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TMI Blog2003 (6) TMI 200X X X X Extracts X X X X X X X X Extracts X X X X ..... his 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 Pharmaceutical Works'. 2. The place of bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 partnership deed dated 24- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nguage and the same shall be closed 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 entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t all losses and/or damages that may be suffered by 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g ratio between the four old original partners, viz. mother and three sons, was restored. 8. For the assessment 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted, the contention of the assessee that the constitutions of both the firms viz. M/s. Arun Chemical and Pharmaceutical Works, Uppal and M/s. Hymavathy Enterprises (Crystal Coffee Club), RTC 'X' Roads, Hyderabad is the same is not maintainable as true and correct. Also, the contention that the carrying on of business as 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 ancillar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firms, viz. Arun Chemical and Pharmaceutical Works and M/s. Hymavathi Enterprises had common partners with common profit sharing ratios. It was also claimed that the business of M/s. Arun Chemical and Pharmaceutical Works almost came to a close in the year of account relevant for the assessment year 1990-91, and so, it opened 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvest the partnership with a juristic personality. As such, if there are two firms consisting of exactly the same partners but carrying on separate business, the real position in law is that there is only one firm and the incomes in the hands of both the firms should be aggregated in one assessment.' But, in the appellant's case, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e intention of the partners was to show the income of M/s. Hymavathi Enterprises (Crystal Coffee Club) as the income of the appellant firm. Taking all these factors into consideration, I will hold that Crystal Col fee Club run by M/s. Hymavathi Enterprises should be considered as part of the business of M/s. Arun Chemicals and Pharmaceutical 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nkata Narasimha Rao Co. [1976] 104 ITR 28, which has been over-ruled by the subsequent Full Bench decision of the A.P. High Court in the case of CIT v. G. Parthasarathy Naidu Sons [1981] 121 ITR 97. So, it is urged that the order of the CIT(A) deserves to be cancelled and that of the Assessing Officer required to be restored. 12. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ata Chemicals Ltd. v. Dy. CIT [2000] 72 ITD 1. 14. Finally, it is pointed out that the Assessing Officer questioned the claim for set off of loss of M/s. Hymavathi Enterprises against the profits of M/s. Arun Chemical and Pharmaceutical Works only in this year, and in all subsequent years, the results of both the units had been clubbed. 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 carr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... another concern. It appears to us that when the Department seeks to club the incomes of two separate firms on the ground that they actually constitute a single firm, the onus lies on the Department to prove that intention of the parties was to constitute a single firm. In the reverse case, like the present one, where the assessee seeks to plead 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, without any corresponding effect on M/s. Arun Chemicals and Pharmaceutical Works. This could not have been done unless M/s. Hymavathi Enterprises has been conceived from the inception as a separate entity. That is why there is no reference at all in the partnership deed dated 24-2-1989 constituting M/s. Hymavathi Enterprises, to the fact of 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 En ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfirmed having not sent any intimation subsequent to the Deed of Retirement dated 19-3-1990. The relevant portion of the said deposition taken from the assessment order reads as under:- "Q.No. 15:- I put it to you that you have filed application for registration as a dealer under section 12 of the Andhra Pradesh General Sales Tax Act, 1957, in Form 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 pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent entities with the different constituents and the assessments shall not be made separately? Ans.:- If the constitutions of both the firms, as mentioned by you, are different, they should be treated as different entities and assessed separately. Q.No. 19: Did you file any fresh deed of partnership mentioning the change in the constitution before the Sales-tax 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s. Hymavathi Enterprises, and the Balance Sheet of M/s. Hymavathi Enterprises stands on an independent footing, and there is no inter-linking of funds of the two units, as already mentioned above. 22. Lastly, it is made out that the Department has proceeded in subsequent years on the assumption that both the concerns constituted a single unit. The learned Departmental Representative pointed out that in the assessment year 1991-92, the Assessing Officer completed the assessment without taking cognizance of the order of the earlier year and did not give any reason for deviating from the same, and pleaded that what is legally correct should not be reversed simply on the basis of sins of commission or omission of a different Assessing Officer in a subsequent assessment year. We are in agreement with this view canvassed by the learned Departmental Representative, and while considering the legality and correctness of the view taken by the Assessing Officer for the year under appeal, we are not bound by the stand taken for the subsequent years. 23. Further, the Apex Court has observed in the case of CIT v. B.M. Kharwar [1969] 72 ITR 603 that the legal character of a transaction cann ..... X X X X Extracts X X X X X X X X Extracts X X X X
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