M/s. Arun Chemical AND Pharmaceutical works. V. The Commissioner of Income-tax-V.

ITTA/49/2004

AI Insights

The case revolves around the appellant, M/s. Arun Chemical & Pharmaceutical Works, which contested the separate treatment of its financial affairs from those of M/s. Hymavathi Enterprises, another firm with common partners. Both firms maintained separate books and were constituted under different partnership deeds. The Income Tax Department's refusal to combine the financial results of the two firms for tax assessment led to this appeal. The court examined whether the financial affairs of the two firms could be treated as one entity for tax purposes, given the common partnership but separate operational and financial structures.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 695656 (HC-HYDERABAD)
• Appeal Type: Others
• Pronouncement Date: 09-12-2014
• Assessment Year: misc
• Laws Referred To: Indian Partnership Act, 1932, Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: J V PRASAD
• Assessee Lawyers: K NEERAJA
• Keywords: Assessment Year 1990-91; Income Tax; Net loss; Partnership deed; Separate Firms; Manufacturing and Sale of Ethyl Chloride
• Section: 143(3)

Judgement Text

"* THE HONOURABLE SRI JUSTICE L. NARASIMHA REDDY and * THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM + I.T.T.A.No.49 of 2002 % 09.12.2014 # M/s. Arun Chemical & Pharmaceutical Works, Hyderabad. …. Appellant Vs. $ The Commissioner of Income Tax – V, Hyderabad …. Respondent ! Counsel for the Appellant: SMT. K. NEERAJA Counsel for Respondent: SRI J.V. PRASAD, SC FOR INCOME TAX Head Note: ? Cases referred: THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY AND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A.No.49 of 2004 JUDGMENT: (per the Hon’ble Sri Justice L.Narasimha Reddy) This appeal is preferred by the assessee feeling aggrieved by the order dated 18.06.2003, passed by the Hyderabad Bench ‘B’ of the Income Tax Appellate Tribunal (for short ‘the Tribunal’) in I.T.A.No.945/Hyd/94. The appellant is a firm registered under the Indian Partnership Act, 1932, through a document dated 19.01.1988, and it comprises of four partners. The activity of the appellant is manufacturing and sale of Ethyl Chloride, which is used in the Anaesthesia. It is stated that the partners of the appellant firm have also brought into existence, another firm by name M/s.Hymavathi Enterprises, through another deed of partnership dated 24.02.1989. The appellant filed its return of income tax for the Assessment Year 1990-91 posting a net loss of Rs.46,420/-. Broadly stated, the figures are that the loss incurred by the appellant at Rs.71,001/-, the loss incurred by M/s.Hymavathi Enterprises at Rs.5,79,852/- and the house property income of the appellant firm at Rs.6,04,480/-. The net loss of Rs.49,420/- was emerged. The Assessing Officer refused to treat the facts and figures pertaining to M/s.Hymavathi Enterprises as part of the return of the appellant firm. Accordingly, he took into account, the net profit and loss of the appellant alone and passed an order of assessment. Aggrieved by that, the appellant filed an appeal before the Commissioner of Income Tax (Appeals) – II, Hyderabad. The appeal was allowed through order dated 17.02.1994. Challenging the order of the Commissioner (Appeals), the Department filed I.T.A. before the Tribunal. The appeal was allowed and the order passed by the Commissioner was set aside. Smt. K. Neeraja, learned counsel for the appellant submits that though two separate firms were constituted, the partners in both the firms are one and the same and only one income tax return was submitted. She contends that the Assessing Officer and the Tribunal were not justified in treating the two firms separately. She further contends that the mere fact that two partners joined M/s.Hymavathi Enterprises on 22.01.1990, and left it hardly within two months, does not make much difference, since the business of the firm commenced only on 23.03.1990. Sri J.V. Prasad, learned Standing Counsel for the respondent, on the other hand, submits that once two firms were brought into existence through separate deeds of partnership, the question of the financial affairs of the one firm being treated as part of the other does not arise. He contends that the appellant itself maintained the difference between the affairs of the two firms by maintaining separate books of account and that the Assessing Officer and the Tribunal have taken correct view of the matter. The entire controversy in this appeal is as to whether the affairs of the two separate and independent firms can be treated as one, simply because the partners are common to both the firms. The appellant firm was constituted under the partnership deed dated 19.01.1988 and its activity is manufacturing and marketing of drugs. The other firm, by name, M/s.Hymavathi Enterprises was registered on 24.02.1989 and its activity is to establish and run hotels. Both the firms have been maintaining separate accounts. Except that the partners in both the firms are common, there is nothing, which unifies them in law. In the returns, the facts and figures pertaining to both the firms were furnished separately. For the assessment year 1990-91, the loss of the appellant firm was shown at the rate of Rs.71,001/- and that of M/s.Hymavathi Enterprises at Rs.5,79,852/-. The combined figure of these losses was pitted against the house property income of the appellant firm of Rs.6,04,480/-. As a result, the net loss of Rs.46,420/- was shown. This was not accepted by the Assessing Officer and his view was upheld by the Tribunal. The mere fact that the same partners happened to be the partners in two separate firms, does not constitute the basis to treat both the firms as one entity, in the context of submitting the returns. Though a firm is not an independent legal entity when compared to a company, in the context of the Income Tax Act, 1961, it is an independent separate assessee. Secondly, in case, the relation of both the firms was so close, common accounting process would have been undertaken. Once separate accounts were opened and operated for each of the firms, there is no way, that a common return could have been filed for them. Even as regards the plea as to uniformity of composition of the firms, the Tribunal took note of the fact that two new partners joined M/s.Hymavathi Enterprises on 22.01.1990, but they did not join the appellant firm. It is a different matter that both of them left M/s.Hymavathi Enterprises on 19.03.1990. That event only demonstrates that both the firms have separate channels, be it of constitution or maintenance of accounts. That being the case, the loss earned by one firm cannot be pitted or set off against the profits of the other firm. We do not find any basis to interfere with the order under appeal. The appeal is accordingly dismissed. There shall be no order as to costs. The miscellaneous petitions filed in this appeal shall also stand disposed of. ___________________________ L.NARASIMHA REDDY, J Date: 09.12.2014 ____________________________ CHALLA KODANDA RAM, J Note: L.R copy to be marked B/o va "