Delhi High Court
Commissioner Of Income-Tax vs Seth Talwar And Co. on 14 February, 2000
Equivalent citations: 2000 243 ITR 190 Delhi
Bench: A Kumar, D Jain
JUDGMENT
1. These are references under Section 256(1) of the Income-tax Act, 1961, at the instance of the Revenue. The assessment years under reference are 1968-69 and 1969-70. The following question has been referred for opinion of this court :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was correct in law in holding that the Income-tax Officer was not correct in clubbing the income of the two firms consisting of the same partners with the same profit-sharing ratio formed only for the execution of two different contracts ?"
2. As per the facts recorded in the statement of case the assessee-firm executed two contracts of building at Pathankot and Yol Camp. The
number of partners and share ratio in the two firms was the same in respect of both the contracts. The nature of contract was also the same. Two separate returns of income were filed for the assessment years 1968-69 and 1969-70 showing separate income from building construction at two different places. However, as the partners, their profit-sharing ratio and nature of contract were the same, the Assessing Officer held that it was the same firm which executed the contracts at two different places at the same time. According to him, these were actually different branches of the same firm called Seth Talwar and Company, in whose name the contracts/orders were secured for both the places. He clubbed the income of both the firms though separate returns had been filed.
3. In the appeal, the Appellate Assistant Commissioner found that no fund had actually passed from one firm to another. He accordingly allowed the appeal thereby rejecting the clubbing of income of the two firms by the Assessing Officer. In further appeal, this view was upheld by the Tribunal, hence this reference.
4. Our attention has been drawn to two decisions of the Supreme Court on the point :
1. Deputy CST v. K. Kelukutty [1985] 155 ITR 158, and
2. CIT v. G, Parthasarthy Naidu [1999] 236 ITR 350. In these two cases, the principles on the question at hand have been clearly enunciated as follows (see [1999] 236 ITR 350, 352) :
"(1) 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 business in partnership.
(2) 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.
(3) The law, English as well as Indian, has for some specific purposes, relaxed its rigid notions and extended a limited personality to a firm.
(4) 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 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. ).
(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 businesses, their nature, character and identity, coupled with the factum or otherwise of interlacing and interlocking of funds between the two firms.
(9) 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.
(10) 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."
5. In the light of the finding of the Appellate Assistant Commissioner as confirmed by the Tribunal that there was no interlacing and interlocking of the two firms and applying the principles laid down by the Supreme Court, these references are answered in the affirmative, i.e., in favour of the assessee and against the Revenue.
