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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 ..... dras 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 extent ? " The Tribunal duly drew up a statment of case and referred the question along with it to the High Court. There were really two refer ences as there were two cases' before the Tribunal. These, however, were heard together by the High Court and disposed of by one judgment. The High Court held that the appellant was not entitled to any relief under section 25(4). The present appeals are from the judgment of the High Court. The facts have to be stated at some length but before we do that we think it would be profitable to set out the statutory provisions concerned. Though we are directly concerned with sub-section (4) of section 25, a consideration of sub-section (3) of that section will throw useful light on the matter in question and so we set both these sub-sections out below : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust 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 twice, once under the Act of 1918 and again under the Act of 1922 and it was because of this that relief was given by sub-sections (3) and (4) of section 25. The second condition of the applicability of section 25(4) is that that business must have been carried on at the commencement of the Indian Income-tax (Amendment) Act, 1939, that is, April 1, 1939, by the person claiming the relief. The third condition is that the person carrying on the business on April 1, 1939, has to be succeeded by another person as the owner carrying on the business. Obviously, the succession indicated must have been after April 1, 1939, as we have earlier state for a person carrying on a business on that date can only be succeeded in that business by another person on a date later than it. The fourth condition is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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, Narayanjee, Maneklal and Hemchand. The other instrument, which is marked as annexure C-II, was between Nagjee, Narayanjee and Maneklal. It will be necessary to set out later some of the terms of these instruments, for on them a large part of the arguments advanced in this case has turned. Briefly, it may be stated here that the appellant contends that these agreements did not really create new partnerships dissolving the existing one. Its case is that under annexure C-I an outsider, Hemchand, was admitted as partner in some of the businesses of the existing partnership, namely, the umbrella and soap businesses and by the other instrument, annexure C-II, the other existing businesses of that partnership, e.g., in yarn, piece-goods, money-lending, etc., were continued by the subsisting partners mentioned a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 business that was being carried on by the firm of Nagjee Purushotham and Company as then constituted as aforesaid, as bankers, piece-goods and yarn merchants and as soap and umbrella manufacturers and sellers. The question however is, was this firm a firm which had been carrying on a business on April 1,1939, and which business had been charged to tax under the Act of 1918 ? The High Court took the view that it was not and we think that that view is correct. In on opinion the business was discontinued in 1937 and what was subsequently carried on was not the same business. We now turn to annexures C-I and C-II dated May 30, 1939. Taking annexure C-I first, the material portions of this document are as follows : " This agreement of Partnership .... between (1) Nagjee .... (2) Narayanjee .... (3) Manekl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., 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) Nagjee ... (3) Narayanjee ... (4) Karsanjee ... (5) Bhawanjee ... (6) Maneklal ... have carried on a partnership trade in Piece-goods, Banking and other articles in Calicut with branches at Madras and Bombay ; and Whereas (1) Purushotham ... (2) Karsanjee and... (3) Bhagwanjee ceased to be partners either by retirement or death ; and Whereas the remaining partners (1) Nagjee...... (2) Narayanjee ......... and (3) Maneklal......... settled the claims in full of the partners who ceased to exist and agreed to carry on and continue and are continuing the existing partnership business under the name and style of 'Sait Nagjee Purushotham And Co.', Bankers, Piece-goods and Yarn Merchants, hereinafter called the ' Firm ' ; and Whereas it is thought advisable and prudent to reduce, into writing the terms and conditions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his 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 October/November, 1937, to which reference is made in the first recital and to put down the terms of which in writing, annexure C-I was executed. Likewise, the provision in clause 1 that " The Firm shall continue to do business " refers to the continuance of the business carried on prior to May 30, 1939, by the firm brought into existence in October/November, 1937, by the oral agreement. The continuance cannot be a continuance of the firm or business of the partnership of 1918, for annexure C-I makes no reference to that partnership at all. It may be that the partnership of 1918 was carried on in the same name as the firm referred to in annexure C-I but we are not aware that an identity of names establishes that the two firms are the same. It seems to us beyond question that the partnership mentioned in annexure C-I is diffe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 businesses. The two instruments, annexures C-I and C-II, therefore, clearly establish that in October/November, 1937, the business that was carried on by the firm of Sait Nagjee Purushotham and Co. till that date was discontinued and its businesses were split up into two and carried on by two independent partnerships then brought into existence. When this happens it is impossible to say that the pre-existing business was continued. This view finds support from S.N.A.S.A. Annamalai Chettiar v. Commissioner of Income-tax, where it was held that when a business carried on in one unit is disintegrated and divided into parts, the parts are not the whole even though all the parts taken together constitute the whole. That was a case of a joint family business which on partition was split up between different members of the family. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 existence, the result would, in our view, necessarily be that the business of the old partnership which was taken over by the two new firms must be deemed to have been discontinued. On the principle stated in Annamalai Chettiar's case, there could not in such a case be succession of a business from one, to another. That being so, there can be no question of the succession to business carried on at the commencement of the Indian Income-tax (Amendment) Act, 1939, i.e., April 1, 1939, and on which tax was charged under the Act of 1918 having taken place in 1948 as claimed by the appellant. What was discontinued could not be succeeded to. Even if it was held that on May 30, 1939, there was a succession to the business which we do not think is a correct view to take, that also. would disentitle the appellant to relief under sub-section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded 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 dissolution of the partnership. When the deed of 1934 was entered into, the deed of 1918 was not revoked but only amended ; it was, however, provided that the principal deed of partnership--to wit of 1918--would remain in force in so far as it was not inconsistent. Some time in the year 1932 or thereabout, the firm had started the manufacture and sale of soaps under the name of " The Vegetable Soap Works ", Proprietors Sait Nagjee Parushotham and Co., and perhaps the manufacture and sale of umbrellas in Calicut with branches at Madras and Bombay under the name and style, at Calicut and Madras, of " Sait Nagjee Purushotham and Co., Soap and Umbrella Merchants ", and at Bombay of " Shah Nagjee Purushotham and Co. " It may be pointed out that the words " Shah " and " Sait " mean the same thing, and the names were not different. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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., Bankers, Piece-goods and Yarn Merchants, Calicut, and such money shall remain in deposit as long as he remains a Partner and such amount shall carry interest at such rates of interest as the Firm of Sait Nagjee Puryshotham & Co., Bankers, Piece-goods and Yarn Merchants may agree from time to time. In C-II, the preamble was : ". . . Whereas the remaining partners (1) Nagjee Amersee Sait, (2), Narayanji Purushotham Sait and (3) Maneklal Purushotham Sait, settled the claims in full of the partners who ceased to exist and agreed to carry on and continue and are continuing the existing partnership business under the name and style of ' Sait Nagjee Purushotham and Co.', Bankers, Piece-goods and Yarn Merchants, hereinafter called the ' Firm ' ....." The relevant terms were : " 2. The Agreement of Partnership dated the 6th day of December, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agjee 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 shall be regulated and governed by the regulations agreed upon orally and reduced into writing in this Deed of Partnership ; and the terms and conditions of the revoked Deed shall not in future apply to the Firm except such as have been repeated in this Deed. 1. The Firm name shall be 'Sait Nagjee Purushotham and Co.', Bankers, Piece-goods, Yarn, Soap and Umbrella merchants. 2. The partners of the Firm are (1) Narayanji Purushotham Sait, (2) Maneklal Purushotham Sait, (3) Jayanand Nagjee Sait (minor) represented by guardian, Maneklal Purushotham Sait, (4) Leeladhar Narayanji Sait and (5) Prabhulal Narayanji Sait." The rest of the terms followed the same pattern as before. In 1948, a limited liability company was formed under the name of Sait Nagjee Purushotham and Co. Ltd. and an agreement was made by which Sait Nagjee Purushotham and Co. repres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 unless there has been a succession by virtue of which the provisions of sub-section (4) have been rendered applicable 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, and the assessee may further claim that the income, profits and gains of the previous year shall be deemed to have been the income, profits and gains of the said period. Where any such claim is made, an assessment shall be made on the basis of the income, profits and gains of the said period, and if an amount of tax has already been paid in respect of the income, profits and gains of the previous year exceeding the amount payable on the basis of such assessment, a refund shall be given of the difference. (4) Where the person who was at the commencement of the Indian Income-tax (Amendment) A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther 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 taken place in 1943 when on the retirement of Hemchand, the two separate business formed under Exs. C-1 and C-2 were amalgamated. The Appellate Assistant Commissioner agreed with this conclusion. The Tribunal also held that the business in soap and umbrella was different from the business of banking, piece-goods and yarn, and the amalgamation of these two businesses in 1943 amounted to a succession by a newly constituted firm. The High Court held on reference that the firm constituted under the deed of 1918 was dissolved in 1939 and the firms constituted under the two deeds of 1939 were dissolved in 1943. The High Court, therefore, held that succession had taken place in 1939 and again in 1943 and the claim on the basis of the transfer to the limited liability company in 1948 was too late. In coming to the conclusion that the firm constituted under the deed of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the names of the partners are disclosed. Under the Income-tax Act, however, a firm is by section 3 made a unit of assessment, but this personality does not make the firm a person in every sense of the word. It only makes it an assessable unit. A firm is not a " Person " and cannot enter into partnership with an individuals, with another firm or with a Hindu undivided family. Section 26 recognises the existence of a firm as an assessable unit and provides for taxation in the event of changes in the constitution of firms. The first sub-section deals with a change in the constitution of the firm or where a firm has been newly constituted and the second sub-section where there is a succession to the person (which includes a firm) by another person. This sub-section deals with all cases of succession except those dealt with under sub-section (4) of section 25 already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 discontinuance of the business before 1948, or a succession not amounting to a mere change in the constitution of the partnership between 1939 and 1948 that the appellants can be denied the benefit of section 25. The expressions, that is to say, " discontinuance " and " succession not amounting to a change of the constitution of a firm " have received exposition in the past. It is hardly necessary to refer to the large number of cases in which the matter has been discussed, because the leading case on the subject of discontinuance is Commissioner of Income tax v. P. E. Polson and on the subject of succession, Commissioner of Income-tax v. A. W. Figgies and Co. It will be sufficient to refer to these two cases. To begin with, it must be remembered that the soap business commenc ed in the year 1932, and did not pay tax under the Act of 1918. Though there is nothing to sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 admitted as a partner in 1939, was in keeping with the continuance of the original business as an entity by itself and emphasised its separate character. From the record it appears that the old and the new businesses were also separately assessed. It is only this one entity to which the provisions of section 25 must be applied and in respect of which it must be considered whether there was a discontinuance or a succession at an earlier period. I shall first examine the question of discontinuance. The Judicial Committee in Polson's case considered what was the meaning of the word " discontinuance ". In that case, Polson who was carrying on business assigned it to a limited company on January 1, 1939. He had paid tax in respect of the business under the Act of 1918. In the assessment year 1939-40 he claimed that in view of the provisions of section 25(3) of the Act of 192 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 business, I am of opinion that this case does not cease to be covered by Figgies's case. I shall examine both the aspects of the matters separately. I shall pass on immediately to the facts of Figgies's case. In that case, a partnership was formed in 1918 between Figgies, Mathews and Notley. In 1924, Mathews retired. In 1926, one Squire was taken as partner. In 1932, Figgies retired. In 1939, one Hillman was taken as a partner. In 1943, Notley retired. In 1945, one Gilbert was taken as a partner. By that time, all the original partners had ceased to be partners and new ones had come in their place. At every change, new deeds of partnership were executed and the shares were readjusted. No doubt, the later deeds did not say that the earlier deeds were revoked but a glance at those deeds (which I have seen in the original brief of the case) shows that they could not have e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 after 1922. Hemchand was given a share only in the newly started businesses to which section 25 could not possibly apply. When Hemchand retired, those businesses were also taken over and merged with the original business. In other words, the original business continued till 1943 in the hands of Narayanjee and Maneklal who were partners as far back as 1918 and three younger members of the family. In 1948, Maneklal and those three other members of the family sold this business to the oompany. It cannot be said that these changes were not covered by the expression " a change in the constitution of the firm " and were comprehended in the term " succession ". No question of the dissolution of the firm, Sait Nagjee Purushotham & Co., ever arose. It continued right through ; even the newly started businesses were owned by it and though for a time the newly started businesses and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment 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 tax for the period between April 13, 1938, and March 28, 1939. It was held by Satyanarayana Rao and Raghava Rao JJ. that as the joint family was split up, the business no longer continued in existence, but was terminated and there was a " discontinuance " within the meaning of section 25(3) and the family was entitled to the benefit of that sub-section. Satyanarayana Rao J. held that is the unit had disintegrated into its component parts so as to annihilate the unity of the business, each part which was thus divided was not identical with the whole, even though all the parts taken together constituted the whole and that, when the unifying principle of that whole no longer existed, the parts gained their individuality and became separate and distinct. The learned judge held that there was discontinuance. Looked at from the point of view of Hindu law, all these results may be said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sections, change does not mean that ever one who owned the former business should leave it and go away. The identity of the person who owned it before and the identity of the person who owned it, later must, however, be distinct. In the present case this has not happened. All the facts have, perhaps, not come on the record with that clarity with which they should have but as pointed out by Chagla C.J. in Jeshingbhai Ujamshi v. Commissioner of Income-tax, there is nothing in law to preclude common partners constituting two entirely separate firms in respect of different businesses carried on by them for the purpose of the Indian Income-tax Act. Where they, do this, it is mainly a question of fact whether there has been a succession to one of such partnerships or not, whether for the purpose of section 26 or for the purpose of section 25(4). But it must be remembered that under se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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