Common partners do not bar a sale between partnership firms if the firms are genuinely distinct on facts.

A sale between two partnership firms composed of the same partners is not legally impossible merely because the partners are common; the decisive question is whether the concerns are in fact one firm or two distinct firms under partnership law. The distinctness of the assessees must be determined on the actual facts and circumstances, including their legal identity and partnership relationship. If the firms are truly separate, a transaction of sale between them can be valid. Common partners alone do not bar inter-firm dealing.

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Issues: Whether a partnership firm can make a transaction of sale to another partnership firm constituted by the same partners though with different shares.

Analysis: The question whether two concerns constituted by the same persons are one firm or two distinct firms must be tested first under partnership law. The tax authority must determine the legal identity of the assessee on the basis of the partnership relationship and the actual facts and circumstances. A sale or purchase between two firms with identical partners is not ruled out as a matter of law, but whether the firms are truly separate and distinct depends on the peculiar facts of each case.

Conclusion: The Tribunal was not right in holding that such a sale transaction is legally impossible. The answer is in the negative and is in favour of the assessee and against the Revenue.

Final Conclusion: The reference was answered by holding that the existence of common partners does not by itself prevent one partnership firm from dealing in sale with another, and the distinctness of the firms must be determined afresh on the facts.

Ratio Decidendi: Where two partnership concerns are said to be constituted by the same partners, their distinctness must be determined under partnership law on the facts, and a sale between them is legally possible if they are in truth separate firms.

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