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J. Ram N. Ram v. Commissioner Of Income-Tax
Structured Summary of the High Court Opinion
Factual and Procedural Background
The assessee was the firm Jittanram Nirmalram, originally constituted by four partners: Rai Bahadur Ramchandram, Lakshmi Narain Bhadani, Vishnu Prasad Bhadani and Bhagwandas Bhadani. On 9 November 1942 Bhagwandas gave notice severing his connection with the firm and commencing a new business (Nirmalram Hari Prasad). His share of profits and assets (computed at over Rs. 1.5 lakhs) was paid partly in cash and partly by allotting to him the Gaya cloth shop previously carried on by the firm.
After Bhagwandas's notice the firm continued to carry on grain, hardware, sugar, petrol, kerosene oil and money-lending businesses. The assessee claimed before the Income-tax Department that Bhagwandas's severance amounted to a discontinuance of business within the meaning of section 25(4) of the Income-tax Act. The Income-tax Officer rejected this contention; appeals to the Appellate Assistant Commissioner and the Income-tax Tribunal were unsuccessful.
Under section 66(1) the Appellate Tribunal referred to the High Court the question of law whether, on the facts and circumstances, the Tribunal was right in holding that there was neither a discontinuance in nor any succession to the appellant's business as contemplated by section 25(3) and section 25(4) of the Income-tax Act.
The High Court, finding the statement of case insufficient, sent the matter back to the Tribunal for two additional factual findings: (1) whether the firm's business had at any time been charged under the Income-tax Act of 1918; and (2) whether the firm stood dissolved on 9 November 1942 as a result of Bhagwandas's severance, or whether Bhagwandas merely retired as a partner without dissolution. The additional statement was subsequently returned and further arguments were heard.
Legal Issues Presented
- Whether, on the facts and in the circumstances of this case, the Tribunal was right in holding that there was neither a discontinuance in nor any succession to the appellant's business as contemplated by section 25(3) and section 25(4) of the Income-tax Act.
- Whether the firm Jittanram Nirmalram had been charged under the Income-tax Act, 1918 (Act VII of 1918) at any time (factual question referred by the High Court).
- Whether on the facts proved the firm was dissolved on 9 November 1942 as a result of Bhagwandas's severance, or alternatively whether there was no dissolution and Bhagwandas merely retired (factual question referred by the High Court).
Arguments of the Parties
Assessee's Arguments
- The assessee initially conceded that it would not press any contention of discontinuance under section 25(3), but relied on a submission that there was succession within the meaning of section 25(4) and that the Income-tax authorities had misapplied the law in denying relief under that provision.
- The assessee relied on the notice given by Bhagwandas (printed in the paper book) and on the Partnership Act (section 43) to argue that Bhagwandas’s exercise of the power to dissolve a partnership at will resulted in dissolution of the original four‑partner firm as from 8 November 1942 (the date in the notice).
- The assessee pointed to the Appellate Tribunal’s finding that there had been no break or discontinuance in the business and that the old business had continued with retention of goodwill and assets, arguing that those facts supported a claim of succession under section 25(4).
Department's Arguments (Standing Counsel)
- There was no succession within the meaning of section 25(4) because Bhagwandas, having severed connection, was granted the Gaya cloth branch of the business partly in lieu of his share — the department argued that succession to the whole business (or the entire quantum of business) is required to claim section 25(4) relief.
- The department relied on the Rangoon High Court decision in Commissioner of Income-tax, Burma v. N.N Firm, where it was held that succession requires succeeding the predecessor in carrying on the business as a whole and where a business was split up the person carrying on part did not succeed for the purposes of the relevant provision.
- It was also argued that because the Appellate Tribunal found that the firm was not dissolved on 9 November 1942 (Bhagwandas had merely retired) there was no change constituting succession within section 25(4) or section 26(2).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-tax, Burma v. N.N Firm (Rangoon High Court) | Held that one person succeeds another in carrying on a business only when he succeeds in carrying on the business as a whole; where business was split up and there was a cessation, succession was not established. | The Court distinguished this case on its facts, observing that the Rangoon case involved an actual cessation of business before the successor commenced; therefore its strict principle (succession requiring the whole business) did not apply to the present facts where continuity was not disputed. |
| Hassan Kassam v. Commissioner of Income-tax (High Court decision of this Court) | Supports the proposition that succession may be found where there is substantial identity in business even if some assets/liabilities are retained by individuals and fresh capital is introduced; emphasis on continuity and same place of business. | The Court cited this authority to support the view that succession need not be mathematical identity of business; substantial identity and continuity may suffice to establish succession under the Income-tax provisions. |
| James Shipstone and Sons, Ltd. v. Morris (English case, Bowlatt J.) | Statement that succession to part of a trade can exist when viewed broadly; one need not succeed to an identical extent or identical lines of customers for succession to be recognized. | The Court quoted the passage to reinforce the proposition that partial continuities do not preclude succession, provided there is substantial identity between predecessor and successor businesses. |
| Commissioner of Income-tax, Madras v. Karuppiah (Madras High Court) | Held that for assessment of income-tax a firm and its partners are different persons; a person carrying on business as sole owner after dissolution does so as a different person from the dissolved firm. | The Court relied on this decision to support the conclusion that a newly constituted partnership (even with some common partners and the same name) can be a different person for income-tax purposes, and therefore succession can arise between distinct taxable entities. |
| Income-tax Commissioners for City of London v. Gibbs (House of Lords) | Held that although a partnership is not a juristic person in English law, the Income-tax legislation treats a partnership as a legal entity for assessment and that succession could arise between partnerships for tax purposes (rule 9, schedule D, 1918 Act). | The Court invoked this House of Lords authority to show that for income-tax purposes a partnership may be treated as a separate taxable entity and that succession between distinct taxable entities is consistent with the legislative scheme. |
Court's Reasoning and Analysis
The Court proceeded in a sequence of legal determinations, each tied closely to the factual findings:
- Continuity versus cessation: The Court accepted the Appellate Tribunal's factual finding that "there had been no break in or discontinuance in the business of the firm." The Court emphasized that section 25(4) or analogous provisions do not require a mathematical identity of scale or every line of business for succession to arise. Rather, substantial identity or similarity in the nature and extent of activities is sufficient.
- Distinguishing authority: The Court distinguished Commissioner of Income-tax, Burma v. N.N Firm on its specific facts — the Rangoon decision involved a split of business together with an actual cessation before the successor commenced operations. Because there was no allegation of cessation before the new firm continued operations in the present case, that decision's restrictive outcome did not control.
- Substantial identity: The Court relied on domestic and English authorities (Hassan Kassam; James Shipstone; Bowlatt J.'s formulation) to articulate the principle that succession may be found where there is substantial similarity in business activities, retention of goodwill, and continuity of operations, even if not all assets or customer lines remain identical.
- Necessity of a "different person": Even accepting substantial identity, the Court observed that section 25(4) requires succession to be from one "person" (taxable entity) to another. The Tribunal's original finding that the firm was not dissolved (Bhagwandas merely retired) would, if correct, negate any change of taxable person and therefore negate succession.
- Application of Partnership law: The Court examined the partnership deed and the notice given by Bhagwandas, and applied section 43(1)–(2) of the Indian Partnership Act (dissolution by notice where partnership is at will). The Court concluded that Bhagwandas validly exercised a right to dissolve the partnership at will and that the partnership was dissolved as of the date in the notice (8 November 1942).
- Character of the successor: The Court held that the subsequent partnership formed by the remaining three partners, although using the same firm name and carrying on substantially the same business, was a different taxable person for Income‑tax Act purposes because a dissolved partnership and a newly registered partnership are distinct entities for tax assessment.
- Statutory and precedential support: The Court cited provisions of the Income‑tax Act (sections treating firms as taxable units) and relied on prior decisions (Madras High Court and House of Lords in Gibbs) recognizing that the legislative scheme treats partnerships as separate taxable entities, reinforcing the conclusion that succession under section 25(4) can occur between distinct partnership entities.
- Net conclusion from analysis: Given (a) the Tribunal's factual finding of continuity of business activities and retention of goodwill, and (b) the legal conclusion that the original firm was dissolved and the subsequent three‑partner firm is a different taxable person, the Court concluded there was succession within the meaning of section 25(4).
Holding and Implications
Reference answered in favour of the assessee.
Core holdings (as stated in the opinion):
- The Appellate Tribunal was correct in holding that there was no discontinuance of the business (i.e., there was continuity of the firm's business activities after Bhagwandas's severance).
- The Appellate Tribunal erred in holding that there was no succession to the petitioner's business as contemplated under section 25(4) of the Income‑tax Act; on the facts and law the Court found that succession did arise.
Direct implications for the parties (explicitly stated in the opinion):
- The reference is answered in favour of the assessee.
- Because the question of discontinuance was decided in favour of the department, there will be no order as to costs.
- The assessee is entitled to withdraw the sum of Rs. 100 deposited with the Appellate Tribunal.
The opinion applies existing authorities to the facts; it does not state that it is laying down a novel rule of law or creating a new precedent beyond the adjudication of the reference.
Ramaswami and Sarjoo Prosad, JJ.:— Under section 66(1) of the Income-tax Act the Appellate Tribunal has referred the following question of law for the determination of the High Court, viz.,
“whether on the facts and in the circumstances of this case the Tribunal was right in holding that there was neither a discontinuance in nor any succession to the appellant's business as contemplated by section 25(3) and section 25(4) of the Income-tax Act”.
The material facts leading up to this reference are not in dispute. The assessee was a firm named Jittanram Nirmalram constituted of four partners, viz. Rai Bahadur Ramchandram, Lakshmi Narain Bhadani. Vishnu Prasad Bhadani and Bhagwandas Bhadani. It is stated that on 9th November, 1942, Bhagwandas gave a notice severing his connection with the firm and commencing a new business of his own known as Nirmalram Hari Prasad. At the time when Bhagwandas gave the notice and severed his connection his share in the profits and assets was computed to be over one and a half lacs which amount was paid to him partly in cash and partly by allotting, to him a cloth shop previously carried on by the firm. It is conceded that after 9th November 1942 the firm continued to deal in grain, hardware, sugar, petrol, kerosene oil and also carried on money-lending business as before. The assessee claimed before the Income-tax Department that on account of the circumstance that Bhagwandas had severed his connection with the firm there was a discontinuance of business within the meaning of section 25(4) of the Income-tax Act. This argument was rejected by the Income-tax Officer. The assessee made an appeal to the Appellate Assistant Commissioner and also to the Income-tax Tribunal. His appeal was unsuccessful. At his instance the Appellate Tribunal has referred the question of law which has been formulated above.
When the case first came before the High Court Mr. Jain on behalf of the assessee conceded that he would not press the argument that there was discontinuance of business within the meaning of section 25(3) of the Income-tax Act. But the learned counsel laid stress on the argument that there was succession within the meaning of section 25(4) and the Income-tax authorities have mis-applied the law in refusing to grant relief to the assessee under section 25(4) of the Income-tax Act. The High Court was not however satisfied that the statement of the case was sufficient to enable it to determine the question. For this reason the High Court referred the case back to the Appellate Tribunal to make a further statement on two questions of fact, viz.—
(1) whether the business of the firm Jittanram Nirmalram as constituted before 9th November, 1942, was at any time charged under the provisions of the Income-tax Act of 1918 (Act VII of 1918);
(2) whether upon the facts proved the firm Jittanram Nirmalram was dissolved on 9th November, 1942, as a result of the severance of Bhagwandas Bhadani, or, in the alternative, whether there was no dissolution of the partnership but Bhagwandas Bhadani merely retired from being a partner of the firm.
We have now before us the additional statement of the case sent by the Appellate Tribunal and we have heard further arguments on behalf of the assessee and on behalf of the department on the manner in which the question referred to us should be answered.
It was contended by the learned Standing Counsel that there was no case of succession within the, meaning of the statute since Bhagwandas Bhadani having severed his connection with the firm was granted the Gaya cloth branch of the business partly in lieu of his share of the assets. The argument was stressed that in order to claim the benefit of section 25(4) there must be a succession to the entire quantum of business. It was pointed out that in the present case there was not only a change in the constitution of partnership but if the Gaya cloth branch did not constitute a portion of the business of the assessee firm after Bhagwandas Bhadani severed his connection with it. In support of his argument learned counsel relied upon In Re: The Commissioner of Income-tax, Burma v. N.N Firm in which it was held by the Rangoon High Court that one person succeeds another person in carrying on a business, profession, or vocation, when he succeeds his predecessor in carrying on the business as a whole and where a business was split up and thereafter another person carried on part of the business he did not succeed his predecessor in carrying on the business within section 26(2) of the Income-tax Act. The principle of that case cannot however be applied to the present case for the material facts are different. In the Rangoon case it was found not merely that the business was split up but also that there was no continuity in carrying on the business. It was actually found by the Income-tax authorities that there was an actual cessation of business for sometime before the new firm commenced to function. Upon these facts the Rangoon High Court was obviously right in concluding that there was no case of succession made out within the meaning of section 26(2) of the Income-tax Act. In the present case, however, it is not alleged on behalf of the department that there was no continuity in carrying on the business. For the application of section 26(2) or section 25(4) it is not essential in every case that the successor firm should have mathematically the same extent of business as the predecessor firm or that it should have taken over the same extent of trad 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 the predecessor firm, had carried on. In our opinion it is sufficient if there is substantial identify or similarity in the nature and extent of the activities carried on between the two firms. This principle is supported by a decision of this Court in Hassan Kassam v. Commissioner of Income-tax in which there was evidence to show that some of the assets and liabilities of the old firm were retained by one of the partners Kassam Manji and fresh capital was introduced by the sons into the new partnership firm. The same business was however carried on at the same place by a successor firm. In view of this circumstance the High Court rejected the argument that there was any alteration in the identity of the business or that there was no succession to the business which was being carried on by the deceased Kassam Manji under the old partnership. The same matter is put clearly by Bowlatt, J., in an English case James Shipstone and Sons, Ltd. v. Morris: “Another point Mr. Latter laid some stress on was this. He said you cannot be successor to a part of a trade. He cited Mr. Justice Bray's remarks in a case in the “Law Times”, the name of which I forget for the moment. I think that is quite sound when you get two parts of a trade, as an omnibus business separate from a tramway business, as it may very well be, but I do not think it means that if what is succeeded to is not the same extent of trade or even does not include a particular line of customers, it necessarily follows that there cannot be a successor to the trade, looking at it broadly. There must be two businesses, one left and the other taken. It does not mean to say you have only taken part of the business in the sense that what you have got is not quite so extensive as what went before. Coming to the facts of the present case the Appellate Tribunal has found that apart from the circumstance that Bhagwandas Bhadani was allotted the Gaya cloth branch the old business of Jittanram Nirmalram had continued retaining its good will and the balance of its assets and its own activities. To quote the language of the Appellate Tribunal
“there had been no break in or discontinuance in the business of the firm”.
The Income-tax Appellate Tribunal's order dated the 23rd February, 1948, also shows that in spite of the fact that Bhagwandas severed his connection with the firm the old business had continued on retaining its goodwill and the balance of its assets and its manifold activities in grain, hardware, sugar, petrol and kerosene oil and also its money-lending business. Upon the facts found by the Tribunal and reiterated in the statement of the case we think that there was substantial identity of the business which was carried on by the predecessor firm and by the newly constituted firm after Bhagwandas Bhadani had severed his connection. The argument of the learned Standing Counsel on this point must fail.
But the question formulated by the Tribunal cannot be answered in favour of the assessee until there is a further finding that the successor firm is a “different person” within the meaning of section 25(4) of the Income-tax Act. The material part of the section states:
“Where the person who was at the commencement of the Indian Income-tax (Amendment) Act, 1939 (VII of 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 (VII of 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…………”.
26(2) in this context. Section 26(2) states:
It is also necessary to consider the provisions of section
“Where a person carrying on any business, profession or vocation has been succeeded in such capacity by another person, such person and such other person shall, subject to the provisions of sub-section (4) of section 25, each be assessed in respect of his actual share, if any, of the income, profits and gains of the, previous year”.
On this question the additional statement submitted by the Appellate Tribunal contains a finding that the firm of Jittanram Nirmalram was not dissolved on 9th November 1942 but Bhagwandas Bhadani merely retired being a partner. On the basis of this finding it was argued by the learned Standing Counsel that there was no break or discontinuance in the existence of the firm Jittanram Nirmalram and there was no case of succession within the meaning of section 25(4) or section 26(2) of the Income-tax Act. The argument cannot possibly be accepted for in reaching the finding that the firm was not dissolved on 9th November 1942 the Appellate Tribunal has committed an error of law. On behalf of the assessee our attention was drawn to the notice given by Bhagwandas Bhadani, printed at page 1 of the paper book. From this notice it appears that there was a clause in the deed of partnership which empowered each of the partners to exercise the right of dissolving partnership at will. In accordance with this clause Bhagwandas Bhadani exercised his right of dissolving partnership on the Diwali day of Sambat 1999 corresponding to 8th November, 1942. Section 43(1) of the Partnership Act states that where the partnership is at will, the firm may be dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm. Section 43(2) provides that the firm is dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is mentioned, as from the date of the communication of the notice. Applying the section it is clear that in the present case the partnership was dissolved when Bhagwandas Bhadani gave notice and that the date of dissolution was 8th November, 1942. It was nevertheless contended by the learned Standing Counsel that even after the dissolution of the partnership all the partners with the exception of Bhagwandas Bhadani carried on the same old business retaining its goodwill and the balance of its assets and its own activities. Learned Standing Counsel based the argument on the finding of the Appellate Tribunal that there was no break or discontinuance of the business of the firm. The contention is that the newly registered firm of partners to the exclusion of Bhagwandas Bhadani was not a different entity but the same old entity continued and there was no warrant for the application of section 25(4) of the Income-tax Act. The case therefore resolves itself into the question whether the newly constituted in consisting of Ramchandram, Lakshmi Narain Bhadani and Vishnu Prasad Bhadani was a different entity to that of the old firm which consisted of these partners and also Bhagwandas Bhadani. It is true that the Appellate Tribunal has found that the old business continued retaining its goodwill and the balance of its assets and the activities of the new firm were in pram, hardware, sugar, petrol, kerosene oil and money-lending business just as the old firm continued its activities. It is also true as the learned Standing Counsel pointed, out that the new firm carried on the business in the name of the old firm, viz., Jittanram Nirmalram. But these considerations are not very material in deciding whether the new firm was an entity different in character from that of the predecessor firm Jittanran Nirmalram. As already observed the old firm of Jittanram Nirmalram stood dissolved from 9th November 1942 as a, result of the notice given by Bhagwandas Bhadani. The new firm consisting of the remaining partners must have been registered on a subsequent date and though it was named Jittanram Nirmalram it must be held to be a “different person” since a new partnership of three persons is a different entity from a dissolved partnership of four persons though three of the partners may be common. It is necessary to remember in this connection that a partnership is not in English law or in Indian law a single juristic person and a firm as such has no legal personality or existence. The partners merely carry on the business both as principals and as agents for each other within the scope of the partnership business. A firm's name is a mere expression and not a legal entity although for procedure and convenience it may be used for the sake of suing and being sued. But in the context of the Income-tax Act a partnership as such is a distinct legal entity. Section 3 which deals with charge of income-tax states that income-tax shall be charged for any year…………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 members of the association individually. Reference should also be made to section 48 which mentions
“any individual, Hindu undivided family, company, local authority, firm or other association of persons or any partner of a firm or member of an association individuality”.
Section 55 which is the charging section as regards super-tax makes reference to any individual. Hindu undivided family, company local authority, unregistered firm or other association of persons not being a registered firm, or the partners of the firm or members of the association individually. On the examination of these provisions it is clear that for the purpose of income-tax a firm is regarded as having its separate juristic existence apart from the partners who carry on the business. This view finds support from the decision of the Madras High Court in Commissioner of Income-taw, Madras v. Karuppiah in which a partner carried on business of partnership after the dissolution and it was contended on his behalf that there was succession to the business within the meaning of section 26(2) of the Income-tax Act. The contention was accepted by the High Court and it was held that for the purpose of assessment of income-tax, a firm and its partners were different persons, and a person who carried on a business as sole owner after dissolution of partnership did so as a different person from the firm. The same principle is laid down in Income-tax Commissioners for City of London v. Gibbs in which the question arose whether partnership of four stockbrokers who took in a fifth partner, ceased to carry on business and was succeeded by the partnership of five within the meaning of sub-rule (1) of rule 9, schedule D to the Income-tax Act, 1918, which provided that if a person charged under schedule D ceased within the year of assessment to carry on the trade in respect of which the assessment was made and was succeeded by another person, the commissioners shall adjust the assessment as directed. It was held by the House of Lords reversing the decision of the Court of Appeal that though in English law a partnership was not a single juristic person, the scheme of the Income-tax legislation treated the partnership as a legal entity for the purpose of assessing revenue and there was succession to the business within the meaning of rule 9, sub-rules (1) and (2). Applying the principle of these authorities it is clear that in the present case there has been succession to the business within the ambit of section 25(4) of the Income-tax Act and the argument on behalf of the assessee on this part of the case must prevail.
For the reasons we have expressed we hold that the Tribunal was right in holding that there was not a discontinuance of the business but that the Tribunal was not right in holding that there was no succession to the petitioner's business as contemplated under section 25(4) of the Income-tax Act.
The reference is accordingly answered in favour of the assessee. But since the question of discontinuance has been answered, in favour of the department there will be no order as to costs. The assessee is entitled to withdraw the amount of Rs. 100 which he has deposited with the Appellate Tribunal.
S.H
Reference answered.section 25(3) and section 25(4)
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