1932 (4) TMI 17 - HC - Income Tax

Registered firm cannot be partner in other firms; income belongs to individual partners, not firm.

The court held that a registered firm cannot legally be a partner in other firms. The partners in the unregistered firms were identified as individuals, ... - Issues Involved:1. Whether a registered firm can legally be a partner in another firm in its corporate capacity.2. Whether the income from the various partnership concerns is the exclusive income of the applicant firm or the individual income of the partners of the applicant firm.Issue-Wise Detailed Analysis:1. Legality of a Registered Firm Being a Partner in Another Firm:Sulaiman, CJ:The primary issue was whether the registered firm Jai Dayal Madan Gopal of Benares could legally be a partner in nine other firms. The Commissioner assumed that a registered firm could be a partner in another firm in its corporate capacity and sought to determine if this was a legal and proper finding based on the deed of partnership and other relevant evidence. However, the question of law regarding the impossibility of one firm being a partner in another firm was not explicitly referred to the court.The court noted that Section 239 of the Contract Act defines a partnership as a relation between persons who have agreed to combine their property, labor, or skill in some business and to share the profits. It was argued that the term 'person' does not include a firm. Citing precedents, the court referenced cases such as Sheodayal Khemka v. Joharmul Manmull and Brojo Lal Saha v. Budh Nath Pyare Lal, which held that a firm is not a person but a collective name for individuals who are members of the partnership.The court also considered the definition of 'person' in the General Clauses Act, which includes any company or association or body of individuals, whether incorporated or not. However, it was concluded that there is no repugnancy in Section 239 that would prevent applying this definition to the term 'person.' Despite this, the court adhered to the view that a firm cannot legally be a partner in another firm, as this interpretation avoids complications in the dissolution of partnerships.Mukerji, J:Mukerji, J., agreed with the view that a firm cannot be a partner in another firm under Section 239 of the Contract Act. He emphasized that the definition of 'partnership' in the Contract Act uses the term 'persons' and not 'firms.' He pointed out that various sections of the Act, such as Section 254, presuppose that partners are individuals, not firms.The court cited precedents supporting this view, including Basanti Bibi v. Babu Lal Poddar and Sheodayal Khemka v. Joharmul Manmull. Mukerji, J., concluded that the Income-Tax Officer erred in holding that the firm Jai Dayal Madan Gopal was a partner in the nine firms. The real question was whether the partners in the nine unregistered firms were the individuals Lala Jai Dayal and Rai Sahib Ram Ratan Das or the firm Jai Dayal Madan Gopal.Conclusion:The court concluded that the firm Jai Dayal Madan Gopal cannot legally be a partner in the nine other firms. The partners in the nine unregistered firms are Lala Jai Dayal and Rai Sahib Ram Ratan Das in their individual capacities.2. Income Attribution:Sulaiman, CJ:The court addressed whether the income received by the Benares firm from the various partnership concerns is part of the taxable income of the Benares firm. It was noted that for the purposes of the Income-tax Act, the Benares firm must be regarded as a 'person' to be taxed. The firm, being a distinct legal entity, can own property and have its own income. If the Benares firm invested its funds in other firms, the profits earned on that investment and paid to the Benares firm are considered its income, regardless of the legal status of the partnership.Mukerji, J:Mukerji, J., emphasized that the income received from the unregistered firms was credited to the books of the Benares firm. The fact that the income was deposited in the firm's account does not change its nature as the property of the individual partners. The two partners, Lala Jai Dayal and Rai Sahib Ram Ratan Das, are the partners in the nine firms in their individual capacities, and thus the income should be treated as their individual income.Conclusion:The court concluded that the income received by the Benares firm from the other firms is the property of the individual partners, Lala Jai Dayal and Rai Sahib Ram Ratan Das, and not the exclusive income of the Benares firm.Final Judgment:The court answered the question referred by stating that the Benares firm cannot legally be a partner in the nine other firms, and the income received by the Benares firm is part of its own income, subject to the limitation that it does not necessarily follow that the income is no part of its own income. The Crown must pay the costs of the assessee.