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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI A. MOHAN ALANKAMONY
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
This appeal of the assessee is directed against the order of the Principal Commissioner of Income Tax-2, Coimbatore, dated 29.02.2016, for the assessment year 2011-12.
Shri S. Subramaniam, the Ld. representative for the assessee, submitted that the Assessing Officer completed the assessment under Section 143(3) of the Income-tax Act, 1961 (in short 'the Act') treating the assessee as firm. However, Principal Commissioner, in exercise of power under Section 263 of the Act, found that HUF or trust cannot be a partner in the partnership firm, hence, the assessee has to be treated as Association of Persons.
Referring to the order of this Tribunal in I.T.A.
No.1959Mds/2016 dated 03.02.2017, the Ld. representative for the assessee submitted that a member nominated by HUF can be a partner in the partnership firm. This Tribunal placing its reliance in the judgment of Apex Court in Rashik Lal & Co. v. CIT (1998) 229 ITR 458, found that an individual coparcener of HUF can be a partner in representative capacity in the partnership firm. According to the Ld. representative, the Tribunal has also placed its reliance on the judgment of Apex Court in CIT v. Bagyalakshmi & Co. (1965)
55 ITR 660. Therefore, according to the Ld. representative, the Principal Commissioner is not justified in treating the assessee as Association of Persons.
On the contrary, Ms. Vijayalakshmi, the Ld. Departmental Representative, submitted that a HUF or trust cannot become a partner in the partnership firm. In this case, the HUF and trust were taken as partner, therefore, it cannot be treated as a valid partnership firm. Hence, it has to be assessed only as Association of Persons and not as firm, therefore, provisions of Section 40(b) of the Act is squarely applicable. According to the Ld. D.R., since the Assessing Officer has treated the assessee as firm, the order of the Assessing Officer is erroneous and prejudicial to the interests of Revenue, therefore, the Principal Commissioner has rightly exercised his revisional power under Section 263 of the Act.
We have considered the rival submissions on either side and perused the relevant material available on record. The issue arises for consideration before this Tribunal is whether the assessee has to be assessed either as firm or Association of Persons. This was considered by this Tribunal in in the assessee's own case, for assessment year 2012-13. This Tribunal after considering the constitution of partnership firm and judgments of Apex Court in Rashik Lal & Co. (supra) and Bagyalakshmi & Co.
(supra), found that individual coparcener or an individual trustee can be a partner in the representative capacity in a partnership firm. In the case before us, as found by the Tribunal for assessment year 2012-13, the coparcener and trustee are partners only in representative capacity, therefore, the partnership firm was validly constituted. In fact, the Tribunal observed as follows:-
“7. We have perused the orders and heard the rival contentions carefully. The question before us is whether the partnership was one formed between the HUF and two trustees or between three individuals. One more question also arises whether a valid partnership could be formed between three persons in representative capacity. Relevant clauses in partnership deed in the case of Aqua sub Engineering read as under:-
“THIS DEED OF PARTNERSHIP entered this Twenty Fourth Day of May, One Thousand Nine Hundred and Ninety among:
(1) Mr. R. KUMARAVELU, Son of Late Mr. R. Ramaswamy, aged about 37 years, residing at 703, Avanashi Road, Coimbatore, hereinafter called “the Party of the First Part”;
(2) Mrs. HOMAI KUMARAVELU, Wife of Mr. R. Kumaravelu, aged about 28 years, residing at 703, Avanashi Road, Coimbatore, hereinafter called “the Party of Second Part”;
(3) Dr.H.S. ADENWALLA, Son of Late Sorab Hirji Adenwalla, aged about 59 years, residing at Jubilee Mission Hospital, Trichur hereinafter called “the Party of Third Part”;
AND (4) Mrs. DAMAYANTI RAMACHANDRAN, Wife of Late Mr. R. Ramachandran, aged about 43 years, residing at 16 A.T.D Street, Race Course, Coimbatore, hereinafter called “the Party of the Fourty Part” ”
Similar is the wordings in the case of Aqua Pump Industries also. The Assessing Officer had considered these firms to have been formed between these persons in their
representative capacity and not in their individual capacity, considering the following clause appearing in page 2 of the partnership deed. The said clause is reproduced hereunder:-
“WHEREAS, the parties hereto of the Second and Third Parts are Partners in a representative capacities respectively, representing “THE CHRYSANTHEMUM TRUST”, and “THE MARIGOLD TRUST”, being trusts evidenced by two indentures of Trust dated the Twentyfifth day of February, One Thousand Nine Hundred and Ninety.
WHEREAS, Mr. R. Kumaravelu the party hereto of the First Part represents the Hindu Undivided Family consisting of himself, his wife and minor daughter, of which Hindu Undivided Family he is at present the Kartha.”
In our opinion, the above clause would not ipso facto convert partnership firm as one entered between two Trusts and an HUF. This is because of the reason that in the first part of partnership where the description of parties are given, it is never stated that the parties were representing any Trust or HUF. Even if we take that Shri R. Kumaravelu was representing an HUF, by virtue of judgment of Apex Court in the case of Rashik Lal & Co. (supra), he could also be considered as a partner in his individual capacity. Para 13 of the judgment of Apex Court is reproduced hereunder:-
“A Hindu undivided family cannot be in a better position than a firm in the scheme of the Partnership Act. The reasons that led this court to hold that a firm cannot join a partnership with another “individual” will apply with equal force to a Hindu undivided family. In law, a Hindu undivided family can never be a partner of a partnership firm. Even if a person nominated by the Hindu undivided family joins a partnership, the partnership will be between the nominated person and the other partners of the firm. Having regard to the definition of “partnership” and “partners” and in view of the principle laid down in Dulichand’s case [1956] 29 ITR 535 (SC), it is not possible to hold that a Hindu undivided family being a fluctuating body of individuals, can enter into a partnership with other individual partners. It cannot do indirectly what it cannot do directly. If the karta or any other member of a Hindu undivided family joins a partnership, he can do so only as an individual. His rights and obligations vis-a-vis other partners are determined by the Partnership Act and not by Hindu law.”
What their Lordship held is that even if a person nominated by a HUF joins a partnership, the partnership could be deemed as one between such nominated person and other partners of the firm. The Apex Court did not hold that such partnership would only be an Association of Persons. In any case, it is not in dispute that the assessees were granted the status of registered firm by virtue of provisions of Section 185(1) of the Act since assessment year 1991-92. The position continued for a period of twenty years and it was after such twenty years, the Assessing Officer attempted to disturb this. When a set of facts which permeates from earlier years, is consistently the same, it would not be appropriate to disturb the conclusions reached based on such facts. No doubt, rule of res judicata may not be applicable to the income-tax proceedings, but the rule of consistency demands that a position consistently taken shall not be disturbed unless there were significant change in facts. Insofar as reliance placed on Section 40(b) of the Act by the A.O. is concerned, there is nothing in that section to conclude that a partnership could not be formed by a karta of an HUF in his individual capacity with other persons. The same, in our opinion, would also apply where an individual who joins partnership in a representative capacity. It can always be considered that he was doing so in his individual capacity. This position has been reiterated by Hon'ble Apex Court in the case of Bagyalakshmi & Co. (supra), which has also been relied on by the Ld. CIT(Appeals). Considering the facts of the case, we are inclined to uphold the orders of the CIT(Appeals). The appeals of the Revenue stand dismissed.”
In view of the above, this Tribunal is unable to uphold the order the Principal Commissioner. The order of the Principal Commissioner is quashed.
In the result, the appeal filed by the assessee is allowed.
Order pronounced on 27th July, 2017 at Chennai.