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PETITIONER: SAIT NAGJEE PURUSHOTHAM AND CO.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, MADRAS

DATE OF JUDGMENT: 20/12/1963

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

CITATION:  1967 AIR  617            1964 SCR  (6)  91

ACT: Income Tax Act (11 of 1922). s. 25(3) and (4)-Firm  carrying on   business  in  1918-Disintegration  into  two   firms-If discontinuance of business.

HEADNOTE: 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  vocation in which tax was at any time charged under the provisions of the  Indian  Income-tax  Act, 1918,  is  succeeded  in  such capacity  by another person, the change not being  merely  a change in the constitution of a partnership, no tax shall be payable  by  the first mentioned person in  respect  of  the income,  profits and gains of the period between the end  of the previous year and the date of such succession." A firm bearing the same name as the appellant firm, had been carrying  on business from before 1918 and had paid  tax  on that business under the Income-tax Act, 1918.  The firm  did three  kinds of businesses, namely, (a) in piece-goods,  yam as general merchants, 92 (b)  in the manufacture and sale of umbrellas and (c) in the manufacture  and sale of soaps.  There were various  changes in  the constitution of the firm between 1918 and 1934.   In May  1939  two,  documents were executed, one  by  the  then members of the firm, and a stranger H. being 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.   Cl.   On October  30.  1943  a document styled  as  an  agreement  of partnership  was executed by five persons who were then  the persons  interested in the businesses carried on  under  the instrument  of May 30, 1939.  This document referred to  the two,  agreements of partnership of May 30, 1939 and  certain subsequent  retirements  of partners and admissions  of  new partners and provided that the businesses previously carried

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on  by the two partnerships. referred to in the  instruments of  May  30,  1939, would thereafter be carried  on  by  one single  partnership  constituted  by  the  parties  to   it. Thereafter  all the businesses aforesaid were carried on  by this  single  partnership.   The  firm  constituted  by  the instrument  of  October  30,  1943  continued  with  certain changes  in its constitution till February 7, 1948 when  the then  partners  of,  it entered into  an  agreement  with  a company to transfer the business of the firm to the  latter, the  transfer to be completed by February 13, 1948  and  the transfer  was  in fact made.  The firm  constituted  by  the document  of October 30, 1943 claimed relief under s.  25(4) in  assessment  for  the years 1948-49 and  1949-50  on  the ground  that it had been carrying on a business on April  1, 1939 when the Income-tax (Amendment) Act, 1939 commenced; to operate on which business tax had been charged under the Act of  1918  and that it was succeeded in that  business  by  a company in February 1948. Held:     (per  Sarkar and Shah JJ.). The assessee  was  not entitled to the relief. Exs.   Cl  and CII showed that the business  that  had  been carried on by the firm existing in 1918 was discontinued  in October/November 1937 and its businesses were split up  into two and from then carried on by two independent partnerships brought into existence by those documents.  The old firm was brought to an end by Exs.  Cl and CII. When a business carried on in one unit is disintegrated  and divided into parts, the parts are not the whole, though  all the parts taken together constitute the whole.  In such case there is a discontinuance of the original businesses. S.   N.  A.  S. A. Annamalai, Chettiar  v.  Commissioner  of Income-tax, Madras, 20 I. T. R. 238. referred to. 93 The business on which tax had been charged under the Act  of 1918  was  not being carried on April 1, 1939  by  the  firm which had paid tax under that Act. The  business  to  which the  company  succeeded  under  the agreement ,of February 7, 1948 cannot before the  succession be said to have been carried on by a firm which was carrying on  business on April 1, 1939, for that firm had been  newly formed  under  the instrument of ,October  30,  1943,  which expressly revoked the partnership agreements of May 30, 1939 under  which  two firms had been brought into  brought  into existence. Per, Hidayatullah J. (dissenting) (i) Sub-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  discontinuance of the business which had  paid  tax under the Act 1918. (ii) There is difference of approach to the same facts under the law  of partnership and the Income-tax law. Charandas v. Haridas, (1960)39 1. 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 constitution  of the firm or even succession  where,  though the business changes hands, the original business which paid the tax in 1918 is carried on. Shivram Poddar v. Income-tax, Officer, C. A. No. 455 of 1963 dated December 13, 1963, referred to.

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(iv) All  cases of discontinuance of businesses are  treated under  sub-s. (3) and all cases of succession  under  sub-s. (4) and all cases of mere change in the constitution of  the firm  are  neither cases under sub-s. (3) nor  under  sub-s. (4).   These  sub-sections do not apply to cases  where  the business was not in existence before the Act 1922 came  into force. Ambalal  Himatlal v. Commissioner 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 complete  cessation  of business.  In the  present  case  it could  be said that this had taken place in respect  of  the piece-goods business; this might 94 have  been managed by persons other than those who had  paid the  tax  under  the  1918 Act, but  the  business  was  not discontinued for the application of sub-s. (3). Commissioner  of  Income-tax,  Bombay  v.  P.   E.   Polson, (1945)13  1.  T. R. 384.  Commissioner of  Income-tax,  West Bengal  v.  A. W. Figgies and Co. [1954] S. C.  R.  171  and Mevoppar  v.  Commissioner of Income-tax, Madras, 1.  L.  R. (1944) 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 owned by it.  It cannot be said that the old firm  had  either  discontinued or  had  been  succeeded  by another  person.   Hemchand  was  a  mere  employee   though described  as  a  partner.  The entry of  Hemehand  did  not constitute a dissolution of the old firm. Commissioner of Income-tax, Bombay City v. Kolhia Hirdagarh, Co.   Ltd., Bombay, (1949) 17 1. 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 regarding the business in piece-goods yarn and banking which alone had paid tax under the 1918 Act.

JUDGMENT: CIVIL APPELLATE 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(M). S.   T. Desai, C. V. Mahalingam, B. Parthasarathi and J.   B. Dadachanji, for the appellant (in both the appeals). K.   N.  Rajagopal Sastri and R. N. Sachthey, for  the  res- pondent (in both the appeals). 95 December  20, 1963.  The Judgment of A. K. Sarkar and J.  C. Shah,  JJ. was delivered by Sarkar, J. M.  Hidayatullah,  J.

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delivered a Dissenting opinion. SARKAR J.-These two appeals arise out of assessments of  the appellant  to income-tax for the years 1948-49 and  1949-50. The question in these appeals is whether on the 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  application  was rejected.   It then moved the High Court under s. 66 (2)  of the  Act and the High Court directed the Tribunal  to  refer the following question for determination by it:               "Whether,   on   the   facts   and   in    the               circumstances of the case, the assessee is not               entitled to relief under section 25 (4) of 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 Court.   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 subsec.  (3) of that section will throw useful light on  the matter 96 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, pro fits  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               commencement   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 succession

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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 discontinuance  of the business gave rise to a  relief  from taxation  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 succession taking place after April 1, 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  fulfilled before  a  claim  to relief under it can be  made.   As  the present appeals relate only to a business carried on by a 97 firm, in discussing these conditions we will omit all refer- ences to the professions, vocations and owners of businesses other than firms.  We would like to remind here that a  firm is  a  taxable  unit under the Income-tax Act and  it  is  a person  as  that  word is used in the Act.   Now  the  first condition  of the applicability of sub-sec. (4) of s. 25  is that  the business must have been charged to tax  under  the Indian Income-tax 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 assessment  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 Act 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 business  must have been carried on at the  commencement  of the  Indian Income-tax Act (Amendment) Act, 1939,  that  is, April 1, 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 transfer by an instrument executed on February 7, 1948.  The appellant further contends that its constitution has changed 134-159 S.C.-7. 98 from  time to time but the firm has never been dissolved  so that  it has been the same firm continuing and  carrying  on the  same business from before 1918 till the transfer  afore said. It is on this basis that it claimed the benefit of  s. 25 (4) of the Act. We  now  proceed  to  set out the facts of  the  case  in  a

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chronological  order.   It appears 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  business in  piece-goods,  yarn, and other articles at  Calicut  with branches in Madras and Bombay.  It also subsequently 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,  Nagjee,  Narayanjee, Krishnajee,  Maneklal and Bhagwanjee.  Of these persons  the last  named was an outsider and the rest were members  of  a family.   The  agreement provided that the withdrawal  of  a partner   for  whatever  reason,  would  not  dissolve   the partnership  as between the remaining partners.   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  Purusbotham 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 instrument, which is marked  as  annexure CI,  was between Nagjee, Narayanjee, Maneklal and  Hemchand. The  other instrument, which is marked as annexure C II  was between 99 Nagjee,  Narayanjee and Maneklal.  It will be  necessary  to set out later some of the terms of these instruments, for on them a large part of the arguments advanced in this case has turned.   Briefly it may be stated here that  the  appellant contends  that  these agreements did not really  create  new partnerships dissolving the existing one.  Its case is  that under  annexure  C I an outsider Hemchand was  -admitted  as partner  in some of the businesses of the existing  partner- ship,  namely, the umbrella and soap businesses and  by  the other   instrument,  annexure  C  11,  the  other   existing businesses of that partnership, e.g., in yarn,  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  transferred to two different owners, namely, two  newly constituted firms 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 on which tax had been charged under the Act of 1918 was  being  carried  on on April 1, 1939  and  no  question, therefore, 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  refers to  the two "agreements of partnership of May 30, 1939"  and certain  retirements  of  partners  and  admission  of   new

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partners and provides that the parties to the instrument had agreed  to  carry on "as one single partnership"  the  busi- nesses  carried  on  previously  by  the  two   partnerships referred 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 instrument   of  October  30,  1943  clearly   evidenced   a dissolution  of  -the  partnership  then  existing  and  the creation  of  an  entirely ,new  partnership  to  which  the business of the old firm was -transferred.  It was said that this was a succession to business within the meaning of sub- sec.  (4) of s. 25 and, therefore, the later succession,  if any, by the transfer of Febru- 100 ary 7, 1948 could not provide the basis for relief under  s. 25  (4).  Whether relief could be granted under the  earlier succession,  it was said, is irrelevant for such relief  had never  been claimed. The  last  instrument  to  which we have  to  refer  is  the agreement  of February 7, 1948 between  Maneklal,  Jayanand, Leeladhar  and Prabhulal as partners of the  appellant  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 constituted 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, Purushotham  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  business  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 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 C 1 and C 11 dated May  30,  1939. Taking  annexure  C 1 first, the material portions  of  this document are as follows:-          "This agreement of Partnershipbetween               (1)Nagjee.... (2) Narayanjee(3)    Maneklal               and (4) Hemchand(hereinafter  called  the               partners) witnesseth asfollows:               Whereas Partners 1 to 4 have been carrying  on               a  business as partners from the beginning  of               Samvat 1994 (=October-November 1937) in               101               the  manufacture and sale of Soaps  under  the               name of ’The Vegetable Soap Works’  Proprietor               Sait  Nagjee  Purushotham & Co.,  and  in  the               manufacture  and sale of umbrellas in  Calicut               with  branches at Madras and Bombay under  the               name  and style of Sait Nagjee  Purushotham  &               Co.,  Soap and Umbrella Merchants  at  Calicut               and  Madras  and  in the name  of  Sha  Nagjee               Purushotham  &  Co.,  at  Bombay   hereinafter               called the Firm;

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             And whereas it is thought advisable to  reduce               the terms of the said partnership into writing               for  the  proper  and better  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               namely 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                             ’Sait  Nagjee  Purushotham  &  Co.,  S oap   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               mainly  in the manufacture and sale  of  soaps               and  umbrellas  and such allied  products  and               such other articles as all the partners or the               majority of them may agree.               (8)It is always understood by the  Partners               herein   that   the  Firm   of   Sait   Nagjee               Purushotham               102               &  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 ...........               (9)   Until otherwise determined by  Partners.               Nos.  1, 2 and 3 in writing  the  Partnership,               shall not borrow any amount from any one other               than  the Firm Sait Nagjee Purushotham &  Co.,               Bankers,   Piece-goods  and   Yarn   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 11.               "This  agreement  of partnership  between  (1)               Nagjee....  (2) Narayanjee and  Maneklal  ....               hereinafter called the Partners witnesseth  as               follows:               Whereas under the Agreement of Partnership               dated the 6th day of December 1918               (1)   Purushotham (2) Nagjee......               (3)   Narayanjee (4) Karsanjee.......               (5)   Bhagvanjee (6) Maneklal .... have               carried on a partnership trade in  Piecegoods,                             Banking  and  other articles  in  Cali cut  with               branches at Madras and Bombay, and               Whereas (1) Purushotham .... (2) Karsanjee....

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             and  (3)  Bhagvanjee  .  ..  .  ceased  to  be               partners either by retirement or death, and                103               Whereas the remaining partners (1)  Nagjee....               (2)   Narayanjee....  and   (3)   Maneklal....               settled the claims in full of the partners who               ceased  to  exist and agreed to carry  on  and               continue  and  are  continuing  the   existing               partnership business under the name and  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 It  is clear that these two instruments recite events  which had  happened  in 1937.  Annexure C I shows  that  in  Octo- ber/November  of that year a new partnership was started  to do  businesses of manufacture and sale of soap and  umbrella between Hemraj and the remaining partners of the preexisting firm  of  the  same name, that is,  Nagjee,  Narayanjee  and Manecklal.   This is clear from the terms of the  instrument which we have earlier set out.  We think it right especially to  draw  attention  to the terms of cls. 8,  9  and  25  of annexure  C  I. These indicate that there  were  two  firms, namely,  one,  of  which  the  constitution  appeared   from annexure  C I and which carried on umbrella and  soap  busi- nesses  and the other, consisting of Nagjee, Narayanjee  and Manecklal   carrying  on  other  kinds  of  businesses   the constitution of which appeared from annexure C 11.   Clauses (8)  and  (9) show that one firm was to lend  money  to  the other.  Such an agreement could not of course have been made unless  the  two firms were separate.  By cl. (25)  all  the parties to annexure C I agreed that the firm constituted  by Nagjee, Narayanjee and Maneklal was a different firm.Learned counsel  relied on cl.1  of annexure C I and contended  that itprovided for the continuance of the old firm, that  is, thefirm constituted by the instrument of December 6,  1918 and  hence no new firm had been created.We think  that  this contention is without foundation.  There is no reference  in annexure  C I to the firm constituted by the  instrument  of December 6, 1918.  The word "firm" in annexure C I refers to

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the partnership brought into existence by it.  Clause 1 says that "The Firm shall continue to be of old".  The word "old" refers  to the partnership orally brought into existence  in October/November  1937  to which reference is  made  in  the first recital and to put down the terms of which in writing, annexure C I was executed.  Likewise the provision in cl.  1 that "The Firm shall continue to do business" refers to  the continuance of the business carried on prior to May 30, 1939 by the firm brought into existence in October/November  1937 by  the  oral  agreement.   The  continuance  cannot  be   a continuance  of the firm or business of the  partnership  of 1918 for annexure C I makes no reference to that partnership at all.  It may be 105 -that  the  partnership of 1918 was carried on in  the  same name as the firm referred to in annexure C I but we are  not ,aware  that an identity of names establishes that  the  two firms  are  same.  It seems to us beyond question  that  the partnership mentioned in annexure C I is different from  the partnership  which was brought about by the  instrument  -of December 6, 1918 for the partners in the two firms were  not the same.  It has not been shown to us, neither do we think, that  where different groups of persons, some of  whom  -are common,  carry  on  different  businesses  under   different -agreements,  they  can form one partnership.   Further,  as ,clearly  appears from annexure C 11, the firm brought  into existence  by  the 1918 instrument was dissolved and  a  new firm  was started between Nagjee, Narayanjee  and  Manecklal -after  the retirement of Purushotham in 1934.  If the  1918 firm  was  thus  dissolved  it  could  not,  of  course,  be continued.   So the firm created by annexure C I  could  not have   been  a  ,continuation  of  the   1918   partnership. Therefore, the firm mentioned in annexure C I is a new  firm and not the old 1918 firm reconstituted. This  position is reinforced by the terms of annexure C  11. First  it  is called an agreement of partnership,  that  is, agreement creating a partnership.  The recital provides that the  remaining  partners  of the  firm  constituted  by  the instrument  of  1918  agreed to carry on  and  continue  the existing  partnership business.  Clause (2) states that  the deed  of December 6, 1918 is revoked and the affairs of  the firm would be governed by the terms of annexure C 11 and the conditions  of  the revoked deed were not to apply.   It  is impossible   after   this  to  say  that   the   partnership constituted  by the instrument of December 6, 1918  was  not dissolved.   There is no warrant for the view for which  the appellant  contended,  that  only the  terms  on  which  the business under the document of December 6, 1918 was  carried were  revoked and not the head agreement to do  business  in partnership.  The fact that an express agreement to carry on the  business  in partnership was made (for  which  see  the third  recital in annexure C 11) further indicates that  the agreement  to that effect in the instrument of  December  6, 1918  was  no  longer subsisting.  In  this  case  the  term providing for the continu- 106 ance  must refer to the continuance of the business and  not to the continuance of the partnership agreement because that was  expressly  revoked.  If this is not the  correct  view, then cl. 20 would be inexplicable.  That clause states  that the partners in their individual capacity would be  partners with  Hemchand  in  another  business  the  terms  of  which partnership  appear in another partnership agreement of  the same  date and which is annexure C 1. This would  show  that the  old partnership of 1918 had given up doing some of  its

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existing  businesses  and it was decided to  carry  them  on under  a new partnership agreement.  This would support  the view that the old partnership was dissolved for it would not have otherwise given up those businesses. The  two  instruments  annexure C I  and  C  11,  therefore, clearly establish that in October/November 1937 the business that  was carried on by the firm of Sait Nagjee  Purushotham and Co. till that date, was discontinued and its  businesses were  split  up into two and carried on by  two  independent partnerships then brought into existence.  When this happens it  is impossible to say that the pre-existing business  was continued.   This  view finds support from S. N.  A.  S.  A. Annamalai Chettiar v. Commissioner of Income-tax,  Madras(1) where  it  was held that when a business carried on  in  one unit is disintegrated and divided into parts, the parts  are not  the  whole  even though all the  parts  taken  together constitute  the  whole.  That was a case of a  joint  family business  which on partition was split up between  different members  of  the family.  ’It was held that as a  result  of this splitting up there was a discontinuance of the original business   at  the  date  of  the  partition  and  on   such discontinuance the family became entitled to relief under s. 25(3)  It  is  of some significance to point  out  that  the partners  constituting  the appellant at the moment  of  the transfer  in  1948 also thought that in 1937  the  old  firm ceased  to exist and its business was carried on  thereafter by  two independent firms, for the document of  October  30, 1943 has referred to annexures C 1 and C 11 as  constituting two  independent partnerships and proceeded to  revoke  them both and provided that the parties to the instrument "have (1)  201. T.  R. 238. 107 agreed  to carry on and continue as one  single  partnership business the existing partnership businesses of Sait  Nagjee Purushotham  and  Co., Bankers, Piece-goods  and  Yarn  Mer- chants,  Sait Nagjee Purushotham and Co., Soap and  Umbrella Merchants." Now when the business on which tax was charged under the Act of 1918-which, it is not disputed, happened in this case-was discontinued in 1937 it could not have been carried on April 1, 1939. What was then carried on must have been some  other business.  So one of the conditions on which relief under s. 25(4) of the Act could be claimed was not satisfied and  the claim would not be maintainable. Furthermore, for the reasons earlier stated, it must be held that on April 1, 1939 the business, assuming its identity to have  continued  in  spite of the splitting  up,  was  being carried on by two persons, namely, two firms with  different partners.  Now the person who transferred the business which caused the succession in 1948 on which the appellant  relies for  relief under s. 25(4), was a single firm.  This  latter firm  could not have been brought about by a change  in  the constitution  of  an  existing  firm,  for  there  were  two existing  firms  and  they could not become  one  by  simple changes  in  their constitution.  Indeed the  instrument  of October  30,  1943 which brought the  transferor  firm,  the appellant  before us, into existence, expressly states  that "The  Agreements of Partnerships dated 30th  May  1939...... are  hereby  revoked".   It follows that  at  the  date  the succession relied upon can, be said to have taken place, the business  was being carried, on by a person  different  from those  who  carried  it on on April  1,  1939.   So  another condition  of the applicability of’ s. 25(4) of the  Act  is not satisfied.  The claim for relief under that section must fail on this ground also.

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If  it  were to be said that the partnerships  were  brought into  existence  on May 30, 1939 by annexures C I and  C  II instead  of in October/November 1937, then also  the  appel- lant’s claim must fail.  Whenever the new partnerships  were brought  into  existence,  the result would,  in  our  view, necessarily  be  that the business of  the  old  partnership which was- 108 taken over by the two new firms must be deemed to have  been discontinued.    On  the  principle  stated  in   Annamalai’ Chettiar’s case,(1) there could not in such a case be a suc- cession of the business from one to another.  That being so, there  can be no question of the succession to the  business carried  on  at the commencement of  the  Indian  Income-tax (Amendment)  Act, 1939, that is, April 1, 1939 and on  which tax was charged under the Act of 1918 having taken place  in 1948  as  claimed by the appellant.  What  was  discontinued could not be succeeded to.  Even if it was held that on  May 30, 1939, there was a succession to the business which we do not  think  is  a  correct view to  take,  that  also  would disentitle the appellant to relief under sub-sec: (4) of  s. 25 in the years 1948-49 and 1949-50, for it should, in  such an event,       have claimed the relief in the year 1939-40. In  the  result  we have come to  the  conclusion  that  the business  which had been subjected to tax in 191.8 had  been discontinued in October/November 1937 or on May 30, 1939 and it was not in existence in 1948 so as to permit a succession to it taking place under the instrument of February 7, 1948. The  appeals,  therefore,  fail  and  they  are  accordingly dismissed with costs. HIDAYATULLAH  J.-I  have had the advantage  of  reading  the judgment just delivered by my learned brother Sarkar J.  but I have the misfortune to disagree with him in his conclusion that these appeals must be dismissed.  In my judgment, these appeals  must  be allowed.  The facts have been set  out  in detail by my learned brother and I shall content myself with repeating   only  such  facts  as  are  necessary  for   the elucidation of my point of view. The  appellant  is a firm which in 1948  consisted  of  four partners namely Manecklal Purushotham, Liladhar  Narayanjee, Jayanand  Nagjee and Prabhulal Naranji.  It was carrying  on business   mainly   in  piece-goods,   yarn,   banking   and manufacture  and  sale of umbrellas and  soaps.   ’Its  head office  was  at Calicut but it had branches  at  Bombay  and Madras.  The history of the firm goes back to the year 1902. In that year, five members of a family by name  Purushotham, Nagjee, Narayanjee, Krishnajee and Premchand along (1)  20 I.T.R. 238.                             109 with   one   stranger  Bhagwanjee  started   the   appellant firm--Sait  Nagjee Purushottam & Co. Thereafter, there  were changes in the constitution of the firm caused by the  death or by the retirement of partners.  Of the original partners, Premchand  retired in 1912 and another member of the  family Manecklal  was  taken in his place.  In 1933 and  1934,  two members  (Krishnajee  and Purushotham) died  and  Bhagwanjee retired.   In  that  year, the  firm  consisted  of  Nagjee, Narayanjee  and Manecklal who were members of  the  original family.   We  have  on the record the  partnership  deed  of December  6, 1918 by which the shares of the  partners  were adjusted after the retirement of Premchand and the admission of  Manecklal and a deed of Januarv 1, 1934 after the  death of Krishnajee and retirement of Bhagwanjee.  In the deed  of 1918,  it was stated that this firm carried on  business  in Calicut,  having  branches at Madras and Bombay  and  though

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Manecklal  was  included as a new partner, the firm  was  to carry  on  and continue the  existing  partnership  business under  the  same name and style.  By the deed of  1918,  the earlier  partnership deed of April 4, 1902 was  revoked  and the  affairs  of the firm were to be regulated  by  the  new deed.   It  was, however, provided that  the  withdrawal  or death  of  a partner would not cause a  dissolution  of  the partnership.   When the deed of 1934 was entered  into,  the de-Id  of  1918 was not revoked but only  amended;  it  was, however, provided that the principal deed of  partnership-to wit  of 1918-would remain in force in so far as it  was  not inconsistent. Sometime  in  the  year 1932 or  thereabout,  the  firm  had started the manufacture and sale of soaps under the name  of "The   Vegetable   Soap  Works"  Proprietors   Sait   Nagjee Purushotham  & Co. and perhaps the manufacture and  sale  of umbrellas  in  Calicut with branches at  Madras  and  Bombay under  the name and style, at Calicut and Madras,  of  "Sait Nagjee  Purushotham & Co. Soap and Umbrella Merchants",  and at  Bombay  of  "Sha Nagjee Purushotham & Co.".  It  may  be pointed  out that the words "Sha" and "Sait" mean  the  same thing, and the names were not different. In 1937, one Hemchand a stranger to the family was  admitted as a working partner.  On May 30, 1939, two 110 deeds  were executed.  They are respectively marked  C1  and C2.   Cl was executed by Nagjee, Narayanjee,  Manecklal  and Hemchand.   C2  was  executed  by  Nagjee,  Narayanjee   and Manecklal.  In Cl the preamble was as follows:               "Whereas Partners 1 to 4 have been carrying on               a  business as Partners from the beginning  of               Samvat 1994 (Guzarathi Era) in the manufacture               and  sale  of  Soaps under the  name  of  "The               Vegetable Soap Works" Proprietors Sait  Nagjee               Purushotham & Co., and in the manufacture  and               sale of Umbrellas in Calicut with branches  at               Madras and Bombay under the name and style  of               Sait  Nagjee  Purushotham  &  Co.,  Soap   and               Umbrella  Merchants at Calicut and Madras  and               in the name of Sha Nagjee Purushotham & Co. at               Bombay hereinafter called the Firm."               The terms relevant to our purpose were:               1.    The Firm shall continue to be as of  old               namely 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               "Sait  Nagjee  Purushotham  &  Co.  Soap   and               Umbrella  Merchants as aforesaid with  I  lead               Office  at Calicut and branch at Madras  under               the  same name and branch at Bombay under  the               name of "Sha Nagjee Purushotham & Co."               2.    "The  business  of  the  Firm  shall  be               carried  on by Partner No. 4  Hemchand  Virjee               Sait according to the directions of Partners 1               to  3 and the said Hemchand Virjee Sait is  to               manage  work  and assist the business  of  the               firm  and he shall be called  hereinafter  the               Workinh Partner;"               14.   "The  working  Partner  Hemchand  Virjee               Sait  may draw on the First of each month  the               monthly  sum of Rs. 400 only from out  of  the               Firm’s account on account of the share of his               111

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             profits for the current year, but if on taking               the  annual account it shall appear  that  the               monthly sums drawn out by him exceed his share               of  profits  he  shall  forthwith  refund  the               excess."               15.   "The Profits and Losses shall be divided               and  apportioned in the following  proportion:               Partner No. 1 shall have 3 annas 8 pies in the               Rupee; Partner No. 2 shall have 3 annas 8 pies               in the Rupee; Partner No. 3 shall have 3 annas               8  pies in the Rupee; and Partner No. 4  shall               have  5  annas in the Rupee.   On  taking  the               accounts if it is found that the Finn has  in-               curred  a  loss the aggregate of  the  monthly               sums  drawn  by the Working Partner  shall  at               once be refunded by the Working Partner to the               Firm along with his share of the loss."               17.   "It  is hereby agreed that  the  working               Partner  should invest a sum of Rs. 15,000  as               deposit in the Firm of Sait Nagjee Purushotham               &   Co.,   Bankers,   Piece-goods   and   Yarn               Merchants, Calicut and such money shall remain               in deposit as long as he remains a Partner and               such amount shall carry interest at such rates               of  interest  as  the  Firm  of  Sait   Nagjee               Purushotham  & -Co., Bankers,  Piecegoods  and               Yarn Merchants may agree from time to time."               In C2, the preamble was: " ..............               Whereas  the  remaining  partners  (1)  Nagjee               Amersee  Sait, (2) Narayanji Purushotham  Sait               and (3) Manecklal Purushotham Sait settled the               claims  in full of the partners who ceased  to               exist and agreed to carry on and continue  and               are   continuing  the   existing   partnership               business  under  the name and style  of  "Sait               Nagjee Purushotham & Co." Bankers, Piece-goods               and  Yarn  Merchants, hereinafter  called  the               "FIRM"               112               The relevant terms were:               "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 Veerji  Sait               in   a  Partnership  business  in  Soaps   and               Umbrellas  carried  on in Calicut  and  Madras                             under  the  name  and  style  of  Sait    Nagjee               Purushotham & 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."’ Both deeds provided again that the partnerships would not be dissolved by the death or retirement of a partner. Nagjee  died in August 1943 and Hemchand retired on  October 31, 1943.  On October 30, 1943, a fresh deed of  partnership

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was executed by Narayanjee and Manecklal who were continuing as  partners from 1918 and two other members of  the  family namely  Liladhar  and  Prabhulal  and  to  the  benefits  of partnership  Jayanand Nagjee who was a minor, was  admitted. The preamble was as follows:               ". . . . . . . . . .               And  whereas  partner No. 4  Hemchand  Veerjee               Sait:  has  decided to retire  from  the  said               partnership,    business   as   from    31-10-               1943.............               And whereas the remaining partners are willing               and  have  agreed  to  take  as  new  partners               Leeladhar   Narayanjee  Sait   and   Prabhulal               Narayanjee   Sal   ,   sons   of    Narayanjee               Purushotham Sait as from 31-10-1943.               113               And whereas the remaining partners along  with               the  new partners now included in the Deed  of               Partnership, have agreed to carry on and  con-               tinue as one, single partnership business, the               existing   partnership  businesses  of   "Sait               Nagjee Purushotham & Co., Bankers, Piece-goods               and Yarn merchants, "Sait Nagjee Purushotham &               Co. Soap and Umbrella merchants".               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  conditions   stipulated               hereunder :- The  operative  terms  relevant to  our  purposes  were  the following:               "The Agreements of Partnerships dated 30th May               1939 entered into by (1) Nagjee Amersee  Sait,               (2) Narayanjee Purushotham Sait (3) Maneck lal               Purushotham  Sait and (1) Nagjee Amersee  Sait               (2)  Narayanji Purushotham Sait (3)  Manecklal               Purushotham Sait and (4) Hemchand Veerji  Sait               and  registered as 98 and 97 in the  Joint  11               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  revo ked  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  Nagjee               Purushotham               &  Co.  Bankers, Piece-goods, Yarn,  Soap  and               Umbrella merchants."               2.The   partners  of  the  firm  are   (1)               Narayanjee  Purushotham  Sait,  (2)  Manecklal               Purshotham  Sait,  (3)  Jayanand  Nagjee  Sait               (Minor)  represented  by  guardian   Manecklal               Purushotham Sait (4) Leeladhar Narayanjee Sait               and (5) Prabhulal Narayanjee Sait." 134-159 S.C.-8. 114 The rest of the terms followed the same pattern as before. In  1948, a limited liability company was formed  under  the name of Sait Nagjee Purushotham & Co., Ltd. and an agreement was made by which Sait Nagjee Purushotham & Co.  represented by  the  then  partners Manecklal,  Liladhar,  Jayanand  and

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Prabhulal  sold to the company the goodwill, 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 person  for  the person  who was carrying on business on April 1,  1939.   My learned brethren consider that there was a discontinuance 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  divisions. 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 on April 1, 1939.  The contention of the Department has so far succeeded and I need not give the details of  the decisions of the various Tribunals under the Indian  Income- tax  Act  and the High Court, because my  learned  brother’s judgment gives all such details.  I shall therefore  address myself  to the questions (a) whether there was a  succession in  1948 for the first time when the company  succeeded  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 1, 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 115 sub-sections  deal  with  cases to which  sub-s.  3  is  not applicable.   The  first  sub-section  lays  down  how   the business  is to be assessed when it is discontinued  in  any year   and   sub-section   2  provides   that   any   person discontinuing  business  must  give a notice on  pain  of  a penalty.   We  are not concerned  with  these  sub-sections. Sub-s.  (3) and sub-s. (4) in so far as it is  relevant  for our purpose, are as follows:               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, profits 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 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

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             such  assessment, a refund 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               116               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, 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 such 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 ref und shall               be given of the difference:               Provided.................... Sub-s. (4) was inserted by the Indian Income-tax (Amendment) Act,  1939  (VII of 1939), which also introduced  the  words underlined  in sub-s. (3).  Sub-s. (4) and the amendment  to sub-s.  (3)  were to come into force from April 1,  1939  by virtue of notification No. 7 of the Central Government 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 earning 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 117 to  include a change in the constitution of  a  partnership. In  this  case, the claim to the benefit of sub-s.  (4)  was made  by the company on the basis of a succession either  on November  13, 1947 or on February 13, 1948.  The  Income-tax Officer held that a succession had taken place in 1943  when on  the retirement of Hemchand, the two separate  businesses formed under Ex.  Cl and C2 were amalgamated.  The Appellate Assistant  Commissioner  agreed with this  conclusion.   The

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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 constituted 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, therefor,, held that succession  had taken  place in 1939 and again in 1943 and the claim on  the basis  of the transfer to the limited liability  company  in 1948  was  too late.  In coming to the conclusion  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 discontinuance 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 J., 1939, was  carrying  on  any business on which tax was at any time charged under the  Act of 1918.  The former regards the continuity of the  business which had paid tax under the Act of 1918 and the latter  the continuance  of  the  person  who, on  April  1,  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 provisions  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 118 amounted to "discontinuance" of business for the application of  sub-s.  (3)  or  a succession by  the  formation  of  an entirely  new firm for the application of sub-s.  (4).   For this purpose, I shall first discuss what is the position  of a  partnership  under the ordinary law  of  partnership  and under  the  Income-tax  Act.  At the  outset,  I  must  draw attention to a few fundamental facts.  It was pointed out by this Court in Charandas v. Haridas(1) that those whose  duty it  is  to apply the provisions of the Income-tax  Act  must bear  in mind that what may be the resulting position  under the  law  of  partnership  and/or  the  Hindu  Law  is   not necessarily the resulting position under the Income-tax Act. This  case is another example of the difference of  approach to  the  same  facts under the law of  partnership  and  the Income-tax law. In Dulichand v. The Commissioner of Income-tax, Nagpur (2) , it  was  pointed out by this Court that commercial  men  and accountants  are  apt to look upon a firm in  the  light  in which  lawyers look upon a corporation, that is, as  a  body distinct from the members composing it, and such a  separate existence  has been recognised under the Scottish law.   But under  the English Common Law, a firm is not regarded  as  a separate  entity from the members composing it.  The  Indian Partnership  Act has accepted the English Common Law  though mercantile  usages have crept into business accountancy  and the Civil Procedure Code allows a firm to sue or be sued  in the  firm’s  name  provided the names of  the  partners  are disclosed.  Under the Income-tax Act, however, a firm is  by s.  3 made a unit or assessment, but this  personality  does not  make the firm a person in every sense of the word.   It only makes it an assessable unit.  A firm is not a  "person" and  cannot enter into partnership with an individual,  with

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another firm or with Hindu Undivided family. Section  26 recognises the existence of a firm as an  asses- sable unit and provides for taxation in the event of changes in  the constitution of firms.  The first sub-section  deals with  a  change in the constitution of the firm or  where  a firm  has been newly constituted and the second  sub-section where there is a succession to the person (which includes  a firm) (1) [1960] 39 I. T. R. 202. (2) [1956] S. C. R. 154. 119 by another person.  This sub-section deals with all cases of succession except those dealt with under sub-section (4)  of s. 25 already set out.  Section 25 provides for  discontinu- ance of business.  Discontinuance is thus not a mere  change in  the constitution of the firm nor even succession  where, though  the business changes hands, the business  itself  is carried  on.  It was recently pointed out by us  in  Shivram Poddar v. Income-tax Officer, Calcutta and another(1) thus:               "Under    the    ordinary    law     governing               partnerships, modification in the constitution               of  the  firm  in the  absence  of  a  special               agreement   to   the   contrary   amounts   to               dissolution  of  the  firm  and  reconsitution               thereof, a firm at common law being a group of               individuals  who  have  agreed  to  share  the               profits of a business carried on by all or any               of  them acting for all, and  supersession  of               the agreement brings about an end of the rela-               tion.   But  the Income-tax Act  recognises  a               firm  for  purposes of assessment  as  a  unit               independent  of the partners constituting  it;               it  invests the firm with a personality  which               survives reconstitution.  A firm discontinuing               its  business  may be assessed in  the  manner               provided  by s. 25 (1) in the year of  account               in which it discontinues its business; it  may               also  be assessed in the year  of  assessment.               In  either  case it is the assessment  of  the               income  of  the  firm.   Where  the  firm   is               dissolved,  but  the  business  is  not   dis-               continued, there being change in the constitu-               tion  of the firm, assessment has to  be  made               under s. 26 (1), and if there be succession to               the business, assessment has to be made  under               s. 26 (2)." Therefore  when in sub-s. (4) the word ’person’ is used,  it is  intended  to include not only an individual but  also  a firm.  This is also clear from the words "not being merely a change in the constitution of a partnership." Since the  In- come-tax Act assesses a partnership as a unit and such units (1)  Civil Appeal NO. 455 of 1963 decided on Dec. 13, 1963. 120 must,  in the past, have been assessed to tax under the  Act of  1918,  sub-s.  (4) allows a partnership  to  obtain  the benefits  of  sub-s. (4) when there is a  succession  and  a partnership does not loose this benefit if there has been  a mere  change in the constitution of the partnership  without there  being a succession.  The business, if  it  continues, obtains a similar benefit when it is discontinued.  In  this way  all  cases of discontinuance of  business  are  treated under the 3rd sub-section and all cases of succession  under the  fourth sub-section and all cases of mere change in  the constitution of the firm, are neither cases under the  third nor under the fourth subsections.

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In  this case, we have, therefore, to find out firstly  what is meant by discontinuance of a business.  Next, we have  to find  out  what  is comprehended within  the  expression  "a change in the constitution of a partnership".  It is only if there was a discontinuance of the business before 1948 or  a succession  not amounting to a mere change in the  constitu- tion  of  the  partnership between 1939 and  1948  that  the appellants  can  be  denied  the  benefit  of  s.  25.   The expressions,   that   is  to   say,   "discontinuance"   and "succession not amounting to a change of the constitution of a firm" have received exposition in the past.  It is  hardly necessary to refer to the large number of cases in which the matter  has been discussed, because the leading case on  the subject  of  discontinuance is Commissioner  of  Income-tax, Bombay  v. P. E. Polson(1) and on the subject of  succession Commissioner  of Income-tax, West Bengal v. A. W. Figgies  & Co. and others 2 It will be sufficient to refer to these two cases. To begin with, it must be remembered that the soap  business commenced in the year 1932 and did not pay tax under the Act of 1918.  Though there is nothing to show when the  umbrella business commenced, it is almost certain that it did not pay tax  under the Act of 1918.  In any event the burden was  on the  assessee  firm to ?rove this  before  claiming  relief. These  facts are fundamental, because, if the  umbrella  and soap  business were never assessed to tax under the  Act  of 1918,  they are out of the picture and in respect  of  these businesses, the assessee firm was not at all entit- (1) [1945] 1. T.R. 384. (2) [1954] S. C. R. 171. 121 led  to relief.  Section 25 (3) and (4) do not  apply  where the  business  was not in existence before the Act  of  1922 came into force.  A clear authority for this proposition  is to  be  found in the decision of the Bombay  High  Court  in Ambalal  Himatlal v. Commissioner of Income-tax  and  Excess Profits  Tax,  Bombay North(1).  In that case, a  Hindu  Un- divided  family was carrying on three  separate  businesses, namely money lending, running a ginning factory and a  share business.   This  family disrupted in 1943 and  divided  the business  among its members, and claimed the benefit  of  s. 25(4) in respect of all the three businesses.  It was  found that only the money lending business had paid tax under  the Indian  Income-tax Act of 1918.  It was held by Chagla  C.J. and Tendolkar J. that the assessee was entitled to the bene- fit  mentioned  in s. 25 (4) only in respect  of  the  money lending  business.  Chief Justice Chagla observed at p.  287 thus:               "But before us we have a clear and categorical               finding  that  the  three  businesses  of  the               assessee   were   distinct   businesses   and,               therefore, it cannot be stated that the relief               which  was  intended  for  the   money-lending               business which was carried on by the  assessee                             and which was subjected to tax under t he Act of               1918  should  be extended to the  business  of               running  the  ginning factory  and  the  share               business which were not in existence and which               were  not  subjected to tax under the  Act  of               1918.  The answer, therefore, to the  question               put  to  us  will  be  that  the  assessee  is               entitled to the benefit mentioned in s.  25(4)               only   in   respect   of   the   money-lending               business."

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No  finding  in the present case is necessary,  because  the clear  fact  is  that  the soap business  was  not  even  in contemplation,  much less in existence before 1922  and  the same  is  true of the umbrella business  also.   The  relief could therefore be claimed only in respect of the  remaining businesses  namely  in piece-goods, yarn and  banking  which were started in 1902 and which admittedly continued  without break till 1948.  Since no claim in respect of the  business of  umbrellas  and soaps could at all  be  entertained,  any dealing with that part (1)  (1951) 20 I.T.R. 280. 122 of  the business by the assessee firm would not  affect  the questions  in this case.  Indeed, the agreement to  separate the umbrella and soap business when Hemchand was admitted as a partner in 1939 was in keeping with the continuance of the original business as an entity by itself and emphasised  its separate character.  From the record it appears that the old and the new businesses were also separately assessed.  It is only  this one entity to which the provisions of s. 25  must be  applied  and in respect of which it must  be  considered whether  there  was a discontinuance or a succession  at  an earlier period. I  shall first examine the question of discontinuance.   The Judicial Committee in Polson’s case considered what was  the meaning of the word "discontinuance’.  In that case,  Polson who  was carrying on business assigned it to a limited  com- pany on January 1, 1939.  He had paid tax in respect of  the business  under  the Act of 1918.  In  the  assessment  year 1939-40, he claimed that in view of the provisions of s. 25 (3)  of the Act of 1922, as amended in 1939, his income from the  business made during the year 1938 was not taxable.  It was  held  that he was not entitled to the benefit of s.  25 (3) as the business was not discontinued.  The High Court of Bombay  upheld  the  contention of  Polson,  but  the  Privy Council reversed the decision approving the decision of  the Madras High Court in Meyyappa v. Commissioner of Income-tax, Madras(1).   Lord  Simonds pointed out that  on  January  1, 1939, Polson had ceased to be the owner of the business  and therefore he was not carrying it on "at the commencement of" the amending Act.  Since those words meant the date when the Act  came  into force on April 1, 1939, they  could  not  be carried back to a date anterior to April 1, 1939 and on that date  Polson  ceased to be the owner of  the  business.   As regards the words "discontinued" and "discontinuance" in  s. 25, Lord Simonds pointed out that they had been the  subject of numerous decisions and that it had been uniformly decided that the words did not cover a mere change of ownership  but referred  only to complete cessation of the business.   Lord Simonds further observed "Their Lordships entertain no doubt of the correctness of these decisions, which appear to be in accord with the plain (1)  (1943) 11 I.L.R. 247; I.L.R. (1944) Mad. 166. 123 meaning of the section and to be in line with similar  deci- sions upon the English Income Tax Acts." It would  therefore follow  that  by  discontinuance  in  sub-s.  (3)  is  meant complete cessation of the business.  This cannot be said  to have  taken place in the present case in respect of all  the businesses  and  a fortiori in respect of  the  business  in piece ,goods, yarn and banking.  These businesses might have been  managed by persons other than those who had  paid  the tax  under the Act of 1918 a matter to be  considered  under the  fourth sub-section but they were not  discontinued  for the  application of sub-s. (3).  The Judicial Committee  was

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not  required to consider the matter from the point of  view of  succession, because sub-s. (4) did not then exist.   The Privy  Council  case has been approved of by this  Court  in Figgies’s case to which I shall refer presently.  From this, it follows that there was no discontinuance of the  business at any time between 1921 and 1948 or even thereafter. The  next question to consider is whether there has  been  a succession  or  a  mere change in the  constitution  of  the assessee firm in the years 1939 and 1948.  If we were to  go by the original business, excluding the newly started  busi- ness of manufacture of umbrella and soap, I must say at once that  there  has  been no succession  and  this  case  falls squarely  within the rule of this Court in  Figgies’s  case. But  even  if  one were to include  the  umbrella  and  soap business,  I am of opinion that this case does not cease  to be  covered  by Figgies’s case.  I shall  examine  both  the aspects of the matters separately. I shall pass on immediately to the facts of Figgies’s  case. In  that  case,  a partnership was formed  in  1918  between Figgies,  Mathews and Notley.  In 1924, Mathews retired.  In 1926,  one  Squire was taken as partner.  In  1932,  Figgies retired.   In 1939, one Hillman was taken as a partner.   In 1943,  Notley retired.  In 1945, one Gilbert was taken as  a partner.  By that time, all the original partners had ceased to  be  partners and new ones had come in their  place.   At every change, new deeds of partnership were executed and the shares  were readjusted.  No doubt, the later deeds did  not say  that  the earlier deeds were revoked but  a  glance  at those deeds (which I have seen in the original brief of the 124 case)  shows that they could not have existed side by  side. In any case, there was no incorporation of the earlier docu- ments  by  reference  and they must be taken  to  have  been superseded.  In this case there is a definite statement that the earlier documents were ’revoked’.  But whether the  word ,revoked’  is  used or not, the resulting  position  is  the same.   Some partners went out and others came in  till  the identity of the original partners was completely lost.   The question  was whether, in these circumstances, there  was  a succession within the meaning of sub-s. (4) of s. 25.   This court observed:               "The section does not regard a mere change  in               the personnel of the partners as amounting  to               succession  and disregards such a change.   It               follows  from  the provisions of  the  section               that a mere change in the constitution of  the               partnership  does not necessarily  bring  into               existence a new assessable unit or a  distinct               assessable entity and in such a case there  is               no devolution of the business as a whole." This court pointed out that though under the law of Partner- ship  a firm has no legal existence apart from its  partners and   it  is  merely  a  name  to  describe   its   partners compendiously,  it is equally true that under that law  also there  is ordinarily no dissolution of the firm by the  mere incoming  or outgoing of partners.  This Court also  pointed out  that  the  position is a  little  different  under  the Income-tax  Act  where a firm is charged  as  an  assessable entity  distinct from its partners who can also be  assessed individually.  It was for this reason that sub-s. (4) of  s. 25 expressly mentioned that a case of succession was not  to be  found where there was a mere change in the  constitution of  the  firm.   In other words, 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

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coming in or going out of partners any more than that entity could be disturbed under the law of Partnership. Applying  this test to the present case, it is  quite  clear that the identity of the entity was never lost and there was never a succession till the year 1948.  It must be remember- ed that this was initially a business of a family but not in the 125 sense  in  which  a Hindu Joint Family is  said  to  have  a business.   From  the  very start, certain  members  of  the family  alongwith  a stranger (Bhagwanjee)  carried  on  the business in piece-goods etc.  In 1918, and in 1934 different deeds were executed but the basic deed was that of 1918.  By that  time, Bhagwanjee had retired and the business  was  in the  hands of only the members of the family.  Hemehand  was then taken on in 1937 and in 1939, the original business was separated  from  the businesses newly  started  after  1922. Hemchand  was  given  a  share only  in  the  newly  started businesses  to which s. 25 could not possibly  apply.   When Hemchand retired, those businesses were also taken over  and merged  with  the original business.  In  other  words,  the original  business  continued  till 1943  in  the  hands  of Narayanjee  and Manecklal who were partners as far  back  as 1918  and  three younger members of the  family.   In  1948, Manecklal  and those three other members of the family  sold this  business  to  the company.  It cannot  be  said  these changes were not covered by the expression "a change in  the constitution of the firm" and were comprehended in the  term ’succession’.   No question of the dissolution of  the  firm Sait  Nagjee  Purushotham & Co. ever  arose.   It  continued right through; even the newly started businesses were  owned by,  it and though for a time the newly  started  businesses and  the  other  business were kept  distinct  so  that  the stranger  Hemchand could not get the benefit of  partnership in  the Head Finn, it cannot be said that the old  firm  had either  discontinued  or had been succeeded  to  by  another person.  Hemchand was merely taken on as -a working partner. His  rights in the firm were extremely ,slender; he  had  to make  a deposit of Rs. 15,000 with the head firm and he  was to get a remuneration of Rs. 400 p.m. which was to go up  or down  according  to the profits.  In other words, he  was  a mere  employee though described as -a working  partner.   As was pointed out by Chagla C.J. in .,Commissioner of  Income- tax, Bombay City v. Kolhia Hirdagarh Co. Ltd., Bombay(1) and again in Commissioner of Income-tax, Bombay City v. Sir Homi Mehta’s  Executors (2), such documents must  be  interpreted not in a legalistic way (1) (1949) 17 I.T.R. 545. (2) (1955) 28 I.T.R. 928. 126 but on their true business aspect.  Says the learned  Chief’ Justice in the former case:               "It  is open to us not merely to look  at  the               documents themselves, but also to consider the               surrounding circumstances so -as to arrive  at               a  conclusion as, to what was the real  nature               of  the transaction from the point of view  of               two  businessmen  who were carrying  out  this               transaction.   In  all taxation  matters  more               emphasis  must  be placed  upon  the  business               aspect  of the transaction rather than on  the               purely legal and technical aspect;..."’ Judged from this standpoint, the entry of Hemchand was not a dissolution  of the firm of Sait Nagjee Purushotham and  Co. He  was brought in merely to do the business at one  of  the

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branches and to receive remuneration for doing the work.  No doubt he was described as a working partner, but this,  term did  not mean much.  The very fact that he was not taken  on in  the  original  business also  shows  that  the  original business  in respect of which alone the benefit of s.  25(3) and  (4)  can  be  claimed,  continued  uninterrupted.   The changes, in 1939 and 1943 therefore had no effect upon  this claim. Reliance was placed upon a decision of the Madras High Court in S.N.A.S.A. Annamalai Chettiar v. Commissioner of  Income- tax,  Madras(1)  as  to  the  meaning  of  the  word   "dis- continuance".   In that case, a Hindu Undivided family  con- sisting  of a father and son were carrying on  money-lending business under different vilasams.  On March 28, 1939, there was  a family partition and some vilasams were  allotted  to the father and the rest to the son, and he was the assessee’ In  the assessment year 1939-40, the son claimed that  there was  a discontinuance of the business within the meaning  of s. 25(3) of the Income-tax Act, 1922 and claimed the benefit of that sub-section on the ground that the business of  them joint family was taxed under the Act of 1918 and he was  not liable to pay tax for the period between April 13, 1938  and March  28,  1939.   It was held  by  Satyanarayana  Rao  and Raghava Rao JJ. that as the joint family was split up, the (1)  (1951) 20 I.T.R.38. 127 business no longer continued in existence, but was terminat- ed  and there was a  "discontinuance" within the meaning  of s.   25(3)  and  the family was entitled to the  benefit  of that  sub-section.  Satyanarayana Rao, J. held that  as  the unit  had  disintegrated into its component parts so  as  to annihilate  the unity of the business, each part  which  was thus  divided was not identical with the whole, even  though all the parts taken together constituted 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.   Looked 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 obtained.  It is  possible  that the  decision  might  be justified on the  ground  that  the benefit  was  being  claimed 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  present 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  business 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(1). In  that  case, a Hindu undivided family  of  Rangoon  which consisted  of two brothers carried on  moneylender  business under  a  single vilasam but with shops  at  several  places including  a  shop at Rangoon.  The shops at each  of  these places  had separate capital and there were separate  agents to  manage  the  shops but there was  a  central  system  of

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accounts at one place showing the financial position of (1)  (1940) 8 I.T.R. 531.  128 the  family.   In  1938-1939, the two  brothers  effected  a partition  and the Rangoon shop was thereafter conducted  by the  two  brothers in partnership.  On these facts,  it  was held  by a Full Bench of the Rangoon High Court  that  there was no succession within the meaning of s. 26(2) of the  In- come-tax  Act.  It was pointed out that the family  did  not carry on separate businesses at each of the five places  but had  only a number of branches at these places of  the  same business 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 succession 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 necessary 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 before and the identity  of  the person  who owned it later must, however, be  distinct.   In the present case this has not happened.  All the facts have, perhaps, not come on the record 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 Moffusil(1),  there  is nothing in law  to  preclude  common partners constituting two entirely separate firms in respect of  different businesses carried on by them for the  purpose of  the  Indian Income-tax Act.  Where they do this,  it  is mainly  a  question  of  fact  whether  there  has  been   a succession  to one of such partnership or not,  whether  for the  purpose of s. 26 or for the purpose of s. 25 (4).   But it must 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  respect  of  +the original business there was anything more than a mere change in the constitution of the partnership.  The business of (1)  (1950) 18 I.T.R. 23. 129 umbrella and soap which never paid tax under the Act of 1918 could  be dealt with by the partners as they  liked  without affecting the question of relief under s. 25 in respect  ,of the head business. In  my  judgment,  these appeals must  be  allowed  anD  the question answered in favour of the assessee firm but only in 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.