1979 Supreme(AP) 302

Andhra Pradesh High Court
Judges : C.KONDAIAH, P.A.CHOUDHARY, S.MADHUSUDAN RAO
Commissioner of Income Tax, A.P., Hyderabad - Appellant
Versus
G.Parthasarathy Naidu - Respondent
Decided On : 08-30-79

A firm under the Income Tax Act is 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.

Headnote:

INCOME TAX - FIRM - SEPARATE ENTITY - TWO FIRMS BY SAME PARTNERS - LEGALITY - INCOME TAX ACT, 1961, SEC. 2(23), 2(31), 4, 26, 48, 55 - PARTNERSHIP ACT, 1932, SEC. 3, 4 - GENERAL CLAUSES ACT, 1897, SEC. 3(42) - 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?

Fact of the Case:

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.

Finding of the Court:

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.

Issues: 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 and separate entities for the purpose of the Act.

Ratio Decidendi: 1. A firm under the Income Tax Act is 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. 2. 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. 3. 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. 4. The law, English as well as Indian, has for some specific purposes, relaxed its rigid notions and extended a limited personality to a firm. 5. 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. 6. 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. 7. In law, there is no prohibition for the creation or existence of two or more separate firms or partnerships by the same partners. 8. 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. 9. 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. 10. 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.

Final Decision: The two firms in the instant case are not, in reality, one firm but two different legal entities for the purpose of assessment.