1966 (8) TMI 12 - HC - Income Tax

Aggregation of the income - whether two sets of income derived during the same accounting year by firms which purported to be distinct firms, could be added to one another for the purpose of assessment - Held, no

Summary

Issues: Whether two sets of income derived by purportedly distinct firms during the same accounting year can be added for assessment.

Analysis:
The case involved a reference sought by the Commissioner of Income-tax under section 66(1) of the Income-tax Act, 1922, regarding the aggregation of income derived by two purportedly distinct firms during the same accounting year for assessment. The partnership in question was initially constituted under an instrument of partnership on May 7, 1951, with three partners, one of whom retired on July 31, 1957. Subsequently, the remaining two partners formed a new partnership under an instrument of partnership executed on August 1, 1957. The Income-tax Officer initially aggregated the income earned before and after the retirement, treating it as a single firm. However, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal found that there were two distinct firms, with income earned before the retirement belonging to the old firm and income earned after the formation of the new partnership belonging to the new firm.

The key question before the court was whether the aggregation of income from the two periods was justified. The court emphasized the principle that when a partner retires, the remaining partners have the option to continue the old firm or dissolve it and form a new partnership. The determination of whether a new partnership was formed or the old one continued depends on various factors, including the terms and conditions of the partnerships. The court noted that the Appellate Assistant Commissioner and the Tribunal found that a new partnership was indeed formed by the remaining partners, and there was no evidence to suggest otherwise. The execution of the new instrument of partnership was considered prima facie evidence of the formation of a new partnership, and there was no basis to question the validity of that finding.

Therefore, the court concluded that the aggregation of income from the two periods was not justified, as there were two distinct firms in existence. The court ruled in favor of the assessee, highlighting that the formation of the new partnership was valid and not a mere artifice to circumvent the law. The assessee was awarded costs in the reference, including advocate's fees.