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Petitioner: RAMPRATAP SUGANCHAND VS Respondent: COMMISSIONER OF INCOME-TAX, EAST PAKISTAN-
P L D 1961 Dacca 207
P L D 1961 Dacca 207
Before Amin Ahmed, C. J. and Chakraborti, J
RAMPRATAP SUGANCHAND‑Applicant
versus
COMMISSIONER OF INCOME‑TAX, EAST PAKISTAN -Respondent
Reference Case No. 6 of 1958, decided on 26th November 1958.
Income‑tax Act (XI of 1922)----
------- S 25 (4)‑Applicability -Business‑Succession‑Relief admissible where business " as a whole" is transferred or succeeded.
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. Where a business is split up, and thereafter another person carries on part of the business, he cannot `succeed' his predecessor in carrying on the business.
Sabita Ranjan Pal and S.M. Amin Azhar for Applicant.
A. F. M. Mesbahuddin for A. M. Khan for Respondent.
JUDGMENT
AMIN AHMED, C. J.‑This is a Reference under subsection (1) of section 66 of the Income‑tax Act (to be hereinafter referred to in this judgment as the Act only) for the opinion of this Court on the following question
"Whether in the circumstances of the case there was a succes sion as contemplated under section 25 (4) of the Income‑tax Act, and whether the assessee was entitled to relief under that section ?"
2. The facts of the case, as given in the letter of Reference are very scanty ; and from the Tribunal's order, dated the 22nd of November 1957, against the order of the Appellate Assistant Com missioner in respect of the assessment for the year 1947‑48 it also appears that the material facts have not all been stated. However, we gather from this order, dated the 22nd of November 1957, the following facts.
3. The present firm Messrs Rampratap Suganchand came into existence and was registered under the Partnership Act on account of the deed of gift by Suganchand in favour of his two sons, Ramgopal and Kishorilal, on the 27th of May 1946. In 1929‑30 and from that upto 1932‑33 the assessment was made taking the status as that of an individual. From 1932‑33 till and including 1946‑47 assessment was made on the basis of a Hindu undivided ‑family though, for reasons best known to this firm (nothing appears from the record), they unsuccessfully tried to establish before the taxing authorities that the status of the firm for the purpose of assessment year 1946‑47 was that of an indivi dual, and from the order, of the Tribunal Income Tax Appeal No. 347 of 1953‑54.it appears that,‑
"The only objection pressed before us concerns the refusal of the Appellate Assistant Commissioner to grant relief under section 25 (4) of the Income‑tax Act. It is now conceded before us that the relief under section 23 (4), if at all admissible, should properly arise for consideration in connection with the assess ment year 1947‑48. That being so, we refrain from expressing any opinion on the grounds given by the Appellate Assistant Commissioner in support of his refusal to concede the assessee's claim. The point is left open for consideration in respect of any future year."
And in respect of the assessment for the year 1947‑48 the assessee has claimed relief again under subsection (4) of section 25 of the Act on the basis that the assessee firm is the successor of the former business of the undivided Hindu family. The terms of the partnership deed are that by the deed of gift Suganchand who was the owner of 16 annas share made a gift to his son Kishorilal the second part of the J share of a rupee of the business including kerosene oil agency of the Burmah Shell in the District of Bogra and also in the District of Rangpur with their out stations under the same agency, and a share equivalent to 6 annas in the business at Calcutta, and also the property mentioned in the deed of gift executed by the first part on the 27th May 1946, and to his son Ramgopal third part of the I share of a rupee in the business including the business of kerosene oil agency at Bogra. Lalmonirhat and Kurigram in the District of Rangpur with their out‑stations in the same agency at certain places, and a share equivalent to 6 annas at Calcutta, and also the property which was mentioned in the deed of gift executed by the first part in favour of the third part on the 27th May 1946, which the second and the third parts held and owned absolutely to the use of themselves, their heirs, successors, executors, administrators and assignees. It was also recited in the deed.
"The parties hereto declare that the old business styled Ram pratap Suganchand has discontinued and dissolved, and the new business under the same name has been started afresh between the three parts from the beginning of the year Chait Sudi 9 Sambat year 2003 R. N."
On these facts the Tribunal held that the assessee could not be said to have succeeded the former firm in the same capacity as the transfer, and carrying on business in the terms of subsection (4) of section 5 of the Act. In taking that view the learned Members of the Tribunal observed as follows:‑
"It would appear from the above quotation that the document (partnership deed) discloses an inconsistent position. If the business carried on by Suganchand personally is discontinued and dissolved at the end of 2002 R. N., how could a gift of the business be made to the two sons ? The fact appears to (be) that the business which was carried on by Suganchand perso nally upto the end of 2002 R. N., came to be run by him together with his two sons Kishorilal and Ramgopal, Sugan chand having four annas share, and the two sons having six annas each. The point, therefore is whether taking all the facts in proper perspective (sic) it can be said that there was a succes sion in the business carried on by Suganchand from 2002 R. N. It appears from the recital in the partnership, deed that the share in the business was transferred by a deed of gift to the two sons on 27th May 1946. The situation that emerges on the gifting away of three‑fourth share of certain business to two sons, and the incorporation of a partnership deed between the father and the two sons is that apart of the business, that is, four annas share still remains with Suganchand. It cannot be logically argued that there was a succession here in the sense the word appears in section 25 (4). Upto a certain date Suganchand is the owner of sixteen annas share ; from a succeeding date Suganchand becomes owner of four annas share and the two sons six annas each, the business remains the same. Here the fact is not that one entity is succeeded fully by another entity. We are of the opinion that section 25 (4) does not apply in the facts of this case. If Suganchand had stepped aside from the business wholly the position would have been different, and perhaps section 25 (4) could apply."
Mr. Pal, who appears for the assessee, relies on the findings of fact, and argues that on the findings which we have set out at length, the Tribunal should have held that the as3essee is entitled to relief under subsection (4) of section 25 of the Act.
4. We have given our anxious consideration to the argu ments advanced by the learned Advocates. The learned Advocate for the assessee has relied on the case of Hassan Kassam and others v. Commissioner of Income‑tax, Bihar and Orissa (A I R 1949 Pat. 178), and also on the case of Executors of the Estate of Lt. Commissioner J. K. Dubhas and others v. Commissioner of Income‑tax, Bombay City (A I R 1951 S C (India) 111). His argument is on these lines : It has been found by the Tribunal that there was a partnership deed ; that the business which is now sought to be assessed was in fact charged under the provisions of the Income‑tax Act (VII of 1918) ; and that the present business is identical with the business which was carried on before the succession by its predecessor. Mr. Pal has relied on the following passage in the latter case cited above (observation of Patanjali Sastri, J.)
"The next question is, what is the meaning to be attributed to the phrase 'in such capacity'? A Full Bench of the Madras High Court in the Jupudi Kesava Rao v. Commissioner of Income‑tax, Madras I L R 59 Mad. 377, held that the expression meant `in the capacity as owner', so that `the person who succeeds another must, by such succession, become the owner of the business which his predecessor was carrying on, and which he, after the succession, carries on in such capacity, that is, `the capacity as owner'. Applying that test they held that the sole surviving member of a Hindu undivided family did not succeed to the business of the family within the meaning of section 26 (2), as he was previously a part‑owner of the business, and there was no transfer of ownership. While it is undoubtedly true that a transfer of ownership is ordinarily involved in cases of succes sion falling within section 26 (2) or section 25 (4), it cannot, in my opinion, be regarded as an essential element of succession within the meaning of those provisions. The Income‑tax Act directs its attention primarily to the person who receives the income, profits or gains rather than to the ownership or enjoy ment thereof. The assessee is defined in section 2 (2) as the person by whom the income‑tax is payable and by section 10 the tax is payable by an assessee who carries on the business, pro fession or vocation. The statute thus fastens on the person who carries on the business, etc., the liability to pay the tax on the profits earned by him regardless of their destination or enjoy ment. It is also worthy of note that in several instances persons who have no proprietary or other right in the income charged to tax are made liable to pay the tax for no other reason than the convenience of assessment and collection. Such instances are to be found in section 26 (2) proviso, section 18 (7), section 23‑A (3), section 25‑A and section 42 (1). As observed by Lord Cave in Williams v. Singer (1921) 1 A C 65 :
"The fact is that, if the Income‑tax Acts are examined, it will be found that the person charged with tax is neither the trustee nor the beneficiary, as such, but the per6on in actual receipt and control of the income which it is sought to reach.
There seems to be no warrant, therefore, to insist on a transfer of ownership as the decisive test of 'succession' within the meaning of section 26 (2) or section 25 (4) any more than for insisting on the ownership of the business by the person carrying on a business for the purposes of section 10. I do not, of course, wish to be understood to say that a clerk or an agent in the management of a business would be an assessee liable to be taxed in respect of its profits and gains. Some kind of title there must be, though not of a beneficial character. Nor need it be of the same quality in the predecessor and the successor. The question in each case must be: Is the person who has come in is carrying on the business as a principal ?"
Although it will appear from the terms of the partnership deed and as pointed out by the Tribunal that the former firm was disconti nued and dissolved, Mr. Pal does not claim that, but he argues that it was a going concern which continued and was succeeded by the present assessee on the 27th of May 1946.
5. Mr. Mesbahuddin, who appears for the Commissioner of Income‑tax, relies on the case of Commissioner of Income‑tax. Burma v. N. N. Firm (A I R 1934 Rang. 13 (F. B.)), the leading judgment being that of Page, C. J., and contends that there cannot be any question of succession, for on the showing of the assessee itself the former business was dissolved and discontinued, and, if it was dissolved and discontinued, it is not open to the assessee now to say that the business continued, and the assessee took it over from the predecessor, which according to the records of the Income‑tax authorities was assessed for the immediately preceding year 1946‑47 on the basis of their status as an undivided Hindu family, and not on that as an individual though curiously enough it is stated in the partnership deed that Suganchand from the owner of 16 annas share came to have 4 annas share in the business himself, and his two sons 6 annas each.
6. We have considered the arguments of both the learned Advocates ; but we must observe that none of them has referred to all the statutory conditions that must be fulfilled before subsec tion (4) of section 25 of the Act can be applied, and even the Tribunal which has given some reason for not accepting the contention of the assessee has not applied its mind to these con ditions. In order to apply subsection (4) of section 25 of the Act, it is first of all necessary that the predecessor of this assessee should be assessed under the Income‑tax Act (VII of 1918). There is nothing in the record placed before us to show that they were so assessed. There is no finding of the Tribunal to that effect. There is nothing on the record to show that when the Amending Act of 1939 came into force on the lst of April 1939, the predecessor of the assessee was carrying on business, and, if so, in what capacity they were carrying on the business in 1918 and 1939. There is nothing on the record also to show whether these members of the undivided Hindu family are governed by the Dayabhaga or by the Mitakshara School of Hindu Law. On the other hand, the Tribu nal seems to complain about lack of materials themselves, and they have said in their order of the 22nd of November 1957, that the records beyond 1929‑30 are not available to them, and for the: assessment from the year 1932‑33 upto the year 1946‑47 they can not ascertain from the records as to for what reasons the alleged predecessor of this firm was assessed on the basis of the status of an undivided Hindu family.
7. The Patna case reported in A I R 1949 Pat. 178 does not help the assessee much, far from the facts of that case it will be noticed that the Appellate Tribunal in that case came to a finding that the business concerned was in fact charged under the provi sions of the Income‑tax Act (VII of 1918), and the business which was sought to be assessed was identical with the business which was carried on by the deceased's predecessor in 1926 and on those findings it was held in that case that the entire business which was assessed under the Act of 1918, and not a portion thereof, was succeeded by assessee. In the Supreme Court (India report), reported in A I R 1951 S C (India) 411, to which Mr. Pal referred, Kania, C. J., observed as follows :‑
"The scheme of section 25 read with the provisions of section 26 (2) appear to be to give relief, inter alia, to persons who were carrying on business in 1921, and had been taxed on their income under the Income‑tax Act, 1918. By a change effected by the Income‑tax Amendment Act, 1922, they were subjected to taxation twice on the income of 1921‑22. The relief is intended against this levy of tax twice over . . . . .
The contention that the business was to be carried on by the executors as such, as a going concern or that it was being carried on for the benefit or loss of the testator's estate is not relevant for the present discussion. The only relevant question under section 25 (4), Income‑tax Act is whether in respect of the busi ness there is a successions to another person."
8. Patan jali Sastri, J., also in that case observed as follows:‑
"In other words, the predecessor is given the same relief as if he had discontinued the business on the date of succession. It will thus be seen that the enactment of section 25 (4) is conse quential on the amendment of section 26 (2), and the scope and meaning of the expression `succeeded in such capacity by another person' in section 26 (2) must determine also its scope and meaning in section 25 (4)."
9. Mr. Mesbahuddin has also cited the case of Jupudi Kesava Rao, Banker v. Commissioner of Income‑tax, Madras. That was a case where a Hindu undivided family consisting of father and son was served with notice under subsection (4) of section 25 of the Act. Before the assessment could be done the father died, and the son took over the entire property by survivorship. The son was assessed. The question was raised whether he could be assessed to super‑tax, he being an individual and not a joint family. It was held in that case that an undivided Hindu family which carried on business was not succeeded as the son was himself in part the owner of the property held, and, as such, there was no transfer of ownership of business in the son, and as he was entitled to it by survivorship to the business of his father within the meaning of subsection (2) of section 26 of the Act, he was not liable to be assessed.
10. In this connection we have ourselves examined the following cases, which we shall simply mention, and it is not neces sary to examine them all here. These are the cases of Commis sioner of Income‑tax, Burma v. A. L. V. R. P. Firm (A I R 1940 Rang. 281 S B) and Com missioner of Income‑tax, Burma v. S. Mansookhlal Zaveri (A I R 1937 Rang. 102 S B). In the latter cases : Roberts, C. J., referred to certain observation of Page, C. J., in the Full Bench case of Commissioner of Income‑tax, Burma v. N. N. Firm, and observed as follows:‑
"Page, C. J., thereafter referring to the facts said : `Upon these facts the income‑tax authorities have held that there was a succession to the money‑lending business of the undivided joint family within section 26 (2), Income‑tax Act. In my opinion it is manifest there was not a `succession' within section 26 (2) of the Act. In order that a person should be held to have suc ceeded 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. Where a business is split up, and thereafter another person carries on part of the business, I am of opinion that he does not `succeed' his predecessor in carrying on the business within section 26 (2) of the Act.'
This is only another way of saying that where a person has carried on a business no one can be said to succeed him in such capacity when only part of the business is taken over."
11. We may usefully refer to the case of Commissioner of Income‑tax, Bombay, Sind and Baluchistan v. P. E. Poison (AIR1945PC137) (judgment of Lord Simonds). His Lordship dealt with the scheme of the Income‑tax Acts of 1918, 1922, and the Amending Act of 1939, and particularly the provisions of sections 25 and 26 of the Act and at length, I cannot do better than quoting His Lordship's observations in extenso..
"It is necessary to refer to certain provisions of the Income -tax Acts upon the interpretation of which this case depends. It must in the first place be borne in mind that under section 3, Income‑tax Act, 1922 (which in this respect differs from the English Income‑tax Acts), the subject of charge is not the income of the year of assessment, but the income of the previous year. This was a change introduced by the 1922 Act. Previously, under the 1918 Act, th6 subject of charge was the actual income of the year of assessment. 'The result of this change was that, if a business was in existence and earning‑profits in the year 1921 when the 1918 Act was in force, and continued in existence in the year 1922 when the 1922 Act was in force, the owner would pay income‑tax twice over on his 1921 profits. It was accordingly necessary in the 1922 Act to differentiate for the purpose of discontinued business between those which had, and those which had not, been charged to tax under the 1918 Act. Section 25 of the 1922 Act deals with assessment in the case of discontinued business. By subsection (1) it provides that, where any business on which income‑tax was not at any time charged under the provisions of tine 1918 Act is discontinued in any year, an assessment may be made in that year on the basis of the income, profits or gains of the period between the end of the previous year and the date of such discontinuance in addition to the assessment, if any, made on the basis of the income, profits or gains of the previous year. This subsection does not apply to the present case, but reference may be made to it as illustrating the purpose of the Act to make tile number of assessment agree with the number of years during which the business has been carried on. Subsection (2) of section 25 is an administrative provision. It is upon subsection (3) that this appeal turns. Before the Amending Act of 1939 came into force, it was in the following terms :
`(3) Where any business, profession or vocation . . . . . on which tax was at any time charged under the provisions of the income‑tax Act, 1918, is discontinued, 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 gins of the previous year exceeding the amount payable on the basis of such assessment, a refund shall be given of the difference.'
The purpose and effect of this subsection is clearly to give relief to a tax‑payer who, but for it, would in the aggregate be charged with tax once in respect of every year's income and twice in respect of one year's income. Section 26 of the 1922 Act deals by subsection (1) with assessments where at the time of making the assessment it is found that a change has occurred in the constitution of a firm, and by subsection (2) with assessments where at the time of making the assessment it is found that there has been a succession. It is a section which distributes a tax already charged as between old and new members of a firm or between the predecessor and the successor in a business. In its original form it provides that in the case of a succession the assessment shall be made on the successor as if he had been carrying on the business through out the previous year and have received the whole profits for that year.
Before the Amending Act, came into force, the words `discontinued' and `discontinuance' in section 25 of the 1922 Act had been the subject of numerous decisions in the Courts of India, amongst them 50 Born. 87, (1929) 3 I T C 341 and (1938) 6 I T R 290, and it had been uniformly decided that these words did not cover mere change of ownership, but referred only to a complete cessation of the business. Their Lordships enter tain no doubt of the correctness of these decisions, which appear to be in accord with the plain meaning of the section and to be in line with similar decisions upon the English Income‑tax Act. Nor has their correctness been challenged in the judgment under appeal or in the argument before their Lordships.
It has, however, been contended that the amendments intro duced by the Amending Act impose a different interpretation upon section 25, and it is this contention that has been accepted by the High Court at Bombay. The amendments so introduced are as follows : Sections 25 (1) and (2) are not touched into section 25 (') after the word `discontinued' there are interpolated the words `then, unless there has been a succession by virtue of which the provisions of subsection (4) have been rendered appli cable.' A new subsection (4) is introduced, which is in the following terms :
`(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, 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 assessment, a refund shall be given of the difference.'
A new subsection (5) is also introduced, but it is not relevant to the present question. Consequential amendments are made in subsection (6). Section 26 has ,also been substantially amended, but it is convenient to pause and examine the amend…
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