- (1.) Though served, nobody appears for the respondents. This appeal is preferred against a decision of the full bench of the A. P. High court reported in commissioner OF INCOME TAX v. G. Parthasarathy Naidu and Sons. The question which was referred for the opinion of the High court under Section 256 (1 of the Income Tax Act, 1961 was: "Whether on the facts and in the circumstances of the case, M/s G. Parthasarathy Naidu and Sons and M/s Sri Lakshmi Oil and Flour Mills can be treated as two separate firms and distinct assessable entities -
(2.) The full bench overruled an earlier decision of the same court in commissioner OF INCOME TAX v. M. Venkata Narasimha Rao and Co. The full bench enunciated as many as ten principles as flowing from the several decisions considered by them. The ten principles stated at pp. 108-109 (G. Parthasarathy) are as under: "(1 The concept of partnership law is that a firm is not an entity or a person in law but only a compendious mode of designating persons who have agreed to carry on the business in partnership. (2 A firm as such is not entitled to enter into partnership with another firm or individual as the definition of 'person' in Section 3 (42 489 of the General Clauses Act, 1897, cannot be imported into Section 4 of the Indian Partnership Act. (3 The law, English as well as Indian, has for some specific purposes, relaxed its rigid notions and extended a limited personality to a firm. (4 Under the income tax law a firm is an independent and distinct juristic person for the purpose of assessment as well as for recovery of tax as it is a 'person' within the meaning of Section 2 (31 of the Act, having its own entity and personality. It is also a separate entity under the sales tax law. (5 It is well settled that it is open to any person to arrange his or its affairs by adopting a legal device to reduce his or its tax liability to the minimum permissible under the law and such a device cannot be equated to an attempt to evade tax as long as his or its action is consistent but not contrary to law. (See commissioner OF INCOME TAX v. Sivakasi Match Exporting Co. ) (6 In law, there is no prohibition for the creation or existence of two or more separate firms or partnerships by the same partners. (7 Whether a firm is genuine or bogus or benami is a pure question of fact. But whether two or more partnerships or firms constituted under different deeds of partnership are, in reality, only one partnership or not is a mixed question of fact and law. (8 The prime guideline to determine this latter question is the cumulative effect or the totality of all the material factors relating to the object and intendment of the partnerships and businesses, their nature, character and identity, coupled with the factum or otherwise of interlacing and interlocking of funds between the two firms. (9 The very question as to whether there was really one partnership or two different assessable entities being two separate distinct partnerships unconnected with each other, has to be determined by the IT authorities for the purpose of computing the assessment under the IT Act but not under the general law governed by the provisions of the Partnership Act. (10 The finding of the tribunal about the object and intendment of the partnerships and the businesses and the factum or otherwise of the interlacing and interlocking of the funds between the two partnerships is a question of fact and such finding would be binding on the High court in a reference unless there is no material in support of it. "
(3.) So far as the facts of the case are concerned, the discussion in the full bench judgment is to the following effect: "We may at this stage recapitulate the facts found or admitted by the tribunal in the case on hand. Admittedly, the partners in both the firms are the same. Admittedly, each of the partners in both the firms shared 1/4 of the profit. However, the three major partners in the assessee-firm 490 shared equally 1/3 of the loss, if any, whereas in the second firm, M/s Sri Lakshmi Oil and Flour Mills, the loss shared by G. Parthasarathy Naidu, varaprasada Rao and Chandrasekhara Rao at half, 1/4 and 1/4 a respectively. The business of the assessee-firm was to deal in pulses, whereas the business of M/s Sri Lakshmi Oil and Flour Mills was to manufacture and sell groundnut oil and other oils, oilcake and to purchase and sell groundnut, kernel, oils, oilcake and to work the oil mill and the flour mill. Paragraph 15 of the partnership deed of M/s Sri lakshmi Oil and Flour Mills makes it specific that the business of this partnership shall not be deemed as part and parcel of the assessee- partnership constituted under the deed of partnership dated 1/10/1968. This clause establishes that the intention of the partners in constituting the second firm was to make it a separate, distinct firm unconnected with the assessee-firm which had already come into existence on 1-10- 1968. The registration under the IT Act granted by the ITO to M/s Sri lakshmi Oil and Flour Mills was not cancelled and the same was allowed to continue as a registered firm. The two firms had been constituted under two separate deeds of partnership. There was no interlacing or intermixing between the two firms. The tribunal found that there was no justification for including the profit of Rs 5,500. 00 belonging to M/s Sri Lakshmi Oil and Flour Mills in the income of the assessee-firm and consequently deleted the same. Applying the aforesaid principles to the facts and circumstances found by the tribunal, we must hold that the two firms in the instant case are not, in reality, one firm but two different legal entities for the purpose of assessment. ";