Whether HUF can be a Partner

 

“Partnership “is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.


Persons who have entered into partnership with one another are called individually “partners” and collectively “a firm”, and the name under which their business is carried on is called the “firm name”.


Thus, here also the word has been defined by including the word persons.


The word person again has not been defined in the Act. Here again, We have to, refer to the definition as given in the General Clauses Act,1897 as we have seen in earlier case and the same is reproduced again.


Section 3(42) of General Clauses Act, 1897


(42) “person” shall include any company or association or body of individuals, whether incorporated or not:


The definition as given above is an inclusive definition and not an exclusive definition and therefore it follows that the word person is of wide import. There is no clear cut answer to this question and for this we have to refer to the established judicial pronouncements in this regard. As we have seen that a partnership is a contractual relationship, while the relationship under the Hindu law depends upon the status as a member of the family. A Hindu undivided family is a fleeting body. Its composition changes by birth, death, marriage and divorce. Such a partnership is likely to have a precarious existence. Hence one cannot lightly infer that a Hindu undivided family can bind a partnership in such capacity. In a recent judgement of SC in the case of Rashik Lal and Co. vs. Commissioner of Income-tax reported at (1998) 229 ITR 458, the Hon’hle Supreme court held as under:

 

A firm is a compendious way of describing the individuals constituting the firm. A Hindu undivided family directly or indirectly cannot become a partner of a firm because the firm is an association of individuals. Under Hindu law, not all members of the joint family, hut only such o its members as have, in fact, entered into partnership with the stranger, become partners. The Partnership Act, 1932, contains various provisions regarding the relationship among partners. All these provisions relating to mutual rights and liabilities are only applicable to the individual partners who are members of the firm. There is no way that a Hindu undivided family-can intrude into the relationship created by a contract between certain individuals. The only right of the Hindu undivided family is possibly to call upon its nominee partner to render accounts for the profits that he has made from the partnership business. But that is something between the nominee and the Hindu undivided family, with which the partnership is not concerned. The specific provision in section 13 of the Partnership Act, 1932, that a partner is not entitled to receive any remuneration for taking part in the conduct of the business, has been interpreted to mean that every partner is bound to attend diligently to the business of the firm. For doing his duties, he cannot charge his co-partners any sum or remuneration, whether in the shape of salary, commission or otherwise, on account of the trouble taken by him in conducting the partnership business. There, however, can be a special contract to the contrary in which case, the provisions of that contract will prevail. Section 40(b) of the Income-tax Act, 1961, will apply, even when there is such a special contract. Any commission paid by a firm to its partner will not be permitted as deduction from. the business income of the firm. If a claim is made by a partner that he is representing a Hindu undivided family or any other body of persons, the position in law will not be any different. The Hind,, undivided family is not and cannot be a partner in a partnership firm. The remuneration or the commission that is paid to the partner cannot be claimed to be a remuneration or commission paid to the Hindu undivided family. The partner may be accountable to the family for the monies received by him from the partnership. But, in the assessment of the firm, the partner cannot he heard to say that he has not received the commission as a partner of the firm, but in a different capacity. The application for registration of a firm has to be made under section 184 of the Income-tax Act. The very facts that individual shares of the partners have to he specified and that such partners must personally sign the partnership deed and also the application for registration go to show that even if a person joins a firm as a representative of a Hindu undivided family or any other body or association, within the firm, his position is that of an individual. He may have an agreement with a third party to divide the profits received from the firm, but that agreement does not bind the firm nor does it alter the position of the partners under the Partnership Act or the Income-tax Act. A partner does not act in a representative capacity in the partnership. He functions in his personal capacity like any other partner. The provisions of the Partnership Act and the income-tax Act relating to partners and partnership firms will apply in full force in respect of such a partner. If any remuneration is paid or a commission is given to a partner by a partnership firm, section 40(b) will apply even if the partner has joined the firm as a nominee of a Hindu undivided family. The Hindu undivided family or its representative does not have any special status in the Partnership Act. Although the partnership firm is not a legal entity, it has been treated as an independent unit of assessment under the Income-tax Act. The assessment of a firm will have to be made strictly in accordance with the provisions of the Income-tax Act. The law has to be taken as it is. Section 40(b) applies to certain payments made by a firm to its partners. Neither the firm nor its partners can evade the tax law on the pretext that although in law he is a partner, in reality he is not so. He may have to hand over the money to somebody else. That may be his position qua a third party. But the firm has nothing to do with it. It has paid the commission to one of its partners. It cannot get any deduction in its assessment for that payment, because section 40(b) of the Act expressly prohibits such deduction.


There has been several decisions earlier also in this regard and the courts have not yet settled the issue whether it is possible for a HUF to become partner in the firm.


1.         The Supreme Court in Brij Mohan Das Laxman Das vs CIT [1997] 223 ITR 825 had earlier held in the light of a subsequent Explanation introduced in section 40(b) with effect from April 1, 1985, that a partner can have a dual role vis-à-vis the firm. While representing his joint family as the Karta he can get interest for his personal funds invested in the firm. The decision was followed in Suwalal Anaridilal Jam vs CIT [1997] 224 ITR 753 (SC) in a Bench presided over by three judges, where no conflict was envisaged in exercise of such dual capacity of a partner vis-à-vis the firm, with the caution that ‘this legislative recognition of the theory of different capacities an individual may hold-no doubt confined to clause (b) of section 40’.


2.         In the case of CIT vs Trilok Nath Mehrotra and Others reported at. (1998) 231 ITR 278, the question came up before the Hon’ble Apex Court as to whether on the facts and circumstances of the case , the Tribunal was justified in law in holding that salary could not be assessed in the hands of the Hindu Undivided family”. This was a case the member of the HUF was a partner in the firm on behalf of the HUF. The member was paid salary as a managing partner for the services rendered by him. The salary was held to be his individual income. In so deciding, the Hon’ble Apex Court observed as under:

 

Thus, there is a judicial conflict in this regard and for the purposes of Income-tax Act, 1961, a partnership between an individual and HUF is still possible though in such cases, it is the Karta who joins the partnership firm on behalf of HUF. Reliance in this regard can be placed on several decisions of various High Courts. In the case of Commissioner of Income-tax vs Tej Cloth Weaving Factory reported at (1989) 178 ITR 474, the Punjab & Haryana High Court had to deal with a situation where three HI.Fs through their respective Kartas were partners in a partnership firm. Again the fact that the Karta of HUF can be partner in the Partnership firm is time and again discussed and impliedly approved by the Apex Court in the following decisions:

 

1.         V.D.Dhanwatey vs CIT (1968) 68 ITR 365.


2.         The CIT. Bangalore vs Shri D.C. Shah(1969) 1 SCC 550


3.         Jugal Kishore Baldeo Sahai vs CIT(1967) 1 SCR 416


4.         Jitmal Bhuramal vs CIT(1962) 44 ITR 887


5.         Mathura Prasad vs CIT(1966) 60 ITR 428


6.         CIT WB vs Kalu Babu Lal Chand (1959) 37 ITR 123

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