Loans advanced by partner to firm does not fall in the purview of Sec 269SS

Brief Facts of the case:

The respondent assessee in all these appeals are partnership firms engaged in the business of banking and registered under the Kerala Money Lending Act. The assessees had filed return of income and the same was accepted in due course. Thereafter, notice under Section 148 of

the Act was issued to the respondent-assessees. During the course of the reassessment proceedings, it was it was found that the firm had accepted advances from the partners, during the various years in cash as Total advances made by the partners in 2 financial years to the firm: Rs. 16, 29,09,000.

The Assessing Officer taking the view that the partners and the firm being two distinct and separate entities/persons thus, transaction of advances in cash between them in excess of limits prescribed under Sec 269SS is contravention of the same section , attracting penalty of equivalent to amount of advances u/s 271D.Acordingly,assessee was slapped with the penalty amounting to Rs. . 16,29,09,000. u/s 271D.

Assessee carried the matter to CIT(A) who upheld the order of the Assessing Officer imposing penalty under Section 271-D of the Act by setting aside the assessee’s plea that the contravention does not fall in the reasonable cause clause of Sec 273B.

Aggrieved by the order of CIT (A), assessee challenged his order before ITAT Delhi .ITAT concluded that the advance made to the firm by one of its partners cannot be regarded as loan .Thus, the transaction is not even covered by Sec 269SS, so no question of its contravention.

Revenue aggrieved by the decision of ITAT preferred appeal to Hon’ble Delhi High Court. 

Contention of the Assessee:

The learned counsel for assessee contended that the amount advanced being from a partner to the firm cannot be regarded as a loan but, is a capital of the firm and the transaction cannot be taken as an independent transaction as the partnership firm has neither a separate legal entity nor there a separate identification between the firm and the partner. As such, there was no violation of Section 269-SS of the Act. Assessee also quoted several judgments in support of his arguments.

Contention of the Revenue:

The learned counsel for the revenue contended that ITAT was wrong in allowing the appeal of the assessee by taking the view that the payments made by one of its partner, cannot be regarded as loan advanced to the firm. According to him, the firm and its partners are separate legal entities for the purpose of the Act and the amount advanced is a loan and further the amount being in excess of Rs. 20,000. is violation of Sec 269SS. He relied upon the judgment of this Court in the case of Commissioner of Income Tax Vs. Nagpur Golden Transport Co., [1998] 233 ITR 389 (Delhi) in support of his contentions.

Decision of the Hon’ble High Court:

The High Court observed that the status of partners vis-à-vis the firm has been summed up by the Hon’ble Supreme Court in the case of Commissioner of Income Tax, Madras Vs. R.M.Chidambaram Pillai & Ors (1977) 1 SCC 431, wherein the Supreme Court held that a firm is not a legal person even though it has some attributes of the legal personality. According to the Court, partnership is a certain relation between persons, the product of agreement to share the profits of a business. Firm is a collective noun, and a compendious expression to designate an entity, not a person. In Income Tax Law, a firm is a separate assessee by special provisions but is not a full person;

Applying this principle, the court concluded that the transaction effected in these cases cannot partake the colour of loan or deposit and as such, Section 269-SS nor Section 271-D of the Act would come into play.

Appeal of Revenue is, thus, dismissed.

(Analysed by CA Saurabh Chokhra)