C.Kondiah, J.:-

(1) This is a reference under section 256 (1) of the income tax act (hereafter referred to as "the act") by the income tax appellate tribunal, hyderabad bench, for the opinion of this court on the following question of law: -

"whether on the facts and in the circumstances of the case m/s. G. Parthasarthy naidu and sons and m/s. Sri lakshmi oil and flour mills can be treated as two separate firms and distinct assessable entities?"

(2) The admitted material facts as disclosed in the statement of case may be noticed. G. Parthasarathy naidu, the kartha of the hindu undivided family, consisting of himself and his three sons viz. , vara prasada rao, chandrasekhara rao and venkateswara rao (minor) was a partner with a 5/16th share in m/s. Gadireddi pedanarasimhulu naidu and sons naidupet. The respondent assessee is a registered firm. On 30/09/1968 there was a partition in the joint family of parthasarathi naidu. As per the partition agreement entered into that day 5/16th partnership share in m/s. G. P. N. N. And sons was agreed to be shared by a sub partnership comprising of the four coparceners. Then the assessee firm was constituted under a deed of partnership dated 1 - 10 - 1968 whereunder the profits were agreed to be shared at 1/4th each and the loss was agreed to be shared equally by the three major partners. On 26/11/1968 another partnership in the name and style of m/s. Sri lakshmi oil and flour mills, proprietors g. Parthasarthi naidu and sons, was formed by the same divided coparceners for the purpose of erecting an oil mill and for carrying on oil business. The minor partner venkateswara rao was admitted to the benefits of the partnership carrying 25% to each of the three major partners and the minor partner. In case of loss parthasarathi naidu, varaprasada rao and chandrasekhara rao would share the net loss at 50%, 25% and 25% respectively. In paragraph 15 of the partnership deed dated 25 - 3 - 1970 it was stated that the business of m/s. Sri lakshmi oil and flour mills shall not be deemed as part and parcel of the sub partnership constituted under the partnership deed dated 1 - 10 - 68. Fresh deeds of partnership were executed on 11 - 3 - 71 as the minor partner venkateswara rao has had become a major and he had elected to become and remain as a full fledged partner. For the assessment year 1971 - 72 the assessee firm filed a return admitting rs. 57,340. 00 as the total income from the business. Another return was filed in the name of m/s. Sri lakshmi oil and flour mills declaring a total income of rs. 35,000. 00.

(3) The income tax officer had clubbed the incomes of the two firms and assessed the assessee firm on the ground that the constitution and the ownership of the two businesses were one and the same. For the assessment year 1970 - 71 also the income tax officer had clubbed the income of m/s. Sri lakshmi oil and flour mills with that of the assessee firm and assessed the entire income in the hands of the assessee. The appeals by the assessee to the appellate assistant commissioner were unsuccessful. The further appeals by the assessee to the income tax appellate tribunal were allowed holding that the profit and loss sharing ratio of the two firms cannot be said to be the same, since in the case of loss, differing sharing ratio were provided that the businesses were different, that there was no interlacing, or inter mixing between the two firms and that therefore there was no justification for including the profits of m/s. Sri lakshmi oil and flour mills in the income of the assessee firm. Hence this reference at the instance of the commissioner of income tax.

(4) The division bench, before which the referred case came up for hearing, had referred the matter to a full bench to obtain an authoritative pronouncement on this question of law which is stated to have arisen in a number of cases before the tax authorities and the tribunal as the correctness of the decision of the division bench in addl. Commr. Of income - tax v. Venkatanarasimha rao and co. , (1976) 104 itr 28 (andh pra) has been disputed. That is how this referred case has come up before us.

(5) The sum and substance of the submission of sri p. Rama rao, learned counsel for the revenue, is that a firm, although treated as a unit for the purpose of taxation, is not a separate legal or juristic personality under the indian income tax act, and therefore the firm has no legal existence independently of its partners and that when there are two firms consisting of the same partners, in the eye of law they must be considered to be only one firm and therefore the view of the tribunal in treating the assessee firm and the other firm as separate entities is illegal. He elaborates this contention by referring to the meaning of the expression firm, partner and partnership being statutorily imported into the indian income tax act from the indian partnership act. According to the learned counsel, whenever the income tax act contemplated to make special provision regarding the mode of assessment and other matters associated with the same, a special provision has been specifically made and to that extent only such a special provision prevails over the provisions of the partnership act and in all other respects, the provisions of the partnership act are applicable.

(6) This claim of the revenue is opposed by mr. Dasaratharama reddy, learned counsel. For the assessee contending inter alia that there is no prohibition in law to have more than one partnership by the same partners, that the firm is a legal personality under the income tax act, that, in any event, the assessee firm and m/s. Lakshmi oil and flour mills are two separate and independent registered firms having different businesses, that the shares of the partners also are not exacting, inter mixing etc. , between the two firms and that therefore there was no justification for clubbing the income of the other firm with that of the assessee firm.

(7) Answer to the question depends upon the law governing a firm under the income tax act. We may usefully examine the question, whether a firm under the act is a separate and independent juristic personality. True as contended by sri p. Rama rao section 2 (23) of the act defines the expressions firm, partner and partnership as indicated in the partnership act. A close and careful reading of the provisions of the partnership act indicates that partnership or firms as such is not a separate independent entity or person in law but is merely an association or combination of persons agreed to carry on business in partnership with a motive to share the profits and some persons acting and conducting for and on behalf of the others. It is also well settled that a firm as such is not entitled to enter into a partnership with another firm or individuals and it has no legal personality apart from the partners. In other words, a firm under the partnership law, be it english or indian, is only a collective name for individuals carrying on business in partnership though the mercantile usage recognised the firm as a separate, distinct person. But under the act section 4 charges the total income of the previous year of every person to income tax at the rate or rates specified in the finance act applicable to the assessment year in question. The term person is defined under section 2 (31) thus:

" person includes - (i) an individual, (ii) a hindu undivided family, (iii) a company (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or not, (vi) a local authority, and (vii) every artificial juridical person not falling within any of the preceding sub clauses"

. Hence a firm under the act is, unlike under the partnership act, a separate and distinct legal entity chargeable to income tax and therefore it is a taxable unit. It has a separate personality and existence of its own de hors the partners.

(8) As observed by the supreme court in commr. Of income tax v. A. W. Figgies and co. (1953) 24 it 405 at p. 409:

"a firm can be charged as a distinct assessable entity as distinct from its partners who can also be assessed individually. The partners of the firm are distinct assessable entities, while the firm as such is a separate and distinct unit for purposes of assessment. Sections 26, 48 and 55 of the act fully bear out this position. These provisions of the act go to show that the technical view of the nature of a partnership, under english law or indian law, cannot be taken in applying the law of income - tax"

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(9) In bhagwanji morarji goculdas v. Alembic chemical works co. Ltd. Air 1948 pc 100 it was ruled by the privy council that the indian partnership act attributed personality to a partnership which was more in accordance with the law of scotland rather than english as it went beyond the indian partnership act, 1890. English common law does not recognise a firm as an entity distinct from the members composing it in contrast to the law in scotland which recognised separate full personality to the firm apart from its partners.

(10) This view has not been adopted by the supreme court in dulichand laxminarayan v. Commr. Of income tax, (1956) 29 itr 535 where in the learned chief justice das, while referring to the scotland, english and indian law under the partnership act observed at page 541:

"it is clear from the foregoing discussion that the law, english as well as indian, has for some specific purposes, some of which are referred to above, relaxed its rigid notions and extended a limited personality to a firm. Nevertheless, the general concept of partnership, firmly established in both systems of law, still is that a firm is not an entity or "person" in law but is merely an association of individuals and a firm name is only a collective name of those individuals who constitute the firm. In other words, a firm name is merely an expression, only a compendious mode of designating the persons who have agreed to carry on business in partnership. According to the principles of english jurisprudence, which we have adopted, for the purposes of determining legal rights "there is no such thing as a firm known to the law" as was said by james l. J. In ex parte corbett: in re shand (1880) 14 ch. D. 122, 126). In these circumstances to import the definition of the word "person" occurring in section 3 (42) of the general clauses act, 1897, into sec. 4 of the indian partnership act will, according to lawyers, english and indian, be totally repugnant to the subject of partnership law as they know and understand it to be. It is in this view of the matter that it has been consistently held in this country that a firm as such is not entitled to enter into partnership with another firm or individuals. "

(11) We may usefully refer in this context to the following passage in the judgment of the supreme court in the state of punjab v. Jullundur vegetables syndicate, (1966) 17 stc 326 where in the question as to whether a firm is a separate assessable entity for the purpose of the east punjab general sales tax act or whether it is only a compendious term used to denote a group of partners, fell for decision. The learned judge subba rao, j. , (as he then was) speaking for the court ruled at page 331: "a firm has been given the same status under the act as is given to it under the income tax act. Under section 3 of the income tax act also a "firm" is treated as a unit of assessment and as a distinct assessable entity. Though under the partnership law a firm is not a legal entity but only consists of individual partners for the time being, for tax law, income tax law as well as sales tax, it is a legal entity. If that be so, on dissolution the firm ceases to be a legal entity.

(12) In kapurchand shirmal v. Tax recovery officer, (1969) 72 itr 623 (sc) it was held that a hindu undivided family being a separate taxable entity distinct from the individual members constituting it, the tax recovery officer cannot initiate recovery proceedings against the manager of the hindu undivided family for his arrest and detention as the karta or manager of the family was not a defaulter although he is competent to represent the hindu undivided family against which the proceedings for assessment and recovery of tax had been taken by the department.

(13) The view taken by the supreme court in the aforesaid decisions has been reiterated in a recent decision in commr. Of sales - tax v. Radhakrishnan (1979) 118 itr 534 which arose under the m. P. Sales tax act, 1958.

(14) Supreme court in commr. Of income tax v. R. M. Chidambaram pillai, (1977) 106 itr 292, held that under section 3 of the partnership act a firm is not a legal person but a relationship among persons. It followed the view expressed by the same court in dulichand lakshminarayans case. Therein, the salary, stipulated to be paid to a partner from a firm was held, in strict law, to be the mode of division of firms profits as no person can be his own servant in law since a contract of service postulates two different persons.

(15) A full bench of the kerala high court in income tax officer v. C. V. George (1976) 105 itr 144 held that any liability for income tax imposed on a firm as such under the income tax act cannot be treated as the liability of the individual parties of the firm arising under the act by importing the general principles of the partnership law. It relied upon the decision of the supreme court in income tax officer v. Radhakrishnan (1967) 66 itr 590 wherein it was ruled that

"the liability to pay income tax is statutory; it does not arise out of any contract and its incidence must be determined by a statute"

. The firm under the act both for the purposes of assessment and for recovery of tax is a separate and distinct entity having juristic personality unlike the indian partnership act.

(16) In this view, we are unable to agree with the view expressed by the division bench in addl. Commr. Of income tax v. Venkatanarasimha rao and co. 91976) 104 itr 28 (andh pra) that a firm does not assume a legal personality under the act. The following is the view expressed by the division bench:

"that a firm is a distinct assessable entity, distinct even from its partners for the purposes of assessment to tax, does not make it a legal personality, a personality which is denied to it under the partnership law and which continues to be denied to it under the income tax act in view of section 2 (23) of the latter act. The general concept of a firm remains unchanged by reason of the taxability of the firm as a unit just as the general concept is not altered by the capacity to sue or to be sued in the name of the firm as provided in order xxx, rule, 1, civil procedure code. If parliament intended that a firm should be treated as a legal personality under the income tax act, it was wholly unnecessary for parliament to have defined "firm" by reference to the indian partnership act. What we wish to emphasise is that a firm which may be a taxable entity, does not on that account acquire or become endowed with the characteristics of a legal personality which it does not in law possess"

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(17) We are unable to agree with the aforesaid view that a firm under the act is not a legal personality and the general concept of the firm remains unchanged by reason of the taxability of the firm as a unit. True, as pointed out earlier, under the indian partnership act or under the english common law, a firm is not a full legal personality. But it has now been recognised that it has some personality and for the purposes of income tax and sales tax a firm is a separate and distinct legal entity. Therefore, the provisions of the partnership act cannot be applied in this regard to the indian income tax act.

(18) That apart, the definition of "person" under section 2 (31) of the act includes a firm and six other categories of assessees or units of assessment under the present act. It is pertinent to notice that the definition of "person" in sec. 2 (9) of the 1922 act did not exhaust the various assessable units whereas section 2 (31) of the present act includes all the seven categories of assessees. This definition also is inclusive but not exhaustive.

(19) Brings us to examine the question whether in law there can be two firms by the same partners. The decision of the division bench of this court in addl. Commr. Of income tax v. Venkatanarasimha rao and co. Supra on which strong reliance has been placed by sri p. Rama rao, in support of his plea that there can be no two lawful firms consisting exactly of the same partners and there can be only one firm in the eye of law if the same partners carry on the same or different businesses indifferent names, is based on the following observations of beaumont, c. J. In vissonji sons and co. V. Commr. Of income tax (1946) 14 itr 272 (bom) at p. 275:

"in law a firm has no existence independently of its partners, and if there are two firms consisting of exactly the same partners, the real position in law, is that there is only one firm. It may carry on separate businesses, and may carry on those businesses in different names but in fact there is only one firm in law. It think there is a certain amount of confusion, if i may say so, in the case arising from the failure to appreciate that at the material dates, there was in law only one firm"

: the learned judges also gave the illustration of arun and arjun carrying on business at hyderabad in pulses and textiles respectively at bombay and if the revenue discovers that there are no two such individuals as arun and arjun but the same individual is carrying on both the businesses under different names, there can be no difficulty in holding that the incomes of the two businesses must be aggregated. To that extent we have no quarrel but we are in entire agreement with that view, as the total income of the individual assessee earned by him at all places in any activity, business, profession or vocation has invariably to be clubbed in his hands for the purpose of his assessment. The same principles cannot be applied to a firm on the ground that the same combination of identical persons carry on two businesses under different names. Such application of the principles is not permissible in view of the difference between an individual and a firm. Though both of them are separate entities for purposes of assessment. An individual cannot be equated to firm or an association of persons. The observations of beaumont c. J. Speaking for the court consisting of himself and chagla j. (as he then was) do not lay down the correct legal position. That apart, those observations are obiter as pointed out by the very learned judge, chagla c. J. Who was a party to vissonji sons and co. V. Commr. Of income tax (supra) in jeshinghbhai ujamshi v. Commr. Of income tax (1950) 18 itr 23 (bom) where in it was held that in law, common partners could constitute two separate firms in respect of different businesses for the purpose of income tax on the ground that a firm is recognised by the income tax act as an assessee as much as an individual or a joint hindu family, while referring to the observations of beaumont c. J. In vissonji sons and co. V. Commr. Of income tax, the learned judge observed at page 272:

"with great respect to the learned chief justice, the actual question that he had to consider in that reference was whether a certain item which the assessee claimed as a bad debt was a bad debt or not and the learned chief justice disposed of that reference by coming to the conclusion that this question was really a question of fact and the only question of law that arose was whether there was sufficient evidence to justify the finding of fact by the tribunal. Therefore, this particular observation on which the tribunal has relied was not called for the determination of the reference and, therefore it must be looked upon as pure obiter"

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(20) Reference may be made to the decision of a special bench of the calcutta high court in in re: martin and co. Air 1929 cal 753 wherein rankin c. J. , who spoke for the bench, observed: -

"the proposition that the same partners in the same shares cannot for income tax purposes be partners of two entirely separate firms is a highly abstract proposition. It may or may not be correct but i am not prepared as at present advised to proceed upon so very general a principle without a careful enquiry into the concrete case and into the matters above mentioned. It may turn out that the case depends on the question of fact whether the two firms were entirely separate - a question of intention. It is necessary that we should know whether in substance and in truth the partners as part of the business of martin and company brought up certain assets (in which case the fact that these assets went by a different name would have no importance whatever) or whether on the other hand, it was an entirely separate venture not intended to be any part of the business of martin and company or to have any connection with martin and company"

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(21) The aforesaid view has been followed by the bombay high court in jeshinghbhai ujamshi v. Commr. Of income tax, 91955) 28 itr 454.

(22) In jeshinghbhai ujamshi v. Commr. Of i - t. Supra the bombay high court differed from the view taken by the income tax appellate tribunal on the application of the civil law under the partnership act and remitted back the case to the tribunal to determine whether the two firms carried on the same businesses or separate businesses keeping in view that a firm was a taxable unit and a legal entity under the income tax act though it was not under the ordinary civil law. The tribunal, on a consideration of the entire material, came to the conclusion that the two firms at ahmedabad and bhavnagar constitute only one business on the ground that the owners of the two firms are the same and therefore in law they constitute one firm and not two firms. The high court held that there was evidence to show that there were two distinct firms in existence, that it was not open to the income tax appellate tribunal to find that there was only one firm, and that in view of the finding of the tribunal that there was no interlacing or inter mixing of the bhavnagar business with the ahmedabad business, the assessment of the firms should be distinct and separate.

(23) To the same effect is the decision of the punjab and haryana high court in r. N. Oswal hosiery and mahabir woollen mills v. Commr. Of income tax (1968) 70 itr 843 where in was held that two partnership firms having common partners with identical shares are as a matter of law not one but two different assessable units and whether there is interacting or interlocking between the two firms so as to treat them as one unit is one of fact. The punjab and haryana high courts followed the view expressed by the bombay high court in jeshinghbhai ujamshi v. Commissioner of income tax and in re: martin and co. Supra.

(24) Our earlier division bench in the case of venkatanarasimha rao and co. (1976) 104 itr 28 overlooked the fact that the question fell for decision only for the purpose of computing the assessment of the partnership or partnerships under the act. Hence the only purpose of determining the question whether a partnership is a separate and independent entity or not was for computing the income of the partnership in question, but not for any other purpose in general law. Hence the legal principles laid down in that case are not correct, although the decision may be justified on the facts of that case as there was inter lacing and inter locking.

(25) The aforesaid discussion the following principles emerge: (1) the concept of partnership law is that a firm is not an entity or a person in law but only a compendious mode of designating persons who have agreed to carry on the business in partnership. (2) a firm as such is not entitled to enter into partnership with another firm or individual as the definition of person in section 3 (42) of the general clauses act 1897 cannot be imported into section 4 of the indian partnership act. (3) the law, english as well as indian, has for some specific purposes, relaxed its rigid notions and extended a limited personality to a firm. (4) under the income tax law a firm is an independent and distinct juristic person for the purpose of assessment as well as for recovery of tax as it is a person within the meaning of section 2 (31) of the act, having its own entity and personality. It is also a separate entity under sales tax law. (5) it is well settled that it is open to any person to arrange his or its affairs by adopting a legal device to reduce his or its tax liability to the minimum permissible under the law and such a device cannot be equated to an attempt to evade tax as long as his or its action is consistent but not contrary to law (see commr. Of income tax v. Sivakasi match exporting co. (1964) 53 itr 204 (sc).) (6) in law, there is no prohibition for the creation or existence of two or more separate firms or partnerships by the same partners. (7) whether a firm is genuine or bogus or benami is a pure question of fact. But whether two or more partnerships or firms constituted under different deeds of partnership are, in reality, only one partnership or not is a mixed question of fact and law. (8) the prime guideline to determine this latter question is the cumulative effect or the totality of all the material factors relating to the object and intendment of the partnerships and businesses, their nature, character and identity, coupled with the factum or otherwise of interlacing and interlocking of funds between the two firms. (9) the very question as to whether there was really one partnership or two different assessable entities being two separate distinct partnerships unconnected with each other, has to be determined by the income tax authorities for the purpose of computing the assessment under the income tax act but not under the general law governed by the provisions of the partnership act. (10) the finding of the tribunal about the object and intendment of the partnerships and the businesses and the factum or otherwise of the interlacing and interlocking of the funds between the two partnerships is a question of fact and such finding would be binding on the high court in a reference unless there is no material in support of it.

(26) We may at this stage recapitulate the facts found or admitted by the tribunal in the case on hand. Admittedly the partners in both the firms are the same partners. Admittedly, each of the partners in both the firms shared 1/4th of the profit. However, the three major partners in the assessee firm shared equally 1/3rd of the loss if any whereas in the second firm m/s. Sri lakshmi oil and flour mills the loss was shared by g. Parthasarathi naidu, varaprasada rao and chandrasekara rao at half, 1/4th and 1/4th respectively. The business of the assessee firm was to deal in pulses whereas the business of m/s. Sri lakshmi oil and flour mills was to manufacture and sell groundnut oil and other oils, oil cake and to purchase and sell groundnut, kernel, oils, oil cake and to work the oil mill and the flour mill. Paragraph 15 of the partnership deed of m/s. Sri lakshmi oil and flour mills makes it specific that the business of the partnership shall not be deemed as part and parcel of the assessee partnership constituted under the deed of partnership dated 1 - 10 - 68. This clause establishes that the intention of the partners in constituting the second firm was to make it a separate distinct firm unconnected with the assessee firm which had already come into existence on 1 - 10 - 1968. The registration under the income tax act granted by the income tax officer to m/s. Sri lakshmi oil and flour mills was not cancelled and the same was allowed to continue as a registered firm. The two firms had been constituted under two separate deeds of partnership. There was no inter lacing or inter mixing between the two firms. The tribunal found that there was no justification for including the profit of rs. 55,000. 00 belonging to m/s. Sri lakshmi oil and flour mills in the income of the assessee firm and consequently deleted the same.

(27) Applying the aforesaid principles to the facts and circumstances found by the appellate tribunal, we must hold the two firms in the instant case are not, in reality, one firm but two different legal entities for the purpose of assessment.

(28) For all the reasons stated above, our answer is in the affirmative and in favour of the assessee holding that m/s. G. Parthasarathy naidu and sons and m/s. Sri lakshmi oil and flour mills can be treated as two separate firms and distinct and separate entities for the purpose of the act. There shall be no order as to costs.

(29) Reference answered in affirmative.