Commissioner of Income-Tax, West Bengal vs A. W. Figgies and Co., and Others

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 77 of 1952

Decision Date: 24 September 1953

Coram: Mehr Chand Mahajan, Natwarlal H. Bhagwati

The matter before the Supreme Court was titled Commissioner of Income-Tax, West Bengal versus A. W. Figgies & Co. and others, and the judgment was delivered on 24 September 1953. The bench comprised Justice Mehr Chand Mahajan, joined by Justice Natwarlal H. Bhagwati. The petitioner was the Commissioner of Income-Tax for West Bengal and the respondents were A. W. Figgies & Co. together with additional parties. The case is reported in the 1953 volume of the All India Reporter at page 455 and also appears in the 1954 Supreme Court Reports at page 171, with several subsequent citations. The operative statutory provision was section 25(4) of the Income-Tax Act (XI of 1922). The appellant sought relief under this provision, alleging that the firm had paid income-tax under the 1918 Act, later converted into a limited company in 1947, and that changes in partnership composition in 1939 and 1947 should not preclude the claim for relief. The civil appeal was numbered 77 of 1952 and arose from an order dated 9 January 1951 of the High Court of Judicature at Calcutta, heard by Chief Justice Harries and Justice Banerjee in a special income-tax reference (Reference No. 70 of 1950). For the appellant, the Solicitor-General for India, C. K. Daphtary, appeared, assisted by Porus A. Mehta. The respondents were represented by counsel N. C. Chatterjee, assisted by B. Sen. The judgment, delivered by Justice Mahajan, concerned an appeal against the High Court’s decision under section 66(1) of the Indian Income-Tax Act.

The factual backdrop involved a partnership firm originally consisting of three partners—identified as A, B and C—who conducted the business of tea brokerage and paid income-tax under the 1918 Act. Over time, the partnership’s composition changed: by 1939 the partners were C, D and E; C subsequently retired, and in 1945 a new partnership deed was executed among D, E and F, who continued the business. In 1947 the partnership was transformed into a limited company. The tax authorities denied relief under section 25(4), reasoning that the partners in 1939 differed from those in 1947, thereby constituting a new assessable entity. The Court held that despite the successive changes in partners, the business continued uninterrupted from its original formation until its succession by the limited company, and the reconstitution in 1945 did not create a distinct assessable unit. Consequently, the firm remained the same entity throughout and was entitled to the relief contemplated by section 25(4) of the Act.

The High Court replied affirmatively to the reference concerning the entitlement of relief under section 25(4) of the Income-Tax Act. The assessee was a partnership firm called A. W. Figgies & Co., engaged in the tea-brokerage business. When the partnership paid tax under the 1918 Act, it comprised three partners: Mathews, Figgies and Notley. Over the ensuing years the composition of the partnership changed repeatedly, affecting the shareholdings of the partners. In 1924 Mathews withdrew and his interest was assumed by Figgies and Notley. Two years later, in 1926, a new partner named Squire joined the firm. Figgies left the partnership in 1932, leaving Notley and Squire as the sole partners until 1939, when Hillman was admitted, creating a three-person partnership of Notley, Squire and Hillman. In 1943 Notley retired, and the business continued under Squire and Hillman. Gilbert was introduced as a partner in 1945, and this configuration persisted until the partnership was converted into a private limited company on 31 May 1947. For the assessment year 1947-48 the partnership claimed relief under section 25(4), arguing that it had been succeeded by the newly formed limited company. The 1939 partnership deed contained a clause that the firm would not be dissolved on a partner’s retirement but would continue with the remaining partners. When Gilbert joined in 1945, a fresh deed was executed, yet the partnership of the three partners carried on the same business originally commenced under the 1918 Act. The case facts indicated that, apart from changes in partner personnel and share distribution, there was no dissolution, division of assets or liabilities, nor any transfer of the business to an external party.

The Income-Tax Officer rejected the relief claim, reasoning that the partners in 1939 differed from those in 1947 and therefore the applicant could not receive relief. The Appellate Assistant Commissioner affirmed this refusal. However, the Income-Tax Tribunal reversed the decision and granted relief under section 25(4). Before the Tribunal, the Commissioner contended that a partnership is merely an association of individuals and that relief should be available only if the partners in 1939 were identical to those in 1947 when the firm was succeeded by the company. The Tribunal rejected this argument, holding that the relief contemplated by section 25(4) is intended for the business itself, not for the particular persons who conduct it, and that alterations in the partnership’s constitution do not defeat the claim. Consequently, the High Court, in answer to the reference, affirmed the Tribunal’s view and held that the firm as constituted on 31 May 1947 was entitled to the relief under section 25(4) of the Income-Tax Act.

It was not contested before the Tribunal that the business of the partnership firm A. W. Figgies & Co. continued to operate as tea brokers from the time of its formation until it was succeeded by a limited company. The Tribunal held that, for the purposes of income tax, the firm must be treated as having a separate juridical existence apart from the individual partners who carried on the business, and that the firm could continue its operations even though its constitution was altered. At the urging of the appellant, the Tribunal framed a specific question and referred it to the High Court under section 66(1) of the Act, asking: “In the facts and circumstances of the case, was the firm as constituted on 31 May 1947 entitled to the relief under section 25(4) of the Indian Income-Tax Act?” The High Court responded affirmatively to the reference and upheld the view expressed by the Tribunal. Before this Court it was argued that the High Court’s construction of section 25(4) was erroneous, that the wording of the provision did not support such a construction, and that because the composition of the firm had changed, the same firm had not continued, thereby denying any right to relief under section 25(4) to the altered firm. This Court found that argument to be without merit. Section 25(4) reads: “Where the person who was at the commencement of the Indian Income-tax (Amendment) Act, 1939, carrying on any business, profession or vocation on which tax was at any time charged under the provisions of the Indian Income-tax Act, 1918, is succeeded in such capacity by another person, the change not being merely a change in the constitution of a partnership, no tax shall be payable by the first mentioned person in respect of the income, profits and gains of the period between the end of the previous year and the date of such succession, and such person may further claim that the income, profits and gains of the previous year shall be deemed to have been the income, profits and gains of the said period. Where any such claim is made, an assessment shall be made on the basis of the income, profits and gains of the said period, and, if an amount of tax has already been paid in respect of the income, profits and gains of the previous year exceeding the amount payable on the basis of such assessment, a refund shall be given of the difference.” The provision makes clear that a mere alteration in the personnel of the partners does not constitute a succession, and such a change is disregarded. Accordingly, the section indicates that a simple change in the partnership’s constitution does not necessarily create a new assessable unit or a distinct assessable entity and in such a case there

In this case, the Court observed that there was no transfer of the entire business merely because the composition of the partnership changed. It noted that, according to partnership law, a firm does not possess a legal existence separate from its partners; it is essentially a collective name describing those partners. However, the Court also emphasized that the mere addition or removal of partners does not dissolve the firm. A partner may retire if the remaining partners consent, and a new partner may be admitted also with the consent of the existing partners. Once reconstituted, the firm is permitted to continue operating under the same name until an actual dissolution occurs. The Court explained that the provisions of the Partnership Act represent a compromise between the strict English common-law view, which treats a partnership only as a group of individuals, and the commercial practice that regards the firm as a distinct, quasi-corporate entity.

The Court then turned to the provisions of the Income-Tax Act, stating that the statutory framework treats a partnership firm as a separate assessable unit, distinct from the individual partners who are also assessed on their own. Section 3 of the Act, the charging provision, expressly provides that income-tax shall be levied for any year on the total income of the previous year of every individual, Hindu undivided family, company, local authority, and of every firm and other association of persons, or of the partners of the firm or the members of the association individually. Consequently, the partners are separate taxable entities, while the firm itself is a distinct taxable entity. The Court further cited Sections 26, 48, and 55 of the Act, which reinforce this position and demonstrate that the technical characterization of a partnership under English or Indian partnership law cannot be applied when interpreting the income-tax provisions. The central issue, therefore, was to determine whether the unit that was assessed under the Income-Tax Act of 1918 and which paid double tax in 1939 was the same unit whose business the private limited company succeeded in 1947. The Court affirmed that both the Tribunal and the High Court were correct in holding that, despite the changes in the partnership’s constitution, the business—conducted as tea brokers—had continued uninterrupted from its origin until it was succeeded by the limited company. The Court noted that the business remained the same, operated at the same location, and there was no cessation or alteration of the assessing unit. Reference was made by Mr. Daphtary to the

The Court noted that a partnership deed executed in 1945 had been introduced by the parties. One side argued that the execution of that deed meant that a new firm had been created at that time. The High Court, however, declined to examine the deed because it had not been relied upon before the Tribunal and because the order of the Income-Tax Officer and the Assistant Commissioner contained no specific reference to it. Despite the existence of the 1945 deed, the Tribunal held that, under the provisions of the Partnership Act, a partnership could continue to operate even when its constitution changed. The Court observed that the deed itself said nothing about the fate of the assets and liabilities of the partnership that had originally been constituted under the 1939 deed. Accordingly, the Tribunal concluded that, for all practical purposes, the reconstituted partnership was not a different commercial unit; it remained the same unit despite the alteration in its internal constitution. On this basis, the Court found no substantial reason to overturn the view expressed by the High Court on the question that had been presented to it. Consequently, the appeal was dismissed and the costs were awarded against the appellant. The agents appearing for the parties were identified as G. H. Rajadhyaksha for the appellant and P. K. Chatterjee for the respondents.