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TMI Blog1963 (12) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... red a separate judgment.] SARKAR J.--These two appeals arise out of assessments of the appellant to income-tax for the years 1948-49 and 1949-50. The question in these appeals is whether, on the facts to be presently stated, the appellant was entitled to relief under section 25(4) of the Indian Income-tax Act, 1922. The appellant claimed relief under section 25(4) contending that it had transferred its business to a limited company with effect either from November 13, 1947, or February 13, 1948, by an instrument executed on February 7, 1948. The claim was rejected by the Income-tax Officer and by the Appellate Assistant Commissioner and also by the Income-tax Appellate Tribunal on appeal to it. The appellant then moved the Tribunal to refer a certain question to the High Court at Madras under section 66(1) of the Act but that application was rejected. It then moved the High Court under section 66(2) of the Act and the High Court directed the Tribunal to refer the following question for determination by it : " 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 exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the business is discontinued it ceases to exist and cannot be succeeded to. Sub-section (4) requires certain conditions to be fulfilled before a claim to relief under it can be made. As the present appeals relate only to a business carried on by a firm, in discussing these conditions we will omit all references to the professions, vocations and owners of businesses other than firms. We would like to remind here that a firm is a taxable unit under the Income-tax Act and it is a person as that word is used in the Act. Now the first condition of the applicability of sub-section (4) of section 25 is that the business must have been charged to tax under the Indian Income-tax Act, 1918. This Act was in force between 1918 and 1922 in which year it was replaced by the present Act. So the business must have been in existence some time between 1918 and 1922. Under the Act of 1918 tax was assessed, computed and levied on the income of the year of assessment but under the Act of 1922 the scheme of assessment of income and tax was modified. By that Act tax was assessed on the income of the previous year and the result of the innovation was that the income of the year 1921-22 was assessed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as having been constituted by this document of December 6, 1918. The partnership agreement of December 6, 1919, was between the following six persons, Purushotham, Nagjee, Narayanjee, Krishnajee, Maneklal and Bhagwanjee. Of these persons the last named was an outsider and the rest were members of a family. The agreement provided that the withdrawal of a partner for whatever reason would not dissolve the partnership as between the remaining partners'. Krishnajee died in 1933 and Bhagwanjee retired about that time. On January 2, 1934, the remaining four partners executed an instrument varying some of the terms of the agreement of December 6, 1918. The instrument, however, provided that subject to the variations made the agreement of December 6, 1918, was to remain effective. It is not in dispute that there was no dissolution of the firm by the instrument of January 2, 1934. Thereafter, on April 27, 1934, Purushotham died and the firm was then left with three partners, namely, Nagjee, Narayanjee and Maneklal. Then we get two instruments both dated May 30, 1939, each described as an agreement of partnership. One instrument, which is marked as annexure C-I, was between Nagjee, Naray ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he meaning of sub-section (4) of section 25 and, therefore, the later succession, if any, by the transfer of February 7, 1948, could not provide the basis for relief under section 25(4). Whether relief could be granted under the earlier succession, it was said, is irrelevant for such relief had never been claimed. The last instrument to which we have to refer is the agreement of February 7, 1948, between Maneklal, Jayanand, Leeladhar and Prabhulal as partners of the appellant firm and a limited company formed to take over the business of the firm. By this instrument the parties agreed that the business of the firm would be transferred to the company with effect from November 13, 1947, the transfer to be completed on February 13, 1948, by payment of the consideration of Rs. 4 lakhs by the vendee and delivery of possession of the assets of the business by the vendor. It is on this instrument that the appellant, which is the firm constituted by Maneklal, Jayanand, Leeladhar and Prabhulal, claimed relief under section 25(4) in its assessment for the years 1948-49 and 1949-50. There is no doubt that as a result or the instrument of February 7, 1948, the company succeeded to the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... understood by the Partners herein that the Firm of Sait Nagjee Purushotham and Co., Bankers, Piece-goods and Yarn Merchants, Calicut, the partners whereof are the Partners 1 to 3 herein shall advance as heretofore all funds that are necessary for the conduct of this Partnership... Such advances shall be deemed as loan by the firm of Sait Nagjee Purushotham and Co., Bankers, Piece-goods and Yarn Merchants to the Firm ......... (9) Until otherwise determined by Partners Nos. 1, 2 and 3 in writing the Partnership shall not borrow any amount from any one other than the Firm Sait Nagjee Purushotham and Co., Bankers, Piece-goods and Yarn Merchants, referred to in paragraph 8 above... (25) All the Partners hereby agree that Partners Nos. 1 to 3 herein are the Partners of the Firm of Sait Nagjee Purushotham and Co., Bankers, Piece-goods and Yarn Merchants, Calicut. We now set out the material portions of annexure C-II: " This agreement of partnership ... between (1) Nagjee ... (2) Narayanjee... and Maneklal ... hereinafter called the Partners, witnesseth as follows ; Whereas under the Agreement of Partnership dated the 6th day of December, 1918 ... (1) Purushotham ... (2) Na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were two firms, namely, one, of which the constitution appeared from annexure C-I and which carried on umbrella and soap businesses, and the other, consisting of Nagjee, Narayanjee and Maneklal carrying on other kinds of businesses the constitution of which appeared from annexure C-II. Clauses (8) and (9) show that one firm was to lend money to the other. Such an agreement could not of course have been made unless the two firms were separate. By clause (25) all the parties to annexure C-I agreed that the firm constituted by Nagjee, Narayanjee and Maneklal was a different firm. Learned counsel relied on clause (1) of annexure C-I and contended that it provided for the continuance of the old firm, that is, the firm constituted by the instrument of December 6, 1918, and hence, no new firm had been created. We think that this contention is without foundation. There is no reference in annexure C-I to the firm constituted by the instrument of December 6, 1918. The word " firm " in annexure C-I refers to the partnership brought into existence by it. Clause 1 says that " The Fim shall continue to be of old." The word " old " refers to the partnership orally brought into existence in Oct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the terms on which the business under the document of December 6, 1918, was carried on were revoked and not the head " agreement to do business in partnership". The fact that an express agreement to carry on the business in partnership was made (for which see the third recital in annexure C-II) further indicates that the agreement to that effect in the instrument of December 6, 1918, was no longer subsisting. In this case the term providing for the continuance must refer to the continuance of the business and not to the continuance of the partnership agreement because that was expressly revoked. If this is not the correct view, then clause 20 would be inexplicable. That clause states that the partners in their individual capacity would be partners with Hemchand in another business, the terms of which partnership appear in another partnership agreement of the same date and which is annexure C-I. This would show that the old partnership of 1918 had given up doing some of its existing businesses and it was decided to carry them on under a new partnership agreement. This would support the view that the old partnership was dissolved for it would not have otherwise given up those busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tners. Now the person who transferred the business which caused the succession in 1948 on which the appellant relies for relief under section 25(4) was a single firm. This latter firm could not have been brought about by a change in the constitution of an existing firm, for there were two existing firms and they could not become one by simple changes in their constitution. Indeed the instrument of October 30, 1943, which brought the transferor firm, the appellant before us, into existence, expressly states that " The agreements of Partnerships dated 30th May, 1939 . . . are hereby revoked." It follows that at the date the succession relied upon can be said to have taken place, the business was being carried on by a person different from those who carried it on on April 1, 1939. So another condition of the applicability of section 25(4) of the Act is not satisfied. The claim for relief under that section must fail on this ground also. If it were to be said that the partnerships were brought into existence on May 30, 1939, by annexures C-I and C-II instead of in October/November, 1937, then also the appellant's claim must fail. Whenever the new partnerships were brought into exist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, there were changes in the constitution of the firm caused by the death or by the retirement of partners. Of the original partners Premchand retired in 1912 and another member of the family, Maneklal, was taken in his place. In 1933 and 1934, two members (Krishnajee and Purushotham) died and Bhagwanjee retired. In that year, the firm consisted of Nagjee, Narayanjee and Maneklal who were members of the original family. We have on the record the partnership deed of December 6, 1918, by which the shares of the partners were adjusted after the retirement of Premchand and the admission of Maneklal and a deed of January 1, 1934, after the death of Krishnajee and retirement of Bhagwanjee. In the deed of 1918, it was stated that this firm carried on business in Calicut, having branches at Madras and Bombay and though Maneklal was included as a new partner, the firm was to carry on and continue the existing partnership business under the same name and style. By the deed of 1918, the earlier partnership deed of April 4, 1902, was revoked and the affairs of the firm were to be regulated by the new deed. It was, however, provided that the withdrawal or death of a partner would not cause a di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid Heinchand Veerjee Sait is to manage work and assist the business of the Firm and he shall be called hereinafter the Working Partner .... 14. The working partner, Hemchand Veerjee Sait, may draw on the first of each month the monthly sum of Rs. 460 only from out of the Firm's account on account of the share of his profits for the current year, but if on taking the annual account it shall appear that the monthly sums drawn out by him exceed his share of profits he shall forthwith refund the excess. 15. The Profits and Losses shall be divided and apportioned in the following proportion : Partner No. 1 shall have 3 annas 8 pies in the Rupee; Partner No. 2 shall have 3 annas 8 pies in the Rupee ; Partner No. 3 shall have 3 annas 8 pies in the Rupee ; and Partner No. 4 shall have 5 annas in the Rupee. On taking the accounts if it is found that the Firm has incurred a loss the aggregate of the monthly sums drawn by the Working Partner shall at once be refunded by the Working Partner to the Firm along with his share of the loss .... " 17. It is hereby agreed that the Working Partner should invest a sum of Rs. 15,000 as deposit in the Firm of Sait Nagjee Purushotham and Co., Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to take as new partners, Liladhar Narayanji Sait and Prabhulal Narayanji Sait, sons of Narayanji Purushotham Sait as from 31-10-1943. And whereas the remaining partners along with the new partners now included in the Deed of Partnership, have agreed to carry on and continue as one single partnership business, the existing partnership businesses of ' Sait Nagjee Purushotham and Co.', Bankers, Piece-goods and Yarn Merchants, ' Sait Nagjee Purushotham and Co., Soap and Umbrella merchants. And whereas it is thought advisable and prudent to reduce into writing the terms and conditions agreed upon orally by them the partners agree and have agreed to the following terms and conditions stipulated hereunder :-- " The operative terms relevant to our purposes were the following : " The agreement of partnerships dated May 30, 1939, entered into by (1) Nagjee Amersee Sait, (2) Narayanji Purushotham Sait, (3) Maneklal Purushotham Sait and (1) Nagjee Amersee Sait, (2) Narayanji Purushotham, (3) Maneklal Purushotham Sait and (4) Hemchand Veerji Sait and registered as 98 and 97 in the Joint II Sub-Registrar's Office, Calicut, respectively, and hereby revoked and the affairs of the firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess on which tax was charged under the provisions of the Indian Income-tax Act and (c) whether there was, prior to 1948, succession by another person to the person who had paid the tax under the provisions of the Income-tax Act, 1918, after April 1, 1939 ? If the answers to (b) and (c) be in the negative, (a) must be answered in the affirmative, but if the answer to either (b) or (c) be in the affirmative, (a) must be answered in the negative. It is necessary at this stage to read section 25 which deals with assessment in the case of a discontinued business. The first two sub-sections deal with cases to which sub-section (3) is not applicable. The first sub-section lays down how the business is to be assessed when it is discontinued in any year and sub-section (2) provides that any person discontinuing business must give a notice on pain of a penalty. We are not concerned with these sub-sections. Sub-section (3) and sub-section (4) in so far as it is relevant for our purposes, are as follows : " 25. (3) Where any business,'profession or vocation on which tax was at any time charged under the provisions of the Indian Income-tax Act, 1918 (VII of 1918), is discontinued, then un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... introduced and the tax was payable on the income of the previous year in the following year which was the year of assessment. Any business which was in existence and earning profits in the year 1921 and continued in the year 1922 was required to pay tax on its profits of 1921, once under the Act of 1918 and again under the Act of 1922. In the 1922 Act, a provision was made to give relief to any business which had paid such double tax when it discontinued business. When the 1939 amendment was made, relief was given by sub-section (4) to a person who had paid tax under the Act of 1918 when be was succeeded in his business by another person. It will, however, be noticed that the two sub-sections were mutually exclusive. It there was a succession, then sub-section (4) was applicable. Sub-section (3) was only applicable when the business was discontinued. It will further be noticed that the term " succession " was not to include a change in the constitution of a partnership. In this case, the claim to the benefit of sub-section (4) was made by the company on the basis of a succession either on November 13, 1947, or on February 13, 1948. The Income-tax Officer held that a succession had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. At the outset, I must draw attention to a few fundamental facts. It was pointed out by this court in Charandas Haridas v. Commissioner of Income-tax that those whose duty it is to apply the provisions of the Income-tax. Act must bear in mind that what may be the resulting position under the ordinary law of partnership and/or the Hindu law is not necessarily, the resulting position under the Income-tax Act. This case is another example of the difference of approach to the same facts under the law of partnership and the income-tax law. In Dulichand v. Commissioner of Income-tax it was pointed out by this court that commercial men and accountants are apt to look upon a firm in the light in which lawyers look upon a corporation, that is, as a body distinct from the members composing it, and such a separate existence has been recognised under the Scottish law. But under the English common law, a firm is not regarded as a separate entity from the members composing it. The Indian Partnership Act has accepted the English common law though mercantile usages have crept into business accountancy and the Civil Procedure Code allows a firm to sue or be sued in the firm's name provided t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " person " is used, it is intended to include not only an individual but also a firm. This is also clear from the words " not being merely a change in the constitution of a partner ship". Since the Income-tax Act assesses a partnership as a unit and such units must, in the past, have been assessed to tax under the Act of 1918, sub-section (4) allows a partnership to obtain the benefits of sub-section (4) when there is a succession and a partnership does not lose this benefit if there has been a mere change in the constitution of the partnership without there being a succession. The business, if it continues, obtains a similar benefit when it is discontinued. In this way all cases of discontinuance of business are treated under the third sub-section and all cases of succession under the fourth sub-section and all cases of mere change in the constitution of the firm are neither cases under the third nor under the fourth sub-sections. In this case, we have, therefore, to find out, firstly, what is meant by discontinuance of a business. Next, we have to find out what is comprehended within the expression a change in the constitution of a partnership. It is only if there was a disco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intended for the money-lending business which was carried on by the assessee and which was subjected to tax under the Act of 1918 should be extended to the business of running the ginning factory and the share business which were not in existence and which were not subjected to tax under the Act of 1918. The answer, therefore, to the question put to us will be that the assessee is entitled to the benefit mentioned in section 25(4) only in respect of his money-lending business." No finding in the present case is necessary, because the clear fact is that the soap business was not even in contemplation, much less in existence before 1922 and the same is true of the umbrella business also. The relief could, therefore, be claimed only in respect of the remaining businesses, namely, in piece-goods, yarn and banking, which were started in 1902, and which admittedly continued without break till 1948. Since no claim in respect of the business of, umbrellas and soaps could at all be entertained, any dealing with that part of the business by the assessee firm would not affect the questions in this case. Indeed, the agreement to separate the umbrella and soap business, when Hemchand was ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esent case in respect of all the businesses and a fortiori in respect of the business in piece-goods, yarn and banking. These businesses might have been managed by persons other than those who had paid the tax under the Act of 1918 (a matter to be considered under the fourth sub-section), but they were not discontinued for the application of sub-section (3). The judicial Committee was not required to consider the matter from the point of view of succession, because sub-section (4) did not then exist. The Privy Council case has been approved of by this court in Figgies's case to which I shall refer presently. From this, it follows that there was no discontinuance of the business at any time between 1921 and 1948 or even thereafter. The next question to consider is whether there has been a succession or a mere change in the constitution of the assessee firm in the years 1939 and 1948. If we were to go by the original business excluding the newly started business of manufacture of umbrella and soap, I must say at once that there has been no succession and this case falls squarely within the rule of this court in Figgies's case. But even if one were to include the umbrella and soap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was for this reason that sub-section (4) of section 25 expressly mentioned that a case of succession was not to be found where there was a mere change in the constitution of the firm. In other words, though a firm was to be regarded as an entity for the purpose of the Income-tax Act, that entity was not to be taken to be disturbed by the coming in or going out of partners any more than that entity would be disturbed under the law of partnership. Applying this test to the present case, it is quite clear that the identity of the entity was never lost and there was never a succession till the year 1948. It must be remembered that this was initially a business of a family but not in the sense in which a Hindu joint family is said to have a business. From the very start, certain members of the family along with a stranger (Bhagwanjee) carried on the business in piece-goods, etc. In 1918 and in 1934 different deeds were executed but the basic deed was that of 1918. By that time, Bhagwanjee had retired and the business was in the hands of only the members of the family. Hemchand was then taken on in 1937, and in 1939 the original business was separated from the businesses newly started ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e branches and to receive remuneration for doing the work. No doubt be was described as a working partner, but this term did not mean much. The very fact that he was not taken on in the original business also shows that the original business, in respect of which alone the benefit of section 25(3) and (4) can be claimed, continued uninterrupted. The changes in 1939 and 1943, therefore, had no effect upon this claim. Reliance was placed upon a decision of the Madras High Court in S.N.A. S.A. Annamalai Chettiar v. Commissioner of Income-tax as to the meaning of the word " discontinuance ". In that case, a Hindu undivided family consisting of a father and a son were carrying on money-lending business under different vilasams. On March 28, 1939, there was a family partition and some vilasams were allotted to the father and the rest to the son, and be was the assessee. In the assessment year 1939-40, the son claimed that there was " a discontinuance of the business within the meaning of section 25(3) of the Income-tax Act, 1922, and claimed the benefit of that sub-section on the ground that the business of the joint family was taxed under the Act of 1918 and he was not liable to pay t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a central system of accounts at one place showing the financial position of the family. In 1938-39, the two brothers effected a partition and the Rangoon shop was, thereafter, conducted by the two brothers in partnership. On these facts, it was held by a Full Bench of the Rangoon High Court that there was no succession within the meaning of section 26(2) of the Income-tax Act. It was pointed out that the family did not carry on separate businesses at each of the five places but had only a number of branches at these places of the same business and in order that there might be a succession, it was necessary that the person succeeding should have succeeded his predecessor in carrying on the business as a whole. The case was under section 26(2) and slightly different considerations govern section 25(4) which have induced the legislature to keep the two sections separate. While it is possible that there may be a succession only to the business which had paid tax under the Act of 1918 for purposes of section 25(4), as is the case here, a complete change of ownership of all the businesses is necessary for purposes of section 26(2) before it can be said that there is succession. In both ..... X X X X Extracts X X X X X X X X Extracts X X X X
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