No. There is no law which prohibits a firm from dealing with its partners. Under the IT Act, a partnership firm is distinct/separate assessable legal entity. In commercial life, partnership firm borrowing from or lending to its partners, selling or purchasing of goods or other assets to or from its partners or giving premises on lease or taking premises on lease from its partners are common and acceptable. Merely because the transaction is between the partnership firm and its partners, it will not result in consequences or application of principle thatthere cannot be a trade or profit between the partnership firm and its partners. Thus, in your case, as the transaction between the partnership firm and its partners being a commercial transaction, the firm must be allowed the loss suffered by it as its business loss. See CIT v Kaluram Puranmal (1979) 119 ITR 564 (Bom).

We wish to incorporate a company with the following main objects:

i) To gather information and have correspondence and business relationship with merchants about trade and to inform them by publicity or advertisement.

ii) To arrange for collection of dues to members according to decision of the association.

iii) To have correspondence with members and other associations to protect the interest of members and to improve their interests.

iv) To improve legislation about trade and commerce, initiate for legislation and approve of the same.

v) To cooperate with such association or bodies having similar objects to improve, gather information from such bodies and to inform them of theimprovements in trade and commerce.

vi) To spend for temples, temple gardens, free libraries and trade expenses.

vii) To purchase or take on lease, for the purpose of the objects of the association land and building, construct such buildings and to maintain any repair to the same.

viii) To sell properties not required by the association and to invest them in known banks, deposit them and to put them in current account.

ix) To collect rents from members for the expenses mentioned above.

x) To meet the expenses of incorporation, printing charges, advertisement, salary for staff, travel expenses and stamps.

xi) To associate with other societies or associations not having objects contrary to the objects of this association and to amalgamate and corporate with them.

xii) If association's funds permit, to start handicrafts relating to machineries.

xiii) To establish handicrafts for earning for purposes not having objects contrary to the objects of the association.

Kindly advise whether the incomeof the company could be claimed as exempt under Section 11 of the Income Tax Act?

XYZ & Others, Delhi

A company, whose dominant or primary purpose is the promotion of trade but has charitable objects, can enjoy exemption under Section 11 only if there are restrictions against the distribution of profits to its members.

During the course of search operations, gold worth Rs 2 lakh was seized. The AO wants to treat it as the assessee's income from undisclosed sources applying section 69A of the Income Tax Act. Can there be any escape from such an action?

Robert John, Panjim

Unless some cogent evidence is adduced regarding the source of acquisition of gold, the AO would be justified in presuming that the gold recovered from the assessee's premises belonged to him and was acquired in the year of search and represents concealed income of the year in question itself justifying an addition under Section 69A of the IT Act (See Chuharmal Vs CIT) (1988 172 ITR 250 (SC).

Can youexplain the concept of partition in the Hindu Law and how can it be used to save taxes?

K N Pande, Delhi

Under the Hindu law, an HUF is entitled to effect a partition which may be total or partial. Where the HUF undergoes a total partition, the entire joint family property is divided among all coparceners and the family ceases to exist as an undivided family. The position is, on the other hand, different when there is partial partition. A partial partition may be as regards the persons constituting the joint family or as regards properties belonging to the joint family or both. A partial partition does not bring about the total disruption of the undivided family. It does not bring the undivided family to an end. The undivided family continues after the partial partition. In partial partition, as regards persons constituting the joint family, one or more coparceners may separate from others and the remaining coparceners may continue to be joint and hence, the undivided family as such continues,though with reduced members. In a partial partition as regards the property, the joint family makes division and severance of interest in respect of a part of the joint estate while retaining their status as a joint family and holding the rest of the properties as joint and undivided property.

Section 171 has, however, been declared ultra vires by the Madras High Court in the case of M V Valliappan v ITO (1988) 170 ITR 238 (Mad). The operation of the Madras High Court stands stayed by the Supreme Court.

After partition, the properties cease to be properties belonging to the family which has been partitioned - totally or partially. Obviously, income from such properties cannot be assessed in the hands of the partitioned family.

Some changes are proposed to be made in the matter of computation of Capital Gains by the Finance Bill, 1998. Kindly explain the implication of the proposed changes in jargon-free language.

S Ganapathy, Chennai

The existing section 48 provides for the manner ofcomputation of capital gains which is arrived at by deducing from the full value of consideration received or accruing from transfer of the capital asset, the cost of acquisition of the same or accruing from transfer of the capital asset, the cost of acquisition of the same or any direct expenditure made for the purpose of the said transfer. In other words, capital gain would be sale value less cost plus other incidentals relating to the transfer of capital assets.

A new provision purported to be inserted in the said section says that in case of transfer of land or building or both, if the value of consideration is less than the value adopted or assessed by the registering authority for the purposes of stamp duty, the value so assessed or adopted shall be deemed to be the full consideration received or accruing.

In essence, the IT authorities will henceforth take cognizance of a deemed sales value rather than the actual consideration received by an assessee.The impact of the change would be that aproperty buyer would now be left to the vagaries of the stamp duty authorities. Stamp duty is a state subject and therefore, vary from one state to another. The stamp duty law as well as the administrative instructions for valuation of properties also differ. So there cannot now be a uniform harmonious or transparent system for computing capital gains. Obviously, the change is proposed on the recommendation of the expert group which submitted its hurried report last year.