Income-tax---

----Assessment---Firm---Whether two firms to be treated as one---Factors to be considered---Two firms having same partners, sharing profit in same ratio, with same firm name and operating at same office---Not sufficient grounds to treat them as one---Indian Income Tax Act, 1961, S.2(31).

So far as the Income Tax Act, 1961, is concerned, although a partnership firm may not have a juristic entity like a company under the Companies Act, it nevertheless possesses a separate legal personality and existence of its own de hors its partners. Section 4 of the Income Tax Act creates a charge upon every person with respect to its total income of the previous year subject to the provisions of the Act. The term "person" is defined under section 2(31) to include, amongst others, a firm, as well. There cannot, thus, be any doubt that a firm is a separate assessable entity for the purpose of taxation under the Income-tax Act.

It is always open to the income-tax authorities to hold enquiry and find whether two or more partnership firms constituted under different deeds of partnership are in fact and reality one partnership or otherwise. The facts that the same persons happen to be the partners in two or more firms and that they also share the profits in the same ratio, are no doubt relevant considerations, which are to be taken into account in coming to a definite conclusion in this regard. But by themselves they cannot be said to be conclusive of the matter. The real character of the partnership firm has to be determined on the basis of the facts and materials available on record, such as intendment of the partnership, the nature, character and identity of the business coupled with the evidence regarding management, inter-locking and interlacing of funds between them and so on. There cannot be a "cut and dried" formula for coming to a conclusion one way or the other. The conclusion has to be arrived at taking into account the cumulative effect or totality of all the material facts and circumstances in that regard.

The assessee was a firm comprising seven partners, who were erst-while members of a Hindu undivided family, and carrying on business in liquor from 1961. In 1966, these seven persons started another business in contract work, under a new partnership in the same name at the same address and with the same profit-sharing ratio. The question was whether the two partnerships could be treated as one:

Held, that there was no evidence to suggest that there was any interlocking or interlacing of the funds between the two businesses or that the management was common. The Tribunal considered the circumstances and came to the conclusion that the mere fact that the partners were common and they also shared the profits in the same ratio could not be a ground to hold that the two firms were one and the same. The order of the Tribunal was justified.

Chandra Pandian (S.V.) v. Sivalinga Nadar (S.V.) (1995) 212 ITR 592 (SC); CIT v. C.A. Ouseph & Sons (1985) 154 ITR 598 (Ker.); CIT v. G. Parthasarathy Naidu & Sons (1980) 121 ITR 97 (AP); CIT v. Sivakasi Match Exporting Co. (1964) 53 ITR 204 (SC); Kelvinator of India Ltd. v. State of Haryana (1973) 32 STC 629; AIR 1973 SC 2526 and State of Punjab v. Jullundur Vegetables Syndicate (1966) 17 STC 326 (SC) ref.

K.K. Vidyarthi and S.K. Sharan for the Commissioner.

Pawan Kumar for the Assessee.

JUDGMENT

This reference under section 256(1) of the Income-tax Act, 1961, is at the instance of the Revenue. The question of law referred to this Court for its opinion runs as follows:

"Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the incomes of the 'two firms having seven common partners with the same profit-sharing ratio should not De clubbed together for the purposes of income-tax assessment?"

The assessee which a partnership firm comprising seven partners being members of an erstwhile Hindu undivided family, started a liquor business in 1961, in the name and style of Brijnandan Prasad & Sons. In 1966, the very same persons started another business in contract work purportedly under a new partnership but in the same name. The income from the two businesses was assessed separately up to 1976-77. In the year 1977-78, which is the assessment year under reference, the Income-tax Officer tagged the income of the other firm, Brijnandan Prasad & Sons (Contractor), with the income of the assessee-firm and made the assessment. He did so on the basis of his finding that both the firms had the same partners sharing the profits in the same ratio, having also the head office at the same place and the investment of both of them had been made from the funds allotted to the partners on, partition of the Hindu undivided family. The assessee appealed to the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) reversed the orders of the Income-tax Officer. According to him, the firms derived income from different sources and although their offices were situate at the same place, they were, in fact, located in different premises; while one of them was transacting its business through the bank, the other one had no bank account. He also found that there was no evidence of interlocking and interlacing of income. It was the turn of the Revenue to prefer an appeal before the Income-tax Appellate Tribunal, which went in vain and the appeal was dismissed.

Mr. K.K. Vidyarthi, learned counsel for the Revenue, has contended that although a firm is treated as a taxable unit under the Income ?tax Act, it has no separate legal or juristic existence of its own, independent of its partners and, therefore, when the same partners comprise two firms, in the eye of law, they must be treated as only one firm and assessed accordingly. He pointed out that under the Income-tax Act the expressions "firm" and "partnership" have been assigned the same meaning as in the Indian Partnership Act. In support of the contention reliance was placed on S.V. Chandra Pandian v. S.V. Sivalinga Nadar (1995) 212 ITR 592 (SC).

The above decision, as would appear, has been rendered in the context of the provisions of the Indian Partnership Act. So far as the Income ?tax Act is concerned, as rightly pointed out by Mr. Pawan Kumar on behalf of the assessee, although a partnership firm may not have a juristic entity like a company under the Companies Act, it nevertheless possesses a separate legal personality and existence of its own de hors its partners. Section 4 of the Income-tax Act creates a charge upon every person with respect to its total income of the previous year subject to the provisions of the Act. The term "person" is defined under section 2(31) to include, amongst others, a firm as well. There cannot, thus, be any doubt that a firm has a separate assessable entity for the purpose of taxation under the Income-tax Act. It would be useful to quote the observations of the Supreme Court in State of Punjab v. Jullundur Vegetables Syndicate (1966) 17 STC 326 as hereunder (at page 331):

"The first question is whether a firm is a separate assessable entity for the purposes of the Act or whether it is only a compendious term used to denote a group of partners. The definition of 'dealer' takes in three categories of assessable units, namely, person, firm or a Hindu joint family. The substantive and the procedural provisions of the Act prescribe the mode of assessment and realisation of the tax assessed on such a dealer. If we read the expression 'firm' in substitution of the word 'dealer', it will be apparent that a firm is an independent assessable unit for the purposes of the Act. Indeed, a firm had 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 laws, income-tax as well as sales tax, it is a legal entity. "

It is not suggested on behalf of the Revenue that there is any legal bar to the same persons joining hands and constituting more than one partnership. As observed by the Supreme Court in CIT v. Sivakasi Match Exporting Co. (1964) 53 ITR 204, it is open to any person to so arrange his affairs that his tax liability is reduced to the minimum by adopting a legal device permissible under the law. Such a device cannot be called an attempt to evade tax as long as the action is not contrary to law. Reference may also be made to Kelvinator of India Ltd. v. State of Haryana (1973) 32 STC 629; AIR 1973 SC 2526, wherein similar observations were made to the effect that there is nothing illegal or impermissible to a party so arranging its affairs that the liability to pay tax is not attracted or that the brunt of taxation is reduced to the minimum.

We must hasten to observe that the claim of the assessee as to the separateness of the firms is not to be taken on its face value. It is always open to the income-tax authorities to hold enquiry and find whether two or more partnerships or firms constituted under different deeds of partnership are in fact and reality one partnership or otherwise. The facts that the same persons happen to be the partners in two or more firms and that they also share the profits in the same ratio, are no doubt relevant considerations, which are to be taken into account in coming to a definite conclusion in this regard. But by themselves they cannot be said -to be conclusive of the matter. The real character of the partnership firm has to be determined on the basis of the facts and materials available on record, such as intendment of the partnership, the nature, character and identity of the business coupled with the evidence regarding management, inter-locking and interlacing of funds between them and so on. There cannot be a "cut and dried" formula for coming to a conclusion one, way or the other. The conclusion has to be arrived at taking into account the cumulative effect or totality of all the material facts and circumstances in that regard.

Adverting to the question referred to this Court aforesaid, it would appear that the Tribunal has relied on a Full Bench decision of the Andhra Pradesh High Court in CIT v. G. Parthasarathy Naidu & Sons (1980) 121 ITR 97. The facts of that case were that there was a partition in the joint family of one G. Parthasarathy Naidu on September 30, 1968. As per the partition agreement, the assessee firm was constituted under the deed of partnership, dated October 1, 1968. Later, on November 26, 1968, another partnership was formed by the same coparceners of the erstwhile Hindu undivided family. The funds which were invested in the business, had been allotted to the shares of the coparceners on partition. The Andhra Pradesh High Court held that in the absence of any evidence regarding interlacing or inter-locking of funds between the two firms, the finding of the Tribunal that their incomes should not be clubbed together, cannot be said to be erroneous. A Full Bench of the Kerala High Court in CIT v. C.A. Ouseph & Sons (1985) 15,4 ITR 598 noticed with approval the aforesaid decision of the Andhra Pradesh High Court and came to a similar conclusion. In that case not only the partners of the two firms, carrying on the business in jewellery and grocery and general merchandise, respectively, were the same but they also shared the profits in the same ratio. The Kerala High Court held that as there is no evidence of interlacing or inter-locking of income between the two businesses, both these firms must be held to be separate entities for the purpose of the Income-tax Act and the mere fact that the partners of both the firms were the same and they shared the profits in the same ratio, cannot be sufficient to hold that they were one or the same firm and their income should, therefore, be aggregated.

In the present case, there is no evidence to suggest that there was any inter-locking or interlacing of the funds between the two businesses or that the management was common. The Tribunal considered the circumstances and came to, the conclusion that the mere fact that the partners are common and they also share the profits in the same ratio cannot. be a ground to hold that the two firms are one and the same. We see no error in the findings. We would, thus, answer the question of law referred to this Court as follows:

The facts that the partners, of the two firms are common and they also share the profits in the same ratio, are relevant circumstances to determine their real character as being the same or a distinct taxable entity but by themselves they cannot be said to be sufficient or conclusive of the matter. Whether they are one and the same taxable entity or distinct, would depend on the cumulative effect and totality of all the material fact and circumstances.

??????????? The question is, accordingly, answered in the negative, that is, in favour of the assessee and against the Revenue. There would be no order as to costs.

Let a copy of this order be sent to the Income-tax Appellate Tribunal, Patna Bench, Patna.

M.B.A./1623/FC???????????????????????????????????????????????????????????????????????????????? Reference answered.