Itta/49/2004 Of M/S. Arun Chemical And Pharmaceutical Works v. The Commissioner Of Income-Tax-V

*THE HONOURABLE SRI JUSTICE L. NARASIMHA REDDYand *THE HON’BLE SRI JUSTICE CHALLAKODANDA 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 <Gist : >Head Note: ? Cases referred: THE HON’BLE SRI JUSTICE L.NARASIMHA REDDYANDTHE HON’BLE SRI JUSTICE CHALLA KODANDA RAMI.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 bythe order dated 18.06.2003, passed by the Hyderabad Bench ‘B’ of theIncome Tax Appellate Tribunal (for short ‘the Tribunal’) inI.T.A.No.945/Hyd/94. The appellant is a firm registered under the Indian PartnershipAct, 1932, through a document dated 19.01.1988, and it comprises offour partners. The activity of the appellant is manufacturing and sale ofEthyl Chloride, which is used in the Anaesthesia. It is stated that thepartners of the appellant firm have also brought into existence, anotherfirm by name M/s.Hymavathi Enterprises, through another deed ofpartnership dated 24.02.1989. The appellant filed its return of income tax for the AssessmentYear 1990-91 postinga net loss of Rs.46,420/-. Broadly stated, thefigures are that the loss incurred by the appellant at Rs.71,001/-, theloss incurred by M/s.Hymavathi Enterprises at Rs.5,79,852/- and thehouse property income of the appellant firm at Rs.6,04,480/-. The netloss of Rs.49,420/- was emerged. The Assessing Officer refused to treat the facts and figurespertaining to M/s.Hymavathi Enterprises as part of the return of theappellant firm. Accordingly, he took into account, the net profit andloss of the appellant alone and passed an order of assessment. Aggrieved by that, the appellant filed an appeal before theCommissioner of Income Tax (Appeals) – II, Hyderabad. The appeal was allowed through order dated 17.02.1994. Challenging the order ofthe Commissioner (Appeals), the Department filed I.T.A. before theTribunal. The appeal was allowed and the order passed by theCommissioner was set aside. Smt. K. Neeraja, learned counsel for the appellant submits thatthough two separate firms were constituted, the partners in both thefirms are one and the same and only one income tax return wassubmitted. She contends that the Assessing Officer and the Tribunalwere not justified in treating the two firms separately. She furthercontends that the mere fact that two partners joined M/s.HymavathiEnterprises on 22.01.1990, and left it hardly within two months, doesnot make much difference, since the business of the firm commencedonly 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 intoexistence through separate deeds of partnership, the question of thefinancial affairs of the one firm being treated as part of the other doesnot arise. He contends that the appellant itself maintained thedifference between the affairs of the two firms by maintaining separatebooks of account and that the Assessing Officer and the Tribunal havetaken correct view of the matter. The entire controversy in this appeal is as to whether the affairsof 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 deeddated 19.01.1988 and its activity is manufacturing and marketing ofdrugs. The other firm, by name, M/s.Hymavathi Enterprises wasregistered on 24.02.1989 and its activity is to establish and run hotels. Both the firms have been maintaining separate accounts. Except thatthe partners in both the firms are common, there is nothing, whichunifies them in law. In the returns, the facts and figures pertaining to both the firms The entire controversy in this appeal is as to whether the affairsof 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 deeddated 19.01.1988 and its activity is manufacturing and marketing ofdrugs. The other firm, by name, M/s.Hymavathi Enterprises wasregistered on 24.02.1989 and its activity is to establish and run hotels. Both the firms have been maintaining separate accounts. Except thatthe partners in both the firms are common, there is nothing, whichunifies 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 lossof the appellant firm was shown at the rate of Rs.71,001/- and that ofM/s.Hymavathi Enterprises at Rs.5,79,852/-. The combined figure ofthese losses was pitted against the house property income of theappellant 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 hisview was upheld by the Tribunal. The mere fact that the same partners happened to be thepartners in two separate firms, does not constitute the basis to treatboth the firms as one entity, in the context of submitting the returns. Though a firm is not an independent legal entity when compared to acompany, in the context of the Income Tax Act, 1961, it is anindependent separate assessee. Secondly, in case, the relation ofboth the firms was so close, common accounting process would havebeen undertaken. Once separate accounts were opened and operatedfor each of the firms, there is no way, that a common return could havebeen filed for them. Even as regards the plea as to uniformity of composition of thefirms, the Tribunal took note of the fact that two new partners joinedM/s.Hymavathi Enterprises on 22.01.1990, but they did not join theappellant firm. It is a different matter that both of them leftM/s.Hymavathi Enterprises on 19.03.1990. That event onlydemonstrates that both the firms have separate channels, be it ofconstitution or maintenance of accounts. That being the case, the lossearned by one firm cannot be pitted or set off against the profits of theother firm. We do not find any basis to interfere with the order underappeal. The appeal is accordingly dismissed. There shall be no orderas to costs. The miscellaneous petitions filed in this appeal shall also standdisposed of. ___________________________ Date: 09.12.2014 Note: L.R copy to be marked B/ova L.NARASIMHA REDDY, J ____________________________ CHALLA KODANDA RAM, J