Kalpesh Classes

Firm cannot be a partner

The word ‘person’ in section 4 of the Partnership Act contemplates only natural or artificial, i.e., legal persons. Therefore, only individuals or companies can be partners. A firm is not a person and as such, is not entitled to enter into partnership with another firm or HUF or an individual.

But, however, if on true reading of the instrument of partnership, it is found that the constituent members of a firm and not the firm itself have entered into partnership and that fact is borne out both by the recital and that the partnership deed has been signed by the constituent members of the two firms, the refusal to register the firm on the ground that there was no valid partnership is erroneous.

Firms with common partner

Where there are same partners in firms governed by two different partnership deeds, an issue often arises whether there is one firm or two.​​ The issue had been decided earlier by the Supreme Court in Dy. CST v. K. Kelukutty [1985] 155 ITR 158 in a sales-tax case, where it was held that it must be considered in the light of facts in each case. The issue whether there were two firms or one, i.e., whether there are two taxable entities or one for assessment cannot be decided solely with reference to whether there are two partnership deeds or one. At the same time merely because the partners are identical, probably even with identical shares, it may not mean that there is an inference of only one firm. This view was reiterated by the Supreme Court in CIT v. G.Parthasarathy Naidu [1999] 236 ITR 350 in an income-tax reference after pointing out that it is a matter, which has to be considered with reference to the partnership law as was decided in K. Kelukutty's case.​​ If there are two independent agreements creating two firms for carrying on different businesses, each such document would create a distinct and separate firm. On the other hand, if it was only for expansion of the same business or even another business, treated as one with the same management and control, it could mean that there is only one firm. The issue finally has to be decided with reference to all the facts.​​ Even where, for example, there are same partners but with different profit sharing ratio, it can be said that it could still mean that there is only one firm, because mere difference in the profit-sharing ratio depending upon the contribution made for a particular activity does not mean that there are two different firms, unless there are other indicia for such a conclusion. But it can be said that where the identity of the partners is not the same in both, say with an additional partner or one less partner, though substantially the same, two firms have necessarily to be treated as different and distinct.​​ 

[1985] 155 ITR 0158A  CST (Deputy) vs. Kelukutty (K.) (SC) (A land  mark case)​​ 

For determining whether there is a firm, the officer assessing a tax has to apply the partnership law, subject, of course, to any specific provision in that regard in the tax law modifying the partnership law. If the tax law is silent, it is the partnership law only to which he will refer. It will all depend on the intention of the partners.​​ The intention of the partners will have to be decided with reference to the terms of the agreement and all surrounding circumstances, including evidence as to the interlacing or interlocking of management, finance and other incidents of the respective businesses. The firm name is only a collective name for the individual partners. But each partnership is a distinct relationship.​​ 

[1999] 2 36  ITR 0350 -  CIT vs. Parthasarathy Naidu (G.) and Sons (SC)

In the instant case, the two partnerships constituted by different partnership deeds carried on different businesses. Though they had the same partners their shares were different. It was clearly specified that the business of one partnership shall not be deemed to be part and parcel of the other. There was no inter-lacing or inter-locking between the two firms.As it is well-settled that it is open to any person to arrange his affairs by adopting legal device to reduce his tax liability to the minimum under the law, in the absence of prohibition in any law for creation or existence of two partnership firms with the same set of partners, the assessment of such firms cannot be clubbed and one assessment cannot be made merely because the partners are the same in both the firms.​​ Though the question whether a firm is genuine or bogus or benami is a pure question of fact, that must be considered.​​  ​​ 

Conclusion:​​ 

Assessment cannot be clubbed mearly because Partnere in both the firms are the same.