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TMI Blog1981 (4) TMI 133X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 2. By another partnership deed dt. 17th Nov., 1977, it was stated that a firm by the name of Sri Laxmi Ganapathi Rice Stores was constituted. The partners of this firm (hereinafter referred to as the new firm) were the same as the partners of M/s Parimi Ramagopal Others (hereinafter referred to as 'the assessee firm'). However, all the partners shared in the profits and losses equally. According to cl. 4, the managing partner was to be Sri Parimi Apparao,. The new firm carried on business at 27-6-13A, Buchi Sundararao Street, Visakhapatnam. 3. The CIT noticed the aforesaid constitution, viz., the partners being the same, and he also noticed that the nature of the business was the same. According to him, there was mixing up i.e., inter-lacing and inter-locking of finances, and the initial capital of the new firm flowed out of the assessee firm and, therefore, he called upon the assessee firm to show cause why the income of the new firm should not be included in its hands. 4. The assessee claimed that there was no bar against the creation of two or more separate firms with the same partners. It contended, there was no inter-lacing and inter-locking of funds by virtue of wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to the fact that there was substantial inter-purchase and sale between the two firms and taking into account what according to him was the cumulative effect of totality of all material factors relating to the objects and intentions of the partnership business, their nature, character and identity coupled with the factor of inter-lacing and inter-locking of funds, he concluded that the businesses were one and the same though carried on by entities constituted under two partnership deeds. 6. In the light of the aforesaid conclusions, the CIT held that the assessment made on the assessee firm for the years 1978-79 and 1979-80 without including the income of the new firm were erroneous and prejudicial to the interests of the Revenue. He accordingly, by two separate orders, set aside the assessments for the years 1978-79 and 1979-80 with the direction that the ITO should remake the assessments after including the income arising from the business of the new firm in the hands of the assessee firm. 7. Aggrieved with the decision of the CIT, the assessee is in appeal. The ld. counsel for the assessee submitted that capital invested in the new firm by the partners was not out d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid facts could lead to the inference that both the firms were one and the same. 9. The ld. counsel sought to elucidate the concepts of inter-lacing, inter-locking etc. He submitted that these concepts were first enunciated by Rowlatt J. in the case of Scales vs. George Thomson Co. Ltd. (13 Tax Cases 83) and the fact that there was any inter-connection, inter-lacing inter-dependance or unity embracing two businesses was considered repeatedly by the Supreme Court as an adequate test for determining whether two businesses were the same. In the course of doing so, the Supreme Court had evolved certain rests to determine whether there was inter-connection, inter-lacing and inter-dependance and in the case of CIT vs. Prithvi Insurance Co. Ltd. (1967) 63 ITR 632 (SC), the Supreme Court found at page 638 that inter-connection, inter-lacing, inter-dependance and unity were furnished in that case by the existence of (a) common management, (b) common business organisation, (c) common administration, (d) common funds and (e) common place of business. These factors which led the Supreme Court to infer that there was inter-connection etc., in the case of Prithvi Insurance Co. Ltd. we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... later Full Bench decision of the Andhra Pradesh High Court in the case of CIT vs. G. Parthasarathy Naidu Sons (1980) 121 ITR 97 (AP), the ld. counsel stated that at page 108 their Lordships had enunciated 10 principles and he submitted that under the Income-Tax Law a firm was an independent and distinct entity which was separately assessable and there was no prohibition for creation or existence of two or more separate firms by the same partners, and in particular he stated that the prime guideline to determine whether different partnerships were in reality only one partnership or not was the cumulative effect of the totality of all material factors relating to the object and intentment of the partnerships and businesses, their nature, character and identity coupled with the factum or otherwise of inter-lacing and inter-locking of funds between the firms. The ld. counsel submitted that he had established, according to him, that there was no inter-lacing and inter-locking of funds between the two firms in the present case and further it had been stated by the assessee that they came to know that a new building was being let out on lease and other merchants from Kakinada, Pithapura ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cing, inter-locking etc., was in the context of determining whether two businesses were the same or not within the meaning of s. 24(2) of the Indian IT Act, 1922. 15. Averting to the judgment of the Andhra Pradesh High Court in CIT vs. G. Parthasarathy Naidu Sons (1980) 121 ITR 97 (AP), the ld. Deptl. Rep. submitted that their Lordships had placed reliance on the observations of the Supreme Court in CIT vs. A.W.Figgies and Co. (1953) 24 ITR 405 (AP) at 409) which read as under: "A firm can be charged as a distinct assessable entity as distinct from its partners who can also be assessed individually.......... The partners of the firm are distinct assessable entities, while the firm as such is a separate and distinct unit for purposes of assessment. Sec. 26, 48 and 55 of the Act fully bear out this position. These provisions of the Act go to show that the technical view of the nature of a partnership, under English law or Indian law, cannot be taken in applying the law of income-tax." He went on to submit that the Gujarat High Court had occasion to consider the aforesaid observations of the Supreme Court at length in the case of CIT vs. Madhukant H. Mehta, Taxman Vol. 5 Par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered as leading to the inference that both the firms are the same in the light of the well-known fact of which judicial notice could be taken, viz., that new subscribers have to wait for considerable periods for telephone connections. 18. We have already set out the relevant portion of the observations of the Supreme Court in CIT vs. A.W. Figgies Co. which had been referred to by the Andhra Pradesh High Court in the Full Bench decision. The observations stated that a firm can be charged as a distinct assessable entity as distinct from its partners who can also be assessed individually and that the partners of the firm are distinct assessable entitled while the firm as such is a separate and distince unit for purposes of assessment as relevant provisions of the Act fully bear out. Even in the later pronouncement of the Gujarat High Court, these particular observations of the Supreme Court were not considered to be in conflict with any later pronouncement of the Supreme Court itself. In CIT vs. R.M. Chidambaram Pillai 1977 CTR (SC) 71: (1977) 106 ITR 292 (SC), the case which Gujarat High Court considered as declaring the law on the point by the Supreme Court, the Supreme Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me down to about 12 1/2 per cent. In our view, when a business is newly set up for the first time, making of larger purchases from a known party cannot lead to the inference that the two firms are the same. The business premises were different, and looking to the large extent of turnover of the assessee and the fact that there have been large sales and purchases with other parties, there is no material to suggest any common business organisation or common administration. The partners were no doubt the same, but merely because the partners were the same an inference of common management does not flow when the transactions were to a considerable extent with several outside parties. We have already stated the place of business was also not the same. In the light of these features being different, looking to the test laid down by the Supreme Court, we cannot hold that there was any inter-connection, inter-lacing, inter-dependance or unity of control. The mere fact that the assessee may have lent the use of its telephone to the new firm, even if it is taken as a fact, would not make the firm, same looking to the difficulty in getting new telephone connections. The ld. Deptl. Representat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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