2015 (1) TMI 249 - HC - Income Tax

Common partners in two firms Set off of losses incurred by one firm from another - Whether the affairs of the two separate and independent firms can be treated as one Held that - The assessee firm was constituted under the partnership deed dated 19.01.1988 and its activity is manufacturing and marketing of drugs - The other firm, by name, M/s.Hymavathi Enterprises was registered on 24.02.1989 and its activity is to establish and run hotels - both the firms have been maintaining separate accounts - except that the partners in both the firms are common, there is nothing, which unifies them in law - the facts and figures pertaining to both the firms were furnished separately in the returns - mere fact that the same partners happened to be the partners in two separate firms, does not constitute the basis to treat both the firms as one entity, in the context of submitting the returns - once separate accounts were opened and operated for each of the firms, there is no way, that a common return could have been filed for them - both the firms have separate channels, be it of constitution or maintenance of accounts thus, the loss earned by one firm cannot be pitted or set off against the profits of the other firm the order of the Tribunal is upheld Decided against assessee.

Summary

Issues:
1. Treatment of two separate firms' financial affairs as one entity for income tax assessment purposes.

Analysis:
The appellant, a partnership firm manufacturing and selling Ethyl Chloride, filed a return for the Assessment Year 1990-91 showing a net loss. The Assessing Officer refused to consider the figures of another firm, M/s.Hymavathi Enterprises, in the appellant's return, leading to an assessment order based solely on the appellant's figures. The Commissioner of Income Tax (Appeals) allowed the appeal, but the Tribunal set aside this decision. The main contention was whether the two firms could be treated as one entity due to common partners.

The appellant argued that since the partners were common in both firms and only one income tax return was filed, the two firms should not be treated separately. However, the respondent contended that separate firms should maintain their financial independence, especially when separate accounts are kept. The Tribunal upheld the Assessing Officer's view that the firms should be treated independently.

The judgment emphasized that even with common partners, separate firms are distinct entities for income tax purposes. The fact that two partners briefly joined M/s.Hymavathi Enterprises did not alter the separate nature of the firms, as they maintained distinct accounting processes and operations. The Tribunal found no justification to merge the financial affairs of the two firms, as they operated independently and had separate sources of income and losses.

Ultimately, the appeal was dismissed, affirming the Tribunal's decision to treat the two firms as separate entities for income tax assessment. The judgment highlighted the importance of maintaining financial independence between separate firms, even if they share common partners, and upheld the principle that each firm should be assessed based on its individual financial performance.