PETITIONER:
SAIT NAGJEE PURUSHOTHAM AND CO.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, MADRAS
DATE OF JUDGMENT:
20/12/1963
BENCH:
SARKAR, A.K.
BENCH:
SARKAR, A.K.
HIDAYATULLAH, M.
SHAH, J.C.
CITATION:
1967 AIR 617 1964 SCR (6) 91
ACT:
Income Tax Act (11 of 1922). s. 25(3) and (4)-Firm carrying
on business in 1918-Disintegration into two firms-If
discontinuance of business.
HEADNOTE:
By s. 25 (4) of the Income-tax Act, “Where the person who
was at the commencement of the Indian Income-tax (Amendment)
Act, 1939. carrying on any business, profession or vocation
in which tax was at any time charged under the provisions of
the Indian Income-tax Act, 1918, is succeeded in such
capacity by another person, the change not being merely a
change in the constitution of a partnership, no tax shall be
payable by the first mentioned person in respect of the
income, profits and gains of the period between the end of
the previous year and the date of such succession.”
A firm bearing the same name as the appellant firm, had been
carrying on business from before 1918 and had paid tax on
that business under the Income-tax Act, 1918. The firm did
three kinds of businesses, namely, (a) in piece-goods, yam
as general merchants,
92
(b) in the manufacture and sale of umbrellas and (c) in the
manufacture and sale of soaps. There were various changes
in the constitution of the firm between 1918 and 1934. In
May 1939 two, documents were executed, one by the then
members of the firm, and a stranger H. being Ex. CI and the
other by those members alone,. being Ex. CII. It appeared
from Ex. CI that the business in the manufacture and sale
of umbrellas and soaps was being carried on from October-
November 1937 by the parties to it as partners while Ex.
CII showed that the parties to it had been carrying on the
business in yarn piecegoods and as general merchants as
partners from the same time as mentioned in Ex. Cl. On
October 30. 1943 a document styled as an agreement of
partnership was executed by five persons who were then the
persons interested in the businesses carried on under the
instrument of May 30, 1939. This document referred to the
two, agreements of partnership of May 30, 1939 and certain
subsequent retirements of partners and admissions of new
partners and provided that the businesses previously carried
on by the two partnerships. referred to in the instruments
of May 30, 1939, would thereafter be carried on by one
single partnership constituted by the parties to it.
Thereafter all the businesses aforesaid were carried on by
this single partnership. The firm constituted by the
instrument of October 30, 1943 continued with certain
changes in its constitution till February 7, 1948 when the
then partners of, it entered into an agreement with a
company to transfer the business of the firm to the latter,
the transfer to be completed by February 13, 1948 and the
transfer was in fact made. The firm constituted by the
document of October 30, 1943 claimed relief under s. 25(4)
in assessment for the years 1948-49 and 1949-50 on the
ground that it had been carrying on a business on April 1,
1939 when the Income-tax (Amendment) Act, 1939 commenced; to
operate on which business tax had been charged under the Act
of 1918 and that it was succeeded in that business by a
company in February 1948.
Held: (per Sarkar and Shah JJ.). The assessee was not
entitled to the relief.
Exs. Cl and CII showed that the business that had been
carried on by the firm existing in 1918 was discontinued in
October/November 1937 and its businesses were split up into
two and from then carried on by two independent partnerships
brought into existence by those documents. The old firm was
brought to an end by Exs. Cl and CII.
When a business carried on in one unit is disintegrated and
divided into parts, the parts are not the whole, though all
the parts taken together constitute the whole. In such case
there is a discontinuance of the original businesses.
S. N. A. S. A. Annamalai, Chettiar v. Commissioner of
Income-tax, Madras, 20 I. T. R. 238. referred to.
93
The business on which tax had been charged under the Act of
1918 was not being carried on April 1, 1939 by the firm
which had paid tax under that Act.
The business to which the company succeeded under the
agreement ,of February 7, 1948 cannot before the succession
be said to have been carried on by a firm which was carrying
on business on April 1, 1939, for that firm had been newly
formed under the instrument of ,October 30, 1943, which
expressly revoked the partnership agreements of May 30, 1939
under which two firms had been brought into brought into
existence.
Per, Hidayatullah J. (dissenting) (i) Sub-ss. (3) and (4) of
s. 25 ,of the Act are mutually exclusive-. sub-s. (3) was
only applicable when the business was discontinued and that
in the term “succession” was not to be included a change in
the constitution of the partnership. In sub-s. (4) the
emphasis is on succession to a person who on April 1, 1939
was carrying on any business on which tax was at any time
,charged under the Act 1918. In sub-s. (3) the emphasis is
on the discontinuance of the business which had paid tax
under the Act 1918.
(ii) There is difference of approach to the same facts under
the law of partnership and the Income-tax law.
Charandas v. Haridas, (1960)39 1. T. R. 202 and Dulichand v.
,Commissioner of Income-tax, Nagpur, [1956] S.C.R. 154,
referred to.
(iii) Discontinuance of a firm is not a mere change in the
constitution of the firm or even succession where, though
the business changes hands, the original business which paid
the tax in 1918 is carried on.
Shivram Poddar v. Income-tax, Officer, C. A. No. 455 of 1963
dated December 13, 1963, referred to.
(iv) All cases of discontinuance of businesses are treated
under sub-s. (3) and all cases of succession under sub-s.
(4) and all cases of mere change in the constitution of the
firm are neither cases under sub-s. (3) nor under sub-s.
(4). These sub-sections do not apply to cases where the
business was not in existence before the Act 1922 came into
force.
Ambalal Himatlal v. Commissioner of Income-tax and Excess
Profits Tax, Bombay North, (1951) 20 I.T.R. 280, referred
to.
(v) Since the soap and umbrella businesses were not in
existence and no relief could be claimed in respect of these
businesses, changes in respect of them were irrelevant.
(vi) by the expression “discontinued” in sub-s. (3) is meant
complete cessation of business. In the present case it
could be said that this had taken place in respect of the
piece-goods business; this might
94
have been managed by persons other than those who had paid
the tax under the 1918 Act, but the business was not
discontinued for the application of sub-s. (3).
Commissioner of Income-tax, Bombay v. P. E. Polson,
(1945)13 1. T. R. 384. Commissioner of Income-tax, West
Bengal v. A. W. Figgies and Co. [1954] S. C. R. 171 and
Mevoppar v. Commissioner of Income-tax, Madras, 1. L. R.
(1944) Mad. 166. referred to.
(vii) In the present case there was no succession and it
falls within the rule laid down by this Court in Figgies’
case.
(viii) 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. Applying the test to the present case it was held
that the identity of the entity was never lost and there was
never a succession till the year 1948. No question of the
dissolution of the old firm in piece-goods business ever
arose. It continued right through, even other newly started
businesses were owned by it. It cannot be said that the old
firm had either discontinued or had been succeeded by
another person. Hemchand was a mere employee though
described as a partner. The entry of Hemehand did not
constitute a dissolution of the old firm.
Commissioner of Income-tax, Bombay City v. Kolhia Hirdagarh,
Co. Ltd., Bombay, (1949) 17 1. T. R. 545 and Commissioner
of Income-tax, Bombay City v. Sir Homi Metters Executor,
(1955) 28 I.T. R. 928, referred to.
(ix) The appellants are entitled to succeed in their claim
regarding the business in piece-goods yarn and banking which
alone had paid tax under the 1918 Act.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals, Nos. 275-276 of
1963.
Appeals by special leave from the judgment and order dated
May 2, 1960 of the Kerala High Court in Income-tax Referred
case No. 98 of 1955(M).
S. T. Desai, C. V. Mahalingam, B. Parthasarathi and J. B.
Dadachanji, for the appellant (in both the appeals).
K. N. Rajagopal Sastri and R. N. Sachthey, for the res-
pondent (in both the appeals).
95
December 20, 1963. The Judgment of A. K. Sarkar and J. C.
Shah, JJ. was delivered by Sarkar, J. M. Hidayatullah, J.
delivered a Dissenting opinion.
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
s. 25(4) of the Income-tax Act, 1922.
The appellant claimed relief under s. 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 s. 66(1) of the Act but that application was
rejected. It then moved the High Court under s. 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 assessee 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 statement of case and referred
the question along with it to the High Court. There were
really two references 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 s.
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-sec. (4) of s. 25, a consideration of
subsec. (3) of that section will throw useful light on the
matter
96
in question and so we set both these sub-sections out below:
S. 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, ………. 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, pro
fits and
gains of the period between the end of the
previous year and the date of such
discontinuance……….
(4) Where the person who was at the
commencement of the Indian Income-tax
(Amendment)
Act, 1939 carrying on any business, profession
or vocation on which tax was at any time
charged under the provisions of the Indian
Income-tax Act, 1918, is succeeded in such
capacity by another person, the change not
being merely a change in the constitution of a
partnership, no tax shall be payable by the
first mentioned person in respect of the
income, profits and gains of the period
between the end of the previous year and the
date of such succession
Both these sub-sections gave a further right to the assessee
but with that right we are not concerned and shall, there-
fore, make no more reference to it.
Now it will be seen that under sub-sec. (3) the
discontinuance of the business gave rise to a relief from
taxation in respect of its income provided however that
there had not been a succession to the business as mentioned
in sub-sec. (4) which, as will later be seen, has to be a
succession taking place after April 1, 1939. The succession
contemplated in sub-sec. (4) again must have taken place
before the discontinuance for 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
97
firm, in discussing these conditions we will omit all refer-
ences 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-sec. (4) of s. 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 sometime
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-secs. (3) and (4) of s. 25. The
second condition of the applicability of s. 25(4) is that
business must have been carried on at the commencement of
the Indian Income-tax Act (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 stated, 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 the succession was not merely a change in the
constitution of the firm. This condition, of course, is
applicable only where, as in the present case, the business
was carried on by a firm.
The appellant, who is the assessee in these cases, is a
firm. It contends that it had been carrying on a business
on April 1, 1939 from before and on that business tax had
been charged under the Act of 1918 and that it was succeeded
by a company as owner of the business as a result of a
transfer by an instrument executed on February 7, 1948. The
appellant further contends that its constitution has changed
134-159 S.C.-7.
98
from time to time but the firm has never been dissolved so
that it has been the same firm continuing and carrying on
the same business from before 1918 till the transfer afore
said. It is on this basis that it claimed the benefit of s.
25 (4) of the Act.
We now proceed to set out the facts of the case in a
chronological order. It appears that a firm bearing the
same name as that of the appellant, that is, Sait (or Shah)
Nagjee Purshotham and Company was started in 1902 and was
reconstituted by an agreement of partnership dated December
6, 1918. On the last mentioned date it carried on business
in piece-goods, yarn, and other articles at Calicut with
branches in Madras and Bombay. It also subsequently started
a business of manufacture and sale of umbrellas but the
precise date of the commencement of this business does not
appear from the record. Sometime about 1932 it started
another business of manufacture and sale of soap. For
practical purposes the firm can be treated as having been
constituted by this document of December 6, 1918. The
partnership agreement of December 6, 1918 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 Purusbotham
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
CI, was between Nagjee, Narayanjee, Maneklal and Hemchand.
The other instrument, which is marked as annexure C II was
between
99
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 partner-
ship, namely, the umbrella and soap businesses and by the
other instrument, annexure C 11, the other existing
businesses of that partnership, e.g., in yarn, piece-goods,
money-lending etc., were, continued by the subsisting
partners mentioned above. The contention of the respondent,
on the other hand, is that these two instruments show that
the business of the existing firm had been split up into two
and transferred to two different owners, namely, two newly
constituted firms with different partners, some of whom were
no doubt common, and this amounted to a discontinuance of
the business of the old firm. It was contended that after
such discontinuance it could not be said that the same
business on which tax had been charged under the Act of 1918
was being carried on on April 1, 1939 and no question,
therefore, of any subsequent succession to that business to
make sub-sec. (4) of s. 25 applicable, could arise.
We next have an instrument of October 30, 1943, also “Styled
an agreement of partnership, to which Narayanjee, Maneklal,
Jayanand, Leeladhar and Prabhulal were parties. It refers
to the two “agreements of partnership of May 30, 1939″ and
certain retirements of partners and admission of new
partners and provides that the parties to the instrument had
agreed to carry on “as one single partnership” the busi-
nesses carried on previously by the two partnerships
referred to in the instruments of May 30, 1939. One of the
,contentions of the respondent is that even if it was not
right -in its view of the instruments of May 30, 1939, this
instrument of October 30, 1943 clearly evidenced a
dissolution of -the partnership then existing and the
creation of an entirely ,new partnership to which the
business of the old firm was -transferred. It was said that
this was a succession to business within the meaning of sub-
sec. (4) of s. 25 and, therefore, the later succession, if
any, by the transfer of Febru-
100
ary 7, 1948 could not provide the basis for relief under s.
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 consi-
deration of Rs. 4 lacs by the vendee and delivery of posses-
sion 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 s. 25(4) in its assessment for the
years 1948-49 and 1949-50.
There is no doubt that as a result of 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 view is correct. In our opinion,
the business was discontinued in 1937 and what was
subsequently carried on was not the same business.
We now turn to annexures C 1 and C 11 dated May 30, 1939.
Taking annexure C 1 first, the material portions of this
document are as follows:-
“This agreement of Partnershipbetween
(1)Nagjee…. (2) Narayanjee(3) Maneklal
and (4) Hemchand(hereinafter called the
partners) witnesseth asfollows:
Whereas Partners 1 to 4 have been carrying on
a business as partners from the beginning of
Samvat 1994 (=October-November 1937) in
101
the manufacture and sale of Soaps under the
name of ‘The Vegetable Soap Works’ Proprietor
Sait Nagjee Purushotham & Co., and in the
manufacture and sale of umbrellas in Calicut
with branches at Madras and Bombay under the
name and style of Sait Nagjee Purushotham &
Co., Soap and Umbrella Merchants at Calicut
and Madras and in the name of Sha Nagjee
Purushotham & Co., at Bombay hereinafter
called the Firm;
And whereas it is thought advisable to reduce
the terms of the said partnership into writing
for the proper and better conduct of the
business;
The Partners have agreed and also hereby agree
to the following:
(1) The Firm shall continue to be as of old
namely Sait Nagjee Purushotham & Co., Soap and
Umbrella Merchants. The Firm shall continue
to do business in the manufacture and sale of
soaps under the name of the ‘Vegetable Soap
Works’ and in umbrellas under the name of
‘Sait Nagjee Purushotham & Co., S
oap and
Umbrella Merchants as aforesaid with Head
Office at Calicut and branch at Madras under
the same name and branch at Bombay under the
name of ‘Sha Nagjee Purushotham &
Co………..’
(4) The business of the Firm shall consist
mainly in the manufacture and sale of soaps
and umbrellas and such allied products and
such other articles as all the partners or the
majority of them may agree.
(8)It is always understood by the Partners
herein that the Firm of Sait Nagjee
Purushotham
102
& Co., Bankers, Piece-goods and Yarn mer-
chants, 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 & 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 & Co.,
Bankers, Piece-goods and Yarn merchants
referred to in para 8 above.
. . . . .
. . . . .
(25) All the Partners hereby agree that
Partners. 1 to 3 herein are the Partners of
the Firm of Sait Nagjee Purushotham & Co.,
Bankers, Piece-goods and Yam merchants,
Calicut.”
We now set out the material portions of
annexure C 11.
“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) Bhagvanjee (6) Maneklal …. have
carried on a partnership trade in Piecegoods,
Banking and other articles in Cali
cut with
branches at Madras and Bombay, and
Whereas (1) Purushotham …. (2) Karsanjee….
and (3) Bhagvanjee . .. . ceased to be
partners either by retirement or death, and
103
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 & 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
agreed upon orally by them the Partners agree
and have agreed to the following terms and
regulations stipulated hereunder.
(2) The Agreement of Partnership dated the
6th day of December 1918 is 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 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.
(20) All the partners hereby agree that they
in their individual capacity are and shall be
Partners also along with Hemchand Veerjee Sait
in a Partnership business in Soaps and
Umbrellas carried on in Calicut and Madras
under the name and style of Sait Nagjee
Purushotham and Co., Soap and Umbrella
Merchants and in Bombay under the name and
style of Shah Nagjee Purushotham & Co., the
terms and conditions whereof are embodied in
an Agreement of Partnership dated 30-5-1939
signed by all the Partners.
104
It is clear that these two instruments recite events which
had happened in 1937. Annexure C I shows that in Octo-
ber/November of that year a new partnership was started to
do businesses of manufacture and sale of soap and umbrella
between Hemraj and the remaining partners of the preexisting
firm of the same name, that is, Nagjee, Narayanjee and
Manecklal. This is clear from the terms of the instrument
which we have earlier set out. We think it right especially
to draw attention to the terms of cls. 8, 9 and 25 of
annexure C I. These indicate that there were two firms,
namely, one, of which the constitution appeared from
annexure C I and which carried on umbrella and soap busi-
nesses and the other, consisting of Nagjee, Narayanjee and
Manecklal carrying on other kinds of businesses the
constitution of which appeared from annexure C 11. 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 cl. (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 cl.1 of annexure C I and contended that
itprovided for the continuance of the old firm, that is,
thefirm 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 Firm 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 cl. 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
105
-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 same. It seems to us beyond question that the
partnership mentioned in annexure C I is different from the
partnership which was brought about by the instrument -of
December 6, 1918 for the partners in the two firms were not
the same. It has not been shown to us, neither do we think,
that where different groups of persons, some of whom -are
common, carry on different businesses under different
-agreements, they can form one partnership. Further, as
,clearly appears from annexure C 11, the firm brought into
existence by the 1918 instrument was dissolved and a new
firm was started between Nagjee, Narayanjee and Manecklal
-after the retirement of Purushotham in 1934. If the 1918
firm was thus dissolved it could not, of course, be
continued. So the firm created by annexure C I could not
have been a ,continuation of the 1918 partnership.
Therefore, the firm mentioned in annexure C I is a new firm
and not the old 1918 firm reconstituted.
This position is reinforced by the terms of annexure C 11.
First it is called an agreement of partnership, that is,
agreement creating a partnership. The recital provides that
the remaining partners of the firm constituted by the
instrument of 1918 agreed to carry on and continue the
existing partnership business. Clause (2) states that the
deed of December 6, 1918 is revoked and the affairs of the
firm would be governed by the terms of annexure C 11 and the
conditions of the revoked deed were not to apply. It is
impossible after this to say that the partnership
constituted by the instrument of December 6, 1918 was not
dissolved. There is no warrant for the view for which the
appellant contended, that only the terms on which the
business under the document of December 6, 1918 was carried
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 11) 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 continu-
106
ance 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 cl. 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 1. 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 annexure C I and C 11, 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, Madras(1)
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 was held that as a result of
this splitting up there was a discontinuance of the original
business at the date of the partition and on such
discontinuance the family became entitled to relief under s.
25(3) It is of some significance to point out that the
partners constituting the appellant at the moment of the
transfer in 1948 also thought that in 1937 the old firm
ceased to exist and its business was carried on thereafter
by two independent firms, for the document of October 30,
1943 has referred to annexures C 1 and C 11 as constituting
two independent partnerships and proceeded to revoke them
both and provided that the parties to the instrument “have
(1) 201. T. R. 238.
107
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 Mer-
chants, Sait Nagjee Purushotham and Co., Soap and Umbrella
Merchants.”
Now when the business on which tax was charged under the Act
of 1918-which, it is not disputed, happened in this case-was
discontinued in 1937 it could not have been carried on April
1, 1939. What was then carried on must have been some other
business. So one of the conditions on which relief under s.
25(4) of the Act could be claimed was not satisfied and the
claim would not be maintainable.
Furthermore, for the reasons earlier stated, it must be held
that on April 1, 1939 the business, assuming its identity to
have continued in spite of the splitting up, was being
carried on by two persons, namely, two firms with different
partners. Now the person who transferred the business which
caused the succession in 1948 on which the appellant relies
for relief under s. 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’ s. 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 appel-
lant’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-
108
taken over by the two new firms must be deemed to have been
discontinued. On the principle stated in Annamalai’
Chettiar’s case,(1) there could not in such a case be a suc-
cession of the business from one to another. That being so,
there can be no question of the succession to the business
carried on at the commencement of the Indian Income-tax
(Amendment) Act, 1939, that is, 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-sec: (4) of s.
25 in the years 1948-49 and 1949-50, for it should, in such
an event, have claimed the relief in the year 1939-40.
In the result we have come to the conclusion that the
business which had been subjected to tax in 191.8 had been
discontinued in October/November 1937 or on May 30, 1939 and
it was not in existence in 1948 so as to permit a succession
to it taking place under the instrument of February 7, 1948.
The appeals, therefore, fail and they are accordingly
dismissed with costs.
HIDAYATULLAH J.-I have had the advantage of reading the
judgment just delivered by my learned brother Sarkar J. but
I have the misfortune to disagree with him in his conclusion
that these appeals must be dismissed. In my judgment, these
appeals must be allowed. The facts have been set out in
detail by my learned brother and I shall content myself with
repeating only such facts as are necessary for the
elucidation of my point of view.
The appellant is a firm which in 1948 consisted of four
partners namely Manecklal Purushotham, Liladhar Narayanjee,
Jayanand Nagjee and Prabhulal Naranji. It was carrying on
business mainly in piece-goods, yarn, banking and
manufacture and sale of umbrellas and soaps. ‘Its head
office was at Calicut but it had branches at Bombay and
Madras. The history of the firm goes back to the year 1902.
In that year, five members of a family by name Purushotham,
Nagjee, Narayanjee, Krishnajee and Premchand along
(1) 20 I.T.R. 238.
109
with one stranger Bhagwanjee started the appellant
firm–Sait Nagjee Purushottam & Co. Thereafter, 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
Manecklal 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 Manecklal 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 Manecklal and a deed of Januarv 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
Manecklal 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 dissolution of the
partnership. When the deed of 1934 was entered into, the
de-Id 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.
Sometime 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
Purushotham & 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 & Co. Soap and Umbrella Merchants”, and
at Bombay of ”Sha Nagjee Purushotham & Co.”. It may be
pointed out that the words “Sha” and “Sait” mean the same
thing, and the names were not different.
In 1937, one Hemchand a stranger to the family was admitted
as a working partner. On May 30, 1939, two
110
deeds were executed. They are respectively marked C1 and
C2. Cl was executed by Nagjee, Narayanjee, Manecklal and
Hemchand. C2 was executed by Nagjee, Narayanjee and
Manecklal. In Cl the preamble was as follows:
“Whereas Partners 1 to 4 have been carrying on
a business as Partners from the beginning of
Samvat 1994 (Guzarathi Era) in the manufacture
and sale of Soaps under the name of ”The
Vegetable Soap Works” Proprietors Sait Nagjee
Purushotham & Co., and in the manufacture and
sale of Umbrellas in Calicut with branches at
Madras and Bombay under the name and style of
Sait Nagjee Purushotham & Co., Soap and
Umbrella Merchants at Calicut and Madras and
in the name of Sha Nagjee Purushotham & Co. at
Bombay hereinafter called the Firm.”
The terms relevant to our purpose were:
1. The Firm shall continue to be as of old
namely Sait Nagjee Purushotham & Co. Soap and
Umbrella Merchants. The Firm shall continue
to do business in the manufacture and sale of
soaps under the name of the “Vegetable Soap
Works” and in umbrellas under the name of
“Sait Nagjee Purushotham & Co. Soap and
Umbrella Merchants as aforesaid with I lead
Office at Calicut and branch at Madras under
the same name and branch at Bombay under the
name of “Sha Nagjee Purushotham & Co.”
2. “The business of the Firm shall be
carried on by Partner No. 4 Hemchand Virjee
Sait according to the directions of Partners 1
to 3 and the said Hemchand Virjee Sait is to
manage work and assist the business of the
firm and he shall be called hereinafter the
Workinh Partner;”
14. “The working Partner Hemchand Virjee
Sait may draw on the First of each month the
monthly sum of Rs. 400 only from out of the
Firm’s account on account of the share of his
111
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 Finn has in-
curred 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
& 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
Purushotham & -Co., Bankers, Piecegoods and
Yarn Merchants may agree from time to time.”
In C2, the preamble was: ” …………..
Whereas the remaining partners (1) Nagjee
Amersee Sait, (2) Narayanji Purushotham Sait
and (3) Manecklal 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 & Co.” Bankers, Piece-goods
and Yarn Merchants, hereinafter called the
“FIRM”
112
The relevant terms were:
“2. The Agreement of Partnership dated the 6th
day of December 1918 is 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 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.”
20. All the partners hereby agree that they
in their individual capacity are and shall be
Partners also along with Hemchand Veerji Sait
in a Partnership business in Soaps and
Umbrellas carried on in Calicut and Madras
under the name and style of Sait
Nagjee
Purushotham & Co., Soap and Umbrella Merchants
and in Bombay under the name and style of
Shah, Nagjee Purushotham & Co. the terms and
conditions whereof are embodied in an
Agreement of Partnership dated 30-5-1939
signed by all the Partners.”‘
Both deeds provided again that the partnerships would not be
dissolved by the death or retirement of a partner.
Nagjee died in August 1943 and Hemchand retired on October
31, 1943. On October 30, 1943, a fresh deed of partnership
was executed by Narayanjee and Manecklal who were continuing
as partners from 1918 and two other members of the family
namely Liladhar and Prabhulal and to the benefits of
partnership Jayanand Nagjee who was a minor, was admitted.
The preamble was as follows:
“. . . . . . . . . .
And whereas partner No. 4 Hemchand Veerjee
Sait: has decided to retire from the said
partnership, business as from 31-10-
1943………….
And whereas the remaining partners are willing
and have agreed to take as new partners
Leeladhar Narayanjee Sait and Prabhulal
Narayanjee Sal , sons of Narayanjee
Purushotham Sait as from 31-10-1943.
113
And whereas the remaining partners along with
the new partners now included in the Deed of
Partnership, have agreed to carry on and con-
tinue as one, single partnership business, the
existing partnership businesses of “Sait
Nagjee Purushotham & Co., Bankers, Piece-goods
and Yarn merchants, “Sait Nagjee Purushotham &
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 Agreements of Partnerships dated 30th May
1939 entered into by (1) Nagjee Amersee Sait,
(2) Narayanjee Purushotham Sait (3) Maneck lal
Purushotham Sait and (1) Nagjee Amersee Sait
(2) Narayanji Purushotham Sait (3) Manecklal
Purushotham Sait and (4) Hemchand Veerji Sait
and registered as 98 and 97 in the Joint 11
Sub-Registrar’s Office, Calicut respectively,
are 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 revo
ked 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
& Co. Bankers, Piece-goods, Yarn, Soap and
Umbrella merchants.”
2.The partners of the firm are (1)
Narayanjee Purushotham Sait, (2) Manecklal
Purshotham Sait, (3) Jayanand Nagjee Sait
(Minor) represented by guardian Manecklal
Purushotham Sait (4) Leeladhar Narayanjee Sait
and (5) Prabhulal Narayanjee Sait.”
134-159 S.C.-8.
114
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 & Co., Ltd. and an agreement
was made by which Sait Nagjee Purushotham & Co. represented
by the then partners Manecklal, Liladhar, Jayanand and
Prabhulal sold to the company the goodwill, assets etc. of
the firm. The question in this case is whether the
appellate firm was entitled to the benefits of s. 25 (4) of
the Income-tax Act, and if so, to what extent. The answer
to the question depends on (a) whether the business on which
tax was paid under the provisions of the Indian Income-tax
Act, 1918 had discontinued at any time before 1948 or (b)
whether there was a succession by another person for the
person who was carrying on business on April 1, 1939. My
learned brethren consider that there was a discontinuance in
1937-39 of the original business by reason of the division
of the original business into two divisions and the
admission of Hemchand as a partner in one of the divisions.
The Department as respondent contends that there was a
succession in 1939 and again in 1943, because in those years
a different person succeeded to the person carrying on
business on April 1, 1939. The contention of the Department
has so far succeeded and I need not give the details of the
decisions of the various Tribunals under the Indian Income-
tax Act and the High Court, because my learned brother’s
judgment gives all such details. I shall therefore address
myself to the questions (a) whether there was a succession
in 1948 for the first time when the company succeeded the
firm, to entitle the firm to the benefits of s. 25 (4): (b)
whether there was, prior to 1948, a discontinuance of the
business 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 s. 25 which deals with
assessment in case of discontinued business. The first two
115
sub-sections deal with cases to which sub-s. 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-s. (3) and sub-s. (4) in so far as it is relevant for
our purpose, are as follows:
Sub-s. (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.”
Sub-section (4)
“Where the person who was at the commencement
of the Indian Income-tax(Amendment) Act, 1939
(VII of 1939), carrying on any business,
profession or vocation on which tax was at any
time charged under the provisions of the
Indian Income-tax Act, 1918, is succeeded in
such capacity by another person, the change
not being merely a change in the constitution
of a partnership, no tax shall be payable by
the
116
first mentioned person in respect of the
income, profits and gains of the period
between the end of the previous year and the
date of such succession, and such person 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 ref
und shall
be given of the difference:
Provided………………..
Sub-s. (4) was inserted by the Indian Income-tax (Amendment)
Act, 1939 (VII of 1939), which also introduced the words
underlined in sub-s. (3). Sub-s. (4) and the amendment to
sub-s. (3) were to come into force from April 1, 1939 by
virtue of notification No. 7 of the Central Government dated
March 18, 1939. Under s. 3 of the Indian Income-tax Act,
1918, the subject of the tax was not the income of the
previous year of assessment, but the income of the
assessment year. By the. Act of 1922, a change was
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 busi-
ness. When the 1939 amendment was made, relief was given by
sub-s. (4) to a person who had paid tax under the Act of
1918 when he was succeeded in his business by another
person. It will, however, be noticed that the two sub-
sections were mutually exclusive. If there was a
succession, then, sub-s. (4) was applicable. Sub-s. (3) was
only applicable when the business was discontinued. It will
further be noticed that the term “succession” was not
117
to include a change in the constitution of a partnership.
In this case, the claim to the benefit of sub-s. (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 businesses
formed under Ex. Cl and C2 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, therefor,, 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 1918 was dissolved, the
High Court relied upon cl. 2 of the deed Ex. C2.
The two sub-sections which have been quoted apply
differently, because in sub-s. (3) the emphasis is on the
discontinuance of the business which had paid tax under the
1918 Act while the emphasis in sub-s. (4) is on succession
to a person who, on April J., 1939, was carrying on any
business on which tax was at any time charged under the Act
of 1918. The former regards the continuity of the business
which had paid tax under the Act of 1918 and the latter the
continuance of the person who, on April 1, 1939, was
carrying on the business which had paid such tax. There
cannot, therefore, be a case in which both the sub-sections
apply at the same time, because the intention is obviously
to keep them separate and when sub-s. (4) was added, sub-s.
(3) was amended by the addition of the words “unless there
has been a succession by virtue of which the provisions of
sub-s. (4) have been rendered applicable.” The main idea is
the continuance of business unless there has been a succes-
sion. The question that arises is whether there was at any
time a dissolution of the partnership and if so, whether; it
118
amounted to “discontinuance” of business for the application
of sub-s. (3) or a succession by the formation of an
entirely new firm for the application of sub-s. (4). For
this purpose, I shall first discuss what is the position of
a partnership under the ordinary law of partnership and
under the Income-tax Act. At the outset, I must draw
attention to a few fundamental facts. It was pointed out by
this Court in Charandas v. Haridas(1) 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 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. The Commissioner of Income-tax, Nagpur (2) ,
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 the names of the partners are
disclosed. Under the Income-tax Act, however, a firm is by
s. 3 made a unit or 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 individual, with
another firm or with Hindu Undivided family.
Section 26 recognises the existence of a firm as an asses-
sable 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)
(1) [1960] 39 I. T. R. 202.
(2) [1956] S. C. R. 154.
119
by another person. This sub-section deals with all cases of
succession except those dealt with under sub-section (4) of
s. 25 already set out. Section 25 provides for discontinu-
ance of business. Discontinuance is thus not a mere change
in the constitution of the firm nor even succession where,
though the business changes hands, the business itself is
carried on. It was recently pointed out by us in Shivram
Poddar v. Income-tax Officer, Calcutta and another(1) thus:
“Under the ordinary law governing
partnerships, modification in the constitution
of the firm in the absence of a special
agreement to the contrary amounts to
dissolution of the firm and reconsitution
thereof, a firm at common law being a group of
individuals who have agreed to share the
profits of a business carried on by all or any
of them acting for all, and supersession of
the agreement brings about an end of the rela-
tion. But the Income-tax Act recognises a
firm for purposes of assessment as a unit
independent of the partners constituting it;
it invests the firm with a personality which
survives reconstitution. A firm discontinuing
its business may be assessed in the manner
provided by s. 25 (1) in the year of account
in which it discontinues its business; it may
also be assessed in the year of assessment.
In either case it is the assessment of the
income of the firm. Where the firm is
dissolved, but the business is not dis-
continued, there being change in the constitu-
tion of the firm, assessment has to be made
under s. 26 (1), and if there be succession to
the business, assessment has to be made under
s. 26 (2).”
Therefore when in sub-s. (4) the word ‘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 partnership.” Since the In-
come-tax Act assesses a partnership as a unit and such units
(1) Civil Appeal NO. 455 of 1963 decided on Dec. 13, 1963.
120
must, in the past, have been assessed to tax under the Act
of 1918, sub-s. (4) allows a partnership to obtain the
benefits of sub-s. (4) when there is a succession and a
partnership does not loose 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 3rd 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 subsections.
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 constitu-
tion of the partnership between 1939 and 1948 that the
appellants can be denied the benefit of s. 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,
Bombay v. P. E. Polson(1) and on the subject of succession
Commissioner of Income-tax, West Bengal v. A. W. Figgies &
Co. and others 2 It will be sufficient to refer to these two
cases.
To begin with, it must be remembered that the soap business
commenced in the year 1932 and did not pay tax under the Act
of 1918. Though there is nothing to show when the umbrella
business commenced, it is almost certain that it did not pay
tax under the Act of 1918. In any event the burden was on
the assessee firm to ?rove this before claiming relief.
These facts are fundamental, because, if the umbrella and
soap business were never assessed to tax under the Act of
1918, they are out of the picture and in respect of these
businesses, the assessee firm was not at all entit-
(1) [1945] 1. T.R. 384.
(2) [1954] S. C. R. 171.
121
led to relief. Section 25 (3) and (4) do not apply where
the business was not in existence before the Act of 1922
came into force. A clear authority for this proposition is
to be found in the decision of the Bombay High Court in
Ambalal Himatlal v. Commissioner of Income-tax and Excess
Profits Tax, Bombay North(1). In that case, a Hindu Un-
divided family was carrying on three separate businesses,
namely money lending, running a ginning factory and a share
business. This family disrupted in 1943 and divided the
business among its members, and claimed the benefit of s.
25(4) in respect of all the three businesses. It was found
that only the money lending business had paid tax under the
Indian Income-tax Act of 1918. It was held by Chagla C.J.
and Tendolkar J. that the assessee was entitled to the bene-
fit mentioned in s. 25 (4) only in respect of the money
lending business. Chief Justice Chagla observed at p. 287
thus:
“But before us we have a clear and categorical
finding that the three businesses of the
assessee were distinct businesses and,
therefore, it cannot be stated that the relief
which was intended for the money-lending
business which was carried on by the assessee
and which was subjected to tax under t
he 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 s. 25(4)
only in respect of the 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
(1) (1951) 20 I.T.R. 280.
122
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 s. 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 com-
pany 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 s. 25
(3) of the Act of 1922, as amended in 1939, his income from
the business made during the year 1938 was not taxable. It
was held that he was not entitled to the benefit of s. 25
(3) as the business was not discontinued. The High Court of
Bombay upheld the contention of Polson, but the Privy
Council reversed the decision approving the decision of the
Madras High Court in Meyyappa v. Commissioner of Income-tax,
Madras(1). Lord Simonds pointed out that on January 1,
1939, Polson had ceased to be the owner of the business and
therefore he was not carrying it on “at the commencement of”
the amending Act. Since those words meant the date when the
Act came into force on April 1, 1939, they could not be
carried back to a date anterior to April 1, 1939 and on that
date Polson ceased to be the owner of the business. As
regards the words “discontinued” and “discontinuance” in s.
25, Lord Simonds pointed out that they had been the subject
of numerous decisions and that it had been uniformly decided
that the words did not cover a mere change of ownership but
referred only to complete cessation of the business. Lord
Simonds further observed “Their Lordships entertain no doubt
of the correctness of these decisions, which appear to be in
accord with the plain
(1) (1943) 11 I.L.R. 247; I.L.R. (1944) Mad. 166.
123
meaning of the section and to be in line with similar deci-
sions upon the English Income Tax Acts.” It would therefore
follow that by discontinuance in sub-s. (3) is meant
complete cessation of the business. This cannot be said to
have taken place in the present 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-s. (3). The Judicial Committee was
not required to consider the matter from the point of view
of succession, because sub-s. (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 busi-
ness 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
124
case) shows that they could not have existed side by side.
In any case, there was no incorporation of the earlier docu-
ments by reference and they must be taken to have been
superseded. In this case there is a definite statement that
the earlier documents were ‘revoked’. But whether the word
,revoked’ is used or not, the resulting position is the
same. Some partners went out and others came in till the
identity of the original partners was completely lost. The
question was whether, in these circumstances, there was a
succession within the meaning of sub-s. (4) of s. 25. This
court observed:
“The section does not regard a mere change in
the personnel of the partners as amounting to
succession and disregards such a change. It
follows from the provisions of the section
that a mere change in the constitution of the
partnership does not necessarily bring into
existence a new assessable unit or a distinct
assessable entity and in such a case there is
no devolution of the business as a whole.”
This court pointed out that though under the law of Partner-
ship a firm has no legal existence apart from its partners
and it is merely a name to describe its partners
compendiously, it is equally true that under that law also
there is ordinarily no dissolution of the firm by the mere
incoming or outgoing of partners. This Court also pointed
out that the position is a little different under the
Income-tax Act where a firm is charged as an assessable
entity distinct from its partners who can also be assessed
individually. It was for this reason that sub-s. (4) of s.
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
could 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 remember-
ed that this was initially a business of a family but not in
the
125
sense in which a Hindu Joint Family is said to have a
business. From the very start, certain members of the
family alongwith 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. Hemehand 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 s. 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 Manecklal who were partners as far back as
1918 and three younger members of the family. In 1948,
Manecklal and those three other members of the family sold
this business to the company. It cannot be said 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 the other business were kept distinct so that the
stranger Hemchand could not get the benefit of partnership
in the Head Finn, it cannot be said that the old firm had
either discontinued or had been succeeded to by another
person. Hemchand was merely taken on as -a working partner.
His rights in the firm were extremely ,slender; he had to
make a deposit of Rs. 15,000 with the head firm and he was
to get a remuneration of Rs. 400 p.m. which was to go up or
down according to the profits. In other words, he was a
mere employee though described as -a working partner. As
was pointed out by Chagla C.J. in .,Commissioner of Income-
tax, Bombay City v. Kolhia Hirdagarh Co. Ltd., Bombay(1) and
again in Commissioner of Income-tax, Bombay City v. Sir Homi
Mehta’s Executors (2), such documents must be interpreted
not in a legalistic way
(1) (1949) 17 I.T.R. 545.
(2) (1955) 28 I.T.R. 928.
126
but on their true business aspect. Says the learned Chief’
Justice in the former case:
“It is open to us not merely to look at the
documents themselves, but also to consider the
surrounding circumstances so -as to arrive at
a conclusion as, to what was the real nature
of the transaction from the point of view of
two businessmen who were carrying out this
transaction. In all taxation matters more
emphasis must be placed upon the business
aspect of the transaction rather than on the
purely legal and technical aspect;…”‘
Judged from this standpoint, the entry of Hemchand was not a
dissolution of the firm of Sait Nagjee Purushotham and Co.
He was brought in merely to do the business at one of the
branches and to receive remuneration for doing the work. No
doubt he 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 s. 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, Madras(1) as to the meaning of the word “dis-
continuance”. In that case, a Hindu Undivided family con-
sisting of a father and 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 he was the assessee’
In the assessment year 1939-40, the son claimed that there
was a discontinuance of the business within the meaning of
s. 25(3) of the Income-tax Act, 1922 and claimed the benefit
of that sub-section on the ground that the business of them
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
(1) (1951) 20 I.T.R.38.
127
business no longer continued in existence, but was terminat-
ed and there was a “discontinuance” within the meaning of
s. 25(3) and the family was entitled to the benefit of
that sub-section. Satyanarayana Rao, J. held that as 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 to follow. But, looked
at from the point of view of s. 25(3), the business could be
said to have ceased. The Income-tax Act thinks, not in
terms of joint family business, but in terms of business in
a business sense, and it is the business which was taxed
under the Act of 1918 which must cease to exist before the
benefit of s. 25(3) can be obtained. It is possible that
the decision might be justified on the ground that the
benefit was being claimed by one of the members of the
erstwhile family and not by the whole family, though I
express no opinion upon it, but even so that would be a case
of succession rather than of discontinuance. The Madras
case cannot, however, be made applicable to the present
facts, because, as pointed out already by me, there was no
cessation of business in so far as the original business of
piece-goods, yarn and banking was concerned. That business
continued in the hands of the same person who had paid tax
under the Act of 1918 though there were changes in the
constitution of the partnership in the years that passed.
I may refer here to a case decided by the Rangoon High Court
in Commissioner of Income-tax Burma v. A.L.V.R.P. Firm(1).
In that case, a Hindu undivided family of Rangoon which
consisted of two brothers carried on moneylender business
under a single vilasam but with shops at several places
including a shop at Rangoon. The shops at each of these
places had separate capital and there were separate agents
to manage the shops but there was a central system of
accounts at one place showing the financial position of
(1) (1940) 8 I.T.R. 531.
128
the family. In 1938-1939, 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 s. 26(2) of the In-
come-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 s. 26(2) and slightly different
considerations govern s. 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 s.
25(4), as is the case here, a complete change of ownership
of all the businesses is necessary for purposes of s. 26(2)
before it can be said that there is succession. In both
sections, change does not mean that every 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
Jesingbhai Ujamshi v. Commissioner of Income-tax, Bombay
Moffusil(1), 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 partnership or not, whether for
the purpose of s. 26 or for the purpose of s. 25 (4). But
it must be remembered that under s. 25(4), a mere change in
the constitution of -the partnership does not count and ss.
25 (4) and 26 (2) do not apply at the same time. I am not
prepared to say that in this case in respect of +the
original business there was anything more than a mere change
in the constitution of the partnership. The business of
(1) (1950) 18 I.T.R. 23.
129
umbrella and soap which never paid tax under the Act of 1918
could be dealt with by the partners as they liked without
affecting the question of relief under s. 25 in respect ,of
the head business.
In my judgment, these appeals must be allowed anD the
question answered in favour of the assessee firm but only in
respect of the business in piece-goods, yarn and banking
which alone had paid tax under the Income-tax Act of 1918. I
would therefore allow the appeals with costs here and in
-the High Court.
ORDER BY COURT
In accordance with the opinion of the majority the appeals
are dismissed with costs.