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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI [CAMP: COIMBATORE]
Before: SHRI N.R.S. GANESAN & SHRI ABRAHAM P. GEORGE
आदेश /O R D E R
PER BENCH:
These appeals filed by the Revenue in respect of the assessees concerned for the impugned assessment year are directed against the orders dated 31.03.2016 of the Commissioner of Income Tax (Appeals)-3, Coimbatore.
Grounds taken by the Revenue are common. It assails deletion of disallowance on claim made by the assessees under Section 40(b) of the Income-tax Act, 1961 (in short 'the Act').
Facts apropos are that the assessees had filed returns in the status of partnership firm for the impugned assessment year. During the course of assessment proceeding, it was noted by the Assessing Officer that the partnership firms consisted of the following partners:-
In M/s Aqua Pump Industries:-
S.No. Name of the Partners 1. Shri R. Kumaravelu HUF 2. The Marigold Trust 3. The Chrysanthemum Trust
In M/s Aqua Sub Engineering:-
S.No. Name of the Partners 1. Shri R. Kumaravelu HUF 2. The Marigold Trust 3. The Chrysanthemum Trust The Assessing Officer was of the opinion that in these partnership firms, there was not even a single partner who was a natural person.
As per the A.O., all the partners were legal or artificial entities and the partnership firms could not exist with artificial persons alone. When this was put to the assessees, their reply was that an individual could be a partner representing HUF where he was a member. Reliance was also placed on the judgment of Apex Court in the case of Rashik Lal & Co. v. CIT (1998) 229 ITR 458. However, the Assessing Officer was not impressed. According to him, by virtue of Section 40(b) of the Act, only an individual could be a partner in a partnership firm and an entity like HUF could not be a partner. He, therefore, treated the assessees as Association of Persons. Interest paid to the partners and remuneration to the working partners were disallowed and assessments completed.
Aggrieved, the assessees moved appeals before the CIT(Appeals). Argument of the assessees was that they were already under Section 185(1)(a) on 23.08.1993 and the firms were enjoying that status since assessment year 1991-92. As per the assessees, the deed of partnership was executed by three individuals, namely, Shri R.
Kumaravelu, Mrs. Homai Kumaravelu and Dr. H.S. Adenwalla. Just because they represented either HUF or Trust, as per the assessees, would not mean that the partnership firms were not genuine one. The assessees also relied on the judgment of Apex Court in the case of Chandrakant Manilal Shaw v. CIT (1992) 193 ITR 1 and also that of Hon'ble Bombay High Court in the case of Ishwar Bhuvan Hindu Hotel v. CIT (2006) 281 ITR 139. The CIT(Appeals) was appreciative of the contention taken by the assessees. According to him, in the case of Ram Laxman Sugar Mills v. CIT (1967) 66 ITR 613, the Hon'ble Supreme Court had held that the karta of a HUF could enter into an agreement of partnership with another undivided family member or stranger. Further, according to him, Hon'ble Supreme Court in the case of Rashik Lal & Co. (supra) clearly held that though a HUF could never be a partner of a partnership firm, if a person nominated by a HUF joins a partnership, the partnership would be between the nominated person and the other partners of the firm. Therefore, relationship of the karta as a partner vis-à-vis the firm and other partners may not be relevant in deciding whether the partnership was genuine or not. Insofar as application of Section 40(b) of the Act was concerned, as per the Ld. CIT(Appeals), this did not prohibit the karta of a HUF or a trustee of a trust becoming partners of a firm. As per the Ld. CIT(Appeals), for the concerned partnership firms, these persons could be considered as individuals. He relied on the judgment of Hon'ble Apex Court in CIT v. Bagyalakshmi & Co. (55 ITR 660) and also the commentary of Chaturvedi & Pithisaria as contained in page 3805 of Income Tax Law Volume 3 Sixth Edition 2014. He thus held that the assessees were genuine partnership firms and therefore, remuneration paid to working partners and interest paid to the partners could not be disallowed. He deleted the disallowance made.
Before us, the Ld. Departmental Representative strongly assailing the order of the Ld. CIT(Appeals), submitted that all the three partners in the firms were partners in representative capacity.
According to the Ld. D.R., unless one of these persons was a natural individual, a partnership firm could not be formed. Reliance was once again laid on the judgment of Apex Court in Rashik Lal & Co. (supra).
Per contra, Ld. AR strongly supporting the order of the Ld. CIT(Appeals), submitted that the partnership deeds clearly provide that the partnerships were entered into by the concerned individuals. Just because they represented a trust or HUF, as per the Ld. A.R., would not make the partnership a non-genuine one. In any case, according to him, the partnership firms had acquired the status of registered firms as early as assessment year 1991-92 under Section 185(1)(a) of the Act and therefore, the Assessing Officer could not disturb a consistent position taken by the Revenue for more than two decades.
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-
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 10 & 1959/Mds/16 C.O. Nos.111 & 112/Mds/16 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.
The cross-objections filed by the assessees being in support of the orders of the CIT(Appeals), have become infructuous.