1. This is a reference made by the Income-tax Appellate Tribunal under Section 66(1) of the Indian Income-tax Act, 1922.
2. The relevant facts are briefly these : The firm of Messrs. Ghella Dayal, consisting of three partners, carried on business in and prior to Samvat Year 1995. A partnership deed, defining the shares of the individual partners, dated October 20, 1932, is in the record. That shows that Haridas Ghella Dayal had a share of six annas three pies in a rupee, Gokuldas Jivraj had a share of six annas three pies in a rupee, and Karsondas Premji, as the manager of an undivided Hindu family, was entitled to a share of three annas six pies in a rupee. The partnership deed further recites that a shop rented in the name of Haridas Ghella Dayal from Ashad Samvat Year 1960 (over forty years ago) at the Ghadial Gaily in the Mulji Jetha Market was used by the partnership for its business in piecegoods, and the rent of the shop was to be paid by the partnership. On October 30, 1939, (Aso Vad 2, 1995) Gokuldas died. The account year of the partnership was the Samvat Year. As this death occurred about twelve days before the close of the Samvat Year, nothing appears to have been done for those days. As from November 12, 1939, that is the beginning of the new Samvat Year 1996, a new partnership was formed. Three sons of Haridas were included as partners, and the shares of the five partners were reshuffled. Gokuldas Jivraj or his estate represented by his legal representative was not given any share in this business. A partnership deed, recording the terms of the partnership and dated December 1, 1939, was duly executed, and is part of the record. According to that Haridas got a share of five annas; his three sons-Dwarkadas, Baboobhai and Ajitsinh-got a share of two annas each, while Karsondas Premji's share was raised from three annas six pies to five annas. From the statement of case it appears that at the end of Samvat Year 1995 there were several outstanding contracts of the old firm and there was also the stock-in-trade. There existed also the out standings of the old firm. Before the Income-tax Officer it was pointed out on behalf of the Department that the business conducted by the reconstituted firm was in piecegoods, that the old trade name with its goodwill was used, and the management of the business before and after the change remained identical. The business premises continued to be the same, and the assets and liabilities of the old partnership were after a period of nineteen months taken over by the reconstituted firm. The reconstituted firm was registered under Section 26A of the Income-tax Act, 1922.
2. When the Tribunal gave its judgment, it appears to have been considerably influenced by three wrong assumptions which find place in its judgment, but which it corrected in the statement of case. First, the members were under the impression, when giving their judgment, that the three sons of the deceased partner were admitted into the new partnership. This is a vital point which must affect the deciding authority. It was later on ascertained by the Tribunal, when stating the case, that this was an error and neither the widow nor the representative of the deceased partner was given any share in and from Samvat Year 1996, but the three sons of one of the surviving partners were given two annas share each. The second material point on which they had misguided themselves when writing the judgment was that the whole of the out standings and the stock-in-trade were taken over by the new firm on the day on which the new partnership started. This again is a very vital fact in deciding whether the business was continued, that is, whether it was the business of the new firm. When the case was stated for the opinion of the Court, it was found that the stock-in-trade and out standings were not taken over, as erroneously assumed by the Tribunal. Comparatively only a small portion of the out standings and stock were taken over and that too after the expiration of nineteen months. The third error was only technical in describing the widow of the deceased partner as executrix. Although in the statement of case the members of the Tribunal have stated that these were immaterial inaccuracies, I do not think that is correct. We are not, however, directly concerned with these inaccuracies. When the matter proceeded before the Tribunal, on the material put before them, (although on the two material points they had misdirected themselves, as I pointed out above), they found that there was no more than a change of constitution of the firm. They rejected the contention that an altogether new firm had come into existence.
3. The question for consideration in respect of the income of the assessee-firm, which is the firm doing business in Samvat Year 1996, has to be considered under two Acts : (1) the Income-tax Act and (2) the Excess Profits Tax Act. Section 26 of the Indian Income-tax Act runs as follows:
Where, at the time of making an assessment under Section 23, it is found that a change has occurred in the constitution of a firm...the assessment shall be made on the firm as constituted at the time of making the assessment.
The first proviso to this section runs in these terms:
Provided that the income, profits and gains of the previous year shall, for the purpose of inclusion in the total incomes of the partners, be apportioned between the partners who in such previous year were entitled to receive the same.
The scheme, therefore, clearly is that while the assessment is being made on the firm as a whole, the individual partners will be held liable in respect of their share of the profits only to the extent they were individually entitled to receive the same. The question before the Tribunal in respect to the assessment under the Income-tax Act was, therefore, governed by Section 26. In that connection the Tribunal, after sifting the material before them, came to this conclusion:
We agree, with the Income-tax Officer that the firm styled as Messrs. Ghella Dayal continued the business after the death of the partner Gokuldas Jivraj and the profits accrued on the old undertakings of the firm are the profits of the firm and have to be taxed in the hands of the firm subject to the provisions of Section 26(1).
A perusal of that judgment clearly shows that the Tribunal has failed to keep apart the constitution of the old firm and of the new firm, and the word 'firm' has been not accurately used when referring to the assessee-firm as contrasted with the firm which was doing business in Samvat Year 1995. For the purpose of Section 26 of the Income-tax Act, this finding is conclusive and binding on us. The only thing which this Court can do is to ascertain whether the assessment on the above finding is properly done under the Income-tax Act.
4. The question submitted to the Court is:
Whether in the circumstances of the case the sum of Rs. 56,260 has rightly been held by the Tribunal to form part of the profits of the assessee for the purposes of the income-tax assessment and the excess profits tax assessment?
The first part of this question deals with the income-tax assessment, and the sum of Rs. 56,260 is held by the Tribunal to be the profits of the assessee within the meaning of Section 26 of the Indian Income-tax Act. In view of the finding, the question answers itself. The contention of the assessee that the assessment under the Income-tax Act was wrongly made cannot, therefore, be accepted. I have already pointed out that the main part of Section 26 of the Income-tax Act deals with the assessment of the firm, and the liability of the individual partners, as mentioned in the proviso, is in respect of the share to which they are individually entitled.
5. The second part of the question deals with the assessment of this sum to tax under the Excess Profits Tax Act. On behalf of the) assessee it was contended that these are not the profits of the business of the assessee. They were profits received or recovered by the assessee-firm for and on behalf of the old firm, and in distributing the profits, for the purposes of the Income-tax Act under Section 26, the Department itself has divided this sum of Rs. 56,260 and the sum of Rs. 10,503, which was assessed to be the profits of the business of the assessee-firm itself in Samvat Year 1996 separately. The first sum they have divided between the two surviving partners and the widow of the deceased partner. The last sum of Rs. 10,503 they have divided between the two Surviving partners and the three new partners according to the newly arranged shares. In this connection the assessee strongly relies on the unequivocal finding of fact in the statement of case recorded by the Tribunal. In paragraph 5 they have stated as follows:
In the Income-tax Appeal the Tribunal recorded the following findings of fact in its order under Section 33, dated November 4, 1943,...
(5) The profits on the old undertakings were divided between the two original partners and the widow of the deceased partner in her capacity as the executrix of her deceased husband.
In the later part of the paragraph they have corrected the word 'executrix' as meaning 'administratrix'. In para. 6 of the statement of case they next considered the arguments of the assessee in respect of the assessment under the Excess Profits Tax Act. The argument was in these terms:
But the point made was that the profits in dispute (Rs. 56,260) did not come in for. computation as the assessee-firm was not the owner thereof.
The Tribunal rejected it by stating:
For the reasons mentioned in the Tribunal's order in. R.A.A., No. 15-(Bombay) of 1943-44, dealing with the income-tax assessment, the Tribunal repelled this contention and found that the profits disclosed in the 'A' account were profits of the assessee's business.
The profits disclosed in the 'A' account were the sum of Rs. 56,260.
6. On behalf of the Commissioner it has been urged that this is a finding of fact by the Tribunal, and this Court should not go behind it. It is contended that as this sum of Rs. 56,260 is found to be the profits of the assessee's business, the provisions of the Excess Profits Tax Act applies, and the assessee-firm (as reconstituted in Samvat Year 1996) is liable to pay the excess profits tax on the whole profit. Counsel relied on the scheme of the Excess Profits Tax Act for this purpose. In Section 2(5) the word 'business' is defined, and the last proviso says that
all businesses to which this Act; applies carried on by the same person shall be treated a? one business for the purposes of this Act.
Section 4 deals with 'Charge of tax', and Section 6 defines, how the standard profits have to be computed. The argument of the assessee is based on Section 8. Sub-section (1) says:
As from the date of any change in the persons carrying on a business, the business shall, subject to the provisions) of this section, be deemed for all the purposes of this Act...to have been discontinued, and a new business to have been commenced.
It appears that some reliance was placed on Sub-section (3) of Section 8 also before the Tribunal. Having regard to the view we take of the matter, it is not necessary to discuss those provisions of the Act.
7. The question before the Court is : whether the profits of Rs. 56,260 are the profits of the business of the assessee-firm for the accounting year, i.e. Samvat 1996? For this purpose the change, which occurred in the constitution of the firm in Samvat Year 1995, is not material. The one and the only relevant question is whether this sum is the profit of this new : business, that is the business of the newly constituted firm? The question is : 'What are the profits of the business?' Having regard to what is stated in Section 2(5) last proviso, it is clear that in order that different businesses may be considered as one business, they should all be carried on by the same person. That, again, must be as the owner. To put it in other words, the same person must be the owner of the resultant profit or loss of the business. As an illustration one may consider the case of a firm doing business as merchants in cotton for its own benefit. Its business may result in a profit or loss to which the partners are entitled. If that firm was employed by an upcountry constituent to do business on his behalf, as the merchants in Bombay will not enter into transactions in the name of the up-country constituent, the transactions will be entered into in the name of the local dealer in Bombay with the other party in Bombay. Therefore, according to the books of the local dealer the business will appear from the contracts as if it was the business of that dealer with the other party. The profit or loss would also appear as resulting from those contracts in the name of the local dealer. It is, however, clear, and it was not disputed at any stage of the case, that the local dealer will be entitled to contend that the book profits were not the profits of his firm, but in that business the local dealer was only a commission agent of the upcountry constituent, and the local dealer will not be liable to pay the excess profits tax on the profits so appearing in his books. In the present case, having regard to the finding of the Tribunal that the profits of the old undertakings (which undisputably amount to Rs. 56,260) were divided between the original partners and the widow of the deceased partner, it is clear that those profits were not the profits of the assessee firm. The later statement of the Tribunal in rejecting the argument urged on behalf of the assessee firm in respect of its non-liability to pay excess profits tax, is only a portion of the sentence which they had recorded in their judgment. On looking at the judgment, (of which I have quoted the relevant portion above,) it is clear that its conclusion that the profits disclosed in the 'A' account were the profits of the assessee-firm, was for computation under Section 26. If that finding meant that the profits belonged to the partners of the assessee-firm, it is directly contrary to the express finding recorded by the Tribunal in the statement of case. It is, therefore;, clear that what is stated by the Tribunal in para. 6 is not its finding of fact. The finding of fact is recorded by the Tribunal in sub-para. (5) of para. 5 of the statement of case.
8. In my opinion, the position of the assessee-firm in respect of the undertaking of the old firm, on the footing that the resultant profit did not belong to the partners of the assessee-firm, is absolutely similar to the position of the local dealer doing business under the instructions of an upcountry constituent. In both cases the firm, when attempted to be assessed, is entitled to point out that the profits are not the profits of its business, but they are the profits of the business of another party. If on inquiry it is found that the contention is correct, they are not the profits of the firm tinder the Act. Having regard to the conclusion of the Tribunal in this case that those profits of the old undertakings were divided between the two surviving partners and the administratrix of the deceased partner of the old firm in the proportion of their shares under the old deed, they are not the profits of the assessee-firm. Under those circumstances the profits in the hands of the assessee-firm are not liable to excess profits tax under the Excess Profits Tax Act.
9. The answer to the second part of the question, therefore, is in the negative.
10. Having regard to the fact that the assessee has failed in respect of the first part of his contention and succeeded in respect of the second part, we make no order for the costs of this reference.