Balu Readymade Stores vs Commissioner of Income Tax

Venkataswami, J.—The following question is referred for the decision of this court :

Whether the Tribunal was right in holding that the two firms are not independent and the building belonged to the appellant-firm ?

The assessee is a firm dealing in cloth. During the assessment year in question, a theatre known as Balamani Theatre was constructed at a cost

of Rs. 2,40,000. The assessee claimed that the theatre belongs to a separate partnership firm constituted under a deed dated April 15, 1977, by

the same partners with a different profit-sharing ratio.

The Income Tax Officer as well as the Appellate Assistant Commissioner held that notwithstanding that there are two partnership deeds

consisting of the same partners with a different profit-sharing ratio, they must be treated as one partnership firm for the purpose of assessment.

Aggrieved by that, the assessee went before the Tribunal. The Tribunal also found that the conclusion reached by the authorities below was

correct. The Tribunal in support of its decision placed reliance on the decision of the Andhra Pradesh High Court in Addl. Commissioner of

Income Tax Vs. M. Venkata Narasimha Rao and Co., . The Tribunal also gave a finding which is as follows :

The mere fact that the profit accrued is different will not make any distinction. There is interlacing of funds and the accounts indicated that the

funds of cloth business alone were utilised for the construction of the theatre. In the firm''s books the theatre building had been shown as the

investment of the firm. It also appears on the assets side of the balance-sheet of the assessee during the assessment year 1975-76.

On the basis of this finding, the Tribunal held that there are no two separate partnership firms and the income from both the cloth business and

theatre business must be assessed in the hands of the assessee. On the question whether when the same partners entering into two separate

agreements of partnership, each agreement may constitute a distinct and separate partnership or not, the Supreme Court has given certain

guidelines in the judgment in Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam Vs. K. Kelukutty, . The Supreme

Court while considering the question has observed as follows (at page 165) :

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

business.

We have already pointed out the finding rendered by the Tribunal regarding the keeping of accounts and investments of money for the

construction of the theatre. In view of this finding of the Tribunal and applying the ratio laid down by the Supreme Court, we do not find any

difficulty in answering the question against the assessee. This question, is answered accordingly with costs of Rs. 500.