Case: Sait Nagjee Purushotham And Co Vs. Commissioner Of Income-Tax, Madras

Sarkar, J.1. 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 Indian Income-tax Act, 1922.2. 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?"3. 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.4. 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-s. (4) of S. 25, a consideration of sub-s. (3) of that Section will throw useful light on the matter 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, profits 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 (Amendments 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, therefore, make no more reference to it.5. Now it will be seen that under sub-s.(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-s.. (4) which,, as will later be seen, has to be a succession taking place after April 1. 1939.The succession contemplated in sub-s. (4) again must have taken place before the discontinuance for if the business is discontinued it ceases to exist and cannot be succeeded to.6. Sub-section (4) requires certain conditions to be fulfilled before a claim to relief under it can be made. As the present appeals relate only to a business carried on by a firm, in discussing these conditions we will omit all references to the professions, vocations and owners of businesses other than firms. We would like to remind here that a firm is a taxable unit under the Income-tax Act and it is a person as that word is used in the Act. Now the first condition of the applicability of sub-s. (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 Divas 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-ss. (3) and (4) of S. 25. The second condition of the applicability of S. 25 (4) is that that business must have been carried on at the commencement of the Indian Income-tax (Amendment) Act, 1939, that is, April 1, 1939, by the person claiming the relief. The third condition is that the person carrying on the business on April 1, 1939 has to be succeeded by another person as the owner carrying on the business. Obviously, the succession indicated must have been after April 1, 1939, as we have earlier 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.7. 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 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 aforesaid. It is on this basis that it claimed the benefit of S. 25 (4) of the Act.8. 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 Purushotham 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 December 6, 1918 was between the following six persons, Purushotham, Nagjee. Narayanjee, Krishnajee, Manekal 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 1938 and Bhagwanjee retired about that time. On January 2, 1934, the remaining four partners executed an instrument varying some of the terms of the agreement of December 6, 1918. The instrument, however, provided that subject to the variations made the agreement of December 6, 1918 was to remain effective. It is not in dispute that there was no dissolution of the firm by the instrument of January 2, 1934. Thereafter on April 27, 1934 Purushotham died and the firm was then left with three partners, namely, Nagjee, Naravanjee and Maneklal.9. Then we get two instruments both dated May 30, 1939, each described as an agreement of partnership One instruments which is marked as annexure C 1, was between Nagjee, Narayanjee, Maneklal and Hemchand. The rather instrument which is marked as annexure C II was between Nagjee Narayanjee and Maneklal. It will be necessary to set out later some of the terms of these instruments, for on them a large part of the arguments advanced in this case has turned. Briefly it may be stated here that the appellant contends that these agreements did not really create new partnerships dissolving the existing one its case is that under annexure C l an outsider Hemchand was admitted as partner in some of the businesses of the existing partnership namely, the umbrella and soap businesses and by the other instrument annexure C II, the other existing businesses of that partnership e. g. in yarn piece-goods money lending etc. were continued by the subsisting partners mentioned above. The contention of the respondent on the other hand, is that those two instruments show that the business of the existing firm had been split 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 April 1, 1939 and no question therefore, of any subsequent succession to that business to make sub-s. (4) of S. 25 applicable could arise.10. 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 businesses 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 an 30, 1939, this instrument of October 30, 1943 clearly evidenced a dissolution of the partnership i hen 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-s. (4) of S. 25 and, therefore, the later succession, it any by the transfer of February 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.11. The last instrument to which we have to refer is the agreement of February 7, 1948 between Maneklal, Jayanand, Leeladhar and Prabhulal as partners of the appellant firm and a limited company formed to take over the business of the firm. By this instrument the parties agreed that the business of the firm would be transferred to the company with, effect from November 13, 1947, the transfer to be completed on February 13, 1948 by payment of the consideration of Rs 4 lacs by the vendee and delivery of possession of the assets of the business by the vendor. It is on this instrument that the appellant, which is the firm constituted by Maneklal Jayanand, Leeladhar and Prabhulal, claimed relief under S 25 (4) in its assessment for the years 1948-49 and 1949-50.12. 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 that view is correct. In our opinion, the business was discontinued in 1937 and what was subsequently carried on was not the same business.13. We now turn to annexures C I and C II dated May 30, 1939. Taking annexure C I first the material portions of this document are as follows:-"This agreement of Partnership ........... between (1) Nagjee ........... (2) Naravanjee ............. (3) Maneklal..... and (4) Hemchand ...............(hereinafter called the partners) witnesses the as follows :Whereas Partners 1 to 4 have been carrying on a business as partners from the beginning of Samvat 1964 (October-November 1937) in the manufacture and sale of Soaps under the name of the Vegetable Soap Works Proprietor Sait Nagjee Purushotham and 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 and Co., Soap and Umbrella Merchants at Calicut and Madras and in the name of Shah Nagjee Purushotham and 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 and 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 and Co., Soap 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 Shah Nagjee Purushotham and Co.,x x x x x xx x x x x x(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.x x x x x xx x x x x x(8) It is always understood by the Partners herein that the Firm of Sait Nagjee Purushotham and Co., Bankers. Piece-goods alla Yarn merchants, Calicut, the partners where of are the Partners 1 to 3 herein shall advance as heretofore all funds that are necessary for the conduct of this Partnership. Such advance shall be deemed as loan by the firm of Sait Nagjee Puroshotham and Co., Bankers, Piece-goods and Yarn Merchants to the Firm . ......(9) Until otherwise determined by Partners Nos. 1, 2 and 3 in writing the Partnership shall not borrow any amount from any one other than the Firm Sait Nagjee Purushotham and Co., Bankers, Piece-goods and yarn Merchants referred to in para 8 above.x x x x x xx x x x x x(25) All the Partners hereby agree that Partners 1 to 3 herein are the Partners of the Firm of Sait Nagjee Purushotham and Co., Bankers, Piece goods and Yarn merchants, Calicut."We now set out the material portions of annexure C II."This agreement of partnership ....between (1) Nagjee .... (2) Narayanjee .... and Maneklal .... hereinafter called the Partners witnesses the as follows:Whereas under the Agreement of Partnership dated the 6th day of December 1918 .... (1) Purushotham .... (2) Nagjee .... (3) Narayanjee .. (4) Karsanjee ...... (5) Bhagvqnjee ... (6) Maneklal .... have carried on a partnership trade in Piece-goods Banking and other articles in Calicut with branches at Madras and Bombay andWhereas (1) Purushotham...... (2) Karsanjee and .... (3) Bhagvanjee ceased to be partners either by retirement or death, andWhereas the remaining partners (1) Nagjee ....(2) Narayanjee .... and (3) Maneka1 . . . 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 Purushotam and Co., Bankers, Piece-goods and Yarn Merchants, hereinafter called the Firm; andWhereas 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 Firms except such as have been repeated in this Deed.x x x x x xx x x x x x(20) All the partners hereby agree that they in their individual capacity are and shall of 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 and Co., the terms and conditions whereof are embodied in an Agreement of Partnership, dated 30-5-1939 signed by all the Partners."14. It is clear that these two instruments recite events which had happened in l937. Annexure C I shows that in October/ 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 pre-existing firm of the same name, that is, Nagjee, Narayanjee and Maneklal. 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 businesses and the other, consisting of Nagjee, Narayanjee and Maneklal carrying on other kinds of businesses the constitution of which appeared from Annexure C II. Clauses (8) and (9) show that one firm was to lend money to the other. Such an agreement could not of course have been made unless the two firms were separate. By Cl. (25) all the parties to Annexure C I agreed that the firm constituted by Nagjee, Narayanjee and Maneklal was a different firm.15. Learned counsel relied on Cl. 1 of Annexure C I and contended that it provided for the continuance of the old firm that is, the firm constituted by the instrument of December 6, 1918 and hence no new firm had been created. We think that this contention is without foundation. There is no reference in Annexure C I to the firm constituted by the instrument of December 6, 1918. The word "firm" in Annexure C I refers to the partnership brought into existence by it. Clause 1 says that "The 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 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 II, the firm brought into existence by the 1918 instrument was dissolved and a new firm was started between Nagjee, Narayanjee and Maneklal 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.16. This position is reinforced by the terms of Annexure C II. 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 II 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 II) further indicates that the agreement to that effect in the instrument December 6, 1918 was no longer subsisting. In this case the term providing for the continuance must refer to the continuance of the business and not to the continuance of the partnership agreement because that was expressly revoked. If this is not the correct view, then 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 I. This would show that the old partnership of 1918 had given up doing some of its existing businesses and it was decided to carry them on under a new partnership agreement. This would support the view that the old partnership was dissolved for it would not have otherwise given up those businesses.17. The two instruments Annexures C I and C II, therefore, clearly establish that in October/November 1937 the business that was carried on by the firm of Sait Nagjee Purushotham and Co. till that date, was discontinued and its businesses were split up into two and carried on by two independent partnerships then brought into existence. When this happens it is impossible to say that the pre-existing business was continued. This view finds support from S. N. A. S. A. Annamalai Chettiar v. Commissioner of Income-tax, Madras, 1951-20 ITR 238 (Mad), 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 I and C II as constituting two independent partnerships and proceed to revoke them both and provided that the parties to the instrument "have agreed to carry on and continue as one single partnership business the existing partnership businesses for Sait Nagjee Purushotham and Co., Bankers, Piece-goods and Yarn Merchants, Sait Nagjee Purushotham and Co., Soap and Umbrella Merchants."18. 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.19. Further, more 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 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 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 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.20. 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 appellants claim must fail. Whenever the new partnerships were brought into existence, the result would, in our view, necessarily be that the business of the old partnership which was taken over by the two new firms must be deemed to have been discontinued. On the principle stated in Annamalai Chettiar case, 1951-20 ITR 238 (Mad), there could not in such a case be succession of a business from one to another. That being so, there can be no question of the succession to business carried on at the commencement of the Indian Income-tax (Amendment) Act, 1939, i.e., April 1, 1939 and on which tax was charged under the Act of 1918 having taken place in 1948 as claimed by the appellant. What was discontinued could not be succeeded to. Even if it was held that on May 30, 1939, there was a succession to the business which we do not think is a correct view to take, that also would disentitle the appellant to relief under sub-s. (4) of S. 25 in the years 1948-1949 and 1949-50, for it should, in such an event, have claimed the relief in the year 1939-40.

Decision reasoning: 1[ds]20. 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 appellants claim must fail. Whenever the new partnerships were brought into existence, the result would, in our view, necessarily be that the business of the old partnership which was taken over by the two new firms must be deemed to have been discontinued. On the principle stated in Annamalai Chettiar case, 1951-20 ITR 238   (Mad), there could not in such a case be succession of a business from one to another. That being so, there can be no question of the succession to business carried on at the commencement of the Indian Income-tax (Amendment) Act, 1939, i.e., April 1, 1939 and on which tax was charged under the Act of 1918 having taken place in 1948 as claimed by the appellant. What was discontinued could not be succeeded to. Even if it was held that on May 30, 1939, there was a succession to the business which we do not think is a correct view to take, that also would disentitle the appellant to relief under sub-s. (4) of S. 25 in the years 1948-1949 and 1949-50, for it should, in such an event, have claimed the relief in the year 1939-40.Applying this test to the present case, it is quite clear that the identity of the entity was never lost and there was never a succession till the year 1948. It must be remembered that this was initially a business of a family but not in the sense in which a Hindu joint family is said to have a business. From the very start, certain members of the family along with a stranger (Bhagwanjee) carried on the business in piece goods etc. In 1918, and in 1934 different deeds were executed but the basic deed was that of 1918. By that time, Bhagwanjee had retired and the business was in the hands of only the members of the family. Hemchand was then taken on in 1937 and in 1939, the original business was separated from the businesses newly started 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 Maneklal who were partners as for back as 1918 and three younger members of the family. In 1948, Maneklal and those three other members of the family sold this business to the 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 and 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 businesses were kept distinct so that the stranger Hemchand could not get the benefit of partnership in the Head firm, 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.