Loan between firm and partners is out of ambit of Section 269SS
Facts of the Case- During the course of the assessment proceedings, it was found that the firm had accepted payments from the partners, during the relevant year corresponding to the Assessment Years, in cash. The details of the total amounts paid to the individual firm by the partners in all the aforesaid four appeals are as under:
|Appeal No.||Amount of advance made by the partners||Assessment Year||Amount of Penalty|
|ITA No. 336/2002||Rs. 2,08,45,000/-||1996-97||Rs.2,08,45,000/-|
|ITA No. 338/2002||Rs.2,29,34,000/-||1998-99||Rs.2,29,34,000/-|
|ITA No. 341/2002||Rs.52,600,000/-||1998-99||Rs.5,90,00,000/-|
|ITA No. 345/2002||Rs.66,530,000/-||1998-99||Rs.66,530,000/-|
It was the case of the assessees before the Assessing Officer (as noted from ITA No. 341/2002) that in the case of a partnership firm, there is no difference between the firm and the partners. As a partner of the firm, he is a part of the firm itself. Section 269-SS of the Act has no application in a transaction between the partner and the firm.
The Assessing Officer, in his order, was of the view that the partners and the firm being two distinct and separate entities/persons are also in the mischief of Section 269SS of the Act. According to him, the assessees had maintained three accounts; (1) capital account, (2) current account, (3) loan account. As per the partnership deed of the firm, Rs. 10,000/- was contributed equally by all the partners. It was his conclusion that the transactions under reference were not part of the current account or the capital account. He held that interest was given to the partners on the amount advanced, which conclusively proved that transactions are between different persons whereby the firm has accepted and repaid loans in cash, and accordingly, initiated the proceedings under Section 271D and 271E of the Act and thereby imposed penalty under Section 271D of the Act.
Held by CIT (A) – In appeals, the Commissioner of Income Tax (Appeals) upheld the order of the Assessing Officer imposing penalty under Section 271D of the Act.
Held by ITAT- On further appeals, the Income Tax Appellate Tribunal (Tribunal, in short), was of the view that the effect that advanced made to the firm by one of its partners cannot be regarded as a loan advanced to the firm. It was also the conclusion that there was no dispute that the amount taken is capital of the firm and amount being not a loan, it cannot be said that the advance made is said to have violated the terms of the Statute.
Contention of the Revenue- Revenue contended that the Tribunal was wrong in allowing the appeal of the respondent-assessee by construing 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 over Rs. 20000/- could not have been given in cash. He relied upon the judgment of this Court in the case of Commissioner of Income Tax Vs. Nagpur Golden Transport Co.,  233 ITR 389 (Delhi) and Soundarya Textiles Vs. Assistant Commissioner of Income Tax,  362 ITR 488 (Ker) in support of his contentions.
Contention of the Assessee- Assessees in these appeals 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 no separate legal entity nor is there a separate identification between the firm and the He would state that as such, there is no violation of Section 269- SS of the Act. In this regard, he relied upon the following judgments:
Held by High Court-
The question raised is whether in a transaction between the firm and the partner the provision of Section 269SS would be attracted and if we hold that Section 269SS was attracted and therefore violated, whether the respondent assessee would be entitled to benefit of Section 273B of the Act. The position that emerges is that there are three different High Courts in in (2013) 354 ITR 9 (Mad), Commissioner of Income Tax Vs. V. Sivakumar, (2008) 304 ITR 172 (Raj), Commissioner of Income Tax Vs. Lokhpat Film Exchange (Cinema) and (2005) 277 ITR 420 (P&H), Commissioner of Income Tax Vs. Saini Medical Store, which have held that Section 269SS would not be violative when money is exchanged inter-se between the partners and partnership firm in spite of the fact that the partnership firm and individual partners are separate assessees. We appreciate and understand that the opposite view is possible. Keeping in view that three different High Courts have taken a consistent view on the facts, which are similar to the facts in the present case, which includes the judgment of the Madras High Court as late as in the year 2013, we respectfully follow the same line of reasoning given by the Madras High Court in the case of Sivakumar (supra).
Having said that, it is clear that any interest, salary, bonus, commission or remuneration paid by a firm to any of its partners should be regarded as a mode of adjusting the amount that must have been taken to have been contributed to the partnership assets by a partner, who can really contribute in kind as well as in money. Applying this principle, we are of the view that the transaction effected in these cases cannot partake the colour of loan or deposit and as such, Section 269SS nor Section 271D of the Act would come into play.
We further find, it is an undisputed fact that the money was brought by the partners of the assessee-firms. The source of money has also not been doubted by the appellant revenue. The transaction was bona fide and not aimed to avoid any tax liability. Creditworthiness of the partners and genuineness of the transactions coupled with the relationship between the “two persons” and two different legal interpretations put forward could constitute a reasonable cause in a given case for not invoking Section 271D and 271E of the Act. Section 273B of the Act would come to the aid and help of the respondent-assessee.