Income Tax Appellate Tribunal - Mumbai
Pathare Dhru And Co. vs Assistant Commissioner Of Income-Tax on 2 May, 1995
Equivalent citations: [1995]54ITD746(MUM)
ORDER
G.E. Veerabhadrappa, Accountant Member
1. These appeals by the assessee arise out of the orders dated 6-9-1989 of the Commissioner of Income-tax (Appeals). All these appeals are for the assessment year 1987-88. They were heard together and are being disposed of by a consolidated order.
2. The main issue relates to the inclusion of income of M/s. Pathare Dhru and Company in the hands of M/s. Dhru and Company on the reasoning that it is only a branch of M/s. Dhru and Company. One of the appeals arises out of the order under Section 185 refusing registration to the firm M/s. Pathare Dhru & Co. The other appeal in the case of M/s. Dhru & Co., relates to certain disallowances made in determining the income. The facts, which give rise to the dispute, are as under. M/s Dhru & Co., is a firm of Solicitors practising in the law profession for the last 20 years and is regularly assessed as a registered firm. The names of the parners and their share ratios in the said firm during the previous year ended 31-12-1986 relevant to the assessment year 1987-88 are as under :
(1) Shri D.B. Dhru 37% (2) Shri K.M. Parekh 37% (3) Shri KJ. Shah 26%
3. One Mr. P.G. Pathare was practising separately as a Solicitor as an individual under the name and style "M/s. Pathare and Company" for the last 40 years. Due to old age, he could not cope up with the professional work. Therefore, he admitted the aforesaid partners of M/s. Dhru & Co. to join his concern and a new partnership firm by the name and style "M/s. Pathare Dhru and Company" was formed by the deed dated 8th day of March, 1984. The results of the aforesaid partnership activity were to be divided among the partners in the following manner :
(a) Shri P.G. Pathare - Fixed amount calculated @ Rs. 1,000 per month
(b) The balance of the profit will have to be divided in the following manner:
(i) Shri D.B. Dhru 37% (ii) Shri K.M. Parekh 37% (iii) Shri K.J. Shah 26%
This firm, Pathare Dhru & Co., was granted registration in the assessment year 1985-86 and such registration was continued for the assessment year 1986-87. For the assessment years 1985-86 and 1986-87, the two partnerships were separately assessed to income-tax. On 31 -12-1985, Shri P.G. Pathare retired and a deed of partnership was executed on 22nd December, 1986. The profession of the erstwhile partnership M/s. Pathare Dhru & Co. was continued by the remaining partners from 1 st January, 1986. The partners and their share ratios of the firm M/s. Pathare Dhru & Co. remained the same as in the case of Dhru & Co. The assessees filed two separate returns. On these facts, the Assessing Officer treated the two separately constituted firms as one unit for income-tax assessment and the income of M/s. Pathare Dhru & Co. was included in the hands of Dhru & Co. The assessee is aggrieved.
4. The learned counsel for the assessee argued that M/s. Pathare Dhru & Co. and M/s. Dhru & Co. were assessed as two different Registered Firms for the assessment years 1985-86 and 1986-87. M/s. Dhru & Co. was in the profession for more than 20 years and M/s. Pathare & Co., which was converted into Pathare Dhru & Co., was also in the profession of Solicitors for over 40 years. The two partnerships are in the profession of Solicitors with different clientele and different nature of work. They are having different establishments and their profession is carried on from two different Chambers. The learned counsel for the assessees pointed out that there is no interlacing or interlocking of the activity. According to Shri Dastur, retirement of one of the partners of M/s. Pathare Dhru & Co. resulted in its constitution to be the same as that of Dhru & Co. For that reason alone, the incomes of the two firms constituted under different deeds of partnerships should not be clubbed. The learned counsel for the assessees pointed out that the same partners and the same ratios should not be the sole criteria for holding the two firms as one entity for the purpose of assessment. Mr. Dastur again pointed out that there is absolutely no interlacing or interlocking of the activities of the firms. Heavy reliance was placed on to the decisions of (1) the Andhra Pradesh High Court in CIT v. G. Parthasarathy Naidu & Sons [1980] 121 ITR 97 (FB);
(2) the Supreme Court in Deputy Commissioner of Sales Tax (Law) v. K. Kelukutty [1985] 155 ITR 158; and (3) the Kerala High Court in CIT v. Sree Radhakrishna Industries [1990] 181 ITR 368.
5. The learned departmental representative, on the other hand, argued that there was a dissolution of the firm Pathare Dhru & Co. on 31-12-1985 and a new firm came- into existence on 1-1-1986. According to him, neither registration of the old firm nor the continuation of registration of that firm in an earlier year is relevant for deciding the issue now raised by the assessee. The learned departmental representative also pointed out that the income cannot be criterion for deciding in whose hands the income should be clubbed. Reliance was placed on to the decision of the Madras High Court in Balu Ready made Stores v. CIT [1994] 207 ITR 461 for the proposition that there is an interlacing and/or interlocking of the management, finance and other incidents of the respective professional firms. According to him, inasmuch as M/s. Dhru & Co. appears as creditor of more than Rs. 1,20,000 in the books of M/s. Pathare Dhru & Co., the interlacing and interlocking of the finance would be established. The learned departmental representative also argued that there is interlacing and interlocking by way of common management and control. It is quite possible that the same partners attend to the work of both these two professional firms. According to him, the business of profession of the two so-called partnership firms is the same and the very intention of entering into a partnership with Shri P.G. Pathare was only to eventually make him retire and all these intentions do exhibit the desire on the part of Dhru & Co. to extend its professional activities and clientele. The fact that the profession is carried on at two different places is not wholly relevant as it is the normal feature of the head office and the branch. There fore, according to him, the Assessing Officer and the Commissioner of Income-tax (Appeals) were right in including the professional income of Pathare Dhru & Co. as a part of the income of Dhru & Co.
6. The learned representative for the assessee, in reply, pointed out that the decision of the Madras High Court in the case relied upon by the revenue was based on the decision of the Andhra Pradesh High Court in Addl CIT v. M. Venkata Narasimha Rao & Co. [1976] 104 ITR 28. It was pointed out to us that the aforesaid decision of the M. Venkata Narasimha Rao & Co.'s case (supra) was overruled by the Full Bench of the Andhra Pradesh High Court in G. Parthasarathy Naidu & Sons 'case (supra). It was pointed out to us that the aforesaid Full Bench decision was not cited before the Hon'ble Madras High Court. It was also argued that close reading of the Madras High Court decision gives the fact that there was interlacing of funds and management.
7. We have carefully considered the rival submissions in the light of the material placed before us. The issue whether two firms having same partners with identical shares should be treated as two independent units and assessed to tax separately or should there be clubbing of income has always agitated the minds of the judiciary under the sales tax legislation as also under income-tax. Sir John Beaumont, Chief Justice of Bombay High Court (Chagla Judge concurring with him) was very forthright and emphatic in dealing with this issue in Vissonji Sons & Co. v. CIT[1946] 14 ITR 272 (Bom.). He held :
In law a firm has no existence independently of its partners, and if there are two firms consisting of exactly the same partners, the real position in law is that there is only one firm. It may carry on separate businesses, and may carry on those businesses in different names but in fact there is only one firm in law.
The above observation was later held to be a mere obiter dictum by Shri Chagla J. (who had earlier concurred with the earlier proposition) in the case of Jesingbhai Ujamshiv. CIT[195O] 18 ITR 23 (Bom.) wherein it was observed:
Therefore, we disagree with the Tribunal in the view it has taken in law and we are of the opinion that there is nothing in law to preclude common partners constituting two separate firms for the purposes of the Income-tax Act.
The Andhra Pradesh High Court in M. Venkata Narasimha Rao & Co. s case (supra) first took a view that a firm has no separate legal existence apart from its partners and the income of the two firms having same partners with identical shares deserves to be aggregated. The above decision was overruled by a Full Bench of the Andhra Pradesh High Court in G. Parthasarathy Naidu & Sons 'case (supra). The Full Bench concluded that the answer to the question whether two or more partnerships or firms constituted under different deeds of partnership are, in reality, one partnership or not will depend on the cumulative effect of the partnerships and the businesses, their nature, character and identity coupled with the factum or otherwise of interlacing and interlocking of funds between the two firms.' The Full Bench ruled that the two firms were two different legal entities and the department is not justified in clubbing together the income of the two firms and assess the income so aggregated. The matter now appears to have been set at rest by the decision of the Supreme Court in the case of K. Kelukutty (supra). The Court observed that the solution this problem was to be found in the partnership law and not in the tax laws. The tax authorities while assessing a firm will have to first ascertain whether there is, in law and in fact, a firm. For determining this, they will have to apply partnership law. Having decided the legal entity of the assessee that it is a firm, they will then turn to tax law and apply its relevant provisions for assessing the partnership income holding that the "foundation of partnership and, therefore, of a firm is a partnership agreement". It went on to say that "it is permissible to say that a partnership deed 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 sense. The firm name is only a collective name for the partners but each partnership is a distinct relationship." The Court concluded by saying that the intention of the partners will be deciding factor whether they constituted two separate firms distinct from each other or the second partnership is an extension of the business of the first partnership. Later on, the Andhra Pradesh High Court in CITv. V. Veeri Naidu & Sons [1987] 168 ITR 567, following these principles, held that legally there could be two firms having same partners with the same profit sharing ratios. The Madras High Court in Balu Readymade Store's case (supra), went by the observations made by the Andhra Pradesh High Court in the case of M. Venkata Narasimha Rao & Co. (supra). The Full Bench of the Andhra Pradesh High Court has overruled that decision. Moreover, looking to the facts of Balu Readymade Stores, the basis for that decision was that there were two separate partnership firms, one in cloth business and the other in theatre business. The funds of cloth business were used for the construction of the theatre. In the firm's books of the cloth business, the theatre building was shown as an investment of the firm doing cloth business. The facts before us are different from the facts before the Madras High Court in the case of Balu Readymade Store's case (supra). Be/fore the Kerala High Court in Sree Radhakrishna Industries' case (supra), the facts were that the two firms of the same two partners were engaged in the business of manufacture and sale of tiles under two different names. The department clubbed the income of these two units for the purpose of assessment. The Tribunal found that the two firms were independently formed at different times. The factories were situate in different places with separate accounting facilities. There was no common business organisation or unity of finance. The Tribunal held that the income of the two different firms should not be clubbed together. The Kerala High Court directed a reference at the instance of the department and answered the question in favour of the assessee and against the department. The facts of the case before us are identical to the facts that were there before the Kerala High Court in the case cited (supra).
We, therefore, are of the opinion that the two firms M/s. Pathare Dhru & Co. and M/s. Dhru & Co. should be separately assessed. In fact, they were so assessed in the assessment years 1985-86 and 1986-87. We agree with Shri Dastur that a mere incident of retirement of one of the partners of M/s. Pathare Dhru & Co., which resulted in the same constitution as that of M/s. Dhru & Co. should not induce the department to assess the two firms by clubbing their income. The two firms are separately registered under the partnership law. They carry on the profession at two different places with separate establishments. There is no interlacing of activities. In law, there is nothing illegal in two partnership firms being constituted by the same persons. In the light of the above discussion, we direct the department to treat the two firms as two units of assessment for the purpose of income-tax. Accordingly, it is directed that income of M/s. Pathare Dhru & Co., which is substantially assessed in the hands of Dhru & Co., shall stand excluded. The protective assessment made in the hands of Pathare Dhru & Co. shall now become substantive.
8. As regards the appeal by M/s. Pathare Dhru & Co. in relation to the action of the Assessing Officer in not granting registration to the assessee under Section 185 of the Act, it may be observed that the order of assessment clearly states that the firm has made an application in Form No. 11 for grant of registration. Copy of the partnership deed is also on our record. In the light of the above discussion, we direct the Assessing Officer to grant registration to the firm M/s. Pathare Dhru & Co. for the assessment year 1987-88. The substantive assessment will be in the status of registered firm.
9. The other appeal filed by Pathare Dhru & Co. relates to the quantum of income determined in the case of Pathare Dhru & Co. The first ground relates to a disallowance of Rs. 1,69,500 being the premium paid to the retiring partner. The facts relevant to this issue arise from clauses 4 and 5 of the partnership dissolution deed dated February 19, 1986, which state as under :
(4) The said Padmakar Ganpatrao Pathare the Party of the First Part agrees and undertakes that he shall not for a period of two years following the date of dissolution directly or indirectly either alone or jointly with any other person or firm or in partnership or as agent, consultant or employee of any other firm act as or do any work done by Solicitors and Advocates for any person, firm or company who shall have been the clients of the said partnership firm of M/s. Pathare Dhru & Co., and he shall not for the like period directly or indirectly either alone or jointly with any person or firm or partnership or as agent consultant or employee of any firm undertake professional work or render professional services as solicitor and advocate in respect of the following types of matters before the Court and Authorities :
(i) Company matters.
(ii) Trade Mark & Patent Matters.
(iii) Shipping matter in Admiralty and Vice Admiralty Jurisdiction of the High Court.
(iv) Labour matters in Industrial Court.
(v) Taxation matters before the Income-tax Authorities.
(vi) Foreign Collaboration.
(vii) Customs & Central Excise and Octroi matters.
(viii) Foreign Exchange matters.
(ix) Court matters relating to the above, but nothing contained in these provisions shall prevent the said Party of the First Part from proceeding to make recovery/recoveries of pending matters of Pathare & Co., and matters completed by Pathare & Co., till 31 st December, 1985 and to complete the pending matters of Pathare & Co., as may be pending on 31 st December, 1985.
(5) In consideration of the obligation undertaken by the Party of the First Part in Clause 4 above, the parties of the Second, Third and Fourth parts shall pay the Party of the First Part a sum of Rs. 3,39,000 as hereinafter stated:
(a) Rs. 2,00,000 (Rupees Two lacs) on or before the execution of the deed of dissolution (the payment and receipt of the said sum of Rs. 2,00,000 to be paid on the signing of this Deed of Dissolution, the Party of the First Part doth hereby acknowledge and discharge the parties of Second, Third and Fourth Parts).
(b) Rs. 1,39,000 (Rupees One Lac Thirty-nine thousand) on or before the 2nd day of April, 1986).
Until the sum mentioned in Sub-clause (b) above is paid to the party of the First Part he shall be entitled to occupy and is hereby authorised to occupy the chamber presently occupied by him in the partnership premises of M/s. Pathare Dhru & Co.
In pursuance of the above clauses, a sum of Rs. 1,69,500 was paid to Mr. P.G. Pathare during the previous year relevant to the assessment year 1987-88. In the assessment of the income of the firm, the aforesaid payment was claimed as revenue expenditure. The Assessing Officer and the CIT (Appeals) held it to be a capital expenditure and the assessee is aggrieved. The learned counsel for the assessee contended that the aforesaid payment was made for preservation of the assessee's business and not in the field of expansion of business. According to him, the clientele was already there with the firm. The payment is only intended for preserving such clients with the assessee-firm. The payment is not for bringing new clients or it does not result in acquisition of either capital asset or benefit of enduring nature. The learned representative for the assessee further pointed out the payment is only to prevent Mr. P.G. Pathare from rendering professional service for a period of two years from the date of dissolution of the firm. According to him, the amount spent was wholly and exclusively for the purpose of profession. Hence the same is allowable under section 37( 1) of the Act. Our attention was drawn to the following case laws in the matter :
(1) CITv. Late G.D. Naidu [1987] 165 ITR 63 (Mad.);
(2) CITv. Coal Shipments (P.) Ltd [1971] 82 ITR 902 (SC);
(3) CITv. Lahoty Brothers Ltd. [1951] 19 ITR 425 (Cal.); and (4) Sree Hanwnan Trading Co. v. CIT [1980] 125 ITR 1 (Ker.).
10. The departmental representative, on the other hand, argued that the expenditure is for acquiring a benefit of enduring nature and, therefore, it shall be treated as a capital. Reliance was placed on to the following decisions :
(1) Devidas Vithaldas & Co. v. C/T[1972] 84 ITR 277 (SC); and (2) CITv. Hari Chand[l993] 199 ITR 277 (AIL).
11. The assessee's learned representative, in reply, pointed out that the facts of the case in Devidas Vithaldas & Co.'s case (supra) relate to payment for goodwill and, therefore, not applicable to the present issue.
12. We have considered the rival submissions in the light of the material placed before us. The facts before the Calcutta High Court in LahotyBros. Ltd. 's case (supra) were that the assessee was a private limited company and carried on business as dealers in petroleum and mobile oil. It was also a sole agent of a company for distribution of kerosene oil in a particular area. Prior to the taking up of the business by the assessee, it was run by a joint family. By an agreement between the joint family and the assessee, it was agreed, inter alia, that the assessee would pay Rs. 2,100 annually to the joint family on the understanding that during the continuance of the agreement the joint family either directly or indirectly in its own name or in the benami name of any others, should not participate in the business in petroleum, mobile oil and kerosene with the oil company within the particular area without the consent of the assessee obtained in writing. To a question whether the payment was an allowable deduction, the Calcutta High Court answered that the money was paid for the purpose of the business and with a view to keep the competitor out of the area in which the assessee was carrying on the business and, therefore, held it to be an allowable deduction. In the facts of the present case also, the payment was for consideration of the restrictions placed on Mr. Pathare from undertaking any professional work which would affect the assessee's professional practice for a period of only two years. This is just to ward off the diversion of clients in favour of Mr. Pathare within the period of two years. The ratio laid down by the other cases relied upon by Mr. Dastur support the claim of the assessee. The payment was not for expansion of any business activity or for acquiring benefits of enduring nature. In our view, the expenditure is incurred in the course of business and for the purpose of business. The same should be allowed as deduction in the computation of income of M/s. Pathare Dhru & Co.
13. The next dispute relates to the disallowance of Rs. 9,000, the expenditure incurred on repairs and maintenance. The Assessing Officer has disallowed these payments on the ground that the assessee has not produced any vouchers sand other evidences. We, therefore, decline to interfere.
14. The next dispute relates to the expenditure of Rs. 18,952 incurred on cupboard, partition, etc. The Assessing Officer has treated these expenses as capital in nature. The contention of the assessee is that the same should be allowed as revenue expenses of the business. The finding of the revenue authorities is that these expenses are incurred for new partitions, furniture and interior decorations. The expenditure is for acquisition of new asset in the form of cupboards, partitions, etc. In our view, the Assessing Officer has rightly treated these expenses as capital in nature.
15. The assessee had taken an additional ground in the case of Dhru & Co. relating to the disallowance of Rs. 1,69,500 being the payment made to the retiring partners of M/s. Pathare Dhru & Co. when it was substantively assessed by the Assessing Officer in the hands of Dhru & Co. We have already directed the exclusion of this income in the hands of Dhru & Co. We have dealt with this issue on merits while disposing of the assessee's ground in the case of Pathare Dhru & Co. The additional ground taken in the case of Dhru & Co. is, therefore, held to be infructuous.
16. In the result, ITA 8912 is allowed in relation to the main dispute and in relation to the additional ground it is dismissed as infructuous. ITA 8911 of Pathare Dhru & Co. is allowed and ITA 8910 of Pathare Dhru & Co. is partly allowed.