1971 (8) TMI 25 - SC - Income Tax

Matter related to an assessment of a pre-Constitution period under the Mysore Income-tax Act 1923 since the Mysore HC had delivered the judgment in 1967 on a reference under that Act the SC could grant special leave under article 136 of the Constitution to appeal against the judgment of the HC - Revenue s appeal allowed

Summary

Issues Involved:
1. Discontinuance of business under Section 25(3) of the Mysore Income-tax Act, 1923.
2. Succession versus discontinuance of business.
3. Applicability of Section 66(2) of the Mysore Income-tax Act for case reference.
4. Jurisdiction and appealability of the Mysore High Court's decision post-Constitution.

Detailed Analysis:

1. Discontinuance of Business under Section 25(3) of the Mysore Income-tax Act, 1923:
The primary issue was whether the business carried on by the Hindu undivided family (H.U.F.) was discontinued as per Section 25(3) of the Mysore Income-tax Act, 1923, following the partition of the family and the subsequent formation of a partnership firm. The court examined whether the partition and formation of a new partnership constituted a "discontinuance" of the business. The High Court had initially ruled in favor of the assessee, stating that the business was discontinued upon the partition. However, the Supreme Court found that the business was not factually discontinued but merely changed ownership from the H.U.F. to a partnership.

2. Succession versus Discontinuance of Business:
The court analyzed the distinction between discontinuance and succession of a business. It was noted that discontinuance implies a complete cessation of business activities, whereas succession involves a change in ownership without interrupting the business operations. The judgment cited various precedents, including Commissioner of Income-tax v. P. E. Polson and Kalu Mal Shori Mal v. Commissioner of Income-tax, which established that the business must cease entirely for it to be considered discontinued. The Supreme Court concluded that the business continued under the new partnership, and therefore, there was no discontinuance.

3. Applicability of Section 66(2) of the Mysore Income-tax Act for Case Reference:
The case was referred to the High Court under Section 66(2) of the Mysore Income-tax Act, which allows for advisory jurisdiction on specific questions of law. The question posed was whether the business was discontinued on November 1, 1948. The High Court had answered this in favor of the assessee. However, the Supreme Court disagreed, stating that the business was continued by the partnership formed after the partition, thus negating the claim of discontinuance.

4. Jurisdiction and Appealability of the Mysore High Court's Decision Post-Constitution:
A preliminary objection was raised regarding the jurisdiction of the Supreme Court to entertain the appeal, arguing that the Mysore High Court's decision was final under the Mysore Act. The Supreme Court dismissed this objection, citing Section 3 of the Finance Act, 1950, which extended the Indian Income-tax Act to cover the entire territory of India, including Mysore. The court also referenced Article 136 of the Constitution, which allows for special leave to appeal against any judgment by any court in India. Therefore, the Supreme Court had the jurisdiction to hear the appeal.

Conclusion:
The Supreme Court allowed the appeal, overturning the High Court's decision. It held that the business was not discontinued but merely succeeded by a partnership, and thus, the assessee was not entitled to the benefits of Section 25(3) of the Mysore Income-tax Act. The court emphasized that the business continued uninterrupted, albeit under new ownership, and the question referred was answered in favor of the revenue. The appellant was ordered to pay the costs of the respondent as per the previous order of the court.