Case: Rashik Lal and Company Vs. Commissioner of Income Tax

scope for any argument that even though under the Indian Partnership Act, an HUF not being a person cannot be a partner, but the payment of commission to the nominee partner will tantamount to payment to the HUF and therefore, such payment will not come within the mischief of S. 13 of the Partnership Act or S. 40(b) of the IT Act. To repeat what has been stated in Mullas Hindu Law only the members who have entered into partnership are to be regarded as partners. The position of the other members is no higher than sub-partnership.17. The application for registration of a firm has to be made under S. 184 of the IT Act. It is specifically provided that :(1) the partnership must be evidenced by an instrument in writing;(2) the individual shares of partners must be specified in that instrument;(3) the application for registration shall be signed by all the partners.The very fact that individual shares of the partners have to be 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 an HUF 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 IT Act. This aspect of the matter was explained by Subba Rao, J. (as his Lordship, then was) in the case of CIT vs. Bagyalakshmi & Co. 1985 (55) ITR 660 (SC) : TC 33R.1334 in the following words : "A partnership is a creature of contract. Under Hindu Law a joint family is one of status and right to partition is one of its incidents. The IT law gives the ITO a power to assess the income of a person in the manner provided by the Act. Except where there is a specific provision of the IT Act which derogates from any other statutory law or personal law, the provision will have to be considered in the light of the relevant branches of law. A contract of partnership has no concern with the obligation of the partners to others in respect of their shares of profit in the partnership. It only regulates the rights and liabilities of the partners. A partner may be the Karta of a joint Hindu family; he may be a trustee; he may enter into a sub-partnership with others; he may, under an agreement, express or implied, be the representative of a group of persons; he may be a benamidar for another. In all such cases he occupies a dual position. Qua the partnership, he functions in his personal capacity; qua the third parties, in his representative capacity. The third parties, whom one of the partners represents, cannot enforce their rights against the other partners nor the other partners can do so against the said third parties." * This judgment given by a Bench of three Judges of this Court is a complete answer to the argument advanced on behalf of the assessee. 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 IT 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, S. 40(b) will apply even if the partner has joined the firm as a nominee of an HUF. The HUF 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 IT Act. The assessment of a firm will have to be made strictly in accordance with the provisions of the IT Act. The law has to be taken as it is. Sec. 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 but 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 of S. 40(b) of the Act expressly prohibits such deduction.18. The basic principle that a firm is a compendious mode of describing the persons constituting the firm must not be overlooked. It is the individuals constituting the firm who are its partners. The partner may be under an obligation to hand over the monies received by him to somebody else by virtue of a sub-contract or any other arrangement. That will not change the character of the payment by the firm to its partner or the status of the partner in the firm. The firm is not entitled to get any deduction on account of payment of commission to a partner merely because the partner has an obligation to share the money with somebody else. So far as the firm was concerned, the commission was paid to one of the partners in his personal capacity.The provisions relating to assessment of the firm should not be construed in a way to defeat its object. Sec. 40(b) forbids deduction of any amount paid by way of commission to partner. In the instant case, Rashiklal is a partner of the firm Rashiklal & Co. The commission received by him from the partnership firm cannot be allowed as a deduction from the business income of the partnership. 19.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]16. Under the IT Act, 1961, firm, partner and partnership have been given the same meaning as assigned to them in the Partnership Act. But the expression partner has been extended to include any person who, being a minor, has been admitted to the benefits of a partnership. Therefore, there is no scope for any argument that even though under the Indian Partnership Act, an HUF not being a person cannot be a partner, but the payment of commission to the nominee partner will tantamount to payment to the HUF and therefore, such payment will not come within the mischief of S. 13 of the Partnership Act or S. 40(b) of the IT Act. To repeat what has been stated in Mullas Hindu Law only the members who have entered into partnership are to be regarded as partners. The position of the other members is no higher than sub-partnership.17. The application for registration of a firm has to be made under S. 184 of the IT Act. It is specifically provided that :(1) the partnership must be evidenced by an instrument in writing;(2) the individual shares of partners must be specified in that instrument;(3) the application for registration shall be signed by all the partners.The very fact that individual shares of the partners have to be 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 an HUF 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 IT Act. This aspect of the matter was explained by Subba Rao, J. (as his Lordship, then was) in the case of CIT vs. Bagyalakshmi & Co. 1985 (55) ITR 660 (SC) : TC 33R.1334 in the following wordspartnership is a creature of contract. Under Hindu Law a joint family is one of status and right to partition is one of its incidents. The IT law gives the ITO a power to assess the income of a person in the manner provided by the Act. Except where there is a specific provision of the IT Act which derogates from any other statutory law or personal law, the provision will have to be considered in the light of the relevant branches of law. A contract of partnership has no concern with the obligation of the partners to others in respect of their shares of profit in the partnership. It only regulates the rights and liabilities of the partners. A partner may be the Karta of a joint Hindu family; he may be a trustee; he may enter into a sub-partnership with others; he may, under an agreement, express or implied, be the representative of a group of persons; he may be a benamidar for another. In all such cases he occupies a dual position. Qua the partnership, he functions in his personal capacity; qua the third parties, in his representative capacity. The third parties, whom one of the partners represents, cannot enforce their rights against the other partners nor the other partners can do so against the said third parties."judgment given by a Bench of three Judges of this Court is a complete answer to the argument advanced on behalf of the assessee. 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 IT 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, S. 40(b) will apply even if the partner has joined the firm as a nominee of an HUF. The HUF 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 IT Act. The assessment of a firm will have to be made strictly in accordance with the provisions of the IT Act. The law has to be taken as it is. Sec. 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 but 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 of S. 40(b) of the Act expressly prohibits such deduction.18. The basic principle that a firm is a compendious mode of describing the persons constituting the firm must not be overlooked. It is the individuals constituting the firm who are its partners. The partner may be under an obligation to hand over the monies received by him to somebody else by virtue of a sub-contract or any other arrangement. That will not change the character of the payment by the firm to its partner or the status of the partner in the firm. The firm is not entitled to get any deduction on account of payment of commission to a partner merely because the partner has an obligation to share the money with somebody else. So far as the firm was concerned, the commission was paid to one of the partners in his personal capacity.The provisions relating to assessment of the firm should not be construed in a way to defeat its object. Sec. 40(b) forbids deduction of any amount paid by way of commission to partner. In the instant case, Rashiklal is a partner of the firm Rashiklal & Co. The commission received by him from the partnership firm cannot be allowed as a deduction from the business income of the partnership.