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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