Income Tax Appellate Tribunal - Nagpur
Income-Tax Appellate Tribunal, Bombay vs Bachraj Nathani Of Raipur. on 4 April, 1945
Equivalent citations: [1946]14ITR191(NAG)
JUDGMENT
This case and Miscellaneous Civil Cases Nos. 81 and 82 of 1944 arise out of reference made by the Income-tax Appellate Tribunal, Bombay, under Section 66(1) of the Indian Income-tax Act and Section 21 of the Excess Profits Tax Act read with Section 66(1) of the Income-tax Act; and Miscellaneous Civil Cases Nos. 5, 6 and 7 of 1942 are applications made by assessee under Section 66(2) of the Income-tax Act. The issue common to all these cases is embodied in the following question formulated by the Tribunal :-
"Whether on the findings arrived at by the Appellate Tribunal in their order dated June 9, 1941, the legal inference is one of discontinuance of business of business within the meaning of Section 25(3) of the Income-tax Act ?"
This order governs the disposal of all the cases.
The facts are that Seth Balkishan and Seth Ramkishan, two divided Hindu brothers carried on business in partnership under the style of Seth Balkishan Ramkishan Nathani with its head office at Raipur and several branches at other places. On December 31, 1938, the partners agreed to dissolve the partnership and nominated an arbitrator to divide the business assets and liabilities of the partnership into moieties by means of two awards. From January 1, 1939, Ramkishan as manager of the family consisting of himself and his sons carried on business under the style of Ramkishan Shaligram Nathani, and Balkishan and his sons under the style of Shaligram Laxmichand. The actual division was made by the arbitrator by means of 2 awards dated March 15, and October 11, 1939. The first made an equal division of the bulk of the properties and business assets. The whole of the business was divided into two lots, one lot being picked up by each, except that the stock of cloth in Raipur shop and the paper agency were made over to Seth Ramkishan at a valuation. A similar division of the business was made of the Bhatapara shop. The business at Neora was allotted to Seth Ramkishan together with its books while Baloda Bazar was made over to Balkishan. In the former, Seth Balkishan took over the shops debtors to the extent of Rs. 1,478, while in the latter, the other brother took over a similar outstanding to the extent of Rs. 2,705. The firms interests in several other concerns were made over to one or the other. The second award divided the only two remaining shops, Bhavani Patna and Nandgaon. Seth Ramkishan died on May 28, 1939 after the first division of the bulk of the properties and assets and the managership of his family devolved on his son Bachraj.
At the time of assessment for the year 1939-40, Seth Balkishan and Seth Bachraj, along with other brothers of the family, made a joint application on December 12, 1939, to the Income-tax Officer stating that the firm of Seth Balkishan Ramkishan Nathani discontinued its business from the date of its dissolution and that the two brothers began carrying on the business that fell to their respective shares separately. On that ground they claimed the benefit of Section 25(3) of the Income-tax Act contending that they were not liable to pay income-tax from the Dewali of 1938 to December 31, 1938. In the alternative, the applicants claimed an exemption from payment of the tax for the period under Section 25(4) of the Act alleging that at all events, Seth Balkishan and Seth Ramkishan had each succeeded to the old firm. This branch of the claim was rejected by the Income-tax Officer with the remark that Section 25(4) expressly excluded from its application a case of succession that had taken place before April 1, 1939. That claim was pressed unsuccessfully before the Assistant Commissioner of Income-tax and eventually abandoned before the Tribunal.
The Tribunal found that each of the shops at Neora and Baloda Bazar was taken over by one or the other of the brothers as a going concern together with its books and admittedly the profits of the firm were not capitalised or distributed at the time of its dissolution, nor were the books balanced. Each of the brothers in substance continued the moiety of the business that fell to his share instead of carrying on the business jointly as before the division. The Tribunal held that the dissolution of partnership between the two brothers did not amount to anything more than a division of the properties, business and its assets and liabilities between the two, each taking over a moiety of his share. The Tribunal was of opinion that the only change effected was a change in the proprietorship of the old business and that it did not amount to a discontinuance of business within the meaning of Section 25(3) of the Income-tax Act. On these grounds the Tribunal dismissed the assessees application by an order dated June 9, 1941. The assessee applied to the Tribunal claiming a reference to the High Court, but that application was dismissed on the ground that no question of law was involved. Thereupon the assessee filed 3 applications under Section 66(2) of the Income-tax Act for requiring the Tribunal, Bombay, to state the case and refer it to this Court.
The question came up again in the course of the Income-tax assessment of the year 1940-41 and the excess profits tax assessment for the period between the Dewali 1938 and December 31, 1938. The assessee reiterated their claim under Section 25(3) of the Income-tax Act and claimed the benefit of the second proviso to Section 2(21) of the Excess Profits Tax Act. But their claim was rejected by the Income-tax cum Excess Profits Tax Officer and the Assistant Commissioner of Income-tax. The assessees took their appeals against the four assessments under the Excess Profits Tax Act and three assessments under the Income-tax Act before the Tribunal. No fresh facts were brought to the notice of the Tribunal, but the assessees urged for the second time their old contention that there was discontinuance of the business of the firm styled as Seth Balkishan Ramkishan Nathani within the meaning of Section 25(3) of the Income-tax Act. That contention was rejected as the result of the Tribunals finding that there had been no discontinuance of business on December 31, 1938, and that no new business had been started on January 1, 1939. And inasmuch as, in view of the previous finding, the business of the assessees could not be said to have commenced after July 1, 1938, the Tribunal held that the assessee was not entitled to the benefit of second proviso to Section 2(21) of the Excess Profits Tax Act and rejected the assessees claim. Nevertheless the Tribunal took the view that its findings that there was no discontinuance of business within the meaning of Section 25(3) of the Indian Income-tax Act, was a legal inference from the facts found and referred the question reproduced before above for our decision.
The case, as presented on behalf of the assessee is that it is either one of succession or discontinuance of business. If it is not one of succession, it must follow as a corollary that it is one of discontinuance of business. This argument is rested on the undermentioned clause occurring in sub-section (3) of Section 25 of the Income-tax Act :
"Where any business.....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.........."
Reliance is also placed on Commissioner of Income-tax, Burma v. N. N. Firm, Commissioner of Income-tax, Burma v. S. Mansookhlal Zaveri, Commissioner of Income-tax, Burma v. A. L. V. R. P. Firm, M. Kannappa Naicker & Co. v. Commissioner of Income-tax, Madras, Commissioner of Income-tax, Madras v. Best & Co., Madras, Hanutram Bhuramal v. Commissioner of Income-tax, Bihar and Wilson and Barlow v. Chibbett. These cases mostly deal with cases of succession falling under Section 26(2) of the Income-tax Act although they indirectly go to indicate the circumstances in which a business may be regarded as discontinued. These cases and others cited by the other side will now be examined.
In Commissioner of Income-tax, Burma v. N. N. Firm, the facts were that a joint Hindu family consisting of five members which carried on money-lending business decided to partition the family property and referred the partition to arbitration. During the period the arbitration was in progress no fresh loans were advanced. Under the partition, one of the members received 1/5th share of the assets of the money-lending business and the other 4 members carried on the business at the old premises as before the partition. It was held that there was no succession to the money-lending business of the joint family within the meaning of Section 26(2) of the Income-tax Act on the principle that succession signifies that one person takes the place of another and carries on the business as a whole but that where the business is split up and thereafter another person carries on part of the business, he cannot be said to succeed his predecessor in carrying on the business within the meaning of Section 26(2). It was also pointed out that where there is no continuity in carrying on the business and when one business has come to an end and after a time another business is started although with the same assets and under the same conditions, the person carrying on the new business cannot be said to succeed to those who had carried on the old business. Now, it must be noticed that were two branches of the business, one of ricemilling and another of money-lending. The separating member took 1/5th share of the assets of money-lending business and started a business on his own account under a different name and on new premises. As they did not desire that the rice-mill should be sold, they arranged that the separating members share in it should be bought out by the others. The rice-milling business was continued as before as a whole with this difference that instead of there being five co-owners, there were four and it was held that it was a case of succession. As to the money-lending business which was started by the separated member, it must be observed that the old money-lending business had stopped and therefore, there could not be any succession to a business which was not in existence. The remark made in the judgment that where a business is split up and thereafter another person carried on part of the business, that person does not succeed his predecessor in carrying on the business within Section 26(2) was obiter in view of the finding that the old money-lending business had ceased. It may be that when a person carries on a part of the old business, he does not succeed but it does not necessarily follow that the old business discontinued if the part is taken over as a going concern. This case was commented upon in Commissioner of Income-tax, Burma v. S. Mansookhlal Zaveri, and it was pointed out that the real test was the identity of the two businesses to determine whether the case would be one of succession or the other. These two cases were followed in Commissioner of Income-tax, Burma v. A. L. V. R. P. Firm. That was a case of a Hindu joint family which carried on the business of banking and money-lending at Madras and other places including Rangoon and Myitkyo with its head office at Devakottai in the Madras Presidency up to and including the year 1936-37. The income of the family was assessed to income-tax as a Hindu undivided family in Madras. Following upon the separation of Burma from India, the income of the family from Burma was assessed at Rangoon for the year 1937-38. But in 1938-39 when the assessment came to be made, it transpired that the undivided family had partitioned, and as a result of the partition, two brothers, P and V, carried on the Rangoon business as a contractual partnership while V carried on the Myitkyo business alone. The contractual partnership claimed the benefit of the provisions of Section 25(3) of the Income-tax Act but the Assistant Commissioner held that though the business at Rangoon and Myitkyo were separate, the latter was so small that the Rangoon business was substantially the whole business and therefore, there could be a succession to the Rangoon business alone. It is not clear from the judgment whether the learned Judges found that the contractual partnership was a new business or continuation of the old business. To determine whether it was a case of succession it was necessary to find whether the business in Burma was regarded as a separate business by the joint family or as a branch of the joint business. The learned Judges apparently looked at the question from this point of view, namely, that the business in Burma which was a limb of the original joint business with its headquarters at Devakottai must be deemed to have come to an end when it became an independent business in the hands of the contractual partnership of the two brothers, P and V. The rule that can be deduced from this is that when, as a result of a partition of a joint business, a branch of that business goes into the exclusive ownership of one of the quondam joint owners or partners, the old business of the branch must be deemed to have discontinued, because it ceased to be a branch and became a stem itself. In such a case, it may be noted that the business continues exactly as it was before with this difference that instead of the profits of the branch business going into a pool for the benefit of the joint family as a whole, they go to one of the quondam joint owners exclusively. There is a change of ownership or, at any rate, the quantum of ownership over the branch. But does that necessarily mean discontinuance of the business as such ?
In Hanutram Bhuramal v. Commissioner of Income-tax, Bihar, it was pointed out that the phrase "discontinuance of business" is apt to be used in an ambiguous sense and that where a business changes hands or a partner ceases to be a partner, there is no discontinuance of business but only a change in the ownership of the business. In this case one member separated and the remaining members, as in the rice-milling business in Commissioner of Income-tax, Burma v. N. N. Firm, continued to carry on the family business. It was held that the business could be regarded as discontinued, that is to say, that succession postulates continuity of business.
In Kannappa Naicker & Co. v. Commissioner of Income-tax, Madras, it was pointed out that there can be succession to business only when the same business is carried on by different person or persons, but that where a business terminates and a different though a similar business is carried on by another person or a newly constituted firm, there is no succession. This is on the same principle as the money-lending business in Commissioner of Income-tax, Burma v. N. N. Firm though it is not referred to therein. In this case, the manager of a joint Hindu family had been supplying coolies to the Madras Port Trust under a contract entered into from time to time and after his sons continued to supply coolies. Two other persons, R and G, as partners, were also similarly supplying coolies to other godowns of the Port Trust. The contract given to these firms expired on August 31, 1933, and the Port Trust decided to call for tenders for a contract for 5 years. The members of the joint family and R and G joined in making a common tender and agreed to share profit and loss in certain proportions. Their tender was accepted and they formed themselves into a new firm and supplied coolies from September 1933. No assets or liabilities of the joint family or the partners R and G passed to the new firm but the business was carried on under the name under which the joint family had previously carried on the business in their old premises with most of the old employees being taken over. The question was whether the new firm was liable to be assessed under Section 26(2) of the Income-tax Act as a successor in the business to the previous joint family and the partners R and G, and it was held that they were not successors to the old business as it was not that the old business, though similar in nature. The obvious reason was that the old business, depending as it did on the contract which expired on August 31, 1933, had terminated with that contract.
The case reported in Commissioner of Income-tax, Madras v. Best and Co., Madras, was distinguished on the ground that one of the branches of the business, which Messrs. Best and Co. sold as a going concern to a new company, involved the succession of the new company as the business was identical. It may be pertinent to notice that in Commissioner of Income-tax, Madras v. Best and Co., Madras, Best and Co. owned and controlled several companies including Eagle Rolling Mills which they transferred to a new company. The Income-tax authorities assessed the new company under Section 26(2) of the Income-tax Act holding that the new company succeeded Best and Co. as Eagle Rolling Mills. The assessee companys contention was that it was not a successor to the business of Messrs. Best and Co. because it did not succeed to all the business which Messrs. Best and Co. owned and controlled. The argument was put forward on the assumption that the expression "any business" in Section 26 meant "each and every business." That contention was thrown out and it was held that the new company was the successor of Best and Co. in respect of the Eagle Rolling Mills and that they were liable to be assessed under Section 26(2). This case is not reconcilable with Commissioner of Income-tax, Burma v. A. L. V. R. P. Firm, where it was held that where a branch ceases to be a branch but becomes a stem, the business of the branch must be deemed to have been discontinued. In this case, the Eagle Rolling Mills though it had ceased to be branch. was held not to have discontinued. The facts that in the Rangoon case the branch passed into the exclusive ownership of the quondam members of the joint family and that in the Madras case it passed into strangers hand does not appear to be material so far as the question of continuance and discontinuance of the business is concerned.
In Wilson and Barlow v. Chibbett, the old company went into liquidation and the new company purchased its lands and property and stock-in-trade. The new company retained the old companys employees and continued without any interruption the work in the old companys premises but did not take over the liabilities of the liquidated concern. It was held that though the new business was the same as the old one, it could not be regarded as identical because it was not the case of a business running on and a new person becoming interested as owner. In Commissioner of Income-tax, Bombay v. Sanjana & Co., Ltd., on the other hand, it was held that where one company goes into voluntary liquidation and its business is transferred to, and continued by a new company, the liquidators of the old company were not entitled to any refund for the reason that the old business had not been discontinued but only passed to the new company. It was pointed out that the transfer of ownership left the business wholly unaffected.
In Kalu Mal v. Commissioner of Income-tax, Punjab, a joint family consisting of a father and six sons became divided, the sons separated and started business of their own and the father retained the old business with all the rights appertaining thereto. The fathers contention was that the old business, as a consequence of disruption in the family, had discontinue a within the purview of Section 25(3) but the Income-tax authorities held that the father only succeeded to what was formerly a joint family business. The question whether the business discontinued or not in consequence of the breaking up of a family was treated as a question of fact to be determined according to the facts of each case and the view of the Income-tax authorities was accepted. In Commissioner of Income-tax, Madras v. Karuppiah, there was a partnership of V and K; V retired from the partnership receiving a sum in lieu of his share of profits, the other partner K carried on the business for his own benefit : it was held that K succeeded to the business of the partnership after dissolution on the principle that a firm as an entity was quite different from the partners who composed it. It was argued that the old partnership business should be deemed to have been discontinued but that argument was repelled on the ground that when the business of the quondam partnership is carried on without any break by one of the partners after dissolution, the section that is applicable is Section 26(2) and not Section 44 of the Indian Income-tax Act.
In Michael Faraday v. Carter, A and B, partners, had dissolved their partnership by a deed dated November 22, 1922, as from April 1, 1922. Upon dissolution of the partnership, A continued to carry on business at the firms address but from November 22, 1922, until his death on July 17, 1923, B carried on in his own name a small amount of business previously done by the firm. By a deed dated December 15, 1922, A took C into partnership as from April 1, 1922. It was held that there has been no discontinuance but that A had succeeded to the business of A and B, and that A and C succeeded to the business carried on by A after the dissolution of his partnership with B. The decision turned on the issue of fact whether the business was identical or not and the findings was that the business was one business all through as it never lost its identity.
On a review of the authorities, it would appear that the question, whether there is succession or discontinuity of business, was treated as a mixed question of law and fact but the actual decision eventually turned on the particular facts of each case. The rule which can be broadly deduced from them is that succession postulates continuity of the business as a whole so that it retains its identity despite the change of partnership, but the cases do not make it clear whether integrity and indentity of business are the essential elements of the continuity of the business. When a unit of business devolves on an heir or is sold to a purchaser, there is a clear case of succession because there is nothing but a change of ownership. In such case, neither the identity nor the integrity of the business is impaired. Such a simple case would no doubt be a good illustration of the rule. But difficulty arises in its application to a case of division of a business which is run in several branches which are carried on independently but which attain apparent unity only because of common ownership. When there is a division of such a running business and the quondam partners become the exclusive owners of the branches of the original business, can it not be predicated that it is a case of succession for the reason that the original business of the branch continues as before ? The fact that as a result of partition of the parent business, the branches lose their organic relation with each other does not necessarily imply the discontinuance of the business of the branch which passes into the hands of the quondam partner. To be able to say that with respect to the branch that the business has ceased, the parent business must terminate so that the branch which becomes independent should cease to be going concern when it passes into the hands of the quondam partner. The business in his hands would, if it was running independently even though as a factor of a larger unit, change its identity or integrity. To elucidate the principle, let us take two illustrations : (1) A and B jointly carry on business consisting of 4 branches. They effect partition in such a way that 2 branches go to one and 2 to another, all the branches being active at the time of the division. This would be a case of succession because there is no change in the business but only in the ownership. Each of the branches retains its integrity as well as identity. (2) A and B jointly carry on only one running business, e.g., a shop. They divide the shop with the result that each of them gets 1/2 of the shop as a going concern, Here it may be said that the business has lost its integrity and perhaps also its identity but can it be said that it has discontinued ? This conceivably represents a case on the border line of continuity and discontinuity of business. Now supposing that A and B run a joint business with 9 branches. They divide the business in such a way that 4 branches go to each of them and one branch is divided into 2 moieties. In such a case, the business which falls to the share of each may well be regarded as whole and identical in spite of the fact that they include a fraction of an old branch as was done in Commissioner of Income-tax, Burma v. A. L. V. R. P. Firm in the case of Myitkyo business. As so regarded, the conclusion would be a conclusion of fact.
We will now proceed to examine the argument that as the assessees case is not a case of succession, it must be a case of discontinuity of business. This argument rests on an imperfect application of the meaning of the words "then unless" in sub-section (3) of Section 25. On their true construction, they mean "except when." It must be observed that sub-section (3) is concerned with business, profession or vocation and sub-section (4) with person. When an owner of a business dies or transfers his business or when partners dissolve their partnership, there is discontinuance so far as the person dying or transferring or the separating partners are concerned but there may be no discontinuance of the business as such. Thus the word discontinuity is capable of a double interpretation according as it is vis-a-vis the owners or vis-a-vis the business. In the former case, the discontinuity is notional or jural and in the latter case, it is real or factual. The word "unless" occurring in sub-section (3) is used to exclude the case of notional or jural discontinuity from the purview of that sub-section because it is, in reality, a case of succession postulating continuity of business as opposed to discontinuity in truth and in fact. Consequently, it indicates that, being an exception to the discontinuity contemplated in sub-section (3), it should be dealt with under sub-section (4). The word succession means and includes fractional or partial succession as illustrated in para. 15 above (see Ram Rakha Mal v. Commissioner of Income-tax) if the business is carried on as it had been done before partition or dissolution of partnership. Succession, therefore, denotes a change in ownership. Consequently, the form which the issue assumes in such cases is whether the business was discontinued, not whether it was discontinued by joint owners.
In the present case, the assessees had perhaps a good case under Section 26(2) of the Income-tax Act but they could not derive any benefit from it as sub-section (4) of Section 25 excluded a case of succession that has taken place before April 1, 1939. Having been denied the benefit of that section, the assesses had no alternative but to take the position which has become untenable in view of the Tribunals finding that the business never came to a standstill but was active throughout; the profits of the firm were never capitalised or distributed, each of the businesses was allowed to continue and there was no interruption in the flow of the business as a whole. The Tribunal was right in drawing the inference that there was no discontinuance of business in spite of the dissolution of partnership. Mere division of business does not necessarily signify termination of the business. In our opinion, the Tribunal was right in rejecting the assessees claim made under Section 25(3) of the Indian Income-tax Act. On that footing, there could be no commencement of any business as such after July 1, 1938, so as to attract the applications of the 2nd proviso to Section 2(21) of the Excess Profits Tax Act. We answer the reference accordingly. The assessees applications made under Sections 66(2) of the Income-tax Act are dismissed. The assessees will pay the costs of the reference and bear their own. Counsels fees as certified.
Reference answered accordingly.