1963 (12) TMI 7 - SC - Income Tax

Whether, on the facts and in the circumstances of the case, the asses see is not entitled to relief under section 25(4) of the Indian Income-tax Act, and to what extent ? Held that - What was discontinued could not be succeeded to. Even if it was held that on May 30, 1939, there was a succession to the business which we do not think is a correct view to take, that also. would disentitle the appellant to relief under sub-section (4) of section 25 in the years 1948-49 and 1949-50, for it should, in such an event, have claimed the relief in the year 1939-40. The business which had been subjected to tax in 1918 had been discontinued in October/November, 1937, or on May 30, 1939, and it was not in existence in 1948 so as to permit a succession to it taking place under the instrument of February 7, 1948. Appeal dismissed.

Summary

Issues Involved:
1. Entitlement to relief under Section 25(4) of the Indian Income-tax Act, 1922.
2. Discontinuance of business.
3. Succession of business.
4. Change in the constitution of the partnership.

Issue-wise Detailed Analysis:

1. Entitlement to Relief under Section 25(4) of the Indian Income-tax Act, 1922:
The appellant firm claimed relief under Section 25(4) on the grounds that it had transferred its business to a limited company by an instrument executed on February 7, 1948. The Income-tax Officer, Appellate Assistant Commissioner, and Income-tax Appellate Tribunal rejected this claim. The High Court also held that the appellant was not entitled to any relief under Section 25(4). The Supreme Court examined whether the appellant was entitled to relief under Section 25(4), which provides that no tax shall be payable by a person carrying on a business on which tax was charged under the Indian Income-tax Act, 1918, if succeeded by another person after April 1, 1939.

2. Discontinuance of Business:
The court analyzed whether the appellant's business was discontinued. According to Section 25(3), discontinuance of a business that was charged under the Indian Income-tax Act, 1918, provides relief from taxation unless there was a succession as per Section 25(4). The court found that the business was indeed discontinued in 1937 when it was split into two separate firms. This discontinuance meant that the business could not have been carried on April 1, 1939, and thus, the appellant could not claim relief under Section 25(4).

3. Succession of Business:
The court examined whether there was a valid succession of the business. Section 25(4) requires that the business must have been carried on at the commencement of the Indian Income-tax (Amendment) Act, 1939, and that the person carrying on the business on April 1, 1939, must be succeeded by another person. The court found that the business was split into two separate firms in 1937, and therefore, there was no continuity of the original business. Consequently, the succession in 1948 did not meet the requirements of Section 25(4).

4. Change in the Constitution of the Partnership:
The court also considered whether the changes in the partnership's constitution amounted to a succession or merely a change in the partnership's constitution. The appellant argued that the firm had undergone changes in its constitution but had never been dissolved and continued to carry on the same business. However, the court found that the agreements executed in 1939 and 1943 indicated that the original partnership was dissolved, and new partnerships were created. This dissolution and creation of new partnerships did not qualify as a mere change in the constitution but amounted to a discontinuance of the original business.

Separate Judgment by Hidayatullah J.:
Hidayatullah J. delivered a separate judgment disagreeing with the majority. He argued that the business of piece-goods, yarn, and banking, which paid tax under the Act of 1918, continued without interruption and that the changes in 1939 and 1943 were merely changes in the constitution of the partnership, not a discontinuance or succession. He concluded that the appellant was entitled to relief under Section 25(4) but only in respect of the business in piece-goods, yarn, and banking.

Conclusion:
The majority judgment concluded that the appellant's business was discontinued in 1937 or 1939 and was not in existence in 1948, thus disqualifying the appellant from relief under Section 25(4). The appeals were dismissed with costs. Hidayatullah J., in his dissenting judgment, held that the appellant was entitled to relief under Section 25(4) for the business in piece-goods, yarn, and banking.