TaxTMI 
TaxTMI 
2023 (1) TMI 1462
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....med u/s 10(2A) of the Act of Rs.20,71,600/- was denied. The assessee has filed rectification application u/s 154 of the Act, which has also been rejected. The assessee (LLP) is deriving income from business in the form of running of plant and machineries and share of profit from partnership firm, namely M/s. M.S. Enterprises. The ld. CIT(A) has also dismissed the appeal of the assessee by relying on the judgement of Hon'ble Supreme Court in the case of Dulichand Laxminarayan Vs. CIT by observing as under: "4.2.1 I have carefully gone through the submission of the Appellant. I have also gone through the records and facts of the case. The appellant has claimed that income received as partner in a partnership firm shall be exempt u/s 10(2A) of the Income Tax Act. Though it is correct that a partner's income from partnership firm is exempt u/s 10(2A), however the fact remains that a firm cannot be partner in another firm. A firm is not the person having a legal existence and therefore cannot as such become a partner in another partnership firm. This was held in the case of Dulichand Laxminarayan vs. CIT (Supreme Court wherein the Apex Court held that firm is not an entity or "per....
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....the provisions regarding the liability of the partnership firm is restricted to the contents to the LLP agreement ie. under the LLP Act, the liability of the partner is restricted only to the extent provided in the agreement; such a provision runs contrary to Section 25 and 49 of the Indian Partnership Act. It is also pointed out that under LLP foreign investment is permissible whereas it is not permissible under the Partnership Act. 5. The learned Counsel for the petitioner relied on the judgment of this Court in M.M.Pulimood vs. Registrar of Firm: 1984 KLT 420 in support of his contention that the rejection in Ext.P2 is illegal and without understanding the provisions contained in the LLP Act. 6. Relying on the judgment of the apex court in Dulichand Laxminarayanan vs. Commissioner of Income Tax, Nagpur : AIR 1956 SC 354 the learned Government Pleader argued that a firm cannot enter into a partnership with LLP. It is their case that though LLP is a kind of partnership having the nature of company the provisions inthe LLP are completely frustrating the purport of Section 25 and 49 of the Indian Partnership Act. 7. Heard Adv.Mohammed Al Rafi, learned counsel for the petitione....
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....firm name". 11. It is therefore necessary to find out the definition of 'person'. 'Person' is not defined either in the Partnership Act or in the LLP Act. Section 3(42) of the General Clauses Act, 1897 reads as follows: 3. Definitions.-In this Act, and in all General Acts and Regulations made after the commencement of this Act, unless there is anything repugnant in the subject or context,- xxxxxxxxxxxxxxx (42) "person" shal l include any company or associat ion or body of individuals, whether incorporated or not; xxxxxxx 12. A partnership can be entered into between two persons. Such persons can be an incorporated body of individuals. LLP is a body corporate. It can be said to be a person, as defined in Section 3(42) of the General Clauses Act, 1897 in case there is no repugnancy in the subject or context. In order to examine the same it is necessary to have a look at some more provisions in both the Acts viz Partnership Act and LLP Act. 13. The definition of body corporate, LLP and LLP agreement are given under clause (d), (n) and (o) of Section 2 of the LLP Act as follows: 2. Definitions.-(1) In this Act, unless the context otherwise requires,- x....
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....as no authority to act for the limited liability partnership in doing a particular act; and (b) the person knows that he has no authority or does not know or believe him to be a partner of the limited liability partnership. (2) The limited liability partnership is liable if a partner of a limited liability partnership is liable to any person as a result of a wrongful act or omission on his part in the course of the business of the limited liability partnership or with its authority. (3) An obligation of the limited liability partnership whether arising in contract or otherwise, shall be solely the obligation of the limited liability partnership. (4) The liabilities of the limited liability partnership shall be met out of the property of the limited liability partnership. 16. Extent of liability of a partner in an LLP is given under Section 28 as follows: 28. Extent of liability of partner.-(1) A partner is not personally liable, directly or indirectly for an obligation referred to in sub-section (3) of Section 27 solely by reason of being a partner of the limited liability partnership. (2) The provisions of sub-section (3) of Section 27 and sub-section (1) of this sec....
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....ship with other firms or individuals or Hindu Undivided Family. It was held as follows: "In our opinion, the word "persons" in Section 4 of the Indian Partnership Act, which has replaced Section 239 of the Indian Contract Act, contemplates only natural or artificial i.e. legal persons and for the reasons stated above, a firm is not a "person" and as such is not entitled to enter into a partnership with another firm or Hindu undivided family or individual. In this view of the matter there can arise no question of registration of a partnership purporting to be one between three firms, a Hindu undivided family business and an individual as a firm under Section 26-A of the Act. 20. Section 4 of the Partnership Act permits Constitution of a firm or partnership between one or more persons. In this case the partnership deed was executed between an individual and an LLP which is a body corporate having a legal entity and coming within the definition of "person". The individual liability of the partners of LLP would not be relevant when the LLP itself would have liability independent of the liability of the partners. Therefore, the difference in the provisions under the Partnership Act ....
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....ship firms. The assessee is a LLP and has received share of profit from other partnership firm which has been claimed as exempt income. A similar issue has been decided by the Hon'ble High Court of Guwahati in the case of Radha Krishna Jalan Vs. CIT reported in (2007) 165 Taxman 538 (Gauhati). The relevant parts of the judgment are as under:- 12. We have considered the decision in Sun Engg. Works (P.) Ltd.'s case (supra). The Supreme Court provided that it is neither desirable nor permissible to pick out a word or a sentence from the judgment, divorced from the context of the issues under consideration and treat it to be the complete law declared by the Supreme Court. The Hon'ble Supreme Court held that while applying the decision of the Court to a later case, the Courts must carefully try to ascertain the true principle enunciated to support their reasoning. It is in this context, we would now like to examine the proposition canvassed by Shri Agarwalla which are summarised below : (i)Whether for the limited purpose of assessment by income-tax authorities in the case of income diverted by overriding title to the sub-partnership of a person, such person is to be deemed to be a p....
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....a Krishna Jalan are firms assessed as firms under section 184. It may be mentioned here that in the case of firms which are assessed as firms, payment of interest, salary, bonus, commission or remuneration paid to the partners have been allowed to be deducted in the hands of the firm requiring the firm to pay tax on its total income as a distinct entity as provided in section 167A. The share of income of an individual partner is not to be included in computing his total income, but the interest, salary, bonus, commission or remuneration received by a partner from the firm is assessable in his hands as income from business or profession. It is, therefore, clear that with effect from April 1, 1993, there is no scope for double taxation in the case of a firm assessed as firm under section 184. On the other hand, as provided in section 185, in force with effect from 1-4-1993, to 31-3-2004, a firm is required to be assessed as an association of persons and the provisions of sections 67A, 167B and 86 are applicable to such firm. That a share of income of an individual partner is not required to be included in his total income is further crystallized in the provisions of sub-section (2A) ....
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....177 ITR 431 (SC), it was held that the law providing for concession for tax purposes to encourage industrial activity should be liberally construed. The question before the court was whether strawboard could be said to fall within the expression 'paper and pulp' mentioned in the Schedule relevant to the respective assessment years. The court held that since the words 'paper and pulp' were mentioned in the Schedule, the intention was to refer to the paper and pulp industry and since the strawboard industry could be described as forming part of the paper and pulp industry, it was entitled to the benefit." (p. 193) 17. In CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 6253, the Hon'ble Supreme Court held as follows : "We are conscious of the settled position that under the common law, 'owner' means a person who has got valid title legally conveyed to him after complying with the requirement of law such as the Transfer of Property Act, Registration Act, etc. But, in the context of section 22 of the Income-tax Act, having regard to the ground realities and further having regard to the object of the Income-tax Act, namely, 'to tax the income', we are of the view, 'owner' is a person wh....
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....ore it becomes the income of the partner. The partner in the main firm receives the income not only on his behalf but on behalf of the partners in the sub-partnership. This view is crystallised in the judgment of the Hon'ble Supreme Court in Murlidhar Himatsingka's case (supra), the Apex Court held that in the case of a sub-partnership, the sub-partnership creates a superior title and diverts the income before it becomes the income of the partners. This otherwise means that the partner in the main firm receives the income not only in his behalf but on behalf of the partners in the sub-partnership. In Sunil J. Kinariwala's case (supra), the Supreme Court held that when a third person becomes entitled to receive the amount under obligation of an assessee even before he could lay a claim to receive the income, there would be a diversion of income by overriding title. Referring to the decision of P.C. Mullick v. CIT [1938] 6 ITR 206 (PC), the Supreme Court had observed in Sunil J. Kinariwala's case (supra) as follows : "In Murlidhar Himatsingka's case [1966] 62 ITR 323 (SC). . . . It was held there was overriding obligation which converted the income of the partner in the main firm i....
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....e the share income of the concerned partner in the main partnership before it becomes the income of the partners. (3)Assessment of a share of income of a partnership in the hands of a partner has to be apportioned as per the provisions of the Income-tax Act and, thereafter, the income-tax authorities are required to determine whether it would be assessed in the hands of that partner or in the hands of the subpartnership. (4)The diversion of the income of a partner in the main partnership at source to the sub-partnership by overriding obligation created by the sub-partnership converts the income of a partner into the income of the sub-partnership, thus, vesting an enforceable right upon the sub-partnership to claim a share in the profits accrued to or received by the partner. (5)The right to receive profits and pay losses become the asset of the sub-partnership. 22. It would appear from the above principles that diversion of income by overriding title to sub-partnership confers upon it the attributes of a partner insofar as it relates to such income for the purpose of the Income-tax Act, 1961, irrespective of the provisions of the Indian Partnership Act, 1932. As stated here....
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.... (2)A trust cannot be a partner in a firm whereas a trustee may be. The share of income pertaining to such trustee is assessed in the hands of the trust. 24. In support of the above proposition, we may refer to the decisions of the Hon'ble Supreme Court in CIT v. Kalu Babu Lal Chand [1959] 37 ITR 123; Charandas Haridas v. CIT [1960] 39 ITR 202 and CIT v. A. Abdul Rahim & Co. [1965] 55 ITR 651. The decisions rendered therein are relevant for the purpose at hand are quoted below : Kalu Babu Lal Chand's case (supra) : "It is now well-settled that a Hindu undivided family cannot as such enter into a contract of partnership with another person or persons. The karta of the Hindu undivided family, however, may and frequently does enter into partnership with outsiders on behalf and for the benefit of his joint family. But when he does so, the other members of the family do not, vis-a-vis the outsiders, become partners in the firm. They cannot interfere in the management of the firm or claim any account of the partnership business or exercise any of the rights of a partner. So far as outsiders are concerned, it is the karta who alone is, and is in law recognized as, the partner. Whet....
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....f the karta, and assessee not him qua partner but as representing the Hindu undivided family. In doing so, the income-tax law looks not to the provisions of the Partnership Act, but to the provisions of Hindu law. When once the family has disrupted, the position under the partnership continues as before, but the position under the Hindu law changes. There is then no Hindu undivided family as a unit of assessment in point of fact, and the income which accrues cannot be said to be a Hindu undivided family. There is nothing in the Indian income-tax law or the law of partnership which prevents the members of a Hindu joint family from dividing any asset. Such division must, of course, be effective so as to bind the members, but Hindu law does not further require that the property must in every case be partitioned by metes and bounds, if separate enjoyment can otherwise be secured according to the shares of the members. For an asset of this kind there was no other mode of partition open to the parties if they wished to retain the property and yet 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 b....
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....the basic scheme of the Act since the income of the partner once taxed in the hands of the partnership would be again exigible to tax in the hands of sub-partnership. This would be contrary to the legislative scheme in force with effect from April 1, 1993, relating to assessment of partnership firm. The learned Tribunal negated the contention of the appellant-firm relying upon a decision of the Rajasthan High Court in CIT v. Alisher Contractors [1986] 159 ITR 534. But in that case, the assessment year in question was 1973-74, i.e., prior to April 1, 1993, when the scheme of the Act was different and the burden of tax was on the partner and not the partnership firm. The provision for exemption under section 10(2A) came into force with effect from April 1, 1993, and, therefore, the said decision could not be relied upon by the Tribunal in deciding the case at hand. 27. The Income-tax Act provides for levy of tax on the total income 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 an....