1. The questions propounded are:

(a) Whether on the facts of this case the assessee firm did succeed to the business of the individual partners within the meaning of Section 26(2) of the Indian Income-tax Act? and

(b) whether a firm constituted under a registered deed of partnership of which one member is a firm is not entitled to be registered as a firm for the purpose of income-tax merely because while specifying the individual share of the profits and losses the instrument does not specify the shares inter se of the partner firm.

2. Prior to the 31st August, 1933, a firm called M.K. Naicker & Sons was supplying labour to the Madras Port Trust under a contract which expired on the 31st August, 1933, and M. Raju Naicker and R. Govindarajulu Naicker in partnership had a similar contract with the Madras Port Trust which also expired on the same date. The labour under the contract was supplied by the former partnership M.K. Naicker & Sons to two godowns belonging to the Madras Port Trust and by the latter partners to two other godowns also belonging to the Madras Port Trust. Until 1933-1934 the family represented by M.K. Naicker & Sons which was an undivided family and the firm consisting of M. Raju Naicker and R. Govindarajulu Naicker were separately assessed. The managing member of the former firm had for many years been supplying labour to the Madras Port Trust under similar contracts. When the before-mentioned contracts 'were about to expire, the Port Trust, contrary to their previous practice, decided to call for tenders for the supply of labour for a period of five years from September, 1933, the previous practice having been to grant contracts without calling for tenders. M.K. Naicker & Sons and the other partnership decided to tender jointly for this contract in pursuance of an informal agreement entered into between them on 3rd July, 1933, in which it was agreed that if the tender should be accepted by the Port Trust, 50 per cent, of the profits and losses would be allotted to M.K. Naicker & Sons, 25 per cent, to Raju Naicker and 25 percent, to Govindarajulu Naicker and that an acceptance of the tender a detailed partnership agreement would be executed and registered. These persons succeeded in getting the contract and accordingly jointly supplied labour to the four godowns of the Madras Port Trust which they had previously done individually and on the 21st December, 1934, executed a deed of partnership in respect of a firm styled M.K. Naicker & Co., the present petitioners M.K. Naicker & Sons, consisting of four partners, being called the partners of the first part and Raju Naicker and Govindarajulu Naicker partners of the second and third part respectively, and their shares in the profits and losses were specified as follows: M.K. Naicker & Sons 7 annas in the rupee; Raju Naicker 5 annas in the rupee and Govindarajulu Naicker 4 annas in the rupee. Under the document the partners who are described as three in number agreed to carry on the labour supply to the Madras Port Trust in pursuance of an agreement made by M.K. Naicker & Co., with the latter dated 5th September, 1933. Subsequently M.K. Naicker & Co. applied to the Income-tax Officer for the registration of the firm under Section 26-A of the Act filing the instrument of partnership already referred to dated the 21st December, 1934. This application was refused on the ground that the instrument of partnership did not specify the shares of the partners in the partnership. This point will be dealt with when we come to consider question (b) and as regards question (a) some further facts must be stated and they are that for the assessment of the year 1934-1935. M.K. Naicker & Sons filed a return showing the income of the labour supply business carried on by them during the period 1st January, 1933 to 31st August, 1933, the date on which their independent contract with the Port Trust expired, contending that the labour supply business carried on by them had been discontinued on 31st August, 1933 and therefore claiming the relief provided by Section 25(3) of the Act. Raju Naicker and Govindarajulu Naicker made a similar return and claim. The Income-tax Officer held that there was no discontinuance of the business within the meaning of Section 25(3) of the Act but that there was a "succession" within the meaning of Section 26(2) of the Act and held that the firm of M.K. Naicker & Co. (the assessees here) was liable to be taxed in respect of the profits earned by M.K. Naicker & Sons and the partnership of Raju Naicker and Govindarajulu Naicker. He accordingly required M.K. Naicker & Co. to make a return of its income for the tax year 1934-1935. The firm filed a return declaring a loss amounting to Rs. 6,475-13-7. Since the assessee firm's contract with the Port Trust commenced only in September, 1933, they required "September to August" to be treated as their "previous" year for the purposes of the assessment. This claim was allowed but the Income-tax Officer held that for the year 1934-1935, M.K. Naicker & Co. was liable to be assessed on the profits of M.K. Naicker & Sons, and the partnership of Raju Naicker and Govindarajulu Naicker for the period January, 1933 and 31st August, 1933 and he determined the profits of this period to be Rs. 23,064.

3. The facts have been found by the Income-tax Commissioner as follows : (a) The individual partners were separately carrying on the business of supplying labour to the Madras Port Trust until 31st August, 1933; (b) when the Port Trust invited tenders for the supply of labour from 1st September, 1933, the partners of the firm tendered jointly and secured the contract; (c) from 1st September, 1933, the partners continued to carry on the same business (supply of labour to the Port Trust) jointly in accordance with the agreement dated 5th September, 1933; (d) most of the employees of the old business and the goodwill of the individual partners as suppliers of labour are now used for the joint business of the three partners in the same line. From 1st September, 1933, the individual partners have not been carrying on the business of supplying labour separately either to the Port Trust or to any other person. The Commissioner is of the opinion that the facts before stated by him establish that the business carried on by M.K. Naicker & Co., is identical with the business carried on by M.K. Naicker & Sons and Raju Naicker and Govindarajulu Naicker individually, that it is in continuation of the individual business of the partners, that the effect of the joint contract of the partners with the Port Trust is that their separate businesses became amalgamated into one business, that prior to 1st September, 1933, the business of supplying labour to the Port Trust consisted of two units, one owned by M.K. Naicker & Sons and the other by Raju Naicker and Govindarajulu Naicker, that after 1st September took these units are owned by M.K. Naicker & Co., no one having any exclusive ownership of any one unit, that there is thus a transfer of ownership of the separate business from the partners concerned to the firm and that this amounts to "succession" within the meaning of Section 26(2) of the Act; and in support of this opinion he relies upon Best & Co. v. Commissioner of Income-tax, Madras (1932) 63 M.L.J. 15 : I.L.R. 55 Mad. 832 : 6 I.T.C. 92. Taking question (a) first, the relevant section is Section 26 (2) of the Act which reads as follows:

Where at the time of making assessment under Section 23, it is found that the person carrying on any business, profession or vocation has been succeeded in such capacity by another person, the assessment shall be made, on such person succeeding, as if he had been carrying on the business, profession or vocation throughout the previous year, and as if he had received the whole of the profits for that year.

4. The requisites of that sub-section, therefore, are that there must be a business in existence prior to the date of an assessment being made and that on the date of the making of the assessment it must be carried on by a different person to the person who carried it on prior to the date of the assessment, that is to say, the business must be the same but the person carrying it on must be different. For the Commissioner of Income-tax, Bell v. National Provincial Bank of England, Ltd. (1904) 5 T.C. 1, was relied upon. The question there was whether the respondent Bank which acquired by purchase the business of the County of Stafford Bank succeeded to the business of the latter Bank within the meaning of Rule 4 of the 1st and 2nd cases of schedule D, Section 100 of the Income-tax Act of 1842, the material part of which is similar to the sub-section in question here. On page 10 the Master of the Rolls says:

It seems to me that the words of Rule 4 are plain, and that if the National-Provincial Bank had not existed, but some new company had been formed to take over for the first time the business of the Stafford Bank, there would have been a case directly falling in terms within the words of the 4th Rule : "If any person shall have succeeded to any trade, manufacture, adventure or concern." In the case I put up a new company formed for the first time and acquiring the Stafford Bank, that would clearly be a case of a person succeeding to a concern. What difference does it make that that person who succeeds to the concern should himself already have an existing business? Does he the less succeed to the new business because he had the old one? It seems to me certainly not. He had the old one before. He has the old one still and the new one in addition and to that new one, it seems to me, he has-succeeded.

5. It was accordingly held that there had been a succession within the meaning of the 4th Rule. There, there was a definite existing business, namely, the respondent Bank. There was also a definite and distinct business, the Stafford Bank. The former Bank became the owners by purchase of the latter. Therefore, the business of the latter was at the date of the assessment being carried on by a different body, namely, the Respondent Bank and, as the Master of the Rolls put it, it had clearly succeeded to that business. The present case, in our opinion, is distinguishable from Bell v. National Provincial Bank of England, Ltd. (1904) 5 T.C. 1, for the following reason, namely, that at the time of the purchase of the Stafford Bank it was an existing business which could and probably would have been continued under the same ownership for years. Here, the facts are entirely different and for this purpose the nature of the businesses which were going on prior to the date of the assessment in question here must be examined. Those businesses were to supply cooly labour to certain godowns belonging to the Madras Port Trust and were being conducted under contracts of specified durations. There is nothing to show that on the termination of any contract the next contract was bound to go to either of the firms carrying on these businesses which it is important to note existed solely for the purposes of those contracts, because it is not suggested that either of the partnerships carried on any other businesses in connection with the supply of labour except that M.K. Naicker & Sons had a small contract business. In our view, these businesses must be held to have terminated on the dates of the expiry of each contract, that is to say, the business of M.K. Naicker & Sons terminated on the 31st August, 1933, and that of Raju Naicker and Govindarajulu Naicker on the same date. Reference was made by the Commissioner of Income-tax to the goodwill of these firms but we were unable to get from Mr. Patanjali Sastri any helpful reply in answer to questions put by us as to what could possibly be the goodwill attaching to such businesses. Unlike the case of the Stafford Bank, there was nothing which either of these partnerships could sell to any one for example in August, 1933, or to take an earlier date July when these two entities informally agreed to make a joint tender for the contract in question. They had no contract lasting beyond 31st August, 1933, to sell, even supposing the Madras Port Trust would permit them to do so. It is conceded also that M.K. Naicker & Co. did not take over any of the assets or liabilities of the businesses carried on by M.K. Naicker & Sons and Raju Naicker and Govindarajulu Naicker. Whereas in Bell v. National Provincial Bank of England, Ltd. (1904) 5 T.C. 1, the latter took over Stafford Bank's existing business and its clients and also its premises. The Income-tax Officer's main reason for the assessment is that these persons had for several years possessed the monopoly of supplying labour to the Port Trust and finding that their monopoly was about to come to an end owing to the adoption by the Port Trust of the policy of inviting tenders and in order to secure continuity for their business they entered into a partnership and put in their tender for the contract and as they were successful they found themselves in a position to continue the business without a break, It is quite correct that they continued to supply labour to the godowns of the Madras Port Trust as before and that what they did after 31st August, 1933, was the business of the same nature as before. But in our view what the section requires is that it should be the same business and not business of the same nature and we think that this is the mistake which has been made by the Commissioner of Income-tax when he finds that "the partners continued to carry on the same business (supply of labour to the Port Trust)". This is not a case like Best & Co. v. Commissioner of Income-tax, Madras (1932) 63 M.L.J. 15 : I.L.R. 55 Mad. 832 : 6 I.T.C. 92. There Best & Co. were carrying on a number of businesses in their own name and as proprietors of concerns under different names. Amongst the latter was the Eagle Rolling Mills. This business they sold to a new company floated for acquiring it as a going concern and it was held that the new company had succeeded Best & Co., within the meaning of Section 26(2) of the Act. That was a plain case of an existing company being purchased by another as in Bell v. National Provincial Bank of England, Ltd (1904) 5 T.C. 1. In our view, the two businesses of M.K. Naicker & Sons and Raju Naicker and Govindarajulu Naicker came to an end on the 31st August, 1933, and thereafter a new partnership (M.K. Naicker & Co.) was started to carry on a business of a similar nature. There was therefore no "succession" to a business as is required by Section 26(2) of the Act.

6. There remains question (b) to be considered. The procedure relating to registration of firms is laid down in Section 26-A of the Act which is as follows:

(1) Application may be made to the Income-tax Officer on behalf of any firm, constituted under an instrument of partnership specifying the individual shares of the partners, for registration for the purposes of this Act and of any other enactment for the time being in force relating to income-tax or super-tax.

(2) The application shall be made by such person or persons and at such times and shall contain such particulars and shall be in such forms, and be verified in such manner, as may be prescribed; and it shall be dealt with1 by the Income-tax Officer in such manner as may be prescribed.

7. It is the former sub-section that is in question here. The application was refused on the ground that the individual shares of the partners were not specified in the instrument of partnership. The instrument of partnership as has already been stated treats the partnership of M.K. Naicker & Sons which was made up of four partners as one of the three partners in the firm of M.K. Naicker & Co., and to this partnership a 7 annas share in the rupee in the profits and losses is given. The contention of Income-tax authorities is that as M.K. Naicker & Sons consists of four partners, the shares of each of them should have been set out in the partnership deed (Ex. C). The shares of the partners in M.K. Naicker & Sons were each Re. 0-1-9 totalling 7 annas and as that partnership had previously been registered, a reference to the instrument relating to it, a copy of which was filed with the Income-tax authorities, would show this. Not only would the Income-tax authorities be aware of what the shares of the partners were--and it is conceded that they did not know--but the application for registration itself set out the individual shares of the partners of M.K. Naicker & Sons. Notwithstanding this knowledge the Income-tax Officer--and his action has been upheld by the Commissioner--presumably took the view that he was rigidly bound by the words of the section and that as in the instrument of partnership these individual shares were not given, registration must be refused. The object in requiring this information is in order that the Income-tax authorities may determine what the profit received by each of the partners from the partnership profits is and in order to prevent the profits from being distributed to the partners otherwise than in accordance with the shares of the partners as shown in the instrument of partnership registered under the Act and to prevent any partner returning his income below its real amount. We think that this is a hard case in view of the fact that the Income-tax authorities were really aware of the shares of the partners; but the words of the sub-section do not seem to us to permit of any elasticity of construction. Section 28(2) also points to the same conclusion. The individual shares of the partners must be specified in the instrument of partnership. They were not. That being so, the Income-tax Officer could refuse registration on that ground. The answer to this question, therefore, must be in the negative.

8. As regards cost, as the main contention has been upon question (a) and the assessees have succeeded, in our opinion they are entitled to the costs which we fix at Rs. 250. The Rs. 100 deposited by the assessees is ordered to be refunded to them.