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PETITIONER: COMMISSIONER OF INCOME-TAX, MADRAS

       Vs.

RESPONDENT: K.   H. CHAMBERS, MADRAS

DATE OF JUDGMENT: 09/11/1964

BENCH: SUBBARAO, K. BENCH: SUBBARAO, K. SHAH, J.C. SIKRI, S.M.

CITATION:  1965 AIR  970            1965 SCR  (2)  43

ACT: The  Income-tax Act, (XI of 1922), s.  25(4)-Succession-What is  Finding regarding succession-High Court-Jurisdiction  to review.

HEADNOTE: Succession contemplated by s. 25(4) of the Indian Income-tax Act, (XI of 1922) involves change of ownership, that is, the transferor  goes  out  and  the  transferee  comes  in.   It connotes  that the whole business is transferred.   It  also implies  that substantially the identity and the  continuity of the business are preserved.  If there is a transfer of  a business,  any  arrangement between the transferor  and  the transferee in respect of some of the assets and liabilities, not  with a view to enable the transferor to run a  part  of the business transferred but to enable the transferee to run the  business unhampered by any load of debts, or,  for  any other  appropriate collateral purpose, cannot  detract  from the totality of succession. [49 F-H] Reynolds,  Sons  &  Co. Ltd. v. Ogston H.  M.  Inspector  of Taxes, (1929) 15 T.C. 501, Commissioner of Income-tax, Burma v.  N. N. Firm, (1934) 2 I.T.R. 85, Commissioner of  Income- tax,  Burma  v.  A.L.V.R.P.  Firm,  (1940)  8  I.T.R.   531, Jittanram  Nirmalram v. Commissioner of Income-tax, Bihar  & Orissa, (1953) 23 I.T.R. 288, Malayalam Plantations, Ltd. v. Clark (H.M. Inspector of Taxes) (1935) 19 T.C. 314, referred to. The  tests  crystallised  by decisions have  given  a  legal content  to the expression "succession" in s. 25(4)  of  the Act and whether facts proved satisfy those tests would be  a mixed  question  of  law and fact.   The  High  Court  would therefore  have jurisdiction under s. 66(1) of the  Act,  to ascertain the correctness of a finding given by the Tribunal on the question of succession. [52 D] Meenakshi Mills, Madurai v. The Commissioner of  Income-tax, Madras, [1956] S.C.R. 691, referred to.

JUDGMENT: CIVIL  APPELLATE  JURISDICTION : Civil Appeal  No.  1106  of

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1963. Appeal  by special leave from the judgment,  dated  December 21,  1960 of the Madras High Court in Case Referred No.  136 of 1956. N.   D. Kharkhanis and R. N. Sachthey, for the appellant. R.   Ganapathy Iyer, for the respondent. The Judgment of the Court was delivered by Subba  Rao,  J.  This appeal by  special  leave  raises  the question  of  the applicability of s. 25(4)  of  the  Indian Income-tax   Act,  hereinafter  called  the  Act,   to   the assessment in question. One  G. A. Chambers was carrying on two businesses,  one  in the name and style of "Chambers & Co." and the other in the 44 name  and  style  of "Chrome Leather  Company".   The  first business was concerned with export of hides, skins and mica, insurance  and shipping brokerage.  The said Chambers &  Co. was  an assessee under the Indian Income-tax Act, 1918.   As the  business  was  in a bad way, in or  about  1931  G.  A. Chambers handed over the management of the said business  to his  son, K. H. Chambers.  The change of management did  not bring  about  any  favourable turn in  the  affairs  of  the business.   The appellant’s case is that towards the end  of 1932 G. A. Chambers transferred the business to his son,  K. H.  Chambers,  and  that  after the  said  transfer,  K.  H. Chambers  carried  on  the business in  his  own  name  till January  1,  1948,  when the business was taken  over  by  a limited  company.   For the assessment year  1948-49  K.  H. Chambers  claimed relief under s. 25 (4) of the Act  on  the ground that the business had been assessed under the old Act of  1918  when  it  was carried on  by  his  father,  G.  A. Chambers,  and  that  the  said  Chambers  transferred   the business  to  him towards the end of 1932.   The  Income-tax Officer, by his order, dated March 18, 1949, held that K. H. Chambers  did  not  take over the  business  of  his  father carried  on  in  the name of "Chambers & Co."  "as  a  whole running  concern"  and,  therefore,  the  assessee  was  not entitled  to relief under s. 25 (4) of the Act.  On  appeal, the Appellate Assistant Commissioner agreed with the Income- tax  OfficeR and held that the business carried on  by  K.H. Chambers  was  not the same business  which  was  originally assessed  under  the  old Act of 1918 in the  hands  of  his father.   On  a  further appeal,  the  Income-tax  Appellate Tribunal  came  to the same conclusion and  found  that  the identity  of the business carried on by the father was  lost in  the  hands of the son, as the entire  business  was  not transferred  to him.  Ultimately the Tribunal  referred  the following  question  to  the High Court of  Madras  for  its opinion under s. 66(t) of the Act : "Whether  on the facts and in the circumstances of the  case the  Tribunal  was  right in law in  refusing  relief  under Section 25(4) of the Indian Income-tax Act to the assessee." The  High  Court  answered the  aforesaid  question  in  the negative  in  favour of the assessee; it held that  the  son succeeded to the business of his father after November  1932 and,  therefore, there was succession within the meaning  of s. 2 5 (4) of the Act.  Hence the appeal. Mr.  Karkhanis,  learned  counsel for  the  Revenue,  raised before us two contentions, namely, (i) the question referred by  the Tribunal to the High Court was only a pure  question of fact and, 45 therefore,  the High Court has no jurisdiction to  give  its opinion  thereon; and (ii) where the transferor retains  the goodwill  and most of the assets and the transferee  carries

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on  the  same  business with a part of  the  assets  of  the principal  business,  it  cannot  be  said  that  there   is succession  to the whole of the business within the  meaning of s. 25 (4) of the Act. We  shall take the second question first.  G.  A.  Chambers, the father, was carrying on two independent businesses,  one in  the  export of hides, skins and mica, in  insurance  and shipping  brokerage under the name and style of "Chambers  & Co."  and  the  other under the name and  style  of  "Chrome Leather  Company".  In 1932, G. A. Chambers handed over  the sole  management of the former ’business to his son,  K.  H. Chambers.   The son was managing the business, but not  with any  success.   In July 1932, the son was going  to  foreign countries,  presumably in connection with his business.   On July  7,  1932, before the son left India,  G.  A.  Chambers wrote  a  letter  to him informing him that by  the  end  of August  1932  the sum of Rs. 40,000 invested by him  in  the business  would  run  out, and that unless  Rs.  60,000  was invested  by him (the father), which he could not afford  to risk,  the business could not be conducted.  He,  therefore, suggested to his son that the Chambers & Co. could be  wound up  and that if he chose he could have the goodwill  of  the said Company so that he might obtain some advantage from the goodwill  and  connections  of Chambers  &  Co.,  either  by interesting   financially   one  or  other  of   the   firm’ connections  or by offering to work on a  commission  basis. On July 8, 1932, the son replied to the father to the effect that  he would prefer to start right afresh in his own  name or in the name of Chambers & Co.; he also suggested that  he could get a place for less rent and use a smaller staff; and requested  his  father  to allow him  to  use  the  existing private codes.  On December 5, 1932, G.A. Chambers asked his auditors,  M/s.   Fraser & Ross, to close  the  accounts  of Chambers  &  Co.  and send the  balance-sheet,  venture  and profit  and loss accounts for 8 months ending  November  30, 1932,  together with the schedule of accounts taken over  by K.  H.  Chambers showing the amount due to him  from  K.  H. Chambers.  in  that  letter  G.  A.  Chambers  informed  the auditors that from December 1, 1932, K. H. Chambers would be running the export business separately in his own name; that he  had asked Chambers & Co. "to close their  accounts  upto the  end  of  November and transfer  all  such  accounts  to Messrs.  Chambers and Company relating to G. A. Chambers  to us so that we may run Messrs. Chambers and Company’s account at  Chromepet." This letter was signed by G. A. Chamebrs  on behalf of the Chrome Leather 46 Company.   This letter shows that from December 1, 1932,  K. H.  Chambers  would  run the export business  and  that  the accounts,  of G. A. Chambers in the Chambers & Co. would  be transferred to the accounts of Chrome Leather Co. From  that date  the export business which K. H. Chambers  was  running earlier  as  manager would be continued by him  in  his  own name; that is, instead of as manager, as its own proprietor. Pursuant  to the instructions given by G. A. Chambers,  M/s. Fraser & Ross, the auditors, prepared a balance-sheet of the Chambers  &  Co. and also the individual accounts of  G.  A. Chambers  and K. H. Chambers.  The balance-sheet shows  that G. A. Chambers was given assets valued at Rs.     5,67,485- 10-2 and liabilities valued at Rs. 5,95,433-12-3;K.      H. Chambers  was  given  assets valued at  Rs.  55,214-2-3  and liabilities valued at Rs. 27,266-0-2.  The liabilities given toK.  H.  Chambers includes the amount  representing  the difference  between the value of the assets and  liabilities given  to  G. A. Chambers.  Broadly stated, the  father  had

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taken  over  the  liabilities of  the  Company  and  assets, including  buildings and machinery sufficient  to  discharge the liabilities, while the son was given the stock in  trade and  a small amount of debts.  After this allotment,  it  is conceded  that K. H. Chambers continued to operate the  same lines of business as was carried on by Chambers & Co. taking over  all the constituents of that business, using the  same premises,  the same telephone number, Post Box No.,  private codes  and  trade marks and the important  sections  of  the staff that belonged to Chamber & Co. On May 23, 1933.  G. A. Chambers  wrote  to  the  Liverpool  and  London  and  Globe Insurance Company, Calcutta, wherein he stated : "We  confirm our conversation with your representative  that inasmuch  as we have transferred all our export business  to Mr.  K. H. Chambers, who is now running the business in  his own name and at his own risk and responsibility, we shall be pleased  if  you will transfer the agency of  your  firm  to him." It  is also conceded by the Department that G.  A.  Chambers utilized  his  good  offices in getting  the  Liverpool  and London and Globe Insurance Company to transfer the agency of that company to Chambers & Co. run by K. H. Chambers.   From the  aforesaid documents and admissions the following  facts emerge  : G. A. Chambers was conducting two businesses,  one under  the  name and style of Chambers & Co. and  the  other under  the  name and style of Chrome Leather  Company.   The Chambers  &  Co. was doing ,export  business.   Some  months prior to July 7, 1932, K. H. 47 Chambers  invested  a  sum of Rs.  40,000  in  the  business conducted  by Chambers & Co. and was actually  managing  the same.  The business was running at a loss and the father was not anxious to continue the business and, therefore, he made some  alternative suggestions to his son.  But the  son  was anxious   to  continue  the  business  independently.    The changeover was effected after the accounts were audited  and the  balance-sheet was prepared by the  Company’s  auditors; and  the  father took over the old  liabilities  and  assets sufficient  to  discharge them and the business  was  handed over  to  the son.  Thereafter the son was carrying  on  the business of Chambers & Co. in his own name, in the same pre- mises,  taking over all the constituents of Chambers &  Co., using  the  same  codes and trade marks  and  the  important members  of the staff of the Company.  It is true  that  the name  of Chambers & Co. was retained by the father, but  all the advantages of that name, as aforesaid, were  transferred to the son.  It is also true that some substantial assets of Chambers  & Co. were( not transferred to the son,  but  they were  retained by the father only for discharging the  debts in  order  to  help  the son to  carry  on  the  transferred business  without  being  burdened with  heavy  debts.   The taking over of the assets and liabilities by the father  was not  for the purpose of continuing to do a business  of  his own in the same lines, but to facilitate the carrying on  of the   transferred  business  by  the  son  effectively   and profitably.   On these facts, can it be held that there  was no succession to the business within the meaning of S. 25(4) of  the  Act  ?  Though there is  no  clear  and  exhaustive definition of the expression "succession", decided cases and textbooks  throw  some  light on the  subject.   In  Simon’s Income Tax, Vol. 2, 2nd Edn., it is stated at pp. 137-138 : .lm15 " In particular, argument from decided cases has resulted in the  acquisition  by  the word "succession"  of  a  somewhat artificial meaning.

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In  order to constitute a succession there must be,  broadly speaking,  a  taking  over  of the  whole  of  the  business concerned;........................  But  if  a  business  is taken  over  as a whole, the fact that minor assets  of  the business  are  omitted from the transfer  will  not  prevent there  being  a  succession.  The fact  that  the  purchaser already  has  a similar business is not a material  fact  in establishing succession.  The purchase of a business with  a view  to  closing  it down would not  appear  to  constitute succession. 48 Other questions which have been used as tests are : (1)  whether  a similar trade has been carried on after  the transfer; (2) whether goodwill or other intangible assets  are included in the transfer; (3) whether  staff  is taken  over; (4) the treatment on transfer of the stock  and debts  of the transferor; (5) whether there was an  interval in  the  carrying  on  of  the trade  as  a  result  of  the transfer’." (Briton Ferry Steel Co., Ltd. v. Barry, [1940] 1 K. B. 463, 476). In Reynolds, Sons & Co., Ltd. v. Ogston (H.  M. Inspector of Taxes)  (1),  Lord Hanworth, M. R., accepted  the  following tests  laid down by Rowlatt, J., to ascertain whether  there was a succession, namely : "You want to measure the income of the successor by the past history  of  the business, it is  therefore  essential  that there  should be a very close identity between the  business of the former proprietorship and the business in the present proprietorship." The Rangoon High Court in Commissioner of Income-tax,  Burma v. N. N. Firm (2) had to consider the meaning of the word  " succeeded"  in S. 26(2) of the Income-tax Act.  Page,  C.J., giving the opinion of the Court, observed : "In  order that a person should be held to have  "succeeded" another  person  in carrying on a  business,  profession  or vocation, it is necessary that the person succeeding  should have  succeeded his predecessor in carrying on the  business as a whole." The Rangoon High Court again in The Commissioner of  Income- tax,  Burma v. A. L. V. R. P. Firm (3) reiterated  the  same principle.   What  is the meaning of the  expression  "whole business"  has  been  the subject  of  other  decisions.   A Division  Bench  of  the  Patna  High  Court  in   Jittanram Nirmalram v. Commissioner of Income-tax, Bihar & Orissa,  (4 ) after considering the relevant decisions, both English and Indian, said that it was sufficient if there was substantial identity  or  similarity  in the nature and  extent  of  the activities  carried  on  between the  two  firms  i.e.,  the transferor  and  the transferee firms.  The  Court  observed therein :               "For  the  application  of  Section  26(2)  or               Section  25(4)  it is not essential  in  every               case that the successor               (1)   (1929) 15 T.C. 501, 527.               (2)   (1934) 2 I.T.R. 85, 87, 88.               (3)   (1940) 8 I.T.R. 531.               (4)   (1953) 23 I.T.R. 288, 296.               49               firm  should  have  mathematically  the   same               extent of business as the predecessor firm  or               that it should have taken over the same extent               of trade or the same line or set of  customers               as belonging to the predecessor firm nor  does               it  mean that the successor firm  should  have               taken over all the different businesses  which

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             the predecessor firm had carried on."               In  Malayalam Plantations, Ltd. v.  Clark  (H.               M.  Inspector  of  Taxes)(1)  the   appellant-               company  therein, by an agreement dated  March               28,  1928, acquired from another  company,  as               from  April 1, 1928, a rubber estate in  India               together    with    plantations.    nurseries,               factories,  plant  etc., and  the  benefit  of               contracts and engagements whether with coolies               or  others,  but did not take  over  any  book               debts  or the vendor’s  selling  Organisation.               It  was  contended  that  there  had  been  no               succession  to  a trade.   In  rejecting  that               contention, Finlay, J., observed :               "The  substance  of what was  done,  I  think,               clearly was this The thing was taken over as a               going  concern,  taken over  with  the  things               growing  on it, and with the coolies  employed               to  work the estate.  I am not going  into  it               any  further  because  it  is  essentially   a               question of fact, but I cannot avoid the  view               that   there  was  material  upon  which   the               Commissioners  might arrive at the  conclusion               that there was a succession." This is an authority for the position that if a business was taken  over  as  a going concern the  mere  fact  that  some assets,  which  were  not  required  by  the  successor  for carrying  on  of the business, were not transferred  to  him would not make it anytheless a succession in law.  It is not necessary to multiply decisions.  Succession involves change of  ownership;  that  is, the transferor goes  out  and  the transferee comes in; it connotes that the whole business  is transferred; it also implies that substantially the identity and the continuity of the business are preserved.  If  there is  a  transfer of a business, any arrangement  between  the transferor  and  the transferee in respect of  some  of  the assets  and  liabilities  not  with a  view  to  enable  the transferor to run a part of the business transferred but  to enable the transferee to run the business unhampered by  the load  of  debts  or for  any  other  appropriate  collateral purpose cannot detract from the totality of succession. In  the present case, the export business of the father  was carried  on  by  the son.  The whole  of  the  business  was transferred, (1)(1935) 19 T.C. 314, 323. 50 the  identity  was  preserved  and  the  same  business  was continued.  The father reserved for himself some assets  for the purpose of discharging the debts.  He did so not for the purpose of running the same business by himself but only  to help the son to carry on the same business more effectively. If so, it follows that on the facts found or admitted  there is a clear case of succession in the present case. Learned  counsel for the Revenue argued that  whether  there was  succession or not was a pure question of fact  and  the High  Court had no jurisdiction to question the  correctness of  the  finding given by the Tribunal to  the  effect  that there was no succession to the business. This  Court in Meenakshi Mills, Madurai v. The  Commissioner of   Income-tax,   Madras(1)   laid   down   the   following propositions  which are relevant to the question now  raised before us :               (a)   Where an ultimate finding on an issue is               an inference to be drawn from the facts found,               on  the application of any principle  of  law,

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             there is a mixed question of law and fact, and               the inference from the facts found is, in such               a  case,  a  question of law and  is  open  to               review by the Court.               (b)   Where  the  final determination  of  the               issue  does not involve an application of  any               principle of law, an inference from the  facts               is  a  pure inference of fact although  it               is drawn from other basic facts.               (c)   The  proposition that an inference  from               proved  facts  is  one  of  law  is  therefore               correct in its application to mixed  questions               of law and fact, but not to pure questions  of               fact.               In the case of pure questions of fact, the in-               ference  from  proved  facts  being  itself  a               question  of  fact can be  attacked  as  being               erroneous in law only if there is no  evidence               to support it or if it is perverse."               This distinction between a question of law and               a  question  of fact was also brought  out  by               some  of  the English decisions cited  at  the               Bar.   In  Bell  (Surveyor of  Taxes)  v.  The               National Provincial Bank of England, Ltd.  (2)               the Master of the Rolls observed :               "The  finding of the Commissioners  upon  that               part of the case is this : ’The  Commissioners               were of opinion               (1) (1956] S.C.R. 691.               (2) (1903) 5 T.C. 1, 10, 12.                                     51               that  there  was  no  succession  within   the               meaning of the said 4th Rule.’ That is, as  my               brother Mathew has pointed out, not a  finding               in fact that there was no succession, but that               the  particular kind of succession which  took               place in this case was not a succession within               the  meaning of the 4th Rule.  That is  not  a               finding  of  fact, but a finding  of  law  and               construction  based  upon the  fact  that  one               existing  Bank did acquire and take over,  not               for  the  purpose of extinction, but  for  the               purpose of development, the existing  business               of another Bank existing in another place."               So too, Mathew, L.J., stated :               "’No succession’ say the Commissioners  within               the meaning of the said 4th Rule.  That is the               proposition  of  law  we  have  to  decide  as               distinguished  from fact, and we are  entitled               to differ from that view."               In  Wilson  and  Barlow v.  Chibbett  (H.   M.               Inspector of Taxes) (1) Rowlatt, J., observed               "The  question  was whether here there  was  a               succession,  which  is a primary  question  of               fact upon which, of course, it is possible the               Commissioners  might take a wrong view of  the               law and apply false law."               The learned Judge concluded thus               " All I can say is that I do not see my way to               say that  can discern any sort of error in law               here  in  the way in which  the  Commissioners               have dealt with the case.............. " These  observations  imply  that if correct  tests  are  not applied  in,  coming  to  a  conclusion  whether  there   is succession or not in a particular case, it can be  re-opened

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by the High Court.  In Malayalam Plantations, Ltd. v.  Clark (H.   M.  Inspector  of  taxes) ( 2)  ,  Finlay,  J.,  after considering  at  some length the facts  placed  before  him, refused to go further into the matter because the finding of succession  was  essentially a question of  fact.   But  the facts  in  that case disclosed that the correct  tests  were applied  and, therefore, no illegality was committed by  the Commissioners. The  said decisions did not lay down that in every case  the finding of succession is one of fact.  Indeed, the first two decisions, (1) (1929) 14 T.C. 407, 412,  1 3. (2)  (1935) 19 T.C. 314,323. 52 clearly  maintained that a finding on a question  whether  a succession  is  one  within  the  meaning  of  a  particular provision  or whether it is vitiated by any error of law  is not  final.   The English view is also in accord  with  that expressed by this Court. The question, therefore, is whether a finding that a  person succeeded  another in his business within the meaning of  s. 25(4)  ,of  the Act is a finding of  fact.   The  expression ’;succession", as stated by Simon in his book on Income-tax, has  acquired a somewhat artificial meaning.  The  cases  we have  considered  supra ,and similar others have  laid  down some  tests,  though not exhaustive,  to  ascertain  whether there  is succession in a given case or not.  The  tests  of change of ownership, integrity, identity and continuity of a business  have to be satisfied before it can be said that  a person  "succeeded" to the business of another.  Unless  the facts  found  by the Tribunal satisfy the  said  tests,  the finding  cannot  be conclusive.  The tests  crystallized  by decisions  have  given  a legal content  to  the  expression "succession"  within the meaning of S. 25(4) of the Act  and whether facts proved satisfy those tests is a mixed question of  law and fact.  If so, it follows that a question of  law arose  out  of the Tribunal’s order and the High  Court  has jurisdiction  to  ascertain the correctness of  the  finding given by the Tribunal on the question of succession. In the result, the appeal fails and is dismissed with costs. Appeal dismissed. 53