Full Judgment Text
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PETITIONER:
DEPUTY COMMISSIONER OF SALES-TAX, (LAW) BOARD OF REVENUE (TA
Vs.
RESPONDENT:
MESSRS K. KELUKUTTY
DATE OF JUDGMENT03/05/1985
BENCH:
PATHAK, R.S.
BENCH:
PATHAK, R.S.
VENKATARAMIAH, E.S. (J)
CITATION:
1985 AIR 1143 1985 SCR Supl. (1) 135
1985 SCC (4) 35 1985 SCALE (1)1264
ACT:
Kerala General Sales Tax Act 1963:
Partnership Firms-Two-One dealing in timber-Another
selling saw dust-Partners common in both firms-Assessment of
sales tax-Whether to be treated as two firms.
Taxation:
Partnership firm-Assessment of partnership income-Duty
of assessing officer-First decide legal identity of assessee
and then apply relevant tax law.
Indian Partnership Act 1932:
Partners-Who are-Partnership agreement-What is-
Intention of partners-Determination of.
HEADNOTE:
The respondent in the appeal was a partnership firm
dealing in timber and consisted of six partners. It filed
returns of its taxable turnover for the assessment years
1968-69 and 1969-70 under the Kerala General Sales Tax Act,
1963 and the assessments were completed by the Sales Tax
Officer. Subsequently, the Sales Tax Officer discovered that
the respondent-firm owned a Saw Mill and that the Saw Mill
was run by another partnership firm which consisted of the
same partners as the respondent-firm. It was further noticed
that during the relevant assessment years the Saw Mill firm
had sold saw dust but had not been assessed to sales tax on
that turnover. The Sales Tax Officer took the view that both
she respondents-timber firm and the Saw Mill firm consisted
of identical partners, the two businesses carried on
respectively, by them had to be treated as the business of a
single partnership firm and, therefore, the turnover of the
sale of saw dust had to be included in the earlier
assessments made on the respondent-Timber firm. The
assessment orders were upheld by the Appellate Assistant
Commissioner.
The appeals filed by the respondent-Timber firm before
the Sales Tax Appellate Tribunal were allowed and the cases
were remanded for fresh consideration.
The Revenue applied to the High Court, but the revision
petitions were dismissed. The High Court relying on the
decision of this Court in State of
136
Punjab v. M/s. Jullundur Vegetables Syndicate, [1966] 17 STC
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326 held that the Saw Mill partnership firm was a
partnership firm distinct from the respondent Timber firm
for the purposes of sales tax assessment and the turnover of
the one could not be included in the turnover of the other.
Dismissing the Appeals to this Court,
^
HELD: 1. The approach adopted by the High Court is not
sound. The true solution has to be found not in the tax law
but in the partnership law. The orders of the High Court
dismissing the Tax Revision Cases are maintained. The orders
of the Sales Tax Appellate Tribunal remanding the case are
confirmed. Instead of the cases going back to the assessing
officer they shall stand remanded to the Appellate Assistant
Commissioner. [144 D-E]
State of Punjab v. M/s. Jullundur Vegetables Syndicate
[1966] 17 S.T.C. 326, distinguished.
2. In every case when the assessee professes that it is
a partnership firm and claims to be taxed in that status,
the first duty of the assessing officer is to determine
whether it is, in law and in fact, a partnership firm. For
determining whether there is a firm, the assessing officer
will apply the partnership law, subject of course, to any
specific provision in that regard in the tax law modifying
the partnership law. If the tax law is silent, it is the
partnership law only to which he will refer. Having decided
the legal identity of the assessee, that it is a partnership
firm, he will then turn to the tax law and apply its
relevant provisions for assessing the partnership income.
142 D-F]
Commissioner of Income-Tax, West Bengal v. A. W.
Figgies and Company and Others, [1953] 24 I.T.R. 405,
Jesingbhai Ujamshi v. Commissioner of Income Tax, Bombay
Mofussil, [1950] 18 I.T.R. 23, Jeshingbhai Ujamshi v.
Commissioner of Income Tax, Bombay, [1955] 28 I.T.R. 454,
R.N. Oswal Hosiery and Mahabir Woollen Mills v. Commissioner
of Income-Tax, Punjab, [1968] 70 I.T.R. 843, Commissioner of
Income-Tax, A.P.-III v. G. Parthasarathy Naidu & Sons.,
[1980] 121 I.T.R. 97, Income Tax Commissioner for City of
London v. Gibbs, 10 I.T.R. Suppl. 121, referred to.
In the instant case, there are two businesses, a
business in timber and a business in saw dust. Both
businesses were carried on by the same partners, one as a
partnership firm called K. Kelukutty, and the other under
the name M/s. K.K.K. Sons Saw Mills, said to be a separate
partnership firm. On the material before the Court, it is
not possible to say, whether there is one firm or two. That
is a question which appropriately falls for examination by
the authorities constituted under the Kerala General Sales
Tax Act, 1963.
144 B-C]
3. Having regard to the definitions of "dealer" and
"person" in sections 2 (viii) and 2 (xvi-A) of the Kerala
General Sales Tax Act, 1963 a partnership firm must be
regarded under that Act as an assessable entity separate and
distinct from its individual partners. However, the Act
contains
137
no provision which bears on the identity of a partnership
firm. Therefore, recourse must be had for that purpose to
the partnership law alone. Where it is claimed that there
are not one but two partnership firms constituted by the
same persons and carrying on different businesses, the
assessing authority must test the claim in the light of the
partnership law. It is only after that question has been
determined namely, whether in law there is only one
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partnership firm or two partnership firms, that the next
question arises: whether the turnover is assessable in the
hands of the partnership firm as a taxable entity separate
and distinct from the partner ? There is first a decision
under the law of partnership, thereafter the second question
arises, the question as to assessment under the tax law.
[139 C-D; 142 G-H; 143 A]
4. Persons who have entered into partnership with one
another are called individually "Partners", and collectively
"a firm". The relationship between those persons constitutes
the partnership, and is founded in the agreement between
them, the partnership agreement. A partnership agreement is
the source of a partnership, it also gives expression to the
other ingredients defining the partnership, viz. specifying
the business agreed to be carried on, the persons who will
actually carry on the business, the shares in which the
profits will be divided etc. Each partnership agreement may
constitute a distinct and separate partnership, and
therefore distinct and separate firms. The firm name is only
a collective name for the individual partners but each
partnership is a distinct relationship. The partners may be
different and yet the nature of the business may be the
same. 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 to extend merely a partnership originally
constituted to carry on one 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
the surrounding circumstances, including evidence as to the
interlacing or interlocking of management, finance and other
incidents of the respective businesses. [144 C-H]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 2585
and 2586 of 1978.
From the Judgment and Order dated 14.2.1978 of the
Kerala High Court in T.R. C. No. 6 and 9 of 1977.
V.J. Francis for the Appellant.
S.T. Desai (A.C.) for the Respondent.
The Judgment of the Court was delivered by
138
PATHAK, J. These appeals by special leave are directed
against the judgment and order dated February 14, 1978 of
the High Court of Kerala dismissing two tax revision
petitions arising out of assessments made under the Kerala
General Sales Tax Act, 1963.
The respondent, Messrs. K. Kelukutty is a partnership
firm dealing in timber. It consists of six partners. It
filed returns of its taxable turnover for the assessment
years 1968-69 and 1969-70 under the Kerala General Sales Tax
Act, 1963, and the assessments were completed by the Sales
Tax Officer. Subsequently, the Sales Tax Officer discovered
that the partners of the respondent firm owned a Saw Mill,
and the Saw Mill was run by a partnership firm Messrs.
K.K.K. Sons Saw Mills which consisted of the same partners
as the respondent firm. He found that during the assessment
years 1968-69 and 1969-70 they had sold saw dust from the
mill, but had not been assessed to sales tax on that
turnover. The Sales Tax Officer took the view that as both
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Messrs. K. Kelukutty and Messrs. K.K.K. Sons Saw Mills
consisted of identical partners, the two businesses carried
on respectively by them had to be treated as the business of
a single partnership firm and, therefore, the turnover of
the sale of saw dust had to be included in the earlier
assessments made on the respondent firm. The assessment
orders were upheld by the Appellate Assistant Commissioner,
Sales Tax. Thereafter, the appeals filed by the respondent
firm before the Sales Tax Appellate Tribunal were allowed by
its order dated March 30, 1976 and the cases were remanded
for fresh consideration. The Revenue applied to the High
Court in revision, Tax Revision Cases Nos. 6 and 9 of 1977,
on the following two questions:-
(a) Was the Appellate Tribunal justified in law in
holding that the reasoning in the decision
reported in 70 ITR 843 is applicable to the
instant case and directing a further investigation
and denovo disposal of the matter, in the light of
the observations contained in paragraph 15 of the
order ?
(b) In the light of admitted or proved fact that the
partners of the assessee’s firm and that of the
firm K.K.K. Saw Mills are the same, was the
Appellate Tribunal justified in its view that
there is no bar in there being two firms with the
same partners, carrying on business independently
? Is not the said
139
approach and view against the principles of
Partnership Act, and the ratio of the decision
reported in 21 STC 72 and 14 ITR 272 ?
On February 14, 1978, the High Court of Kerala
dismissed the two revision petitions in the view that
Messrs. K.K.K. Sons Saw Mills was a partnership firm
distinct from the respondent firm for the purposes of sales
tax assessment and the turnover of one could not be included
in the turnover of the other. Reliance was placed by the
High Court on the decision of this Court in State of Punjab
v. M/s Jullunder Vegetables Syndicare.(1)
The word "dealer" has been defined by cl. (viii) of s.
2 of the Kerala General Sales Tax Act to mean "any person
who carries on the business of buying, selling, supplying or
distributing goods..." and the word "person" has been
defined by cl. (vvi-A) of s. 2 of the Act as including a
firm. Therefore, a partnership firm must be regarded under
that Act as an assessable entity separate and distinct from
its individual partners. That would be in line with the view
taken by this Court respecting a partnership firm as an
assessable entity under the Income Tax Act. See Commissioner
of Income-Tax, West Bengal v. A. W. Figgies and Company and
Others(2). The question remains, however, whether when the
partners constituting a partnership firm carrying on one
business constitute thereafter another partnership firm
carrying on a separate and distinct business are there two
distinct partnership firms in whose hand the turnover of the
two businesses falls to be respectively assessed or is there
in law only a single partnership firm liable to assessment
on the turnover of both businesses ?
Before we proceed to examine this question, reference
may be made to some relevant decisions of the Courts. In
Vissonji Sons & Company v. Commissioner of Income Tax,
Central,(3) a case under the Indian Income Tax Act, 1922,
Beaumont C.J., speaking for the Bombay High Court, expressed
the view that in law a firm had no existence independently
of its partners, and that if there are two firms consisting
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of exactly the same partners and they carry on separate
businesses, the real position in law is that there is only
one firm.
140
Subsequently, however, in Jesingbhai Ujmashi v. Commissioner
of Income Tax, Bombay Mofussil, (1) the same High Court
speaking through Chagla C.J., observed that the observations
of Beaumont C.J. were obiter merely, and that it was
perfectly permissible in law that the same partners should
constitute two different firms for the purpose of the
Income-tax law leaving the question open as one of fact
whether there are two separate firms or only one firm or
whether one of the businesses carried on by one firm was in
fact a business carried on by the other firm. That view was
reaffirmed by the Bombay High Court in Jeshingbhai Ujamshi
v. Commissioner of Income-Tax, Bombay(2) where it was
explained that there can be two separate firms in the eyes
of the Income-tax Act even if the partners are the same in
both the firms provided the businesses carried on by the
firms are different. It was further observed that the
correct test to determine whether the businesses are the
same or different businesses is whether there is any
interlocking or interlacing between the two businesses. The
point was considered by the High Court of Punjab and Haryana
in R.N. Oswal Hosiery and Mahabir Woollen Mills v.
Commissioner of Income-Tax, Punjab, (8) which after
considering the earlier authorities on the point concurred
with the opinion of the Bombay High Court in Jeshingbhai
Ujamshi (supra). A contrary view was taken by a Division
Bench of the High Court of Andhra Pradesh in Addl.
Commissioner of Income Tax, A.P. v. M. Venkata Narasimha Rao
& Co.(4) but that decision was over-ruled by a Full Bench of
the same High Court in Commissioner of Income-Tax, A.P.-III
v. G. Parthasarathy Naidu & Sons.(5) where the learned
Judges agreed with the view expressed by the High Court of
Bombay in Jeshingbhai Ujamshi (supra) and by the High Court
of Punjab and Haryana in R.N. Oswal Hosiery and Mahabir
Woollen Mills (supra). This Court in The State of Punjab v.
Jullunder Vegetables Syndicate (supra) declared that
although under the partnership law a firm is not a legal
entity and only consists of the individual partners for the
time being, it was a legal entity for the purposes of the
Income-tax law as well as the Sales-tax law. That was a case
where this Court was called upon to consider whether an
assessment could be made on a firm under the Punjab Sales-
tax Act after its dissolution on the turnover of sales
affected during its existence. In our opinion, that question
cannot
141
be identified with the one before us. The Revenue has
invited our attention to Mahendra Kumar Ishwarlal & Company
v. The State of Madras,(1) but in that case the Madras High
Court has assumed that the same partners cannot constitute
two different partnership firms, and on that assumption has
concluded that no sale transaction could take place between
the two firms.
Except for the observations of Beaumont C.J. in
Vissonji Sons Company (supra) and the overruled decision of
the High Court of Andhra Pradesh in M. Venkata Narasimha Rao
& Co. (supra) the High Courts, in the cases mentioned
earlier, have proceeded to hold that in the eyes of the tax
law you can have two partnership firm composed of the same
partners carrying on different businesses. The corner stone
of that view is that for the purposes of the income tax law
each partnership firm must be regarded as an assessable
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entity separate and distinct from its partners. The approach
proceeds upon a conceptual perspective of the tax law and
apparently assumes that otherwise, under the partnership
law, the conclusion would have been that there is only one
partnership firm carrying on two different businesses.
It seems to us that the approach adopted by the High
Courts is not sound, and that the true solution has to be
found not in the tax law but in the partnership law. We are
concerned here with the Kerala General Sales-tax Act. There
is no doubt that under that Act a partnership firm must be
regarded as an assessable entity. What precisely is the
significance of that concept ? Does the tax law clothe a
partnership firm with juristic personality ? How far does
the tax law depart from the fundamental concept embodied in
the partnership law that a business carried on by a
partnership firm is, in its material essence, a business
carried on by individual members in partnership, and that a
name given to a partnership firm is nothing more than a
compendious description of the partners carrying on the
business ?
As long ago as Watson and Everitt v. Blundan,(2) Romer
L.J. said that for taxing purposes "a partnership firm is
treated as an entity distinct from the persons who
constituted the firm". This
142
dictum was approved by the House of Lords in Income Tax
Commissioners for City of London v. Gibbs,(1) and was
accepted as good law in India in respect of a partnership
firm under the Indian Income-tax Act, 1922 in A. W. Figgies
and Co. (supra). What that implies is that for the purposes
of assessment to tax the income of the partnership firm has
to be assessed in the hands of the firm as a single unit,
the firm itself being treated as an assessable entity
separate and distinct from the partners constituting it. The
firm is an assessable unit separate and distinct from the
individual partners, who as individuals constitute
assessable units separate and distinct from the firm. It is
on that basis that the provisions of the tax law are
structured into a scheme providing for the assessment of
partnership income. We do not think the principle goes
beyond the purposes of that scheme. It does not confer a
corporate personality on the firm. Beyond the area within
which that principle operates, the general law, that is to
say, the partnership law holds undisputed domain.
Now in every case when the assessee professes that it
is a partnership firm and claims to be taxed in that status,
the first duty of the assessing officer is to determine
whether it is, in law and in fact, a partnership firm. The
definition in the tax law defines an "assessee" or a
"dealer" as including a firm. But for determining whether
there is a firm, the assessing officer will apply the
partnership law, subject of course, to any specific
provision in that regard in the tax law modifying the
partnership law. If the tax law is silent it is the
partnership law only to which he will refer. Having decided
the legal identity of the assessee, that it is a partnership
firm, he will then turn to the tax law and apply its
relevant provisions for assessing the partnership income.
The Kerala General Sales-tax Act contains no provision
which bears on the identity of a partnership firm.
Therefore, recourse must be had for that purpose to the
partnership law alone. Where it is claimed that they are not
one but two partnership firms constituted by the same
persons and carrying on different businesses, the assessing
authority must test the claim in the light of the
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partnership law. 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 : whether the turnover is assessable in the
hands of the partnership firm as a taxable entity separate
143
and distinct from the partners ? There is first a decision
under the law of partnership; thereafter, the second
question arises, the question as to assessment under the tax
law. It is clear, therefore, that reference must be made
first to the partnership law.
The Indian Partnership Act, 1932 has, by s.4, defined a
"partnership" as "the relation between persons who have
agreed to share the profits a business carried on by all or
any of them acting for all". The section declares further
that the persons who have entered into partnership with one
another are called individually "partners" and collectively
"a firm". The components of the definition of "partnership",
and therefore of "a firm" consist of (a) persons, (b) a
business carried on by all of them or any of them acting for
all and (c) an agreement between those persons to carry on
such business and to share its profits. It is the
relationship between those persons which constitutes the
partnership. The relation is founded in the agreement
between them. 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 persons who will actually carry on the business, the
shares in which the profits will be divided, and the 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 conclusion be
right, it is only a further step to hold that each
partnership agreement may constitute a distinct and separate
partnership and therefore distinct and separate firms. That
is not to say that a firm is a corporate entity or enjoys a
juristic personality in that sence. The firm name is only a
collective name for the individual partners. But each
partnership is a distinct relationship. The partners may be
different and yet the nature of the business may be the
same, the business may be different and yet the partners may
be same. 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 to extend merely a partnership,
originally constituted to carry on one 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 the surrounding circumstances, including
evidence as to the interlacing or
144
interlocking of management, finance and other incidents of
the respective businesses.
In the present case, there are two businesses, a
business in timber and a business in saw dust. Both
businesses are carried on by the same partners, one as a
partnership firm called K. Kelukutty, and the other under
the name Messrs. K.K.K. Sons Saw Mills, said to be a
separate partnership firm. On the material before us it is
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not possible to say, in the light of the considerations to
which we have adverted, whether there is one firm or two.
That is a question which appropriately falls for examination
by the authorities constituted under the Kerala General
Sales Tax Act.
While, therefore, we maintain the orders of the High
Court dismissing the Tax Revision Cases 6 and 9 of 1977 and
confirm the orders of the Sales Tax Appellate Tribunal
remanding the cases, we do so for the considerations and
upon the reasons set forth in this our judgment. In order to
abridge the time which inevitably will be further taken in
disposing of this already protracted litigation, we direct
that instead of the cases going back to the assessing
officer they shall stand remanded to the Appellate Assistant
Commissioner, Sales Tax for taking up the appeals before him
again, permitting the parties to lead evidence in the light
of the considerations mentioned by us and disposing of those
appeals in accordance with law. These appeals are disposed
of accordingly. There is no order as to costs.
N.V.K. Appeals dismissed.
145