CAN A FIRM BE PARTNER OF ANOTHER FIRM?
Dear Friends,
As you are aware that a “ Partnership Firm” is not a legal entity. When two or more than two persons come together for lawful purpose and decided to distribute profit among themselves, they are said to be in partnership. It is an agreement between association of persons through which association decide to split profit among them.
A partnership is a form oPf business which enables two or more persons to co-own an organization, and they agree to share the profits and losses of the company. Each member of such a business is called a Partner, and collectively they are known as a partnership firm.
“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”.
A Partnership firm is governed by the Partnership Act, 1932 and the partnership deed executed between the partners (A partnership deed can be in oral and in the written form however in the state of Maharashtra a written agreement is required)
Section 4 of The Act defines 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.
CAN A PARTNERSHIP FIRM BE CONSIDERED AS A LEGAL ENTITY?
AS THE DEFINITION IN CLEAR WORDS SPECIFIES THAT THE PARTNERS COLLECTIVELY FORM A FIRM.
There are two imports that can be drawn to answer the question that a Firm is a separate legal entity or not;
- The English law does not recognize Partnership as a Separate legal entity and;
- The Scottish law recognizes Partnership as a separate legal entity.
However, our partnership law is based on English law, and we have also adopted the notions of English lawyers as regards a partnership firm.
Under the Indian Partnership Act, 1932, a firm is recognized as an entity apart from the persons constituting it, and that the entity continues so long as the firm exists and continues to carry on its business. It is true that the Indian Partnership Act goes further than the English Partnership Act, 1890, in recognizing that a firm may possess a personality distinct from the persons constituting it; the law in India in that respect being more in accordance with the law of Scotland, than with that of England. But the fact that a firm possesses a distinct personality does not involve that the personality continues unchanged so long as the business of the firm continues. The Indian Act, like the English Act, avoids making firm a corporate body enjoying the right of perpetual succession.
The general concept of a partnership, firmly established in both systems of law, still is that a firm is not an entity or ‘person’ in law but is merely an association of individuals and a firm name is only a collective name of those individuals who constitute the firm.
In other words, a firm name is merely an expression only a compendious mode of designating the persons who have agreed to carry on business in partnership.
Referring to Section 4 of the Act, a Partnership is a relation between persons and since the word person is not defined in the Partnership Act, 1931 therefore, definition of the word ‘person’ occurring in Section 3(42) of the General Clauses Act, 1897 shall apply for the interpretation of Section 4 of The Act. However, the fact that the definitions of the General Clauses Act shall apply only when there is nothing repugnant in the subject or text of the existing Act.
According to lawyers, English or Indian, the definition of person be totally repugnant to the subject of partnership law as they know and understand it to be.
From the above case it becomes clear that the definition of person ‘person’ occurring in Section 3(42) of the General Clauses Act, 1897 shall not apply for the interpretation of Section 4 of The Act.
For an entity to be Legal/ Juristic person it shall comprise of the following 5 attributes:
- The entity shall be different from its members.
- Perpetual succession.
- It must be competent to enter into a contract.
- Is capable to sue or being sued in its own name.
- Can hold the property in its own name.
Examining the above 5 Attributes:
1. The entity shall be different from its members.
Since a partnership is merely an association of individuals and the law does not recognize partnership to have a personality or existence distinct from its partners; in other words, a partnership is not different from the partners constituting it. a firm is only a compendious name for certain persons who carry on business or have authorized one or more (of) their Partners to carry it on in such a way that they are jointly entitled to the profits and jointly liable for the debts and losses of the business.
- Perpetual succession
That continuous existence which enables a corporation to manage its affairs, and hold property without the necessity of perpetual conveyances, for the purpose of transmitting it. By reason of this quality, this ideal and artificial person remains, in its legal entity and personality, the same, though frequent changes may be made of its members.[8]
From the definition it becomes clear that the partnership does not have a perpetual succession as the firm collapses on changes in the partners of the firm which can be due to death or retirement of the partners.
3. Power to enter into a contract.
The partnership firm is not regarded as a legal entity, therefore the firm cannot on its own create or enter into any contract. Any Partner authorized by all the partners, or all the Partners of the firm shall execute the contract. Subject to the Partnership agreement, the firm is made party to the contract in order to make all the partners at the time of the Execution of the contract jointly and severally liable to contract.
4. May or may not be sued in its own name.
Order XXX of the Civil Procedure Code, 1908 reads as- Suits by or Against Firms and person carrying on business in names other than their own.
Here we deal with the question whether a Firm can institute a suit in its own name?
Rule I of Order 30 that any two or more persons claiming or being liable a partners may sue or be sued in the name of the firm (if any) of which such persons were partners at the time of the accruing of the cause of action. As stated by us earlier, a firm is not under the law a juristic person but is a compendious name for all the persons who are members of the firm (partners).
The effect of using the name of the firm, as provided in Rule 1, is merely to bring all the partners before the Court and the procedure indicated in Rules 1 and 2 of Order 30 is only a convenient method for showing the persons who constituted the firm at the time of the accruing of the cause of action, and a decree in favor of or against a firm, in the name of the firm, has the same effect as a decree in favor of or against all the partners. The various rules of Order 30 make this clear.
Rule 1 of Order 30, in providing the mode or form of the suit, prescribes a requirement that the two or more persons who, claiming or being liable as partners, sue or be sued in the name of the film must be persons who were partners at the time of the accruing of the cause of action.
A firm can sue or be sued subject to two conditions:
- If the Firm is a registered Partnership;
- The persons suing, i.e., all the partners of the firm at the time of the institution of the suit, are or have been shown in the Register of Firms as partners in the firm, while under Rule I of Order 30 two or more persons who claim as partners may sue, or who are liable as partners may be sued, in the name of the firm (if any), provided such persons were partners at the time of the accruing of the cause of action.
From the above it becomes clear that Order 30 of CPC allows the name of the firm is used merely to bring all the partners before the court and person who constituted the firm at the time of accruing of the cause of action, but a firm can sue or be sued subject to the conditions stated above.
5. Can hold the property in its own name.
According to Section 14 of the Partnership Act, 1932 specifies any property and rights and interest in property acquired with money belonging to the firm are deemed to have been acquired for the firm.
A Partnership is not a juristic person; the legal entity is the partner himself. All partners in their individual capacity ought to additionally be part of as parties to the agreement to sell or to the conveyance deed and execute it in their individual capacity. Once an immovable property is transferred to a firm it vests in all the partners of the firm and not within the firm, since the firm has no separate legal existence.
LET’S DISCUSS THE CASE
The issues under consideration are as under:
1). Whether a firm can be a partner of another firm?
2). Whether the CIT (Appeals) has the power to change the status of assessee.
These issues came up before the Madras High Court in Mega Trends Inc. v. CIT (2016).
The Court observed that since a partnership firm is a relationship between persons who have agreed to share the profits of the business carried on by all are any of them acting for all, and the term “persons” can connote only natural person. Since some of the partners are other firms, the assessment cannot be carried out as a firm, as per the Supreme Court ruling in Dhulichand Laxminarayan v. Cff (1956). The contention of the Commissioner (Appeals) that a firm cannot be a partner of another firm is, therefore, correct.
In Mega Trends Inc’s case, the Madras High Court further observed that, under section 251(1), the powers of the first appellate authority are co-terminous with those of the Assessing Officer and the appellate authority can do what the Assessing Officer ought to have done and also direct him to do what he had failed to do.
If the Assessing Officer had erred in concluding the status as a firm, it could not be said that the Commissioner (Appeals) had no jurisdiction to go into the issue. The appeal was in continuation of the original proceedings and unless fetters were placed upon the powers of the appellate authority by express words, the appellate authority could exercise all the powers of the original authority.
The High Court held that the power to change the status of the assessee is available to the assessing authority and when it is not used by him, the appellate authority is empowered to use such power and change the status.
The Court relied on a full bench decision of the Madras High Court in State of Tamil Nadu v. Arulmurugan and Co. reported in [1982] to come to much conclusion, accordingly, applying the rationale of the Madras High Court ruling to the case on hand; the CIT (Appeals) has the power to change the status of the assessee.
COLCLUSION: from above discussion it is clear that a Partnership Firm is only an association of persons evidenced by a Partnership Deed and came together to split profit according to a specified ratio. A Firm does not have separate legal entity than its partners and hence it cannot be partner of another firm.
DISCLAIMER: the article presented here is only for sharing information with readers. In case of necessity do consult with professionals.
AUTHOUR: FCS Deepak P. Singh[ B.Sc. FCS,LLB,AIII, CIAFP]/cs.deepakpsingh@gmail.com
