Assigning Share In Profit In Partnership Firm Different From Constituting A Sub-Partnership: Gujarat High Court

Background

In the instant case, the IT Department conducted a search and seizure operation under Section 132 of the Income Tax Act at the premises of the Assessee. The Department, thereafter, directed the provisional attachment of various properties of the Assesse.

The Assessee had, by paying INR 1,50,00,000 to one of the partners of the petitioner-firm with respect to the suit property, received 2.5% of share in the profit from the said partner. The IT Department attached the firm's property also.

Thus, the present wit petition was filed by the partnership firm.

It was contended that under Section 281B of the IT Act, only the property of the Assessee can be attached. It was emphasized that the property in question could not be attached as the same belongs to the firm and that the Asseesee was merely an assignee for the share in profit and did not own the asset of the firm.

The petitioner referred to section 29 of the Partnership Act which envisages the transfer by a partner of their interest in the firm and not a transfer by a partner of their interest in any particular property or assets of the firm.

It also relied on Commissioner of Income Tax Vs. Sunil J. Kinariwala, [(2003) 1 SCC 660], where the Supreme Court drew a distinction between a case a partner of a firm assigns his/her share in favour of a third person and a case where a partner constitutes a sub-partnership with his share in the main partnership.

It was held therein:

"whereas in the former case, in view of Section 29(1) of the Indian Partnership Act, the assignee gets no right or interest in the main partnership except to receive that part of the profits of the firm referable to the assignment and to the assets in the event of dissolution of the firm. In the latter case, the sub-partnership acquires a special interest in the main partnership."

The Respondent, per contra, averred that the very object of provisional attachment as envisaged under Section 281B of the Act is to protect the interest of the revenue. The Assessee had contributed to the purchase of the land of the firm which was a 'huge contribution' in the purchase of the land. By assigning a share in the profit in favour of the Assesee, the firm had assigned a share in the land, too, per the Respondent.

Judgement

The Bench identified that the primary issue worth consideration was whether the Department could have attached the property, which was indisputably in the ownership of the Petitioner-Firm.

To address this, the Court made a plain reading of Section 281B of the Act which provides for attachment of property. It noted that the same provides for attachment of the property of the assessee only and of no one-else.

Thus, the Bench opined:

"Even if we go by the case of the revenue that there is some interest of Savaliya involved in the land in question, the same will not make the subject land of the ownership of the assessee i.e. Arnav Savaliya."

The Court also agreed with the Sunil J Kinariwala judgement and concluded that the attachment of the subject land was not sustainable in law.

It said,

"The assessee in the case on hand is Arnav Savaliya. The provisional attachment is of the property, which belongs to the writ-applicant – Partnership Firm...The case on hand indisputably is not one of a sub-partnership though in view of Section-29(1) of the Partnership Act, Arnav Savaliya as an assignee may become entitled to receive the assigned share in the profits from the writ-applicant – Firm, not as a sub-partner because no sub-partnership came into existence, but as an assignee to the share of profit of the assigner-partner."

Accordingly, the impugned order was quashed.

The Court also cautioned the Income tax authorities that the powers vested under Section 281B are "drastic", permitting the Assessing Officer to attach any property of an assessee even before the completion of assessment or reassessment.

"These powers are thus in the nature of attachment before judgment. They have provisional applicability and in terms of sub-section (2) of section 281B of the Act, a limited life. Such powers must, therefore, be exercised in appropriate cases for proper reasons. Such powers cannot be exercised merely by repeating the phraseology used in the section and recording the opinion of the officer passing such order that he was satisfied for the purpose of protecting the interest of Revenue, it was necessary so to do." 

Case Title: M/S. RAGHUNANDAN ENTERPRISE Versus ASSISTANT COMMISSIONER OF INCOME TAX

Citation: 2022 LiveLaw (Guj) 41

Case No.: C/SCA/1321/2022

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