Civil Appeals Nos 2585 and 2586 of 1978
From the Judgment and Order dated 1421978 of the Kerala High Court in TR C No 6 and 9 of 1977
VJ Francis for the Appellant
ST Desai AC for the Respondent
The Judgment of the Court was delivered by 138 PATHAK J
These appeals by special leave are directed against the judgment and order dated February 14 1978 of the High Court of Kerala dismissing two tax revision petitions arising out of assessments made under the Kerala General Sales Tax Act 1963
The respondent Messrs K Kelukutty is a partnership firm dealing in timber
It consists of six partners
It filed returns of its taxable turnover for the assessment years 1968 69 and 1969 70 under the Kerala General Sales Tax Act 1963 and the assessments were completed by the Sales Tax Officer
Subsequently the Sales Tax Officer discovered that the partners of the respondent firm owned a Saw Mill and the Saw Mill was run by a partnership firm Messrs KKK Sons Saw Mills which consisted of the same partners as the respondent firm
He found that during the assessment years 1968 69 and 1969 70 they had sold saw dust from the mill but had not been assessed to sales tax on that turnover
The Sales Tax Officer took the view that as both Messrs K Kelukutty and Messrs KKK Sons Saw Mills consisted of identical partners the two businesses carried on respectively by them had to be treated as the business of a single partnership firm and therefore the turnover of the sale of saw dust had to be included in the earlier assessments made on the respondent firm
The assessment orders were upheld by the Appellate Assistant Commissioner Sales Tax
Thereafter the appeals filed by the respondent firm before the Sales Tax Appellate Tribunal were allowed by its order dated March 30 1976 and the cases were remanded for fresh consideration
The Revenue applied to the High Court in revision Tax Revision Cases Nos 6 and 9 of 1977 on the following two questions a Was the Appellate Tribunal justified in law in holding that the reasoning in the decision reported in is applicable to the instant case and directing a further investigation and denovo disposal of the matter in the light of the observations contained in paragraph 15 of the order  b In the light of admitted or proved fact that the partners of the assessee s firm and that of the firm KKK Saw Mills are the same was the Appellate Tribunal justified in its view that there is no bar in there being two firms with the same partners carrying on business independently  Is not the said 139 approach and view against the principles of Partnership Act and the ratio of the decision reported in 21 STC 72 and  On February 14 1978 the High Court of Kerala dismissed the two revision petitions in the view that Messrs KKK Sons Saw Mills was a partnership firm distinct from the respondent firm for the purposes of sales tax assessment and the turnover of one could not be included in the turnover of the other
Reliance was placed by the High Court on the decision of this Court in State of Punjab vs Ms Jullunder Vegetables Syndicare1 The word dealer has been defined by cl
viii of section 2 of the Kerala General Sales Tax Act to mean any person who carries on the business of buying selling supplying or distributing goods  and the word person has been defined by cl
vvi A of section 2 of the Act as including a firm
Therefore a partnership firm must be regarded under that Act as an assessable entity separate and distinct from its individual partners
That would be in line with the view taken by this Court respecting a partnership firm as an assessable entity under the Income Tax Act
See Commissioner of Income Tax West Bengal vs A W Figgies and Company and Others2
The question remains however whether when the partners constituting a partnership firm carrying on one business constitute thereafter another partnership firm carrying on a separate and distinct business are there two distinct partnership firms in whose hand the turnover of the two businesses falls to be respectively assessed or is there in law only a single partnership firm liable to assessment on the turnover of both businesses  Before we proceed to examine this question reference may be made to some relevant decisions of the Courts
In Vissonji Sons  Company vs Commissioner of Income Tax Central3 a case under the Indian Income Tax Act 1922 Beaumont CJ speaking for the Bombay High Court expressed the view that in law a firm had no existence independently of its partners and that if there are two firms consisting of exactly the same partners and they carry on separate businesses the real position in law is that there is only one firm
140 Subsequently however in Jesingbhai Ujmashi vs Commissioner of Income Tax Bombay Mofussil 1 the same High Court speaking through Chagla CJ observed that the observations of Beaumont CJ were obiter merely and that it was perfectly permissible in law that the same partners should constitute two different firms for the purpose of the Income tax law leaving the question open as one of fact whether there are two separate firms or only one firm or whether one of the businesses carried on by one firm was in fact a business carried on by the other firm
That view was reaffirmed by the Bombay High Court in Jeshingbhai Ujamshi vs Commissioner of Income Tax Bombay2 where it was explained that there can be two separate firms in the eyes of the Income tax Act even if the partners are the same in both the firms provided the businesses carried on by the firms are different
It was further observed that the correct test to determine whether the businesses are the same or different businesses is whether there is any interlocking or interlacing between the two businesses
The point was considered by the High Court of Punjab and Haryana in RN Oswal Hosiery and Mahabir Woollen Mills vs Commissioner of Income Tax Punjab 8 which after considering the earlier authorities on the point concurred with the opinion of the Bombay High Court in Jeshingbhai Ujamshi supra
A contrary view was taken by a Division Bench of the High Court of Andhra Pradesh in Addl
Commissioner of Income Tax AP vs M Venkata Narasimha Rao  Co4 but that decision was over ruled by a Full Bench of the same High Court in Commissioner of Income Tax AP III vs G Parthasarathy Naidu  Sons5 where the learned Judges agreed with the view expressed by the High Court of Bombay in Jeshingbhai Ujamshi supra and by the High Court of Punjab and Haryana in RN Oswal Hosiery and Mahabir Woollen Mills supra
This Court in The State of Punjab vs Jullunder Vegetables Syndicate supra declared that although under the partnership law a firm is not a legal entity and only consists of the individual partners for the time being it was a legal entity for the purposes of the Income tax law as well as the Sales tax law
That was a case where this Court was called upon to consider whether an assessment could be made on a firm under the Punjab Sales tax Act after its dissolution on the turnover of sales affected during its existence
In our opinion that question cannot 141 be identified with the one before us
The Revenue has invited our attention to Mahendra Kumar Ishwarlal  Company vs The State of Madras1 but in that case the Madras High Court has assumed that the same partners cannot constitute two different partnership firms and on that assumption has concluded that no sale transaction could take place between the two firms
Except for the observations of Beaumont CJ in Vissonji Sons Company supra and the overruled decision of the High Court of Andhra Pradesh in M Venkata Narasimha Rao  Co supra the High Courts in the cases mentioned earlier have proceeded to hold that in the eyes of the tax law you can have two partnership firm composed of the same partners carrying on different businesses
The corner stone of that view is that for the purposes of the income tax law each partnership firm must be regarded as an assessable entity separate and distinct from its partners
The approach proceeds upon a conceptual perspective of the tax law and apparently assumes that otherwise under the partnership law the conclusion would have been that there is only one partnership firm carrying on two different businesses
It seems to us that the approach adopted by the High Courts is not sound and that the true solution has to be found not in the tax law but in the partnership law
We are concerned here with the Kerala General Sales tax Act
There is no doubt that under that Act a partnership firm must be regarded as an assessable entity
What precisely is the significance of that concept  Does the tax law clothe a partnership firm with juristic personality  How far does the tax law depart from the fundamental concept embodied in the partnership law that a business carried on by a partnership firm is in its material essence a business carried on by individual members in partnership and that a name given to a partnership firm is nothing more than a compendious description of the partners carrying on the business  As long ago as Watson and Everitt vs Blundan2 Romer LJ said that for taxing purposes a partnership firm is treated as an entity distinct from the persons who constituted the firm
This 142 dictum was approved by the House of Lords in Income Tax Commissioners for City of London vs Gibbs1 and was accepted as good law in India in respect of a partnership firm under the Indian Income tax Act 1922 in A W Figgies and Co supra
What that implies is that for the purposes of assessment to tax the income of the partnership firm has to be assessed in the hands of the firm as a single unit the firm itself being treated as an assessable entity separate and distinct from the partners constituting it
The firm is an assessable unit separate and distinct from the individual partners who as individuals constitute assessable units separate and distinct from the firm
It is on that basis that the provisions of the tax law are structured into a scheme providing for the assessment of partnership income
We do not think the principle goes beyond the purposes of that scheme
It does not confer a corporate personality on the firm
Beyond the area within which that principle operates the general law that is to say the partnership law holds undisputed domain
Now in every case when the assessee professes that it is a partnership firm and claims to be taxed in that status the first duty of the assessing officer is to determine whether it is in law and in fact a partnership firm
The definition in the tax law defines an assessee or a dealer as including a firm
But for determining whether there is a firm the assessing officer will 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
Having decided the legal identity of the assessee that it is a partnership firm he will then turn to the tax law and apply its relevant provisions for assessing the partnership income
The Kerala General Sales tax Act contains no provision which bears on the identity of a partnership firm
Therefore recourse must be had for that purpose to the partnership law alone
Where it is claimed that they are not one but two partnership firms constituted by the same persons and carrying on different businesses the assessing authority must test the claim in the light of the partnership law
It is only after that question has been first determined namely whether in law there is only one partnership firm or two partnership firms that the next question arises  whether the turnover is assessable in the hands of the partnership firm as a taxable entity separate 143 and distinct from the partners  There is first a decision under the law of partnership thereafter the second question arises the question as to assessment under the tax law
It is clear therefore that reference must be made first to the partnership law
The has by s4 defined a partnership as the relation between persons who have agreed to share the profits a business carried on by all or any of them acting for all
The section declares further that the persons who have entered into partnership with one another are called individually partners and collectively a firm
The components of the definition of partnership and therefore of a firm consist of a persons b a business carried on by all of them or any of them acting for all and c an agreement between those persons to carry on such business and to share its profits
It is the relationship between those persons which constitutes the partnership
The relation is founded in the agreement between them
The foundation of a partnership and therefore of a firm is a partnership agreement
A partnership agreement is the source of a partnership it also gives expression to the other ingredients defining the partnership specifying the business agreed to be carried on the persons who will actually carry on the business the shares in which the profits will be divided and the several other considerations which constitute such an organic relationship
It is permissible to say that a partnership agreement 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 sence
The firm name is only a collective name for the individual partners
But each partnership is a distinct relationship
The partners may be different and yet the nature of the business may be the same the business may be different and yet the partners may be same
An agreement between the partners to carry on a business and share its profits may be followed by a separate agreement between the same partners to carry on another business and share the profits therein
The intention may be to constitute two separate partnerships and therefore two distinct firms
Or to extend merely a partnership originally constituted to carry on one business to the carrying on of another business
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 the surrounding circumstances including evidence as to the interlacing or 144 interlocking of management finance and other incidents of the respective businesses
In the present case there are two businesses a business in timber and a business in saw dust
Both businesses are carried on by the same partners one as a partnership firm called K Kelukutty and the other under the name Messrs KKK Sons Saw Mills said to be a separate partnership firm
On the material before us it is not possible to say in the light of the considerations to which we have adverted whether there is one firm or two
That is a question which appropriately falls for examination by the authorities constituted under the Kerala General Sales Tax Act
While therefore we maintain the orders of the High Court dismissing the Tax Revision Cases 6 and 9 of 1977 and confirm the orders of the Sales Tax Appellate Tribunal remanding the cases we do so for the considerations and upon the reasons set forth in this our judgment
In order to abridge the time which inevitably will be further taken in disposing of this already protracted litigation we direct that instead of the cases going back to the assessing officer they shall stand remanded to the Appellate Assistant Commissioner Sales Tax for taking up the appeals before him again permitting the parties to lead evidence in the light of the considerations mentioned by us and disposing of those appeals in accordance with law
These appeals are disposed of accordingly
There is no order as to costs
NVK Appeals dismissed


Summary:
The respondent in the appeal was a partnership firm dealing in timber and consisted of six partners
It filed returns of its taxable turnover for the assessment years 1968 69 and 1969 70 under the Kerala General Sales Tax Act 1963 and the assessments were completed by the Sales Tax Officer
Subsequently the Sales Tax Officer discovered that the respondent firm owned a Saw Mill and that the Saw Mill was run by another partnership firm which consisted of the same partners as the respondent firm
It was further noticed that during the relevant assessment years the Saw Mill firm had sold saw dust but had not been assessed to sales tax on that turnover
The Sales Tax Officer took the view that both she respondents timber firm and the Saw Mill firm consisted of identical partners the two businesses carried on respectively by them had to be treated as the business of a single partnership firm and therefore the turnover of the sale of saw dust had to be included in the earlier assessments made on the respondent Timber firm
The assessment orders were upheld by the Appellate Assistant Commissioner
The appeals filed by the respondent Timber firm before the Sales Tax Appellate Tribunal were allowed and the cases were remanded for fresh consideration
The Revenue applied to the High Court but the revision petitions were dismissed
The High Court relying on the decision of this Court in State of 136 Punjab vs Ms Jullundur Vegetables Syndicate 1966 17 STC 326 held that the Saw Mill partnership firm was a partnership firm distinct from the respondent Timber firm for the purposes of sales tax assessment and the turnover of the one could not be included in the turnover of the other
Dismissing the Appeals to this Court  HELD 1
The approach adopted by the High Court is not sound
The true solution has to be found not in the tax law but in the partnership law
The orders of the High Court dismissing the Tax Revision Cases are maintained
The orders of the Sales Tax Appellate Tribunal remanding the case are confirmed
Instead of the cases going back to the assessing officer they shall stand remanded to the Appellate Assistant Commissioner
144 D E State of Punjab vs Ms Jullundur Vegetables Syndicate 1966 17 STC 326 distinguished
In every case when the assessee professes that it is a partnership firm and claims to be taxed in that status the first duty of the assessing officer is to determine whether it is in law and in fact a partnership firm
For determining whether there is a firm the assessing officer will 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
Having decided the legal identity of the assessee that it is a partnership firm he will then turn to the tax law and apply its relevant provisions for assessing the partnership income
142 D F Commissioner of Income Tax West Bengal vs A W Figgies and Company and Others  Jesingbhai Ujamshi vs Commissioner of Income Tax Bombay Mofussil  Jeshingbhai Ujamshi vs Commissioner of Income Tax Bombay  RN Oswal Hosiery and Mahabir Woollen Mills vs Commissioner of Income Tax Punjab  Commissioner of Income Tax AP III vs G Parthasarathy Naidu  Sons
  Income Tax Commissioner for City of London vs Gibbs 10 ITR Suppl
121 referred to
In the instant case there are two businesses a business in timber and a business in saw dust
Both businesses were carried on by the same partners one as a partnership firm called K Kelukutty and the other under the name Ms KKK Sons Saw Mills said to be a separate partnership firm
On the material before the Court it is not possible to say whether there is one firm or two
That is a question which appropriately falls for examination by the authorities constituted under the Kerala General Sales Tax Act 1963
144 B C 3
Having regard to the definitions of dealer and person in sections 2 viii and 2 xvi A of the Kerala General Sales Tax Act 1963 a partnership firm must be regarded under that Act as an assessable entity separate and distinct from its individual partners
However the Act contains 137 no provision which bears on the identity of a partnership firm
Therefore recourse must be had for that purpose to the partnership law alone
Where it is claimed that there are not one but two partnership firms constituted by the same persons and carrying on different businesses the assessing authority must test the claim in the light of the partnership law
It is only after that question has been determined namely whether in law there is only one partnership firm or two partnership firms that the next question arises whether the turnover is assessable in the hands of the partnership firm as a taxable entity separate and distinct from the partner  There is first a decision under the law of partnership thereafter the second question arises the question as to assessment under the tax law
139 C D 142 G H 143 A 4
Persons who have entered into partnership with one another are called individually Partners and collectively a firm
The relationship between those persons constitutes the partnership and is founded in the agreement between them the partnership agreement
A partnership agreement is the source of a partnership it also gives expression to the other ingredients defining the partnership viz specifying the business agreed to be carried on the persons who will actually carry on the business the shares in which the profits will be divided etc
Each partnership agreement may constitute a distinct and separate partnership and therefore distinct and separate firms
The firm name is only a collective name for the individual partners but each partnership is a distinct relationship
The partners may be different and yet the nature of the business may be the same
An agreement between the partners to carry on a business and share its profits may be followed by a separate agreement between the same partners to carry on another business and share the profits therein
The intention may be to constitute two separate partnerships and therefore two distinct firms
Or to extend merely a partnership originally constituted to carry on one business to the carrying on of another business
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 the surrounding circumstances including evidence as to the interlacing or interlocking of management finance and other incidents of the respective businesses
144 C H