JUDGMENT

B. P. JEEVAN REDDY, J.:— These appeals are preferred against the judgment of the Karnataka High Court answering the question referred to it, at the instance of the revenue, in favour of the revenue and against the assessee. The question referred under Section 256 of the Income-tax Act, 1961, read as follows: "Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1,79,742/- could not be disallowed under Section 40(c) of the Income-tax Act, 1961." (The above question related to Assessment Year 1974-75. The question referred for A. Y. 1975-76 was identical except in the matter of amount). Since the facts in all the appeals are identical it would be sufficient to notice the facts in C.A. Nos. 6092 and 6092A/90 (Prakash Beedies (P) Ltd. v. Commr. of Income Tax, Karnataka, Bangalore).

2. Prior to 15-7-1972, a partnership firm called K. M. Anand Prabhu & Sons, Mangalore, consisting of three partners K. M. Vishnudas Prabhu, K. M. Ramdas Prabhu and K. M. Shankar Prabhu was engaged inter alia in the business of manufacturing and sale of beedies under the brand name Mangalore Prakash Beedies. On May 20, 1972 a private limited company called Parkash Beedies Limited (the assessee-appellant herein), was incorporated with its registered office at Mangalore. One of its objects was to take over the business of the aforesaid firm. Under an agreement dated July 15, 1972 between the firm and the company, the firm sold its rights and assets to the company on the terms and conditions set out therein. Clause 4(a) of the agreement, which alone is material for the purposes of these appeals reads:

"(a) For the use of the trade name the Company shall pay royalty to the Vendor at the rate of 10ps. for every thousand beedies sold by the Company by using the trade name of the Vendor. The royalty shall be worked out at the end of each quarter ending on March, June, September and December, on the sales made during each quarter. The royalty fixed hereby shall not be varied for a period of one year and may be reviewed and/or revised there afterwards from time to time".

3. The assessee was making payments to the firm every year on account of royalty in terms of said clause.

4. The three partners aforesaid of the firm were also the directors of the assessee-company.

5. For the assessment years 1974-75 and 1975-76, the assessee claimed deduction of the amount paid by it to the firm on account of royalty in terms of clause 4(a) of the agreement. The amounts paid during the accounting years relevant to the said assessment years were Rs. 3,16,526/- and Rupees 3,95,742/- respectively. The I. T. O. allowed the deductions as claimed.

6. In exercise of the powers conferred on him by Section 263, the Commissioner of Income-tax initiated (suo motu) proceedings for revising the said assessments in so far as the aforesaid deductions were concerned. After hearing the assessee, he passed orders on September 16, 1976 whereunder he disallowed payments to the firm over and above the ceiling prescribed in Section 40(c). The assessee preferred appeals to the Tribunal against the orders of the I.T.O. The appeals were allowed and the orders of the I.T.O. restored. On reference, the High Court answered the question in the negative i.e., in favour of the revenue and against the assessee, on the following reasoning: the three directors of the assessee-company were also the partners in the firm to which royalty payments were made. In law, a firm has no separate legal existence; it is not a juristic person or a distinct legal entity. It is merely a collection or association of the individuals for carrying on a business. Merely because the firm is an assessable entity under the Income tax Act it does not follow that it is a juristic or legal entity. It must, therefore, be held that the payments made to the firm are in reality payments made to the directors. Such payments clearly attract and fall within the mischief of Section 4