Thota Komarayya Somayya vs Commissioner, Excess Profits Tax

Jaganmohan Reddy, J.—We had by our order dated 12-8-1954 directed the Commissioner, Excess Profits Tax to state a case upon the following two questions of law, viz.,

(i) Whether in the circumstances of the case there was any justification whatsoever to hold that Mr. Juluri Kasaiah was an employee sharing 4 annas share of the profits hut not a regular partner in the business.

(ii) Whether the business carried on in the name of Thota Sivalingam Siviah is not a separate business liable to E.P.T. separately.

The facts as appear from the statement of the case are that the Petitioner Thota Komarayya Somayya is a firm consisting of two partners, Thota Sivalingam and Thota Siviah, who are the sons of the deceased Komarayya and Somayya respectively. This firm carried on business in cloth at Warangal and in compliance with a notice u/s 13(1) of the Hyderabad Excess Profits Tax Act, it made a return for the III C.A.P. declaring an income of Rs. 13,370/- claiming a deficiency of Rs. 10,630/- on the basis of a minimum standard profit of Rs. 24,000.

The E.P.T. Officer found during the course of his examination of the Assessee''s accounts that there was another business at Warangal which was started with effect from 5-7-1353F (10-4-1944) consisting of Thota Sivalingam and Sivayya and one Julury Kasayya who was given one-fourth share of the profits of business after which the balance of. profits being equally divided between the two partners Thota Sivalingam and Thota Sivayya.

The income of this new business was however, not disclosed at the time of the Petitioner''s assessment and consequently the E.P.T. Office. examined the claim of the Petitioner that his business constituted a separate partnership between Thota Sivalingam, Thota Sivayya and Julury Kasayya. The Excess Profits Tax authorities founts the following facts:

(a) that there was no partnership

(b) that no initial capital as such was invested at the commencement of the new partnership by the partners.

(c) that the capital which was subsequently introduced was made only by means of adjustments, i.e. by crediting the accounts standing in the name of their late fathers Thota Komarayya and Thota Somayya with Rs. 16,000/- each and debited the accounts of the existing business with Rs. 32,000/-, the entries having been made on 8-10-1944 (3-1-1354) while the corresponding entry in the books of the existing business was made on 9-10-1944 (4-1-1354);

(d) that the new business was entirely financed by the old one which advanced, cash as and when required.

(e) that the amounts due to the old business were collected by the new business and that the amounts due to new business were collected by old business;

(f) that there were dealings in cloth between the two concerns, i.e. the new business supplied cloth to the old one worth Rs. 8,914/- and received cloth from the latter worth Rs. 2,415/-.

(g) that Julury Kasaiah''s name was not mentioned as a partner in the application made to the Central Bank of India when opening an account in the name of the new business with the Central Bank;

(h) that although the E.P.T. Officer has called for the copy of the application this was not produced; and

(i) that Julury Kasaiah did not contribute any capital for the business but on the other hand the cloth quota which he had was made over to the new concern for a consideration of Rs. 300/-.

It may here be mentioned that subsequently on or about 4-3-1949 a new firm was constituted consisting of Thota Sivalingam, Sivayya, Julury Kasaiah and Srisarlam and in the deed of partnership entered between the partners, the recitals stated that there was previously a partnership between Thota Sivalingam, Sivayya and Julury Kasaiah and that now another person by name Srisailam was being taken into the partnership. This partnership deed was filed before the E.P.T. authorities and was registered.

The Commissioner, E.P.T. on an application under Sections 20 and 48, E.P.T. Act considered the recitals in this deed as interested recitals and having regard to all these facts he confirmed the finding of the E.P.T. Officer and the Deputy Commissioner, E.P.T. that the business started on 6-7-1953 fn the name of Thota Sivalingam Sivayya is only a branch of the firm of Komarayya Somayya and that Julury Kasaiah was only an employee remunerated by share of profits; consequently the profits of both these businesses were added up and an assessment made, and with respect to the application u/s 48 he was of the view that the question whether or not a person is a partner in a firm is a question of fact and he, therefore, dismissed the application.

Aggrieved by this order, the Petitioners came up before us under Sub-section (2) of Section 43 and at that time we were impressed by the fact that Julury Kasaiah, as contended by the Petitioners, had contributed his cloth quota towards his capital; consequently we directed the Commissioner to state a case on the aforesaid1 questions and furnish a statement as to whether any expenses of the branch were debited in the accounts of the main firm and whether there was any direction given by the firm to the branch to act in any particular way or with respect to any circumstance which would disclose that the main firm had exercised a control over the new firm.

It is argued before us by the learned advocate for the Petitioners that there was no necessity for a deed of partnership to be entered into between the partners for the simple reason (i) there was no provision under the Hyderabad E. P. T. Act for the registration of a firm (ii) that Section 69 of the Hyderabad) Partnership Act pertaining to the registration of a firm had not by then been enforced, consequently this circumstance cannot be taken into consideration in determining the non-existence of a partnership.

With respect to the omission of the name of Julury Kasaiah as one of the partners in the account opening form filed with the Central Bank of India, it is contended that this also is not significant because Julury Kasaiah not having contributed any capital, it was agreed between the partners that only Shivlingam and Sivayya should operate all banking accounts and in support of this the learned advocate has read out one of the clauses from the agreement dated 4-3-1949 which provides for the operations of the accounts by only two partners, namely, Shivlingam and Sivayya and not Julury Kasaiah. He further contends that when once the E.P.T. Officer admitted that Julury Kasaiah was given 0-4-0 share In the profits of the partnership, he must be considered a partner and these partners constitute a partnership and at any rate there is no justification nor is there any evidence for him to hold that he was a servant remunerated by a share In the profits of the firm.

The question whether a person is a partner in a firm or whether any partnership is a genuine one, is in our view, a question of fact to be determined on the circumstances and evidence in each case. It is, therefore, not open to us to interfere with such questions of fact unless tile material on record is not sufficient to sustain a finding of fact which is based on inferences from other proved facts, when it becomes a question of law.

As Bose J. observed in AIR 1949 249 (Nagpur) at p. 252 (A).

The mere fact that a fact is proved by Inferences from other facts, or as it is sometimes said by circumstantial evidence does not necessarily turn the matter into a question of law. K lad K fact irrespective of the evidence by which it is proved. The only time a question of law can arise in such a case is when it is alleged that there is no material on which the conclusion can be based or no sufficient material.

We have, therefore, only to address our mind to the further question whether the E.P.T. Officer had before him sufficient evidence from which he could deduce the inference that the firm or Messrs Shivalingam Sivayya and Kasaiah was a separate firm consisting of the aforesaid persons or whether it was a branch of the main firm.

u/s 4 of the Partnership Act unless, there are three elements present, there could be no partnership, viz., (i) there must be an agreement entered into by all the persons concerned;(ii) the agreement must be to share the profits of a business, and (iii) the business must be carried on by all or any of the persons concerned acting for all. Section 6 of the Partnership Act there after lays down the method of determining the existence of a partnership in the following terms:

In determining whether a group of persons, is or is not a firm or whether a person is or is not a partner in a firm regard shall be had to the real relation between the parties, as shown by all relevant facts taken together.

Explanation 1:The sharing of profits or of gross returns arising from property by persons- holding a joint or common interest in that property does not of itself make such persons partners.

Explanation 2:The receipt by a person of a share of the profits of a business or of a payment contingent upon the earning of profits or varying with the profits earned by a business, does not of itself make him a partner with the persons carrying on the business and in particular the receipt of such share or payment....

(a) by a lender of money to persons engaged- or about to engage in any business,

(b) by a servant or agent as remuneration,

(c) by a widow or child of a deceased partner, as annuity, or

(d) by a previous owner or part owner of the- business, as consideration for the sale of the goodwill or share thereof,

does not of itself make the receiver a partner with, the persons carrying on the business:

It is clear from the aforesaid provisions of law that a partnership is not necessarily created by an agreement in writing. It could be by oral agreement also or an agreement can be inferred from the conduct of the parties. Therefore apart from a written agreement the actual conduct or the intentions of the parties is important in deciding questions of partnership, but intention is often incapable of proof and has to be only an inference.

The desire to obtain the benefits of mutual agency, which is the basis of partnership, the different motives affecting the positions of individuals comprising it, has reference both to the nature of the common object of the relationship and also to the position of each party thereto.

Therefore in determining the question as to whether a partnership is constituted and if so whether it is genuine it is often important to as-certain the underlying intention which caused the relationship to be brought into existence.

It will be observed from explanation (ii) to Section 6 of the Partnership Act that the mere payment of a share in the profits does not by itself make a person receiving it a partner with the person receiving it a partner with the person carrying on the business. The explanation goes on to particularise the instances of a servant or agent or other persons specified therein receiving remuneration or share in the profits as remuneration and lays down that the receiver of such remuneration is not a partner.

Though the receipt by a partner of a share in the profits of a business is an important element to the existence of a partnership between him and the person carrying on the business, it is not conclusive evidence as explanation (ii) to Section 6 of the Partnership Act makes it clear. The contention of the learned advocate for the Petitioner that because Julury Kasaiah receives a share in the profits, he cannot be declared to be a servant, in our view, would logically lead to the conclusion that he should be declared a partner which in turn leads to the further conclusion that no person who is not a partner shall be a partner.

We may here observe that generally the question of determining whether a particular person is a partner or not or whether a firm is a new firm arises in disputes between partners inter se or in civil litigations when firms are sought to be made liable for the debts of its partners etc. Apart from this for the purposes of taxation laws such as under the E.P.T. Act or Income Tax Act, such questions also arise for the purposes of reduction of liability It not for complete avoidance of tax itself.

The taxing authorities are often confronted with this tendency on the part of the Assessees to create a new and different partnership by introducing servants and close relatives as partners who might have been given the status of general partners but with their rights and powers so restricted that it would be difficult to hold them as real partners.

The tendency of real partners will be to impose restrictions in the matter of drawing on Bank account anti entering into business contracts, control of establishment etc., etc. These nominal partners are sometimes paid fixed sums by way of share of profit and do not participate in loss, In these circumstances in determining a question of partnership for the purposes of taxation laws, It is necessary to determine the ambit of partnership liability and the persons who are liable within that ambit.

Inasmuch as for the purposes of E.P.T. Act Individual partners are not liable and it is only the firm as a business unit that become liable, the question whether there are two or more partnerships or whether they are distinct or separate businesses becomes a matter of vital importance. Under the second proviso to Section 2(5) all businesses to which the E.P.T. Act applies which are earned on by the same person are to be treated as one business and consequently in deciding such matters the question is whether in fact the businesses can be reasonably held to be separate or to be so connected with each other as to form a single business.

In Scales v. George Thomson and Co. Ltd. (1928) 13 Tax Cas 8 (B) the test laid down for determining whether two businesses are one or separate is whether there is any other Interconnection, an interlacing, an interdependence and a unity embracing the businesses.

In this case there being no deed of partnership we are unable to ascertain what was the intention of the persons claiming to be partners and whether there was any agreement to share losses which ordinarily would be more consistent with the constitution of a partnership than with any other relationship between the contracting parties.

We have, therefore, to see whether there Is sufficient material on record from which the E. P. T. authorities could draw an inference that the firm of Messrs. Shivalingam Sivayya was only a branch of the old firm and not a separate partnership. In our view the E.P.T. Officer had sufficient material for coming to that conclusion.

From the statement of the case to which extracts of accounts have been attached, it appears that the cloth quota which was in the name of Julury Kasaiah was sold to the new Arm for a sum of Rs. 300/-, that the, new firm has not purchased any stock for the purposes of business initially, the entire business of the new firm was started by transfer of cash and goods from the old firm to the new firm, that no capital was contributed'' by Julury Kasaiah and that the capital which has been contributed by Shivalingam and Shivayya has not been contributed at the time of the commencement of the business but after six months and even then the credit and debit entries relating to capital were by adjustments made on different dates in the respective books.

Further during the six months prior to this entry, business was being carried on with the goods supplied and cash advanced by the old firm and from the entries in the accounts the reference to "Mana Nayana Garu" (our father) with respect to the old firm while introducing cash or stock would indicate the close and exclusive relationship between the old and the new firm giving rise to the inference that it was a branch of the old firm and that it did not include Julury Kasaiah and the collection of outstandings of the old firm by the new and of the new firm by the old, cumulatively justify the inference drawn by the E.P.T. Officer, that the new firm is a branch of the old firm of Messrs. Thota Komarayya and Somayya.

In our view though each one of the circumstances cited above may be in itself indecisive and though each one may be capable of some explanation, yet ''Juncta Juvant. The only significant circumstances upon which great reliance and emphasis is placed is the payment of four annas profits to Julury Kasaiah, but this is consistent with the position of his being a servant as well as a partner and unless there are other circumstances from which a definite inference can be drawn, he cannot merely by the receipt of the four annas profit be said) to be a partner.

In this view of the matter our answer to the first question is that Julury Kasaiah was not a partner in the business of Shivalingam and Sivayya and with respect to the second question that the firm of Shivalingam Shivayya is not a separate business but is a branch of the firm of Messrs. Thota Komarayya and Somayya. The reference is answered accordingly with costs to the Respondent which we assess at Rs. 100/-.