1. These appeals are interconnected and were heard together. Therefore, the same are being disposed of by the common order for the sake of convenience-Two issues are involved/firstly, whether the assessees before us are entitled to registration under Section 185 and secondly, whether the business income of M/s Rural Agencies can be clubbed in the hands of M/s. Rural Suppliers.
2. The brief facts giving rise to these appeals as gathered from the record are these. First we take up the case of M/s Rural Suppliers.
This firm deals in mono blocks, pump, and pipes and its fittings, electric motors, etc. Initially, the business was started by Shri Nathu Z. Attarde of Jalgaon as proprietary business and continued as such upto asst. yr. 1970-71. From asst. yr. 1971-72, the said business was taken over by the partnership firm under the same name and style having following partners ; As per Clause 8 of this deed, Nathu Attarde was to manage the affairs of the business and signed all the documents. Bank a/c was also to be operated by him alone. The capital of Rs. 15,000 introduced by Dinesh Attarde came out of the amount gifted to him by his father Shri Nathu Attarde. This firm underwent constitutional charges vide partnership deed dt. 20th Oct., 1971, as under : The new partner was taken as new branch at Burhanpur was to be opened.
He also contributed Rs. 15,000 as his capital, This amount also came from the gift made by his father Nathu Attarde. The terms of earlier partnership remained the same in this partnership deed also. There was a third change in the partnership vide partnership dt. 14th Nov., 1974.
This time, there was only change in the profit and loss sharing ratio as under : The terms of partnership deed continued to be the same. The reason for change was that efficiency of Nathu Attarde was being reduced due to old age and further, he wanted to devote some time to agricultural activity. Thereafter, there was fourth change in the profit-sharing ratio vide partnership dt. 4th Nov., 1975, asunder : Clause 9 of this deed still provided that Nathu Attarde would operate bank a/c and to collect cheques from Government and semi-Government organisations.. Since then, the constitution of partnership remains the same.
3. Now we take up the case of the Rural Agencies. This firm came into existence under the partnership dt. 5th April, 1981 having the following constitution : The business to be carried on under the aforesaid deed was to deal in electric motors, oil engines, pumps and accessories. According to Clause 8, the Bank a/c was to be operated by Nathu Attarde and other partners were only sleeping partners.
4. After considering the above factual aspects and legal position under the Indian Partnership Act, 1932, the AO concluded that both the firms belonged to the same group of persons. The reasons given by him were as under : 1. That relationship between the persons forming the alleged partnership was non-commercial, the firms were constituted only to reduce the tax incidence. Hence, in reality, there was no partnership firm.
3. The business shop was taken on rent by M/s Rural Suppliers on yearly rent of Rs. 4,000. The business of Rural Agencies was carried on from the same business premises, but no rent was paid by this firm.
4. The Rural Agencies was also utilising the furniture of M/s Rural Suppliers. There was also common counter for both the firms. Hence, there was unity of control.
5. Capital of Dinesh and Sudhakar was also provided by Nathu Attarde by way of gift.
In support of his conclusion, the AO relied on the Supreme Court decision in the case of Ladhuram Taparia v. CIT (1962) 44 ITR 521 (SC).
Accordingly, the AO refused, to grant the registration under Section 185(1)(b) and held that M/s Rural Suppliers was liable to be assessed in the status of BOI. The income of M/s Rural Agencies was also clubbed in the hands of Rural Suppliers on substantive basis. On the other hand, M/s Rural Agencies was assessed in the status of BOI on protective basis.
5. On appeal, the CIT(A) did not agree with the conclusions of the AO.According to him, in order to club the income of two firms, there must be interlacing and interlocking of the funds as held by Kerala High Court in the case CIT v. Sree Radha Krishna Industries (1990) 181 ITR 368 (Ker). In the absence of such test, the factual aspects taken into consideration by AO would be irrelevant. Hence, it was held by him that clubbing of income was not justified.
5.1. He also accepted the contention of the assessee that no assessment could be made in the status of body of individuals (BOI) on the basis of return filed by the registered firm in view of Bombay High Court decision CIT v. Associated Cements & Steel Agencies (1984) 147 ITR 776 (Bom). At the best, the AO could have treated the firm as URF. But, for assessing it in the status of BOI, separate proceedings should have been initiated by the AO.5.2. Regarding refusal of registration, it was noticed by him that these firms were allowed registration in the past and there was no finding that any partner was Benamidar of the other. The mere fact that first the partner gifted money which was introduced as capital by other partner and the fact that the first partner operated bank a/c did not establish that two partners were Benamidars of the first partner.
According to him, something more is required i.e., fruits of business must be enjoyed by the first partner. Since there was no material to establish the same, it could not be said that first partner was Benamidar of the other partners. Accordingly, it was held by him that partnerships were valid partnerships and registration could not be refused. Aggrieved by the same, the Revenue is in appeal before the Tribunal.
6. We have heard both the parties. The learned Departmental Representative has not been able to oppose seriously the findings and conclusions arrived at by the CIT(A). However, he has relied on the reasonings given by the AO. On the other hand, the learned counsel for the assessee has reiterated the reasonings given by the CIT(A).
Therefore, it is not necessary for us to repeat the submissions of both the parties. However, it is mentioned that the learned counsel for the assessee has relied upon the decision of Supreme Court in the case of Dy. CST v. Kelukutty (1985) 155 ITR 158 (SC).
7. The rival submissions of the parties have been considered carefully.
The legal position in respect of the issues before us is now well settled by the decision of Supreme Court in the case of Kelukutty (supra) wherein it has been held that validity of the partnership has to be seen with reference to the provisions of Indian Partnership Act.
Once the firms are found valid in accordance with such Act, then the question would arise whether the income of one firm can be clubbed with the income of the other firm. In this regard, the intentions of the partners will have to be seen along with surrounding circumstances and evidence as to the interlacing or interlocking of the management, and other incidents of the respective business. It would be useful to quote the relevant observations of the Supreme Court as under : "1. Where the same partners enter into two separate agreements of partnership, each agreement may constitute a distinct and separate partnership and, therefore, a distinct and separate firm.
2. An agreement between the partners to carry on a business and share its profits may be followed by a separate agreement between the same partners to carry on another business and share the profits therein. The intention may be to constitute two separate partnerships and, therefore, two distinct firms or merely to extend a partnership, originally constituted to carry on the business, to the carrying on of another business. It will all depend on the intention of the partners. The intention of the partners will have to be decided with reference to the terms of the agreement and all surrounding circumstances, including evidence as to the interlacing or interlocking of management, finance and other incidents of the respective businesses.
3. Where it is claimed that there are two partnership firms and not one constituted by the same persons and carrying on different businesses, the assessing authority must test the claim in the light of the partnership law.
4. It is only after that question has been first determined, namely, whether in law there is only one partnership firm or two partnership firms, that the next question arises, viz., whether the turnover is assessable in the hands of the partnership firm as a taxable entity, separate and distinct from the partners. There is first a decision under the law of partnership, thereafter, the second question, the question as to assessment, arises under the tax law." 8. Now, it is also well settled legal position that if the ITO finds on investigation that a number of firms carrying on business under different firm names really belong to one and same group of persons, he can refuse to register these firms under the IT Act and treat the aggregate income of all the firms as income of this group of persons.
Further, the IT authorities are not bound to register a firm merely because the firm has been registered as such under the Partnership Act.
Reference can be made to the Supreme Court judgment in the case of Ladhu Ram Taparia (supra).
9. Regarding the validity of the partnership under the Indian Partnership Act, 1932, it would be useful to refer to the judgment of Supreme Court in the case of K.D. Kamat & Co. v. CTT (1991) 82 ITR 680 (SC) wherein it has been held as under : "The legal requirement under Section 4 of the Partnership Act to constitute a partnership in law are : (i) there must be an agreement to share the profits or losses of the business; and (ii) the business must be carried on by all the partners or any of them acting for all. There is implicit in the second requirement the principle of agency." It was also held by their Lordships that vesting of control and management in one partner by agreement was not destructive of the theory of partnership. The relevant portion from the headnote is quoted below : "Held, reversing the decision of the High Court, that the facts that the exclusive power and control, by agreement of the parties, was vested in one Panwar, and the further, circumstance that only one partner could operate the bank accounts or borrow on behalf of the firm was not destructive of the theory of partnership provided two essential conditions were satisfied, namely : (i) that there should be an agreement to share profits and losses of the business of the firm; and (ii) that the business must be carried on by all the partners or any of them acting for all. Clause 5 read with other clauses showed that the first condition, namely, all persons agreeing to share profits or losses, was satisfied. The second condition was also satisfied; even though vast powers of management and control had been given to K, the business was being carried on by him on behalf of all the partners. Both the ingredients of partnership was satisfied and the firm could be granted registration under Section 26A.10. Considering the above legal position and facts of the case before us, we are of the opinion that there is no merit in the appeals by the Revenue. In the present cases, both the partnership firms are evidenced by the partnership agreements. As per the agreements, the parties had agreed to share the profits and losses of the business. To that extent, there is no dispute. The main objection of the AO is that the entire control of the business was in the hands of one partner Shri Nathu Attarde. This objection of the AO cannot be approved in the light of Supreme Court judgment in the case of K.D. Kamath & Co. (supra).
According to the provisions of Indian Partnership Act, 1932, the control and management of the business can be vested in one partner by the agreement as held by the Supreme Court in the above case. The other objection of the AO is that capital by other partners was supplied by Shri Nathu Attarde. This objection, in our opinion, is also not of relevance since there is no requirement in Section 4 of the Indian Partnership Act, 1932, that each partner must contribute capital.
Reference can be made to Madras High Court decision in the case of A.M.Abdul Rahim & Co. v. CTT (1965) 56 ITR 556 (Mad), relied upon by the learned counsel for the assessee before the CIT(A). Accordingly, it is held that both these partnership firms were validly constituted in law.
11. Now the only question which remains to be considered is whether the same business is carried on by both the firms or both the firms were controlled by the same group of persons. This aspect has to be decided on the facts of the case by applying the test of interlacing or interlocking of funds as well as management and other incidence of business and not on the basis of items dealt in by the firms. After going through the facts discussed by the AO we do not find any interlacing or interlocking of funds or management. There is no finding of AO that funds required to run M/s Rural Agencies were provided by M/s Rural Suppliers or vice versa. Further, there is no finding that funds of these two firms were mixed with each other. It is also not the case of the AO that trade creditors or debtors were same in both these firms. The list of employees of both the firms also shows that separate employees were kept in different businesses. M/s Rural Agencies had a separate godown for keeping the stock, for which rent was paid by that firm. This rent had been duly debited to the P&L a/c. Merely the fact that common sale counter was kept for convenience of the customers is no ground for drawing any adverse inference. Further, separate account books were maintained as contended before the CIT(A). It is also pertinent to note that there is no finding that profits of M/s Rural Agencies were enjoyed by M/s Rural Suppliers which is one of the necessary findings for holding that a particularly firm is a Benamidar of another firm. No material has been brought to our notice to controvert these factual aspects. Therefore, we are of the view that there was no interlacing or interlocking of funds and management between the two firms. Consequently, it cannot be said that income of M/s Rural Agencies really belonged to M/s Rural Suppliers.
12. The decision of Supreme Court in the case of Ladhu Ram Taparia (supra) has been heavily relied on by the AO. The said decision, in our opinion, is fully distinguishable on the facts of that case. In that case, there was a positive finding that there was interlacing and interlocking of funds and management. In order to appreciate the same, it would be useful to refer to those facts as found by the Tribunal in that case and reproduced by the Supreme Court in view of judgment at p.
524 : "The nature of the business of firms I to IV is practically the same. The businesses are mainly dealings in piece-goods and yarn.
Dealings are mostly wholesale in each case. Regarding firms Nos. V and VI, the business consisted in dealings in standard cloth supplied by Government. It has been found that each of the firms had been considerably financed by the other firm. It is noteworthy that almost the same outside parties had financed the aforesaid firms, namely, I to VI. On analysing the trading account of the various firms it is found that huge purchases have been made from and huge sales have been made to allied concerns (excepting for firm Nos. V and VI which did handling of agency work under the Government of Bengal). It appears that the goods had been shifted from one concern to another and only a divided portion of profits is actually shown by each of the firms. It is further found that most of the outside parties to whom goods had been sold and from whom goods had been purchased were the same for each of the firms I, II, III and IV. Other points of striking similarity, viz., (a) that businesses of the firms had been carried on nearly at same place, (b) the rent register produced by the landlord of the premises showing that the rent of all the firms had been paid in most cases on the same date during the month, (c) goods had been insured with the same company, viz., Jupiter General Insurance Co. Ltd. are also noticed." Further, the Supreme Court referred to the following facts appearing at pp. 524 & 525 : "On an analysis of the replies received from the banks in which accounts were maintained by the firms, the ITO observed that the declarations made by the partners to the banks 'were mostly conflicting with the constitution of the firms declared before' him, that Ladhuram had control over the business carried on by firm No. II though he was not a partner of that firm and that he had in fact authority to operate some of the accounts, that Ganpatrai had declared himself to be partner of firm No. III to the Nath Bank Ltd. even though he was not a partner of that firm, that declarations of the constitution of the firms given before the banks did not in a majority of cases tally, that the employees of some firm declared themselves to be proprietors of other firms, that Ladhuram and his sons Hanumanbux and Ladhuram and Ganeshmal jointly operated some accounts indicating that they were not separate and that Ganeshmal, sons of Ladhuram, had operated some of the accounts of firm Nos. I and IV in which he was not a partner. According to the ITO it appeared from the declarations given to the banks that "little discrimination" was observed between Ladhuram and his sons in the matter of control of funds of the firms. He, therefore, concluded that all the six firms belonged to one and the same group of persons, namely, Ladhuram and his sons and Ganpatrai and that Ladhuram was the 'real man behind the scene and he played the principal part.' The ITO accordingly refused to register the firms under Section 26A of the IT Act for the year of assessment 1945-46 and treated the aggregate income of the six firms as assessable in the hands of firm No. I." The above facts clearly show that there was complete interlacing and interlocking of funds and management which is lacking in the present case.
13. In view of the above discussion, it is held that both the firms were valid partnership firms under the provisions of Indian Partnership Act, 1932. Further, there was no interlacing or interlocking of funds and management of these two firms. Therefore, the AO was not justified in holding that both the firms belonged to the same group of persons.
Consequently, the orders of CTT(A) in both the cases are upheld.