1981 (4) TMI 133 - AT - Income Tax

Summary

Issues Involved:
1. Constitution and registration of the assessee firm and the new firm.
2. Inclusion of the income of the new firm in the hands of the assessee firm.
3. Inter-lacing and inter-locking of finances and business activities between the two firms.
4. Legal principles and tests for determining whether two businesses are the same.

Issue-Wise Detailed Analysis:

1. Constitution and Registration of the Assessee Firm and the New Firm:
The assessee firm, constituted under a partnership deed dated 19th March 1974, carried on business in purchase and sale of rice. The partners and their profit-sharing ratios were specified. A new firm, Sri Laxmi Ganapathi Rice Stores, was constituted by a partnership deed dated 17th November 1977 with the same partners but an equal profit-sharing ratio. The new firm carried on the same nature of business at a different address.

2. Inclusion of the Income of the New Firm in the Hands of the Assessee Firm:
The CIT observed that the partners and the nature of business were the same for both firms, leading to the conclusion that there was inter-lacing and inter-locking of finances. The initial capital of the new firm was perceived to have flowed from the assessee firm. Consequently, the CIT included the income of the new firm in the hands of the assessee firm for the assessment years 1978-79 and 1979-80, setting aside the original assessments.

3. Inter-lacing and Inter-locking of Finances and Business Activities:
The CIT's view was based on the observation that the new firm was started to ward off competition and overcome Civil Supplies restrictions. It was noted that some partners withdrew capital from the assessee firm to invest in the new firm. However, the assessee contended that the withdrawals were minimal and did not constitute significant capital introduction. The assessee also argued that there were no cash advances between the firms, and the inter-se transactions of purchase and sale were minimal compared to the total turnovers.

4. Legal Principles and Tests for Determining Whether Two Businesses Are the Same:
The assessee's counsel referred to various legal precedents to elucidate the concepts of inter-lacing and inter-locking, emphasizing the absence of common management, business organization, administration, funds, and place of business. The Andhra Pradesh High Court's decision in CIT vs. G. Parthasarathy Naidu & Sons was cited, which laid down principles for determining whether different partnerships were in reality one. The cumulative effect of all material factors, including inter-lacing and inter-locking of funds, was considered crucial. The counsel argued that the businesses were separate entities based on these principles.

Conclusion:
The Tribunal concluded that there was no inter-charge of finances or flow of funds between the two firms, and the inter-se transactions were in the normal course of business. The business premises were different, and there was no common business organization or administration. The partners' minimal withdrawals did not constitute significant capital introduction. The Tribunal found no inter-connection, inter-lacing, inter-dependence, or unity of control between the firms. The orders of the CIT were set aside, and the original assessments by the ITO were restored. The appeals were allowed.