AI Drafter 
TaxTMI 
TaxTMI 
2023 (1) TMI 1462
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....e Act on 25.11.2021, wherein the exemption claimed 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 ....
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....t the same time it is stated that under Section 28 of the LLP Act, 2008 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 Indi....
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....e called individually "partners" and collectively "a firm" and the name under which their business is carried on is called the "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....
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....ment. The extent of liability of limited liability partnership given in Section 27 reads as follows: 27. Extent of liability of limited liability partnership.-(1) A limited liability partnership is not bound by anything done by a partner in dealing with a person if- (a) the partner in fact has 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 S....
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....rtnership. 19. In the judgment in Dhuli Chand's case, the Apex Court was considering a case where the Income Tax Officer rejected an application submitted under Section 26A of the Income Tax Act on the ground that the deed of partnership consisted of three firms, one Hindu undivided family business and one individual. Apex Court found that a firm cannot be treated as a person which can enter into a partnership 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 partne....
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....prises. The section 10(2A) of the Act grants exemption to a person being a partner of firm which is separately assessed as such, his share in the total income of the firm. The firm has been defined in section 2(23) of the Act, which includes LLP also. The Act is very clear that the LLP is to be treated as a firm. A firm can be a partner in other partnership firms. There is no restriction in the income tax Act for becoming partner by firm in other partnership 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 d....
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....om the firm. This position continued till 31-3-1993. The Finance Act, 1992, introduced wide changes in respect of assessment of income of the firms with effect from 1-4-1993. The changed position applicable to the assessment years 1996-97 and 1997-98 recognizes two kinds of firms, i.e., firm, assessed as firm under section 184 and firm assessed as association of persons under section 185. 15. In the instant case, the admitted position is that M/s. Rock International and M/s. Radha 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, t....
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....g was a society engaged in 'marketing' of the agricultural produce of its members. The court held that the object of section 81(1) was to encourage and promote growth of co-operative societies and consequently, a liberal construction must be given to the operation of that provision. And since ginning and pressing was incidental or ancillary to the activities mentioned in section 81(1), the assessee was entitled to exemption and the proviso did not stand in his way. In CIT v. Strawboard Manufacturing Co. Ltd. [1989] 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 IT....
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....ner could not before the Partnership Act, 1890, be held liable to the creditors of the principal firm by reason only of his participation in the profits thereof, and there is nothing in that Act to alter the law in this respect." (p. 329) 20. The above judgment of the Apex Court lends support to the contention of Shri R.P. Agarwalla that sub-partnership has been recognized in India and registration has been accorded to them under the Indian Income-tax Act, 1922. It has also been held that sub-partnership creates a superior title and diverts the income before 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 ....
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....me of the assignor-partner." (p. 17) 21. From the decisions referred to above, we may cull out the following principles relating to diversion of share of income of a partner at source by overriding title : (1)A sub-partnership is a partnership within a partnership in respect of the share of a partner in the main partnership. Formation of a sub-partnership does not affect the position of the partner in the main partnership though its character changes vis-a-vis the sub-partnership and the income-tax authorities. (2)The superior title of the sub-partnership diverts at source 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-partner....
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....of "partnership" in the Partnership Act, the sub-partnership in the instant case could not enter into any partnership for the reason that one partner of such firm signing on behalf of the firm would not meet the requirement short of compliance with rule 2. The following situations better clarify the position : (1)A Hindu undivided family cannot be partner per se in a firm under the Partnership Act, though a "karta" representing it can be a partner therein. For the purpose of the Partnership Act, his position in the firm is that of a partner and his share is not assessed in his hands but in the hands of the Hindu undivided family. (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) : ....
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....a particular income may be treated as the income of the Hindu undivided family or as the income of the separated members enjoying separate shares by partition. The fact of a partition in the Hindu law may have no effect upon the position of the partner, insofar as the law of partnership is concerned, but it has full effect upon the family insofar as the Hindu law is concerned. Just as the fact of a karta becoming a partner does not introduce the members of the undivided family into the partnership, the division of the family does not change the position of the partner vis-a-vis the other partner or partners. The income-tax law before the partition takes note, factually, of the position of 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 fa....
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.... in Assam Bengal Carriers Ltd. v. CIT [1999] 239 ITR 862, 886 (Gauhati) it is held-"When a legal fiction is created for an obvious purpose full effect of it is to be given-there is no half way house". 26. Let us consider the anomalous situation that would emerge in case a sub-partnership is not deemed to be a partner in respect of assessment of its income diverted from a partner in the main partnership by overriding title. With effect from April 1, 1993, the income of a partnership is subject to tax in the hands of the firm. The share of an individual partner has been exempted under sub-section (2A) of section 10. If the benefit of section 10(2A) is denied in case of diversion, it would completely nullify 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 ....