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

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 byon 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 whatThe 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.

Reasoning:
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.