TaxTMI 
TaxTMI 
2003 (6) TMI 200
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.... a copy of which may be seen at pages 1 to 4 of the assessee's paper-book, and this partnership was deemed to have been commenced with effect from 1-4-1987. The said partnership consisted of the following partners- (1) Smt. T. Hymavathi, W/o. Late Shri T. Nagabhushanam (2) Shri T. Sivakumar (3) Shri T. Manmohan (4) Shri T. Rajkumar The partners at Sl. Nos. 2 to 4 above are the sons of Smt. T. Hymavathi, the partner at Sl. No. 1 above. The relevant portion of the partnership deed dated 19-1-1988 reads as under:- "Whereas the parties of the first three parts have been carrying on business under the name and style of M/s. Arun Chemicals and Pharmaceuticals Works as and from 1-4-1978 under the terms and conditions agreed upon by them as per the partnership Deed executed on 10-6-1978 and whereas to have a more efficient administration and better management and strengthen the financial resources of the firm they have decided to take Sri T. Raj Kumar as partner and accordingly they all have constituted themselves into a partnership and have agreed upon the following terms and conditions. Now this deed of partnership witnesseth as under: 1. The name and style of the....
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....payments made and liabilities incurred on behalf of the firm in the ordinary course of business. 17. All the partners shall be faithful to each other and shall not do any such act which shall be detrimental to the interest of the business. 18. That in all other matters which are not specifically mentioned in this deed the provisions of the Indian Partnership Act, 1932 shall apply. 19. That the partners named hereinabove have the right to add, alter, delete and/or amend any of the clauses of this Deed as they may deem it necessary from time to time. 20. All other matters not specifically mentioned herein shall be governed by the Law of Partnership for the time being in force in the State of Andhra Pradesh." 3. It may be observed that the mother and the three sons had equal shares in the profits and losses of the firm. It may also be observed that the eldest son, Shri Shivkumar was the Managing Partner of the firm and the bank account of the firm was to be operated by Shri Shivkumar and Shri Rajkumar. The borrowals of the money for the business of the firm was to be undertaken under the joint signatures of all the partners. 4. When the matters stood thus, the above ....
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....responsible for day to day transactions, maintenance of accounts and they are authorised to negotiate in all matters and the remuneration may be fixed from time to time with mutual consent of all partners. 10. Books of Account : (a) The books of account shall be maintained in usual manner in English language and the same shall be closed to profit and loss account every year ending by 31st March, or any such other convenient date to be decided by the partners from time to time. The profit and loss account and balance sheet shall be signed by the Managing Partner and working partner and is binding on all the partners. (b) All the account books shall be kept at the Registered Address of the partnership and shall not be removed without prior permission of all the partners. Every partner shall have a right to inspect the books of account and to take extracts from the same. 11. Operation of Bank Account: The Bank Account shall be opened in any nationalised Bank or in any Scheduled bank in the name of the firm and the same shall be operated by Sri T. Shiv Kumar, Managing Partner, party of the First Part or T. Raj Kumar, Working Partner, party of the second part individually. 1....
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....nd any money of the partnership or give credit on behalf of the partnership or have any dealings with any persons, company or firm when the other partners shall previously in writing has forbidden him to trust or deal with. Any partner committing any breach of the foregoing stipulations shall indemnify the other against all losses and/or damages that may be suffered by reason of such breach. 19. Any of the above clauses may be altered, varied, modified, cancelled or added on mutual consent of the partners. 20. With regard to any change in the terms mentioned above, the same shall be brought by executing a deed of amendment to the partnership on a valid stamp paper of Rs. 5. 21. With regard to any other terms not touched by this agreement, the partnership act in force shall be applicable." It may be observed that the Deed dated 24-2-1989 does not refer at all to the fact that Smt. Hymavathi and her three sons have been carrying on business under the name and style of M/s. Arun Chemicals and Pharmaceuticals Works. Further, many of the terms of the Deed dated 24-2-1989 are different from those of the earlier Deed dated 19-1-1988 governing the firm, M/s. Arun Chemicals a....
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....nbsp; 25% Smt. T. Puspa 12 1/2% Smt. T. Geetha 12 1/2% It may be observed that out of the two newly admitted partners, Smt. Puspa is the wife of Shri T. Shivkumar and Smt. Geetha is the wife of Shri T. Rajkumar. 7. On 19-3-1990, a deed of retirement was executed and as per this deed, Smt. Puspa and Smt. Geetha retired from M/s. Hymavathi Enterprises with immediate effect and the original profit sharing ratio between the four old original partners, viz. mother and three sons, was restored. 8. For the assessment year 1990-91, M/s. Arun Chemical and Pharmaceutical Works filed a return, declaring a loss of Rs. 46,420, which has been arrived at as under:- "Income from property at Rs. 6,04,480 1. Less : Loss from business in the name of M/s. Arun Chemical & Pharmaceutical Works &....
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.... not informed about the retirement of Smt. Puspa and Smt. Geetha. The Assessing Officer-thereupon rejected the claim that the two firms, M/s. Arun Chemical and Pharmaceutical Works and M/s. Hymavathi Enterprises constituted one firm, with the following remarks- "18. When the clear cut difference between the constitutions of assessee firm viz. M/s. Arun Chemical and Pharmaceutical Works and that of M/s. Hymavathy Enterprises - (Crystal Coffee Club) was put to the assessee and when it was required as to why both the entities shall not be treated as separate and totally distinct to each other and the set off of loss claimed relating to M/s. Hymavathy Enterprises shall not be disallowed, the Managing Partner answered in the sworn deposition dated 23-3-1993, that, if the constitutions of the both the firms are different, they should be treated as different entities and assessed separately. However, subsequently, the Managing Partner viz. Sri T. Shiv Kumar filed a copy of deed of retirement dated 19-3-1990 purporting to have retired the lady partners, viz. Smt. T. Pushpa and Smt. T. Veeta; and that their shares to go to their respective husbands. The Managing Partner has categorically....
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....wability of losses under the same head, set off of losses of one head under the another head of income, and carry forward of such losses of the same entity only. None of the provisions of Income-tax Act, 1961 envisage allowance of set off of losses of one entity from the income of another entity which is totally different. From the above, it is clear that the assessee firm has adopted a device in claiming the set off of alleged losses from M/s. Hymavathy Enterprises (Crystal Coffee Club) from the Income of the assessee firm with the manifest intention of defrauding the revenue and to evade tax on the legitimate income." 10. The CIT(A) however allowed the claim of the assessee on appeal. It was pointed out before the CIT(A) that the assessee had actually addressed a letter dated 22-3-1990 to the Sales Tax Department informing about the retirement of the two ladies. Smt. Puspa and Smt. Geetha from M/s. Hymavathy Enterprises. A copy of the said letter is also filed before us at page-21 of the assessee's paper-book. It was also pointed out before the CIT(A) that the assessee had filed Form No. 45D dated 25-7-1990 before the ITO, survey stating that M/s. Hymavathy Enterprises was ....
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.... Pharmaceutical Works and that of M/s. Hymavathi Enterprises. The Assessing Officer examined the Managing Partner of M/s. Hymavathi Enterprises Sri T. Sivakumar in this connection. In coming to the conclusion that the firms are two different entities, the Assessing Officer relied on the registration of M/s. Crystal Coffee Club for Sales-tax purposes and also admission by the partner Sri T. Shivakumar to this effect. In this connection, it may be mentioned here that the appellant's representative filed before me a copy of Form No. 45D filed with the ITO Survey stating that M/s. Hymavathi Enterprises is only a unit of M/s. Arun Chemicals and Pharmaceutical Works. Therefore the question before me is whether the Assessing Officer was justified in not clubbing the incomes of those two businesses. 3.5 It was held by the A.P. High Court in the case of Addl. CIT v. M. Venkata Narasimha Rao & Co. [1976] 104 ITR 28 in which it was held as under: 'Under the Partnership Act, 1932, a partnership firm has no separate legal existence apart from its partners. It is merely an association of persons who constitute the "firm". The firm's name is only a compendious designation of the persons, wh....
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....ck. The income credited to the trading and profit & loss account is only in erect received of Rs. 2,925 and chit dividend of Rs. 30,833. Hence, it is evident that no business was done. If there is no business carried on by M/s. Arun Chemicals and Pharmaceutical Works (by ignoring that Crystal Coffee Club as part of the business of the appellant), the firm will not be entitled for every registration as there was no business activity. On the contrary, the Assessing Officer has allowed continuation of registration and allocated the share income to the partners as per the partnership deed of M/s. Arun Chemicals and Pharmaceutical Works at equal share. 3.7 As stated earlier, in the partnership deed of M/s. Arun Chemicals and Pharmaceutical Works, there was a clause for diversification of business without mentioning the nature of the business. Since the business of M/s. Arun Chemicals and Pharmaceutical Works has come to an end before the closing of the accounting year and there was no business activity of M/s. Arun Chemical and Pharmaceutical Works, the only other business which has come as part of the business is Crystal Coffee Club which was run by M/s. Hymavathi Enterprises. It ma....
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....s, the assessee came up with the idea of claiming that both the firms constituted one assessable unit, and thus claiming for set off of loss of Smt. Hymavathi Enterprises against the profit of M/s. Arun Chemical and Pharmaceutical Works, and thus projecting a tax saving device. He butressed his argument by referring to the assessment order and pointed out that the assessee obtained the Sales Tax Registration only on the basis of the deed dated 22-1-1990 in respect of M/s. Hymavathi Enterprises, according to which there were six partners. He pointed out that even Shri Shivakumar Managing Partner of both the firms admitted that the retirement of Smt. Puspa and Smt. Geetha from M/s. Hymavathi Enterprises was not intimated to the Sales Tax Department. According to him, the subsequent letter of the assessee dated 22-3-1990 allegedly addressed to the Sales Tax Department about the retirement of the two ladies had little evidentiary value, as it was not filed before the Assessing Officer and the Assessing Officer did not have opportunity of going into the question of the genuineness of the same. Similar argument is advanced in respect of Form No. 45D dated 25-7-1990 allegedly filed before....
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....ed as that of M/s. Arun Chemical and Pharmaceutical Works on the ground that the two firms constituted different entities, then M/s. Arun Chemical and Pharmaceutical Works would not have been entitled even for registration, as it was not carrying on any business. As the Assessing Officer granted registration, it implied that the two firms constituted a single entity and the business of M/s. Hymavathi Enterprises constituted the business of the assessee as well. He also pointed out that M/s. Hymavathi Enterprises did not claim separate registration before the Income-tax Department, and so, it is clear that the intention of the concerned parties all along had been that M/s. Hymavathi Enterprises constituted a unit of M/s. Arun Chemical and Pharmaceutical Works. 13. The learned counsel for the assessee further pleaded that there is no prohibition for the two firms to be treated as one in law, and in this context, he relied upon the following decisions- (a) M. Venkata Narasimha Rao & Co.'s case. (b) Dy. CST(Law)v. K. Kelukutty [1985] 155 ITR 158 (SC). (c) Balu Readymade Stores v. CIT [1994] 207 ITR 461 (Mad.). He pointed out that in order to find out whether the two busi....
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....sses may be different and yet the partners may be the same. An agreement between the partners to carry on a business and share the profits may be followed by a separate agreement between the same partners to carry on another business and share the profits therein. The intention may be to constitute two separate partnerships and, therefore, two distinct firms. Or to extend merely a partnership originally constituted to carry on one business, to the carrying on of another business. It will all depend on the intention of the partners. The intention of the partners will have to be decided with reference to the terms of the agreement and all the surrounding circumstances, including evidence as to the interlacing or interlocking of management, finance and other incidents of the respective businesses." In the light of the above remarks of the Apex Court, it is evident that whether two concerns created by two separate partnership deeds can be regarded as a single firm, depends on the intention of the parties concerned, and the intention has to be gleaned or ascertained from the surrounding circumstances. Further, it may be noticed that in all the decided cases mentioned hereinabove, it ....
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....mendment deed dated 26th September, 1989 to enable the assessee-firm, M/s. Arun Chemical and Pharmaceutical Works, to launch upon a new line of business. 17. The matters may be examined from another angle. The crucial argument of the assessee before us is that on the date of commencement of the business by M/s. Hymavathi Enterprises, i.e., 23-3-1990, there were only four partners as in M/s. Arun Chemical and Pharmaceutical Works, and their profit sharing ratios are also same. The question is not whether the two firms had the same partners and the same profit sharing ratios on the date of commencement of business of M/s. Hymavathi Enterprises. The question is as to what was the intention of the partners on the date M/s. Hymavathi Enterprises was created i.e., on 24-2-1989, i.e., whether on this date, the partners conceived of M/s. Hymavathi Enterprises as a separate unit, independent of M/s. Arun Chemical and Pharmaceutical Work, or created it as part of M/s. Arun Chemical and Pharmaceutical Works. If they had conceived M/s. Hymavathi Enterprises as a unit of M/s. Arun Chemical and Pharmaceutical Works, they could not have by their subsequent deed dated 22-1-1990 inducted two mor....
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....e firms had to be clubbed, and so, the Revenue was justified in clubbing the incomes of both the firms. 19. Similar is the position in the case considered by the Hon'ble A.P. High Court in the case of M. Venkata Narasimha Rao & Co., wherein, as per the relevant portion of the head-note of the decision, it was observed by the Hon'ble A.P. High Court as under- "...There was inter-lacing of finances in the accounts of the two firms. While the ledger account of 'A' in the books of 'B' showed credits and debits to the tune of Rs. 2.35 and 2.15 lakhs, the ledger account of 'B' in the account books of 'A' showed cash credits and debits to the tune of Rs. 2.15 and 2.84 lakhs." The decision of the A.P. High Court in that case has been of course, overruled by the Full Bench decision of the Hon'ble A.P. High Court in G. Parthasarathy Naidu & Sons' case. But, we are pointing out the above observations of the Hon'ble High Court only to indicate that in the present case there is no such inter-lacing of funds as on 31st March, 1990, i.e., the last day of the accounting year relevant for the assessment year under appeal. 20. The learned counsel for the assessee relied on certain other ....
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.... Crystal Coffee Club, mentioned as that of six partners. You have filed both the documents namely the partnership deed dated 24-2-1989 of M/s. Hymavathi Enterprises of four partners - (copy) and the deed of amendment dated 26-9-1989 in original today only before me. In the face of the application and the partnership deed filed before the Sales-tax Department with the different constitution with that of M/s. Arun Chemical and Pharmaceutical Works, the claim made by you in the Income-tax Return claiming set off of loss of Hotel business and allegedly stating that constitution of M/s. Hymavathi Enterprises is one and to the same is a device planned by you to reduce the incidence of tax payable by M/s. Arun Chemical and Pharmaceuticals Works on its real income. What do you say? Ans.:- The facts mentioned in the application and filing of partnership deed dated 22-1-1990 before the Sales-tax Authorities alongwith the application in Form-D were the mistake committed by us. I am aware of the fact of the mentioned made in the application Form-D and also filing of partnership deed dated 22-1-1990. But I forget to change the position with the sales-tax authorities. Q.No. 18: In view of ....
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....; 8,589.97 Fixed Assets 8,39,952.00 (Partner) Deposits Sri T. Rajkumar 5,489.97 Deep Freezer 2,500.00 (Partner) Sundry Creditors 62,041.58 Loans & Advances 14,000.00 I.O.B. Term Loan &....
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.... 1,200.00 Difference in Books 54.44 ------------- ------------- 9,58,090.07 9,58,090.07 ....