Commissioner of Income Tax vs V. Veeri Naidu and Sons

Y.V. Anjaneyulu, J.—These applications filed u/s 256(2) of the Income Tax Act, 1961, relate to the same assessee but for different assessment years. The Revenue is aggrieved by the refusal by the Income Tax Appellate Tribunal, Hyderabad, to refer the following question of law to this court :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the firms of M/s. Vegi Veeri Naidu and Sons, Visakhapatnam, and M/s. Vegi Venkateswara Rao and Brothers, Visakhapatnam, are two different entities and not one and the same entity and the Income Tax Officer cannot make a single assessment clubbing the income of both the firms ?"

Having looked into the facts of the case, we are not persuaded to accept the submission of learned standing counsel for the Revenue that a question of law does arise from the order of the Tribunal. It is not in dispute that there are two separate partnership firms constituted under two separate deeds of partnership. One firm is carrying on business in lorry transport and the other firm is carrying on business in the exhibition of cinema films. It is no doubt true that the partners of both the firms are the same. The only ground on which the Revenue canvasses the plea that both the firms must be treated as one indivisible firm is that monies were advanced by one of the firms to the other firm for the construction of the cinema theatre to facilitate the exhibition of cinema films. Based on the advances made by one of the partnership firms to the other partnership firm, the Revenue draws the conclusion that both the partnership firms must be considered to be the same and for purposes of tax assessments, the income of both the firms must be assessed together. Learned standing counsel for the Revenue invited our attention to the decision of the Supreme Court in Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam Vs. K. Kelukutty, , in support of his contention that the Full Bench decision of this court in Commissioner of Income Tax Vs. G. Parthasarathy Naidu and Sons, is no longer good law. In view of the aforesaid judgment of the Supreme Court, learned standing counsel for the Revenue urges that the Tribunal should be directed to refer the aforementioned question of law to this court for consideration.

The principle enunciated by the Supreme Court in the abovementioned case is 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. 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 relating to assessability under the tax law arises. It follows, therefore, that the matter should first be examined for ascertaining whether under the partnership law there are two separate firms. If the enquiry under the partnership law reveals that there are two separate firms duly constituted for carrying on business, then only the further question whether the two partnerships could be considered to be one partnership for the purpose of tad assessment under the Income Tax Act arises.

In the present case, the conclusion that the two partnership firms constituted one indivisible firm was reached on the basis of single circumstance, namely, that one of the partnership firms advanced funds to the other partnership firm for the construction of a cinema theatre. We do not find from the order of the assessing authority that any endeavour was made to examine whether the two partnership firms could be considered to have been validly constituted under the Partnership Act or not. Apparently, the conclusion regarding the assessability of the income relating to the two partnership firms in the hands of one single partnership firm was reached with reference to the tax law. The Tribunal examined the question from the point of view canvassed before it and came to the conclusion that there are enough factual circumstances leading to the belief that both the partnership firms are separate and the mere circumstance that one partnership firm lent funds to the other partnership firm cannot lead to the conclusion that both the partnership firms are the same. Inasmuch as the assessing authority itself did not base its conclusion for a single assessment on the conceptual perspective of the partnership and tax laws, we are unable to say that there is any error in the order of the Tribunal. In our opinion, no question of law arises on the facts aforementioned. We, therefore, decline to direct the Tribunal to refer the matter to this court. Applications dismissed.