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TMI Blog1983 (2) TMI 105X X X X Extracts X X X X X X X X Extracts X X X X ..... to deal in jewellery articles of curios, to act as commission agents, sale and purchase of precious and semi-precious stones, manufacture of precious and semi-precious stones and any other business of the allied nature with the mutual consent of all the partners to act as money-lenders and to deal in shares and securities, in real properties or any other business. " According to clause 4 of the deed, the capital required for partnership business shall be contributed by the partners as mutually agreed and the partners would be at liberty to charge such rate of interest on the capital account as mutually agreed. The partnership was at will. Clause 17 of the deed provided that in the case of death of any of the partners, the firm shall not be dissolved but the same shall be carried on by the surviving partners along with heirs, successors or legal representatives, as the case may be, of the deceased. This partnership deed has 19 different clauses. In respect of the business of this firm, the assessee filed a return for the year ending Diwali, 1976 relevant to the assessment year 1977-78 declaring income at Rs. 1,23,370. 3. By a deed of partnership dated 23-6-1976 effective from 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it shall be divided amongst the partners as under : 1. Shri Mannalal Soorana 10 per cent 2. Shri Nirmal Kumar Soorana, HUF 30 per cent 3. Shri Vimal Kumar Soorana, HUF 30 per cent 4. Shri Narendra Kumar Soorana 30 per cent " When the ITO noticed that the assessee-firm and the firm of Mannalal Nirmal Kumar Soorana Co. were constituted with the same partners and the shares in the profits and losses of the partners in the two firms were equal, he formed an opinion that the income of Mannalal Nirmal Kumar Soorana Co. should be clubbed with the income of the assessee-firm of this year. The assessee was required to show cause as to why these two firms be not treated as one firm and their income be aggregated in one assessment. The assessee objected to the proposed action and it was first pointed out that the partners of the two different firms were not the same inasmuch as, in the firm of Mannalal Nirmal Kumar Soorana Co., Nirmal Kumar Soorana and Vimal Kumar Soorana represented their respective HUFs. It was further submitted that the capital contributed by Nirmal Kumar Soorana, Vimal Kumar Soorana and Narendra Kumar Soorana had flown from the bigger HUF, namely, Mannalal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks of Mannalal Nirmal Kumar Soorana Co. in the subsequent year had flown from the firm Hazarimal Milapchand Soorana. Rs. 1,41,425 which had been separately taxed as income of Mannalal Nirmal Kumar Soorana Co. was included in the income of the assessee in the assessment framed on11-9-1980. This firm had been allowed registration earlier and the benefit of continuation of registration was allowed in this year. 4. The assessee filed an appeal to the Commissioner (Appeals) and, inter alia, submitted that the income of Rs. 1,41,425 belonging to the firm Mannalal Nirmal Kumar Soorana Co. should not have been taxed as the income of the assessee. Similar arguments which had been advanced before the ITO were advanced before the Commissioner (Appeals) also and it was also pointed out that the firm Mannalal Nirmal Kumar Soorana Co. had been separately registered under the Indian Registration Act, 1908. The Commissioner (Appeals) did not accept the assessee's submission and confirmed the action of the ITO in including the sum of Rs. 1,41,425, being the income of Mannalal Nirmal Kumar Soorana Co., as the income of the assessee. The assessee is aggrieved by this order of the Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointed out that the tests to be applied were : (1) whether there was interlocking, interlacing and unity of control in respect of the two businesses ; and (2) whether the beneficiaries in respect of the two businesses were the same. He explained that for the purpose of ascertaining whether there was unity of control, the capital structure of the two businesses had to be considered. He pointed out that there was no connection whatsoever between the capital of the assessee-firm and of Mannalal Nirmal Kumar Soorana Co. For purposes of ascertaining whether there was interlacing or interlocking, he explained, it had to be found out whether for purposes of funds one firm was dependent on the other. He submitted that no such nexus had been established in this case that the business of Mannalal Nirmal Kumar Soorana Co. was dependent on the funds provided by Hazarimal Milapchand Soorana. He referred to the trading account of Mannalal Nirmal Kumar Soorana Co. for this year and pointed out that out of total sales of Rs. 35,98,834, there were export sales to the extent of Rs. 28,52,049 and these export sales had to be made through the assessee because Mannalal Nirmal Kumar Soorana Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property or firm's assets all that is meant is property or assets in which all partners have a joint or common interest. If that be the position, it is difficult to accept the contention that upon dissolution the firm's rights in the partnership assets are extinguished. The firm as such has no separate rights of its own in the partnership assets but it is the partners who own jointly or in common the assets of the partnership and, therefore, the consequence of the distribution division or allotment of assets to the partners which flows upon dissolution after discharge of liabilities is nothing but a mutual adjustment of rights between the partners and there is no question of any extinguishment of the firm's rights in the partnership assets amounting to a transfer of assets within the meaning of section 2(47) of the Act. In our view, therefore, there is no transfer of assets involved even in the sense of any extinguishment of the firm's rights in the partnership assets when distribution takes p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee-firm. He also referred to the same paragraph at page 59 in the judgment in Malabar Fisheries Co.'s case which has been reproduced above. He pointed out that a partnership firm under the Partnership Act was not a distinct legal entity apart from the partners of the firm constituting it but this was not so for purposes of income-tax. He also pointed out that in the case of Malabar Fisheries Co., the controversy was different but the controversy in the present case had been squarely dealt with by the Full Bench of the Andhra Pradesh High Court in the case of G. Parthasarathy Naidu Sons. He submitted that the judgments in Sivakasi Match Exporting Co.'s case, Agarwal Co.'s case and Bagyalakshmi Co.'s case were not relevant to the issue involved in this case. He also pointed out that the partnership deeds of both the firms were not identical because in the case of the assessee-firm there was existing clause 17 in the deed dated 1-5-1973, according to which, in case of death of any of the partners, the firm shall not dissolve but the same shall be carried on by the surviving partners along with heirs, successors or legal representatives, as the case may be, of the decea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecause the partners are the same in both the firms. " It is unnecessary to refer to any other judgment because during the course of this judgment, a number of other judgments have been considered. On the basis of this judgment, therefore, we would hold that the two separate firms can be assessed as two separate legal entities. 9. The further question, that is required to be considered, is whether the two partnerships constituted under different deeds of partnership are to be assessed as one unit or as separate entities and for this purpose the prime guideline for determination is the cumulative effect or totality of all the material factors relating to the object and intendment of the partnerships and businesses, their nature, character and identity, coupled with the factum or otherwise of interlacing and interlocking of funds between the two firms. In the present case, there is no interlacing or interlocking of the funds between the two firms because for purposes of starting the business of Mannalal Nirmal Kumar Soorana Co., that firm did not borrow any money from the assessee-firm. Clause 3 of the partnership deed, dated 23-6-1976 of the firm Mannalal Nirmal Kumar Soorana s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmal Kumar Soorana Co. cannot be brought to tax in the hands of the assessee as it would amount to double taxation. 10. The learned departmental representative had relied on the judgment in Sivakasi Match Exporting Co.'s case but the question for consideration in that case was regarding the registration under the Act and it was held that the jurisdiction of the ITO was, therefore, confined to ascertaining the facts, namely : (i) whether the application for registration was in conformity with the rules made under the Act ; and (ii) whether the firm shown in the document presented for registration was a bogus one or had no legal existence. This case has no application to the issue involved before us. In the case of Bagyalakshmi Co., also the question for consideration was regarding the registration under the Act. It is true that in that case it was held that a contract of partnership has no concern with the obligation of the partners to others in respect of their shares of profit in the partnership. It only regulates the rights and liabilities of the partners. These observations also do not help the revenue because the consideration for holding whether a firm is entitled to reg ..... X X X X Extracts X X X X X X X X Extracts X X X X
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