HUF as partner in Partnership Firm

Querist : Anonymous (Querist) 18 April 2011 This query is : Resolved
Unlike a company, which has a separate legal entity, a HUF has no separate existence from its members. A HUF cannot be treated as a person (though under the Income Tax Act, the terms 'person' includes a HUF also for limited purpose only). However, what would be status of a Partnership Firm in which a HUF (and not KARTA) is shown AS one of the Partner? What would happen to credir facilities provided by Bank to such Partnership Firm and what is the remedy?

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Arun Bhatia (Expert) 18 April 2011
Karta can be a partner in the partnership firm for and on behalf of HUF

M.Sheik Mohammed Ali (Expert) 18 April 2011
yes, i agree

Querist : Anonymous (Querist) 18 April 2011
Thanks. But my specific query is here HUF is a partner and not the Karta. What would be the status of Firm?

A V Vishal (Expert) 19 April 2011
HUF can never be a partner. The Partnership Act, 1932

5. PARTNERSHIP NOT CREATED BY STATUS.

The relation of partnership arises from contract and not from status; and, in particular, the members of a Hindu undivided family carrying on a family business as such, or a Burmese Buddhist husband and wife carrying on business as such are not partners in such business.

Querist : Anonymous (Querist) 19 April 2011
What would be remedy available to a Bank who has extended credit facilities to such Firm which has a HUF as one of the Partners. Whether the Partnership Deed would be void?

A V Vishal (Expert) 19 April 2011
In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together. Furnish details of the case.

Parveen Kr. Aggarwal (Expert) 19 April 2011
The partnership deed in such a case cannot be void in its entirety. As HUF cannot be partner in a firm but other persons who can be legally partners in a firm, the rights and liabilities of the other partners remain unaffected.

Regarding the liability of firm towards the bank, the HUF can be held liable on the principle of holding out contained in section 28 of the Indian Partnership Act, 1932.