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 1955M
section 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 section 254 of the Income tax Act 1922
The appellant claimed relief under section 254 contending that it had transferred its business to a limited company with effect either from November 13
1947 or February 13 1948 by an instrument executed on February 7 1948
The claim was rejected by the Income tax Officer and by the Appellate Assistant Commissioner and also by the Income tax Appellate Tribunal on appeal to it
The appellant then moved the Tribunal to refer a certain question to the High Court at Madras under section 661 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 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 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 sec
4 of section 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 section 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 section 25 is that the business must have been charged to tax under the Indian Income tax Act 1918
This Act was in force between 1918 and 1922 in which year it was replaced by the present Act
So the business must have been in existence 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 section 25
The second condition of the applicability of section 254 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 SC 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 section 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 eg 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 section 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 section 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 section 25 4
Whether relief could be granted under the earlier succession it was said is irrelevant for such relief had never been claimed
The last instrument to which we have to refer is the agreement of February 7 1948 between Maneklal Jayanand Leeladhar and Prabhulal as partners of the appellant firm and a limited company formed to take over the business
of the firm
By this instrument the parties agreed that the business of the firm would be transferred to the company with effect from November 13 1947 the transfer to be completed on February 13 1948 by payment of the 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 section 254 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 1Nagjee 2 Narayanjee3 Maneklal and 4 Hemchandhereinafter 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
8It 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 berNovember 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 cl1 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 OctoberNovember 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 OctoberNovember 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 OctoberNovember 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 section N A section A Annamalai Chettiar vs Commissioner of Income tax Madras1 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 section 253 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 1 107 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 section 254 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 section 254 was a single firm
This latter firm could not have been brought about by a change in the constitution of an existing firm for there were two existing firms and they could not become one by simple changes in their constitution
Indeed the instrument of October 30 1943 which brought the transferor firm the appellant before us into existence expressly states that The Agreements of Partnerships dated 30th May 1939 are hereby revoked
It follows that at the date the succession relied upon can be said to have taken place the business was being carried on by a person different from those who carried it on on April 1 1939
So another condition of the applicability of  section 254 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 OctoberNovember 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 case1 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 section 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 1918 had been discontinued in OctoberNovember 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 1 109 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
It is hereby agreed that the working Partner should invest a sum of Rs 15000 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
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
The firm name shall be Sait Nagjee Purushotham  Co Bankers Piece goods Yarn Soap and Umbrella merchants
 2The 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 SC 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 section 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 section 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 affirmativea must be answered in the negative
It is necessary at this stage to read section 25 which deals with assessment in case of discontinued business
The first two 115 sub sections deal with cases to which sub section
3 is not applicable
The first sub section lays down how the business is to be assessed when it is discontinued in any year and sub section 2 provides that any person discontinuing business must give a notice on pain of a penalty
We are not concerned with these sub sections
Sub section
3 and sub section
4 in so far as it is relevant for our purpose are as follows Sub section
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 taxAmendment 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 section
4 was inserted by the Indian Income tax Amendment Act 1939 VII of 1939 which also introduced the words underlined in sub section
Sub section
4 and the amendment to sub section
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 section 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 section
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 section
4 was applicable
Sub section
3 was only applicable when the business was discontinued
It will further be noticed that the term succession was not 117 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 businesses formed under exhibit 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 exhibit C2
The two sub sections which have been quoted apply differently because in sub section
3 the emphasis is on the discontinuance of the business which had paid tax under the 1918 Act while the emphasis in sub section
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 section
4 was added sub section
3 was amended by the addition of the words unless there has been a succession by virtue of which the provisions of sub section
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 section
3 or a succession by the formation of an entirely new firm for the application of sub section
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 vs Haridas1 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 andor 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 vs 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 section 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 2 1956 section 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 section 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 vs Income tax Officer Calcutta and another1 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 section 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 section 26 1 and if there be succession to the business assessment has to be made under section 26 2
 Therefore when in sub section
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 section
4 allows a partnership to obtain the benefits of sub section
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 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 Bombay vs P E Polson1 and on the subject of succession Commissioner of Income tax West Bengal vs 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 2  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 vs Commissioner of Income tax and Excess Profits Tax Bombay North1
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 section 254 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 CJ and Tendolkar J that the assessee was entitled to the bene fit mentioned in section 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 section 254 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 1 122 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 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 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 section 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 section 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 vs Commissioner of Income tax Madras1
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 section 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  ILR 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 section
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 section
The Judicial Committee was not required to consider the matter from the point of view of succession because sub section
4 did not then exist
The Privy Council case has been approved of by this Court in Figgies s case to which I shall refer presently
From this it follows that there was no discontinuance of the business at any time between 1921 and 1948 or even thereafter
The next question to consider is whether there has been a succession or a mere change in the constitution of the assessee firm in the years 1939 and 1948
If we were to go by the original business excluding the newly started 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 section
4 of section 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 section
4 of section 25 expressly mentioned that a case of succession was not to be found where there was a mere change in the constitution of the firm
In other words though a firm was to be regarded as an entity for the purpose of the Income tax Act that entity was not to be taken to be disturbed by the coming in or going out of partners any more than that entity 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 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 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 15000 with the head firm and he was to get a remuneration of Rs 400 pm 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 CJ in Commissioner of Income tax Bombay City vs Kolhia Hirdagarh Co Ltd Bombay1 and again in Commissioner of Income tax Bombay City vs Sir Homi Mehta s Executors 2 such documents must be interpreted not in a legalistic way 1 2 126 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 section 253 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 SNASA Annamalai Chettiar vs Commissioner of Income tax Madras1 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 section 253 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 ITR38
127 business no longer continued in existence but was terminat ed and there was a discontinuance within the meaning of section 253 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 section 253 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 section 253 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 vs ALVRP Firm1
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  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 section 262 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 section 262 and slightly different considerations govern section 25 4 which have induced the legislature to keep the two sections separate
While it is possible that there may be a succession only to the business which had paid tax under the Act of 1918 for purposes of section 254 as is the case here a complete change of ownership of all the businesses is necessary for purposes of section 262 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 CJ in Jesingbhai Ujamshi vs Commissioner of Income tax Bombay Moffusil1 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 section 26 or for the purpose of section 25 4
But it must be remembered that under section 254 a mere change in the constitution of the partnership does not count and sections 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 1 129 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 section 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


Summary:
By section 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 exhibit CI and the other by those members alone
being exhibit CII
It appeared from exhibit 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 exhibit 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 exhibit 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 section 254 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
Cl and CII showed that the business that had been carried on by the firm existing in 1918 was discontinued in OctoberNovember 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
section N A section A Annamalai Chettiar vs Commissioner of Income tax Madras 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 sections
3 and 4 of section 25 of the Act are mutually exclusive  sub section
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 section
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 section
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 vs Haridas 196039 and Dulichand vs Commissioner of Income tax Nagpur 1956 SCR 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 vs 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 section
3 and all cases of succession under sub section
4 and all cases of mere change in the constitution of the firm are neither cases under sub section
3 nor under sub section
These sub sections do not apply to cases where the business was not in existence before the Act 1922 came into force
Ambalal Himatlal vs Commissioner of Income tax and Excess Profits Tax Bombay North  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 section
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 section
Commissioner of Income tax Bombay vs P E Polson 194513 Commissioner of Income tax West Bengal vs A W Figgies and Co  and Mevoppar vs Commissioner of Income tax Madras 1
L R 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 vs Kolhia Hirdagarh Co Ltd Bombay 1949 17  and Commissioner of Income tax Bombay City vs Sir Homi Metters Executor  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