9911796707
TMI Blog2003 (6) TMI 200X X X X Extracts X X X X X X X X Extracts X X X X ..... ages 1 to 4 of the assessee's paper-book, and this partnership was deemed to have been commenced with effect from 1-4-1987. The said partnership consisted of the following partners- (1) Smt. T. Hymavathi, W/o. Late Shri T. Nagabhushanam (2) Shri T. Sivakumar (3) Shri T. Manmohan (4) Shri T. Rajkumar The partners at Sl. Nos. 2 to 4 above are the sons of Smt. T. Hymavathi, the partner at Sl. No. 1 above. The relevant portion of the partnership deed dated 19-1-1988 reads as under:- "Whereas the parties of the first three parts have been carrying on business under the name and style of M/s. Arun Chemicals and Pharmaceuticals Works as and from 1-4-1978 under the terms and conditions agreed upon by them as per the partnership Deed executed on 10-6-1978 and whereas to have a more efficient administration and better management and strengthen the financial resources of the firm they have decided to take Sri T. Raj Kumar as partner and accordingly they all have constituted themselves into a partnership and have agreed upon the following terms and conditions. Now this deed of partnership witnesseth as under: 1. The name and style of the firm is and shall be 'M/s. Arun Chemicals & Phar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urse of business. 17. All the partners shall be faithful to each other and shall not do any such act which shall be detrimental to the interest of the business. 18. That in all other matters which are not specifically mentioned in this deed the provisions of the Indian Partnership Act, 1932 shall apply. 19. That the partners named hereinabove have the right to add, alter, delete and/or amend any of the clauses of this Deed as they may deem it necessary from time to time. 20. All other matters not specifically mentioned herein shall be governed by the Law of Partnership for the time being in force in the State of Andhra Pradesh." 3. It may be observed that the mother and the three sons had equal shares in the profits and losses of the firm. It may also be observed that the eldest son, Shri Shivkumar was the Managing Partner of the firm and the bank account of the firm was to be operated by Shri Shivkumar and Shri Rajkumar. The borrowals of the money for the business of the firm was to be undertaken under the joint signatures of all the partners. 4. When the matters stood thus, the above mentioned four partners, viz., Smt. Hymavathi and her three sons, executed another partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to profit and loss account every year ending by 31st March, or any such other convenient date to be decided by the partners from time to time. The profit and loss account and balance sheet shall be signed by the Managing Partner and working partner and is binding on all the partners. (b) All the account books shall be kept at the Registered Address of the partnership and shall not be removed without prior permission of all the partners. Every partner shall have a right to inspect the books of account and to take extracts from the same. 11. Operation of Bank Account: The Bank Account shall be opened in any nationalised Bank or in any Scheduled bank in the name of the firm and the same shall be operated by Sri T. Shiv Kumar, Managing Partner, party of the First Part or T. Raj Kumar, Working Partner, party of the second part individually. 12. Loans from partners : The partners can lend or advance to the firm apart from the capital, such loans or advances as may be required from time to time and such loan or advances made by any partner shall carry interest at the rate agreed from time to time. 13. Interest on Capital : The partners are entitled to receive interest on their capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason of such breach. 19. Any of the above clauses may be altered, varied, modified, cancelled or added on mutual consent of the partners. 20. With regard to any change in the terms mentioned above, the same shall be brought by executing a deed of amendment to the partnership on a valid stamp paper of Rs. 5. 21. With regard to any other terms not touched by this agreement, the partnership act in force shall be applicable." It may be observed that the Deed dated 24-2-1989 does not refer at all to the fact that Smt. Hymavathi and her three sons have been carrying on business under the name and style of M/s. Arun Chemicals and Pharmaceuticals Works. Further, many of the terms of the Deed dated 24-2-1989 are different from those of the earlier Deed dated 19-1-1988 governing the firm, M/s. Arun Chemicals and Pharmaceuticals Works. M/s. Hymavathi Enterprises has a new place of business and while Shri Shiv Kumar is the Managing Partner of both the firms, Shri Rajkumar is declared working partner of M/s. Hymavathi Enterprises and there is no such working partner for M/s. Arun Chemicals & Pharmaceutical Works. It may be observed that the business of M/s. Hymavathi Enterprises is to run ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year 1990-91, M/s. Arun Chemical and Pharmaceutical Works filed a return, declaring a loss of Rs. 46,420, which has been arrived at as under:- "Income from property at Rs. 6,04,480 1. Less : Loss from business in the name of M/s. Arun Chemical & Pharmaceutical Works Rs. 71,001 2. Less : Loss from M/s. Hymavathi Enterprises (Crystal Coffee Club) Rs. 5,79,852 Rs. 6,50,853 ------------ ---------------- (-) Rs. 46,423" ---------------- It may be observed that the assessee claimed set off for the loss of Rs. 5,79,852 relating to the firm M/s. Hymavathi Enterprises, which ran Crystal Coffee Club against the income from property of Rs. 6,04,480 of M/s. Arun Chemical & Pharmaceutical Works. The set off was claimed on the ground that both the firms, even though created under two separate deeds, constituted only one firm. 9. The Assessing Officer noticed that the assessee did not file the original deed dated 24-2-1989 relating to M/s. Hymavathi Enterprises or the subsequent deed dated 22-1-1990 inducting two more partners or even the deed of retirement dated 19-3-1990 by which the said two partners who had subsequently joined retired. On enquiries with the Sales Tax Depar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hoteliers is supported by the ancillary clause in clause 3 of partnership deed dated 19-1-1988 is not maintainable as true and correct. This is amply proved by clause No. 4 of the partnership deed dated 24-2-1989, which states that the partnership shall be deemed to have commenced from that date (though the said deed was not filed either before the Income-tax Department or before the Sales Tax Department). It is also proved beyond any iota of doubt, that the firm of M/s. Hymavathy Enterprises constituted with six partners under deed of partnership executed on 22-1-1990 was commenced w.e.f. 1-1-1990 only. When it is specifically mentioned in the partnership deed of M/s. Hymavathy Enterprises that the said partnership commenced only w.e.f. 1-1-1990, it is not correct on the part of the assessee that the carrying on of business as hoteliers is pursuant to the ancillary clause in clause 3 of partnership deed dated 19-1-1988 of M/s. Arun Chemical and Pharmaceutical Works, Uppal Further, M/s. Hymavathy Enterprises (Crystal Coffee Club) has been filing the returns under Sales Tax Act with the constitution of six partners only and the Sales Tax authorities have completed the assessments, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed a new line of business of running a coffee club. It was also pointed out that it was only by way of abundant caution that the concerned parties executed a new partnership deed, but all along the intention was that M/s. Hymavathy Enterprises was a unit of M/s. Arun Chemical and Pharmaceutical Works only. The CIT(A) allowed the claim of the assessee with the following remarks- "3.4 In view of the contention of the appellant's representative, I have perused the records. In this case the appellant firm filed a return of Income on 31-8-1990 showing a loss of Rs. 46,420. The income returned included income from property, loss from M/s. Hymavathi Enterprises and loss from M/s. Arun Chemicals and Pharmaceutical Works. It is seen that the return of income was accompanied by two separate profit & loss accounts and balance sheet, one in the case of M/s. Arun Chemicals and Pharmaceutical Works and the, other in the case of M/s. Hymavathi Enterprises - (Crystal Coffee Club). The appellant also filed capital accounts of the partners, depreciation statement etc. alongwith the return of income. On going through the order of the Assessing Officer it is seen that the Assessing Officer has not fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, the Assessing Officer treated these two firms as separate entity as it was beneficial to the revenue to treat these separately. So that the loss from M/s. Hymavathi Enterprises need not be adjusted from income from property owned by the appellant firm. Therefore, the assessment was made by the Assessing Officer only with a view of collecting taxes from the income in respect of property owned by the appellant firm and importing the losses incurred by the Crystal Coffee Club. 3.6 As stated earlier, the firm M/s. Hymavathi Enterprises did not file a separate return of income and also did not apply for registration under section 185 of the I.T. Act as a separate entity. Though the firm came into existence by a separate deed originally executed on 24-2-1989 and it was reconstituted by another partnership deed dated 22-1-1990, two partners Smt. T. Pushpa and Smt. T. Geetha were released from the partnership by a codicil drawn on 19-3-1990. The effect is that only four partners, namely, T. Sivakumar, T. Manmohan, T. Rajkumar and Smt. T. Hymavathi continued as partners with equal shares. The actual business of the Crystal Coffee Club commenced only from 23-3-1990 and the accounts were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmaceutical Works. Therefore, the Assessing Officer should have included the loss/income of this business on the basis of the profit & loss account of M/s. Hymavathi Enterprises as the income of the appellant firm. 3.8 On going through the profit & loss a/c. of the firm M/s. Hymavathi Enterprises, it is seen that the appellant has claimed certain indirect expenses which should have been enquired into by the Assessing Officer. This include expenses for repairs and maintenance of building, interest paid to banks, advertisement charges, chit loss and depreciation. The depreciation claimed is to the extent of Rs. 2,85,256. It is supported by a depreciation statement and the details regarding the cost of the fittings are available on record. Since the expenditure cannot be fully verified, I will direct the Assessing Officer to make a lump sum disallowance of Rs. 50,000 from the various expenses claimed. With this direction the Assessing Officer is directed to take net loss from M/s. Hymavathi Enterprises at Rs. 5,29,552 (Rs. 5,79,852 minus Rs. 50,000). This will be adjusted against the property income of the appellant firm. The Assessing Officer is directed to recompute the income acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. The learned counsel for the assessee, on the other hand, reiterated the contentions made out before the CIT(A). He invited our attention to clause 3 of the partnership deed dated 19-1-1988 in the case of Arun Chemical and Pharmaceutical works, according to which the said firm was at liberty to change its line of business. It is pointed out that it was only to remove all ambiguity in the matter that the partners thought of executing a new deed, when they contemplated starting a new line of business, Crystal Coffee Club. He further pointed out that the letter dated 22-3-1990 addressed to the Sales Tax Department intimating the retirement of the two lady partners cannot be doubted, as it bears the receipt stamp of Sales Tax Department. Similar plea is advanced about From No. 45D allegedly filed before ITO Survey. It is claimed that the said Form bears the initials of an official of the Income-tax Department, though the identity of the particular official is not clear therefrom. The learned counsel for the assessee has stressed, as pointed before the CIT(A), that the business of M/s. Hymavathi Enterprises commenced only on 23-2-1990 and by that date, both the firms and common partne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... So, it is made out that when the Department itself has accepted that both the firms constituted one single taxable entity in the subsequent years, there is no reason for making a departure from that position for the assessment year under appeal. 15. We are of the view that the Revenue deserves to succeed. The law is clear on the question as to whether two separate firms created by separate deeds can under specified circumstances be considered as a single firm. The law in this regard has been laid down by the Apex Court in the case of K. Kelukutty, wherein it has been held as under: ". . . The foundation of a partnership and, therefore, of a firm is a partnership agreement. A partnership agreement is the source of a partnership; it also gives expression to the other ingredients defining the partnership, specifying the business agreed to be carried on, the person who will actually carry on the business, the shares in which the profits will be divided, and several other considerations which constitute such an organic relationship. It is permissible to say that a partnership agreement creates and defines the relation of partnership and, therefore, identifies the firm. If that conclus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ead that the apparent is not real, the onus is on the assessee to prove the same. 16. Now, we have to see whether the surrounding circumstances adduced by the assessee lead to the conclusion that the onus lying on the assessee was discharged. It is made out that the firm, M/s. Hymavathi Enterprises was created by a deed dated 24-2-1989 only because anew line of business was contemplated by the existing firm, M/s. Arun Chemical and Pharmaceutical Works. It may be observed that even according to the assessee, clause 3 of the Partnership Deed dated 19-1-1988 of M/s. Arun Chemical and Pharmaceutical Works seeks to empower the firm to change the line of business by mutual consent of the partners. Then, where is the need for a new deed and creation of the firm M/s. Hymavathy Enterprises, vide deed dated 24-2-1989. Assuming that there was doubt in the minds of the parties about clause 3 of the deed dated 19-1-1988, and so they executed another deed dated 24-2-1989 to create the firm, M/s. Hymavathy Enterprises, then where was the necessity for amending clauses 3 of the deed dated 19-1-1988 of M/s. Arun Chemical and Pharmaceutical Works by amendment deed dated 26-9-1989. We have already r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the very same partners carrying on business in the name and style of M/s. Arun Chemical and Pharmaceutical Works. There are also further aspects like, the terms of two deeds are different and while Shri Rajkumar is the working partner of M/s. Hymavathi Enterprises, there is no working partner for M/s. Arun Chemical and Pharmaceutical Works. Some of the other clauses of the partnership deed are also different. So, it appears to us that it is only towards 31st of March, 1990, i.e., the last day of the accounting year relevant for assessment year under appeal, that the assessee thought of claiming that the two firms constituted a single entity, as such a stand would reduce its tax liability. 18. It has been argued before us that the partners withdrew their capitals from M/s. Arun Chemical and Pharmaceutical Works to invest in M/s. Hymavathy Enterprises. That, to our mind, does not by itself constitute inter-lacing of funds. Whenever the same partners think of floating a different firm, they may have to draw the funds from their capitals invested in earlier firms. That is like withdrawing from their respective bank accounts. There is inter-locking of funds only when the funds of one f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D, filed on 22-2-1990 by you as managing partner of M/s. Crystal Coffee Club, partnership firm. The constitution of the said firm was mentioned as that of 6 partners namely as under:- 1. T. Shiv Kumar 2. T. Raj Kumar 3. Smt. T. Hymavathy 4. Shri T. Manmohan 5. Smt. T. Pushpa 6. Smt. T. Geetha I am showing you that attested true copy of the said application given by the Commercial Tax Officer, Chikkadapally, Hyderabad. Please verify and tell whether the constitution mentioned therein was mentioned by you and signed by various partners. Ans.:- I have verified the application. The constitution of the firm mentioned therein is that of six partners. By way of clarification I wish to state that we wanted to change the constitution of six partners which we did not do so far. Q.No. 16:- I am showing a certified copy of the partnership deed dated 22-1-1990 of M/s. Hymavathy Enterprises issued by the Commercial Tax Officer, Chikkadapally, Hyderabad, which you have filed along with the application Form D for obtaining sales-tax license. As per the said deed of partnership, the constitution of the firm is of six partners as mentioned in the application in Form-D. Please verify and an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Authorities so far? Ans.: No." From the above deposition, it may be observed that the Managing Partner was not even aware that the retirement of the two lady partners admitted on 22-1-1990, by the deed of retirement dated 19-3-1990 was informed to the Sales Tax Authorities, even upto the date of deposition. So, it throws considerable doubt on the evidentiary value of the so-called letter addressed to the Sales Tax Department. It has been made out that the said letter was addressed by Shri Raj Kumar, working partner, and possibly, the Managing Partner, Shri Shivakumar was not aware at that time. Normally, the Managing Partner, being a more responsible functionary, should be aware of the induction and retirement of partners and intimations sent in that regard to the Government Departments, as he is expected to be well-versed with the affairs of the firm. 21. Reliance has been placed on the Form No. 45D allegedly given to ITO Survey. This was also not filed before the Assessing Officer. Apart from that, this is an event after 31-3-1990, i.e., after the assessee seems to have hit upon the idea of claiming set off of the loss of one unit against the income of the other unit. Same i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT v. B.M. Kharwar [1969] 72 ITR 603 that the legal character of a transaction cannot be ignored. As per the relevant portion of the head-note, the Apex Court observed as under- "It is now well-settled that the taxing authorities are not entitled, in determining whether a receipt is liable to be taxed, to ignore the legal character of the transaction which is the source of the receipt and to proceed on what they regard as "the substance of the matter". The taxing authority is entitled, and is indeed bound, to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the "substance of the transaction". This principle applies alike to cases in which the legal relation is recorded in a format document, and to cases where it has to be gathered from evidence-oral and documentary-and conduct of the parties to the transaction." In the present case, we are of the view that legal effect of separate partnership deed dated 24-2- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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