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Kotha Govindarajulu Chettiar v. Commissioner Of Income-Tax
Summary of the Opinion (Five-Judge Bench) — Succession and Section 25(4)
Factual and Procedural Background
The assessee was the manager of a Hindu joint family that carried on a money-lending business. The joint family comprised an uncle and two nephews. A partition of the family was effected on 20 April 1940, and a formal deed reflecting the separation was executed on 10 May 1940. Although the family members had equal shares as joint-family members, the parties agreed that the uncle (the managing member) would have a larger share in the business in the ratio 26:19:19.
For the accounting year 1939–40 the Income-tax Officer assessed the family's total income at Rs. 46,127 (Rs. 44,420 derived from the business). By consent the year was treated as commencing 13 April 1939 and ending on 20 April 1940 so the assessment period coincided with the date of partition. The total tax under the assessment was Rs. 6,129, which the Officer directed should be recovered equally from each of the three groups into which the family had been divided.
The assessee, as managing member, objected. He claimed that the partnership formed after partition had "succeeded" to the business of the joint family within the meaning of Section 26(2) of the (then) Act and that the joint family was therefore entitled to relief under Section 25(4) (relief designed to prevent double assessment on transition between the Income-tax Act, 1918 and the Income-tax Act, 1922 and its amendment). The Income-tax Officer rejected that contention, relying upon this Court's decision in Thontepu Chinna Pullayya v. Commissioner of Income-tax (Madras) ('36) 9 I.T.C. 377. The appellate Assistant Commissioner and the Income-tax Appellate Tribunal (Calcutta Bench) upheld the rejection.
Because reported cases disclosed a conflict of view among High Courts, the Tribunal referred the following question to this Court:
Whether in the circumstances of the case the assessees are entitled to the relief contemplated by Section 25(4) of the Act?
The reference was placed before a Bench of five Judges to reconsider Thontepu Chinna Pullayya and an earlier three-Judge decision of this Court.
Legal Issues Presented
- Whether, where members of a Hindu joint family separate and thereafter carry on the family business in partnership, the partnership can be regarded as having "succeeded" to the business of the joint family within the meaning of Section 26(2), thereby entitling the original family (the first-mentioned person) to the relief under Section 25(4) of the Act?
Arguments of the Parties
Assessee's Arguments
- The partnership formed after partition succeeded to the business of the joint family within the meaning of Section 26(2).
- Consequently, the joint family (the outgoing entity) was entitled to the relief under Section 25(4), preventing double taxation for the transitional period.
Income-tax Officer / Commissioner (Respondent) Arguments
- The Income-tax Officer relied on the Court's prior decision in Thontepu Chinna Pullayya, which held that there was no change of ownership and therefore no "succession" within the meaning of the relevant provision; accordingly relief under Section 25(4) could not be given.
- On behalf of the Commissioner it was suggested that Section 25(4) could not apply to a joint Hindu family which had ceased to exist because of partition; this contention was raised in argument before the Court.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Thontepu Chinna Pullayya v. Commissioner of Income-tax, Madras ('36) 9 I.T.C. 377 | Held that, on facts where family members separated and carried on business in partnership, there was no change of ownership; assessment should be made under Section 25A(2) (i.e., as if no separation had taken place). | This Court reconsidered that decision on a five-Judge Bench and expressed dissent from its conclusion; the opinion finds an "obvious fallacy" in treating the post-partition firm as not amounting to a change of ownership and therefore rejects Thontepu's application to the present facts. |
| Jupudy Kesava Rao v. Commissioner of Income-tax, Madras ('36) 23 A.I.R. 1936 Mad. 67 | Interpreted "succession" to connote a transfer of ownership; held that where the entity continues by survivorship (death of a member) there is no succession by another person within the section. | The Court explained the factual foundation of Jupudy (survivorship, not transfer) and explicitly dissented from extending its reasoning to cases of partition leading to a partnership. The five-Judge Bench gave reasons for rejecting Jupudy's application to the partition-and-partnership situation. |
| Commissioner of Income-tax, Madras v. Karuppiah Pillai ('41) 28 A.I.R. 1941 Mad. 255 (Full Bench) | Considered Jupudy and noted that Jupudy was based on survivorship, observing that if that was the sole ground the conclusion would not be open to question as to the applicability of Section 26(2). | The Court cited this Full Bench decision in explaining the limited foundation of Jupudy's reasoning. The present Bench nevertheless gave reasons to dissent from the earlier three-Judge decisions when applied to partition-into-partnership situations. |
| Firm Nihal Chand Kishori Lal ('27) 14 A.I.R. 1927 All. 397 (Allahabad) | The Allahabad High Court held that where members of a Hindu joint family convert themselves into a registered firm, the partnership must be deemed to be the successor of the joint family under Section 26. | The Supreme Court noted this decision as being in conflict with the Madras line; it referred to the divergence but did not examine the Allahabad judgment in detail, preferring to state its own reasons for dissenting from the Madras decisions. |
| Beli Ram Bros., Lahore v. Commissioner of Income-tax, Punjab, N.W.F. and Delhi Provinces ('35) 22 A.I.R. 1935 Lah. 681 | Lahore High Court decision holding that a firm formed from joint-family members is the successor under Section 26. | The Supreme Court recorded this as part of the conflicting authorities and stated that it was unnecessary to examine those Lahore judgments in detail because the Court gave its own reasons for dissenting from the earlier Madras cases. |
| Mitter Chand Lakshmidas v. Commissioner of Income-tax ('37) 24 A.I.R. 1937 Lah. 172 | Another Lahore decision to like effect (partnership deemed successor). | Noted by the Court as part of the conflicting High Court decisions; the Supreme Court relied on its own reasoning rather than analyzing these judgments in detail. |
| Ram Raksh Mal and Sons, Ltd. v. Commissioner of Income-tax, Punjab ('37) 24 A.I.R. 1937 Lah. 830 | Lahore High Court decision treating a firm formed by former joint-family members as successor to the family business. | Recorded as a conflicting authority; Court gave its own reasons for dissenting from the Madras decisions instead of entering into detailed examination of this line. |
| Commissioner of Income-tax, Bombay v. Jesinghbhai Ugarchand ('38) 25 A.I.R. 1938 Bom. 350 | Bombay High Court followed this Court's decision in Thontepu Chinna Pullayya on similar facts, without expressing its own independent opinion. | The Supreme Court noted that the Bombay High Court followed Thontepu (without its own view); the five-Judge Bench nonetheless felt it appropriate to correct what it regarded as an erroneous decision. |
Court's Reasoning and Analysis
The Court began by explaining the statutory context and the purpose of Section 25: under the Income-tax Act of 1918 tax was levied on income actually earned in the year of assessment; the 1922 Act changed the computation so that tax in the year of assessment is calculated on income of the previous year. Section 25 was inserted to prevent injustice (double assessment) to persons assessed under the 1918 Act when they ceased to be chargeable under the 1922 Act. Subsection (4) of Section 25 deals with cases where a person has "succeeded" to a business, profession or vocation.
The Court analysed the concept of "succession" as used in the statutory provisions and distinguished between two factual situations treated in earlier decisions:
- Cases of survivorship (e.g., death of a family member) where the assessing entity remains effectively the same joint family; and
- Cases of partition followed by formation of a partnership where the business is carried on by an entirely different legal entity (the firm) rather than the joint family.
The Court accepted the principle articulated in Jupudy Kesava Rao that "succession" connotes transfer of ownership where that was the factual situation (for example, survivorship does not create succession by another person). However, it held that the logic of Jupudy and of Thontepu was being inappropriately extended to cases of partition-into-partnership.
Concretely, the Court reasoned that when a Hindu joint family separates and the members continue the family business in partnership, there is a change of ownership: the business ceases to be owned by the joint family and becomes owned by the firm, which is an entirely different entity. The mere fact that the same persons divide profits among themselves in the same proportions does not negate the change in the owning entity. Because that change constitutes "succession" within the meaning of the statutory provision, Section 25(4) is applicable and the outgoing entity (the joint family) is entitled to the statutory relief.
The Court also rejected the Commissioner's suggestion that Section 25(4) could not apply to a joint Hindu family which had ceased to exist as a result of partition: the Court found that contention unsustainable. It noted that Section 25A required the family to be regarded as joint for the purpose of assessment notwithstanding partition, and that this must include the grant of relief under Section 25(4) where succession (as properly understood) has taken place.
Holding and Implications
Holding: The assessees are entitled to the relief contemplated by Section 25(4) of the Act.
Implications and direct consequences as stated in the opinion:
- The Court answered the referred question in the assessees' favour: the partnership formed after partition is to be regarded as having succeeded to the business for the purposes of Section 25(4).
- The assessees succeeded in the reference and were awarded costs. The Court fixed the advocate's fee at Rs. 250.
- The Court expressly dissented from the earlier three-Judge decisions in Jupudy Kesava Rao and Thontepu Chinna Pullayya insofar as those decisions treated partition-into-partnership situations as not amounting to succession; the five-Judge Bench corrected that view on the particular point of law addressed.
Note: The Court recorded and considered conflicting High Court authorities (Allahabad, Lahore, Bombay) but chose to give its own reasons for reaching the conclusion that where the joint family business becomes a firm, there is a change of ownership constituting succession within Section 26(2), thereby attracting Section 25(4) relief.
1. The assessee was the manager of a Joint Hindu family the members of which carried on a money-lending business. On 20th April 1940 a partition was effected, but the erstwhile coparceners decided to continue the business in partnership. A formal deed embodying the terms of separation was executed on 10th May 1940. The joint family consisted of an uncle and two nephews. Although as members of the joint family they had equal shares in the business, it was agreed that the uncle, who had been the managing member, should have a larger share than each of his nephews. The ratio was to be 26:19:19. For the year of account (1939-40) the Income-tax Officer calculated that the income of the family was Rs. 46,127, of which Rs. 44,420 had been derived from the business. By consent the year of account was deemed to commence on 13th April 1939 and to end on 20th April 1940. The extra days were added in order that the end of the financial year should coincide with the date of the partition. The total tax due on this assessment was Rs. 6129, which the Income-tax Officer directed should be recovered equally from each of the three groups into which the family had been divided. The assessee was the managing member and as such he objected to the assessment. The business had been assessed under the Income-tax Act of 1918. He claimed that the partnership had succeeded to the business of the joint family within the meaning of Section 26 (2) of the present Act, and therefore the joint family was entitled to the relief contemplated by Section 25 (4). Belying on the decision of this Court in Thontepu Chinna Pullayya v. Commissioner of Income-tax, Madras('36) 9 I.T.C. 377 the Income-tax Officer rejected the contention. The judgment in that case rendered full support for his action. He was asked to ignore the judgment because other High Courts had taken a different view. As he was functioning within the jurisdiction of the Madras High Court, the Income-tax Officer very properly considered himself to be bound by that case. The appellate Assistant Commissioner upheld the decision of the Income-tax Officer, as did the Income-tax Appellate Tribunal, Calcutta Bench. At the request of the assessee and, in view of the conflict disclosed by the reported cases, the tribunal referred the following question for the opinion of this Court:
Whether in the circumstances of the case the asses-sees are entitled to the relief contemplated by Section 25(4) of the Act?
The reference has been placed before a Bench of five Judges as it calls for the reconsideration of the judgment in Thontepu Chinna Pullayya v. Commissioner of Income-tax, Madras('36) 9 I.T.C. 377 and of an earlier case of this Court, each of which was decided by a Bench of three Judges. Before entering upon a discussion of these cases, the position under the Act of 1918 and the position under the Act of 1922, as now amended, should be stated. Under the Act of 1918, the tax was levied on the income actually earned in the year of assessment. The Act of 1922 made a great change. It provided that the tax levied in the year of assessment should be calculated on the income earned in the previous year. In order to prevent the injustice of the double assessment of a person who was assessed under the Act of 1918 when he ceased to be chargeable under the Act of 1922, Section 25 was inserted in the new Act. Subsection (3) of Section 25 deals with the case where a business, profession or vocation is discontinued and Sub-section (4) the ease where a person has succeeded to a business, profession or vocation. In the present case we are concerned only with the question of succession. Subsection (4) reads as follows:
Where the person who was at the commencement of the 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 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 such assessment, a refund shall be given of the difference.
Therefore if the partnership with which this case is concerned can be regarded as having "succeeded" to the business of the joint family, the members of the family are entitled to the benefit of Section 25 (4). A joint family was a taxable entity under the Income-tax Act of 1918 and continues to be so under the later Act. Section 3 of the Act of 1922 says that the tax shall be charged 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. The joint family of which the assessee was the head was a taxable entity under the Act of 1918 and continued to be such under the Act of 1922 until the partition in 1940. Section 2 (9) of the Act of 1922 states that the word "person" includes a Hindu undivided family and a local authority.
2. The earlier case on which Thontepu Chinna Pullayya v. Commissioner of Income-tax, Madras('36) 9 I.T.C. 377 is based is Jupudy Kesava Rao v. The Commissioner of Income-tax, Madras('36) 23 A.I.R. 1936 Mad. 67. There an undivided Hindu family consisted of the assessee, his wife and his father. They carried on a family business and after the father's death the assessee continued it. The question was whether it could be said that the assessee had succeeded to the business within the meaning of Section 2G (2). It was held that he was not within the section. In delivering the judgment of the Court, Madhavan Nair J. who was officiating as the Chief Justice, observed:
The terms 'the person carrying on any business, profession or vocation has been succeeded in such capacity by another person' may well suggest that what is contemplated is merely succession in the management of business by another person; but obviously that cannot have been the intention of the Legislature. It appears to us that the word 'succession' as used in the section connotes a transfer of ownership and the person who succeeds another must have 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. If this view is correct as we think it is, then it seems fairly clear that the undivided Hindu family which was carrying on business has not been 'succeeded' in such capacity by the petitioner, as the petitioner was himself in part the owner of the property already, and as such there has been no transfer of ownership in the business as he has become entitled to it by survivorship.
As the Full Bench which decided Commissioner of Income-tax, Madras v. Karuppiah Pillai ('41) 28 A.I.R. 1941 Mad. 255 pointed out, the decision in Jupudy Kesava Rao v. The Commissioner of Income-tax, Madras('36) 23 A.I.R. 1936 Mad. 67 was that it was not a matter of succession by another person at all. It was a matter of survivorship. The family remained joint notwithstanding the' death of the member. In no sense of the word could it be said that there was succession or change in the identity of the assessee. If the decision in Jupudy Kesava Rao v. The Commissioner of Income-tax, Madras('36) 23 A.I.R. 1936 Mad. 67 that Section 26 (2) did not apply had been based on this ground without reference to transfer or change of ownership, the judgment would not be open to question so far as the application of Section 26 (2) was concerned. The entity for assessment during the lifetime of the father was the joint family and after his death the entity still remained the joint family, then represented by the assessee as the only male member. As the entity remained the joint family, there could be no question of succession and therefore Section 26 (2) could not apply.
3. In Thontepu Chinna Pullayya v. Commissioner of Income-tax, Madras ('36) 9 I.T.C. 377 the facts were similar to the facts of the present case. The members of a Hindu undivided family separated and thereafter the members continued the family business in partnership. The question was whether the assessment of the total income of the family up to the date of separation should be made on the firm as successors of the undivided family within the meaning of Section 26 (2) or on the members as if no separation or partition had taken place according to Section 25A (2), Income-tax Act. After quoting the passage which we have quoted from the judgment of Madhavan Nair, O. C.J., in Jupudy Kesava Rao v. The Commissioner of Income-tax, Madras('36) 23 A.I.R. 1936 Mad. 67, Beasley C.J., with whom the other members of the Court agreed, said:
Applying the test laid down there to the present case, there seems to me to have been no change of ownership at all. All the members of the new firm were members of the undivided family and they now have the same share in the business of the firm as they had in the family business at the date of the partition. Applying that case to this, the answer to the question propounded must be that the assessment must be in accordance with Section 25A (2), Income-tax Act.
There is here an obvious fallacy. When a Hindu joint family separates and its members carry on the family business in partnership, there is a change in ownership. The business is no longer owned by the joint family but by the firm, an entirely different entity, and the fact that as before the profits continue to be divided equally between the same persons makes no difference. When such a change takes place, there is succession within the meaning of Section 26 (2). That being the case, the assessee here is entitled to the benefit of Section 25 (4). On behalf of the Commissioner of Income-tax, it has been suggested that Section 25 (i) cannot apply to a joint Hindu family which has ceased to exist as the result of partition, but it is obvious that this contention is unsustainable. Under Section 25A the assessee's family had, notwithstanding the partition, to be regarded as joint for the purpose of assessment, which must include the grant of relief under Section 25(4).
4. The High Courts whose judgments conflict with Thontepu Chinna Pullayya v. Commissioner of Income-tax, Madras('36) 9 I.T.C. 377 are Allahabad and Lahore. In In the matter of Firm Nihal Chand Kishori Lal('27) 14 A.I.R. 1927 All. 397, the Allahabad High Court held where the members of a Hindu joint family who have carried on business as a family convert themselves into a registered firm the partnership must be deemed to be the successor of the joint family within the meaning of Section 26. There are three decisions of the Lahore High Court to the same effect: Beli Ram Bros., Lahore v. Commr. of Income-tax, Punjab, N.W. F. and Delhi Provinces('35) 22 A.I.R. 1935 Lah. 681, Mitter Chand Lakshmidas v. Commissioner of Income-tax('37) 24 A.I.R. 1937 Lah. 172 and Ram Raksh Mal and Sons, Ltd. v. Commissioner of Income-tax, Punjab('37) 24 A.I.R. 1937 Lah. 830 It is not necessary to examine these judgments in detail as we have given our own reasons for dissenting from what was said in Jupudy Kesava Rao v. The Commissioner of Income-tax, Madras ('36) 23 A.I.R. 1936 Mad. 67 and Thontepu Chinna Pullayya v. Commissioner of Income-tax, Madras('36) 9 I.T.C. 377.
5. The same question was raised in the Bombay High Court in Commissioner of Income-tax, Bombay v. Jesinghbhai Ugarchand ('38) 25 A.I.R. 1938 Bom. 350 On the ground that it was not desirable that conflicting decisions under the Income-tax Act, which applies to the whole of British India, should be given by different High Courts on exactly similar facts the Bombay High Court followed the decision of this Court in Thontepu Chinna Pullayya v. Commissioner of Income-tax, Madras ('36) 9 I.T.C. 377 without expressing any opinion of its own. The attention of the Bombay High Court was apparently not drawn to the conflict which already existed. We agree, of course, that it is very desirable that conflict should be avoided as far as possible. Otherwise it will mean that the tax will not be levied on the same basis on all persons who are subject to the provisions of the Act. Conflict cannot, how- ever, always be avoided and it is just as desirable that an erroneous decision should be corrected when the opportunity occurs. For the reasons given our answer to the question referred is that in the circumstances of the case the assessees are entitled to the relief contemplated by Section 25 (4) of the Act. The assessees have succeeded and will have their costs. We fix the advocate's fee at Rs. 250.
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