Case Note & Summary
These two appeals by special leave arose from assessments of the appellant firm Sait Nagjee Purushotham and Co. for income tax for assessment years 1948-49 and 1949-50. The appellant claimed relief under Section 25(4) of the Income-tax Act, 1922 on the ground that it had transferred its business to a limited company effective 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, Appellate Assistant Commissioner, and the Income Tax Appellate Tribunal. The High Court of Madras, on reference under Section 66(2), also held that the appellant was not entitled to relief. The appellant then appealed to the Supreme Court. The undisputed facts showed that a firm bearing the same name had carried on business from before 1918 and had paid tax under the Indian Income-tax Act, 1918. The firm did three kinds of business: piece-goods, yarn and general merchants; manufacture and sale of umbrellas; and 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 and a stranger H (Ex. C1) and another by those members alone (Ex. C2). These documents indicated that the umbrella and soap business was carried on from October-November 1937 by parties to Ex. C1 as partners, and the yarn, piece-goods and general merchant business was carried on by parties to Ex. C2 as partners from the same time. On October 30, 1943, a partnership agreement was executed by five persons who were then interested, stating that the businesses previously carried on by the two partnerships under the 1939 instruments would thereafter be carried on by one single partnership. The firm so constituted continued with changes until February 7, 1948, when the then partners entered into an agreement with a company to transfer the business, completed by February 13, 1948. The legal issue was whether the appellant satisfied the conditions of Section 25(4): that the business on which tax was charged under the 1918 Act was carried on by the person at the commencement of the Indian Income-tax (Amendment) Act, 1939 and was succeeded by another person, the change not being merely a change in the constitution of a partnership. The majority (Sarkar and Shah JJ.) reasoned that the execution of Exs. C1 and C2 in 1939 (showing businesses carried on from October-November 1937) resulted in the discontinuance of the old firm's business by splitting it into two independent partnerships. When a business carried on in one unit is disintegrated and divided into parts, the parts are not the whole; there is a discontinuance. Consequently, the business on which tax had been charged under the 1918 Act was not being carried on April 1, 1939 by the firm that had paid the tax. The single partnership formed in 1943 was a new entity, and the company succeeded that new firm, not the original. Therefore, relief under Section 25(4) was not available. Hidayatullah J. dissented. He held that Sections 25(3) and 25(4) were mutually exclusive; Section 25(3) applied to discontinuance and Section 25(4) to succession. A mere change in constitution of a partnership was neither. Under the Income-tax Act, a firm is an entity but its identity is not disturbed by changes in partners. The piece-goods business, which alone had paid tax under the 1918 Act, continued without dissolution or succession until 1948. The new partners, including H, did not cause a dissolution; H was a mere employee described as partner. The soap and umbrella businesses were not in existence before 1922 and could not claim relief. Thus, the appellant was entitled to succeed for the piece-goods, yarn and banking business. The Supreme Court, by majority, dismissed the appeals and held the appellant not entitled to any relief under Section 25(4).
Headnote
A) Income Tax - Succession Relief - Conditions under Section 25(4) - Income-tax Act, 1922, Section 25(4) - The assessee firm transferred its business to a limited company in February 1948 and claimed relief under Section 25(4) on the ground that it had carried on business on 1 April 1939 which had been charged under the 1918 Act; majority held not entitled because the business that paid tax under 1918 Act had been discontinued by splitting into two partnerships in 1937 and the new firm formed in 1943 succeeded the company, not the original entity; Held relief denied (Paras Not mentioned). B) Income Tax - Discontinuance vs Succession - Splitting business into two partnerships amounts to discontinuance - Income-tax Act, 1922, Section 25(3) - The old firm carrying on three businesses was split into two independent partnerships in October/November 1937; majority held that when a business carried on in one unit is disintegrated and divided into parts, the parts are not the whole, so the original business was discontinued; applied Annamalai Chettiar v. Commissioner of Income-tax, Madras, 20 I.T.R. 238; Held discontinuance occurred (Paras Not mentioned). C) Income Tax - Partnership Identity - Change in constitution versus succession - Income-tax Act, 1922, Section 25(4) - Dissenting view of Hidayatullah J. held that a firm is regarded as an entity under the Income-tax Act but its identity is not disturbed by coming in or going out of partners; the piece-goods business continued uninterrupted and there was no dissolution or succession until 1948; Held appellant entitled for piece-goods, yarn and banking business (Paras Not mentioned). D) Income Tax - Scope of Sections 25(3) and 25(4) - Mutual exclusivity - Income-tax Act, 1922, Sections 25(3), 25(4) - Sub-section (3) applies to discontinuance of business, sub-section (4) to succession to a person carrying on business at commencement of 1939 Amendment; mere change in constitution of partnership is neither discontinuance nor succession; dissenting view; Held sections mutually exclusive (Paras Not mentioned). E) Income Tax - Business Existence Before 1922 - Relief limited to businesses in existence and taxed under 1918 Act - Indian Income-tax Act, 1918; Income-tax Act, 1922, Section 25(4) - The soap and umbrella businesses were not in existence before 1922, so no relief could be claimed for them; changes in respect of them irrelevant; dissenting view; Held only piece-goods business eligible (Paras Not mentioned).
Issue of Consideration
Whether the appellant firm was entitled to relief under Section 25(4) of the Income-tax Act, 1922 upon transfer of its business to a limited company in February 1948, given that the business had been charged under the 1918 Act and whether the original business had been discontinued or succeeded.
Final Decision
By majority (Sarkar and Shah JJ.), the appeals were dismissed and the assessee held not entitled to relief under Section 25(4). Hidayatullah J. dissented, holding that the appellant was entitled to succeed regarding the piece-goods, yarn and banking business which alone had paid tax under the 1918 Act.
Law Points
- Succession under section 25(4) requires business charged under 1918 Act carried on at commencement of 1939 Amendment Act
- discontinuance of original business before succession disentitles relief
- splitting one business into two partnerships amounts to discontinuance
- mere change in constitution of partnership is neither discontinuance nor succession
- section 25(3) applies to discontinuance and section 25(4) to succession
- firm is taxable unit under Income-tax Act.
