Partnership is considered as same entity as individual partners, i.e. it is not separate legal entity. Reference can be made to the judgment of Hon’ble Supreme Court in case of CIT v. Hind Construction (1972 ) 83 ITR 211 (SC) ( dated 16.09.1971), in which it is held that the transfer of assets to firm by partner is not a ‘sale’ by partner. The converse is that taking away of assets by partner as his share of capital on retirement also cannot amount to sale by firm to partner. Reference can also be made to the Judgment of Hon’ble Supreme Court in case of N. Khadervalisahab & Another v. N. Gudusaheb (Decd) & others (2003 ) 261 ITR 1 (SC)., dealing with section 17 of the Registration Act , 1908 , Hon’ble Supreme Court has observed as under:
“A Partnership Firm is not an independent legal entity, the partners are the real owners of the assets of the partnership firm. Actually the firm name is only a compendious name given to the partnership for the sake of convenience. The assets of the partnership belong to and are owned by the partners of the firm.”
Under Sales Tax laws also, in number of cases it is held that, between firm and partners there is no sale purchase. Readily reference can be made to following 2 judgments of Hon’ble MST Tribunal:
1. Shiv Timber Mart , S. A. No. 1306 of 86 dated 31.7.1987.
2. Shree Jayanti Corporation (S.A. No. 1508 of 2003 dated 05.03.05)
Under GST, there is separate mention of firm in the definition of person. However, the same cannot override the legal relationship between firm and partners and in my opinion the law laid down above by the Supreme Court and other forums will prevail. The result is that, taking away of assets by retiring partners cannot amount to supply in hands of firm. Though, the firm is going to complete the work in post-retirement period still it is part of settlement of claim of partner and therefore it will not amount to supply and no liability under GST.
The position can further be analyzed that there is no agreed consideration to be paid by retiring partners to firm. At the most, it can be said to be transaction without consideration between related parties. When the transaction is between related parties, then they can be considered as supply if the transaction falls in Schedule-I to the CGST Act. Para 2 of Schedule-I reads as under:
“Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business”
As per section Explanation in section 15, legally recognized partners in business are related persons. Therefore, a view can be taken that the transaction between retiring partners and continuing partners, though without consideration, is supply transaction. However, the further requirement of Para 2 in Schedule-I is that it should be in course or furtherance of business. The partner retiring from the firm cannot be considered as in course or in furtherance of business. The firm’s business is separate without getting affected by partner coming in or going out from the firm. On the contrary, by retirement of the partner, the firm may suffer in the form of losing the experience of the partner, his financial contribution etc. So it cannot be said to be in furtherance of business but on the contrary some loss to the firm. Therefore, in my view even in light of above Schedule-I also, no liability is attracted under GST Act.
However, the querist has further asked as to who will be liable and when?
In light of my above view, there is no requirement to answer this query. However, for the sake of clarification it can be said that, if at all any liability falls it will be on the firm as it is firm which is providing services. This being continuous service, the GST will be payable as per terms in agreement for periodic payments. In other words, it should be same as for normal customers.