1967 (1) TMI 30 - HC - Income Tax

Mysore Income Tax Act - Assets distributed on partition of HUF. Three coparceners and widow daughter of karta firmed a partnership and carry on the same business. The assessee (undivided family) claimed exemption u/s 25(3) of the Act contending there is a discontinuance of the business originally carried on by the undivided family - assessee is entitled to exemption

Summary

Issues Involved:
1. Reopening of assessment under section 34 of the Mysore Income-tax Act, 1923.
2. Claim for exemption under section 25(3) of the Mysore Income-tax Act, 1923.
3. Interpretation of "discontinuance" of business under section 25(3).
4. Legal implications of partition and subsequent partnership formation on business continuity.

Detailed Analysis:

1. Reopening of Assessment:
The assessment for the income-tax year 1949-50 of a Hindu undivided family (HUF) was originally completed on December 29, 1949. However, the assessment was later sought to be reopened under section 34 of the Mysore Income-tax Act, 1923. At this stage, the assessee claimed exemption under section 25(3) of the Act.

2. Claim for Exemption under Section 25(3):
The assessee, an HUF, claimed exemption under section 25(3) of the Mysore Income-tax Act, 1923, contending that the business originally carried on by the HUF was discontinued following a partition on November 2, 1948. The partition deed and the partnership deed were executed on the same date, and the business continued under the old name "Hanumanthappa & Son" without any outward change. The partition was reported to the income-tax authorities under section 25A, and an order recording the partition by metes and bounds was made.

3. Interpretation of "Discontinuance" of Business:
Section 25(3) of the Mysore Income-tax Act, 1923, provides that if a business is discontinued, no tax shall be payable in respect of the income, profits, and gains of the period between the end of the previous year and the date of such discontinuance. The term "discontinuance" has been interpreted by various High Courts and the Privy Council to mean complete cessation of business. This interpretation was accepted as correct by the Privy Council in Commissioner of Income-tax v. P. E. Polson. The court noted that the benefit of exemption from double taxation was lost if the business was transferred or assigned without total cessation.

4. Legal Implications of Partition and Subsequent Partnership Formation:
The court analyzed whether the partition and subsequent formation of a partnership by the family members constituted a discontinuance of the business. The court observed that in the case of undivided Hindu families, the business itself is regarded as an asset available for partition. The court referred to cases such as Commissioner of Income-tax v. N. N. Firm and S. N. A. S. A. Annamalai Chettiar v. Commissioner of Income-tax, where it was held that if a business is split up and its assets are divided among family members, the subsequent carrying on of the business by the divided members as partners does not constitute a continuation of the original business.

The court concluded that the partition resulted in the division of business assets among the family members, and the subsequent partnership formed to carry on the business was a new business. The court emphasized that the legal consequence of the partition was the creation of separate ownership of the business assets, and the new partnership could not be considered a continuation of the old family business.

Conclusion:
The court held that the assessee was entitled to exemption under section 25(3) of the Mysore Income-tax Act, 1923, as the business carried on by the undivided family was discontinued due to the partition. The assessee was awarded costs of the reference, with an advocate's fee of Rs. 250.