of the 1932 Act defines " partner ship " as 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. The persons who have entered into partnership with one another are called individually " partners " and collectively " a firm " and the name under which their business is carried on is called the " firm name ". The other provisions regulating the formation of partnership, rights and obligations of partners and dissolution of partnership firms are not necessary to dilate. In more than one case, the Supreme Court had occasion to examine the status of a firm and its partners. In Malabar Fisheries Company v. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ip assets but it is the partners who own jointly or in common the assets of the partnership and, therefore, the consequence of the distribution, division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of right between the partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of section 2(47) of the Act. In our view, therefore, there is no transfer of assets involved even in the sense of any extinguishment of the firm's rights in the partnership assets when distribution takes place upon dissolution. " In every one of the earlier or later cases, the Supreme Court has reiterated the above exposition and, therefore, it is unnecessary to refer to all of them. What emerges from the above exposition is that a partnership firm is not a juristic or legal entity and there is really no distinction and difference between the partners and the firm, which is only a collection or association of individuals, for carrying on a business. This then is the general law of partnership in the country. The Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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