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PETITIONER: COMMISSIONER OF INCOME-TAX,WEST BENGAL

       Vs.

RESPONDENT: A. W. FIGGIES & CO., AND OTHERS.

DATE OF JUDGMENT: 24/09/1953

BENCH: MAHAJAN, MEHR CHAND BENCH: MAHAJAN, MEHR CHAND DAS, SUDHI RANJAN BHAGWATI, NATWARLAL H.

CITATION:  1953 AIR  455            1954 SCR  171  CITATOR INFO :  RF         1956 SC 354  (15)  RF         1967 SC 617  (40,41)  D          1974 SC1026  (15)  R          1979 SC 379  (5)  RF         1982 SC1085  (9)  F          1985 SC1143  (4,8)  RF         1986 SC 376  (22)

ACT:  Income-tax  Act  (XI of 1922), s. 25(4)-Firm paying  tax  in  1918 -Conversion to limited company in 1947-Right to  relief  under s.  25(4)-Change  in  personnel of firm  in  1939  and  1947, effect of.

HEADNOTE: For  purposes  of  assessment to income-tax,  a  firm  is  a different  entity  distinct from its partners,  and  a  mere change  in the constitution of the firm does not bring  into existence  a  new assessable unit or a  distinct  assessable entity. (1)  67 I.A. 464,481. 172 A firm consisting of three partners, A, B and C, carried  on the  business of tea brokers and paid income-tax  under  the Income-tax  Act of 1918.  There were several changes in  the personnel of the partners and in 1939 the firm consisted  of C, D and E. C retired and in 1945 a new partnership deed was written  up  between  D, E and F and  they  carried  on  the business.   In  1947 the partnership was  converted  into  a limited company.  The Income-tax authorities refused to give relief under s. 25(4) of the Income-tax Act as the  partners of the firm in 1939 were different from the partners of  the firm in 1947: Held,  that in spite of the changes in the  constitution  of the firm, the business of the firm as originally constituted continued  right  from  its inception to  the  time  it  was succeeded  by the limited company and the firm was the  same unit all through; the reconstitution of the firm in 1945 did not  make  it a different unit, and the firm  was  therefore entitled to relief under s. 25(4) of the Act.

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JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 77 of 1952. Appeal  from the Judgment and Order dated the  9th  January, 1951,  of the High Court of Judicature at Calcutta  (Harries C. J. and Banerjee J.) in its Special Jurisdiction  (Income- tax) in Income-tax Reference No. 70 of 1950. C.   K. Daphtary, Solicitor-General for India (Porus A.   Mehta, with him) for the appellant. N.   C. Chatterjee (B.  Sen, with him) for the respondents. 1953.   September  24.   The  Judgment  of  the  Court   was delivered by MAHAJAN  J.-This  is an appeal from a judgment of  the  High Court  of  Judicature at Calcutta delivered in  a  reference under section 66(1) of the Indian Incometax Act, whereby the High   Court   answered  the  question   referred   in   the affirmative. The assessee is a partnership concern.  When income-tax  was paid  under  the  Act  of  1918,  the  partnership   concern consisted  of three partners, Mathews, Figgies  and  Notley. The  name  of  the firm was A. W. Figgies &  Co.,  and  its’ business  was  that  of tea  brokers.   There  were  several changes  in  the  constitution of the firm  resulting  in  a change in the shares of                             173 the  partners.  In 1924, Mathews went out and his share  was taken  over by Figgies and Notley.  In 1926 another  partner Squire  was introduced.  In 1932 Figgies went out, and  from 1932  to 1939 the partnership consisted only of  Notley  and Squire.  In 1939 Hillman was brought in and the  partnership consisted  of these three partners. In 1943 Notley went  out and  the  partnership  business was carried on  by  the  two partners,  Squire and Hillman.  In 1945 Gilbert was  brought in.   This arrangement continued up to 31st May, 1947,  when the partnership was converted into a limited company. For  the assessment year 1947 -48 the assessee claimed  that it was entitled to relief under section 25(4) of the Act  as the partnership firm had been succeeded by a private limited company.   There was a provision in the partnership deed  of 1939  that on the retirement of any partner the  partnership would  not  be  determined but would be carried  on  by  the remaining  partners.   It appears that a  fresh  partnership deed was drawn up in the year 1945 when Gilbert was  brought in.   The  partnership constituted by these  three  partners continued  to  carry  on the same  business  that  had  been started  when the tax was paid under the Act of 1918.   From the statement of the case it does not appear that apart from the  mere  change in the personnel of the  partners  and  in their respective shares there was any actual dissolution  of the firm, and any division of its assets and liabilities  or a succession to its business by any outside person. The Income-tax Officer disallowed the claim of the  assessee on  the ground that the partners of the firm in  1939  being different  from the partners of the firm in 1947, no  relief could  be given to the applicant.  The  Appellate  Assistant Commissioner upheld this view.  On appeal to the  Income-tax Tribunal, this decision was reversed and relief was  granted to  the applicant under section 25(4).  Before the  Tribunal it  was  argued  on  behalf of  the  Commissioner  that  the partnership  was nothing but an association of  persons  and therefore, in 24 174 order  to  get  relief under section 25(4) of  the  Act  the partners  of 1939 must be the same as the partners  of  1947

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when  the firm was succeeded by the company.   The  Tribunal repelled   this   contention  and  held  that   the   relief contemplated  by section 25(4) of the Income-tax Act was  to be given to the business and not to the persons carrying  on the  business and that mere changes in the  constitution  of the firm had to be ignored.  It was not disputed before  the Tribunal that the business of the partnership firm of A.  W. Figgies  &  Co.  continued as tea  brokers  right  from  its inception  till  the time it was succeeded  by  the  limited company.   The Tribunal took the view that for  purposes  of incometax  the firm was to be regarded as having a  separate juristic  existence apart from the partners carrying on  the business and that the firm could be carried on even if there was a change in its constitution. At the instance of the appellant the Tribunal stated a  case and referred the following question to the High Court  under section 66(1) of the Act : "In the facts and circumstances of the case, was the firm as constituted on 31st May, 1947, entitled to the relief  under section 25(4) of the Indian Incometax Act ?" The  High  Court  answered  the  question  referred  in  the affirmative.  It upheld the view taken by the Tribunal. It  was contended before us that the construction placed  by the  High Court upon section 25(4) of the Act was  erroneous and  was  not warranted by the language of the  section  and that by reason of the change in the composition of the  firm the  same firm did not continue throughout and  hence  there was no right to relief under section 25(4) of the Act in the changed  firm.  In our opinion, this contention  is  without force.  Section 25 (4)   is in these terms:- "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                             175 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,  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  refund shall be given of the difference." 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. It  is true that under the law of partnership a firm has  no legal  existence apart from its partners and it is merely  a compendious  name  to describe its partners but it  is  also equally true that under that law there is no dissolution  of the  firm by the mere incoming or outgoing of  partners.   A partner  can retire with the consent of the  other  partners and  a  person can be introduced in the partnership  by  the consent  of the other partners.  The reconstituted firm  can

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carry  on  its  business  in  the  same  firm’s  name   till dissolution.   The law with respect to retiring partners  as enacted  in  the Partnership Act is to a  certain  extent  a compromise between the strict doctrine of English common law which  refuses to see anything in the firm but a  collective name for individuals carrying on business in partnership and the mercantile usage which recognizes the firm as a distinct person  or quasi corporation.  But under the Income-tax  Act the  position is somewhat different.  A firm can be  charged as a distinct assessable entity as distinct from its 176 partners  who can also be assessed individually.  Section  3 which  is the charging section is in these terms:  Where  any  Central  Act enacts that  income-tax  shall  be charged  for any year at any rate or rates tax at that  rate or those rates shall be charged for that year in  accordance with, and subject to the provisions of, this Act in  respect of   the  total  income  of  the  previous  year  of   every individual,  Hindu  undivided  family,  company  and   local authority,  and  of  every firm  and  other  association  of persons  or the partners of the firm or the members  of  the association individually." The  partners of the firm are distinct assessable  entities, while  the firm as such is a separate and distinct unit  for purposes  of assessment.  Sections 26, 48 and 55 of the  Act fully  bear out this position.  These provisions of the  Act go  to  show  that the technical view of  the  nature  of  a partnership under English law or Indian law cannot be  taken in  applying  the law of incometax.  The  true  question  to decide  is  one of identity of the unit assessed  under  the Income-tax  Act,  1918, which paid double tax  in  the  year 1939,  with the unit to whose business the  private  limited company  succeeded in the year 1947.  We have no doubt  that the  Tribunal and the High Court were right in holding  that in  spite  of the mere changes in the  constitution  of  the firm,  the  business of the firm as  originally  constituted continued  as tea brokers right from its inception till  the time it was succeeded by the limited company and that it was the same unit all through, carrying on the same business, at the  same place and there was no cesser of that business  or any change in the unit.  Reference was made by Mr.  Daphtary to  the  partnership deed drawn up in 1945.  It  was  argued that a different firm was then constituted.  The High  Court refused to look into this document as it had not been relied upon   before  the  Tribunal  and  no  reference  bad   been specifically  made  to  it in the  order  of  the  Incometax Officer  or  the Assistant Commissioner.   The  Tribunal  in spite  of  this  document  took  the  view  that  under  the Partnership Act a firm could be carried on even if there was a change in its constitution.  This                             177 document  is silent on the -question as to what happened  to the assets and liabilities of the firm that was, constituted under  the  deed of 1939.  To all intents and  purposes  the firm  as  reconstituted  was not a  different  unit  but  it remained  the  same  unit  in spite of  the  change  in  its constitution. The  result  is  that  we see  no  substantial  grounds  for disturbing  the  opinion  given by the  High  Court  on  the question submitted to it.  The appeal therefore fails and is dismissed with costs.                 Appeal dismissed. Agent for the appellant: G. H. Rajadhyaksha.  Agent for the respondents: P. K. Chatterjee.

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