SAIT NAGJEE PURUSHOTHAM AND CO. v. COMMISSIONER OF INCOME-TAX, MADRAS

Citation: [1964] 6 S.C.R. 91; 1963 INSC 267

Court: Supreme Court of India

Bench: A.K. SARKAR , M. HIDAYATULLAH, J.C. SHAH

Judgment date: 1963-12-20

Case summary

1963 INSC 267. Supreme Court of India judgment dated 1963-12-20. SAIT NAGJEE PURUSHOTHAM AND CO. v. COMMISSIONER OF INCOME-TAX, MADRAS. Read the judgment...

Judgment text

' .. • fJ S. C. R. SUPREME COURT REPORTS 91 tained allegations only as regards 6 and not as regards the rest. This would mean that the Tribunal had no jurisdiction to find that more than 6 votes had been improperly rejected in his case. If the votes regarding which no plea of impro- priety had been raised by Jabar Singh were eliminated, it would follow that as a result of the final scrutiny Genda Lal had obtained properly 5,660 valid votes as against 5,658 pol- led by Jabar Singh. The result of the election, therefote, was materially affected by the improper reception or refusal of votes and therefore I consider that the election of J abar Singh was properly set aside and that is why I concur in the order that the appeal should be dismissed. Appeal dismissed. SAIT NAGJEE PURUSHOTHAM AND CO. v. COMMISSIONER OF INCOME-TAX, MADRAS (A. K. SARKAR, M. HIDAYATULLAH AND J. C. SHAH JJ. ) Income Tax Act (II of 1922). s.

25(3) and (4)-Firm carrying on business in 1918-Disintegration into two firms-If discontinuance of business . By s. 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 vocatioa 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, yarn as general merchants, 1961 Jabar Singh v. Genda Lal Ayyangar J.

1963 December, 20 SUPREME COURT REPORTS [1964] 1963 (b) in the manufacture and sale of umbrellas and (c) in the manu- s . 1 N . p facture and sale of soaps. There were various changes in the con- ar ag1ee uru- . . shotham & Co. s! Jtuhon of the firm between 1918 and 1934. In May 1939 two T. Commissioner Income-taz, Madras documents were executed, one by the then members of the firm, and of a stranger H. being Ex. CI and the other by those members alone,. being Ex. CII. It appeared from Ex. 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 Ex. 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 Ex. CI. 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 ~fay 30, 1939, wou~d 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 S· 25(4) in assess1nent 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 charge'd under the Act of 1918 and that it was succeeded in that business by a company in February J 948. Held: (per Sarkar and Shah JJ. ). The assessee was not entitled to- the relief. Exs. CI and CII showed that the busihess 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. CI and CIT. 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. S. N. A· S. A. Annamalai, Chettiar v. Commissioner of Income-tax~ Madras, 20 I. T. R. 238. referred to. .. , ti S. C. R. SUPREME COURT lZEPORTS 93 1963 .. The business on which tax had been charged under the Act of 1918 was not being carried on on April 1, 1939 by the firm which had paid tax under that Act. Sait Nagjee Puru- shotham & Co. • • v. The business to which the company succeeded under the agreement Commissioner of of February 7, 1948 cannot before the succession be said to have Income-tax. ·been carried on by a firm which was carrying on business on April 1, Madras 1939, for that firm had been newiy 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 existence. Per, Hidayatullah J. (disserlting) (i) Sub-ss. (3) and (4) of s. 25 of the Act are mutually exclusive: sub-s.

(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-s. ( 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-s. (3) the emphasis is on the dis- cnntinuance of the business which had paid tax under the Act 1918. (ii) There is difference of approach to the same facts under the law -0f partnership and the Income-tax law. Charandas v. Haridas, ( 1960)39 I. T. R. 202 and Dulichand v . . Commissioner of Income-tax, Nagpur, [1956] S. C. R. 154, referred to.. (iii) Discontinuance of a firm is not a mere change in the con- stitution of the firm or even succession w! iere, though the business changes hands, the original business which paid the tax in 1918 is ,carried on. Shivram Poddar v. 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 I . sub-s. ( 3) and all cases of succession under sub-s. ( 4) an'd all cases of ·mere change in the constitution of the firm are neither cases under sub-s. (3) nor under sub'%. (4). These sub-sections do not apply to cases where the business was not in existence before the Act 1922 came into force. Ambalal Himutlal v. Co111missio11er of Income-tax and Excess Profits Tax, Bombay North, (1951) 20 I. T. R. 280, 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-s. (3) is meant com- plete 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 SUPREME COURT REPORTS [r9b4J 1963 have been managed by persons other than those who had paid the tax 0 • 1 N . p under the 1918 Act, but the business was not discontinued for the i. >DI ag1ee uru- . . shotham & Co. apphca! ion of sub-s. (3). v. Commissioner of Income-tax, Madras Co1nn1issioner of Income-tax, Bombay v. P. E. Polson, ( 1945) 13 I. T. R. 384. Commissioner of Income-tax, West Bengal v. A. W. Piggies and Co. [1954] S. C. R. 171 and Mevoppar v. Commissioner of Income-tax. Madras. I. L. R. (1. 944) Mad. 166, 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 owne'd by it. It cannot be said that the old firm ha·d either discontinued or had been succeeded by another person. Hemchand was a mere employee though described as a partner. The entry of Hemchand did not constitute a dissolution of the old firm. Comrnissioner of Income-tax, Bombay City v. Kolhia Hirdagarh Co. Ltd. , Bombay, (1949) 17 I. T. R. 545 and Commissioner of Income-tax, Bombay City v. Sir Homi Metters Executor, (1955) 28 I. T. R. 928, referred to. (ix) The appellants are entitled to succeed in their claim regard- ing the business in piece-goods yarn and banking which alone had paid tax under the 1918 Act. CIVIL APP ELLA TE JURISDICTION: Civil Appeals Nos. 275-276 of 1963.

Appeals by special leave from the judgment and order dated May 2, 1960 of the Kerala High Court in Income-tax. Referred case No. 98 of 1955(Ml. S. T. Desai, C. V. Mahalingam, B. Parthasarathi and J. B. Dadachanji, for the appellant (in both the appeals). K. N. Rajagopa/ Sastri and R. N. Sachthey, for the res- pondent (in both the appeals). I ' ... .. • , • 6 S. C. R. SUPREME COURT REPORTS 95 December 20, 1963. The Judgment of A. K. Sarkar 1963 and J. C. Shah, JJ. was delivered by Sarkar, J. M. Sait Nagjee Puru- Hidayatullah, J. delivered a Dissenting opinion. shotham & Ca. v. . Commissioner · of SARKAR J . -These two appeals anse out of assessments· Income-tax. of the appellant to income-tax for the years 1948-49 and Madras 1949-50. The question in these appeals is whether on the Sarkar-,:- facts to be presently stated, the appellant was entitled to relief under s. 25 ( 4) of the Income-tax Act, 1922. 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 applica- tion was rejected. It then moved the High Court under s. 66 ( 2) of the Act and the High Court directed the Tribu- nal to refer the following question for determination by it: "Whether, on fue facts and in the circumstances of the case, the assessee is not entitled to relief under section 25 ( 4) o; the Indian Income-tax Act, and to what extent? " The Tribunal duly drew up a statement of case and referred the question along with it to the High Codrt.

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. 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-sec. ( 4) of s. 25, a consideration of sub-·· sec. ( 3) of that section will throw useful light on the matter 1963 Sait Nagjee Puru- shotham & Co. v. ·-Commissioner of Income-tax, Madras Sarkar J. SUPREME COURT REPORTS 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 commence- ment of the Indian Income-tax (Amendment) 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 suc- cession ..... .

Both these sub-sections gave a further right to the assessee but with that right we are not concerned and shall, there- fore, make no more reference to it. Now it will be seen that under sub-sec. (3) the dis- continuance of the business gave rise to a relief from taxa- tion in respect of its income provided however that there had not been a succession to the business as mentioned in sub-sec. ( 4) which, as will later be seen, has to be a suc- cession taking place after April I, 1939. The succession contemplated in sub-sec. ( 4) again must have taken place before the discontinuance for if the business is discontinued it ceases to exist and cannot be succeeded to. Sub-section ( 4) requires certain conditions to be ful- filled before a claim to relief under it can be made. As the present appeals relate only to a business carried on by a .. ' .. , 6 S. C. R.

SUPREME COURT REPORTS 97 firm, in discussing these conditions we will omit all refer- 1961 ences to the professions, vocations and owners of businesses Sait Nar/u p,,,. ,.. oilier than firms. We would like to remind here that a firm shotluzm cl Co. is a taxable unit under the Income-tax Act and it is a person Commis;~. ,, of as that word is used in the Act. Now the first condition of lncomNax. the applicability of sub-sec. ( 4) of s. 25 is that the bttSiness Madr~ must have been charged to tax under the Indian Income-tax Sarkor J. 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 assess- ment but under the Act of 1922 the scheme of assessment of income and tax was modified.

By that Act tax was 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 N::t of 1922 and it was because of this that relief was given by sub-secs. (3) and ( 4) of s. 25. The second condition of the applicability of s. 25 ( 4) is that that busi- ness must have been carried on at the commencement of the Indian Income-tax Act (Amendment) Act, 1939, that is, April I, 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. 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 trans- fer by an instrument executed on February 7, 1948. The appellant further contenifs that its constitution has changed 134-159 S. C. -7. 98 SUPREME COURT REPORTS [1964] 1961 from time to time but the firm has never been dissolved so Sait Nag/ee Puru- that it has been the same firm continuing and carrying on 1hotham & Co. the same business from before 1918 till the transfer afore- Comm.. ri~ner of said. It is on this basis that it claimed the benefit of s. 25 ( 4) Income-ta.

of the Act. Madra1 Sarkar /. We now proceed to set out the facts of the case in a chronological order. It \~ars that a firm bearing the same name as that of the appellant, that is, Sait (or Shah) Nagjee Purshotham 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 busiri. ess in piece-goods, yarn, and other articles at Cali- cut with branches in Madras and Bombay. It also subse- quently 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 of December 6, 1918 was between the following six persons, Purushotham, N:igjee, Narayanjee, Krishnajee, Maneklal and Bhagwanjee.

Of these persons the last named was an outsider and the rest were memliers of a family. The agreement provided that the withdrawal of a partner for whatever reason, would not dissolve the partnership as between the remaining part- ners. Krishnajee died in 1933 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, Narayanjee and Maneklal. Then we get two instruments both dated May 30, 1939, ·each described as an agreement of partnership.

One instru- ment, which is marked as annexure CI, was between Nagjee, Narayanjee, Maneklal and Hemchand. The other ·instrument, which is marked as annexure C Il was between .. • .. 6 S. C. R. SUPREME COURT REPORTS 99 Nagjee, Narayanjee and Maneklal. It will be necessary to 1961 mit out later some of the terms of these instrum~nts, . for on Salt Nag/•• p,,,.. them a large part of the arguments advanced m this case shot/ram & co. has turned. Briefly it may be stated here that the appellant Commi. J~,,. , al contends that these . agreements did not really create new lncom .. tu, partnerships dissolving the existing one. Its case is .. that Madru_ under annexure C I an outsider Hemchand was admitted as Sarkar. /. partner in some of the businesses of the existing partner- ship, namely, the umbrella and soap businesses and by the -0ther instrument, annexure C II, the other existing businesses of that partnership, e. g. , in yam, piece-goods, money-lending etc.

, were continued by the subsisting partners mentioned above. The contention of the respondent, on the other hand, is that these two instruments show that the business ·of the existing firm had been split up into two and transfer- red to two different owners, namely, two newly constituted Jirms with different partners, some of whom were no doubt common, and this amounted to a discontinuance of the business of the old firm. It was contended that after such discontinuance it could not be said that the same business <>n which tax had been charged under the Act of 1918 was being carried on on April l, 1939 and no question, there- fore, of any subsequent succession to that business to make 'Sub-sec. ( 4) of s. 25 applicable, could arise. We next have an instrument of October 30, 1943, also styled an agreement of partnership, to which Narayanjee, Maneklal, Jayanand, Leeladhar and Prabhulal were parties.

It refetS to the two "agreements of partnership of May 30, 1939" and certain retirements of partners and admission of new partners and provides that the parties to the instrument bad agreed to carry on "as one single partnership" the busi- nesses carried on previously by the two partnerships refer- red to in the instruments of May 30, 1939. One of the contentions of the respondent is that even if it was not right in its view of the instruments of May 30, 1939, this instru- ment of October 30, 1943 clearly evidenced a dissolution of the partnership then existing and the creation of an entirely new partnership to which the busines~ of the old firm was ,transferred. It was said that this was a succession to busj .. :ness within the meaning of sub-sec. ( 4) of s. 25 and, there· ! fore, the later succession, if any, by the transfer of Febru- 100 SUPREME COURT REPOR! S [ 1964J 196J ary 7, 1948 could not provide the basis for relief under Id N;, Puru- s. 25 ( 4).

Whether relief could be granted under the earlier 1hotluun 4 Co. succession, it was said, is irrelevant for such relief had never c;,,,,,,,. ;};k,.. , of been claimed. :. t':d':':""' The last instrument to which we have to refer is the agreement of February 7, 1948 between Maneklal, Jaya- nand, Leeladhar and Prabhulal as partners of the appellant Sarkar J. firm and a limited company formed to take over the business of the firm. By this instrument the parties agreed that the business of the firm would be transferred to the company with effect from November 13, 1947, the transfer to be completed on February 13, 1948 by payment of the consi- deration of Rs. 4 lacs by the vendee and delivery of posses- sion of the assets of the business by the vendor. It is on this instrument that the appellant, which is the firm consti- tuted by Maneklal, Jayanand, Leeladhar and Prabhulal, claimed relief under s. 25 ( 4) in its assessment for the years 1948-49 and 1949-50.

There is no doubt that as a result of the instrument of February 7, 1948 the Company succeeded to the business that was being carried on by the firm of Nagjee, Purusho- tham and Company as then constituted as aforesaid, as bankers, piece-goods and yarn merchants and as soap and umbrella manufacturers and sellers. The question, however is, was this firm a firm which had been carrying on a busi- ness on April 1, 1939 and which business had been charged to tax under the Act of 1918? The High Court took the view that it was not and we think, that that view is correct. In our opinion, the business was discontinued in 1937 and what was subsequently carried on was not the same business- We now turn to annexures CI and C II dated May 30, 1939. Taking annexure C I first, the material portions of this document are as follows:- · "This agreement of Partnership ...... between (I] Nagjee .... (2) Narayanjee .... (3) Maneklal .... and ( 4) Hemchand ....

(hereinafter call- ed the partners) witnesseth as follows: Whereas Partners 1 to 4 have been carrying on a business as partners from the beginning of Samvat 1994 (=October-November 1937) in .. \ • • 6 S. C. R. SUPREME COURT REPORTS 101 the manufacture and sale of Soaps under the 1'63 name of 'The Vegetable Soap Works' Proprie- Sait N;;;. Puru- tor Sait Nagjee Purushotham & Co. , and in shotloam & Co. the manufacture and sale of umbrellas in Calicut commis;;~ner of with branches at Madras and Bombay under Income-ta, the name and style of Sait Nagjee Purusho- Madrru_ tham & Co. , Soap and Umbrella Merchants at Sarkar /. Calicut and Madras and in the name of Sha Nagjee Purushotham ··& Co.

, at Bombay here- inafter called the Firm; And whereas it is thought advisable to reduce the terms of the said partnership into writing for the proper and oetter conduct of the business; The Partners have agreed and also hereby agree to the following: ( 1) The Firm shall continue to be as of old name- ly Sait Nagjee Purushotham & Co. , Soap and Umbrella Merchants. The Firm shall continue to do business in the manufacture and sale of soaps under the name of the 'Vegetable ·Soap Works' and in umbrellas under the name of 'Sail Nagjee Purushotham & Co. , Soap and Umbrella Merchants as aforesaid with Head Office at Calicut and branch at Madras under the same name and branch at Bombay under the name of 'Sha Nagjee Purushotham & Co. ' ( 4) The business of the Firm shall consist main- ly in the manufacture 8nd sale of soaps and umbrellas and such allied products and such other articles as all the partners or the majo- rity of them may agree .

{ 8) It is always understood by the Partners here- in that the Firm of Sait N agjee Purushotham 196$ Solt Nag/•• Puru· lhotham & Co. v. Commi. uioner of lncome·t0%, Madra1 Sarkar. J. 102 SUPREME COURT REPORTS [1g64} (9) & Co. , Bankers, Piece-goods and Yarn mer- chants, Calicut, the partners whereof are the: Partners 1 to 3 herein shall advance as. heretofore all funds that are necessary for the conduct of this Partnership ...... Such advances shall be deemed as loan by the firm of Sait Nagjee Purushotham & Co. , Bankers,. Piece-goods and Yarn Merchants to the: Firm ..... •.. Until otherwise determined by Partners. Nos. l, 2 and 3 in writing the Partnership shall not borrow any amount from any one: other than the Firm Sait Nagjee Purusho- tham & Co. , Bankers, Piece-goods and Yam merchants referred to in para 8 above. (25) All the Partners hereby agree that Partners 1 to 3 herein are the Partners of the Firm of Sait Nagjee Purushotham & Co.

, Bankers, Piece-goods and Yam merchants, Calicut. " We now set out the material portions of annexure C II. ''This agreement of partnership ...... between (1) Nagjee .... (2) Narayanjee .... and Manek· Jal. ... hereinafter called the Partners wit- nesseth as follows: Whereas under the Agreement of Partnership dated the 6th day of December 1918 . . . . .. ( 1 ) Purushotham . . . . ( 2) N agjee ... . (3) Narayanjee .... (4) Karsanjee ... . ( 5) Bhagvanjee ( 6) Maneklal . . . . have carried on a partnership trade in Piece- goods, Banking and other articles in Calicut with branches at Madras and Bombay, and Whereas (1) Purushotham . . . . ( 2) Karsanjee .... and (3) Bhagvanjee .... ceased to be partners either by retirement or death; and ' t 6 S. C. R. SUPREME COURT REPORTS Whereas the remaining partners (1) Nagjee . . . . 1963 (2) Narayanjee .... and (3) Maneklal ... · sait NagJ•e Puru- settled the claims in full of the partners who shotham cl Co.

ceased to exist and agreed to carry on and Commis~~ ... , llf continue and are continuing the existing Income-ta. partnership business under the name and ri,i;'f;: 1 • style of 'Sait Nagjee Purushotham & Co. ' Bankers, Piece-goods and Yarn Merchants, hereinafter called the 'Firm'; and Whereas it is thought advisable and prudent to reduce into writing the terms and conditions agreed upon orally by them the Partners agree and have agreed to the following terms and regulations· stipulated hereunder. (2) The Agreement of Partnership dated the 6th day of December 1918 is hereby revoked and the affairs of the Firm shall be regulated and governed by the Regulations agreed upon orally and reduced into writing in this Deed and the ·terms and conditions of the revoked deed shall not in future apply to the 'Firm' except such as have been repeated in this Deed.

(20) All the partners hereby agree that they in their individual capacity are and shall be Partners also along with Hemchand Veerjee Sait in a Partnership business in Soaps and Umbrellas carried on in Calicut and Madras under the name and style of Sait Nagjee Purushotham and Co. , Soap and Umbrella Merchants and in Bombay under the name and style of Shah Nagjee Purushotham & Co. , the terms and conditions whereof are embodied in an Agreement of Partnership dated 30-5-1939 signed by all the Partners. 104 SUPREME COURT REPORTS Lr964J 1963 It is clear that these two instruments recite events which Sait Noa/•• Puru- had happened in 1937. Annexure CI shows that in Octo- •hotham 1nd have agreed to the following terms and conditions stipulated hereunder :- The operative terms relevant to our purposes were the following: "The Agreements of Partnerships dated 30th May 1939 entered into by (! ) Nagjee Amersee Sail, (2) Narayanjee Purushotham Sait (3) Maneck, la!

Purushotham Sail and (I) Nagjee Amersee Sail (2) Narayanji Purushotham S;lit (3) Manecklal Purushotham Sait and ( 4) Hem- chand Veerji Sait and registered as 98 and 97 in the Joint II Sub-Registrar's Office, Calicut respectively, are hereby revoked and the affairs of the firm shall be regulated and governed by the regulations agreed upon orally and reduced into writing in this deed of Partnership; and the terms and conditions of the revoked Deed shall not in future apply to the Firm except ,such as have been repeated in this Deed. 1. The firm name shall be "Sait N agjee Purushotham & Co. Bankers, Piece-goods, Yarn, Soap and Umbrella merchants. " 2. The partners of the firm are (I) Narayanjee Purushotham Sail, (2) Manecklal Purshotham Sait, (3) Jayanand Nagjee Sait (Minor) represent- ed by guardian Manecklal Purushotham Sail ( 4) Leeladhar Narayanjee Sait and ( 5) Prabhulal Narayanjee Sait. " 134-159 S. C. -3.

II4 SUPREME COURT REPORTS [1964} 1963 The rest of the terms followed the same pattern as before. Saifholfi. ":! :. • /'C:- In 1948, a limited iiability company was formed under v. the name of Sait Nagjee Purushotham & Co. , Ltd. and an Commi,. ioner 0 1 agreement was made by which Sait Naoiee Purushotham Income-tax, bJ Madr. , & Co7 represented by the then partners Manecklal, Lila- Hidayatullah 1 . dhar, Jayanand and Prabhulal sold to the company the good- will, assets etc. of the firm. The question in this case is whether the appellate firm was entitled to the benefits of s. 25 ( 4) of the Income-tax Act, and if so, to what extent. The · answer to the question depends on (a) whether the business on which tax was paid under the provisions of the Indian Income-tax Act, 1918 had discontinued at any time before 1948 or (b) whether there was a succession by another per- son for the person who was carrying on business on April 1, 1939.

My learned brethren consider that there was a dis- continuance in 1937-39 of the original business by reason of the division of the original business into two divisions and the admission of Hemchand as a partner in one of the divi- sions. The Department as respondent contends that there was a succession in 1939 and again in 1943, because in those years a different person succeeded to the person carrying on business &t April l, 1939. The contention of the Depart- ment has so far succeeded and I need not give the details of the decisions of the various Tribunals under the Indian In- come-tax Act and the High Court, because my learned bro- ther's judgment gives all such details. I shall therefore address myself to the questions (a) whether there was a suc- cession in 1948 for the·first time when the company succeed- ed the firm, to entitle the firm to the benefits of s.

25 ( 4) : (b) whether there was, prior to 1948, a discontinuance of the business on which tax was charged under the provisions of the Indian Income-tax Act and ( c) whether there was, prior to 1948, succession by another person to the person who had paid the tax under the provisions of the Income-Tax Act, 1918 after April l, 1939? If the answers to (b) and (c) be in the negative, (a) must be answered in the affirmative, but if the answer to either (b) or ( c) be in the affirmative, (a) must be answered in the negative. It is necessary at this stage to read s. 25 which deals with assessment in case of discontinued business. The first two .. • • ·, ' 6 s. c. n.. SUPREME COURT REPORTS II5 sub-sections deal with cases to which sub-s. 3 is not applica- 1963 ble. The first sub-section lays down how the business is to be sail Nall. , Puru- assessed when it is discontinued in any year and sub-section shotham &: Co.

2 provides that any person discontinuing business must give Commis;~ntr of a notice on pain of a penalty. We are not concerned with ln«;r•·tax, these sub-sections. Sub-s. (3) and sub-s. (4) in so far as Ma, .. _ it is relevant for our purpose, are as follows: Hidayatullah /. Sub-s. (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 (VII of 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, and the assessee may further claim that the income, pro- fits and gains of the previous year shall be deemed to have been the income, profits and gains of the said period.

Where any such claim is m_ade, an assessment shall be made on the basis of the income, profits and gains of the said period, and if an amount of tall; has already been paid in respect of the income, profits and gains of the previous year exceeding the amount payable on the basis of such assessment, a re- fund shall be given of the difference. " Sub-section ( 4) "Where the person who was at the commencement of the Indian Income-tax (Amendment) Act, 1939 (VII of 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 1963 Sail Natiee l'uru- 1hotham . l Co. v. Commissioner of Income·tu. ~llldru Hitlayatullah J.

u6 SUPREME COURT REPORTS 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 suc- cession, and such person may further claim that the income, profits and gains of the previous year shall be deemed to have been the income, profits and gains of the said period. Where any ~uch claim is made, an assessment shall be made on the basis of the income, profits and gains of the said period, and, if an amount of tax has already been paid in respect of the income, profits and gains of the previous year exceeding the amount payable on the basis of such assessment, a refund shall be given of t1ie difference: Provided . . . . . . . . . . . . . . . ... " Sub-s. ( 4) was inserted by the Indian Income-tax (Amend- ment) Act, 1939 (VII of 1939), which also introduced the words underlined in sub-s. (3). Sub-s. (4) and the amend· ment to sub-s. ( 3) were to come into force from April 1, 1939 by virtue of notification No.

7 of the Central Govern- ment dated March 18, 1939. Under s. 3 of the Indian Income-tax Act, 1918, the subject of the tax was not the income of the previous year of assessment, but the income of the assessment year. By the Act of 1922, a change was introduced and the tax was payable on the income of the previous year in the following year which was the year of assessment. Any business which was in existence and earn- ing profits in the year 1921 and continued in the year 1922 was required to pay tax on its profits of 1921, once under the Act of 1918 and again under the Act of 1922. In the 1922 Act, a provision was made to give relief to any business which had paid such double tax when it discontinued busi- ness. When the 1939 amendment was made, relief was given by sub-s. ( 4) to a person who had paid tax under the Act of 1918 when he was succeeded in his business by another person. It will, however, be noticed that the two sub-sections were mutually exclusive.

If there was a succession, then, sub-s. ( 4) was applicable. Sub-s. ( 3) was only applicable when the business was discontinued. It will further be noticed that the term "succession" was not .. • • l ' 6 S. C. R. SUPREME COURT REPORTS 117 to include a change in the constitution of a [? artnership. If63 In this case, the claim to the benefit of sub-s. ( 4) was made Sait Nagj .. Puru- · hv the company on the basis of a succession either on 1hotham &: Co. November 13, 1947 or on February 13, 1948. The Income- CommilJ~ner of tax Officer held that a succession had taken place in 1943 lncom•-tax, when on the retirement of Hemchand, the two separate busi- Madras_ nesses formed under Ex. C 1 and C2 were amalgamated. Hidayatullal:t The Appellate Assistant Commissioner agreed with this con- clusion. The Tribunal also held that the business in soap and umbrella was different from the business of banking, piece.

goods and yarn, and the amalgamation of these two businesses in 1943 amounted to a succession by a newly con- stitutN firm. The High Court held on reference that the firm constituted under the. deed of 1918 was dissolved in 1939 and the firms constituted under the two deeds of 1939 were dissolved in 1943. The High Court, therefore, held that so. 1ccession had taken place in 1939 and again in 1943 and the claim on the basis of the transfer to the limited liabi- lity company in 1948 was too late. In coming to the con- clusioi1 that the firm constituted under the deed of 1918 was dissolved, the High Court relied upon cl. 2 of the deed Ex. C2. The two sub-sections which have been quoted apply differently, because in sub-s. (3) the emphasis is on the dis- continuance of the business which had paid tax under the 1918 Act while the emphasis in sub-s. ( 4) is on succession to a person who, on April 1, 1939, was carrying on an.

y business on which tax was at any time charged under the Act of 1918. The former regards the continuity of the busi- ness which had paid tax under the Act of 1918 and the latter the continuance of the person who, on April I, 1939. was carrying on the business which had paid such tax. There cannot, therefore, be a case in which both the sub-sections apply at the same time, because the intention is obviously to keep them separate and when sub-s. ( 4) was added, sub-s. ( 3) was amended by the addition of the words "unless there has been a succession by virtue of which the i::irovisions of sub-s. ( 4) have been rendered applicable. " The main idea is the continuance of business unless there has been a succes- sion. The question that arises is whether there was at any time a dissolution of the partnership and if so, whether it \ u8 SUPREME COURT REPORTS [ 1964] l96J amounted to "discontinuance" of business for the application Soit N-;;j;; Puru· of sub-s.

( 3) or a succession by the formation of an entirely •lwtham & Co .. new firm for the application of sub-s. ( 4). For this purpose, Commwt~nu of I shall first discuss what is tham & Co. section. Satyanarayana Rao, J. held that as the unit had Commi•ri~ner of disintegrated into its component parts so as to annihilate the if":ime-ta. t. unity of the businesJ, each part which was thus divided . ra•_ was not identical 'with the whole, even though all the parts Hidayatullah J, taken together constitute~ the whole and that, when the unifying principle of that whole no longer existed, the parts gained their individuality and became separate and distinct. The learned Judge held that there was discontinuance. Look· ed at from the point of view of Hindu Law, all these results may be said to follow. But, looked at from the point of view of s. 25(3), the business could be said to have ceased.

The Income-tax Act thinks, not in terms of joint family business, but in terms of business in a business sense, and it is the business which was taxed under the Act of 1918 which must cease to exist before the benefit of s. 25(3) can be ob- tained. It is possible that the decision might be justified on the ground that the benefit was being clalmed by one of the members of the erstwhile family and not by the whole family, though I express no opinion upon it, but even so that would be a case of succession rather than of discontinuance. The Madras case cannot, however, be made applicable to the pre- sent facts, because, as pointed out already by me, there was no cessation of business in so far as the original business of piece-goods, yarn and banking was concerned. That busi- ness continued in the hands of the same person who had paid tax under the Act of 1918 though there were changes in the constitution of the partnership in the years that passed.

I may refer here to a case decided by the Rangoon High Court in Commissioner of Income-tax Burma v. A . L. V. R. P. Firm('). iu that case, a Hindu undivided family of Ran- goon which consisted of two brothers carried on money- lending business under a single vilasam but with sho;is at seve- ral places including a shop at Rangoon. The sho;is at each of these places had separate capital and there were separate agents to manage the shops but there was a central system of accounts at one place showing the financial position of (1) (1940) 8 I. T. R. 531. 128 SUPREME COURT REPORTS [1964] 1963 ·the family. In 1938-1939, the two brothers effected a . Sait Nagjee Puru- partition and the Rangoon shop was thereafter conducted shotham & Co. by the two brothers in partnership. On these facts, it was Commis:~ner of held by a Full Bench of the Rangoon High Court, that there . JMncodme-tax, was no succession within the meaning of s. 26(2) of the In- a~ . . . come-tax Act.

It was pomted out that the family did not . Hidayatullah J. carry on separate businesses at each of the five places but had only a number of branches at these places of the same busi- ness and in order that there might be a succession, it was necessary that the person succeeding should have succeeded his predecessor in carrying on the business as a whole. The case was under s. 26(2) and slightly different considerations govern s. 25 ( 4) which have induced the legislature to keep the two sections separate, While it is possible that there may be a successon only to the business which had paid tax under the Act of 1918 for purposes of s. 25(4), as is the case here, a complete change of ownership of all the businesses is neces- sary for purposes of s. 26(2) before it can be said that there is succession. In both sections, change does not mean that every one who owned the former business should leave it and go away.

The identity of the person who owned it be- fore and the identity of the person who owned it later must, however, be distinct. In the present case this has not hap- pened. All the facts have, rerhaps, not come 011 the recrird with that clarity with which they should have. but as pointed out by Chagla C. J. in Jesingbhai Ujamshi v. Commissioner of Income-tax, Bombay Woflusi/(1), there is nothing in law to preclude common partners constituting two entirrJy separate firms in respect of different businesses carried on by th. ~m for the purpose of the Indian Income-tax Act. Where they do this, it is mainly a question of fact whether there hns been a succession to one of S! ICh partnership or not, whether for the purpose of s. 26 or for the purpose of s. 25 ( 4). But it mmt be remembered that under s. 25(4), a mere change in the constitution of the partnership does not count and ss. 25(4) and 26(2) do not apply at the same time.

I am not prepared to say that in this case in resrect of the original business there was anything more than a mere chanee in the constitution of the partnership. The business of (1) (1950) 18 I. T. R. 23. - • 6 S. C. R. SUPREME COURT REPORTS 129 umbrella fllld soap which never paid tax under the Act of 1961 1918 could be dealt with by the partners as they liked Sail Nagi•• p,,,. without affecting 'the question of relief under s. 25 in respect shottam &: Co. . of the head business. Commi. s:~,,. ,. ot lncome·ta>:. · In my judgment, these appeals must be allowed ano the Madr. , question answered in favour of the assessee firm but only in Hidayatul/IJh 1. ; respect of the business in piece-goods, yarn and banking which alone had paid tax under the Income-tax Act of 1918. I would therefore allow the appeals with costs here and in the High Court ORDER BY COURT . In accordance with the opinion of the majority the appeals are dismissed with costs. VIDY ACHARAN SHUKLA 11.

KHUBCHAND BAGHEL AND OTHERS (B. P. SINHA, C. J. , K. SUBBA RAO, RAGHUBAR DAYAL, N. RAJAGOPALA AYYANGAR AND J. R. MUDHOLKAR JJ. ) Election-Appeal ta High Court under s. 116·A-Whether in computing period of limitation for filing an appeal to High Court, time provided by s. 12 of Limitation Act for getting a copy of the order CIJll be excluded-Whether s. 29(2)(a) applied to cases of appeal preferre4 under s. 116-A-Relationship between the two limbs of •· 29(2) of Limi· tation Act-Limitation Act. 1908 (9 of 1908), ss. 12, 29(2), Fir/II Schedule, Art, 156-Representation of the People Act, 1951 (43 of 1951), •· 116-A. The appellant was elected to the House of the People from a con· •tituency in the State of Madhya Pradesh. The respondents were tho other contesting candidates' Respondent No. 1 filed an election petition challenging the election of the appellant. That election petition was dismissed by the Election Tribunal. Against the order of the Tribunal.

the first respondent preferred an appeal to the High Court under s. 116-A 134-159 S. C. -9. 1963 Decunber, 20

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