Chandrachud, J.:— By its order dated the 8th of March, 1963, the Income-tax Appellate Tribunal has referred the following question to the High Court under section 66(1) of the Income-tax Act, 1922:

“Whether, on the facts and in the circumstances of the case, the sum of Rs. 29,800 is taxable in the hands of the assessee under section 10(2)(vii) of the Act?”

2. The assesses, Messrs. Bhavnani Bus Service Company, is a registered partnership firm doing the business of transporting passengers on certain routes. The firm was formed under a deed of partnership dated the 8th of October, 1949, for a period of three years commencing from the 17th day of June, 1949. It was to continue thereafter at the will of the parties. The firm consisted of four partners, Tuljaram Issardas Bhavnani, Hiranand Issardas Bhavnani, Bhagwan H. Mansukhani and Mrs. Lili Mansukhani having a share of 6 annas, 4 annas, 4 annas and 2 annas, respectively.

3. On the 29th of July, 1952, a fresh deed of partnership was executed between Tuljaram Issardas Bhavnani, Hiranand Issardas Bhavnani, Sunder Singh and Mrs. Ramibai having a share of 6 annas, 4 annas, 4 annas and 2 annas, respectively. Bhagwan H. Mansukhani and Mrs. Lili Mansukhani, who were partners under the first deed of partnership, went out of the partnership and their places were taken by Sunder Singh and Ramibai. Clause 2 of the preamble of this deed recites that the partnership of the 8th of October, 1949, had come to an end “by a flux of time” obviously meaning “by efflux of time”.

4. On the 14th of May, 1955, a third deed of partnership was executed under which the firm consisted of two partners only, namely, Tuljaram Issardas Bhavnani and Hiranand Issardas Bhavnani, each having an equal share. It is recited in this deed that the second partnership was dissolved with effect from the 1st of May, 1955.

5. In the assessment year 1957-58, the previous accounting year being the one ended the 30th of April, 1956, the assessee sold four buses for a total consideration of Rs. 29,800. The Income-tax Officer held that the written down value of these buses which were purchased in 1949 and 1951 was nil, as full depreciation had already been allowed on the buses. He, therefore, taxed the sum of Rs. 29,800 as profits of the assessee under section 10(2)(vii) of the Act.

6. That order was confirmed by the Appellate Assistant Commissioner. He rejected the contention of the assessee that the benefit of the depreciation allowed in the past years was not exclusively enjoyed by the two partners of the assessee-firm and that, therefore, the profit which accrued on sale of the buses should be allocated amongst the partners.

7. In the appeal filed by the assessee to the Tribunal the argument took a different shape. It was contended on behalf of the assessee that the second firm was dissolved with effect from the 1st day of May, 1955, and as the assessee-firm was a new and distinct assessable entity, it could not be said that any depreciation was allowed to it. It was submitted on behalf of the assessee that, if the sale proceeds of the four buses exceeded their book value, the same could be taxed as the capital gains of the firm but the firm could not be taxed under the provisions contained in section 10(2)(vii) of the Act. The Tribunal rejected this contention holding that though it was stated in the third deed of partnership that the earlier firm was dissolved, “yet, the factual position showed that in fact there was no dissolution but that the same firm continued to exist, there being only a change in the constitution of the firm”. Consistently with this finding the Tribunal held that it was the assessee-firm which had received depreciation on the buses in the past years and, therefore, the profit of Rs. 29,800 was taxable under section 10(2)(vii) of the Act, the written down value of the buses being nil.

8. This reference which is made at the instance of the assessee came up for hearing before Mody, Acting C.J, and K.K Desai J. on the 21st of January, 1970, when they asked the Tribunal to submit a supplementary statement of the case “giving the facts which are already on the record of this case as to what were the written down values as computed in the various income-tax assessments of the four buses at the end of the first partnership and similarly at the end of the second partnership and at what price or value were these four buses taken over by the second partnership and similarly by the third partnership after the respective immediately preceding partnership ceased to exist”. This was necessary because it was not clear from the judgment of the Tribunal as to which particular facts showed that the same firm was carrying on the business all throughout.

9. In its supplementary statement of the case dated the 7th of August, 1970, the Tribunal has stated that “when the second firm and the third firm took over the four buses from the first firm and the second firm respectively, the vehicles were taken over at the book values, i.e, at cost less depreciation provided in the accounts of the predecessor firm, in each case”. This information was obtained by the Tribunal from the relevant balance-sheets of the firm which form part of the supplementary statement.

10. The question for consideration is whether the sum of Rs. 29,800 which was realised by the assessee by sale of the four buses is taxable under section 10(2)(vii) of the Act. That section provides, to the extent material, that in computing business profits allowance shall be made for the amount by which the written down value of the building, machinery or plant which has been sold exceeds the amount for which it is actually sold. The second proviso to clause (vii) provides that where the amount for which the building, machinery or plant is sold exceeds the written down value, so much of the excess as does not exceed the difference between the original cost and the written down value shall be deemed to be profits of the previous year in which the sale took place.

11. The decision of the question which is referred to us by the Tribunal depends in a substantial measure on whether the depreciation which was allowed to the two previous firms can be taken into consideration for fixing the written down value of the buses in the hands of the assessee. In turn, this question involves the consideration of the issue as to whether the assessee-firm is a hew and distinct firm or whether it is a continuation of the original firm which was formed in 1949. If it is a mere continuation of the old firm, the depreciation which was allowed in the past shall have to be taken into account in calculating the written down value. On the other hand, if the assessee-firm is a new firm altogether, it shall have to be held that it did not derive any benefit from the depreciation which was allowed to the previous firm in the past years.

12. For a proper determination of the question whether the assessee-firm is a mere continuation of the old firms or whether it is a new and distinct firm, it would be necessary to call attention to the more important provisions of the three deeds of partnership. Turning first to the deed dated the 8th of October, 1949, clause 1 thereof provides that the name and style of the firm shall be “Messrs. Bhavnani Bus Service Company”. Clause 4 says that the capital required by the business shall be invested by Tuljaram Issardas Bhavnani and Mrs. Lili Hashamatrai Mansukhani in the proportion of ⅓rd and ⅔rd respectively. Under clause 5, Tuljaram was to contribute a sum of Rs. 30,000, while Mrs. Lily Mansukhani was to contribute Rs. 60,000 to the capital of the firm. Under clause 7, Tuljaram was to have a share of 6 annas, Bhagwan Hashmatrai Mansukhani and Hiranand Issardas Bhavnani were to have a share of 4 annas each and Mrs. Lily Mansukhani was to have a share of 2 annas. Under clause 8, the duration of the partnership was for a period of three years in the first instance and thereafter the partnership was to be a partnership at will. Under clause 9, Tuljaram Bhavnani was to be in charge of the bus service and was entitled to appoint and dismiss the employees at his discretion. Under clause 10, Bhagwan Mansukhani was to maintain account books and to attend to the correspondence. Under clause 11, Hiranand Bhavnani was to attend to the management of the bus service at Sion. Under clause 12, Mrs. Lili Mansukhani was to be a sleeping partner. Under clause 16, the goodwill and the name of the business of the partnership was to be the absolute property of Tuljaram Bhavnani. Under clause 21, on the dissolution of the partnership, full account was required to be taken of the assets and the liabilities of the partnership. The profits and losses were to be shared by the partners according to their respective shares.

13. Turning to the second deed of partnership dated the 29th of July, 1952, it consisted of Tuljaram Bhavnani, Hiranand Bhavnani, their mother, Ramibai, and a retired railway engineer called S. Sundersingh. Their shares respectively were 6 annas, 4 annas, 2 annas and 4 annas.

14. Paragraph 2 of the preamble of the second partnership deed says that the first partnership had ended by efflux of time and that Tuljaram and Hiranand had become the sole proprietors of the goodwill of the firm as well as the licence to ply buses on hire on various routes. Clause 2 of this partnership says that Tuljaram and Hiranand had already invested a capital of Rs. 70,000 and that Ramibai had invested Rs. 5,000 in the firm. Sundersingh was not to make any contribution to the capital of the firm. Clause 4 provides that Tuljaram and Hiranand were to be in charge of the working of the buses as well as in charge of the accounts. The other two partners were not to be called upon to take any active part in the business, though liberty was reserved to Sundersingh to take such part in the business and its management as he in his discretion thought fit. Under clause 6, the partnership was to continue for a period of three years with effect from the 17th of June, 1952. Under clause 7, Tuljaram was to be in charge of the business of the firm which was to be styled “Bhavnani Bus Service”. Under clause 8, the written down value of the buses and some other assets was agreed to be of Rs. 75,000. Under clause 13, on the dissolution of the partnership, the goodwill and the lice???ces were to be the property of Tuljaram and Hiranand only and this was to form. “a condition of taking accounts”. These two partners, on dissolution, were to “retain all vehicles, tools and plants, business premises, etc., on book values”.

15. The third deed of partnership dated the 14th of May, 1955, was executed between Tuljaram and Hiranand only. The preamble of the deed says that the two partners and two others were previously carrying on business in the name and style of “Messrs. Bhavnani Bus Service”, that that partnership was dissolved as from the 1st of May, 1955, and that Tuljaram and Hiranand had retained the vehicles, tools, plants and other things. Under clause, 6 of this deed, the capital of the partnership was to be brought in by the partners “in kind in the shape of vehicles/tools and plants which shall belong to the partners in equal shares”. Under clause 14, on dissolution of the partnership, the assets were to belong to the two partners in equal shares and the profits and losses were also to be shared in equal shares.

16. It is contended on behalf of the assessee, that the three firms were distinct and separate, that the first partnership had come to an end by efflux of time on the 17th of June, 1952, that the second firm was in terms dissolved with effect from the 1st of May, 1955, and therefore the third firm must be held to be a new and distinct entity. As the benefit of depreciation allowed in the past years was not obtained by this firm, section 10(2)(vii) of the Act cannot, according to the learned counsel, apply to the facts of the case.

17. It seems to us impossible to accede to this contention. It is undoubtedly true that the second deed of partnership dated the 29th of July, 1952, says that the first partnership had come to an end by efflux of time and the third deed of partnership dated the 14th of May, 1955, contains a recital that the second partnership was dissolved with effect from the 1st of May, 1955. In our opinion, however, the three deeds of partnership shall have to be construed as a whole and the mere circumstance that the two last deeds contain recitals that the first and second partners were dissolved or had come to an end by efflux of time cannot conclude the question whether the third partnership is a mere reconstitution of the old firm or is a new and distinct firm.

18. Reliance is placed by the learned counsel on a judgment of the Supreme Court in Commissioner of Income-tax v. Motors & General Stores (P.) Ltd. [1967] ???6 I.T.R ???92 S.C. in support of his submission that in the absence of any allegation of mala fides the language used, particularly in the two later deeds of partnership, must be given its due and full effect. Now, in that case, a deed of exchange was executed between two parties and the question was whether the transaction was really a sale and therefore the second proviso to section 10(2)(vii) of the Act was attracted. It was held by the Supreme Court that there was no suggestion of mala fides or that the document was never intended to have any legal effect and, therefore, when the transaction was embodied in a document, the liability to tax would depend upon the meaning and the content of the language used in accordance with the ordinary rules of construction. Now, an important distinguishing feature of the instant case is that the deeds of partnership are relied upon by both the parties for determination of the question whether the two earlier partnerships were in fact dissolved. In the case before the Supreme Court the parties had in fact executed a deed of exchange and the contention of the department was that the transaction was really in the nature of a sale though in the form of an exchange.

19. We have no deed of dissolution before us and all that is relied upon in support of the plea that the two earlier partnerships were dissolved is the recital contained in the second deed of partnership that the first-partnership had come to an end by efflux of time and the recital in the third deed of partnership that the second partnership was dissolved with effect from the 1st of May, 1955. As observed by Lord Russell of Killowen in Duke of Westminster v. Commissioners of Inland Revenue [1935] 19 T.C 490 H.L., it is permissible to disregard mere nomenclature and decide the question of taxability or non-taxability in accordance with the legal rights of the parties. What cannot be done on the pretext of considering the substance and not the form of the matter is to brush aside deeds, disregard the legal rights and liabilities arising under a contract between parties, and decide the question of taxability or non-taxability upon the footing of the rights and liabilities of the parties being different from what in law they are. These observations have been cited with approval by the Supreme Court in Motors & General Stores' case, where reference has also been made to a judgment of Viscount Simon in Inland Revenue Commissioners v. Wesleyan General Assurance Society [1948] 16 I.T.R Supp. 101 H.L., which takes the view that “the name given to a transaction by the parties concerned does not necessarily decide the nature of the transaction. To call a payment a loan if it is really an annuity does not assist the taxpayer any more than to call an item a capital payment would prevent it from being regarded as an income payment if that is its true nature. The question always is what is the real character of the payment, not what the parties call it.” The mere circumstance therefore that the parties have chosen to construe certain facts as amounting to a dissolution of the partnership, properly so called, will not be conclusive on the question whether the partnerships were in fact dissolved. For that purpose one has to turn to various facts and circumstances and we must now proceed to consider them.

20. The Tribunal has held that Tuljaram Issardas Bhavnani and Hiranand Issardas Bhavnani were the real owners of the business and they took in different persons from time to time either to assist them in the conduct of business or in order to secure finances. Under clause 9 of the first deed of partnership dated the 8th of October, 1949, Tuljaram was to be in charge of the bus service and it was within his exclusive power to appoint or dismiss the employees. Under clause 16 of the deed, the goodwill and the name of the business was to be the absolute property of Tuljaram. Under clause 4 of the second deed of partnership dated the 29th of July, 1952, Tuljaram and Hiranand were to be in charge of the management of the business as well as in charge of accounts. The two other partners were not to be called upon to take any active part in the business, though it was open to the fourth partner, Sundersingh, to take such part in the business as he thought fit. Other partners came and went but Tuljaram and Hiranand continued as partners throughout.

21. Clause 21 of the first deed of partnership provides that on the dissolution of the partnership “full and general account will be taken of the assets, property, credits, debts, liabilities of the partnership, including these of the capitalist”. There is no evidence to show that on the alleged dissolution of the first partnership by efflux of time, accounts were taken of the dissolved firm. It is difficult to conceive of a dissolution of partnership without adjustment of the rights and liabilities of the partners. Such an adjustment is a fair indication of dissolution but that is totally absent in this case.

22. Clause 13 of the second partnership deed contains a significant provision that on dissolution of the partnership the goodwill and the licences shall remain the property of Tuljaram and Hiranand to the exclusion of the other partners and that “this shall be a condition of taking account for purpose of dissolution of partnership”. That clause further says that “on dissolution, parties Nos. 1 and 2 (i.e, Tuljaram and Hiranand) shall retain all vehicles, tools and plants, business premises, etc., on book values”. It is clear from this provision that the two Bhavnani brothers were the real owners of the business. The assets of that business were vested in them and that state of affairs continued almost during the entire existence of the three partnerships. The extent of the interest and participation of these two partners in the affairs of the firm can be appreciated in the light of clause 3 of the second deed of partnership under which they had respectively a share of 6 annas and 4 annas in the profits, and if there was any loss, it was to be borne by them exclusively.

23. The third paragraph of the preamble of the third partnership deed dated the 14th of May, 1955, shows that the two Bhavnani brothers had retained with them the vehicles and the other assets of the firm. Clause 6 of this deed shows that the capital of the partnership which was to be brought in by the two brothers was to consist of “vehicles, tools and plants”. It is clear from this provision that the assets of business which was carried on by the two earlier partnerships and which really vested in the two brothers were retained by them all throughout and those assets constituted their contribution to the capital of the third partnership.

24. Along with the supplementary statement of the case the Tribunal has forwarded a copy of the balance-sheet of Messr???. Bhavnani Bus Service Company for the assessment year 1957-58 corresponding to the accounting year ended the 30th of April, 1956. It may be recalled that the third deed of partnership was executed on the 14th of May, 1955, and the partnership is said to have commenced its business from the 1st of May, 1955. The first year therefore during which this partnership did business, assuming that it was a distinct entity, was the accounting year 1st of May, 1955, to 30th of April, 1956. There is no question of this firm having any previous balance-sheet. But the balance-sheet as at 30th of April, 1956, begins by showing the value of buses at Rs. 32,396-14-0 “as per last balance-sheet”. After this entry, the written down value of the buses is calculated. The cost of two out of the four buses is shown as Rs. 40,000, the depreciation which was allowed on these buses in the past is shown at Rs. 31,594, the written down value on the date of sale of the buses is shown as the difference between these two amounts, namely, Rs. 8,406 and the value realised by the sale of the buses is shown as Rs. 12,750. It is on this basis that the profit transferred to the profit and loss account is shown at Rs. 4,344. Exactly similar calculations have been made in regard to the cost, the depreciation allowed in the past, the written down value, the value realised by the sale of the buses and the profit made by the sale in regard to the two remaining buses. This accounting leaves no doubt that there was in fact no dissolution of the second partnership nor, indeed, that the first partnership had come to an end by efflux of time.

25. Learned counsel for the department has drawn our attention to section 59 of the Motor Vehicles Act, 1939, which has some relevance on the question which we are considering. It provides, in so far as material, that a permit for operating a public carriage shall not be transferable from one person to another except with ???he permission of the transport authority which granted the permit. It is clear from the prefatory recitals of the first deed of partnership dated the 8th of April, 1949, that Tuljaram Bhavnani had, through his personal exertions, obtained the permit to cover bus routes from Sion to Ghatkopar and from Sion to Trombay. Having obtained the permit for plying a public bus service, he took three other persons as partners as stated in the very deed. There could be no dissolution of the firm properly so-called, for if this firm were to come to an end it would have become necessary to obtain the permission of the transport authority to allow the second partnership to ply a bus service on the particular routes.

26. Thus, the two brothers, Tuljaram and Hiranand, carried on the same business with the same assets and under the same permit all throughout. The integrity of the business which was commenced on the 17th of June, 1949, was never broken. In other words, there was a structural alteration in the constitution of the firm from time to time by some partners retiring and others coming in, resulting in a consequent re-distribution of the shares of the partners. As observed by the Supreme Court in Commissioner of Income-tax v. A.W Figgies and Company “a mere change in the constitution of the partnership does not necessarily bring into existence a new assessable unit or a distinct assessable entity….”

27. We must, therefore, confirm the finding of the Tribunal that though the two subsequent deeds of partnership mentioned that the earlier firms were dissolved, there was in fact no dissolution. The same firm continued to exist all along and all that happened was that there was a change in the constitution of the firm from time to time.

28. This finding, however, will not justify an affirmative answer to the question referred to us by the Tribunal, in regard to the entire amount. The question requires us to consider whether the sum of Rs. 29,800 is taxable in the hands of the assessee under section 10(2)(vii) of the Income-tax Act, 1922. The contention of the department is that the written down value of the buses was nil and, therefore, the entire sale proceeds, namely, the sum of Rs. 29,800, would be taxable as a profit in the bands of the assessee. It is not possible to accede to this contention, because paragraph 4 of the supplementary statement of the case shows that the written down value of the buses at the end of the 2nd partnership was not nil but was Rs. 18,328. The learned counsel for the department says that the written down value cannot be this, because the initial depreciation has not been taken into account while fixing the written down value at the end of the second partnership. We cannot entertain this submission, because such a point was never made before the Tribunal. In paragraph 6 of the supplementary statement of the case the Tribunal says that the statement was finalised after hearing both the parties and “the figures have been accepted as correct by the parties”. We must, therefore, proceed on the basis that the written down value of the buses at the end of the second partnership was Rs. 18,328. On that basis, the profits in the hands of the assessee will not be Rs. 29,800 but the amount as reduced by Rs. 18,328, i.e, Rs. 11,472. The question referred to us by the Tribunal necessarily includes the issue whether if the sum of Rs. 29,800 is found not to be taxable, any lesser amount can be taxed in the hands of the assessee under section 10(2)(vii) of the Act.

29. Our answer, therefore, to the question is that the sum of Rs. 11,472 is taxable in the hands of the assessee under section 10(2)(vii) of the Act.

30. In the circumstances, there will be no order as to costs.