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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

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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

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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

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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

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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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