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Commissioner Of Income-Tax, Andhra Pradesh, Hyderabad v. G. Parthasarathy Naidu
Structured Summary of the Court's Opinion
Factual and Procedural Background
This is a reference under section 256(1) of the Income Tax Act by the Income Tax Appellate Tribunal, Hyderabad Bench, asking whether 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 assessable entities for income-tax purposes.
Relevant admitted facts (as recorded in the statement of case and by the tribunal): G. Parthasarathy Naidu (the kartha) and his three sons were coparceners in a Hindu Undivided Family. On 30.09.1968 the HUF partition agreement provided for a sub-partnership of a 5/16th partnership share. M/s G. Parthasarathy Naidu and Sons (the assessee firm) was constituted by deed dated 1.10.1968, with profits shared 1/4th each among four partners and losses shared equally by the three major partners. On 26.11.1968 the same coparceners formed M/s Sri Lakshmi Oil and Flour Mills (initially proprietorship style "G. Parthasarathi Naidu and Sons") to run an oil mill business; the minor was admitted to benefits initially and later became a full partner by fresh deeds. Paragraph 15 of the Sri Lakshmi deed (dated 25.3.1970) expressly stated that that firm's business "shall not be deemed as part and parcel" of the earlier sub-partnership. Separate partnership deeds existed (and fresh deeds were executed when the minor became major). The two firms filed separate returns for assessment year 1971-72 (assessee firm: Rs. 57,340 as total income; Sri Lakshmi: Rs. 35,000 as total income).
The Income Tax Officer had aggregated (clubbed) the incomes of the two firms and assessed them together on the ground that constitution and ownership were the same. Appeals to the Appellate Assistant Commissioner failed; the Income Tax Appellate Tribunal allowed the appeals and held the firms were separate (different profit/loss sharing on loss, different businesses, no interlacing/intermixing). The Commissioner of Income Tax referred the legal question to this High Court.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, 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 assessable entities under the Income Tax Act?
Arguments of the Parties
Revenue's Arguments (Sri P. Rama Rao, learned counsel)
- A firm, while treated as a unit for taxation, is not a separate legal or juristic personality under the Income Tax Act because the definitions of "firm", "partner" and "partnership" in section 2(23) of the Act are imported from the Indian Partnership Act.
- Since a firm has no legal existence independent of its partners under partnership law, two firms consisting of the same partners must in law be treated as a single firm; therefore the Tribunal's treatment of the two firms as separate entities is illegal.
- The Income Tax Act only makes special provisions where specifically intended; otherwise partnership law principles apply.
Assessee's Arguments (Mr. Dasaratharama Reddy, learned counsel)
- There is no legal prohibition on the same partners forming more than one partnership/firm.
- For the purposes of the Income Tax Act a firm is a legal personality (it is an assessable unit), and the assessee firm and Sri Lakshmi are two separate, independently registered firms with different businesses.
- The profit and loss sharing arrangements differ (particularly on losses), there was an explicit clause in the Sri Lakshmi deed denying that business being part of the assessee firm, there was no interlacing or intermixing of funds, and the tax registrations were separately maintained; hence there was no justification for clubbing incomes.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commr. of Income Tax v. A.W. Figgies & Co. (1953) 24 ITR 405 | Recognises that a firm can be charged as a distinct assessable entity separate from its partners for income-tax purposes. | Quoted to support the proposition that for taxation a firm has a separate personality and is a taxable unit under the Act. |
| Bhagwanji Morarji Goculdas v. Alembic Chemical Works Co. Ltd., AIR 1948 PC 100 | Discusses that the Indian Partnership Act attributes personality to a partnership in a manner akin to Scots law rather than English law. | Invoked to show differing jurisprudential treatments of firm personality under various legal systems; used to contextualise the discussion. |
| Dulichand Laxminarayan v. Commr. of Income Tax (1956) 29 ITR 535 | Affirms that generally a firm is not an entity or "person" in law but a collective name for partners; the Act has extended limited personality in some contexts. | Cited to acknowledge that partnership law treats firms as associations, but to note that tax law can differ from general partnership law. |
| Ex parte Corbett: In re Shand (1880) 14 Ch D 122 | Represents the English jurisprudential position that "there is no such thing as a firm known to the law". | Used in discussion of English jurisprudence to contrast with positions under Indian tax law and Scots law. |
| State of Punjab v. Jullundur Vegetables Syndicate (1966) 17 STC 326 | Holds that a firm is given the same status under applicable tax law (sales tax) as under the Income Tax Act — i.e., a firm can be a distinct assessable entity for tax purposes. | Relied upon to show that tax statutes treat firms as legal entities distinct for tax purposes. |
| Kapurchand Shirmal v. Tax Recovery Officer (1969) 72 ITR 623 (SC) | Holds that a HUF is a separate taxable entity distinct from its members; procedural consequence for recovery actions. | Referenced to illustrate statutory separate personality for tax purposes of other collectivities (analogy to firms as taxable units). |
| Commr. of Sales-tax v. Radhakrishnan (1979) 118 ITR 534 | Affirms the view that for sales-tax (and analogous tax statutes) a firm is a distinct assessable entity. | Noted as recent reiteration that tax law treats a firm as a juristic person for tax assessment/recovery. |
| Commr. of Income Tax v. R. M. Chidambaram Pillai (1977) 106 ITR 292 | Observed under Partnership Act a firm is not a legal person but a relationship among persons; applied to questions like partner-salary. | Cited to show that some Supreme Court decisions follow the partnership-law view; used as part of the comparative discussion. |
| Income Tax Officer v. C. V. George (1976) 105 ITR 144 (Kerala Full Bench) | Held that liability for income tax imposed on a firm cannot be treated as liability of individual partners by importing partnership law; firm is separate and distinct for assessment and recovery under the Act. | Adopted to support the conclusion that a firm has juristic personality for tax purposes and assessment/recovery must follow the statute. |
| Income Tax Officer v. Radhakrishnan (1967) 66 ITR 590 | Holds that liability to pay income tax is statutory and its incidence is determined by the statute (not by contract/partnership law). | Used to reinforce that tax incidence and assessment is governed by statute rather than partnership law principles. |
| Addl. Commr. of Income-tax v. Venkatanarasimha Rao & Co. (1976) 104 ITR 28 (Andhra Pradesh) | Earlier division-bench view: A firm as assessable entity does not thereby acquire full legal personality; the general concept of firm under partnership law remains unchanged. | The court explicitly disagreed with this reasoning and found the legal principles stated in that decision to be not correct for income-tax purposes (though the facts of that case might have justified its outcome). |
| Vissonji Sons & Co. v. Commr. of Income Tax (1946) 14 ITR 272 (Bombay) | Observation (Beaumont C.J.) that if two firms consist of exactly the same partners, in law there is only one firm — used as authority by some tribunals/courts. | The court treated those observations as not laying down correct legal position for tax law generally (and as obiter in related contexts), distinguishing individuals from firms and endorsing a factual enquiry instead. |
| Jeshinghbhai Ujamshi v. Commr. of Income Tax (1950) 18 ITR 23 (Bombay) | Held that common partners could constitute two separate firms in respect of different businesses for income-tax purposes; emphasised that firm is a taxable unit. | Relied upon to support that two firms with common partners may be separate assessable entities; cited approvingly. |
| In re: Martin & Co., AIR 1929 Cal 753 | Observed that the proposition that same partners cannot be partners of two separate firms is abstract; factual inquiry is necessary to determine whether two firms are entirely separate — intention and substance matter. | Adopted to support the court's approach that the question is predominantly factual (intention, interlacing/interlocking, substance over form). |
| Jeshinghbhai Ujamshi v. Commr. of Income Tax (1955) 28 ITR 454 (Bombay) | Bombay High Court's later decision differing from ITAT; remitted matters to determine whether two firms carried same or separate businesses and emphasised evidence of interlacing. | Followed as authority that factual findings about interlacing/interlocking determine whether two firms are separate for tax assessment. |
| R. N. Oswal Hosiery & Mahabir Woollen Mills v. Commr. of Income Tax (1968) 70 ITR 843 (P & H) | Held two partnership firms with common partners and identical shares are as a matter of law two different assessable units; interacting/interlocking is question of fact. | Relied upon to reinforce that common partners do not ipso facto make two firms one; factual determination of interaction is required. |
| Commr. of Income Tax v. Sivakasi Match Exporting Co. (1964) 53 ITR 204 (SC) | Recognises that persons may arrange affairs in devices to minimize tax liability; such devices are legitimate if consistent with law (distinguishing tax avoidance from evasion). | Invoked to note that formation of separate firms may be a legitimate tax planning device if not contrary to law. |
Court's Reasoning and Analysis
The court conducted a step-by-step examination of the governing law and facts:
- Statutory definitions and tension between partnership law and tax law:
- Section 2(23) of the Income Tax Act imports the expressions "firm", "partner" and "partnership" from the Indian Partnership Act. Under partnership law a firm is generally an association of individuals and not a separate legal person.
- However, section 4 of the Income Tax Act charges "every person" with tax, and section 2(31) defines "person" to include a firm (among other categories). Thus, under the Income Tax Act a firm is expressly treated as a separate assessable unit.
- Authoritative case law:
- The Court relied on Supreme Court authority (Commr. of Income Tax v. A.W. Figgies & Co.) holding that a firm can be a distinct assessable entity separate from its partners; earlier Privy Council and other decisions show divergent treatments (Scots law, English law, Indian act).
- Some Supreme Court decisions and other high court decisions acknowledge that while partnership law may not fully recognise firm personality, tax statutes have relaxed that notion for limited purposes (assessment and recovery of tax).
- Rejection of the view that tax recognition of a firm as an assessable unit does not create any juristic personality:
- The court disagreed with a prior Division Bench view (Addl. Commr. v. Venkatanarasimha Rao & Co.) that taxability as an entity does not amount to legal personality. The court held the Income Tax Act's explicit inclusion of a firm within the definition of "person" gives it a distinct legal existence for tax purposes.
- Whether the same partners can form multiple firms:
- The court concluded there is no legal prohibition on the same partners forming two or more separate firms. Whether the firms are genuine separate entities or in reality a single enterprise is a question of fact and mixed law and fact, to be determined on cumulative factual materials.
- The prime test is one of substance: object and intendment of the partnerships, nature, character and identity of the businesses, and whether there is interlacing/interlocking of funds or operations between the firms.
- Binding nature of fact-finding:
- The tribunal's findings on the object/intention of partnerships and on interlacing/interlocking of funds are findings of fact and binding on the High Court in a reference unless unsupported by material.
- Application to the admitted facts in the present case:
- Admitted commonality of partners and that profits were shared 1/4th each in both firms.
- Material differences existed: differing loss-sharing ratios; different businesses (pulses trading vs. manufacturing/sale of groundnut oil and allied activities); an express clause in Sri Lakshmi's deed (para 15) that its business shall not be part and parcel of the assessee firm; separate partnership deeds and registration under the Income Tax Act; no interlacing or intermixing of funds as found by the tribunal.
- The tribunal found no justification for including Rs. 55,000 of Sri Lakshmi's profit in the assessee firm's income and deleted it; the court accepted those facts and conclusions as supported by material.
Holding and Implications
Answer to reference: In the affirmative — M/s G. Parthasarathy Naidu & Sons and M/s Sri Lakshmi Oil and Flour Mills can be treated as two separate firms and distinct and separate entities for the purposes of the Income Tax Act.
Implications and consequences:
- Direct effect on the parties: The Tribunal's conclusion that there was no justification to aggregate Rs. 55,000 of profit of M/s Sri Lakshmi Oil and Flour Mills with the assessee firm's income (and its deletion) is upheld. The two partnerships are to be treated as separate assessable entities for the purpose of assessment under the Act.
- Legal consequence: The court clarified that for income-tax (and analogous tax statutes) purposes a firm is a juristic person and a separate taxable unit as provided by the statute; therefore, the provisions of partnership law (which treat a firm as an association of persons) cannot be mechanically imported to override statutory tax treatment.
- Guidance for future cases: There is no absolute legal bar on the same partners constituting multiple partnerships; whether multiple partnership deeds create separate assessable units is to be decided on the totality of facts (intention, nature of businesses, existence of interlacing/interlocking), and factual findings of the tribunal on these matters are binding unless unsupported by evidence.
- Costs: There shall be no order as to costs.
Final procedural outcome recorded in the opinion: "Reference answered in affirmative."
Note: This summary is strictly confined to the content and holdings expressly set out in the provided court opinion. No additional facts or external information have been added.
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"
.
(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"
.
(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"
.
(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"
.
(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.
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