DAMODARAM SANJIVAYYA NATIONAL

LAW UNIVERSITY
VISAKHAPATNAM, A.P., INDIA

DISTINCTION BETWEEN PARENT PARTNERSHIP FIRM AND

SUBSIDIARY PARTNERSHIP FIRM

CONTRACTS- II

Mr. P. JOGI NAIDU B.SC., MHRM., LLM

ASSISTANT PROFESSOR

ASHIRBAD SAHOO
2019082
3rd SEM

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 ACKNOWLEDGEMENT

I have taken efforts in this project. However, it would not have been possible without the kind support and help of many individuals. I would like
to extend my sincere thanks to all of them.
I am highly indebted to Mr. P. Jogi Naidu Sir for her guidance and constant supervision as well as for providing necessary information regarding
the project & also for their support in completing the project.
I would like to express my gratitude towards my family for their kind co-operation and encouragement which help me in completion of this
project.
My thanks and appreciations also go to my friends in developing the project and people who have willingly helped me out with their abilities.

ASHIRBAD SAHOO
2019082

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 CONTENTS

PARTNERSHIP FIRM..........................................................................................................................................................................................4
DEFINITIONS........................................................................................................................................................................................................4
ADVANTAGES OF PARTNERSHIP..................................................................................................................................................................4
DISADVANTAGES OF A PARTNERSHIP........................................................................................................................................................5
PARENT COMPANY............................................................................................................................................................................................5
Special Considerations: Accounting for Subsidiaries.............................................................................................................................................6
SUBSIDIARY PARTNERSHIP FIRM................................................................................................................................................................6
Case laws..................................................................................................................................................................................................................7
Addl. CIT v. Mohanbhai Pamabhai......................................................................................................................................................................7
ISSUE..........................................................................................................................................................................................................................7
View.............................................................................................................................................................................................................................7
JUDGEMENT............................................................................................................................................................................................................7
Commissioner Of Income-Tax...............................................................................................................................................................................7
v................................................................................................................................................................................................................................7
S G. Seshagiri Rao..................................................................................................................................................................................................8
FACTS-....................................................................................................................................................................................................................8
ISSUES.....................................................................................................................................................................................................................8
REASONING..........................................................................................................................................................................................................8
Conclusion...............................................................................................................................................................................................................9
Commissioner of Income-tax v.Shreyas Chinubhai............................................................................................................................................9
FACTS...................................................................................................................................................................................................................10
ISSUES...................................................................................................................................................................................................................10
JUDGEMENT.......................................................................................................................................................................................................10
BANKA MAL LAJJA RAM & CO. VS COMMISSIONER OF INCOME-TAX.........................................................................................11
Facts.......................................................................................................................................................................................................................11
Issue:......................................................................................................................................................................................................................11
Reasoning:.............................................................................................................................................................................................................11
Judgement.............................................................................................................................................................................................................11
SHIVAGOUDA RAVJI PATIL AND OTHERS VS CHANDRAKANT NEELKANTH SEDALGE.........................................................11
Facts:......................................................................................................................................................................................................................11
Issue:......................................................................................................................................................................................................................11
Legal Provision:....................................................................................................................................................................................................11
Reasoning:.............................................................................................................................................................................................................12
Judgement.............................................................................................................................................................................................................12
CONCLUSION.....................................................................................................................................................................................................12

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 PARTNERSHIP FIRM

The measure of money that can be submitted by an partnership firm is a lot bigger. This is conceivable in light of the fact that each partner can
get a piece of the aggregate sum of capital required instead of just a single individual orchestrating the cash. There are more individuals to deal
with various elements of the business, (for example, Marketing, Finance, Production, and so on) Consequently business can be overseen better
However, decision making is collective. There is a need to include and persuade different partner before any choice can be taken. An partnership
can be framed either orally or in writing. There is a limit on the number of partners who can start an enterprise together.1

DEFINITIONS

According to the Oxford Dictionary for the Business World. “Partner is a person who shares or takes part in activities of another person.
Partnership is an association of two or more people formed for the purpose of carrying on a business” According to Prof. L. H. Haney,
“Partnership is the relation existing between persons competent to make contracts, who agree to carry on a lawful business in common, with a
view to private gains.”In the words of Prof. Macnaughton, “Partnership results from the desires of business to take advantages of complementary
ability and to raise more capital” “Partnership is an association of two or more persons who carry on as co-owners, a business for profit” –
Uniform Partnership Act, U.S.A.2

ADVANTAGES OF PARTNERSHIP

1) EASE OF FORMATION- Any two people equipped for going into contract can begin partnership. The partnership deed can be oral or
written. Registration isn't mandatory. In this way, partnership is extremely simple to shape. In any case, business conditions or necessities
may compel partnerships to be framed through a partnership deed, which is recorded as a hard copy. For instance, banks may not permit a
partnership firm to open a banking account except if there is a written partnership deed.
2) FLEXIBILITY OF OPERATIONS- There is extensive opportunity in completing business tasks. There is no requirement for taking
endorsements from Government or some other authority, to change the nature, degree or area of the business.
3) Greater Financial Resources- Partnership consolidates the financial strength of all partners as the liability of partners is joint and several. Not
exclusively is the capacity to contribute capital more prominent, it additionally improves the borrowing capacity of the firm.
4) . Greater Managerial Resources- Partnerships are frequently formal by individuals searching for advantages of synergy. On the off chance
that one accomplice has technical knowledge, other could be marketing or account master. Along these lines, the managerial resources of the
firm are upgraded. The financial resources accessible with the firm empowers the firm to utilize a good manager on salary reason for dealing
with the business in an expert way.
5) Greater Creditworthiness-At the point when a lender evaluates the proposition for loan, he takes a gander at the creditworthiness of the
borrower. A partnership firm, by definition, has more than one individual answerable for the business. All accomplices are jointly and
severally liable for the debt taken by the firm. The individual assets of the apparent multitude of accomplices can be utilized for repayment of
the loan. This gives more noteworthy certainty to the lenders. In this manner, a partnership firm appreciates more prominent creditworthiness
and therefore raise more debt for the business.
6) Balanced Judgement- In a partnership, the everyday management may be dealt with by one or few partners. Nonetheless, if there should be
an occurrence of significant issues, partners are probably going to examine the conditions and show up at a balanced judgment. Choices are
probably not going to be taken in flurry, or in feeling.
7) . Specialisation- Partnership can profit by division of work. Partners may decide to specialize in an area of interest. Partners can obviously
characterize responsibilities and duties among themselves. This will bring about skill in management, aside from increment in efficiency,
along these lines augmenting profits.
8) . Maintenance of Secrecy- A partnership firm is a firmly held business. It isn't legally necessary to impart its performance and position to
other people. Hence, all information about the firm is confined to just the partners of the firm.
9) . Personal Contacts with Staff and Customers- A partnership concern is a relatively little association, whose exercises can be managed by a
gathering of individuals. In this manner, partners stay in touch with clients and staff. They are subsequently ready to take note of the
changing tastes and perspectives and respond quicker to such changes.
10) Economies in Management- Partners have a stake in the benefits of the business. They guarantee that wastage is kept at the base. All costs
are firmly administered. Consequently, costs of the executives are controlled.
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11) Conservative Management- Partners have unlimited liability. Unlimited liability keeps the partners from taking wild choices. They not just
guarantee that the choices taken by them are adequate to all, yet in addition affirm that no other accomplice is acting unnecessarily forceful.
12) Protection of Minority Interest- A partner being jointly and severally liable for any activity of the firm, he has an option to prevent the firm
from making a move that isn't in the interests of the firm. Such a partner cannot be ignored regardless of whether majority of partners feel in
any case. Choices of partnership need the assent of all partners.
13) Incentive to Hard work- Partners have share in the profits of the firm. Partners put in difficult work and attempt to expand profits of the firm.
A genuine and submitted exertion gets additional prizes.
14) Risk Reduction- The profits and losses are shared by all partners. Likewise, if the firm can't meet any of its installment commitments, all
partners are dependable. Subsequently, partnership offers hazard decrease as the danger is spread across partners.
15) Greater Scope for Expansion- As number of partners is bigger, the firm can get ready for quicker expansion. It can likewise have
geographical expansion, as a partner can be mobile and adequately experienced to deal with the organizational activities from another spot.
16) Easy Dissolution- It is exceptionally simple to break down the partnership firm. Any partner can request disintegration of firm by allowing a
14-day notice. The firm can be dissolved on death, insolvency or lunacy of any partner. No legal formalities are required.
17) Taxation- The Income Tax Act, 1961 treats a Partnership as a separate 'person' and its tax is calculated separately. This permits scope for
partners to do tax arranging and diminish absolute tax payable to minimum.

DISADVANTAGES OF A PARTNERSHIP

1) UNLIMITED LIABILITY- Partners become completely liable for all claims against the firm to a limitless degree. The partner may lose all
the investment funds of his life on account of a misfortune or a misstep in business. This is one reason that the choice of an partner or
association with a similar partner is the main thing in framing a partnership business.
2) Restriction on Transfer of Interest- One of the brilliant standards of any investment is that there must be a simple exit. On the off chance that
partner needs money, or isn't in agreement with others, he can't transfer his interest in the firm to outsiders without the consent of outsiders.
A partner won't have the option to reduce or increase his stake in the partnership.
3) Inadequacy of Capital- The number of partners in a firm is restricted to a limit of twenty people. Along these lines, a partnership firm may
not be in a situation to raise the necessary capital to finance its expansion plans. Thus, organizations that need a lot of capital are commonly
organized as Joint Stock companies. For instance, an oil refining professional Reliance Industries Limited or a car manufacturing systematic
Tata Motors Limited, can't be envisioned as Partnership firms.
4) . Mutual Conflicts- Partnership requires close cooperation and a great deal of comprehension among partners. In the event that there is a
genuine contrast of assessment among partners, with various partners attempting to seek after various objectives then it isn't useful for the
wellbeing of the business. Grinding between partners will in the long run lead to conclusion of business.3

PARENT COMPANY

A parent company is a company that has a controlling interest in another company, giving it control of its operations. Parent companies can be
either hands-on or hands-off owners of its subsidiaries, contingent upon the measure of managerial control given to subsidiary managers,
however will consistently keep up a specific degree of dynamic control. Parent companies can be conglomerates, comprised of various different,
seemingly unrelated businesses, similar to General Electric (GE), whose diverse business units can benefit from cross-branding. A parent
company, notwithstanding, is different from a holding company. Parent companies conduct their own business operations, not at all like holding
or shell companies which are set up specifically to passively claim a gathering of subsidiaries—often for tax purposes. Parent companies and
their subsidiaries might be horizontally integrated, similar to Gap Inc, which owns the Old Navy and Banana Republic subsidiaries. Or on the
other hand they might be vertically integrated, by owning several companies at different stages along the production or the supply chain. For
instance, AT&T's acquisition of Time Warner meant that it got proprietor of both the film production business and broadcasters that sold those
productions to audiences, in addition to its telecommunications networks that gave the media infrastructure.The two most basic ways companies
become parent companies are either through the acquisitions of smaller companies or through spin-offs. Larger companies regularly purchase
out smaller companies to lighten rivalry, expand their tasks, decrease overhead, or to pick up cooperative energies. For instance, Facebook
acquired Instagram to build generally user engagement and reinforce its own foundation, while Instagram profits by having an extra stage on
which to promote and more users. Facebook, however has not applied an excess of control, keeping a self-ruling group set up, including its
unique originators and CEO. Businesses that need to smooth out their tasks regularly spin off less beneficial or disconnected auxiliary
businesses. For example, an organization may spin off one of its develop specialty units that are not developing, so it can zero in on an item or
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administration with better development possibilities. Then again, if a portion of the business is going an alternate way and has distinctive
strategic priorities from the parent organization, it very well might be spun off so it can open an incentive as an autonomous activity—and
maybe be set available to be purchased.

Special Considerations: Accounting for Subsidiaries

Since parent companies own over half of the voting stock in a subsidiary, they need to create united financial statements that consolidate the parent and
subsidiary financial statements into one bigger arrangement of financial statements—and which eliminate all overlaps, for example, inter-company transfers,
payments, and loans.1 These combined financial statements give an image of the general wellbeing of the whole gathering of companies rather than one
company's independent position. In the event that the ownership stake of the parent company is under 100%, a minority interest is recorded on the balance
sheet to represent the bit of the subsidiary that isn't possessed by the parent company.

SUBSIDIARY PARTNERSHIP FIRM

According to section 4 of the Companies Act, a company shall be deemed to be a subsidiary of another, if and only if:

(a) that other controls the compositions of its Board of directors; or

(b) that other holds more than half in nominal value of its equity share capital (where a company had preference shareholders, before
commencement of the Companies Act,1956, enjoying voting rights with that of equity shareholder, for the purpose of control, holding company
should enjoy more than half of the total voting power; or

(c) the first-mentioned company is a subsidiary of any company which is that other’s subsidiary.4

In the case of M.Velayudhan v. Registrar of Companies  the position regarding holding-subsidiary relationship was extensively laid down :

“Sec. 4 envisages the existence of subsidiary companies in different situations. It may be that by acquiring sufficient share capital of a company,
sufficient control may be obtained over the company to enable control in the composition of BOD. But, it is also possible to obtain such control
in regard to the composition of the BOD without making such an in equity capital of the company. Such control may be by reason of an
agreement such as where one company may agree to advance funds to another company and in return may, under the term of an agreement, gain
control over the right to appoint all or a majority of BOD. The first of the cases envisaged in section 4 is the case where a control is obtained by
a company in the matter of composition of the BOD of another company. That would be sufficient to constitute the former as holding company
and the other as subsidiary. The second type of cases is where more than half of the nominal value of the equity share capital is held by another
company. By virtue of such holding that other company becomes a holding company and the one whose share are so held becomes a subsidiary
company. The third case envisaged is where a subsidiary company of a holding company may be a holding company in relation to another
company. That other company is also a subsidiary of the holding company of the subsidiary”. For example, where company B is a subsidiary of
company A and company C is a subsidiary of company B then company C shall be the subsidiary of company A. if company D is a subsidiary of
company C, then company D shall also be a subsidiary of company B and consequently also of company A. So basically speaking, when a
particular company An owns/acquires more than 50% of voting stock of another company B, at that point in such circumstances company B
turns into the subsidiary of Company A, in this manner obtaining the control of its operations, the company A (the acquiring company) turns into
the subsidiary company’s (company B) parent company. The parent company maybe some of the time, be organized for holding of stock in
different companies, such parent companies are called "holding companies". A "wholly owned subsidiary" is the point at which the parent
company owns all the voting stocks of another company. A company also may turn into a subsidiary through acquisition. A company may
establish a subsidiary by framing another corporation and retaining all or part of its stock. A subsidiary company is a company which is claimed
by a larger company or corporation. The larger company is known as the parent corporation. The parent company can claim the subsidiary
company by owning over half of the issued share capital. Subsidiary companies ought not be mistaken for mergers where the parent company
purchases a company and dissolves its character and organizational structure. A subsidiary company may claim subsidiary companies which will
consequently be subsidiaries of the parent company. For the purposes of taxation and regulation, subsidiary companies are separate legal entities.
There are two ways a subsidiary company can be framed: one is the point at which a corporation purchases a controlling interest in an existing
company. The second is the place where the corporation creates a subsidiary itself. At the point when a corporation acquires an existing
company, forming a subsidiary can be preferable to a consolidation because the parent corporation can acquire a controlling interest with a
smaller investment than a consolidation would require. And dissimilar to in mergers, the approval of stockholders of the acquired firm is not
needed. At the point when a company is purchased, the parent corporation may determine that the acquired company's name acknowledgment in

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the market merits making it a subsidiary rather than merging it with the parent company. A consolidation is not suitable if the subsidiary
produces products and enterprises that are diverse to those of the parent corporation. Corporations that operate in more than one country
regularly find it helpful or necessary to create subsidiaries. For example, a multinational corporation may create a subsidiary in a country to
obtain favorable tax treatment, or a country may require multinational corporations to establish local subsidiaries in request to work together
there. Subsidiaries can also be created for the particular motivation behind limiting their liability regarding another business that may be viewed
as risky. Since the parent and subsidiary companies remain separate legal entities, they don't share in the obligations and liabilities of each other.
In any case, it is normal for the parent company to be sued if its subsidiary experiences financial insecurity. Generally, the separate legal
identities of the two companies will guarantee that the parent company is immune from financial liabilities of the subsidiary, yet there can be a
few exemptions.

Case laws

Addl. CIT v. Mohanbhai Pamabhai5

FACTS- Disputes emerged between the partners of a partnership firm and because of which the assessee retired from the firm. On retirement, the
assessee got a specific sum in regard of his share in the partnership remembering his proportionate share for the estimation of the goodwill which
established an asset of the partnership and in this manner, at risk to be considered in deciding the share of every assessee in the partnership on
the date of retirement. The ITO held that the sum got by the assessee to the degree it remembered his proportionate share for the estimation of
the goodwill spoke to capital gains chargeable to tax under section 45. This was confirmed by the Commissioner. The Tribunal anyway held that
goodwill was a self-created asset, which had cost nothing to the firm and its partners and a "transfer" of it was, consequently, not inside the
ambit section 45. The High Court in CIT v. Mohanbhai Pamabhai [1973] 91 ITR 393 (Guj) (HC) held that when, an accomplice resigns, what he
gets is his share in partnership and no consideration for transfer of his advantage in partnership to proceeding with partners and accordingly,
there is no transfer of interest in the partnership assets required inside the significance of section 2(47). Appropriately, the High Court held that
no portion of the sum got by any assessee in regard of his share in the estimation of the goodwill could be respected ascapital gain chargeable to
tax.

ISSUE
Whether the amount received by a partner from the partnership on retirement by way of his share in the goodwill of the firm was liable to be
assessed to tax as capital gains?

View
Interest of a partner in the partnership is not interest in any specific item of the partnership property, rather, it is a right to obtain his share of
profits from   time to time during the subsistence of the partnership and  on  dissolution of the partnership or his retirement from the partnership,
to get the value of his  share in the net partnership assets which remain after satisfying the debts and liabilities ofthe partnership. When,
therefore, a partner retires from a partnership6

and amount of his share in net partnership assets after deduction of liabilities and prior charges is determined on taking accounts on footing of
notional sale of partnership assets and given to him, what he receives is his share in partnership and not any consideration for transfer of his
interest in partnership to continuing partners. His share in the partnership is worked out by taking accounts in the manner prescribed by the
relevant provisions of the partnership law and it is this and this only, namely, his share in the partnership which he receives in terms        of
money. There is in this transaction no element of transfer of interest in the partnership assets by the retiring partner to the continuing partners. It
is true that section 2(47) defines “transfer” in relation to a capital asset and this definition gives an artificially extended meaning to the term
“transfer” by including within its scope and ambit two kinds of transactions which would not ordinarily constitute “transfer” in the accepted
connotation of that word, namely, relinquishment of the capital asset and extinguishment of any rights in it. But, even in this artificially extended
sense, there is no transfer of interest in the partnership assets involved when a partner retires from the partnership. Therefore, even if goodwill is
assumed to be capital asset within the chargingprovision enacted in section 45, there is no transfer of interest of any assessee in the goodwill
within the meaning of section 2(47) when the assessee retired from the firm.

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JUDGEMENT
The Supreme Court dismissed the appeal of the Revenue having regard to the view taken by it in Sunil Siddharthbhai v. CIT [1985] 156 ITR
509.  The order of the High Court stood and ratio is applicable even after the introduction of provision of section 45(4) unless any asset
belonging to the firm is allotted to the retiring partner.

Commissioner Of Income-Tax

v.

S G. Seshagiri Rao7

FACTS- THERE was a partnership under the name and style of Messrs. White Field Industrial Corporation, Bangalore (for short, "white Field).
It purchased certain land in Seghalli, Bidarahalli, Hebli, Hoskote Taluk, Bangalore district, from Messrs. Krishna Mining Company,
Goginenipuram. Gudur, Nellore district, under a registered sale deed dated Out of the four partners of the White Field, one Sri Peda Sekhar died
on 9/07/1977. The remaining partners continued under a fresh deed of partnership executed on 15/07/1977. Three more partners including the
assessee, were included in the partnership under the deed of partnership dated 1/04/1977. The land which was purchased by White Field was
converted for industrial purposes and was revalued at Rs. 12 lakhs. The assessee's share in the said partnership in a sum of Rs. 2 lakhs were
credited to his account. On 20/02/1980, the old partners of White Field retired and the assessee received the said sum of Rs. 2 lakhs on
retirement. For the assessment year 1980-81, in the assessment proceedings, the assessee claimed that the said amount of Rs. 2 lakhs received by
him did not constitute "transfer" within the meaning of section 2 (47) of the Income-tax Act. Accepting this contention, the Income-tax Officer
completed the assessment on 10/12/1980. In exercise of the power under section 263 of the Income-tax Act, the Commissioner revised the order
of assessment on the ground that the Assessing Officer did not go into the question whether any capital gains liable to tax had arisen in the case
of the assessee on his receiving Rs. 2 lakhs at the time of his retirement. Against this order of the Commissioner of Income-tax dated 1/12/1982,
the assessee filed appeal before the Income-tax Appellate Tribunal. The Tribunal took the view that as the land in question was purchased by the
firm even before the assessee became the partner of the firm, the question of transferring the interest of the assessee in favour of the other
partners in the firm did not arise. It accordingly allowed the appeal following the judgment of this court in CIT v. L. Raghu Kumar [1983] 141
ITR 674. At the instance of the Commissioner of Income-tax, the above two questions are referred to this court for its opinion. ) SRI S. R.
Ashok, learned standing counsel for the Department, submits that on retirement, the assessee received the benefit of conversion of property into
industrial purpose and as the conversion is at a higher valuation, the benefit was passed on to the assessee on retirement, so there was a transfer
within the meaning of section 2 (47) of the Act.FROM the narration of the facts given above, it is clear that even before the assessee became the
partner of White Field, the land was purchased by White Field. After the assessee was inducted into the partnership, the capital assets of the firm
were credited to each of the partners. The amount which was allotted to the account of the assessee was Rs. 2 lakhs. He withdrew the said
amount which was standing to the credit of his capital account. IN Raghu Kumar's case [1983] 141 ITR 674 (AP), the assessee was the karta of a
Hindu undivided family. He was a partner of two firms. He retired from the said two firms with effect from 1/01/1971. On the date of retirement,
his capital account was credited with a sum of Rs. 46,500, which was in excess of the amount due to him towards his capital and profits. The
Income-tax Officer treated the addition l amount of Rs. 46,500 as capital gains in the hands of the assessee. The assessee carried the matter in
appeal but the appeal was dismissed upholding the order of the Income-tax Officer. The assessee then went up in further appeal to the Appellate
Tribunal. Before the Tribunal, he contended that there was no transfer of any capital asset within the meaning of section 2 (47) of the Act. It was
held by this court that when the share of a partner in the partnership was worked out by taking accounts in the manner prescribed by the relevant
provisions of the partnership law, there was no element of transfer of interest in the partnership assets by the retiring partner to the continuing
partners. It was further held that for the purpose of section 45 of the Income-tax Act, no distinction-could be drawn between an amount received
by the partner on dissolution of the firm and that received on his retirement, since both of them stood on the same footing and the amount
received by a partner from the partnership in excess of the capital and profits standing to his credit at the time of retirement could not be
construed as "capital gain" under section 45 of the Act as there was no transfer within the meaning of section 2 (47) of the Act, and such excess
was not exigible to tax as capital gains. This judgment was followed by the Tribunal in arriving at the conclusion to which it reached. From the
above judgment it follows a fortiori that when the amount standing to the capital amount of the retiring partner is drawn by him at the time of his
retirement, it cannot be said that there was any transfer of a capital asset in favour of the existing partners by him for the purpose of section 45 of
the Income-tax Act. In this view of the matter, the second question is answered in the affirmative, e., in favour of the assessee and against the

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Revenue. The first question which is only a consequential question is also answered in the affirmative, e., in favour of the assessee and against
the Revenue.8

ISSUES

1. Whether sub-section 2a of section 69 inserted by the Maharashtra amendment violates article 300a of the constitution of India?

2. Whether sub-section 2A of Section 69 inserted by the Maharashtra Amendment violates Article 14 of the Constitution of India?

3. Whether sub-section 2A of Section 69 inserted by the Maharashtra Amendment violates Article 19(1) (g) of the Constitution of India?

REASONING

The partnership firm not being a legal entity has its property belonging to the partners of the firm. The amendment deprives a partner of the firm
to recover its property if the firm which he is a part of is not registered. The Article 300(A) of the Constitution of India states that: no person
shall be deprived of his property save by authority of Law. As held in the Landmark judgment of Maneka Gandhi v. Union of India and Anr. that
for any law to be valid it is essential for it to be non-arbitrary. The Sub-section 2A deprives a partner of an unregistered firm of it right to get his
share in the property of the firm which is jointly owned by him.There also is no provision for such partner to get any kind of compensation. The
partner of an unregistered firm also could not file a suit for the dissolution of the firm even though he/she wants it to.There can be deprivation of
property in various forms, by destruction of property as in Chiranjit Lal Chowdhuri v. Union of India, or by the confiscation by the decision
from a Court as in Ananda Behra v. State of Orissa, or by revocation of any kind of proprietary right which was also in the case of  Virendra
Singh v. State of Uttar Pradesh.There also is deprivation of property when a municipal authority under any kind of statutory obligation, destroys
any premise which is held to be dangerous as vide the decision in Vairapuri Naidu v. New Theatres, Carnatic Talkies Ltd.In the present situation
any partner of an unregistered firm has been deprived of its property without any reasonable grounds as a result of which the Amendment is held
to be violative of Article 300(A) of the Constitution of India. The appellant also contended that the Amendment is in violation of Article 14 and
Article 19(1)(g) of the Constitution of India. Article 14 of the Constitution of India grants the right to equality to all persons. It gave the people
the right to be treated equally. This right is not an an absolute right.The equals are treated equally and the unequals unequally. This right also
authorises classification on reasonable grounds which are based on the doctrine of intelligible differentia and this classification must have an
established nexus between the object to be achieved and the classification made. In the given situation the partners of an unregistered firm are
distinguished from those of a registered firm.They are deprived of the right to dissolve the firm nor they have the power to get their property.
The Amendment in this case while differentiating amongst the registered and unregistered firms fails to provide the nexus between the objective
of the amendment and the classification made. Therefore, the Amendment is held to be violative of Article 14 of the Constitution of India. The
Article 19(1)(g) of the Constitution of India grants the right to practise any occupation, trade or business. Like the Article 14, this is also not an
absolute right and the State has the right to impose reasonable restriction in the exercise of this right for upholding the interest of the general
public which are provided under Article 19(1)(g).9

JUDGEMENT
In Chintamanrao and Anr. V. State of Madhya Pradesh, it was held that the phrase reasonable restriction involved that the restrictions imposed
on the enjoyment of the right should be reasonable and the State should not act arbitrarily or unreasonably while limiting the exercise of the
rights.As held in M.C.V.S. Arunachala Nadar v. State of Madras and Ors; the reasonable restriction must be rationally related to the object which
is intended to be achieved by the Legislature and should in no manner be beyond that objective.The registration of firms is supported to ensure
the protection of rights of third parties so that he does not suffer any kind of hardships to prove as to who are the partners of the firm.A partner
whose name appears on the Register cannot deny that he is a partner except under the circumstances provided. Despite according to the Indian
Law did not make it mandatory to register a firm and it could come into existence and function without being registered.The Amendment being
discussed in this case, denies the enforcement of rights against third parties by an unregistered firm. Simultaneously the partner of unregistered
firm is denied its enforcement of its right against third partner or his fellow partner.Neither could it file a suit for the dissolution of such firm or
get his share of the property. The effect of the Amendment is that a partnership firm is allowed to come into existence and function without
registration but it cannot go out of existence (with certain exceptions). This can lead to injustice to a partner who wants to dissolve the firm in
case of dispute or illegal exercise of power by anyone of the partners. This can prove to be unfair for the other partner who suffers the hardships
due to the acts of the other partner. The aggrieved partner is left with no remedy neither in the form of suit nor in the form of arbitration.
Therefore, it can be concluded that the changes introduced by the Maharashtra Amendment Act to Section 69(2)(a) is arbitrary and in no form is
upholding the interest of the public but is strictly against it. And as a result of which this restriction cannot be held to be reasonable which makes
8
www.indiankanoon.org
9
https://www.law.cornell.edu
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the Maharashtra Amendment to be violative of Article 19(1)(g) of the Constitution of India.Therefore the restrictions placed by the Maharashtra
Amendment Act are arbitrary, unreasonable and of excessive nature and went beyond what is of public interest.

Conclusion

After a careful study of the contentions of the parties and then the judgment given by the honourable judge of the Supreme Court of India, I
support the judgment and also find the Maharashtra Amendment to be violative of the provisions of the Constitution of India.The English Law
strictly makes the registration of a firm compulsory and non-registration of the same is liable to be penalized. But this is not followed in the
Indian Partnership Act, 1932 because it was not compatible with the prevailing situations at that point of time and could have resulted into
various difficulties. Hence registration was made optional at the discretion of the partners, but following the English precedent, any firm which
was not registered by virtue of Sub-sections (1) & (2) of Section 69 disabled a partner or the firm from enforcing certain claims against the firm
or third parties in a Civil Court.

Commissioner of Income-tax v.Shreyas Chinubhai10

FACTS

The relevant assessment year is 1975-76. The assessee was an owner of 202 sq. yards of land at Kalupur, Ahmedabad. On December 1, 1971, the
assessee was admitted to the benefits of partnership, which was constituted under the deed dated December 4, 1971. The business of the firm
was to purchase and sell immovable properties, to construct buildings on lands purchased and to sell the same. On December 23, 1974, a fresh
partnership deed was drawn, by which five new partners were taken in the firm. On February 14, 1975, a deed of retirement was executed as per
which the five new partners who were inducted under the partnership deed dated December 23, 1974, took over the business of the firm as a
going concern and the other partners went out of the firm. The stock-in-trade was determined and after adjusting the opening value thereof, the
balance was credited to the accounts of the outgoing partners as a result of which the assessee got his share of Rs. 1,25,092. In this connection,
the Income Tax Officer held that the said amount was an income from adventure in the nature of trade and that induction of new partners was
merely a device to transfer their assets to the new partners. It was held that the said amount credited to the assessee's account was liable to tax as
business income being adventure in the nature of trade or in the alternative, it was taxable under section 28(iv) of the said Act.

ISSUES

1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the amount of Rs.
1,25,092 received by the assessee on retirement from the partnership firm of Arun Corporation (Estate Division) was not liable to tax under
section 28(iv) of the Act?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the sum of Rs.
1,25,092 received by the assessee on retirement from the partnership firm of Arun Corporation (Estate Division) was not liable to tax under
section 45 of the Act?

3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the sum of Rs.
1,25,092 was not liable to tax as being the adventure in the nature of trade?"

JUDGEMENT

The Commissioner of Income Tax (Appeals), however, accepted the assessee's case and held that the. impugned amount cannot be taxed as
business income being adventure in the nature of trade, nor could it be taxed under section 28(iv) of the Act. In the appeal filed by the Revenue
before the Tribunal, it was held that in view of the decision of this court in CIT v. Alchemic Pvt. Ltd.: [1981]130ITR168(Guj) the provisions of
section 28(iv) of the Act, were not applicable. Relying upon the decision of this court in CIT v. Mohanbhai Pamabhai : [1973] 91 ITR 393 the
Tribunal held that the said amount was not exigible to capital gains tax. It was also held that the amount was not taxable as business income as
an adventure in the nature of trade. The appeal was, therefore, dismissed. There is no dispute about the fact that the land in question was treated
as stock-in-trade of the firm. The value of the land was credited to the capital account of the assessee at the time when it was contributed by the
assessee as his share in capital in the said firm. The deed of retirement was executed on February 14, 1975, as a result of which the assessee, Is a
retiring partner, received the said amount in his share. The question for our consideration is whether the said amount was taxable either as
benefit in the course of business under section 28(iv) of the Act or as capital gains under section 45 or as business income of adventure in the
nature of trade. In CIT v. Alchemic Pvt. Ltd.: [1981]130ITR168(Guj) this court while construing the provisions of section 28(iv) of the Act, held
10
1999 237 ITR 358 Guj

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that it is only if the benefit or the perquisite is not in cash or money, but is non-monetary benefit or non-monetary perquisite that the question of
including the value of such benefit or perquisite would ever arise. It was held that section 28(iv) would not apply when the amount received is in
cash or is considered in terms of money. In the case of CIT v. Smt. Chetanaben B. Sheth : [1993]203ITR24(Guj) it was held by this court that
the amount that had fallen to the share of the assessee-partner on dissolution in the assets of the partnership firm, could never be equated with the
benefit accruing to the partner under the provisions contained in section 28(iv) of the Act. The questions similar to the aforesaid questions Nos. 1
and 2 were also dealt with by this court in Income Tax Reference No. 111 of 1974, decided on September 4, 1975, in which it was held that
when at the time of retirement, the only thing which the partner gets, was the share in the partnership firm, which he receives in terms of money,
the amount so received can under no circumstances be said to be a benefit received by the assessee from business under section 28(iv) of the Act.
In view of the settled legal position, we hold that the Tribunal was right in concluding that the amount in question received by the assessee on
retirement from the firm was not liable to tax under section 28(iv) of the Act and question No. 1 is answered in the affirmative against the
Revenue. The question whether such amount received by a partner on retirement from the firm would be liable to tax for capital gains under
section 45 of the Act, is also no longer res integra. In CIT v. Anant Narhar Nimkar (HUF) : [1997]224ITR221(Guj) it was held by this court that
the receipt of any sum by a partner on his retirement from the firm or on dissolution of the firm as the value of his share in the assets of the firm,
does not involve any transfer of a capital asset resulting in accrual or receipt of income chargeable to tax as capital gains in the hands of the
retiring partner. This court had already settled this point in CIT v. Mohanbhai Pamabhai : [1973] 91 ITR 393 in which it was held that when an
assessee retires from a firm and receives an amount in respect of his share in the partnership, there is no transfer of interest of the assessee in the
goodwill of the firm and no part of the amount so received by him would be assessable to capital gains tax under section 45 of the Act. In view
of this settled legal position, we are of the opinion that the Tribunal was right in concluding that the said amount was not liable to capital gains
tax and question No. 2 is accordingly answered in the affirmative against the Revenue. As regards the third question, admittedly, the assessee
had contributed the land in the partnership firm by treating it as stock-in-trade and thereafter, it had become the asset of the firm. The assessee
was given the amount in question as his share in the firm, which he was entitled to get on his retirement and which at that point of time was
directly relatable to the land which he had contributed as stock-in-trade at the time of his entry in the firm. The Tribunal was, therefore, right in
holding that the said amount was not liable to tax as income from an adventure in the nature of trade. Question No. 3 is accordingly answered in
the affirmative against the Revenue. The reference stands disposed of with no order as to costs.11

BANKA MAL LAJJA RAM & CO. VS COMMISSIONER OF INCOME-TAX 12

Facts:

In 1937 a partnership was entered into of which the partners were five individuals and ten units who were different Hindu Undivided Families.
Sohan Lal who was a partner in this firm died and a new partnership was entered into on 28-61945 and one of the partners was Sohan Lal's son
Satish Kumar who is described at No. 6 in the partnership deed as "Satish Kumar minor son of Lala Sohan Lal B. Sc., by his guardian and
mother Shrimati Shakun-tala Devi residing at Ferozepore City". Terms of the partnership deed make no distinction between the liabilities of the
minor partner Satish Kumar and the other partners. According to this partnership then all the partners including Satish Kumar were jointly
responsible for the loss and entitled to the profits of this business.

Issue:

"Whether a minor son can, according to law, enter into a partnership through his mother the natural guardian, even with the consent of the other
partners?"

Legal Provision:

Under Section 30, Partnership Act a minor cannot be a full-fledged partner in a partnership firm and therefore the contract entered into making a
minor a partner would be invalid and cannot be registered under Section 26A, Income-tax Act.

Reasoning:

A widow on the death of her husband was not the karta of an undivided Hindu family and consequently an agreement of partnership purported to
have been entered into by a widow on behalf of her minor sons and as representing the joint family would be invalid.

Judgement:

A minor cannot enter into a partnership through his guardian, even when the other partners are consenting.

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AIR 1953 P H 270, 1953 24 ITR 150 P H

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 13
SHIVAGOUDA RAVJI PATIL AND OTHERS VS CHANDRAKANT NEELKANTH SEDALGE

Facts:

A partnership firm was being run wherein one of the partners was a minor (respondent 1) and was admitted to the benefits of the partnership.
The partnership was dissolved and subsequently the minor partner became a major. However, he did not exercise his option to become a partner
under Section 30(5) of the Indian Partnership Act. When the appellants claimed their dues, the respondents were unable to pay them and so all
three of them were sued by the appellants for adjudicating them for being insolvent.

Issue:

Is respondent 1, who did not exercise his right to be a partner for the firm, a partner under Section 30(5) of the Indian Partnership Act?

Legal Provision:

Under the provisions of the Provincial Insolvency Act, a person can only be adjudicated insolvent if he is a debtor and has committed an act of
insolvency as defined in the Act: see ss. 6 and 9.

Under s. 30(1) of the Partnership Act a minor cannot become a partner of a firm but he may be admitted to the benefits of a partnership. Under
sub-ss. (2) and (3) thereof he will be entitled only to have a right to such share of the properties and of the profits of the firm as may be agreed
upon, but he has no personal liability for any acts of the firm, though his share is liable for the same.

Reasoning:

At any time within six months of his attaining majority, or of his obtaining knowledge that he had been admitted to the benefits of partnership,
whichever date is later, such person may give public notice that he has elected to become or that he has elected not to become a partner in the
firm, and such notice shall determine his position as regards the firm

Judgement:

Under ordinary circumstances a respondent 1 would be a partner of the firm. However, in this case he had attained majority only after the firm
had been dissolved. A minor after attaining majority cannot elect to be a partner of a firm that does not exist. Hence Section 30 of the Partnership
Act does not apply to him.14

CONCLUSION

When moderate amounts of capital, diversified managerial talents are needed, the partnership is an ideal choice of the form of business
ownership. In general, partnerships work well in those areas where sole proprietorships work well, but a partnership is usually somewhat larger
than a sole proprietorship, because there are more mouths to feed. Partnership works out particularly well in the profession of law, medicine and
accountancy. By sharing office and clerical expense, the partners effect considerable savings. Wholesale trade, retail trade, commercial farming,
small scale industries, warehousing, transport service etc. are usually conducted through partnerships. A partnership, however, will not function
well in a very small business that cannot provide enough income to make association worthwhile. Nor is a partnership really adequate for very
large enterprise, where the corporate form of ownership is more suitable.

BIBLIOGRAPHY

13
1965 AIR 212, 1964 SCR (8) 233
14
https://www.law.cornell.edu
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BOOKS

1. Contract and specific relief by Avtar Singh

2. Studies in Contract Law by Edward J. Murphy

ONLINE SOURCES

1. www.legalserviceIndia.com

2. www.legalcareerpath.com

3. https://indiankanoon.org

4. https://www.law.cornell.edu

5. https://www.legalmatch.com

CASES
1. Addl. CIT v. Mohanbhai Pamabhai
2. Commissioner of Income-Tax v. S G. Seshagiri Rao
3. Commissioner of Income-tax v. Shreyas Chinubhai
4. BANKA MAL LAJJA RAM & CO. VS COMMISSIONER OF INCOME-TAX
5. SHIVAGOUDA RAVJI PATIL AND OTHERS VS CHANDRAKANT NEELKANTH SEDALGE

13