Deloitte Haskins - Firm Exceeding 20 Partners or Not
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Learning from M/s Deloitte Haskins & Sells V/s. Deputy Commissioner of Income Tax (ITAT Delhi) –
AO to decide whether number of partners exceeded 20 rendering firm as
illegal Association of
persons- some important contentions missed by
assessee.
Section 11 of the companies Act 1956.
Section 464 of the companies Act 2013.
Summary:
In
case before Tribunal CIT had held that the partnership consisted of 21
partners – twenty individuals and one another firm. As per author view
can be taken that in such situation, number of partners will be 20
individual partners of firm and all uncommon partners of another firm
which has been made a partner through one of individual partner as
representing that firm. The author take such a view because by the
arrangement all partners of Deloitte, Mumbai will also share profit
though indirectly.
However,
in view of author restrictions on number of partners will not be
applicable in case of a CA firm which is engaged in a profession and not
in a business. There is clear difference in business and profession.
Furthermore firms of CA are also governed by ICAI Act and ICAI
Regulations. This contention was not raised by assessee, however, it can
be raised now before the AO.
Case of Deloitte (supra.):
In
this case dispute arose as to whether the partnership firm of Chartered
Accountants having more than 20 partners is an illegal association and
cannot be assessed as partnership but has to be assessed as AOP.
The
case was that the firm had twenty individual partners in their
individual capacity. One Shri Mukund Dharmadhikari, already a partner of
the firm in his individual capacity, was added once again as partner in
a representative capacity, representing M/s Deloitte Haskins &
Sells, Mumbai.
Thus another partnership firm of CA was made a partner through one out of twenty individual partners.
Authors view of number of partners:
In
this way, in fact, partners of M/s Deloitte Haskins & Sells, Mumbai
became entitled to share profit of the assessee firm. Therefore, I in
view of author the firm became partnership of large number of
individuals that is all individual partners of assessee firm and also
all individual partners of M/s Deloitte Haskins & Sells, Mumbai
and at best common individual partners of two firms can be counted as
one individual partner. So naturally total number of partners will be
much more than 20 and not only 21.
The firm contended that a firm is not a person, and therefore, only 20 individuals are partners and the firm is valid one.
The provisions of Income-tax Act, 1961 were under consideration. Assessee was assessed as partnership firm. The CIT in exercise of powers under section 263 set
aside the assessment and held that the assessment as firm was
erroneous, deductions for remuneration paid to working partners was
wrongly allowed. CIT directed to make assessment in status of AOP and to
disallow deduction of remuneration paid to working partners.
On
appeal before Tribunal the Tribunal considered and observed that
assessee was a renowned CA 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 smoke screen and discover the
true state of affairs - 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, 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.
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 ld. CIT required modification thus the matter
was decided partly in favour of assessee.
Now
the matter is before the AO who will decide issue. Some important
points which require consideration , which seems not have been pressed
earlier.
Business and profession:
As
per general understanding of common men and general dictionary
meanings, the term business, and profession and businessman and
professional man have different meaning. Even a child studying in class 4
or 5 can easily distinguish these two categories. I asked few children
under age of 10 years about this, answers were like uncle having grocery
shop / fruit shop/ cake shop etc. are businessman and doctor uncle is a
professional or father of his friend who is advocate or CA are
professional. Thus the difference is clear and there cannot be a doubt.
In the context of various provisions of Income-tax Act also the Supreme Court has in G. K. Choksi and Co. v. C.I.T. 2007 (11) TMI 7 - Supreme Court of India held
that a firm of CA is not carrying business and is not entitled to
initial depreciation which is admissible on residential houses, in a
business, for employees. Profession is not covered in business and
language used , in provision confers benefit only to business.
In
this case matter relating to initial depreciation on building for
residence of low paid employees was considered. The assessee firm is a
firm of chartered accountants engaged in “profession” of CA’s. As per
the Supreme Court it does not carry on “business” and is therefore not
entitled to initial depreciation on such building under section 32(1)(iv)of theIncome-tax Act, 1961.
Supreme courts notes and held that the Legislature intended to have different scope for “business” and “profession” in section 32(1) of the Income-tax act, 1961 for
consideration of normal depreciation. From the scheme of the section it
is discernible that the various clauses operate on further specific
conditions laid down in each specific clause. In clause (iv) the
Legislature has used the word “business” only. This means that the
Legislature was conscious of the fact that business and profession are
different and separate and they cannot be used interchangeably.
Under
clause (iv) the Legislature intended to restrict the benefit to the
assessee carrying on business only and not to one carrying on a
profession.
The
court further held that wherever the Legislature intended that the
benefit of a particular provision should be for both business and
profession, it has used the words “business or profession” and wherever
it intended to restrict the benefit to either business or profession the
Legislature has used the word either “business” or “profession”,
meaning thereby that it intended to extend the benefit to either
“business” or ‘profession”, i.e., the one would not include the other.
Thus while affirming the Decision of the Gujarat High Court in G.K. Choksi and Co. v. CIT 2001 (8) TMI 103 - GUJARAT High Court held,
that the appellant, a firm of chartered accountants, was not entitled
to claim initial depreciation for the assessment year 1984-85 under section 32(1) (iv) in
relation to a building constructed by it for the purpose of residence
of its low paid employees, as the allowance was not available to
professionals and was available only to an assessee carrying on a
business.
Part D of chapter IV consists of sections 28 to 43 of the Act which
deals with “Profits and gains of business or profession”. Though the
phrase has been used in certain sections as “business or profession”,
nowhere has the phrase been used as “business and profession”,. In fact,
wherever the Legislature intended that the benefit of a particular
provision should be for both business or profession, it has used the
words “business or profession” and wherever it intended to restrict the
benefit to either business or profession, then the Legislature has used
the word either “business” or “profession”, meaning thereby that it
intended to extend the benefit to either “business” or “profession”,
i.e., the one would not include the other.
Prohibition on number of members in unregistered Associations:
As
per authors reading he found that under the Indian Partnership Act,
there seem no restrictions on the number of partners a firm can have.
However we find restrictions on number of persons in any associations to
be legal in the provisions of S. 11 of the Companies act, 1956. In this regard relevant provisions are reproduced below:
From the Companies Act, 1956:
PROHIBITION OF ASSOCIATIONS AND PARTNERSHIPS EXCEEDING CERTAIN NUMBER.—
(1) No company, association or partnership consisting of more than ten persons shall be formed for the purpose of carrying on the business of banking, unless it is registered as a company under this Act, or is formed in pursuance of some other Indian law.
(2) No company, association or partnership consisting of more than twenty persons shall be
formed for the purpose of carrying on any other business that
has for its object the acquisition of gain by the company, association
or partnership, or by the individual members thereof, unless it is
registered as a company under this Act, or is formed in pursuance of
some other Indian law.
(3) This section shall not apply to a joint family as such carrying on a business; and where a
business
is carried on by two or more joint families, in computing the number of
persons for the purposes of sub-sections (1) and (2), minor members of
such families shall be excluded.
(4) Every member of a company, association or partnership carrying on business in contravention
of this section shall be personally liable for all liabilities incurred in such business.
(5)
Every person who is a member of a company, association or partnership
formed in contravension of this section shall be punishable with fine which may extend to ten thousand rupees.
Restriction is in relation to business and not profession:
We find that the restriction is on number of members of associations which are engaged in business only. This
also become evident when we find that in case of banking business
maximum number can be 10 and in case of other business maximum number
can be 20. If the number of members is higher than the Association must
be registered under the companies act.
Therefore
the restriction of 20 partners is not applicable in case of a
partnership firm of CA. However, it seems that this plea was not raised
by Deloittee.
Similarly in the Companies Act 2013 also we find restriction vide provision of Section 464.
Companies Bill 2012 / Companies act 2013
464. (1)
No association or partnership consisting of more than such number of
persons as may be prescribed shall be formed for the purpose of carrying on any business that has for its object the acquisition of gain by the association or partnership or by the individual members thereof, unless it is registered as a company under this Act or is formed under any other law for the time being in force:
Provided that the number of persons which may be prescribed under this sub-section shall not exceed one hundred.
(2) Nothing in sub-section (1) shall apply to—
(a) a Hindu undivided family carrying on any business; or
(b) an association or partnership, if it is formed by professionals who are governed by special Acts.
(3) Every member of an association or partnership carrying on business in contravention of sub-section (1)
shall be punishable with fine which may extend to one lakh rupees and
shall also be personally liable for all liabilities incurred in such
business.
In
new provisions also we find restriction in relation to association
carrying business and not profession. Furthermore, in case of
associations of professionals the restriction is not applicable if such
professionals are governed by special Acts. The firm of CA are governed
by the provisions of the ICAI Act and Regulations. Therefore, in view of
new provisions a firm of CA shall not be subject to restrictions on
number of partners as per the companies Act 2013.
DEFINITIONS. In the Act, unless there is anything repugnant in the subject or context,
(b) "business" includes every trade, occupation and profession;
DEFINITION OF "PARTNERSHIP", "PARTNER", "FIRM" AND "FIRM-NAME"."Partnership" is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
Persons
who have entered into partnership with one another are called
individually, "partners" and collectively "a firm", and the name under
which their business is carried on is called the "firm-name".
Number of partners as per Partnership act:
Since
partnership is ‘agreement’ there must be minimum two partners. The
Partnership Act does not put any restrictions on maximum number of
partners. However, section 11 ofCompanies Act prohibits
partnership consisting of more than 20 members, (10 in case of Banking
Business) unless it is registered as a company or formed in pursuance of
some other law.
In
partnership Act the terms business includes profession. However, as
stated earlier there is no restriction on number of partners in the
Partnership Act. The restrictions provided in the companies act, 1956 are
in relation to business and does not apply to profession. There is no
definition of business in Partnership Act, and in ITA we find that there
is marked difference between business and profession. And what is
applicable to business, may not be applicable to profession, it depends
to language used in particular provision. This is well settled by
judgment of Supreme Court cited earlier.
Therefore, on conjoint reading of S.11 of Companies act and provisions of ITA about business and profession, it can be said that S.11 of the Companies Act 1956 is
not applicable to professionals, Particularly so when profession is
regulated by other enactment. This position has further been clarified
by the provisions of theCompanies act, 2013 as discussed earlier.
Learning from the case:
While
making any arrangement, one must consider all related aspects as per
law, and also as per common practices. There must be exercise to explore
other possible ways and means. What view can be taken by concerned
authorities must be considered? Attempt must be made to avoid
controversy.
Suppose in this case ultimately it is held by courts that the firm was an illegal association in terms of S.11 of the Companies Act, 1956 then
what will be consequences – whether the illegal association will be
entitled for registration under ICAI Act and Regulations? Whether
professional work (particularly audits and attestations can be
considered as illegal?
We
find from the list of partners that some of them are factually
employees and share miniscule percentage of profit for example 0.0005%
in case of one of partner. Such partners could continue as employee. For
meeting requirement of capacity to undertake audits, another
partnership firms could be formed. The parent firm could be provided
returns by way of sharing fees in some assignments where the partners of
parent firm had active role. Thus many ways could be found.
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| By: CA DEV KUMAR KOTHARI |
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Wednesday, September 25, 2013
Deloitte Haskins - Firm Exceeding 20 Partners or Not
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