1970 (12) TMI 31 - HC - Income Tax

Reconstitution of the firm - Whether there was merely a change in the constitution of the partnership of the firm, and, therefore, they were not entitled to the relief under section 25(4) of the Income-tax Act 1922

Summary

Issues Involved:
1. Entitlement to relief under Section 25(4) of the Income-tax Act, 1922, for the Hindu Undivided Family (HUF) of Muni Lal, Moti Lal, and Hans Raj.
2. Entitlement to relief under Section 25(3) or 25(4) for the firm M/s. Muni Lal Moti Lal.

Issue-wise Detailed Analysis:

1. Entitlement to Relief under Section 25(4) for the HUF of Muni Lal, Moti Lal, and Hans Raj:
The primary issue was whether the Hindu Undivided Family (HUF) of Muni Lal, Moti Lal, and Hans Raj was entitled to relief under Section 25(4) of the Income-tax Act, 1922. The relevant facts are as follows:

- The joint Hindu family of Mehtab Shah's four sons (Muni Lal, Moti Lal, Bhim Sen, and Hans Raj) existed until 1932, when a partition dissolved the joint family, and a partnership was formed.
- On April 14, 1956, the HUFs of Muni Lal, Moti Lal, and Hans Raj disrupted, leading to the inclusion of their respective sons as partners, and the shares were re-determined.

The Income-tax Officer and the Appellate Assistant Commissioner rejected the relief claims under Section 25(4), but the Income-tax Appellate Tribunal allowed the relief based on the case of Dulichand Laxminarayan v. Commissioner of Income-tax. The Tribunal held that the business carried on by the HUF was succeeded by the members who became partners, thus constituting a succession under Section 25(4).

However, the High Court disagreed, emphasizing that for Section 25(4) to apply, the following conditions must be met:
1. The business must have been charged to tax under the 1918 Act.
2. The business must have been carried on April 1, 1939, by the person claiming the relief.
3. The person carrying on the business on April 1, 1939, had to be succeeded by another person as the owner carrying on the business.
4. The succession was not merely a change in the constitution of the firm.

The High Court found that only the first condition was satisfied. The business had remained the same, and the firm, not the HUF, was carrying on the business on April 1, 1939. The inclusion of new partners was deemed a change in the constitution of the firm, not a succession. Therefore, the relief under Section 25(4) was not applicable.

2. Entitlement to Relief under Section 25(3) or 25(4) for the Firm M/s. Muni Lal Moti Lal:
The firm M/s. Muni Lal Moti Lal claimed relief under Section 25(3) or 25(4), arguing that the introduction of new partners on April 14, 1956, constituted a dissolution of the earlier firm and succession to the business.

The High Court noted that the firm's counsel conceded that the question referred by the Tribunal should be answered in the affirmative, meaning the firm was not entitled to relief under Section 25(4). The question was whether the introduction of new partners was merely a change in the constitution of the partnership, not a succession.

The High Court affirmed that the change in partners constituted a reconstitution of the firm, not a succession. The firm continued to exist, and the business was not succeeded by another entity. Therefore, the firm was not entitled to relief under Section 25(3) or 25(4).

Conclusion:
The High Court concluded that the claims for relief under Section 25(4) by the HUFs of Muni Lal, Moti Lal, and Hans Raj were invalid as the conditions for succession were not met. Similarly, the firm's claim for relief under Section 25(3) or 25(4) was also invalid, as the introduction of new partners was a reconstitution, not a succession. The questions referred to the High Court were answered in the negative, and there was no order as to costs.