1968 (3) TMI 8 - HC - Income Tax

When the ITO for the first time came to the conclusion that there being common partners of both the firms the two units constituted one assessable entity for purposes of income-tax - whether the business was one or separate was a question of fact which could only be determined by the Tribunal after taking into consideration all the relevant materials

Summary

Issues Involved:
1. Whether two partnership firms having common partners and identical shares are as a matter of law one?
2. If yes, whether the income earned by such two firms should be assessed collectively?

Issue-wise Detailed Analysis:

1. Whether two partnership firms having common partners and identical shares are as a matter of law one?

The court examined whether two firms with identical partners and shares should be considered a single entity for tax purposes. The background provided includes the formation of two partnerships, R. N. Oswal Hosiery and Mahabir Woollen Mills, both consisting of the same five partners with identical shares but engaging in different businesses. These firms were separately registered and assessed until 1958-59, when the Income-tax Officer concluded that they constituted one assessable entity due to common partners.

The Tribunal upheld this view based on a judgment from the Bombay High Court, which stated, "In law a firm has no existence independently of its partners, and if there are two firms consisting of exactly the same partners, the real position in law is that there is only one firm." However, this was contested, and the court referred to other judgments, including a Special Bench decision in In re Martin & Co., which emphasized that whether the same set of partners constituted two separate firms is a factual matter, not merely an abstract legal theory.

The court also cited the Supreme Court's view in Commissioner of Income-tax v. A. W. Figgies and Company, which recognized that a firm can be a distinct assessable entity under the Income-tax Act, separate from its partners. This perspective was reinforced by Chief Justice Chagla in Jesinghbhai Ujamshi v. Commissioner of Income-tax, who disagreed with the proposition that common partners necessarily mean a single firm, emphasizing that whether there are two firms or one is a factual question.

2. If yes, whether the income earned by such two firms should be assessed collectively?

Given the court's conclusion on the first issue, this question became moot. The court determined that the proposition that two firms with common partners and identical shares are necessarily one entity in law was not correct. Therefore, the income earned by such firms should not be assessed collectively.

Conclusion:

The court concluded that the view in In re Martin & Co., Jesinghbhai Ujamshi v. Commissioner of Income-tax, and Jesinghbhai Ujamshi v. Commissioner of Income-tax was more consistent with the provisions of the Income-tax Act than the view adopted by the Bombay High Court in Vissonji Sons & Co. v. Commissioner of Income-tax. Consequently, the first question was answered in the negative, in favor of the assessee, and the second question did not arise. The assessee was entitled to costs of the reference.