1978 (2) TMI 189 - HC - VAT and Sales Tax

Summary

Issues:
1. Whether the same set of partners constituting two different firms can be regarded as one person for the purposes of the General Sales Tax Act, 1963.

Analysis:
The High Court of Kerala addressed the issue of whether two different partnerships formed by the same set of partners should be considered as separate assessable units or entities under the General Sales Tax Act, 1963. The Appellate Tribunal had initially ruled that the turnover from sales by one partnership was not taken into account by the other partnership formed by the same partners. The Tribunal remanded the proceedings to determine interlacing and interlocking aspects. The revenue challenged this decision, arguing that two partnerships by the same persons should be viewed as one legal entity. The revenue relied on the Punjab and Haryana High Court decision and the development of law in this area, including decisions by the Bombay High Court, Madras High Court, Andhra Pradesh High Court, and the Supreme Court. The Supreme Court's ruling in Commissioner of Income-tax, Madras v. R.M. Chidambaram Pillai was also considered, emphasizing that a firm is not a legal person but a unit of assessment. However, the earlier Supreme Court decision in State of Punjab v. Jullundur Vegetables Syndicate clarified that for tax law purposes, a firm is considered a legal entity. The Court concluded that the direction by the Appellate Tribunal was correct based on this precedent.

The Court further discussed the nature of payments made by a firm to its partners, stating that a contract of service cannot exist between a firm and its partners. The payment of salary to a partner was deemed to represent a special share of profits, retaining the same character as the firm's income. The Court referenced the Supreme Court decision in State of Punjab v. Jullundur Vegetables Syndicate, which established that for tax law purposes, a firm is considered a legal entity despite not being one under partnership law. This principle, derived from an examination of relevant taxing statutes, was found applicable to the Sales Tax Act, defining a "dealer" to include a firm. Consequently, the Court upheld the Appellate Tribunal's decision, dismissing the tax revision cases with no order as to costs.