TMI Blog1979 (8) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... , the learned counsel for the assessee, opposes the claim of Mr. Rama Rao, contending, inter alia, that the decision of the Division Bench in the case of Addl. CIT v. Venkata Narasimha Rao Co. is a wrong decision and, in any event, it is no longer good law in view of the Full Bench decision of this court in Addl. CIT v. Visakha Flour Mills [1977] 108 ITR 466 on this aspect, although it was overruled by a later Fuller Bench of five judges in the case of Addl. CIT v. Vinayaka Cinema [1977] 110 ITR 468. Sri Rama Rao replied that the Full Bench in Visakha Flour Mills [1977] 108 ITR 466 [FB] did not consider the question now raised in this referred case and the decision of the Division Bench of this court in Addl. CIT v. Venkata Narasimha Rao Co. [1976] 104 ITR 28 is binding on the Division Bench. We learn that a number of cases of this type have arisen before the Tribunal and we prefer to constitute a Full Bench to obtain an authoritative pronouncement on this question of law. We, therefore, refer the case to a Full Bench. JUDGMENT OF THE FULL BENCH The judgment of the court was delivered by C. KONDAIAH C.J.--This is a reference under s. 256(1) of the Income- tax Act (herein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled in the name of M/s. Sri Lakshmi Oil and Flour Mills declaring a total income of Rs. 35,000. The ITO had clubbed the income 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 ITO 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 AAC 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-ratios were provided, that the businesses were different, that there was no inter-lacing 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 CIT. The Division Bench, before which the referred case came up for hearing, had referred the matter to a Full Benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istic personality. True, as contended by Sri. P.Rama Rao, s. 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 " firm " as such is not a separate independent entity or person in law but is merely an association or combination of persons who agree 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 s. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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] LR 14 Ch 122, 126 (CA). In these circumstances, to import the definition of the word 'person' occurring in section 3(42) of the General Clauses Act, 1897, into section 4 of the Indian Partnership Act will, according to lawyers, English or 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." We may usefully refer in this context to the following passage in the judgment of the Supreme Court in State of Punjab v. Jullundar Vegetables Syndi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Supreme Court in ITO v. Radha Kishan [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 the 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 under the Indian Partnership Act. In this view, we are unable to agree with the view expressed by the Division Bench in Addl, CIT v. Venkata Narasimha Rao Co. [1976] 104 ITR 28 (AP) that a firm does not assume a legal personality under the Act. The following is the view expressed by the Division Bench (p. 32): "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 sue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd may carry on those businesses in different names but in fact there is only one firm in law. I 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 and Bombay in pulses and textiles respectively 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 differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uth the partners as part of the business of Martin and Company bought 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. " The aforesaid view has been followed by the Bombay High Court in Jeshinghbhai Ujamshi v. CIT [1955] 28 ITR 454. In Jesingbhai Ujamshi v. CIT [1950] 18 ITR 23, the Bombay High Court differed from the view taken by the Tribunal on the application of the civil law under the Partnership Act and remitted the case to the Tribunal to determine whether the two firms carried on the same business or separate businesses keeping in view that a firm was a taxable unit and a legal entity under the I.T. 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 Bhavanagar 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 tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erson for the purpose of assessment as well as for recovery of tax as it is a "person" within the meaning of s. 2(31) of the Act, having its own entity and personality. It is also a separate entity under the 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 CIT 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 businesse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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