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CASE STATEMENT

There is a partnership firm ABC & Co comprising of 3partners A, B.C. A and B are active

partners and there share in firm is 25% each. C is a sleeping partner and he has 50% share in this partnership firm. The firm is in the business of manufacturing certain goods & the total capital isRs 5 million. Doing its business since 2006 and there income for the year 2009 & 2010 was 2million (gross income).

The office of the firm is on the rental basis which is owned by Mr. M. And his monthly rent is Rs40,000/- per month. The said premises were mortgaged in favor of a bank against a liability of 3million. Mr. M could not pay off the liability and the bank is about to attach the property.

Q1. Under the circumstances is there any remedy available to the partners of the firm jointly or severally?

Q2. What is the Legal status of Mr. M?

Q3. Any concession regarding the income tax available to Mr.M?

Q4. If there is any tax concession available to the partnership firm and its partners?

Q5. What is the possible resolution to this problem?

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S UMMARY

As a group, we have analyzed the case is that there are two major parties in this case involved:

y Mr. M

y The Bank

Minor party:

y ABC Company

We are saying this because rather the property of Mr. M is mortgaged under bank and bank is

now attaching the property of Mr. M because Mr. M is not able to pay off the liability and this

property is under the possession of ABC Company under the rent agreement as tenant. S o the

real case is between Mr. M and Bank and ABC Company is directly being hurt. S o in case if

bank goes for the auction of property, company cannot do anything in this regard. But only can

try to save its business by availing possible remedy that is described below.

The possible solutions and answers are given as follows:

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Q1 :- Under these circumstances is there any remedy available to the partners of the firm jointly or separately?

Answer:Under these circumstances one remedy will be available to the partners of the firm. Bank willfile a case against Mr. M because he has become defaulter. Mr. M will give notice to firm tovacate the property (premises).Then the partners of the firm can take a stay order against Mr. Mfrom court (Remedy). According to the stay order, the firm may have the right to carry on their manufacturing business until the final decision between the bank and Mr. M is finalized by thecourt.

In case, the court decides to auction the property of Mr. M, then the tenant (firm) has the veryfirst right to take the ownership of that premises in the auction.

Q2 :- Legal status of Mr. M?

Answer:

The legal status of Mr. M will be of the owner of the premises (Office of the firm) and also of adefaulter till auction. When the final decision will be the auction means he is now bankrupt.

Q3 . Any concession regarding the income tax available to Mr. M?

Answer:

p There will be no tax concession available to Mr. M.

Mr. M will pay tax on the income received from his tenant (ABC& Co.) in the form of rent of property under the head of Income from property.

When firm takes stay order from the court for the smooth continuity of its business operations,then by courts order tenant will submit rent to court or court will collect the rent until the caseget resolved between Mr. M and bank. In such case, Mr. M will pay tax only on the amount(rent) received by him before the stay (accumulated rent). If that accumulated rent falls under theincome slab of tax then that amount will be chargeable to tax under the head Income fromproperty .

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Another case is when there is already a mutual agreement between Mr. M and the partnershipfirm that the ABC & Co will pay the income tax. But in such case also Mr. M will have no taxconcession.

Q4 . Any tax concession available to Partnership firm or its Partners?

Answer:

p There will be no tax concession available or rewarded to Partnership firm or partners.

EXCEPTIONS:

The partnership firm will take stay order from the court in order to avoid disruptions in theoperations of the business, until the case get resolved between Mr. M and Bank against themortgage. The legal expenses incurred in order to obtain the stay order are considered as

business expenses and firm can claim deductions against these expenses. Because, it is a businessexpense and included in general deductions. Also the rent which is paid by the firm is consideredas revenue expense and will be deducted from the gross income and on it the firm can claim taxdeduction also. As a result, of these deductions income decreases which results in decrease of Income Tax. This income is taxable income (Net Income before Tax). Then the tax paidaccording to the slabs and the remaining amount is Net Income/

The partners of the firm get their share from firms net income ( income after tax)

A sketch of income statement for partnership firm

Gross income Rs. 2,000,000Less: Rent expense(40,000*12) Rs. 480,000Less: legal expenses( S uppose) Rs. x Rs. 480,000+xEarning before interest &tax Rs. 1,520,000-xLess: Interest expense - Earning before tax(EBT) Rs. 1,520,000-xLess: Tax( S uppose) Rs. y

Net income Rs. 1,520,000-x-y

Note : the net income will be finally distributed among the partners according to their perspectiveratios.

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Q5 . Is there any possible resolution to this problem?

Answer:

POSSIBLE RESOLUTION FOR MR. M:

According to our opinion there could be two possible resolutions for Mr. M.

1. F irst is that he can take the stay order from court to give him some time to pay back his

due amount by saying that it was only an Ex-party decision .And then further he will

continue paying the remaining loan payments to fulfill the previous mortgage agreement.

2. S econdly he may try to do settlement with the bank separately .That he is not able to pay

the whole amount . S o if the bank facilitates him by giving Interest Exemption then hewill pay the principal amount at that very moment. It is the practical case and it mostly

happens in our real life. As we know that the value of money does not always remain

same .The money in hand is considered to be more valuable. S o most probably the

chance is that the bank will accept this settlement.

However if the Auction is made/bank attach the property then there is no possible resolution for

Mr. M. The amount that will be received from Auction;

a) At first will be settled out for the amount that Mr. M has to pay to bank

b) The bank will claim for the deduction of the expenses it made on Auction

event

POSSIBLE RESOLUTION FOR PARTNERSHIP FIRM:

The only remedy for the partnership firm was that it could take the stay order from court until the

final decision of the case .That the partnership firm has availed under the given condition. Once

the property has been auctioned, then the partnership firm has no other possible resolution except

that it buys the property (business office) in Auction. It is noticeable here that Auction will be

made by the bank at courts final decision and the first right will be given to the tenant to buy the

property or if at the auction it is announced that Mr. Ms property is on rent to ABC company on

Rs. 40,000/- monthly and if the new owner wants to have this firm on rent as it goes on

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previously or with new understandings regarding rent and conditions, then new rent agreement

can be formed and firm can carry on its smooth operations.

CONCLUSION

This all we have analyzed within the group and with some personal example regarding mortgage.