TaxTMI 
TaxTMI 
2010 (10) TMI 544
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....allowed to its working partners. The facts 4. The brief facts, in-so-far as are relevant, are that the assessee is engaged in the hotel business, running a bar attached thereto. The licence for the same under the Kerala Akbari Act is in the name of one of the partners, Smt. Monisenan. The provisions of the said Act and the Rules framed there-under proscribe the transfer thereof in any manner without the express and prior permission from the excise commissioner, which stands neither applied for nor obtained in the present case. In view of the bar licence being utilized by the assesseefirm, the Assessing Officer (AO) considered the same as only amounting to its transfer by the said licencee-partner in favour of the firm, so that the partnership agreement as entered into and being acted upon was in violation of the law and, thus, unlawful. Accordingly, in his view, the firm could not be granted the status of a `firm' under the provisions of the Act. ... The Law 5. The hon'ble apex court in the aforesaid case affirmed its earlier decision in the case of Bihari Lal Jaiswal vs. CIT (1996) 217 ITR 746 (SC), and held such a partnership firm as having been rightly de....
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....ion 184) is titled as: `Assessment as a firm' and provides for the procedure to be followed for the purpose. Sub-section (1) of section 184 provides that the firm shall be assessed as a firm if it is evidenced by an instrument and the individual shares of the partners are specified therein. Further, a certified copy of such instrument of partnership shall be filed along with the return of income for the previous year relevant to the assessment year commencing on or after 1.4.1993 for which the assessment as a firm is first sought (sub-section-2). Sub-section (3) provides that where the firm is assessed as such for any assessment year, it shall be assessed in the same capacity for every subsequent year if there is no change in its constitution or in the shares of the partners. Sub-section (4) provides that where any such change has taken place in any year, the firm shall, like wise, file a certified copy of the revised instrument of partnership along with the return of income for such year. The last sub-section (5) provides for the consequences of the assessment of the firm per an order u/s. 144. Section 185 provides for the consequences that follow the noncompliance of the provisio....
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....nt by the Finance Act, 1992, and after considering the decision in the case of Narayanan & Co. v. Dy. CIT (supra). The Revenue, on the other hand, relied on the decisions aforementioned. Findings 7.1 The foregoing contentions, in fine, delineate the controversy attending the present case. The question that requires to be answered does not concern the registration of the firm, which is no longer applicable, but whether the provisions of section 185 would become applicable or not for the relevant years. In this regard, we find that the said provision has undergone a change by the Finance Act, 2003, with effect from 1.4.2004, so that the provisions both before and after the said amendment would apply, the relevant assessment years being 2003-04 and 2004-05. 7.2 Before the amendment by the Finance Act, 2003 w.e.f. 1.4.2004, section 185 read as under: Assessment when section 184 not complied with - "185. Where a firm does not comply with the provisions of section 184 for any assessment year, the firm shall be assessed for that assessment year in the same manner as an association of persons, and all the provisions of this Act shall apply accordingly." After the amendmen....
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....ears, it would be necessary to ascertain if the assessee is a firm or not. This is so as the provision of section 184 would be applicable thereto if and only if it is so. Section 2(23) defines the terms 'firm', `partner' and `partnership', to have the same meaning respectively as assigned to them under the Indian Partnership Act, 1932, also including a minor who stands admitted to the benefits of the partnership, as a partner. As such, an assessee, to be considered as a firm under the Act, is to first qualify as a partnership firm under the partnership law. It is only then that the further question of it having complied with section 184 of the Act or not, and its impact on the status it is liable to be assessed thereunder, and of it being allowed, either directly or consequentially, a deduction in respect of particular payment/s in computing its income assessable head 'Profits and Gains of Business or Profession', would arise for consideration. 7.5 The partnership agreement in the instant case is violative of the provisions of State Abkari Act and is, thus, illegal. The contract of partnership, in fact, is void in view of section 23 of the Indian Contract Act, 1872, which furthe....
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....ng, has a persuasive value, and having been brought to notice, it is incumbent on us to deal therewith. We have perused the decision. The same stands rendered, even as the decision in the case of Narayanan & Co. vs. CIT (supra) was cited before the bench, in view of the decision by the apex court in the case of Grand Enterprises vs. CIT (Appeal No. 1317 to 1319 of 2001 dated 4th December, 2002/copy on record), whereby the apex court reversed the impugned order by the hon'ble jurisdictional high court by relying on the decision in the case of Jer & Co. vs. CIT (1971) 79 ITR 546 (SC), wherein it has been held that merely by forming a partnership firm, and the utilization of the licence by the firm, without something more, would not tantamount to a transfer of the licence. As such, in the absence of a statutory provision expressly prohibiting the formation of a partnership by the licence-holder, or only subject to permission by the concerned authority, would not lead to the conclusion that there was a transfer of the licence in contravention of the condition on which the licence was granted to the partner, so as to deny the partnership firm the benefit of registration under the Act. T....
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....uld be relevant to reproduce Clause 12 of the partnership deed dated 4/2/1999 for the purpose, which reads as under: "12. The firm shall utilize, for the purpose of its business, the FL-3 license granted to the party of the first part by the State Excise Authorities. But nothing contained in this deed shall ever be construed as sale, sublet or otherwise transfer of the said license or otherwise creating any other interest in the said license, in favour of the other partners or the firm which is not at all the intention of the parties but on the contrary, merely an arrangement to enjoy the benefits of partnership business by using the license granted to the first party due to deficiency of capital at her disposal. "Toward this, we may, firstly, refer to the decision by the apex court in the case of CIT vs. Narang Dairy Products (1996) 219 ITR 478 (SC), wherein it was concerned with the scope of the words `otherwise transferred' occurring in s. 34(3)(b) of the Act, as the transfer of plant & machinery within a prescribed period led to the withdrawal of the development rebate that stood allowed thereon u/s. 33(1)(a) of the Act. The definition of transfer u/s. 2(47), it was expla....
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....n the totality of rights of the original owner into a joint or shared interest with other persons. An exclusive interest in property is a larger interest than a share in that property. To the extent to which the exclusive interest is reduced to a shared interest, there is a transfer of interest." "Where a partner of a firm makes over capital assets which are held by him to a firm as his contribution towards capital, there is a transfer of a capital asset within the terms of section 45 of the Income-tax Act, 1961, because an exclusive interest of the partner in personal assets is reduced, on their entry into the firm, into a share interest". It stands further explained that the `consideration' for the transfer of the personal asset is the right which arises to the transferor-partner during the subsistence of the partnership to get his share of the profits from time to time and, after dissolution of the partnership firm or his retirement from the partnership, to get the value of the share in the net partnership assets on the date of dissolution or retirement after deduction of the liability and prior charges. The credit entry in the capital account of the partner in the b....
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....contrary, it rather establishes the factual primacy of the said earlier finding, i.e., there is no basis to contend that the licence in question stands not transferred or does not form part of the `partnership' property. A transfer of interest may not necessarily be by way of an endorsement, which would in fact be inapplicable in the present case, as what is intended to be transferred is only the user right in the licence. Rather, if that were not so, and transfer by endorsement a permissible course, that would be the end of the matter; the transfer of the licence to the firm having been authorized by following the due process of law, so that no controversy obtains. 7.8 In view of the discussion vide the foregoing para # 7.7, the reliance on the cited case law is both, factually and legally, misplaced. Conclusion 8. In view of the foregoing, the assessee stands rightly assessed as an AOP for both the years under reference. Also, the payment of remuneration by it to the `partners' shall be covered by the provisions of section 37(1) read with section 40(ba) and, resultantly, it shall not be entitled to deduction in its respect. We decide accordingly. 9. The only other iss....