2003 (6) TMI 200 - AT - Income Tax

Summary

Issues Involved:
1. Whether M/s. Arun Chemical and Pharmaceutical Works and M/s. Hymavathi Enterprises constitute a single firm.
2. The eligibility of the loss of M/s. Hymavathi Enterprises to be set off against the profit of M/s. Arun Chemical and Pharmaceutical Works.

Detailed Analysis:

1. Whether M/s. Arun Chemical and Pharmaceutical Works and M/s. Hymavathi Enterprises constitute a single firm:

The primary issue revolves around whether the two firms, M/s. Arun Chemical and Pharmaceutical Works and M/s. Hymavathi Enterprises, should be considered a single entity for tax purposes. The CIT(A) had ruled in favor of the assessee, allowing the firms to be treated as one entity based on the argument that the partners and profit-sharing ratios were the same, and there was an intention to treat M/s. Hymavathi Enterprises as a unit of M/s. Arun Chemical and Pharmaceutical Works.

The CIT(A) relied on the decision of the A.P. High Court in the case of Addl. CIT v. M. Venkata Narasimha Rao & Co., which stated that if two firms consist of exactly the same partners but carry on separate businesses, they should be treated as one firm for tax purposes. However, this decision was overruled by a subsequent Full Bench decision of the A.P. High Court in the case of CIT v. G. Parthasarathy Naidu & Sons.

The Tribunal noted that the intention of the partners, as evidenced by the separate partnership deeds and the different terms and conditions in those deeds, indicated that the firms were intended to be separate entities. The Tribunal emphasized that the question is not whether the two firms had the same partners and profit-sharing ratios on the date of commencement of business by M/s. Hymavathi Enterprises but rather what the intention of the partners was on the date M/s. Hymavathi Enterprises was created. The Tribunal found that the partners conceived M/s. Hymavathi Enterprises as a separate unit independent of M/s. Arun Chemical and Pharmaceutical Works.

2. The eligibility of the loss of M/s. Hymavathi Enterprises to be set off against the profit of M/s. Arun Chemical and Pharmaceutical Works:

The Assessing Officer (AO) had rejected the claim for set-off of the loss of M/s. Hymavathi Enterprises against the profit of M/s. Arun Chemical and Pharmaceutical Works, arguing that the two firms were distinct entities with different names, nature of business, places of business, and constitutions. The AO pointed out that M/s. Hymavathi Enterprises had obtained Sales Tax Registration based on a deed constituting six partners, and the retirement of two partners was not intimated to the Sales Tax Department.

The Tribunal upheld the AO's decision, concluding that the two firms were separate entities and the loss of M/s. Hymavathi Enterprises could not be set off against the profit of M/s. Arun Chemical and Pharmaceutical Works. The Tribunal emphasized that the legal character of the transaction and the intention of the partners, as evidenced by the partnership deeds, indicated that the firms were separate. The Tribunal also noted that the assessee's argument that the firms should be treated as one entity was only raised towards the end of the accounting year to reduce tax liability.

Conclusion:

The Tribunal concluded that M/s. Arun Chemical and Pharmaceutical Works and M/s. Hymavathi Enterprises are separate entities and cannot be treated as a single firm for tax purposes. Therefore, the loss of M/s. Hymavathi Enterprises cannot be set off against the profit of M/s. Arun Chemical and Pharmaceutical Works. The Tribunal set aside the CIT(A)'s order and restored the AO's decision, allowing the Revenue's appeal.