1. All these appeals raise a common question and will, therefore, be decided by this common order. The assessees in both these sets of appeals were represented by the same counsel, viz., Shri A.L. Jain, chartered accountant, and Shri B.B. Khare, advocate.
2. Ghasiram Kaluram, the appellant in the first set of appeals, is a registered firm and was carrying on 'arhat' business at Daulatganj, Ujjain, for long before the assessment year 1976-77. The Madhya Pradesh Krishi Upaj Mandi Adhiniyam, 1972, provided the establishment of market areas and the constitution of mandi committees for their management.
One of the objects of this legislation, as it was contended before us, was to protect the interests of the farmers by creating a machinery through which they got fair price for their produce without unauthorised deductions. In pursuance of the provisions of that Act, a mandi committee was constituted at Daulatganj, Ujjain, as well. It was contended that in order to give effect to the provisions of the said Act, the mandi committee had decided that a pucca arhatia would not carry on business of a kutcha arhatia and kutcha arhatia had to be separately licensed. The functioning of kutcha arhatias was authorised from 27-1-1975 and the kutcha arhatia association passed a resolution on 25-1-1975 that the business as kutcha arhatia would start from 27-1-1975 and every member of the kutcha arhat association should make necessary arrangements. In pursuance of this, a new firm, Oswal Trading Co. was created. The old firm, Ghasiram Kaluram, consisted of four partners, viz., Smt. Chandbai, Maneklal, Rajendrakumar and Subhashchand. All the three male partners are real brothers and Smt.
Chandbai is their mother. The new firm, Oswal Trading Co. (the appellant in the other set of appeals), was created with effect from 27-1-1975 and consisted of three partners, namely, Subhashchand, Smt.
Prernkumari and Smt. Kusumkumari. Subhashchand is one of the partners in the old firm, Ghasiram Kaluram, and Smt. Premkumari and Kusumkumari are the wives of the other two partners of Ghasiram Kaluram, namely, Maneklal and Rajendrakumar, respectively. An application for the registration of the new firm was moved for the first-assessment year, i.e., 1976-77, the accounting year for which ended on Diwali 1975.
During the course of the enquiry, a survey was also conducted at the business premises of the firm and after enquiry, the ITO held that Oswal Trading Co. was not a genuine firm and its business was actually carried out by Ghasiram Kaluram. The ITO, therefore, refused registration to Oswal Trading Co. by an order dated 28-3-1979 and further ordered that its income will be included in the income of Ghasiram Kaluram and in the alternative as a protective measure, Oswal Trading Co. shall be assessed as an AOP as well. Consequently, its assessments for the various years were completed resulting in the aforesaid appeals by the two sets of the assessees.
3. The first set of four appeals is by Ghasiram Kaluram for the assessment years 1976-77, 1977-78, 1979-80 and 1980-81, respectively.
It has objected to the inclusion of the income of Oswal Trading Co. in its income and has also objected to the disallowance of salary paid to its partners. Interest paid by Ghasiram Kaluram to Oswal Trading Co.
was also disallowed on the ground that it was an interest paid to itself and this is also in dispute in some of these appeals.
4. IT Appeal No. 59 of 1983 is an appeal by Oswal Trading Co. against the refusal of registration vide an order passed under Section 185(1)(b) of the Income-tax Act, 1961 ('the Act'). There is no separate quantum appeal against the assessment under Section 143(3) of the Act.
However, in the grounds of appeal, the disallowance of salary paid to Maneklal and Rajendrakumar, the partners in Ghasiram Kaluram and the husbands of the two ladies, who purport to be partners in Oswal Trading Co., has also been challenged. The other appeals are for the assessment years 1977-78, 1978-79, 1979-80 and 1980-81, respectively, against assessments under Section 143(3) challenging the action of the ITO in treating the assessee as an AOP. The other grounds raised in these appeals are regarding the aforesaid salary payments and the payment of interest to Smt. Chandbai. Since there was no specific order refusing continuation of registration, there are no separate appeals in that regard.
5. We have heard the learned Counsel for the appellants and the learned departmental representative and have given our careful consideration to the issues involved. The main issue in this case is whether the firm, Oswal Trading Co., was an independent firm and not merely another name of Ghasiram Kaluram and even if it was a separate firm, whether it was a genuine firm and whether it should have been registered by the ITO The other grounds, as mentioned above, are merely consequential and their decision would depend upon the result of the main controversy.
6. In holding that the firm, Oswal Trading Co., is not a genuine firm and is only another name adopted by Ghasiram Kaluram for carrying on a part of its business, the ITO relied upon the following circumstances : (1) that the same persons were beneficially interested in both the firms ; (4) that the business premises of both the so-called firms were common ; and 7. Except the facts that the two firms had no separate business premises and were carrying on business in the same premises belonging to the HUF of the aforesaid brothers, all other circumstances were challenged by the learned Counsel for the appellants in these appeals before us. We will now deal with them.
8. As has already been stated, all the partners of Ghasiram Kaluram belong to one family. They are three real brothers and their mother.
The other firm, Oswal Trading Co., purports to consist of one of the brothers, namely, Subhashchand and the wives of the two other brothers.
The two other brothers, namely, Rajendrakumar and Maneklal purport to have been employed by Oswal Trading Co., for carrying on its business.
It was admitted that so far as the female members of both the firms are concerned, they were simply sleeping partners and had no concern with the actual carrying out of the day-to-day business. The result, therefore, is that the same three persons who are real brothers are actually managing the business of both the firms. This is not in dispute at all. Smt. Premkumari and Kusumkumari are said to have invested a sum of Rs. 5,000 each in the Oswal Trading Co., while the financial requirements of the so-called firm were much more. A copy of the personal account of these two ladies in the accounts of Oswal Trading Co., was furnished in the paper book, which shows that, apart from the purported initial investment of Rs. 5,000, these ladies did not contribute any further money. On the other hand, Subhashchand purports to have withdrawn Rs. 50,000 on 28-1-1975 and Rs. 25,000 on 31-1-1975 from Ghasiram Kaluram and invested in Oswal Trading Co., not only this, about Rs. 1,68,000 purport to have been advanced by the old firm to the new firm to provide for its financial requirements. A copy of the account of Oswal Trading Co. in the books of Ghasiram Kaluram is at page 24 of the paper book and it shows that on 28-1-1975, it advanced a sum of Rs. 10,000 to the new firm and during the accounting year, relevant to the assessment year 1976-77, there were other total advances amounting to Rs. 8,76,408 and at the end of the year, there was a debit balance of Rs. 87,568. These facts clearly show that the new firm, Oswal Trading Co., was totally dependent for its finances on the old firm, Ghasiram Kaluram. No attempt was made on behalf of the present appellants to show that Oswal Trading Co. raised funds from other sources as well, and these advances were not financial accommodations but were on account of regular trade dealings as would happen between two independent concerns dealing with each other.
9. As already stated, it is admitted that the ladies are not taking any active interest in the business of the firm and are so-called sleeping partners. It was not even asserted that the two ladies, Premkumari and Kusumkumari wanted to start arhat business and, therefore, they entered into a partnership with Subhashchand for that purpose. No initiative was alleged or shown to have come from these ladies, who, at the most, appeared to have lent their names at the instance of their husbands.
Why a firm in the name of Oswal Trading Co. was put up is very relevant and that gives us the clue about the real nature of this so-called independent firm. It was vehemently contended before us on behalf of the appellants that after the establishment of the market committee under the Madhya Pradesh Krishi Upaj Mandi Adhiniyam, a pucca arhatia could not work as a kutcha arhatia and, therefore, in face of that situation the only option before the firm, Ghasiram Kaluram, was either to close down that line of business or to indulge in illegal transactions in contravention of the provisions of the Act and that since it could not do either of the two things, a new firm was set up to work as kutcha arhatia, while that part of the business which related to pucca arhatia could be continued by Ghasiram Kaluram. Thus, it is not any necessity of the ladies that brought about this new name into existence. On the other hand, it was the need of the partners of Ghasiram Kaluram to continue their business that they had to pick up a new mask in the name of Oswal Trading Co.
10. As already observed, it is also admitted that the business in both the names is being conducted by the same persons, that is the three brothers. All of them are partners in Ghasiram Kaluram. As regards the Oswal Trading Co., Subhashchand purports to be a full-fledged partner while the other two brothers have been engaged as employees. The fact remains that the entire business and its management is in the hands of the same persons.
11. The ITO had examined Subhashchand on 10-1-1978 and some of the answers given by him to the questions addressed by the ITO are important. In answer to question Nos. 15 and 16 regarding the flow of money from one firm to the other, Subhashchand impliedly admitted it to be so. At the hearing before us, it was contended that Ghasiram Kaluram did not do kutcha arhat business. This, however, is disproved from the material on record. In answer to question No. 18, Subhashchand did not deny that Ghasiram Kaluram was doing kutcha arhat business. When asked to explain whether there was any difference in the two types of arhat for purposes of accounting or for purposes of sales tax, he said that there was no such difference. Question Nos. 20 and 21 and their answers are important and are, therefore, reproduced below : Q. 20 : Which means that the business which Oswal Trading Co. is doing now was a part of Ghasiram Kaluram before the assessment year 1976-77. What you have to say Ans : This was done by Ghasiram Kaluram previously and is also being done today.
Q. 21 : Which means that the business that you call the kutcha arhat is also being done by Ghasiram Kaluram today Ans : Yes, it was done by Ghasiram Kaluram previously and also being done today.
12. The next day, i.e., on 11-1-1978, the ITO conducted a survey at the premises of these firms and found that the cash was only at one place.
There were no separate business premises and transactions were initially noted in a common book and were ledgerised in separate books later on. The ITO recorded the statement of Maneklal as well and after sustained questioning, Maneklal had to admit that there was no separate cash box for Oswal Trading Co. Earlier, he had tried to pretend that the cash box and accounts of Oswal Trading Co. were in another almirah kept nearby. When that almirah was opened, it contained some old and miscellaneous papers and registers of both the firms and some personal papers about life insurance, etc. On opening that almirah further showed that it was not in regular use. Although a day earlier Subhashchand had stated that Ghasiram Kaluram was doing kutcha arhat business as well, Maneklal contradicted it and said that Ghasiram Kaluram did only pucca arhat business. As was vehemently contended before us, the necessity for floating a new firm arose because the same persons could not do kutcha arhat as well as pucca arhat business. If Ghasiram Kaluram was not doing kutcha arhat business earlier, there was nothing for them to worry by the new regulations as they would not affect them in any manner whatsoever. The fact that they were worried and the argument that the only option for the firm was either to close down a branch of its business or bring about a new entity for carrying on kutcha arhat business, itself indicates and proves beyond doubt that Ghasiram Kaluram was doing kutcha arhat business as well and it is this business of Ghasiram Kaluram which is being done in the name of Oswal Trading Co. after the enforcement of certain regulations under the aforesaid Act. Thus, Ghasiram Kaluram started doing its kutcha arhat business in a new name, Oswal Trading Co.
13. It was contended that Subhashchand's statement about the nature of the two businesses was confused. Such an argument cannot be accepted.
The appellants had ample opportunity to prove that in fact Ghasiram Kaluram was doing only pucca arhat business and had no interest in the kutcha arhat business done in the name of Oswal Trading Co. We find that the appellants made no effort whatsoever to rebut the evidence collected by the ITO. A statement made by a person cannot be treated as a confused statement merely because it is contended to be so. It was also argued that interest amounting to Rs. 1,600 was paid by Ghasiram Kaluram to Oswal Trading Co., which reflected the genuineness of the latter firm and its independent character. This is not so. It can be a mere accounting exercise and it is patently so. Any person who puts up a show creates certain circumstances to give the appearance a natural tenor and the entries of interest in the accounts are only an attempt in that direction.
14. From the above discussion, it is clear that the findings of the authorities below that the same persons were beneficially interested in the two firms, that the same persons conducted and controlled the business, that the finances were common, that the business premises were the same and, the initial entries were made in common account books are based on cogent, direct and circumstantial evidence and the learned Counsel for the appellants have failed to dislodge these findings. They are, accordingly, confirmed.
15. Now we proceed to look to certain authorities dealing with situations like this. In the case of Setabganj Sugar Mills Ltd. v. CIT  41 ITR 272, it was observed by the Hon'ble Supreme Court of India that in order to find whether two different ventures can be said to constitute the same business, one has to look to things such as unity of control and management, conduct of business through the same agency, the inter-relation of the business, the employment of the same staff to run the business and the nature of the different transactions.
If we look at the facts of the present case in the light of the observations in this ruling, we find that there is unity of control and management in the two appellants. The business of both the appellants is being carried on through the same persons the finances are interlocked and the nature of the business is supplementary to each other. In other words, they are two limbs of the same business. In Dhanji Lalji v. CIT  107 ITR 395 (Bom.), one DL was doing business as sole proprietor with two of his relations as his servants.
The business was converted into partnership purporting to take the two servants as partners. On the circumstances of the case, it was held that no genuine partnership had come into existence. It was observed that each one of the circumstances taken by itself might not be sufficient to lead to an inference about the non-genuineness of the firm but that did not mean that taking all the circumstances and factors cumulatively such an inference can never be drawn. In the case before us also, the various circumstances found above, as matters of fact, when considered cumulatively, lead to the only one and irresistible conclusion that Oswal Trading Co. is nothing but a new name adopted by Ghasiram Kaluram in order to regularise its kutcha arhat business.
16. In Ladhu Ram Taparia v. CIT  44 ITR 521 (SC), the ITO, on investigation, found that a number of firms carrying on business under different firm names really belonged to one and the same group of persons. The Hon'ble Supreme Court held that the ITO could refuse to register those firms under Section 26A of the Indian Income-tax Act, 1922 ('the 1922 Act'). It was observed that the income-tax authorities are not bound to register a firm merely because the firm has been registered as such under the Indian Partnership Act, 1932. In CIT v. G.Parthasarathy Naidu & Sons  121 ITR 97 (AP) (FB), there were two firms with the same partners, though with the difference in the ratio of sharing profits. The two firms carried on different businesses and it was held that the two firms were genuine. Great reliance was placed on behalf of the appellants on this ruling, which, however, does not help the appellants in any manner whatsoever. The question has to be decided on the cumulative effect or totality of all the material factors relating to the object and intendment of the partners in business, their nature, character and identity, coupled with the factum or otherwise of interlacing and interlocking funds between the two firms. Nothing of the sort was found in that case, while in the case before us all the circumstances are against the assessee. There could have been some force in the arguments of the learned Counsel if all the three brothers were the partners in the new firm. Instead of doing so, they, however, brought in the two ladies as benamidars. As already found, the nature of the business is the same and it is being conducted as one and the same business with common funds, common business premises, common management and control and even same common account books. A case somewhat identical to the facts of the case before us came up before the Hon'ble Madras High Court in CIT v. S.S.A.M.Shammugha Nadar Financing Corpn.  141 ITR 656. In that case, there were nine partners of a firm. One of those partners, along with the wives of the other eight partners, entered into a partnership and constituted a financing corporation B. The eight ladies withdrew Rs. 1,16,309 from the amounts standing to their credit in the old firm, while M, the male partner, withdrew Rs. 5,000 and invested in the new firm. Other amounts were also withdrawn and invested in the new firm from the old one and entries were made by mere book adjustments and no cash actually passed. It was held that the new firm was not a genuine firm. It was observed that the execution of a partnership deed is not by itself a talisman which can entitle a firm to be registered as, apart from the execution of the partnership deed, there must be circumstances and facts to show that it had come into existence and that it had carried on business. The mere fact, therefore, that a separate partnership deed was executed in the case before us between Subhashchand and the two ladies, does not provide any great advantage to the appellants and we have to look to the totality of the circumstances.
17. In view of the above discussion, we agree with the findings recorded by the authorities below that the firm, Oswal Trading Co., was not a genuine firm and it was merely an alias of Ghasiram Kaluram adopted for meeting the legal requirements under the Madhya Pradesh Krishi Upaj Mandi Adhmiyam. The authorities below were, therefore, right in holding that the business in the name of Oswal Trading Co. was actually carried on by Ghasiram Kaluram and, therefore, it was not an independent unit and its income was to be taxed in the hands of Ghasiram Kaluram. Registration was accordingly, rightly refused to Oswal Trading Co. because in view of its character it was not a genuine firm and in any case this business was merely benami for all the partners of Ghasiram Kaluram or at least the two ladies were the benamidars of their respective husbands.
18. Having covered the above ground, we now come to the question of disallowances of salary and interest. In the assessment year 1976-77 payment of Rs. 1,800 as salary to Maneklal and Rajendrakumar, partners,' and payment of Rs. 1,600 to Oswal Trading Co. as interest have been disallowed. Salary paid to a partner is not a business expenditure and interest paid to Oswal Trading Co. was a fictitious thing as it amounted to paying interest on its own capital. These so-called expenses debited to the profit and loss account were, therefore, rightly disallowed. For the same reason, a sum of Rs. 6,353 paid to Oswal Trading Co. as interest during the assessment year 1977-78 was rightly disallowed. Salary amounting to Rs. 8,100, Rs. 10,000 and Rs. 10,800 pertaining to the assessment years 1976-77, 1977-78 and 1978-79 was disallowed in the case of Oswal Trading Co.
These were amounts paid to Maneklal and Rajendrakumar In view of the finding that the business in the name of Oswal Trading Co was the business of Ghasiram Kaluram itself of whom the aforesaid persons were partners, these payments could not be allowed as a business expenditure Similarly, interest paid to Smt. Chandbai (Rs. 687 in the assessment year 1977-78 and Rs. 915 in the assessment year 1978-79) could not be allowed as a business expenditure, being the interest paid to one of the partners.
19. In view of the above findings, all these appeals fail and are hereby dismissed.