By TIOL News Service

CHENNAI, JULY 12, 2013: THE issues before the Bench are - Whether a partnership firm having 20 partners, can admit an existing individual partner in the representative capacity of Deloitte Haskins & Sells, Mumbai, an already participating firm, so that they became entitled for a share of profit; Whether this can be construed as indirectly bringing on board Deloitte Haskins & Sells, Mumbai and circumventing the statutory limit of 20 partners under the Partnership Act; Whether when assessee has claimed substantial amount as remuneration to its partners u/s 40(b) which was allowed without considering the crucial aspect of the legality of its claim of status as a firm, such assessment order becomes an erroneous one and prejudicial to the interests of Revenue; Whether when an attempt is made by a concern to evade tax using subtle camouflages, bounden duty of the authorities is to find out the real intention and Whether the CIT went over board when he directed the AO to modify the assessment order by treating the assessee as an AOP and disallow the claim of remuneration to its partners. And the verdict partly goes in favour of the Revenue.

Facts of the case

Assessee, a firm of Chartered Accountants, made an amendment in its partnership deed whereby one Shri Mukund Dharmadhikari, already a partner of the firm, was added once again as partner in a representative capacity, representing M/s Deloitte Haskins & Sells, Mumbai. Shri Mukund Dharmadhikari had a share of 20.0530% in the total profits left, after paying Rs. 267 lakhs to him in his capacity as representative partner of M/s Deloitte Haskins & Sells, Mumbai. The assessee brought into the partnership M/s Deloitte Haskins & Sells, Mumbai, which was already a participating firm. The assessee had claimed allowance on the salaries paid to the partners, which was allowed by the AO in the assessment order. However, the CIT issued a show cause notice u/s 263 to the assessee on the ground stating that the assessee had tried indirectly to circumvent the maximum limit of 20 partners allowed in a firm and thus, the number of partners in the firm had gone above 20, during the relevant previous year. The CIT noted that Shri Mukund Dharmadhikari had right to share of profit, both in the representative capacity as well as in his individual capacity. Thus, according to him, the number of partners exceeded 20, maximum allowed under Indian Partnership Act, 1932. He opined that the assessee had to be treated as an Association of Persons. Therefore, as per him the AO did not consider this aspect, but had accepted the claim of the assessee that it was a firm and on account of this, assessee was allowed deduction u/s 40(b) of the Act on salaries paid to its partners.

The assessee argued that the number of partners did not exceed 20. The assessee relied on the decision of Apex Court in the case of CIT v. Bagyalakshmi & Co and argued that an individual could represented group of persons as well as himself thereby occupying a dual position. As per assessee, the right of Shri Mukund Dharmadhikari was only to share the profits of the assessee-firm and nothing more. He submitted that agreement which an individual had with a third party to divide the profits received from the firm did not bind the firm nor did it alter the position of the firm under the Partnership Act or Income-tax Act. However, the CIT was not impressed by any of the above contentions taken by the assessee. Therefore, he exercised his revisionary powers and directed the AO to modify his assessment order and enhance the assessment by disallowing the claim made by the assessee.

Aggrieved, the assessee has filed this appeal before the Tribunal.

The counsel of the assessee submitted that even if Shri Mukund Dharmadhikari was considered as a representative of M/s Deloitte Haskins & Sells, Mumbai, he still remained an individual qua the assessee-firm. For the purpose of count, what mattered was number of individuals. Section 4 of Indian Partnership Act, 1932 was clear that there had to be a relation between partners agreeing to share the profits for a partnership to come into existence. According to him, when a person was treated as a partner in his representative capacity, it could not be stated that the firm was bound to the person whom he was representing. Once again the counsel relied on the decision of Apex Court in the case of Bagyalakshmi & Co. and submitted that a partner could be a trustee, could enter into partnership with others, could be a representative of group of persons or could be a benamidar. He finally submitted that though Shri Mukund Dharmadhikari was a partner both in his individual capacity as well as in a representative capacity, but, qua the assessee-firm, Shri Mukund Dharmadhikari was only one person.

On the other hand, the Departmental Representative contended that strongly supported the order of CIT, and submitted that the AO had committed gross error in not verifying the supplementary deed. As per the DR the AO had without applying his mind, accepted the claim of the assessee that it was a partnership firm and also allowed its claim of remuneration u/s 40(b) of the Act. Hence, according to him, CIT was justified in invoking his revisionary power under Section 263 of the Act.

Having heard the parties, the Tribunal held that,

++ one is that M/s Deloitte Haskins & Sells, Mumbai, which is a participating firm, is not a stranger to the assessee. Assessee can take policy decisions, which have a policy bearing on such firm, once there is an approval of the majority of the members of the “National Firm”. Shri Mukund Dharmadhikari was representing M/s Deloitte Haskins & Sells, Mumbai, which was a participating firm. What can easily be construed from the above is that endeavour of the assessee through the amendment deed, was to bring on board the participating firm, on which it had powers to make policy decision, so that they became entitled for a share of profit. In other words, the effort of the assessee was to bring indirectly into the partnership M/s Deloitte Haskins & Sells, Mumbai, which was already a participating firm. Assessee was a renowned partnership firm and was well aware that number of partners cannot exceed 20. It is a well settled principle of law that what is permissible is tax planning, but not evasion. When an attempt is made by a concern to evade tax using subtle camouflages, bounden duty of the authorities is to find out the real intention. It is the duty of the Court in every case, where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smokescreen and discover the true state of affairs, as held by jurisdictional High Court in the case of Indo Tech Electric Co. v. DCIT. The Court has to go into substance and not to be satisfied with the form. No doubt, as pointed out by the A.R., Apex Court in the case of Rashik Lal & Co. has clearly held that a partner may be a trustee or may enter into a sub-partnership with others, or can be a representative of a group of persons. Qua the partnership, he functions in his personal capacity;

++ but, in our opinion, the above decision as well as decision in the case of Bagyalakshmi & Co. of Apex Court will not have any applicability here, since assessee was indirectly trying to bring in M/s Deloitte Haskins & Sells, Mumbai, another firm, which was already a participating firm, as its partner, circumventing the limit of maximum 20 members. It is also obvious that Assessing Officer despite having the amendment deed with him, had not gone into these aspects. Assessment order is a crisp one accepting the income returned by the assessee. Assessee has not been able to place any record to show that Assessing Officer had called for any details regarding the number of partners during the course of assessment. A crisp order by itself might not show that Assessing Officer had not applied his mind. But, when the circumstances show that despite availability of materials, aspects vital to the assessment were missed out, then the normal inference that can be drawn is that Assessing Officer had not looked into such aspects nor applied his mind. Assessee had claimed substantial amount as remuneration to its partners under Section 40(b) of the Act and this was allowed as such without considering the crucial aspect of the legality of its claim of status as a firm. In our opinion the circumstances would show that Assessing Officer had not applied his mind and such assessment order by virtue of this, became an erroneous one which was prejudicial to the interests of Revenue;

++ no doubt, the CIT went over board when he directed the Assessing Officer to modify the assessment order by treating the assessee as an AOP and disallow the claim of remuneration to its partners. The CIT ought have simply set aside the order of A.O. for consideration of issue afresh, since it was erroneous insofar as it was prejudicial to the interests of Revenue and to this extent, order of CIT required modification. Thus, while confirming the order of CIT(Appeals) insofar as invocation of his powers under Section 263 of the Act is concerned, we find it necessary to modify his order. Assessing Officer shall be free to consider the claim of the assessee afresh and will not be constrained by the direction of the CIT that assessment has to be done disallowing the claim of remuneration to partners. Assessing Officer shall be free to proceed in accordance with law.

(See 2013-TIOL-610-ITAT-MAD)