TMI Blog2024 (3) TMI 1005X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to a firm as compared to an individual. The benefits in the shape of deductions or exemptions available to an individual are not transferrable or inter-changeable to the firm nor the vice versa. The firm in general law may not be treated as a separate juristic person, however, under the Income Tax Act, it is assessable as a separate and distinct juristic person. The Income Tax Act is a special legislation, therefore, the interpretation given in general law cannot be imported when the special law defines the firm as a separate person assessable to Income Tax. Therefore, the contention of the Ld. Counsel that section 2(23) of the Income Tax Act gives meaning to firm, partner and partnership as defined in the Indian Partnership Act, 1932, in our view, does not, in any way, effect, take-away or exclude the firm from the definition of person as defined u/s 2(31) of the Income Tax Act. Under the relevant provisions of the Indian Partnership Act, 1932, the partnership firm has been defined as a relationship between the persons who have agreed to share the profits of the business carried on by all or any of them acting for all and the persons who have entered into partnership w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turn subject to the fulfilment of the relevant conditions as prescribed under law. Though, a firm may consist of partners who belong to the exempted category of Scheduled Tribe in their individual capacity, however, there will be not any mechanism available to the Assessing Officer to know that such a firm consists of the individuals whose income is exempt or not. Thus under the Income Tax Act, the exemption of 10(26) of the Act is available to the individual members of the Scheduled Tribe and that this benefit cannot be extended to a firm which has been recognized as a separate assessable person under the Income Tax Act. The advantages and disadvantages conferred under the Act on separate class of persons are neither transferrable nor inter-changeable. The scope of the beneficial provisions cannot be extended to a different person under the Act, even after liberal interpretation as it may defeat the mechanism and process provided under the Income Tax Act for assessment of different class/category of persons. Proposed questions are answered in negative by holding that a partnership firm being a separate assessable person under the Income Tax Act, would not be entitled to the same e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It consisted of two partners namely Shri Prabhat Dey Sawyan and Mr. Walamphang Roy, both the partners are related to each other (brothers) and are belonged to Khasis tribe which is enlisted as Scheduled Tribe in the State of Meghalaya and is covered under Clause (25) of Article 366 of the Constitution of India. They are residents of Khasi Hills Autonomous District which area is specified under Part-II of the Table appended to 6th Schedule to the Constitution of India and are, and thus are entitled to exemption u/s 10(26) of the Income Tax Act (in short the Act ) in their individual capacity. The claim of the assessee before the Assessing Officer has been that since a partnership firm in itself is not a separate juridical person and it is only a collective or compendious name for all of its partners having no independent existence without them, and since the partners of the assessee firm are entitled to exemption u/s 10(26) of the Act, therefore, the same exemption u/s 10(26) is available to a partnership firm formed by such partners. However, the Assessing Officer did not agree with the aforesaid contention of the assessee. He observed that under section 2(31) of the Act defines p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o two partners having equally share. The members of Khasi tribe entitled for 10(26) exemption in their individual capacity since covered under Article 366 of the Constitution of India. The question that requires our apt adjudication herein is as to whether the assessee / partnership firm itself can also be held to be entitled for the impugned sec. 10(26) exemption since its two partners are already eligible for the very relief. 18. Article 265 Constitution of India stipulates that Taxes are not to be imposed qua by the authority of law. No tax shall be levied or collected except by the authority of law . The Legislative enacted the Income Tax Act, 1961 therefore to provide for levy and collection of tax on income earned by a person comprising of (I) to (VII) categories of an individual, HUF, company, a firm, an association of persons or a body of individuals; where incorporated or not, a legal authority and every judicial person not falling within any of the above specified classes u/s 2(31) of the Act. It further inserted Chapter-III in the Act comprising of section 10 to 13B specifying incomes which do not form part of the total income for the purpose of assessment and levy of ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interpretation that words used by the legislature are to be understood in their natural, ordinary or popular sense and construed as per their grammatical meaning unless such a construction leads to some absurdity or there is something in the context or in the object of the statute to suggest to the contrary. Their lordships also invoked the Golden Rule of Interpretation that words of a statute must prima facie to be given their ordinary meaning only. 20. Hon'ble apex court's yet another landmark decision in Smt. Tarulata Shyam and Others vs. Commissioner of Income-tax (1977) 108 ITR 345 (SC) also holds there is no scope of intendment in tax laws as follows:- We have given anxious thought to the persuasive argument.... (which) if accepted, will certainly soften the rigour of this externally drastic provision and bring it more in conformity with logic and equity. But, the language of the sections ...... is clear and unambiguous. There is no scope for importing into the statute the words which are not there. Such interpretation would be, not to construe, but to amend the statute. Even if there is causes omicus the defect can be remedied only by legislative and not by judicial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to suggest that a Khasi male cannot have his own property, earned by his own sweat. There are men of considerable property, who will dispose of that property among their relatives as they deem fit. By pointing out the above peculiarities of the Khasi clan, the point that is sought to be emphasised is that amongst the Khasis, the individual is not the unit of society. It is the family which is the unit, and, if this peculiarity is kept in mind, it would be immediately obvious that the ancestral properties would always be held by Ka Khaddu for the family, and most the self-acquired properties also would become the properties of family either on the mother's side or of that consisting of wife and the children. The use of the word 'person' in section 10(26) in the context of the above peculiarities of the Tribal law, assumes importance. The Legislature has deliberately not use the word individual in section 10(26) and has, instead, used the words 'person', which is wide enough to include in its ambit, a unit as that of Khasi family as in the present case. It is difficult to believe that the Parliament intended to grant exemption only to Khasi individuals who own pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t sec. 13 of the General Clauses Act, 1897 (supra) treats masculine and singular expression in central regulations to be inter-changeable famine gender plural expression; also carries no substance since the legislature expression herein is very much clear that the impugned exemption benefit is available to a member a of Scheduled Tribe only takes to a partnership firm consisting of partners who are member of such a Scheduled Tribe. We reiterate that the said provision General Clause Act itself contains a stipulation that unless there is anything repugnant in the subject or context . We therefore decline the assessee's instant argument as well. We make it clear whilst holding so the Income Tax Act is complete code in itself in the nature of specific law which applies at the cost of all the general laws going by the legal maxim generalia specialibes non derogant as per hon'ble apex court's decision in Union of India and Another vs. Indian Fisheries (P) Ltd. (1965) 57 ITR 331 (SC). 23. We also wish to quote hon'ble apex court's foregoing decision in M/s Jullunder Vegetables holding that though under the Partnership Law a firm is not a legal entity but only consists ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdingly decline the lead case Ita No.348/Gau/2018. 6. On a further appeal, the Hon ble Meghalaya High Court vide its order and judgment dated 06.07.2023 has set aside the above order and remanded the matter back to the Tribunal for consideration afresh. The relevant observations and direction of the Hon ble Meghalaya High Court in the said order and judgment are as under:- 1. These four appeals involve a common question of law. In short, the issue is whether the ratio decidendi in the judgment reported at (1992) 195 ITR 630 (Gau) (Commissioner of Income-Tax v. Mahari Sons) would be applicable in these matters. The ancillary issue is whether the dictum in Mahari Sons still holds good despite apparently contrary judgments of the Supreme Court pronounced in matters pertaining to the interpretation of a taxing statute and the strict interpretation of an exemption clause in a taxing statute. 2. In Mahari Sons, members of a family, all of them tribals and individually entitled to the benefits under Section 10(26) of the Income Tax Act, 1961, were engaged in a business and the question that arose was whether the exemption granted under Section 10(26) of the Act was restricted to an indivi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a notified area, such assessee will not be entitled to the benefit under Section 10(26) of the Act. 6. In the present appeals, in one of the matters the registered partnership firm has a husband and wife as partners. In the other matters, uterine brothers constitute the partnership firm in each case. Going by the dictum in Mahari Sons and, particularly, the interpretation of the concept of family made therein, it would appear that an association, even if it be a partnership, between a husband and wife or between a brother and another, would be entitled to the same exemption as any of the partners would in their individual capacity. 7. It cannot also be missed that the rule which has been enunciated in Mahari Sons has held the field for more than three decades and persons may have organised their businesses in accordance therewith. 8. There is no doubt that the Appellate Tribunal noticed the dictum in Mahari Sons in the common order impugned and, in effect, held that such rule was per incuriam or, at any rate, no longer good law in view of subsequent Supreme Court pronouncements. However, the exercise appears to have been done in a rather cavalier manner without covering the enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bench of the Appellate Tribunal deciding the primary legal issue in accordance with law. 7. In view of the directions of the Hon ble Meghalaya High Court, we proceed to decide the issues afresh. 8. Shri Sanjay Modi, the ld. AR of the assessee, has not only addressed the Bench orally but later on also sent written submissions through email, which have been taken on record which are summarized as under: (i) That prior to March, 2013 when Hon ble Meghalaya High Court came to be established, the Gauhati High Court was Common High Court also for the State of Meghalaya and hence, its decision of December 07, 1991 is the decision of the Jurisdictional High Court. (ii) The decision of the Hon ble Guwahati High Court in Mahari Sons (supra) has also become final as SLP preferred by the Revenue there against was dismissed by the Hon ble Supreme Court in SLP No. 3499-502/91. (iii) That the Hon ble Guwahati High Court in the case of Mahari Sons (supra) has held that the word 'family' refers to a group of persons consisting of parents and children, spouse, brother, sister etc. who are related to each other. That a Khasi family would mean a group of Khasis who are blood relatives or who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividuals] whereas in the present matters such joint income of group (two) of members of Scheduled Tribe who are also relatives and family members is assessable in the status of Firm [Partnership Firm]. (ix) That it has been held by various courts of law that a Firm is an association or body of individuals . It is a a conglomeration of individuals who carry on some activity with the object of earning income. In the instant matters, also both the firms are also a conglomeration of two individuals only who carry on activity with the object of earning income. (x) That under section 2(31 ) of the Income Tax Act , it has been provided that the words Firm or Partnership shall have the same meaning as assigned to them in the Indian Partnership Act, 1932. Whereas as per section 4 of the Indian Partnership Act, Partnership is a relation between persons . The entities who enter into relationship as partners have to be Persons . But, Partnership is merely a relationship and the same is not person per se. (xi) That in the instant matters, the income of Firm is joint income of two members of Scheduled Tribe and the are entitled to exemption u/s 10(26) of the Act not only individually but jointl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or Body of Individuals, or vice-versa would have been covered by provisions of section 45(1) itself. (xvi) That further, the provisions of section 28(v) of the Act read with Explanation 2 to section 15 also evidences that under the scheme of the Income Tax Act, 1961, business done in the name of the Firm is treated as business of partners. Any amount apportioned by the Firm to a Partner as Salary or Interest , is charged to tax in the hands of the partner as his business income under the head Profit and Gains from Business or Profession under section 28(v). If Firm was treated as a separate legal entity, the Salary received by Partner would have been assessed under the head Income from Salary under section 15 and similarly, interest would have been charged to tax under the head Income from Other Sources under section 56. (xvii) That the dictum of the decision of the Hon ble Common High Court in Mahari Sons (supra) is holding field for the last more than 32 years and rule of certainty and consistency of law is applicable. (xviii) Thus, in the decision of the Hon ble Supreme Court in the case of Jullunder Vegetables (supra) is in the context of power of taxing authority to make an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and district entity and is assessed separately from its partners. That the benefits, if any, available to the individuals cannot be conferred upon the partnership firm, even though, such partnership firm consists of such individual partners who are eligible of benefits in their individual capacity. 11. We have given our thoughtful consideration to the rival submissions of Ld. Representatives of the parties. 12. The Hon ble Meghalaya High Court has directed to refer this matter to the Larger Bench of the Tribunal observing that the Division Bench of the Tribunal has made no distinction between a partnership firm with close relatives as partners and any other partnership firm where the partners are unrelated. That the Tribunal has not taken into consideration the concept of the family business as ruled in the case of Mahari Sons, and missed out the applicability of the said dictum in Mahari Sons by virtue of the partners being close relatives and further that even none of the Supreme Court judgments referred to in the order impugned by the Tribunal expressly deals with the situation covered by Mahari Sons. To address this issue, we deem it appropriate to refer to the relevant statu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 2] of 3[the Companies Act, 2013 (18 of 2013)] and includes (i) a limited liability partnership registered under this Act; (ii) a limited liability partnership incorporated outside India; and (iii) a company incorporated outside India, but does not include (i) a corporation sole; (ii) a co-operative society registered under any law for the time being in force; and (iii) any other body corporate (not being a company as defined in 4[clause (20) of section 2] of 3[the Companies Act, 2013 (18 of 2013)] or a limited liability partnership as defined in this Act), which the Central Government may, by notification in the Official Gazette, specify in this behalf; 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. 4. Non-applicability of the Indian Partnership Act, 1932. Save as otherwise provided, the prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm. Section 5, about which we will make more discussion in later part of this order, states that partnership is created by contract between the partners and not by their status being members of a HUF or family. As per Section 10, every partner has a duty to indemnify the firm for any loss caused by his fraud in the conduct of business. The rights and duties between the partners are determined by contract between them and not by their status and even such contracts may provide that a partner shall not carry on any business other than that of the Firm while he is a partner. As per Section 14, the firm holds the property which includes goodwill of business also, which, as per section 15, is to be used by partners exclusively for the purpose of the business of the Firm. Even as per section 16, if personal profits are derived by a partner from any transaction or from the use of the property, business connection or even firm s name, he shall account for that profit and pay the same to the firm. Even if a partner carries on any business in competition with that of the firm, he is liable to pay the firm all profits made by him in that business. As per section 18, a partner is the agent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Act, especially when in the definition of person under the income tax act, corporate and non corporate , juridical and non juridical persons, as mentioned therein, have been included as separate assessable entities. Moreover, as discussed above, there are many rights and obligations and restrictions of the partners to and against the firm which have been prescribed, which distinguishes a firm from its partners as separate entity. Therefore, the contention of the Ld. Counsel that section 2(23) of the Income Tax Act gives meaning to firm, partner and partnership as defined in the Indian Partnership Act, 1932, in our view, does not, in any way, effect, take-away or exclude the firm from the definition of person as defined u/s 2(31) of the Income Tax Act. Under the relevant provisions of the Indian Partnership Act, 1932, the partnership firm has been defined as a relationship between the persons who have agreed to share the profits of the business carried on by all or any of them acting for all and the persons who have entered into partnership with one another is called individually partners and collectively a firm. The contention of the ld. AR is that the partnership is a relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be assessed in the hands of the firm as a single unit, the firm itself being treated as an assessable entity separate and distinct from the partners constituting it. The firm is an assessable unit separate and distinct from the individual partners, who as individuals constitute assessable units separate and distinct from 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. 9. 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 officer 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 officer will apply the partnership law, subject of course, to any specific pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the persons who will actually carry on the business, the shares in which the profits will be divided, and the several other considerations which constitute such an organic relationship. It is permissible to say that a partnership agreement creates and defines the relation of partnership and, therefore, identifies the firm. If that conclusion be right, it is only a further step to hold that each partnership agreement may constitute a distinct and separate partnership and, therefore, distinct and separate firms. That is not to say that a firm is a corporate entity or enjoys a juristic personality in that sense. The firm name is only a collective name for the individual partners. But each partnership is a distinct relationship. The partners may be different and yet the nature of the business may be the same, the business may be different and yet the partners may be the same. An agreement between the partners to carry on a business and share its profits may be followed by a separate agreement between the same partners to carry on another business and share the profits therein. The intention may be to constitute two separate partnerships and, therefore, two distinct firms. Or to exten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has the authority to make an assessment in case of a partnership firm after its dissolution under the East Punjab General Sales Tax Act in respect of turnover affected during its existence. The Hon ble Court observed that the issue was decided by the Full Bench of the Punjab High Court in favour of the assessee and the main reason for the decision was : The main reason given by it for its decision was that firm was a separate assessable entity under the Act and that there was no machinery provided under the Act for assessing a firm after its dissolution in respect of its turnover of business before the said dissolution. The Hon ble Supreme Court has observed that as per the provisions of section 2 of the said Sales-tax Act, a partnership firm is a dealer , i.e., a separate assessable unit. The Hon ble Court observed: A dealer and its partners are jointly and severally responsible to pay the tax assessed on dealer. But, there is no provision expressly empowering the assessing authority to assess a dissolved firm in respect of its turnover before its dissolution. The question is whether such a power can be gathered by necessary implication from the other provisions of the Act. The fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxing authority to assess an assessable unit after its disruption, such power cannot be read into it by implication. This decision is in the context of power of taxing authority to make an assessment; when a partnership firm is treated as a separate unit of assessment by the concerned taxing statute. This decision does not lay down that even for purposes which does not involve powers to be exercised in connection with procedure of assessment or process of assessment, the partnership firm is to be treated as a separate legal entity. It is a well settled position of law that a decision is only an authority for what it decides and not what may logically follow from it. The above submissions of the Ld. Counsel, in fact further affirms our view that under the income Tax Act, a partnership is a separate entity distinct from its partners. In case of Jullunder Vegetables (supra) the question before the hon ble Supreme Court was as to whether in absence of any specific provision, whether assessment of a dissolved partnership firm after its dissolution can be made under East Punjab General Sales Tax Act in respect of turnover affected during its existence. The question was whether assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se relatives as partners and any other partnership firm where the partners are unrelated is concerned, most respectfully, in our humble view, no such distinction can be drawn in case of a Partnership Firm. Having held above that under the Income Tax Act, a Partnership Firm is a separate assessable entity distinct from its partners, we further refer to the following provisions of Indian Partnership Act, 1932: Section 5: PARTNERSHIP NOT CREATED BY STATUS: The relation of partnership arises from contract and not from status; and, in particular, the members of a Hindu undivided family carrying on a family business as such, or a Burmese Buddhist husband and wife carrying on business as such are not partners in such business. 27. A perusal of the above provision of section 5 of the Indian partnership act would reveal that a partnership is created by contract between the partners and not by their status being members of HUF or of same family. It has been specifically stated that members of a Hindu Undivided Family as such, or a Burmese Buddhist husband and wife, carrying on business are not partners in such business. In the case in hand, even though the partners of the firm are brothers i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As discussed above, in a partnership, the relation between the partners is purely contractual and no obligation arises out of the family status or relationship, inter se of the partners. A male member having received his share of profit may apply it as per the societal norms of the Khasi community. However, his rights in the business of the partnership firm as a partner does not get affected in any manner, even though he is or all of partners are members of the same Khasi Family. A partner, irrespective of his relation or status with other partners, enjoys equal rights among all partners subject to the contract between the partners. Under the Income Tax Act, once two or more individuals enter into a partnership agreement and forms a firm, the same becomes a separate assessable entity, different from its partners. 28. An Association of Persons or a Body Of Individuals whether incorporated or not has also been included in the definition of person under the Income Tax Act. AOP (Association of persons) and BOI (body of individuals) under the income Tax Act are general terms which includes different type of societies including co-operative societies, clubs, trusts including charitable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the next contention raised by the Ld. AR. The share of profit which has already been subjected to Income tax in the hands of the partnership firm, is not subjected again to taxation in the hands of individual to avoid double taxation of the same amount as it would create hardship and discourage the partnership business. However, that, in our view, does not mean that the individual partners and the firm are one and the same entity and that the tax benefits available to a partner in his individual capacity will also be available to the firm or vice-versa. Let us take the case of a Hindu Undivided Family (HUF) which has also been recognized as a separate assessable person under the Income Tax Act. The standard deduction as available to an individual is also available to the HUF, which is formed of such individuals. The property of the HUF is property of its members. An HUF in general law is not a separate and distinct entity from its members, however, under the Income Tax Act, it has been recognized as a separate entity. If the individual members of an HUF earn income in individual capacity and they also earn some income collectively through and in the name of HUF, separate standard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion clarify that by contribution of asset by a partner to the firm, it is treated as transfer of asset by the partner to firm. It becomes the property of the firm. The partner loses its exclusive ownership over such asset. It is settled law that no one can transfer a property to himself. This section declares that partners and the firm are separate entities and transaction of transfer of asset by partner to firm is subjected to tax. So far as the salary or the interest income received by a partner is taxed as business income is on the basis that such receipts are out of the business income of the firm which are chargeable at the hands of the partners but the character of such receipts is not changed. These provisions, in no way , implies that the firm and partners are not separate entities under the Act. 31. Though, it is true, as held in various decisions of the Hon ble Supreme Court as referred to by the ld. AR that the beneficial and promotional exemption provision should be given liberal interpretation. However, in our humble opinion, liberal interpretation does not mean that the benefit of such exemption provision could be extended to bypass the express provisions of the fisca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer will not have any information about the individual status of the partners of the firm. Suppose a male member of the Scheduled Tribe of exempted category marries to a girl of non-exempted category and that girl becomes the members of the HUF, we ask ourselves whether in such a condition the income of the HUF or to say of the family will be exempt u/s 10(26) of the Act?, the answer obviously will be no . Though an argument will be there that the exemption will be allowable if all the members of the family/HUF are of the exempted category, but the question before us is how the Income Tax Authorities would know that in the family one member is of non-exempted category. There is no such mechanism available to the Income Tax Authorities to know the status to each of the member of a family/HUF and even in the case of a partnership firm. The partners in a firm may change during the year, replacing a non-exempted category partners with an exempted category partner. Can under such circumstances it be argued that income of the firm is exempt on the ground that the firm at the end of the year was having partners of the exempted category only and the Assessing Officer having no such ..... X X X X Extracts X X X X X X X X Extracts X X X X
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