1. Abdul Karim Silk Mills were being run by the partnership and one of the partners of this firm died on the 13th January, 1943, and in an action in this Court a receiver was appointed of the partnership assets on the 19th November, 1943. This receiver sold the assets of those mills to the assessee company on the 22nd January, 1944. The contention of the assessee was that it was entitled to take into consideration the price paid by it for the purpose of determining depreciation under the Excess Profits Tax Act. This contention was negatived by the Department, the department taking the view that the case fell within section 8 (3) of the Excess Profits Tax Act. The contention of the Department was upheld by the Tribunal and the assessee has now come before us on this reference.
2. Turning first to the section, section 8 (1) introduces a legal fiction that although there may be only a change in the persons carrying on a business, the business shall be deemed to have been discontinued and a new business to have been commenced. Therefore, notwithstanding a succession to a business, for the purposes of sub-section (1) the business will be looked upon as a new business and the old business, would be considered to have been discontinued. Sub-section (3) of section 8 does away with the fiction introduced in section 8 (1) and the fiction is done away with for the limited purposes mentioned in sub-section (3), and one of the purposes is the question of computation of depreciation. Therefore, if there is a succession to a business, then for the purpose of sub-section (3) that succession has got to be accepted and the consequences of that succession would follow, and one of the consequences would be that the successor would not be entitled to claim the consideration paid by him for the purchase of the business in computing depreciation under the Excess Profits Tax Act.
3. The contention of the assessee in this case was that it was not the successor of the business of Abdul Karim Silk Mills. According to it, it was a new business and in having purchased this new business for Rs. 6,25,000 it was entitled to have this purchase price considered for the purpose of depreciation On the other hand, the contention of the Department was that the assessee had succeeded to the business of Abdul Karim Silk Mills and having succeeded to that business the purchase price paid by the assessee had succeeded had to be ignored for the purpose of computing depreciation. Now, it is well settled law that in other to determine whether there is a succession to a business, two factors have got to be considered. One obviously is the identity of the two businesses. If the two businesses are not identical, no question of succession can arise. But even if the two business are not identical another factor has also got to be taken into consideration and that is that factor of the continuity of the two business. In other words, the successor business must be the continuation of the original business. If the original business has come to an end or had be discontinued, then the subsequent business even though it may be identical with the first business, cannot be looked upon as it successor because a successor must not only do the same business but also must continue the business to which it has succeeded.
4. In this case, unfortunately, a great deal of confusion has been caused by the manner in which the matter was dealt with before the Tribunal. We should have thought that when the Tribunal was considering the question of succession, it should have inquired into the nature of the business sold by the receiver. The question it should have applied its mind to was : Was the receiver selling a going business or was he selling the assets of a business which has come to an end and which had been discontinued It should have investigated into the powers of the receiver who was an officer to the Court and ascertained whether the receiver had the authority to carry on the business of which he was appointed receiver. But we find from the order of the Tribunal that these questions were not looked into at all, and perhaps there is an explanation for this because, as we shall presently point our, the view taken by the Tribunal was that once the identity of the two businesses was established it was not necessary for the Department to establish continuity. If that was the right view of the law, then undoubtedly one can understand the reason why no attention was given by the Tribunal to this aspect of the matter.
5. Now, an application was made by the assessee to the Tribunal for a reference under section 66 (1) of the Income-tax Act. That application having been rejected, the assessee came before us under section 66 (2) and it raised these two questions :
(1) Whether the Tribunal misdirected itself in law in applying section 8 (3) of the Excess profits Tax Act, 1940, for the purpose of computation of capital and calculation of depreciation allowance
(2) Whether the assessee was entitled in law to depreciation of capital on the basis of the original cost of the assets to the assessee
6. When we turn to the statement of the case we find a very elaborate statement which has been submitted to us, and Mr. Palkhivala has made a grievance of the fact that many materials have been incorporated in this statement of the case which were never before the Tribunal when it functioned as an appellate authority and which were never refereed to either by the assessee or the Department. I think we must point our to the Tribunal what the correct procedure is with regard to the submission of a statement of the case. It is true that very often the Tribunal may not offer to all the evidence and all the facts in its appellate order. We quite appreciate the difficulty of the Tribunal as it has got to deal with a large number of cases, and it may be that in many cases the decision may seem obvious to the Tribunal and it might dispose of an appeal by a very short order. If a statement of the case is subsequently called form, naturally the Tribunal would want to elaborate its decision by pointing our various materials and pieces of evidence to which it had not referred in the appellate order. But all that can be referred to in the statement of the case are materials and evidence which were before the Tribunal when it heard the appeal. A statement of the case is not intended for the purpose of buttressing up the order of the Appellate Tribunal or further fortifying it by requisitioning to its aid materials and evidence which were not before the Tribunal but which it discovers by investigation after the order was passed in appeal. Mr. Palkhivala has drawn our attention to two pieces of evidence on which reliance is placed in the statement of the case, which according to him were never become the Appellate Tribunal and which were never referred to by either side. One is the assessment orders of the firm of Abdul Karim & Co., and the other is a partnership deed dated the 31st May, 1953. Mr. Palkhivala says that when the draft statement of the case was submitted to this client he objected to these two documents and pointed our that they were not referred to before the Tribunal and the Tribunal in the statement of the case has not anywhere stated that those two documents were in fact referred to before the Tribunal. There is also a statement in paragraph 11 of the statement of the case to which Mr. Palkhivala had demurred and this is the statement :
'As some of the fact appearing in the assessment record of Abdul Karim & Co. and the previous order of the Tribunal may help their Lordship to judicially to decide the question in issue, we have included them in the statement of the case.'
7. Now, only those facts can help us judicially to decide a question in issue which were before the Tribunal. We must shut our eyes, as indeed the Tribunal should, to any facts or any materials or any evidence which were not before the Tribunal at the time when the appeal was heard. The record is completed as soon as the appeal is disposed of; anything outside the record should not be looked at by the Tribunal, not can we ourselves look at it. At one stage Mr. Palkhivala attempted to satisfy us that there was no evidence for the finding of the Tribunal that there had been a succession by the assessee to the firm of Abdul Karim Silk Mills. But we appointed out to Mr. Palkhivala that the two questions raised did not relate to the absence of evidence with regard to the finding of any fact. All that question (1) would entitle him to contend would be that on the facts found by the Tribunal, which facts were not challenged, the legal inference that there was succession was no justified. It would not however be true to say that the finding of the Tribunal that there was a succession is a finding of fact. It is a finding of law and at most it is a mixed finding or fact and law and it is always open to an assessee to challenge that finding, not indeed as a finding of fact but as an inference of law wrongly arrived at from consideration of facts established before the Tribunal.
8. It is, therefore, from this point of view that we now proceed to consider that order passes by the Tribunal and to see whether the finding given in that order that there was succession is justified by what was established before the Tribunal according to its own order. They point our :
'All that we have got to see is whether the business which was carried on by the assessee as from 1st February, 1944, was the same business which was earlier carried on by its predecessors the receiver of Haji Moosa Haji Abdul Karim and Others.'
9. That is clearly erroneous. The have to see much more than that. They have not only to see that the business is the same, but they have also to see whether when the business was carried on by the assessee, that business was a business in existence or whether that business had ceased to exist and had been discontinued. Then they go on to say :
'It is important to remember that although the partnership came to an end the business carried on by the partnership continued to be carried on by others, may be with short breaks.'
10. Now, we are not told for what duration the others carried on the business, nor what the nature of the breaks was. What little importance they attached to the stopping the business is clear from the next sentence :
'We have nothing before us on record to show that the business was, as a matter of fact, physically stopped at any stage.'
11. But, with respect, it was the duty of the Tribunal to determine whether the business was stopped or not and when it was stopped and what was the nature of the stoppage, and, as we have pointed our, in this case there should have been no difficulty in ascertaining when the business was stooped or whether the business was carried on by the receiver and under what circumstances. Then they go on to say :
'Even if the business remained closed or was suspended for a short time, that, in our opinion, would not make any difference whatsoever.'
12. That statement of the law is clearly wrong. What the Tribunal would have to consider is the nature of the closure or suspension. A business may be closed temporarily due to labour trouble or due to financial difficulties, although the owner of the business may have every intention of carrying on the business as soon as the temporary difficulties were remover. On the other hand, the closure or suspension may be a permanent closure or suspension and the owner of the business may have made up his mind to discontinue the business. The Tribunal has not even considered at what moment of time antecedent to the purchase of the business by the assessee the business was stopped, not had it considered what the nature of the stoppage was. There is another rather serious error in the statement of the case to which Mr. Palkhivala has drawn our attention and that is with regard to the assets purchased by the assessee. In paragraph 4 the Tribunal sets our the assets which were sold by the receiver and which consist of machinery, temporary structures, furniture, yarn and finished stock, trade marks and tenancy, and in the very next sentences the Tribunal goes on to state :
'It may be noted here that the goodwill, trade marks, yarn and finished stock were all sold by the receiver.'
13. It is difficult to understand where the Tribunal got this goodwill which according to this part of the paragraph was sold by the receiver to the assessee. The sale of the goodwill would be a very important and material fact because if goodwill was sold it would considerably assist the contention of the Department that what was sold was a going business. If, on the other hand, the goodwill was not sold, then it would support the contention of the assessee that if the business had been discontinued there was no goodwill to sell. Whatever it may be, we are of the opinion that in the order passed by the Tribunal, the Tribunal misdirected itself in law in coming to the conclusion that there was a succession by the assessee of the business carried on by Abdul Karim Silk Mills.
14. We will therefore answer the first question in the affirmative.
15. With regard to the second question, it depends upon what the true position in law is and that question can only be answered after the Tribunal, properly directing itself in law as indicated in this judgment, gives a finding as to whether there was a succession or not. We will therefore stand over the second question and direct the Tribunal to submit to us a supplemental statement of the case in the light of this judgment. It would be open to both the parties to place before the Tribunal not only the materials which were already before the Tribunal when it heard the appeal, but any other materials which they think relevant for the decision of this issue.
16. No order on the motion. Costs in the reference.
17. Reference answered accordingly.