1944 (11) TMI 18 - HC - Income Tax

Summary

Issues Involved:
1. Assessment of the firm's income under the Indian Income-tax Act, 1922.
2. Assessment of the firm's income under the Excess Profits Tax Act.

Detailed Analysis:

1. Assessment of the Firm's Income under the Indian Income-tax Act, 1922
The case revolves around the assessment of a reconstituted firm's income following the death of one of its partners, Gokuldas Jivraj, in Samvat year 1995. The firm, originally consisting of three partners, was reconstituted in Samvat year 1996 without including the deceased partner's estate. The Tribunal initially made three incorrect assumptions: (1) that the sons of the deceased partner were admitted into the new partnership, (2) that the entire stock-in-trade and outstandings were taken over by the new firm immediately, and (3) that the widow of the deceased partner was the executrix.

Under Section 26 of the Indian Income-tax Act, 1922, the assessment should be made on the firm as constituted at the time of making the assessment. The Tribunal concluded that the firm continued its business after Gokuldas's death, and the profits accrued from the old undertakings should be taxed in the hands of the firm. The Court found this conclusion binding, and thus, the sum of Rs. 56,260 was rightly held to form part of the profits of the assessee for income-tax purposes.

2. Assessment of the Firm's Income under the Excess Profits Tax Act
The second issue pertains to whether the sum of Rs. 56,260 should be assessed under the Excess Profits Tax Act. The assessee contended that these profits were not from the business of the new firm but were received on behalf of the old firm. The Tribunal had earlier divided the profits between the surviving partners and the widow of the deceased partner for income-tax purposes, which the assessee argued should apply similarly under the Excess Profits Tax Act.

The Court examined Section 2(5) of the Excess Profits Tax Act, which defines "business" and states that all businesses carried on by the same person should be treated as one business. Section 8(1) specifies that a business is deemed discontinued and a new business commenced upon any change in the persons carrying on the business.

The Court concluded that the profits of Rs. 56,260 were not the profits of the new firm but were divided between the original partners and the administratrix of the deceased partner. This finding is consistent with the Tribunal's statement that these profits were not the profits of the assessee-firm. Therefore, the profits in the hands of the assessee-firm are not liable to excess profits tax.

Conclusion:
The Court answered the reference by affirming that the assessment of Rs. 56,260 under the Indian Income-tax Act was correct but ruled that these profits were not liable to tax under the Excess Profits Tax Act. Consequently, no order for costs was made.