Commissioner of Income Tax vs Sree Radhakrishna Industries

K.A. Nayar, J.—The interesting question arising for consideration in this case is whether two firms doing the same nature of business at two different places with different partners and assessed separately to income tax can be continued to be assessed separately when the same persons become partners of the two firms. The matter arises out of the order of the Tribunal dated 23-6-1982 in IT Appeal No. 365 (Coch.) of 1980. As directed by this Court, the following question of law was referred to this Court for our opinion:

Whether, on the facts and in the circumstances of the case, and also in view of the finding that ''the two firms comprised the same two partners and the nature of the business was similar'' the Tribunal was right in interfering with the clubbing of incomes of the two firms and directing separate assessments.

The matter arises out of the income for tax assessment for the year 1976-77 for which the previous year ended on 31-12-1950 M.E. The assessee is a firm of two partners, engaged in the business of manufacture and sale of tiles. The partners of the firm are N. Sankaranarayana Iyer and N. Venkiteswara Iyer. The firm filed a return declaring an income of Rs. 66,200. While examining the accounts, the ITO found that the partners were running another tile factory in partnership under the name and style as Shanmugha Tile Works at Avinissery. The ITO noted that the profit ratio in that partnership also is the same as in the case of the assessee- firm. He also noted a lot of money transactions between the two firms. According to him, there was unity of interest and control and there was interlacing and interlocking of funds between the two firms. In that view of the matter, the ITO thought that the income from the Shanmugha Tile Works had to be included in the total income of the assessee which he did and completed the assessment clubbing the income of the Shanmugha Tile Works in the hands of the assessee. The assessee filed appeal before the Commissioner (Appeals) who confirmed the assessment. The Commissioner (Appeals) relied on the decision in Commissioner of Income Tax, Madras Vs. Prithvi Insurance Co. Ltd., and Addl. Commissioner of Income Tax Vs. M. Venkata Narasimha Rao and Co., . On further appeal, the Tribunal held that the income of the two firms should be separately assessed in their respective hands. In so directing, the Tribunal noted that the firms function in dependently and carry on separate business at different places with their own separate managerial organisation and administration. The accounting years of the two firms were different from each other and the terms of dissolution contained in the partnership deed were also different. There were different bank accounts and the advancing of money by one firm to the other firm through personal accounts of the partners. Therefore, the Tribunal held, this would not amount to interlacing and interlocking as contemplated in the decision in Produce Exchange Corporation Ltd. Vs. Commissioner of Income Tax (Central), Calcutta, . The Tribunal went into the genesis of the two firms and the registration given by the income tax Department and came to the conclusion that there was no material to hold that the two firms in reality represented only one single concern whose income should be clubbed together for income tax purposes. The Tribunal referred to the decision of the Andhra Pradesh High Court in Commissioner of Income Tax Vs. G. Parthasarathy Naidu and Sons, to come to this conclusion. It is thereafter that the above question of law was referred to this Court.

We heard the counsel.

The assessee-firm was a partnership between N. Sankaranarayana Iyer, N. Venkitaswara Iyer as also Mrs. S. Subbalakshmi Ammal in the profit sharing ratio of 25:25:50 constituted under the partnership deed of Chingom 1140 [1964]. The third partner, namely, Subbalakshmi Ammal retired from partnership on 5-7-1965 and the assessee-firm in its present form was thereafter constituted by partnership deed dated 5-7-1965. They continued to carry on the manufacture and product ion of tiles and bricks. The profits and losses were to be shared equally and the accounts to be closed on the last day of Karkidakam of the Malayalam era. The death of a partner will not cause the dissolution of the firm and the partnership was to be determined by agreement between the parties. There is a provision requiring the partner unwilling to continue as partner to sell his share to the other. This partnership was given registration by the ITO up to the year 1975-76. The second partnership, namely, Shanmugha Tile Works was originally constituted by one N. Sankaranarayana Iyer along with Mrs. Rukmani Ammal. The latter partner sold her right to Shri N. Venkitaswara Iyer by deed dated 21-8-1968 and, therefore, the Shanmugha Tile Works in its present form was constituted with Shri Sankaranarayana Iyer and Venkiteswara Iyer as partners on 21-8-1968 and they are carrying on the business of manufacture and sale of tiles, bricks, etc. Here also, after reconstitution the profit and loss are to be shared equally. But the accounts had to be closed on 31st March. The partnership was at will. The death of the partner shall not cause dissolution but the legal heirs of the deceased partner should continue the business with the remaining partner. This firm was also given registration under the Act from the inception up to the assessment year 1975-76. The Tribunal found that the two firms were independently formed at different times. There was no intention to create two separate firms to reduce tax liability. The factories are situated in different places with separate accounting facilities. There are separate labour force and administrative staff. There is no common business organisation or common funds or inter-transfer of funds. There is no unity of finance. Even though the two firms comprised the same partners and the nature of business was similar, they function independently and carry on separate business at different places with their own separate managerial and other organisations. Adverting to the cumulative effect of all the material factors relating to the object of the partnership, their nature, character and identity and past history of the two firms including the registration given by the department, the Tribunal came to the conclusion that the two firms are different entities under the income tax Act, 1961 (''the Act) and there is no justification to treat them as one single concern or to club the incomes together.

In G. Parthasarathy Naidu & Sons case (supra), the Full Bench of the Andhra Pradesh High Court held that the question 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, and 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 partnership and business, their nature, character and identity, coupled with the factum or otherwise of interlacing and interlocking of funds between the two firms. In that decision it is held that though under the general law of partnership there is no separate legal existence for a partnership firm apart from its partners, under the provisions of the Act, a partnership firm has got a separate and distinct legal entity apart from its partners and, therefore, a partnership firm is treated as a taxable unit. It has got a separate personality and existence of its own de hors the partners, and the partnership firm is entitled to be assessed as a separate entity. The Full Bench of the Andhra Pradesh High Court further held:

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." (p. 109)

On examining the object, the nature, genesis, etc., of the two partnership firms, the Tribunal came to the conclusion that in their view no case has been established by the department that the two firms in reality represented only one single concern whose income should be clubbed together for income tax purposes.

In the income tax law there is no prohibition for creation or continuance of two or more separate firms or partnerships by the same partners. To the same effect is the decision of the Full Bench of this Court in Commissioner of Income Tax Vs. C.A. Ouseph and Sons, . It was held in that case that although under the partnership law, a firm is not a legal entity but consists only of persons who are partners for the time being, under the income tax Act the 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(57) of the Act having its own entity and personality. There is nothing in law to preclude common partners constituting two separate firms in respect of different businesses carried on by them for the purpose of the Act.

There are special provisions in the Act, regarding firms. Chapter 16 of the Act contains sections 182 and 183 relating to assessment of firms. Sections 184 to 186 of the Act relate to registration of firms and cancellation. There are other special provisions relating to residence of firm [section 6(2)], amounts not deductible [section 40(b)], set off and carry forward of losses of registered firms, unregistered firms, etc. (sections 75 to 78), which would clearly Show that partnerships are treated by the Act as separate entity from its partners for the purpose of taxation. The question whether the same partners when enter into two separate agreements of partnership, each agreement will constitute a distinct and separate partnership and distinct and separate firm so as to give the firm a corporate entity and juristic personality came up for consideration before the Supreme Court in a sales tax matter in Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam Vs. K. Kelukutty, . The Supreme Court observed that it was perfectly permissible in law that the same partners could constitute two different firms for the purpose of the income tax law leaving the question open as one of fact whether there are two separate firms or only one firm or whether one of the businesses carried on by one firm was in fact a business carried on by the other firm. There can be two separate firms in the eyes of the Act even if the partners are the same in both the firms provided the businesses carried on by the firms are different. It was further observed by the Supreme Court that the correct test to determine whether the businesses are the same or different businesses is whether there is any interlocking or interlacing between the two businesses. The Commissioner (Appeals) relied on the decision in M. Venkata Narasimha Rao & Co.''s case (supra) to come to the conclusion that the income from the other firm should be clubbed to the income of the assessee. But that decision has been overruled by the Full Bench decision of the same High Court in G. Parthasarathy Naidu & Son''s case (supra) which was approvingly referred to in the aforesaid decision of the Supreme Court. But the counsel emphasised the fact that the decision of the Supreme Court as well as the Full Bench decision of this Court required to advert to the fact of interlacing and interlocking as to whether the two partnerships should in fact be considered as carrying on one business and the income from one has to be clubbed with the income of the other. In Scales v. George Thompson & Co. Ltd. [1927] 13 TC 83, dealing with a similar question, Rowlatt, J. observed as follows:

I think the real question is, was there any interconnection, any interlacing, any inter-dependence, any unity at all embracing those two businesses; and I should have thought, if it was a question for me, that there was none. But I do not think it was a question of law.

I think the Commissioners had ample evidence upon which they could decide, and they did so decide.

The question, therefore, was one of fact and there was evidence on which the Tribunal could come to the decision which it arrived at. Therefore, we have no hesitation to answer the question referred to us in the affirmative, i.e., in favour of the assessee and against the department. We do so.