The Reader

The Apex Court, in Addl. CIT v. M. Venkata Narashima Rao & Co. (1976) 104 ITR 28 (SC), has laid down 10 principles for the purpose of deciding whether two separate firms can be treated as single entity or separate entities.

(a) The concept of partnership law is that a firm is not an entity or a person in law but only a compendious mode of designating persons who have agreed to carry on business in partnership.

(b) A firm as such is not entitled to enter into partnership with another firm or individual as the definition of 'person' in section 3(42) of the General Clauses Act, 1897, cannot be imported into section 4 of the Indian partnership Act.

(c) The law, English as well as Indian, has for some specific purposes, relaxed its rigid notions and extended a limited personality to a firm.

(d) Under the income-tax law a firm is an independent and distinct juristic person for the purpose of assessment as well as for recovery of tax as it is a 'person within the meaning of section 2(31) of the Act, having its own entity and personality. It is also a separate entity under the sales tax law.

(e) It is well settled that it is open to any person to arrange his or its affairs by adopting a legal device to reduce his or its tax liability to the minimum permissible under the law and such a device cannot be equated to an attempt to evade tax as long as his or its action is consistent but not contrary to law [see CIT v. Sivakasi Match Exporting Co. (1964) 53 ITR 204 (SC)].

(f) In law, there is no prohibition for the creation or existence of two or more separate firms or partnerships by the same partners.

(g) Whether a firm is genuine or bogus or benami is a pure question of fact. But whether two or more partnerships or firms constituted under different deeds of partnership are, in reality, only one partnership or not is a mixed question of fact and law.

(h) The prime guideline to determine this latter question is the cumulative effect or the 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.

(i) The very question as to whether there was really one partnership or two different assessable entities being two separate distinct partnerships unconnected with each other, has to be determined by the income-tax authorities for the purpose of computing the assessment under the Income Tax Act but not under the general law governed by the provisions of the partnership Act.

(j) The finding of the Tribunal about the object and intendment of the partnerships and businesses and the factum or otherwise of the interlacing and interlocking of the funds between the two partnerships is a question of fact and such finding would be binding on the High Court in a reference unless there is no material in support of it.

In the given case, the sole purpose of forming one more partnership firm is to keep the turnover below Rs. 40 lacs, so as to avoid the tax audit provisions. In such a situation,  both the separate firms can be treated as single entity by the Assessing Officer.

CA. B L Bhojwani,

Kota