Firm cannot be partner in its own capacity; taxable income depends on true ownership of funds, not partnership form.

A registered firm cannot enter into a partnership in its own capacity because, under the Indian Contract Act, a firm is not a "person" but only a collective name for its partners. The article distinguishes that contractual incapacity from income-tax treatment: the Income-tax Act may assess a firm as a taxable entity, but that does not convert it into a legal person for partnership purposes. On the stated facts, profits credited through associated firms could not be treated as arising from a valid partnership in the firm's corporate capacity; the real inquiry remained whether the income belonged to the firm or to the individual partners. The reference was answered in favour of the assessee.

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Issues: Whether a registered firm can legally be a partner in another firm, and whether profits received through such arrangements are assessable as the income of the firm or of the individual partners.

Analysis: The Court applied the definition of partnership under Section 239 of the Indian Contract Act, 1872, and held that the term "person" in that provision does not include a firm. A firm is only a collective name for the individuals composing it and is not itself a legal person capable of entering into partnership in its own capacity. The Income-tax Act, 1922 was nevertheless treated as recognizing the assessee firm as a taxable person for assessment purposes, but that did not alter the legal position under the Contract Act. On the facts, the profits credited to the Benares firm could not be treated as arising from a legally valid partnership in the nine other firms in the firm's corporate capacity. The real question was whether the income belonged to the firm or to the partners individually, and the Court held that the legal incapacity of the firm to be a partner did not by itself make the received income cease to be the firm's income if the underlying funds belonged to the firm.

Conclusion: A firm cannot legally be a partner in another firm in its own capacity, and the reference was answered in favour of the assessee.

Ratio Decidendi: A firm is not a "person" within Section 239 of the Indian Contract Act, 1872, and therefore cannot enter into a partnership in its own capacity, though income actually received by or credited to the firm remains taxable according to the true ownership of the funds.

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