Patna High Court
Kaniram Ganpatrai vs Commr. Of Income-Tax on 10 March, 1953
Equivalent citations: AIR1953PAT271, 1953(1)BLJR16, [1953]23ITR314(PATNA), AIR 1953 PATNA 271
JUDGMENT Ramaswami, J.
1. This case relates to the assessment made on Messrs. Kaniram Ganpatrai for the assessment year 1944-45. The previous year was the Diwali year ending with Kartik Badi 15 which corresponded to the period 8-11-1942 to 27-10-1943. The firm was constituted of two partners, via., Inderchand Kerjriwal who had ten annas share and Mahadeolal Jwalaprasad who had six annas share. Inderchand Kejriwal and Mahadeolal Jwalaprasad were partners in their capacity as kartas of the respective Hindu undivided families. In or about the year 1941, the Hindu undivided family, of which Mahadeolal was partner, became divided but Mahadeolal Jwalaprasad continued to hold the six annas share of the partnership of Kaniram Ganpatrai. On 27-10-1943 Mahadeolal Jwalaprasad retired from the partnership. On the next date a new partnership composed of Inderchand Kejriwal and Ramniranjan Kejriwal was formed. The name of the new firm was Kaniram Jankidas, of which Inderchand had 12 annas share and Ramniranjan had four annas share. The stock in trade and most of the book debts and liabilities of the old firm of Kaniram Ganpatrai were transferred to the new firm of Kaniram Jankidas who continued to carry on the same business in grain, cloth and lac. All the assets and liabilities were taken over by the new firm except the assets of a defunct cloth business to the extent of Rs. 3,09,878 and a portion of the assets of the existing shops to the extent of Rs. 4,90,737. As the old firm of Kaniram Ganpatrai had been assessed to income tax under the 1918 Act, the partners Inderchand and Mahadeolal applied during the course of the assessment for relief under Section 25 (3) and Section 25 (4), Income-tax Act 1922.
It was claimed that relief ought to be granted under Section 25 (3) as the assessee firm had discontinued its business with effect from 28-10-1943. It was contended in the alternative that if it should be held by the Income tax department that business had not been discontinued, relief should be given under Section 25 (4) as there was succession to the business carried on by the assessee. The income-tax officer rejected the claim for relief either under Section 25 (3) or Section 25 (4). An appeal was preferred on behalf of the assessee to the Appellate Assistant Commissioner but the appeal was dismissed. The assessee further appealed to the Income-tax Appellate Tribunal contending that there was either discontinuance of business under Section 25 (3) or there was succession under Section 25 (4) and in either case the assessee was entitled to claim relief. The Appellate Tribunal held that in view of the fact thst 'all the live accounts' had been taken over by the new firm with the stock in trade there was no discontinuance of the business. As regards the alternative claim under Section 25 (4) of the Act the Tribunal said :
"As Inderchand is continuing to be a partner of the old as well as the new partnership, there is no succession either, as Section 25 (4) contemplates a complete change of personnel and not a mere change in the ownership of the business, as we find to be state of affairs in this case".
2. At the instance of the assessee, the High Court directed the Income tax Appellate Tribunal to state a case on the following question of law :
"Whether, on the facts and in the circumstances of this case, the assessee firm or any of the partners thereof is entitled to relief under Sub-section (3) or Sub-section (4) of Section 25, Income-tax Act?"
3. On behalf of the assessee, Mr. Dutt presented the argument that upon the facts found the Income tax Appellate Tribunal should have held that there was succession to the assessee firm within the meaning of Section 25 (4), Income-tax Act. Learned counsel referred to the important finding of the Appellate Tribunal that the stock in trade and most of the debts and liabilities of the assessee firm were transferred to the new firm Kaniram Jankidas. In their order dated 13-4-1951 the Appellate Tribunal states that the new firm took over the assets and liabilities of the old firm and continued the business without cessation. The Tribunal has observed:
"In this state of affairs, on 28-10-1943 Ramniranjan Kejriwal was admitted to the partnership on Kartik Sudi 1, S.Y. 200, and the business was carried on as heretofore with the change in the firm name from Kaniram Ganpatrai to Kaniram Jankidas .......... and business went humming as before without break".
The facts suggest that the whole business of the assessee firm had devolved upon the successor firm Kaniram Jankidas, The identity and continuity of the business has also been substantially preserved for the successor firm Kaniram Jankidas took over the same lines of business from the assessee firm and carried on business at Daltonganj and its various branches. But the question at issue is whether the successor firm of Kaniram Jankidas is a 'different person' within the meaning of Section 25 (4), Income tax Act. On this point the Appellate Tribunal has said that there was no succession "as Inderchand continued to be a partner of the old as well as new partnership and Section 25 (4) contemplated a complete change of personnel and not a mere change of the ownership of the business."
In my opinion the Appellate Tribunal has proceeded on a misconception of law in holding that there was no succession to the firm of Kaniram Ganpatrai. It is true that Inderchand Kejriwal was a partner of the old firm and was also a partner of the new firm. But that is not a material consideration in deciding whether there was succession within the meaning of Section 25(4). In the present case, there are circumstances which suggest that the old firm of Kaniram Ganpatrai had been dissolved with effect from 27-10-1943. The Appellate Assistant Commissioner has stated that Mahadeo Lal Jwalaprasad retired from partnership on this date & the whole business came into the hands of Inderchand. The Appellate Tribunal has affirmed this finding and further stated that most of the assets and liabilities were transferred to the new firm of Kaniram Jankidas who carried on tile business of grain, cloth and lac as before without a break. 'These facts suggest the inference that the old partnership of Kaniram Ganpatrai had been dissolved by agreement. Under Section 40, Partnership Act, a partnership may be dissolved by the agreement of the partners. It is not necessary in every case that the fact of dissolution should be evidenced by a document but the dissolution of the partnership may be inferred from the circumstances of the case and the conduct of the parties (See Joopoody Sarayya v. Lakshmanaswamy', 36 Mad 185 (A)). According to the finding of the Appellate Tribunal the new firm of Kaniram Jankidas was formed on 28-10-1943 with Inderchand Kejriwal having 12 annas share and Kamniranjan Kejriwal having four annas share. The new firm was registered on 21-9-1946 but the deed of partnership recites that the new firm had carried on the business with effect from 23-10-1943. The Appellate Tribunal has held that there was no succession of the assessee firm "since Inderchand continued to be a partner of the old as well as the new partnership, and Section 25 (4) contemplates a complete change of personnel and not a mere change in the ownership of the business."
In my opinion, the Appellate Tribunal has proceeded on a mistaken view of the law. It is true enough to state that a partnership is not in English law or in Indian law a single juristic per-son and a firm as such has no legal personality or existence. But for the purpose of the Income tax Act, a firm is regarded as having a separate existence apart from the partners who carry on the business. The question has recently been discussed by a Bench' of this Court in --'Jittanram Nirmalram v. Commissioner of Income-tax', AIR 1953 Pat 257 (B), where the authorities on the point have been reviewed. It was held in that case that a new partnership of three persons was different legal entity from an old partnership of four persons, though three of the partners were common. The same principle is laid down in --'Income-Tax Commissioners v. Gibbs', (1942) A. C. 402 (C), in which the question arose whether a partnership of four stock brokers who took in a fifth partner ceased to carry on business and was succeeded by the partnership of five within the meaning of Sub-rule 1 of Rule 9, Schedule D to the Income Tax Act, 1918, which provided that if a person charged under Schedule D ceased within the year of assessment to carry on the trade in respect of which the assessment was made and was succeeded by another person, the commissioner shall adjust the assessment as directed. It was held by the House of Lords reversing the decision of the Court of Appeal that though in the English law a partnership was not a single juristic person, the scheme of the Income-tax legislation treated the partnership as a legal entity for the purpose of assessing revenue and there was succession to the business within the meaning of Rule 9, Sub-rules 1 and 2. Applying the principle of these authorities, it is clear that in the present case there has been a succession to the partnership within the meaning of Section 25(4), Income-tax Act and that the finding of the Appellate Tribunal on this point is erroneous and should be overruled.
4. The argument was stressed on behalf of the Income-tax department that all the assets and liabilities of Kaniram Ganpatrai were not taken over by the new firm of Kaniram Jankidas. It was pointed out by the Standing Counsel that assets of the defunct cloth business to the extent of Rs. 3,09,878 and assets of the existing shops to to the extent of Rs. 4,90,737 were not taken over by the new partnership. But the Appellate Tribunal has found that the major portion of the assets and liabilities were taken over by the new firm and the business at Daltanganj and several branches were carried on as heretofore without a break. For the application of Section 25(4), it is not essential in every case that the successor firm should have mathematically same extent of business as the predecessor firm or that it should have taken over the same extent of trade or the same line or set of customers as belonging to the predecessor firm, nor does it mean that the successor firm should have taken over all the assets and liabilities of the predecessor firm. In my opinion it is sufficient if there is substantial identity and similarity in the nature and extent of the activities carried on between the two firms, and if the major portion of the liabilities and assets have been taken over by the new firm from the old partnership. The principle is supported by the decision in --'Hassan Kassam v. Commissioner of Income-tax', B & O, AIR 1949 Pat 178 (D), in which there was evidence to show that some of the assets and liabilities of the old firm were retained by one of the partners Kassam Manji and fresh capital was introduced by the sons into the new partnership firm. The same business was however carried on at the same place by a successor firm. In this state of facts, the High Court rejected the argument that there was any alteration in the identity of the business or that there was no succession to the business which was being carried on by the deceased Kassam Manji under the old partnership.
5. Learned Counsel argued that even if there was succession to the assessee firm within the meaning of Section 25(4) the assessee firm cannot claim relief for the assessment year 1944-45 which is the period to which the reference relates. Counsel pointed out that the accounting year was the Diwali year ending with Kartik Badi 15, 2000 Samvat, corresponding to the period from 8-11-1942 to 27-10-1943. According to the statement of the case, the old firm was dissolved on 27-10-1943 and the new partnership of Kaniram Jankidas was formed on 28-10-1943. Upon these facts, the Standing Counsel argued that succession took place on 28-10-1943 which fell in the accounting year ending with Kartik Badi 15, 2001 Samvat, corresponding to the period October 1943 to October 1944. It was contended that the assessment year for this period would be 1945-48 and relief under Section 25(4) would be granted only in assessment proceedings relating to that year. But the argument of the Standing Counsel must be rejected on two grounds. In the first place, the question was not raised on behalf of the Income-tax department before the Appellate Tribunal and no statement of the case bas been made thereon. It is established by a long line of authorities that the High Court is competent only to decide the question of law raised, in the statement of the case. It is important to remember that the jurisdiction with which the High Court is invested under the Income Tax Act is of an exceptional character & in hearing the reference the High Court has seisin only of such questions of law as have been properly raised before the Appellate Tribunal and upon which there is statement of the case --'in re Chatturam Horil-ram Ltd.', ALR 1951 Pat 174 (E). In the second place, the argument of the Standing Counsel must be rejected on the ground that the date of succession fell in the Diwali Year ending Kartik Badi 15, 2000 Samvat. On reference to the almanac it appears that Kartik Badi 15 of 2000 Samvat corresponded to either 28-10-1943 or 29-10-1943 and Kartik Sudi 1, 2000 Samvat corresponded to 30-10-1943. It is clear therefore that succession took place on 28-10-1943 which fell in the Diwali year ending with Kartik Badi 15 of 2000 Samvat and the rssessee firm is entitled as a matter of right to claim relief under the first part of Section 25(4) which states that "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....".
6. Learned Standing Counsel then objected that the question whether there is or there is no succession within the meaning of Section 25(4) is a question of fact and the finding of the Appellate Tribunal on the point cannot be impugned on a reference to the High Court. I am unable to accept this argument, in the present case the Tribunal has found that the firm Kaniram Ganpatrai had carried, on business in grain, cloth and lac, that on 28-10-1943 a new firm Kaniram Jankidas was constituted with a view to take over the business carried on by the assessee firm, that on that date the stock in trade and most of the debts and liabilities of the assessee firm were transferred to the new firm Kaniram Jankidas who carried on business in grain, cloth and lac fas heretofore without any break. These arc pure findings of fact, but the question is whether upon these facts and applying the correct legal principle there is a succession to the assessee firm with-in the meaning of Section 25(4), Income-tax Act. Such a question is a mixed question of fact and law and the finding of the Appellate Tribunal on such a question has not the quality of unavailability which only belongs to a finding on a question of pure fact. In this connection, a passage from the judgment of the Court of Appeal in --'Bell v. National Provincial Bank of England, Ltd.', (1905) 5 Tax Cas 1 at p. 8 (F), is relevant:
"The great paint urged by Mr. Danckwerts in a very elaborate argument before us, was that the question whether there was a succession or not must be a question of fact, and the Commissioners must be taken in this case to have found as a fact that there was no succession; and he relies upon the authority of a case decided in 'Scotland of Ferguson v. Aikin', (1898) 4 Tax Cas 36 (G) as showing that it is and must be a question of fact whether there has in point of fact been a succession or not. It may be in many cases, or in some cases at all events, a question of fact. But it seems to me for the reasons I have already given that if it was a question of fact for the Commissioner in this case they have deliberately not decided it. They have presented to us a problem of law, and they have given us the benefit of their opinion upon it, and if we do not agree with that we are entitled to say so. In my view, if this is a finding as I think it must be of law that there is no succession within the meaning of the Rule, I find myself unable to agree with it for the reasons I have given."
In, the present case the conclusion of the Income tax Appellate Tribunal is also vitiated since they have misdirected themselves in law. The Appellate Tribunal has inferred that there was no succession 'as Inderchand was continuing to be a partner of the old as well as the new partnership-and Section 25(4) contemplated a complete change of personnel and not a mere change of ownership of the business'. As I have already said, the fact that Inderchand continued to be a partnership, has no relevance to the question whether there was a succession to the old partnership. It is manifest that in finding that there was no succession the Appellate Tribunal had applied a wrong principle of law and the matter is therefore properly open to be reviewed before the High Court on reference.
7. I turn next to the question whether there was a discontinuance of business within the meaning of Section 25(3) and whether relief may be claimed on behalf of the assessee for this reason. On this part of the case Mr. Dutt referred to several authorities. The argument however can hardly be accepted in view of the finding of the Tribunal that after the new firm had taken over the assets and liabilities of the old firm the business was carried on without a break. There is no evidence that any part of the business had stopped; on the contrary, the business was continued by the new partnership in the same manner and to the same extent as it was carried on before. In --'Meyyappa Chettiar v. Commissioner of Income-tax', Madras, AIR 1943 Mad 504 (H), it was held by the Madras High Court that the word 'discontinuance' under Section 25(3) meant 'cessation of business' and did not cover a case of succession or change of ownership. The ratio of this case was expressly approved by the Judicial Committee in --'Commissioner of Income-tax v. Poison', AIR 1945 PC 137 (I), in which it was held that Section 25(3) would apply only to a ease where there was a complete cessation of business and did not include the case of discontinuance of the business by the person formerly carrying it on as the result of the transfer or assignment of that business to another person who thereafter carried it on. It is manifest upon the facts found in the present case that there was no discontinuance of business within the meaning of Section 25(3) of the Act. I have already held in the present case that there was succession within the meaning of Section 25(4) to the assessee firm. For the purpose of assessment, there is a well-marked distinction between discontinuance and succession -- a distinction which is recognised in the English law of Income-tax and adopted and provided for in the Indian Income-tax Act. The conception of succession therefore excludes the conception of discontinuance. I would reject the argument of Mr. Dutt that in the present (case?) there is discontinuance within the meaning of Section 25(3) of the Act.
8. For the reasons expressed I think that in the facts and circumstances of the case, the assessee firm is entitled to relief under Sub-section (4) of Section 25, Income-tax Act.
9. The question is accordingly answered in favour of the assessee. The Income-tax Department must pay the cost of the reference. Hearing fee Rs. 250.
Rai, J.
10. I agree.