Sait Nagjee Purushotham And Co vs Commissioner Of Income-Tax, Madras

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

Court: Supreme Court of India

Case Number: 275-276 of 1963

Decision Date: 20 December 1963

Coram: A.K. Sarkar, M. Hidayatullah, J.C. Shah

In this case the matter was titled Sait Nagjee Purushotham and Co. versus Commissioner of Income‑Tax, Madras and was decided on 20 December 1963 by a Bench of the Supreme Court of India consisting of Justices A. K. Sarkar, M. Hidayatullah and J. C. Shah. The judgment is reported in 1967 AIR 617 and 1964 SCR (6) 91. The dispute concerned the application of section 25(3) and section 25(4) of the Income‑Tax Act, 11 of 1922, to a firm that had been carrying on business in 1918, subsequently split into two firms, and later alleged a succession of its business. The headnote explained that under section 25(4) when a person who was carrying on a taxable business at the commencement of the Income‑Tax (Amendment) Act, 1939 is succeeded in that capacity by another person, and the change is not merely a change in the constitution of a partnership, the original person is not liable for tax on the income, profits and gains accrued between the end of the previous year and the date of succession. The appellant firm, bearing the same name as the original firm, had been in existence before 1918 and had paid tax on its activities under the Income‑Tax Act, 1918. The firm engaged in three distinct lines of business: (a) the trade of piece‑goods, particularly yarn, as general merchants; (b) the manufacture and sale of umbrellas; and (c) the manufacture and sale of soaps. Various alterations in the partnership’s constitution occurred between 1918 and 1934. In May 1939 two documents were executed. The first document, referred to as Exhibit CI, was signed by the then members of the firm together with a stranger, H., who was an ex‑partner. The second document, Exhibit CII, was signed only by those members, who were also ex‑partners. Exhibit CI indicated that the partners had been carrying on the umbrella and soap manufacturing business from October‑November 1937. Exhibit CII showed that the same partners had been conducting the yarn piece‑goods and general merchant business from the same period mentioned in Exhibit CI. Subsequently, on 30 October 1943 a further instrument styled as an agreement of partnership was executed by five persons who were then the interested parties in the businesses previously carried on under the May 1939 agreements. This 1943 agreement referenced the two May 1939 partnership agreements, described certain retirements of partners and admissions of new partners, and provided that the businesses formerly carried on by the two separate partnerships would henceforth be carried on by a single partnership constituted by the signatories. Following that date, all the aforementioned businesses were operated by this single partnership, which continued to undergo changes in its constitution thereafter.

The single partnership formed on 30 October 1943 persisted in its constitution until 7 February 1948, when the partners then in existence entered into an agreement with a company to transfer the firm’s business to that company, with the transfer intended to be completed by 13 February 1948. The transfer was indeed effected. The partnership subsequently claimed relief under section 25(4) in respect of the assessments for the years 1948‑49 and 1949‑50, contending that it had been carrying on a business on 1 April 1939—the commencement date of the Income‑Tax (Amendment) Act, 1939—on which tax had previously been levied under the 1918 Act, and that a company had succeeded it in that business in February 1948. The Court, speaking through Justices Sarkar and Shah, held that the assessee was not entitled to the relief claimed. The evidence contained in Exhibits CI and CII demonstrated that the business originally carried on by the firm existing in 1918 had been discontinued in October‑November 1937 and that its operations were subsequently divided between two independent partnerships created by the May 1939 documents. Consequently, the continuity required by section 25(4) was absent, and the relief under that provision could not be granted.

The partnership continued in its existing form until 7 February 1948, when the partners then in office concluded an agreement with a company to transfer the firm’s business to that company. The transfer was to be completed by 13 February 1948, and the transfer was indeed effected on that date. The partnership created by the instrument dated 30 October 1943 then claimed relief under section 25(4) of the Income‑tax Act in the assessments for the years 1948‑49 and 1949‑50. The claim was based on the assertion that the partnership had been carrying on a business on 1 April 1939, the date on which the Income‑tax (Amendment) Act, 1939 came into force, that tax on that business had been levied under the 1918 Act, and that a company succeeded to that business in February 1948. The majority opinion, delivered by Justices Sarkar and Shah, held that the assessee was not entitled to the relief. The evidential documents identified as Exhibit Cl and Exhibit CII demonstrated that the business which the 1918‑era firm had been conducting was discontinued in October or November 1937, and that its operations were subsequently divided between two independent partnerships that were brought into existence by the documents. Those exhibits also showed that the original firm ceased to exist. When a business that had previously been carried on as a single unit is broken up and its parts are carried on by separate entities, the parts do not constitute the original business, even though the aggregate of the parts may amount to the whole. In such a circumstance the original business is considered to have been discontinued. The Court referred to S. N. A. S. A. Annamalai, Chettiar v. Commissioner of Income‑tax, Madras, 20 I.T.R. 238, for this principle. Consequently, the business on which tax had been imposed under the 1918 Act was not being carried on on 1 April 1939 by the firm that had paid tax under that Act. Moreover, the business to which the company succeeded under the agreement of 7 February 1948 could not, prior to the succession, be said to have been carried on by a firm that was conducting business on 1 April 1939, because that firm had been newly formed by the instrument of 30 October 1943, which expressly revoked the partnership agreements of 30 May 1939 under which the two earlier firms had been created.

Justice Hidayatullah, dissenting, observed that sub‑sections (3) and (4) of section 25 of the Act are mutually exclusive. Sub‑section (3) applies only where the business has been discontinued, and the term “succession” does not encompass a mere alteration in the constitution of a partnership. By contrast, sub‑section (4) focuses on succession to a person who, on 1 April 1939, was carrying on any business on which tax had at any time been charged under the 1918 Act. Sub‑section (3) therefore stresses the discontinuance of the business that had been taxed under the 1918 Act, whereas sub‑section (4) stresses continuity of the business through a successor. Justice Hidayatullah further noted that the same factual situation may be approached differently under partnership law and under income‑tax law. He referred to Charandas v. Haridas, (1960) 39 I.T.R. 202, and Dulichand v. Commissioner of Income‑tax, Nagpur, [1956] S.C.R. 154, for this point. He added that “discontinuance of a firm is” …

In this case the Court held that a mere modification of the partnership constitution or a mere succession, even though the business passes to new hands, does not amount to discontinuance of the business that had been liable to tax under the 1918 Act. The Court referred to Shivram Poddar v. Income‑tax Officer, C.A. No. 455 of 1963 dated 13 December 1963, to support this proposition. The Court then explained that all instances of genuine discontinuance of a business fall within sub‑section (3) of section 25, while all genuine cases of succession fall within sub‑section (4). Situations involving only a change in the partnership constitution do not fit within either sub‑section (3) or sub‑section (4). Moreover, the Court observed that the two sub‑sections are inapplicable where the business did not exist prior to the commencement of the Income‑tax Act 1922, citing Ambalal Himatlal v. Commissioner of Income‑tax and Excess Profits Tax, Bombay North, (1951) 20 I.T.R. 280. The Court further noted that the soap and umbrella enterprises were not in existence before the relevant date, and consequently no relief could be claimed with respect to those enterprises; therefore any changes affecting them were irrelevant. Regarding the meaning of “discontinued” in sub‑section (3), the Court explained that the term denotes a complete cessation of the business. It observed that, although the piece‑goods business might have been managed by persons other than those who paid tax under the 1918 Act, the business had not been discontinued for the purposes of sub‑section (3). The Court relied upon Commissioner of Income‑tax, Bombay v. P. E. Polson (1945) 13 I.T.R. 384, Commissioner of Income‑tax, West Bengal v. A. W. Figgies and Co. [1954] S.C.R. 171 and Mevoppar v. Commissioner of Income‑tax, Madras, 1 L.R. (1944) Mad. 166. The Court then concluded that, in the present facts, there was no succession and the situation fell within the rule laid down in Figgies’ case. The Court further stated that although a firm is treated as an entity under the Income‑tax Act, the entry or exit of partners does not disturb that entity’s continuity. Applying this test, the Court found that the identity of the firm had never been lost and that no succession occurred up to 1948. The firm that carried on the piece‑goods business was never dissolved; it continued uninterrupted even while it owned newly commenced businesses. The Court rejected the characterization of Hemchand as a partner, holding that he was merely an employee and that his admission did not dissolve the original firm. The Court cited Commissioner of Income‑tax, Bombay City v. Kolhia Hirdagarh Co. Ltd., Bombay, (1949) 17 I.T.R. 545 and Commissioner of Income‑tax, Bombay City v. Sir Homi Metters Executor, (1955) 28 I.T.R. 928. Finally, the Court held that the appellants were entitled to succeed in their claim for relief with respect to the piece‑goods, yarn and banking businesses, which alone had been subject to tax under the 1918 Act. The judgment formed part of Civil Appeals Nos. 275‑276 of 1963 filed in the Civil Appellate Jurisdiction.

In this matter, the parties had previously obtained leave from a judgment and order dated 2 May 1960 of the Kerala High Court in Income‑tax Referred case No 98 of 1955 (M). The appellant was represented by counsel S T Desai, C V Mahalingam, B Parthasarathi and J B Dadachanji, while the respondent was represented by counsel K N Rajagopal Sastri and R N Sachthey. The appeals were filed on 20 December 1963. The judgment of Justices A K Sarkar and J C Shah was delivered by Justice Sarkar, and Justice M Hidayatullah gave a dissenting opinion. The two appeals arose from income‑tax assessments made against the appellant for the fiscal years 1948‑49 and 1949‑50. The central issue before the Court was whether, on the facts that would be set out later, the appellant was entitled to relief under subsection 4 of section 25 of the Income‑tax Act, 1922. The appellant claimed that it had transferred its business to a limited company, asserting that the transfer took effect either on 13 November 1947 or on 13 February 1948, and that the transfer was effected by an instrument executed on 7 February 1948. This claim was rejected at three levels: first by the Income‑tax Officer, then by the Appellate Assistant Commissioner, and finally by the Income‑tax Appellate Tribunal on appeal. Following the Tribunal’s refusal, the appellant sought to have a specific question referred to the Madras High Court under subsection 1 of section 66 of the Act, but that application was denied. The appellant then made a further application under subsection 2 of section 66, and the High Court ordered the Tribunal to refer the question for determination by the Court: “Whether, on the facts and in the circumstances of the case, the assessee is not entitled to relief under section 25 (4) of the Indian Income‑tax Act, and to what extent?” The Tribunal consequently prepared a statement of case and forwarded the question, together with the statement, to the High Court. Although there were technically two separate references because two cases were pending before the Tribunal, the High Court heard both matters together and delivered a single judgment, holding that the appellant was not entitled to any relief under section 25 (4). The present appeals therefore stem from that High Court judgment. Before addressing the factual background in detail, the Court considered it appropriate to set out the statutory provisions that governed the issue. While the immediate concern was subsection 4 of section 25, the Court found it helpful also to examine subsection 3 of the same section, as it illuminated the matter. Accordingly, the Court reproduced the two relevant subsections: “Section 25 (3) – Where any business, profession or vocation on which tax was at any time charged under the provisions of the Indian Income‑tax Act, 1918, … is discontinued, then, unless there has been a succession by virtue of which the provisions of subsection 4 have been rendered applicable, no tax shall be payable in respect of the income, profits and gains of the period between the end of the previous year and the date of such [discontinuance].” The Court noted that although both subsections conferred a further right on the assessee, the only one relevant for resolution of the present appeals was subsection 4, and therefore the analysis would focus primarily on that provision.

Section 25(4) of the Indian Income‑tax Act states that where the individual who, at the commencement of the Indian Income‑tax (Amendment) Act 1939, was carrying on any business, profession or vocation on which tax had at any time been levied under the provisions of the Indian Income‑tax Act 1918, is succeeded in that capacity by another person, and that change is not merely a alteration in the constitution of a partnership, then the original person shall not be liable to pay tax on the income, profits and gains accrued between the end of the preceding year and the date of such succession. Both sub‑sections (3) and (4) thereby confer an additional right upon the assessee; however, the Court indicates that it will not pursue that additional right further in the present discussion.

It follows that, under sub‑section (3), the mere discontinuance of a business entitles the assessee to relief from tax on the income of the discontinued undertaking, provided that there has been no succession to the business as contemplated in sub‑section (4). The succession referred to in sub‑section (4) must have taken place after 1 April 1939, and it must occur before the discontinuance, because once a business is discontinued it ceases to exist and therefore cannot be succeeded to. The Court therefore outlines a series of conditions that must be satisfied before a claim for relief under sub‑section (4) may be entertained.

Because the appeals before the Court concern only a business carried on by a firm, the discussion of those conditions excludes references to professions, vocations or owners of businesses other than firms. The Court reminds that, under the Income‑tax Act, a firm constitutes a taxable unit and is regarded as a “person” within the meaning of the statute. The first condition for the operation of sub‑section (4) requires that the business in question must have been subject to tax under the Indian Income‑tax Act 1918. That Act was operative from 1918 until it was superseded by the present Act in 1922; consequently, the business must have been in existence at some time during the period 1918‑1922. Under the 1918 Act, tax was assessed, computed and levied on the income of the year of assessment, whereas the 1922 Act introduced a modification whereby tax was assessed on the income of the preceding year. This change resulted in the income of the year 1921‑22 being assessed twice—once under the 1918 Act and again under the 1922 Act—and it is on account of this double assessment that relief was provided by sub‑sections (3) and (4) of section 25.

The second condition stipulates that the business must have been carried on at the commencement of the Indian Income‑tax (Amendment) Act 1939, that is, on 1 April 1939, by the person who is seeking the relief. The third condition, which the Court mentions next, relates to the identity of the person succeeding to the business, and its detailed exposition continues in the subsequent portion of the judgment.

The fourth condition required that the succession of the business not be merely a change in the firm’s constitution. This condition applied only because, as in the present case, the business was carried on by a firm. The appellant, who was the assessee, was such a firm. It argued that it had been conducting a business on 1 April 1939, that the same business had previously been taxed under the 1918 Act, and that the firm had been succeeded by a company as owner of the business pursuant to a transfer instrument dated 7 February 1948. The appellant further asserted that although its constitution had altered repeatedly, the firm had never been dissolved and therefore remained the same entity, continuously carrying on the same business from before 1918 until the aforementioned transfer. On the basis of this continuous existence, the appellant claimed the benefit of section 25 (4) of the Act.

Accordingly, the Court set out the factual background in chronological order. A firm bearing the same name as the appellant—Sait (or Shah) Nagjee Purshotham and Company—was founded in 1902 and later reconstituted by a partnership agreement dated 6 December 1918. On that date the firm dealt in piece‑goods, yarn and other articles at Calicut and maintained branches in Madras and Bombay. Subsequently the firm began manufacturing and selling umbrellas, although the record did not specify the exact commencement date, and around 1932 it started a soap‑manufacturing and sales business. For practical purposes the firm could be regarded as having been constituted by the 6 December 1918 document. The partnership agreement of that date involved six persons: Purshotham, Nagjee, Narayanjee, Krishnajee, Maneklal and Bhagwanjee. Bhagwanjee was an outsider, while the remaining five were members of the same family. The agreement stipulated that the withdrawal of any partner, for any reason, would not dissolve the partnership among the remaining partners. Krishnajee died in 1933 and Bhagwanjee retired around the same time. On 2 January 1934 the four remaining partners executed an instrument varying certain terms of the 1918 agreement, yet the instrument expressly provided that, subject to the variations, the original agreement would continue to remain effective. It was not contested that this 2 January 1934 instrument did not dissolve the firm.

In 1934 the partner Purusbotham died on 27 April 1934, leaving the firm with three remaining partners: Nagjee, Narayanjee and Maneklal. Five years later, on 30 May 1939, two documents were executed, each described as a partnership agreement. The first document, identified as annexure CI, listed Nagjee, Narayanjee, Maneklal and an outsider named Hemchand as parties. The second document, identified as annexure CII, listed only Nagjee, Narayanjee and Maneklal as parties. The terms of these two instruments would later become the focus of much of the dispute. The appellant argued that the two agreements did not create entirely new partnerships that dissolved the pre‑existing firm. According to the appellant, annexure CI merely admitted the outsider Hemchand as a partner in certain lines of the existing business, specifically the umbrella and soap manufacturing activities, while annexure CII allowed the remaining partners to continue the other existing lines such as yarn, piece‑goods and money‑lending under the same partnership. By contrast, the respondent maintained that the two agreements demonstrated a division of the original firm’s business into two separate entities, each with a different set of partners, albeit with some partners in common. The respondent contended that this division amounted to a discontinuance of the old firm’s business. Consequently, the respondent argued that after such a discontinuance it could not be said that the same business on which tax had been assessed under the 1918 Act was still being carried on as of 1 April 1939, and therefore no later succession under sub‑sec. (4) of s. 25 could be invoked.

The next instrument relevant to the case was dated 30 October 1943 and was also styled as a partnership agreement. The parties to this later agreement were Narayanjee, Maneklal, Jayanand, Leeladhar and Prabhulal. The 1943 agreement expressly referred to the two May 1939 partnership agreements and recorded certain retirements and admissions of partners. It provided that the parties intended to carry on, as a single partnership, the businesses that had previously been conducted under the two separate May 1939 partnerships. The respondent argued that, irrespective of any deficiency in the May 1939 documents, the 1943 agreement clearly demonstrated a dissolution of the partnership that then existed and the creation of an entirely new partnership to which the business of the old firm had been transferred. In the respondent’s view, this transfer constituted a succession to business within the meaning of sub‑sec. (4) of s. 25. Accordingly, the respondent maintained that any later succession, such as the transfer effected by the instrument dated 7 February 1948, could not serve as a basis for relief under s. 25(4). The respondent also questioned whether relief could be granted on the basis of the earlier succession, noting that no claim for such relief had ever been made.

It was observed that the earlier succession argument was irrelevant because no relief had ever been claimed on that basis. The final instrument relevant to the present dispute was the agreement dated 7 February 1948, which was executed between Maneklal, Jayanand, Leeladhar and Prabhulal in their capacity as partners of the appellant firm and a limited company that had been formed to acquire the firm’s business. By virtue of this agreement the parties undertook to transfer the entire business of the firm to the company, with the transfer taking effect on 13 November 1947 and the completion of the transfer scheduled for 13 February 1948. Completion required the buyer to pay a consideration of four lakh rupees and the seller to deliver possession of all business assets. It was on the basis of this February 1948 instrument that the appellant, identified as the partnership of Maneklal, Jayanand, Leeladhar and Prabhulal, sought relief under section 25(4) in the assessments for the financial years 1948‑49 and 1949‑50. The Court noted unequivocally that, as a consequence of the 7 February 1948 agreement, the limited company succeeded to the business that had previously been carried on by the firm known as Nagjee, Purushotham and Company, which at that time conducted banking, piece‑goods and yarn trading as well as manufacturing and selling soap and umbrellas. The pivotal question, the Court explained, was whether that partnership was the same entity that had been carrying on a business on 1 April 1939 and whether that business had been subject to tax under the Income‑Tax Act of 1918. The High Court had held that it was not, and the Court agreed with that conclusion. In the Court’s view the original business had been discontinued in 1937, and the activities that continued thereafter did not constitute the same business. The Court then turned to annexures C‑1 and C‑11, both dated 30 May 1939, to examine the historical records. Annexure C‑1 contained the essential terms of a partnership agreement among four individuals identified as (1) Nagjee, (2) Narayanjee, (3) Maneklal and (4) Hemchand, hereinafter referred to as the partners. The agreement stated that the partners had been conducting a joint enterprise since the beginning of Samvat 1994, which corresponds to October‑November 1937, engaging in the manufacture and sale of soaps under the title “The Vegetable Soap Works” as proprietors of Sait Nagjee Purushotham & Co., and also in the manufacture and sale of umbrellas in Calicut with branches at Madras and Bombay, operating under the style “Sait Nagjee Purushotham & Co., Soap and Umbrella Merchants” and, in Bombay, as “Sha Nagjee Purushotham & Co.” The partners deemed it advisable to reduce the terms of their partnership to writing for proper and better conduct of the business. Consequently, they agreed that the firm would continue as previously known, namely Sait Nagjee Purushotham & Co., Soap and Umbrella Merchants, and that it would persist in manufacturing and selling soaps under the name “Vegetable Soap Works” and umbrellas under the name “Sait Nagjee Purushotham & Co., Soap and Umbrella Merchants.”

It was recorded that the partnership maintained its head office at Calicut, operated a branch in Madras under the same name, and kept a branch in Bombay that was identified as “Sha Nagjee Purushotham & Co.” The principal activity of the firm was specified to consist chiefly of the manufacture and sale of soaps and umbrellas, together with any allied products and any additional articles that the partners, or a majority of the partners, might mutually decide to include in the business. The partners further agreed that the firm known as Sait Nagjee Purushotham & Co., Bankers, Piece‑goods and Yarn Merchants, situated in Calicut, would be responsible for providing all funds required for the operation of the partnership. Such advances were to be treated as loans from the aforementioned banking and merchandising firm to the partnership itself. The partners numbered one, two and three were expressly prohibited, unless a later written determination was made by the partners, from borrowing any sum from any source other than the firm Sait Nagjee Purushotham & Co., Bankers, Piece‑goods and Yarn Merchants referred to in the earlier clause. Additionally, the partners affirmed that partners one, two and three constituted the partners of the firm Sait Nagjee Purushotham & Co., Bankers, Piece‑goods and Yarn Merchants, located in Calicut, thereby confirming their status as partners of that specific entity.

The court then set out the material portions of annexure C‑11, which detailed an earlier partnership agreement between individuals identified as Nagjee, Narayanjee and Maneklal, collectively referred to as the partners. According to the agreement dated 6 December 1918, the partners Purushotham, Nagjee, Narayanjee, Karsanjee, Bhagvanjee and Maneklal had carried on a partnership dealing in piece‑goods, banking and other articles in Calicut, with branches at Madras and Bombay. It was noted that Purushotham, Karsanjee and Bhagvanjee had ceased to be partners either through retirement or death. The remaining partners, namely Nagjee, Narayanjee and Maneklal, had fully settled the claims of the departed partners and agreed to continue the existing partnership business under the name and style “Sait Nagjee Purushotham & Co., Bankers, Piece‑goods and Yarn Merchants,” hereinafter called the Firm. The partners deemed it prudent to commit to writing the terms and conditions that had previously been agreed orally, and therefore they mutually adopted a new set of regulations embodied in a deed that superseded the 1918 agreement. The earlier deed was expressly revoked, and the affairs of the Firm were to be governed solely by the newly written regulations, except for any provisions that were expressly repeated in the new deed. Finally, the partners agreed that each of them, in their individual capacities, would also be partners together with an individual named Hemchand Veerjee.

In this case, the Court observed that the partnership engaged in the manufacture and sale of soap and umbrellas operated in Calicut and Madras under the name Sait Nagjee Purushotham and Co., Soap and Umbrella Merchants, and in Bombay under the name Shah Nagjee Purushotham & Co. The terms and conditions of these businesses were set out in a Partnership Agreement dated 30 May 1939, which was signed by all the partners. The Court noted that the two instruments referred to events that had occurred in 1937. Annexure C I showed that in October–November of that year a new partnership was formed to carry on the manufacturing and selling of soap and umbrellas between Hemraj and the remaining partners of the pre‑existing firm of the same name, namely Nagjee, Narayanjee and Manecklal. This was evident from the terms of the instrument, which the Court had previously set out. The Court emphasized the importance of clauses 8, 9 and 25 of Annexure C I. These clauses indicated the existence of two distinct firms: one whose constitution appeared in Annexure C I and which conducted the soap and umbrella business, and another consisting of Nagjee, Narayanjee and Manecklal that carried on other kinds of business, the constitution of which appeared in Annexure C II. Clauses 8 and 9 demonstrated that one firm was to lend money to the other, a situation that could arise only if the two firms were separate entities. Clause 25 recorded that all parties to Annexure C I agreed that the firm constituted by Nagjee, Narayanjee and Manecklal was a different firm.

The learned counsel relied on clause 1 of Annexure C I and argued that it provided for the continuance of the old firm, that is, the firm created by the instrument dated 6 December 1918, and therefore that no new firm had been created. The Court rejected this contention as unfounded. The Court found that there was no reference in Annexure C I to the firm created by the 1918 instrument. The term “firm” in Annexure C I referred to the partnership that had been brought into existence by the oral agreement of October–November 1937, which was later reduced to writing in Annexure C I. Clause 1 stated that “The Firm shall continue to be of old”; the word “old” referred to the partnership formed orally in 1937, as mentioned in the first recital of Annexure C I, and not to the 1918 partnership. Similarly, the provision in clause 1 that “The Firm shall continue to do business” pertained to the continuance of the business that the 1937 partnership had been carrying on prior to 30 May 1939. The Court held that the continuation could not be of the firm or business created by the 1918 instrument, because Annexure C I made no reference to that partnership at all. While it was possible that the 1918 partnership had been carried on under the same name as the firm mentioned in Annexure C I, the Court observed that a similarity of names did not, by itself, establish that the two firms were identical.

The Court observed that the assertion that the two firms were identical could not be sustained, given the evidence before it. It was clear to the Court that the partnership referred to in annexure C I differed from the partnership created by the instrument dated December 6, 1918. The reason was that the persons who were partners in the two firms were not the same. No material was placed before the Court to show, nor did the Court think plausible, that groups of persons, even with some common members, could form a single partnership. It was also impossible for those groups, who carried on separate businesses under separate agreements, to be treated as one partnership. Further, the Court noted that annexure C 11 clearly indicated that the firm established by the 1918 instrument had been dissolved. The document also showed that a new firm had been formed among Nagjee, Narayanjee and Manecklal after Purushotham retired in 1934. If the 1918 firm was dissolved, it could not, of course, be said to have continued thereafter in any form. Consequently, the Court concluded that the firm created by annexure C I could not be regarded as a continuation of the 1918 partnership. Therefore, the Court held that the firm mentioned in annexure C I was a new entity and not a reconstituted version of the old 1918 firm. This conclusion was supported by the specific terms contained in annexure C 11, which the Court examined in detail. The document labelled the arrangement as an agreement of partnership, meaning it was an agreement intended to create a new partnership. Its recital stated that the remaining partners of the firm formed under the 1918 instrument agreed to carry on and continue the existing partnership business. Clause (2) of annexure C 11 expressly declared that the deed dated December 6, 1918 was revoked by the parties. It further provided that the affairs of the firm would thereafter be governed solely by the terms of annexure C 11, and that none of the conditions of the revoked deed would apply.

After such a revocation, the Court found it impossible to maintain that the partnership created by the 1918 deed continued to exist. The Court rejected the appellant’s argument that only the operational terms of the 1918 document were revoked while the fundamental agreement to carry on business as a partnership remained in force. The Court observed that an express agreement to carry on the business in partnership was set out in the third recital of annexure C 11. That provision indicated that the earlier agreement in the 1918 instrument was no longer subsisting as a binding contract. Accordingly, the Court held that the term in clause 20 referring to “continuance” must be interpreted as referring to the continuation of the business. It could not refer to the continuation of the partnership agreement, because that agreement had been expressly revoked. If this interpretation were rejected, clause 20 would become inexplicable and could not be given a coherent meaning. Clause 20 states that the partners, in their individual capacities, would become partners with Hemchand in another business. The terms of that other business appear in another partnership agreement dated the same day and identified as annexure C 1. This shows that the old partnership of 1918 had relinquished some of its existing businesses and decided to carry those businesses on under a new partnership agreement. The Court therefore concluded that the old partnership had been dissolved, because it would not have otherwise given up those businesses. Thus, the firm described in annexure C I was a fresh partnership and not a continuation of the 1918 firm.

The two instruments labeled annexure C I and annexure C 11 demonstrate that in the months of October and November 1937 the business previously conducted by the firm of Sait Nagjee Purushotham and Co. ceased to exist, and that the various undertakings of that firm were divided into two separate streams, each of which was taken over by a newly created independent partnership. Because the original undertaking was broken up and its assets were allocated to distinct entities, it was impossible to maintain that the pre‑existing business had continued in an unbroken form. This conclusion is supported by the decision in S. N. A. S. A. Annamalai Chettiar v. Commissioner of Income‑tax, Madras (1), where the Court held that when a single business unit is fragmented and its portions are distributed, the resulting parts do not together constitute the original whole, even though their aggregate may represent the entire former activity. The cited case involved a joint‑family enterprise that, upon partition, was divided among family members; the Court observed that the partition caused a discontinuance of the original business on the date of the split, and that this discontinuance entitled the family to relief under section 25(3). It is noteworthy that the partners who formed the appellant at the time of the 1948 transfer also regarded the 1937 event as the termination of the old firm, believing that its business thereafter continued only through two independent firms. This view is reflected in the document dated 30 October 1943, which identifies annexures C I and C 11 as constituting two independent partnerships, revokes both of them, and provides that the parties to the instrument “have (1) 201. T. R. 238. agreed to carry on and continue as one single partnership business the existing partnership businesses of Sait Nagjee Purushotham and Co., Bankers, Piece‑goods and Yarn Merchants, Sait Nagjee Purushotham and Co., Soap and Umbrella Merchants.” Because the business on which tax was assessed under the 1918 Act—an aspect that is not contested—was discontinued in 1937, it could not have been the same business that was subject to taxation on 1 April 1939. Whatever activity existed on that later date must therefore have been a different business altogether, meaning that one of the essential conditions for obtaining relief under section 25(4) of the Act was not fulfilled, rendering the claim untenable. Moreover, for the reasons already discussed, it must be held that on 1 April 1939 the business, even if presumed to have retained its identity despite the division, was being conducted by two separate persons, that is, two distinct firms with different partners. The entity that transferred the business, thereby creating the succession relied upon in 1948 for relief under section 25(4), was a single firm. Such a single firm could not have arisen merely by altering the constitution of an existing firm, because at that time two separate firms existed and they could not merge into one by simple constitutional modifications. Indeed, the instrument of 30 October 1943 that established the transferor firm—the appellant before this Court—explicitly created a new partnership rather than effecting a merger of the two pre‑existing entities.

The instrument dated 30 May 1939 expressly declared that “The Agreements of Partnerships dated 30th May 1939… are hereby revoked.” Consequently, at the moment when the alleged succession was said to have occurred, the business was being carried on by persons different from those who carried it on on 1 April 1939. This fact meant that another prerequisite for the application of section 25(4) of the Act was not fulfilled, and therefore the claim for relief under that provision failed on this ground as well. Even if it were argued that the partnerships had been created on 30 May 1939 by annexures C I and C II rather than in October‑November 1937, the appellant’s claim would still fail. Whenever the new partnerships came into existence, the old partnership’s business, which had been taken over by the two new firms, must be regarded as having been discontinued. Relying on the principle articulated in the Annamalai Chettiar case, there could be no succession of the business from one entity to another in such circumstances. Accordingly, there was no succession to the business that was carried on at the commencement of the Indian Income‑Tax (Amendment) Act, 1939 (i.e., 1 April 1939) on which tax had been levied under the 1918 Act, and which the appellant claimed had taken place in 1948. A discontinued business could not be succeeded to. Even assuming, contrary to the Court’s view, that a succession had occurred on 30 May 1939, the appellant would have been required to seek relief for the year 1939‑40, not for the years 1948‑49 and 1949‑50. The Court concluded that the business subject to tax under the 1918 Act had been discontinued either in October‑November 1937 or on 30 May 1939 and that it did not exist in 1948 to permit a succession under the instrument dated 7 February 1948. Accordingly, the appeals were dismissed with costs.

The dissenting judge, after reviewing the judgment delivered by Justice Sarkar, expressed disagreement with the conclusion that the appeals should be dismissed and held that the appeals must be allowed. The dissent noted that the appellant was a firm which, in 1948, comprised four partners: Manecklal Purushotham, Liladhar Narayanjee, Jayanand Nagjee and Prabhulal Naranji. The firm’s principal activities at that time included the trade of piece‑goods, yarn, banking, and the manufacturing and sale of umbrellas and soaps. Its head office was located in Calicut, and it maintained branches in other cities. The dissenting opinion therefore focused on these factual details to support the view that relief should be granted.

In this case, the firm’s business was carried on in Bombay and in Madras. The partnership’s origins traced back to the year 1902, when five members of the Purushotham‑Nagjee‑Narayanjee family — namely Purushotham, Nagjee, Narayanjee, Krishnajee and Premchand — together with an outsider named Bhagwanjee, founded the partnership known as Sait Nagjee Purushottam & Co.

Subsequent to its formation, the composition of the partnership altered as a result of deaths and retirements among the partners. Premchand withdrew from the partnership in 1912 and was replaced by another family member, Manecklal. Later, in the years 1933 and 1934, two of the original family partners, Krishnajee and Purushotham, died, and the outsider Bhagwanjee also retired. After these changes, the partnership consisted of Nagjee, Narayanjee and Manecklal, all of whom belonged to the founding family.

The record contains two important partnership deeds. The first deed, dated 6 December 1918, was executed to adjust the shareholdings of the partners following Premchand’s retirement and Manecklal’s admission. The second deed, dated 1 January 1934, was executed after the death of Krishnajee and Bhagwanjee’s retirement. The 1918 deed expressly stated that the firm continued to carry on its business in Calicut with branches at Madras and Bombay, and although Manecklal was admitted as a new partner, the firm was to persist under the same name and style. The 1918 deed expressly revoked the earlier partnership deed of 4 April 1902 and provided that the affairs of the firm would henceforth be governed by the new deed. It also contained a provision that the withdrawal or death of any partner would not result in the dissolution of the partnership.

When the 1934 deed was executed, it did not revoke the 1918 deed; rather, it amended it. The amendment stipulated that the principal deed of partnership, namely the 1918 deed, would continue to be in force to the extent that it was not inconsistent with the new provisions.

Around the year 1932, the firm expanded its activities to include the manufacture and sale of soaps under the title “The Vegetable Soap Works” Proprietors Sait Nagjee Purushotham & Co. It is also probable that the firm began manufacturing and selling umbrellas in Calicut, with branches at Madras and Bombay, under the style “Sait Nagjee Purushotham & Co. Soap and Umbrella Merchants” in Calicut and Madras, and under the name “Sha Nagjee Purushotham & Co.” in Bombay. The Court noted that the terms “Sha” and “Sait” were synonymous, and therefore the names did not represent distinct entities.

In 1937, an individual named Hemchand, who was not a member of the founding family, was admitted to the partnership as a working partner. Subsequently, on 30 May 1939, two separate deeds were executed, identified as C1 and C2. Deed C1 was signed by Nagjee, Narayanjee, Manecklal and Hemchand, while deed C2 was signed by Nagjee, Narayanjee and Manecklal. The preamble to deed C1 read: “Whereas Partners 1 to 4 have been carrying on a business as Partners from the beginning of Samvat 1994 (Guzarathi Era) in the manufacture and sale of Soaps under the name of ‘The Vegetable Soap Works’ Proprietors Sait Nagjee Purushotham & Co., and in the …”

The deed stated that the partnership was engaged in the manufacture and sale of umbrellas in Calicut and that it maintained branches at Madras and Bombay. The business operated under the name and style “Sait Nagjee Purushotham & Co., Soap and Umbrella Merchants” at Calicut and Madras, and under the name “Sha Nagjee Purushotham & Co.” at Bombay. For the purposes of the present case the deed referred to this enterprise as “the Firm.” The deed then set out the specific terms that governed the Firm. First, the Firm was to continue as it had historically, namely as “Sait Nagjee Purushotham & Co., Soap and Umbrella Merchants.” The Firm was required to carry on the manufacture and sale of soaps under the trade name “Vegetable Soap Works” and to sell umbrellas under the trade name “Sait Nagjee Purushotham & Co., Soap and Umbrella Merchants.” The principal place of business was to remain at Calicut, with a branch at Madras using the same name and a branch at Bombay using the name “Sha Nagjee Purushotham & Co.” Second, the deed provided that the business of the Firm would be conducted by Partner No 4, Hemchand Virjee Sait, who was to act in accordance with the directions of Partners 1, 2 and 3. Hemchand Virjee Sait was expressly designated as “the Working Partner,” and his duties were described as managing the work and assisting the Firm’s business. The deed further specified that the Working Partner could draw a sum of Rs 400 on the first day of each month from the Firm’s account as his share of current‑year profits, subject to the condition that, after the annual accounts were prepared, any excess amount drawn beyond his profit share must be repaid immediately.

The deed also set out the method of sharing profits and losses. It provided that Partner 1, Partner 2 and Partner 3 each were entitled to three annas and eight pies in the rupee, while Partner 4, the Working Partner, was entitled to five annas in the rupee. In the event that the Firm’s accounts showed a loss, the Working Partner was required to refund the total of the monthly sums he had drawn, together with his proportionate share of the loss. Additionally, the deed required the Working Partner to deposit Rs 15,000 with the Firm, identified as “Sait Nagjee Purushotham & Co., Bankers, Piece‑goods and Yarn Merchants” in Calicut. This deposit was to remain with the Firm for as long as Hemchand Virjee Sait remained a partner, and it was to earn interest at rates to be agreed upon by the Firm from time to time. In the second deed, identified as C2, the preamble explained that the remaining partners—namely Nagjee Amersee Sait, Narayanji Purushotham Sait and Manecklal Purushotham Sait—had settled fully the claims of the partners who had ceased to exist and had agreed to continue the existing partnership business under the same name and style.

In the record the partnership was designated as “Sait Nagjee Purushotham & Co., Bankers, Piece‑goods and Yarn Merchants”, hereinafter referred to as the “Firm”. The deed contained a clause stating that the partnership agreement dated 6 December 1918 was expressly revoked, and that the affairs of the Firm would thereafter be governed by the regulations that had been agreed orally and reduced to writing in the present deed. The clause further provided that, apart from those provisions expressly repeated in the present deed, none of the terms and conditions of the revoked 1918 agreement would continue to apply to the Firm. The deed also recorded that all the partners, in their individual capacities, agreed to remain partners together with Hemchand Veerji Sait in a separate partnership carrying on the trade of soaps and umbrellas in Calicut and Madras under the name “Sait Nagjee Purushotham & Co., Soap and Umbrella Merchants”, and in Bombay under the name “Shah, Nagjee Purushotham & Co.” The terms of that soap‑and‑umbrella partnership were set out in a separate partnership agreement dated 30 May 1939, which had been signed by all the partners. Both the 1918 and the 1939 deeds contained a provision that the partnership would not be dissolved by the death or retirement of any partner. Subsequent events showed that Nagjee died in August 1943 and Hemchand retired on 31 October 1943. On 30 October 1943 the partners executed a fresh deed of partnership. The new deed was executed by Narayanjee and Manecklal, who had continued as partners since 1918, and by two additional family members, Liladhar and Prabhulal, and it admitted Jayanand Nagjee, who was a minor, as a beneficiary of the partnership. The preamble of the new deed recited that partner No. 4, Hemchand Veerji Sait, had elected to retire effective 31 October 1943, and that the remaining partners had agreed to admit as new partners Liladhar Narayanjee Sait and Prabhulal Narayanjee Sal, both sons of Narayanjee Purushotham Sait, from the same date. The preamble further recorded that the continuing partners together with the newly admitted partners would carry on as a single partnership, encompassing the existing partnership businesses of “Sait Nagjee Purushotham & Co., Bankers, Piece‑goods and Yarn Merchants” and “Sait Nagjee Purushotham & Co., Soap and Umbrella Merchants”. The partners deemed it advisable and prudent to set down in writing the terms that had been agreed orally, and they therefore incorporated those terms into the present deed. The operative provisions identified for the purpose of the present dispute were that the partnership agreements dated 30 May 1939, which had been entered into by Nagjee Amersee Sait, Narayanjee Purushotham Sait, Manecklal Purushotham Sait and Hemchand Veerji Sait, and which had been registered as instruments 98 and 97 in the Joint Sub‑Registrar’s Office, Calicut, were hereby revoked, and that the affairs of the firm would henceforth be regulated and governed by the regulations set out in the current deed.

The earlier deed of partnership was expressly revoked, and the Court noted that the terms and conditions of the revoked deed would no longer apply to the firm except for those provisions that were expressly restated in the new deed.

The Court recorded that the firm would thereafter be known as “Sait Nagjee Purushotham & Co. Bankers, Piece‑goods, Yarn, Soap and Umbrella merchants.” The partners of the firm were identified as follows: (1) Narayanjee Purushotham Sait; (2) Manecklal Purshotham Sait; (3) Jayanand Nagjee Sait, who was a minor and was represented by his guardian, Manecklal Purushotham Sait; (4) Leeladhar Narayanjee Sait; and (5) Prabhulal Narayanjee Sait. The Court indicated that the remaining provisions of the deed followed the same pattern as the earlier arrangement.

The Court further stated that in 1948 a limited liability company was incorporated under the name “Sait Nagjee Purushotham & Co., Ltd.” An agreement was executed whereby the limited company, represented at that time by the partners Manecklal, Leeladhar, Jayanand and Prabhulal, purchased from the partnership the goodwill, assets and other interests of the firm. The Court then set out the central question of the appeal: whether the appellant firm was entitled to the benefits provided by section 25(4) of the Income‑Tax Act, and if so, the extent of that entitlement.

In addressing that question, the Court identified two factual inquiries that needed resolution. First, it was necessary to determine whether the business on which tax had been assessed under the provisions of the Indian Income‑Tax Act, 1918 had ceased to exist at any time before 1948. Second, it was required to ascertain whether a succession had occurred whereby a person other than the original taxpayer had taken over the business that was carried on as of 1 April 1939.

The Court noted that the learned members of the tribunal considered that a discontinuance of the original business had taken place during the period 1937‑1939. According to that view, the original business was divided into two separate divisions and Hemchand was admitted as a partner in one of those divisions, which constituted a break in continuity. By contrast, the Department, which was the respondent, argued that a succession had occurred in 1939 and again in 1943, because in those years a different individual had succeeded to the person who was carrying on the business on 1 April 1939. The Court observed that the Department’s position had so far been upheld by the various tribunals and the High Court, and therefore it did not repeat the detailed findings of those decisions, referring instead to the judgment of the learned brother for the full record.

Having summarized the opposing positions, the Court turned to the three specific issues it needed to decide. Issue (a) was whether a succession had taken place for the first time in 1948 when the limited company succeeded the partnership, which would enable the firm to claim the benefits of section 25(4). Issue (b) was whether, before 1948, there had been a discontinuance of the business that was subject to tax under the Indian Income‑Tax Act, 1918. Issue (c) was whether, before 1948, a succession by another person had occurred with respect to the individual who had paid tax on the business after 1 April 1939. The Court explained that a negative answer to both (b) and (c) would require a positive answer to (a), whereas an affirmative answer to either (b) or (c) would preclude a positive answer to (a).

The Court concluded this portion of its analysis by stating that it was necessary at this stage to examine section 25, which governs the assessment of tax in cases where a business has been discontinued. The first two sub‑sections of that provision deal with the method of assessment where a business ceases in any year and the requirement for the person discontinuing the business to give notice, subject to penalty. The Court indicated that those sub‑sections were not the focus of the present inquiry, and that its attention would be directed to sub‑section (3) and sub‑section (4) of section 25, which were relevant to the matters of succession and discontinuance under consideration.

The Court explained that the first two subsections of the relevant provision dealt with the assessment of a business that ceased in any year and required a notice from any person who discontinued a business, on pain of a penalty, but that the Court was not concerned with those two subsections for the present purpose. The Court then set out the text of subsection three and subsection four, which were the portions relevant for its analysis. Subsection three reads: “Where 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 discontinued, then unless there has been a succession by virtue of which the provisions of sub‑section (4) have been rendered applicable no tax shall be payable in respect of the income, profits and gains of the period between the end of the previous year and the date of such discontinuance, and the assessee 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.” Subsection four, as inserted by the Indian Income‑tax (Amendment) Act, 1939 (VII of 1939), 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, 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: Provided ……………………….” The Court noted that subsection four had been inserted by the 1939 amendment, which also introduced the underlined words that appear in subsection three. Both subsection four and the amendment to subsection three were intended to become effective on 1 April 1939 by virtue of Central Government notification No 7 dated 18 March 1939. Finally, the Court observed that these provisions were to be read in conjunction with section three of the Indian Income‑tax Act, 1918.

The Court explained that under the Indian Income‑tax Act of 1918 the tax was levied on the income of the assessment year rather than on the income of the preceding year of assessment. A statutory revision enacted by the Act of 1922 altered this rule so that tax became payable on the income of the previous year in the succeeding year, which was treated as the year of assessment. Consequently, any enterprise that was operating and generating profit in 1921 and that continued its operations in 1922 was required to pay tax on the profits of 1921 once under the 1918 legislation and a second time under the 1922 legislation. To address the problem of such double taxation, the 1922 Act incorporated a provision that allowed relief for a business that had paid the duplicate tax when that business subsequently discontinued its operations. When the amendment of 1939 was introduced, relief was provided in sub‑section (4) to a person who had paid tax under the 1918 Act and who later succeeded to the business through another individual. The Court noted that the two sub‑sections operated on a mutually exclusive basis: sub‑section (4) applied only in cases of succession, whereas sub‑section (3) applied solely where the business itself was discontinued. Moreover, the term “succession” was interpreted as excluding any mere alteration in the partnership’s constitution. In the present matter, the company sought to invoke the benefit of sub‑section (4) on the ground of a succession that it claimed occurred either on 13 November 1947 or on 13 February 1948. The Income‑tax Officer, however, held that a succession had already taken place in 1943 when, upon the retirement of Hemchand, the two separate businesses created under Exhibit Cl and Exhibit C2 were merged. The Appellate Assistant Commissioner concurred with that finding. The Tribunal further observed that the soap and umbrella trade differed from the banking, piece‑goods, and yarn trade, and that the 1943 amalgamation of these distinct businesses constituted a succession by a newly formed firm. The High Court, on reference, determined that the partnership formed under the deed of 1918 was dissolved in 1939, and that the partnerships created under the two deeds of 1939 were dissolved in 1943. Accordingly, the High Court held that succession had occurred both in 1939 and again in 1943, and that the claim based on the transfer to a limited liability company in 1948 was therefore untimely. In reaching the conclusion that the 1918 partnership had been dissolved, the High Court relied upon clause 2 of Exhibit C2. The Court pointed out that the two quoted sub‑sections have distinct applications: sub‑section (3) focuses on the discontinuance of a business that had paid tax under the 1918 Act, whereas sub‑section (4) concentrates on succession to a person who, as of 1 April 1939, was carrying on any business on which tax had at any time been levied under the 1918 Act. The former deals with the continuity of the business itself, while the latter deals with the continuity of the person succeeding to the business.

The Court observed that the second sub‑section concerned the continuance of a business only so long as no succession had taken place. Consequently, a situation could not arise in which both sub‑sections applied simultaneously, because the legislative intent was clearly to keep the two provisions distinct. When sub‑section (4) had been inserted, sub‑section (3) was accordingly amended by adding the words “unless there has been a succession by virtue of which the provisions of sub‑section (4) have been rendered applicable.” The essential principle therefore was the continuance of the business unless a succession occurred. The Court then identified the key issue as whether, at any point, the partnership had been dissolved and, if dissolution had occurred, whether it amounted to a “discontinuance” of business for the purposes of sub‑section (3) or represented a succession through the creation of an entirely new firm for the purposes of sub‑section (4). To address this issue, the Court first explained the position of a partnership under ordinary partnership law and under the Income‑Tax Act. At the outset, the Court highlighted several fundamental facts. It quoted the decision in Charandas v. Haridas(1), noting that officials tasked with applying the Income‑Tax Act must remember that the legal position under partnership law or Hindu law does not necessarily coincide with the position under the Income‑Tax Act. The present case illustrated once more how the same factual circumstances could be examined differently under partnership law and under tax law. The Court also referred to Dulichand v. The Commissioner of Income‑Tax, Nagpur(2), observing that commercial practitioners and accountants often treat a firm as lawyers treat a corporation—namely, as a body distinct from its members—a view that the Scottish law has recognised. However, under English common law a firm is not regarded as a separate legal entity from the persons who compose it. The Indian Partnership Act, while largely following English common law, has allowed certain mercantile usages to influence business accounting, and the Code of Civil Procedure permits a firm to sue or be sued in its own name provided the partners are identified. Under the Income‑Tax Act, by contrast, section 3 treats a firm as a unit of assessment; this statutory personality creates an assessable unit but does not make the firm a “person” in the full legal sense. Accordingly, a firm cannot enter into a partnership with an individual, another firm, or a Hindu Undivided Family. Section 26 of the Income‑Tax Act acknowledges the existence of a firm as an assessable unit and provides tax rules for changes in a firm’s constitution. The first sub‑section of that provision deals with any alteration in the firm’s constitution or with the formation of a newly constituted firm, and the Court proceeded to analyze the implications of these provisions.

The second sub-section addresses situations where succession occurs to a person, a term that the statute includes a firm, as illustrated by two authorities (1) [1960] 39 I. T. R. 202. (2) [1956] S. C. R. 154. This provision governs all cases of succession except those already covered by sub‑section (4) of section 25, which deals with a different concept. Section 25 provides the rule for discontinuance of business, distinguishing it from a mere alteration in a firm’s constitution or a simple succession where the business continues. The Court recently explained this distinction in Shivram Poddar v. Income‑tax Officer, Calcutta and another (1), observing that under ordinary partnership law any modification without a special agreement amounts to dissolution and reconstitution of the firm. A partnership at common law is a group of individuals who agree to share profits of a business carried on by any of them on behalf of all, and termination of that agreement ends the relationship. Nevertheless, the Income‑tax Act treats a firm as an assessable unit independent of its partners, conferring upon it a personality that survives reconstitution. When a firm discontinues its business, it may be taxed under section 25(1) for the accounting year in which the discontinuance occurs, and it may also be taxed in the year of assessment. In either situation the assessment concerns the income of the firm itself, not the individual partners. If a firm is dissolved but the business is not discontinued, thereby effecting a change in constitution, the appropriate assessment is under section 26(1). Conversely, where there is succession to the business, the assessment must be made under section 26(2). Consequently, when sub‑section (4) uses the word ‘person’, the legislative intent is to include both individuals and firms, a meaning reinforced by the expression ‘not being merely a change in the constitution of a partnership.’ Because the Act assesses a partnership as a unit, and historically such units were taxed under the 1918 Act, sub‑section (4) enables a partnership to enjoy the benefits of that provision when succession occurs. The partnership does not lose this benefit if only a constitutional change takes place without succession, as indicated in Civil Appeal NO. 455 of 1963 decided on Dec. 13, 1963 (1). If the business continues, it receives a comparable benefit upon discontinuance, so that all cases of discontinuance fall under the third sub‑section, all cases of succession under the fourth, and mere changes in constitution fall under neither. In this case, we have,

In order to resolve the issue, the Court first had to determine the meaning of “discontinuance of a business” and then to ascertain what fell within the expression “a change in the constitution of a partnership”. The Court explained that only where a discontinuance of the business had occurred before 1948, or where a succession did not amount merely to a change in the constitution of the partnership during the period 1939‑1948, could the appellants be denied the benefit provided by section 25. The terms “discontinuance” and “succession not amounting to a change of the constitution of a firm” had already been explained in earlier cases, and the Court observed that it was unnecessary to refer to the large number of decisions that had discussed them. The leading authorities on discontinuance were Commissioner of Income‑tax, Bombay v. P. E. Polson, and on succession the case of Commissioner of Income‑tax, West Bengal v. A. W. Figgies & Co. and others. The Court then turned to the factual matrix. It noted that the soap business had been commenced in 1932 and that it had never paid tax under the Income‑tax Act of 1918. Although there was no specific evidence as to when the umbrella business had begun, it was almost certain that it also had not been subject to tax under the 1918 Act. The burden of proving the absence of assessment under the 1918 Act rested on the assessee firm before any relief could be claimed. These facts were essential because, if the umbrella and soap businesses had never been assessed under the 1918 Act, they could not be considered for relief under section 25. The Court further stated that sections 25(3) and 25(4) did not apply where a business had not existed before the Income‑tax Act of 1922 came into force, and it cited the Bombay High Court decision in Ambalal Himatlal v. Commissioner of Income‑tax and Excess Profits Tax, Bombay North, as authority for that proposition. In that case a Hindu undivided family operated three separate businesses; only the money‑lending business had been taxed under the 1918 Act, and the Court held that the benefit of section 25(4) could be claimed only in respect of that business. Chief Justice Chagla, at page 287, observed that the three businesses were distinct and that the relief intended for the money‑lending business could not be extended to the ginning factory or the share business, which were not subject to the 1918 Act. Applying the same principle, the Court found no need for further inquiry here because the soap business was not even contemplated, let alone existing, before 1922, and the same applied to the umbrella business. Consequently, relief could be claimed only for the remaining businesses—piece‑goods, yarn, and banking—which had been started in 1902 and had continued without interruption until 1948. No claim could be entertained in respect of the umbrella and soap businesses.

In this case the Court observed that it was unnecessary to make any new finding because the factual situation was clear. The soap business had never been contemplated, and it certainly did not exist before the year 1922, and the same was true of the umbrella business. Consequently, the relief provided by section 25(4) could be claimed only with respect to the businesses that actually existed, namely the piece‑goods, yarn and banking enterprises that had been started in 1902 and had continued without interruption until 1948. Because no claim could be entertained in respect of the umbrella and soap enterprises, any transaction or accounting relating to those parts of the firm would not influence the issues that were before the Court. The Court further noted that the agreement to separate the umbrella and soap operations when Hemchand was admitted as a partner in 1939 was consistent with the continuance of the original business as a distinct entity, and that this agreement highlighted the separate character of the two enterprises. The record showed that the old business and the new business had also been assessed separately for tax purposes. Accordingly, the Court concluded that only the single, continuing entity should be examined for the application of section 25, and that the question to be decided was whether there had been a discontinuance of that business or a succession at an earlier date.

The Court then turned to the issue of discontinuance. It referred to the Judicial Committee’s decision in the case of Polson, which had examined the meaning of the word “discontinuance”. In that case the taxpayer Polson, who was carrying on a business, transferred the business to a limited company on 1 January 1939. Polson had previously paid tax on the business under the Income‑Tax Act of 1918. In the assessment year 1939‑40 Polson claimed, relying on section 25(3) of the Income‑Tax Act of 1922 as amended in 1939, that his income from the business earned in 1938 should not be taxable because the business had been discontinued. The Judicial Committee held that Polson was not entitled to the benefit of section 25(3) because the business had not been discontinued. Although the High Court of Bombay upheld Polson’s contention, the Privy Council reversed that judgment and endorsed the earlier decision of the Madras High Court in Meyyappa v. Commissioner of Income‑tax, Madras. Lord Simonds explained that on 1 January 1939 Polson ceased to be the owner of the business; therefore he was not carrying on the business “at the commencement of” the amending Act, which came into force on 1 April 1939. Since the phrase “at the commencement of” could not be applied to a date earlier than the Act’s effective date, the cessation of ownership on 1 January 1939 could not be treated as a discontinuance for the purposes of the statute.

Lord Simonds explained that the terms “discontinued” and “discontinuance” appearing in section 25 had been examined in many earlier decisions. Those decisions had consistently held that the expressions did not apply to a simple change of ownership. Instead, they required a complete and total cessation of the business. Lord Simonds further stated that the Court had no doubt about the correctness of those earlier rulings because they matched the plain meaning of the statutory provision and were consistent with similar rulings under the English Income Tax Acts. He quoted the judgment, noting the authority of the reports (1) (1943) 11 I.L.R. 247 and I.L.R. (1944) Mad. 166. From this reasoning, it follows that “discontinuance” in subsection (3) must be understood as the business ending entirely. The Court observed that such total cessation had not occurred in the present matter with respect to any of the concerned enterprises, and especially not with respect to the businesses dealing in pieces, goods, yarn, and banking. Although some of these enterprises might have been operated by individuals different from those who paid tax under the Act of 1918—a point that could be examined under the fourth subsection—the enterprises had not been discontinued for the purposes of subsection (3). The Judicial Committee was not required to analyse the issue from the perspective of succession because subsection (4) did not exist at that time. Moreover, the Privy Council decision had been endorsed by this Court in the Figgies case, which the Court intended to discuss shortly. Consequently, the Court concluded that there was no discontinuance of any of the businesses at any time between 1921 and 1948, nor thereafter.

The next issue before the Court was whether the changes that occurred in 1939 and 1948 represented a true succession of the assessee firm or merely a change in its constitution. The Court observed that, if one considered only the original lines of business and excluded the newly introduced manufacturing of umbrellas and soap, there was clearly no succession; the case therefore fell squarely within the rule laid down in the Figgies decision. Even when the umbrella and soap manufacturing activities were included, the Court held that the case remained within the scope of the Figgies precedent. The Court therefore set out to examine both possibilities separately. Turning to the facts of the Figgies case, a partnership was originally created in 1918 between three individuals named Figgies, Mathews, and Notley. In 1924, Mathews retired and was replaced; in 1926, a new partner, Squire, joined the firm. Figgies himself retired in 1932, and a further partner, Hillman, was admitted in 1939. Notley retired in 1943, and Gilbert became a partner in 1945. By the year 1945, none of the original partners remained, and all had been replaced by new partners. At each stage of change, new partnership deeds were executed and the partners’ shares were readjusted. Although the later deeds did not expressly state that the earlier deeds were revoked, a review of those documents indicated that they could not have co‑existent effect; the later deeds effectively superseded the earlier ones, resulting in a situation where the identity of the original partners was completely lost.

The Court observed that the original brief of the case demonstrated that the earlier documents could not have co‑existed. It was clear that the earlier documents had not been incorporated by reference into the later ones, and therefore they were to be considered superseded. In the present matter there was an explicit statement that the earlier documents were “revoked.” Whether the term “revoked” was actually employed or not, the effect was the same: the earlier instruments were no longer operative. Over time some partners retired and new partners were admitted, so that the composition of the partnership changed completely and the identity of the original partners was entirely lost. The issue before the Court was whether, in such circumstances, a succession could be said to have occurred within the meaning of subsection (4) of section 25. The Court quoted its earlier observation that the provision does not treat a mere change in the personnel of the partners as a succession and therefore disregards such a change. It further explained that, according to the wording of the section, a simple alteration in the constitution of the partnership does not automatically create a new assessable unit or a distinct assessable entity, and consequently there is no devolution of the entire business. The Court noted that, under partnership law, a firm does not have a legal existence separate from its partners; it is essentially a name that collectively describes the partners. Moreover, partnership law ordinarily does not consider the firm dissolved merely because partners come and go. The Court then contrasted this with the position under the Income‑Tax Act, where a firm is treated as a separate assessable entity apart from its partners, who may also be assessed individually. For this reason subsection (4) of section 25 specifically stated that a case of succession would not arise where only the constitution of the firm changes. In other words, although the firm is regarded as an entity for tax purposes, that entity is not disturbed by the admission or retirement of partners any more than it would be under partnership law. Applying this test to the facts of the present case, the Court found that the identity of the business entity had never been lost and that no succession had occurred up to the year 1948. It was also reminded that the business originally belonged to a family, but not in the same manner as a Hindu Joint Family business. From the beginning, certain family members together with a non‑family person, Bhagwanjee, had carried on a piece‑goods business. Deeds were executed in 1918 and again in 1934, but the deed of 1918 remained the basic governing instrument. By the time of the later deed, Bhagwanjee had retired and the business was in the hands solely of the family members. Hemehand was admitted as a partner in 1937, and in 1939 the original business was separated from the newer enterprises that had been started after 1922.

The Court observed that the businesses that were started after 1922 were distinct from the original enterprise, and that Hemchand received a share only in those newly started ventures, so that section 25 could not apply to them. When Hemchand retired, those newer businesses were taken over and merged with the original business. Consequently, the original business continued in existence until 1943 under the control of Narayanjee and Manecklal, who had been partners since 1918, together with three younger family members. In 1948, Manecklal and the three younger members sold this business to the company. The Court held that these alterations fell within the meaning of “a change in the constitution of the firm” and were therefore encompassed by the term ‘succession’. At no point did a dissolution of the firm Sait Nagjee Purushotham & Co. occur; the firm persisted without interruption, even though the newly started businesses were at one time kept separate so that the outsider Hemchand could not claim partnership benefits in the Head Finn. Nonetheless, the Court found that the old firm had neither discontinued nor been succeeded by another entity. Hemchand was merely admitted as a working partner, and his rights in the firm were extremely limited. He was required to deposit Rs 15,000 with the head firm and was to receive a remuneration of Rs 400 per month, varying according to profits. In effect, he functioned as an employee, although described as a working partner. The Court referred to the observations of Chief Justice Chagla in Commissioner of Income‑tax, Bombay City v. Kolhia Hirdagarh Co. Ltd., Bombay (1) and again in Commissioner of Income‑tax, Bombay City v. Sir Homi Mehta’s Executors (2), noting that such documents must be interpreted not in a strictly legalistic manner but in accordance with their true business purpose. The learned Chief Justice had explained that it is permissible to look beyond the documents themselves and consider the surrounding circumstances to determine the real nature of a transaction between two businessmen. In taxation matters, greater emphasis must be placed on the business aspect rather than on purely legal and technical forms. Applying this principle, the entry of Hemchand did not constitute a dissolution of Sait Nagjee Purushotham & Co. He was admitted solely to conduct business at a branch and to receive remuneration for his work. Although labeled a working partner, the term carried little substantive meaning, and the fact that he was not admitted into the original business demonstrates that the original business, to which the benefits of sections 25(3) and 25(4) could be claimed, continued without interruption.

The Court observed that the alterations made in the years 1939 and 1943 did not alter the entitlement that was being asserted. The Court noted that the parties had relied upon a decision of the Madras High Court in the matter of S.N.A.S.A. Annamalai Chettiar v. Commissioner of Income‑tax, Madras(1) for the interpretation of the term “discontinuance”. In that precedent, a Hindu Undivided Family comprising a father and his son carried on a money‑lending venture from separate villages, known as vilasams. On 28 March 1939 the family underwent a partition; certain vilasams were allotted to the father and the remaining ones to the son, who subsequently became the assessee. During the assessment year 1939‑40 the son contended that a discontinuance of the business had occurred within the meaning of section 25(3) of the Income‑tax Act, 1922, and he sought to claim the benefit of that subsection. His argument was based on the premise that the joint‑family business had been taxed under the earlier Act of 1918 and therefore he should not be liable for tax for the period from 13 April 1938 to 28 March 1939.

The Madras High Court, where Judges Satyanarayana Rao and Raghava Rao JJ. presided, held that the division of the joint family terminated the continuation of the business. The Court ruled that the split of the family created a “discontinuance” as defined in section 25(3) and that the family was entitled to the relief provided by that clause. Justice Satyanarayana Rao expounded that the original unit had broken down into its component parts, thereby destroying the unity of the business. Each fragment, though together they still formed the whole, was no longer identical with the whole; when the unifying principle vanished, the fragments acquired individuality and became separate and distinct entities. Consequently, the Court concluded that a discontinuance had indeed taken place. From the perspective of Hindu law, such outcomes could be accepted, but the Court stressed that, for the purpose of section 25(3), the business must be regarded in a commercial sense rather than as a joint‑family enterprise. It was the business that had been taxed under the 1918 Act which needed to have ceased to exist before the benefit of section 25(3) could be claimed. The Court acknowledged that the decision might be justified if the benefit were claimed by a single former family member rather than the entire family, yet it observed that such a claim would represent succession, not discontinuance.

Finally, the Court held that the Madras decision could not be applied to the present facts because, as previously pointed out, there was no termination of the original enterprise dealing in piece‑goods, yarn and banking. That business continued to operate in the hands of the same individual who had paid tax under the 1918 Act, notwithstanding the alterations in the partnership’s constitution. Accordingly, the Court concluded that the claim of discontinuance could not be sustained in the present case.

In the years that followed, the Court referred to a decision of the Rangoon High Court in Commissioner of Income‑tax Burma v. A.L.V.R.P. Firm (1). That case concerned a Hindu undivided family in Rangoon composed of two brothers who carried on a money‑lending business under a single vilasam but operated shops at several locations, including a shop in Rangoon itself. Each shop maintained its own capital and employed separate agents, yet a centralized system of accounts prepared at one place reflected the overall financial position of the family (1) (1940) 8 I.T.R. 531. During the fiscal year 1938‑1939 the two brothers effected a partition, after which the Rangoon shop was run by the brothers jointly in partnership. The Full Bench of the Rangoon High Court, on the basis of these facts, held that no succession had occurred within the meaning of section 26(2) of the Income‑tax Act. The Court emphasized that the family did not conduct distinct businesses at each of the five locations; rather, it operated a single business with multiple branches. Consequently, for a succession to be recognised, the successor must have taken over the business as a whole, not merely a branch.

The Rangoon case was adjudicated under section 26(2), while slightly different considerations govern section 25(4), a distinction the legislature deliberately maintained. The Court observed that, although it is possible for a succession to be recognised only with respect to the portion of the business that had paid tax under the Act of 1918 for the purposes of section 25(4), a complete change of ownership of all the businesses is required for a finding of succession under section 26(2). In both provisions, “change” does not demand that every former owner abandon the enterprise; however, the identity of the owner before the change must be distinct from the identity of the owner after the change. In the present matter, such a distinct change had not occurred.

The record, the Court noted, may not have presented the facts with the clarity that would be ideal. Nonetheless, drawing on the observation of Chief Justice Chagla in Jesingbhai Ujamshi v. Commissioner of Income‑tax, Bombay Moffusil (1), the Court recognised that the law does not forbid common partners from forming two entirely separate firms for different businesses under the Indian Income‑tax Act. When partners adopt such a structure, the determination of whether a succession has taken place is a factual inquiry, applicable either to section 26 or to section 25(4). It must also be remembered that under section 25(4) a mere alteration in the partnership’s constitution is insufficient, and the two sections cannot operate simultaneously. Accordingly, the Court declared that it was not prepared to say that a succession existed in the circumstances before it.

The Court observed that, concerning the original business, there was nothing more than a simple alteration in the composition of the partnership. It noted that the umbrella and soap business, which had never been subject to tax under the Income‑Tax Act of 1918, could be managed by the partners in any manner they chose, and such management would not influence the issue of relief under section 25 as it related to the principal business.

Accordingly, the Court held that the appeals should be permitted and that the question should be decided in favour of the assessee firm, but only with respect to the segment of the enterprise that dealt in piece‑goods, yarn and banking—those activities alone having paid tax under the Income‑Tax Act of 1918. Consequently, the Court indicated that it would allow the appeals and award costs in the lower court as well as in the High Court.

In the final order, however, the Court followed the majority opinion and dismissed the appeals, directing that costs be awarded against the appellant.