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iyanar Coffee and Tea Company Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 124 of 1966 (Reference No. 44 of 1966)
Judge
Reported in[1970]78ITR775(Mad)
ActsIncome Tax Act, 1961 - Sections 37(1)
Appellantiyanar Coffee and Tea Company
RespondentCommissioner of Income-tax
Appellant AdvocateV. Ramachandran, Adv.
Respondent AdvocateV. Balasubrahmanyan and ;J. Jayaraman, Advs.
Cases ReferredState of Punjab v. Jullundur Vegetable Syndicate
Excerpt:
.....certain amount raised on firm - whether aforesaid amount was allowable deduction in computation of assessee income - assessee and firm were two different legal entities - business of assessee and firm were not different - business of assessee and firm was interlocked - held, assessee claim for deduction of statutory liability in common trading activity upheld under section 37 (1). - - 20,507 failed, it is entitled to the deduction of the said amount from its chargeable income for the year relevant to the assessment year 1962-63. legally, he would contend that as all the assets and liabilities of the firm were taken by the assessee and in particular as the safes tax reserve created by the firm was also taken over, it follows that the assessee is but a continuation of the firm. 20,507..........was made on the firm on january 31, 1961, resulting in a demand for rs. 20,507 being raised on the firm. the assessee, who took over the assets and liabilities of the firm, including the sales tax reserve in the books of the firm, submitted a return under the income-tax act, 1961, for its income from the coffee business for the previous year ending february 1, 1962, corresponding to the assessment year 1962-63. in its return of income it claimed a deduction of the above sum of rs. 20,507 under section 37(1) of the act, as if it was an expenditure incurred by the assessee's business. the income-tax officer rejected the claim on the ground that the liability was that of the firm and that it related to the financial year 1958-59, and as the firm was still functioning, the claim was not.....
Judgment:

Ramaprasada Rao, J.

1. Iyanar Coffee and Tea Company was originally a limb of a partnership firm run under the name and style of 'A. R. A. Karuppiah Nadar', hereinafter referred to as 'the firm'. There were eight partners in A. R. A. Karuppiah Nadar, besides two minors admitted into its benefits. This firm was carrying on several businesses ; in particular, it adopted the trading style of 'Iyanar Coffee and Tea Company' in so far as its coffee business was concerned. On February 8, 1960, the partners of the firm, for reasons not known, virtually separated their branch business of Iyanar Coffee and Tea Company and began to run the same as an independent partnership concern in which all the partners of the firm were also partners. The result is that the assessee is an independent concern, but a partnership which had its origin in the firm as its branch. All the assets, liabilities, goodwill, quota rights, etc., appertaining to the coffee business, then run as a branch of the firm, were taken over by the assessee. It is common ground that while so taking over the branch, the assessee, inter alia, took over a reserve fund of Rs. 24,632-6-1, which represented a credit balance in the books of the firm and was relatable to sales tax liability of the branch so torn off from the composite firm. Virtually the assessee is continuing the business of the firm in so far as the coffee trade is concerned.

2. In respect of the accounting year ending March 31, 1959, a sales tax assessment in respect of the coffee business was made on the firm on January 31, 1961, resulting in a demand for Rs. 20,507 being raised on the firm. The assessee, who took over the assets and liabilities of the firm, including the sales tax reserve in the books of the firm, submitted a return under the Income-tax Act, 1961, for its income from the coffee business for the previous year ending February 1, 1962, corresponding to the assessment year 1962-63. In its return of income it claimed a deduction of the above sum of Rs. 20,507 under Section 37(1) of the Act, as if it was an expenditure incurred by the assessee's business. The Income-tax Officer rejected the claim on the ground that the liability was that of the firm and that it related to the financial year 1958-59, and as the firm was still functioning, the claim was not admissible. The Appellate Assistant Commissioner upheld the disallowance. On a further appeal, the Tribunal did not also agree with the assessee. The assessee required the Tribunal, under Section 256(1) of the Act, to refer the following question arising out of its order, for an answer by this court :

'Whether, on the facts and in the circumstances of the case, the sum of Rs. 20,507 was an allowable deduction in the computation of the assessee's income for the previous year ending on February 8, 1962, relevant for the assessment year 1962-63 ?'

3. Mr. Ramachandran, sustaining the case of allowance as claimed by the assessee, contends factually that it was the assessee who further pursued in appeal canvassing the propriety of the demand of Rs. 20,507 as sales tax and as such it was relatable to the assessee's business. He would also refer to the refund of Rs. 17,721 obtained by the. assessee in respect of the sales tax assessment of the firm for the year 1958-59. As the deduction claimed refers to the assessment year 1959-60 and as all its efforts in appeal as against the demand of Rs. 20,507 failed, it is entitled to the deduction of the said amount from its chargeable income for the year relevant to the assessment year 1962-63. Legally, he would contend that as all the assets and liabilities of the firm were taken by the assessee and in particular as the safes tax reserve created by the firm was also taken over, it follows that the assessee is but a continuation of the firm. One other singular circumstance strongly relied upon by the assessee is that there has been no change in the constitution of the firm and that of the assessee and that by itself is indicative of the oneness of both the firms and therefore the deduction claimed should be deemed to be one which has arisen in the course of the business of the assessee. The revenue, contending contra, urged that both are different firms and the mere identity of partners in both the firms is not decisive.

4. When once we arrive at the factual finding, on the interpretation of the admitted facts and documents in the case that the business of both the firm and the assessee is one and that there is such identity in them that it is reasonable to infer that the expense of the one can be lawfully claimed as a deduction by the other, as a continuing concern, then it is easy to comprehend the assessee's claim and accept it. The answer to the above poser depends on the proved facts and on their appreciation. There is no dispute that the partners of both the firm are the same. The assessee, after its reconstitution, got a refund of sales tax for the assessment year 1958-59, in which year, only the firm was doing business. For the assessment year 1959-60, when the present demand of Rs. 20,507 was raised, it was the assessee who owned the liability under the demand though it related to the firm when it was compositely functioning, and took up the matter in appeal before the hierarchy of statutory tribunals under the Madras General Sales Tax Act, though unsuccessfully. The result was that the assessee had to meet the demand. Contemporaneous with the creation of the assessee, the sales tax reserve created by the firm was transferred to the assessee, like any other asset. It appears that the sales tax authorities recognised the assessee as the concern solely liable to suffer the demand and without reference to the 'firm' raised the demand against the assessee. Thus, the sales tax authorities completely accepted on principle the status of the assessee as a continuing concern and as a successor to the firm. In our view, this has been rightly done. We have noticed earlier that the assessee obtained a refund of sales tax of Rs. 17,271 which referred to the dealings of the firm for 1958-59 and included the same in its profit and loss account. Later, its attempt to resile proved futile. An attempt by the firm to get a deduction of the sum of Rs. 20,507 by a revision petition to the Commissioner was unsuccessful. The various factual details lend support to the view that the assessee stepped into the shoes of the firm and the assessee is but a reflection of the firm,

5. A partnership is undoubtedly the relation which subsists between persons carrying on business in common with a view to making profit. The partners are collectively referred to as a firm. The mercantile view generally is to look upon the firm as a body distinct from its members and having rights and obligations of its own. But the legal notion of a firm is different, since the legal view is that the firm is not recognised as distinct from the members composing it. In fact, the law ignores the firm but looks to the partners for its identity and composition. In the eye of law, therefore, the rights and obligations of the firm are really the rights and obligations of the individuals constituting it. As is often said, the firm is a short collective name for the individual partners who constitute it and is neither a legal entity nor an artificial person nor a corporation, although the common law provides, probably for convenience, for the firm name being utilised for the purpose of suing and of being sued. It is in this light of the legal notion of a partnership firm that the status of an assessee in juxtaposition to the firm has to be adjudged. The constitution of both the firm and the assessee disclose that there are identical partners in both. The sharing also is reported to be similar. In such circumstances, the law treats them as only one firm though, for convenience, they transact business under two different trading styles.

6. Sir John Beaumont C. J. in Vissonji Sons & Co. v. Commissioner of Income-tax, [1946] 14 I.T.R. 272 (Bom.) expressed the view that in law a firm had no existence independent of its partners and if there are two firms consisting of 'exactly the same partners, the real position in law was that there was only one firm. It may carry on separate business and may carry on these businesses in different names but in fact there was only one firm in law'. Chagla C.J. in Jesinghhai Ujamshi v. Commissioner of Income-tax, : [1950]18ITR23(Bom) (Bom.) thought that the above statement of law was obiter. With great respect we think the exposition is of general application. In fact the dicta in Uissonji Sons & Co. v. Commissioner of Income-tax was quoted with approval in S. S. Subbier v. Commissioner of Excess Profits Tax, : [1959]35ITR362(Mad) . In Jesingbhai Vjamshi v. Commissioner of Income-tax the learned judges took a different view probably because there was not the identity of business between the two firms .having common partners and, in fact, the facts disclose that the sharing of; profits also was in different proportions. In the end they accept that the proposition that the same persons with the same shares cannot for income-tax purposes be partners of two entirely separate firms, though, a highly attractive abstract proposition, is always a question of fact to be decided on the merits of each case.

7. We have already noticed the facts in the case. When the assesseevoluntarily undertook to pay the demand in question as sales tax; it did itbecause of its conscious identity of the personnel of the firm and that of theassessee. Such unison and identity in purpose and in commerce was the intention behind the undertaking being taken over by the assessee. No doubt, ittook over all the liabilities and assets,' which included the sales tax reserve.This again was at a time when the statutory liability for .sales tax payablefor the year was not quantified. Here again the intention is clear that the assesses undertook the liability for sales tax, whatever may be the amount, in order to continue its trade. What may be normally said of an ordinary trade liability cannot be said of a statutory liability or a fiscal liability. Such a liability is assumed not because of the contract of transfer of assets, but because it is a necessary annexure to the incidence of the business having been taken over and continued. In the words of Rajagopalan, Offg. C.J., who spoke for the Bench in Associated Printers (Madras) Private Ltd. v. Commissioner of Income-tax, : [1961]43ITR281(Mad) (Mad.):

'The payment made in discharge of a contractual liability imposed in express terms by the contract of transfer or sale and equated to payment in part of the purchase price is laid out to complete the purchase and to discharge the purchaser's liability. The principle applicable to such payments, that they constitute expenditure of a capital nature, cannot be extended to a case like the present, where the liability devolved on the assessee-company by operation of law.'

8. Mr. Balasubrahmanyan, for the revenue, however strenuously contended that, as a partnership is a legal entity for purposes of fiscal law such as the Income-tax Act or the Sales Tax Act, the assessee should be treated ipso facto as a different legal entity from the firm. Reliance is placed on Com missioner of Income-tax V. Abdullabhai Abdulkadar, : [1961]41ITR545(SC) and State of Punjab-v. Jullundur Vegetable Syndicate, : [1966]2SCR457 , The former was a cash where a resident firm was treated as the agent of a non-resident principal and assessed to tax payable by the non-resident. The resident-firm had to pay a considerable sum by way of such tax, which amount it later claimed as a bad debt or trading loss because it could not recover it from the principal (nonresident). The Supreme court held :

'That in order that a loss might be deductible it must be a loss in the business of the assessee and not a payment relating to the business of somebody else which under the provisions of the Act was deemed to be and became the liability of the assessee. Loss was allowable if it 'sprang directly from and was incidental to ' the business of the assessee ; it was not sufficient that it fell on the trader in some other capacity or was merely connected with his business. The loss which the appellant had incurred was not in its own business but arose because of the business of another person and it was, therefore, not a permissible deduction under Section 10(1) of Income-tax Act. It was not a loss which had to be deducted in respect of the business of the respondent-firm from the profits and gains of the business.'

9. The ratio in the above case is quite understandable. The business of the resident agent is totally different from that of the non-resident principal There being no resemblance between the persons and the business, the deduction claimed was rightly rejected. We have held factually in the instant reference that the firm and the assessee are one and if at all there was any noticeable feature, it was that the assessee continued the quondam business of the firm. It is not a case of transfer of business within the meaning of Section 27 of the Madras General Sales Tax Act, 1959. Therefore, the Supreme Court decision cannot help the revenue.

10. Reference was also made to State of Punjab v. Jullundur Vegetable Syndicate to substantiate the argument that the firm and the assessee are different legal entities under the Income-tax Act. There the Supreme Court was concerned with the question of the statutory right of a taxing authority under the provisions of the Act to assess a dissolved firm in respect of its pre-dissolution turnover. It is in that context they examined the question whether a partnership firm is a separate entity for purposes of the Act (there it was the Sales Tax Act) or whether it was only a compendious term used to denote a group of partners. The court observed :

'Though under the partnership law a firm is not a legal entity but only consists of individual partners for the time being, for tax law, income-tax as well as sales tax, it is a legal entity. If that be so, on dissolution, the firm ceases to be a legal entity. Thereafter, on principle, unless there is a statutory provision permitting the assessment of a dissolved firm, there is no longer any scope for assessing the firm which ceased to have a legal existence. As in the present case, admittedly, the firm was dissolved before the order of assessment was made, the said order was bad.'

11. The answer so rendered by the Supreme Court was done in the peculiar circumstances of that case and mainly on account of the poser confronting them. But, as in the case under consideration, if factually the firm and the assessee are one due to their commensality, interlacing and interlocking, then, notwithstanding the fiscal concept which compels an independent recognition of the two concerns as two legal entities, it follows that the affairs of the one ought to be considered and dealt with as the affairs of the other. In fact, this court in Mahendra Kumar Ishwarlal & Co. v. State of Madras, [1968] 21 S.T.C. 72 (Mad.), after noticing State of Punjab v. Jullundur Vegetable Syndicate, was of a similar view. There the question was whether there could be a sale by one partnership concern to another, if the partners are the same. Ramakrishnan J., speaking for the Bench, held the view that, notwithstanding the peculiar norm in fiscal law to treat a firm as an assessable legal entity, yet it would not make any difference in regard to the definition of a sale, which involves two different persons. If the partners of the seller and the buyer are the same, even though they are fictionally treated as different legal entities, it ceases to be a sale. Even so, in the instant case, merely because for purposes of taxation laws the assessee and the firm are two different legal entities, it cannot be said that in the light of the facts disclosed, the businesses of the firm and the assessee are in any manner different. The nexus interlacing in their business is so conspicuous that their fictional legal individuality in tax laws became submerged in their commercial unison, as understood in the common law of partnership.

12. It, therefore, follows that, if the business of the firm and the assessee is thus interlocked, then the assessee's claim for deduction of the statutory liability in such a common trading activity between the assessee and the firm has to be upheld under Section 37(1) of the Income-tax Act, 1961.

13. We, therefore, answer the question in favour of the assessee with costs. Advocate's fee Rs. 250.


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