IN-Abs/test-data/summary/1697.txt

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 25(4) in assessment for the years 1948 49 and 1949 50 on the ground that it had been carrying on a business on April 1, 1939 when the Income tax (Amendment) Act, 1939 commenced; to operate on which business tax had been charged under the Act of 1918 and that it was succeeded in that business by a company in February 1948.
Held: (per Sarkar and Shah JJ.).
The assessee was not entitled to the relief.
Cl and CII showed that the business that had been carried on by the firm existing in 1918 was discontinued in October/November 1937 and its businesses were split up into two and from then carried on by two independent partnerships brought into existence by those documents.
The old firm was brought to an end by Exs.
Cl and CII.
When a business carried on in one unit is disintegrated and divided into parts, the parts are not the whole, though all the parts taken together constitute the whole.
In such case there is a discontinuance of the original businesses.
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, (1960)39 and Dulichand vs ,Commissioner of Income tax, Nagpur, [1956] S.C.R. 154, referred to.
(iii) Discontinuance of a firm is not a mere change in the constitution of the firm or even succession where, though the business changes hands, the original business which paid the tax in 1918 is carried on.
Shivram Poddar 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, (1945)13 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.