Clubbing of two business entity

[Ramesh Patel]

We are registered under excise. we are mfg product "A". We have four partners Say Z Y X W Since we have spare place in the same factory we decided to mfg product "B". by regestring new firm with parter Z and Y. The existing firm will revise the layout paln of present factory and remove the place allocated to new firm. Input required for both products are same. Is there chance of clubbing two business entity. What is criteria of clubbing two business entity.

[DEV KUMAR KOTHARI]

Two firms are different entities, though some partners are common. Products mafd. by two firms are different. Raw material / inputs are same or similar for both firms manufacturing different products. Therefore, there seems no chance for clubbing of two business firms/ entities merely becaseu they are at smae place and have some common owners. In case the exercise involve some dubious tax planning to avoid taxes payable by old unit, then there can be some difficulty and new firm may be disregarded on consideration of colorable device. Point to consider is that whether old firm can also manufacture product "B"a, if so, then why a new firm was created, can have some questions marks on bonafides. Another apsect is to see relationship between W,X,Y,Z -partners in old firm and Y and Z - partners in new firms.

AI Summary

Clubbing of business entities arises where a new firm is a colorable device to avoid tax; examine ownership and bonafides.
Where two separately registered firms share some partners, the same factory space and identical inputs but manufacture different products, mere co-location and common ownership do not automatically result in clubbing; however, if the new firm is a colorable device to avoid tax or regulatory obligations-shown by questions about why a separate firm was created, whether the old firm could produce the new product, and the partners' relationships-the separate entity may be disregarded and clubbing applied.