TMI Blog2022 (1) TMI 1345X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - ITA No.757/Bang/2022 - - - Dated:- 3-1-2023 - Shri Laxmi Prasad Sahu, Accountant Member For the Appellant : Shri Khamruddin Syed, A.R. For the Respondent : Shi Ganesh R Gale, Standing Counsel for Department. ORDER PERLAXMI PRASAD SAHU, ACCOUNTANT MEMBER: The sole substantive issue raised by the assessee in this appeal of the assessee is eligible for exemption u/s 10(2A) of the Act, which has been denied by the CIT(A) vide his order dated 26.6.2022 for the assessment year 2020-21. 2. The appeal has been filed with a delay of 13 days, which has been duly explained vide his application dated 29.8.2022 and affidavit dated 3.10.2022, which are placed on record. Considering the explanations given above, I condone the delay for filing the appeal of the assessee belatedly. 3. The brief facts of the case are that the assessee filed return of income on 17.10.2020 declaring a total income of Rs.3,75,710/-. The c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der;- 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 ..... ns contained in Section 26A of the Income Tax Act as well as the provisions contained 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Section 3 which reads as follows. 3. Limited liability partnership to be body corporate .- (1) A limited liability partnership is a body corporate formed and incorporated under this Act and is a legal entity separate from that of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordinary course of the business of a firm, or with the authority of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable therefor to the same extent as the partner. 45. Liability for acts of partner done after dissolution. -(1) Notwithstanding the dissolution of a firm, the partners continue to be liable as such to third parties for any 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 bou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of petitioner for registration and to take appropriate action on the same within a period of one month from the date of receipt of a copy of the judgment. The Writ Petition is accordingly allowed. 4.1 He further submitted that the judgement relied by the ld. CIT (A) is not applicable in the present facts of the case and the Hon ble High Court of Kerala has considered the decision of Dulichand Laxminarayan as relied by the ld. CIT(A). 5. The ld DR relied on the order of lower authorities and he submitted 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was assessed as in the case of any other distinct entity and tax was levied on the firm and the partners were not required to pay tax again on their share of income out of the profit of the partnership business. In the case of registered firm, the firm was not required to pay tax and the income of the firm was not assessed to tax. The share of profits of each partner in the income of the firm was added to his other incomes. The levy was on the partners severally and not on the firm. The total income of the partner comprises of his other income and his share of income from 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 incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in CIT v. Canara Workshops (P.) Ltd. [1986] 161 ITR 3201. It was held : ...It seems to us that the object in enacting section 80E is properly served only by confining the application of the provisions of that section to the profits and gains of a single industry. The deduction of 8 per cent is intended to be an index of recognition, that a priority industry has been set up and is functioning efficiently. It was never intended that the merit earned by such industry should be lost or diminished because of a loss suffered by some other industry. It makes no difference that the other industry is also a priority industry. The co-existence of two industries in 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 S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the firm is obviously not exigible to tax in the hands of the partner. This provision available in section 10(2A) is obviously incorporated to obviate double taxation. On this background, we may now proceed to discuss the principles of diversion of share of a partner by superior or overriding title to a sub-partnership comprising the partner and strangers to the main partnership. Sub-partnerships have been recognized in India and registration accorded under the Indian Income-tax Act, 1922, though sub-partnership has not been defined either in the Indian Partnership Act, 1932 or in the Income-tax Act, 1961. In support of this proposition, we may refer to the decision of the Apex Court in various cases. 19. In Murlidhar Himatsingka s case (supra), the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the principle that a partner in the sub-partnership had a definite enforceable right to claim a share in the profits accrued to or received by the other partner in the main partnership, as on entering into a sub-partnership, such a partner changes his character visa- vis the sub-partners and the income-tax authorities. Further, a sub-partnership creates a superior title and results in diversion of the income from the main firm to the sub-partnership before the same becomes the income of the concerned partner. In such a case, even if the partner receives the income from the main partnership, he does so not on his behalf but on behalf of the sub-partnership. . . It is apt to notice that there is a clear distinction between a case where a partner of a firm assigns his share in favour of a third person and a case where a partner constitutes a sub-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 asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egistered as a partnership firm under the Income-tax Act though the term has not been defined in the Indian Partnership Act, 1932. A partnership firm cannot become a partner in another partnership firm for the purpose of the Indian Partnership Act, 1932 since a firm is not a person under this Act and is, therefore, not eligible to enter into an agreement. But the position is otherwise insofar the Income-tax Act, 1961, is concerned. In the Income-tax Act, 1961, a person has been defined in sub-section (31) of section 2 which, amongst, others include a firm also. In the instant case, there is no dispute that the share of income receivable by Shri Radha Krishna Jalan from M/s. Rock International stood diverted by a superior title to the sub-partnership of M/s. Radha Krishna Jalan, the appellant before the partner in Shri Radha Krishna Jalan could lay hand on it. 23. The Tribunal relying upon a decision in Dulichand Laxminarayan v. CIT [1956] 29 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 applicabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is, and is in law recognized as, the partner. Whether in entering into a partnership with outsiders, the karta acted in his individual capacity and for his own benefit or he did so as representing his joint family and for its benefit is a question of fact. If for the purpose of contribution of his share of the capital in the firm the karta brought in monies out of the till of the Hindu undivided family, then he must be regarded as having entered into the partnership for the benefit of the Hindu undivided family and as between him and other members of his family he would be accountable for all profits received by him as his share out of the partnership profits and such profits would be assessable as income in the hands of the Hindu undivided family. . . . What are the facts here ? Here was the Hindu undivided family of which B.K. Rohatgi was the karta . . . . . The finding in this case is that the promotion of the company and the taking over of the concern and the financing of it were all done with the help of the joint family funds and the said B.K. Rohatgi did not contribute anything out of his personal funds if any. In the circumstances, we are cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t hold it not jointly but in severally, and the law does not contemplate that a person should do the impossible. Indeed, the results would have been the same, even if the dividing members had said in so many words that they had partitioned the assets, because insofar as the firms were concerned, the step would have been wholly inconsequential. (p. 208) A. Abdul Rahim Co. s case (supra) : . . . If the partnership is genuine and legal, the share given to the benamidar will be the correct specification of his individual share in the partnership. The beneficial interest in the income pertaining to the share of the said benamidar may have relevance to the matter of assessment, but none in regard to the question of registration. (p. 659) 25. It would appear from the above judgments that the formation of sub-partnership creates a legal fiction whereby the income or loss of a partner becomes the income or loss of the sub-partnership. This situation creates a legal fiction. Mr. Agarwalla, learned senior counsel submitted that such income or loss has to be assessed in the hands of sub-partnership by the income-tax authorities. The effect th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome of an assessee after computation of income from all sources, setting off the losses and deducting the allowable deduction. In the instant case, the total income of M/s. Rock International has been computed at Rs. 39,426 for the assessment year 1996-97 and Rs. 42,750 for the assessment year 1997-98. Shri Radha Krishna Jalan was entitled to 45 per cent of the aforesaid income of the main partnership for the two assessment years. His personal income as partner of the main partnership would roughly be Rs. 17,742 and Rs. 19,234 respectively. The said amount stood diverted to the appellant-firm M/s. Radha Krishna Jalan by overriding title. But the income-tax authorities assessed the total income of M/s. Radha Krishna Jalan, the appellant-firm at Rs. 1,83,13,993 for the assessment year 1996-97 as against the total taxable income of Rs. 39,426 of M/s. Rock International, though the share of income of Shri Radha Krishna Jalan diverted at source to the sub-partnership could not be more than Rs. 17,427. Similarly, for the assessment year 1997-98, the total income of the main firm was Rs. 42,750 and the share of Shri Radha Krishna Jalan was Rs. 19,327. This ..... X X X X Extracts X X X X X X X X Extracts X X X X
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