CHANDRA REDDY C.J. - The Income-tax Appellate Tribunal, Hyderabad Bench has referred the following question for the opinion of this court under section 66(1) of the Indian Income-tax Act (hereinafter called the Act for the sake of convenience) namely :
'Whether, the assessee firm is entitled to exemption from tax in respect of the profits of Rs. 11,878 relating to the period April 1, 1946, to May 13, 1946, or Rs. 26,518 relating to the period April 1, 1946, to July 5, 1946 ?'
The material facts leading up to this reference may be shortly stated. Two persons, by names Kotaiah and Veera Sarabhaiah, entered into a partnership in 1915 and carried on the business of manufacturing expellers, spare, parts etc. under the name and style of 'Shanker Foundry'. The only document in support of the partnership was made on November 30, 1938. That document recited, inter alia, that the shares of the two partners would be equal until the business was discontinued. As Kotaiah, one of the partners, was not maintaining sound health, it was decided between them that they souls convert their business into that of a private limited concern. With this object in view, they took steps to promote and float a company called 'The Shanker Foundry and Machinery .' It was agreed that the factory lands and buildings, machinery, furniture, implements, etc. and the goodwill of the business should be sold to the limited concern for a consideration of Rs. 2,00,000 to be received in cash. While so, Kotaiah made a will on May 12, 1946 bequeathing all his properties including his interest in the partnership to his wife, Durgamba. The next day the testator died leaving behind him his wife, Durgamba, with considerable movable and immovable properties and his business. The relevant terms of the will are set out hereunder :
'(1) I have hereby empowered my wife, Poshita Kanaka Durgamba, to affix, in my stead, the signatures which would have been affixed by me otherwise, for receiving my half share of the amount of consideration, which is jointly due to me and Veera Sarabhaiah Guru who are the properties of the Old Shanker Foundry and Machinery ., and to receive the said amount of consideration. I have hereby also empowered my wife, Poshita Kanaka Durgamba, to affix her signatures in my stead along with my partner, Veera Sarabhaiah Garu to all the bank papers, court paper, sale deed, cowles, kaboliyats agreements, papers relating to Government and the Municipalities, and to all papers which should bear my signature in the matter of my shares, transfers and dividends etc. relating to the limited companies and to take out all steps in that behalf.
(5) If for any reason the transaction relating to the above mentioned limited company does not fructify unfortunately and thereby the amount which is expected to be got is not received and if the said partner, Veera Sarabhaiah Garu, and clears, Rupakula Lakshminarayana Garu, both of them should consider that it is better to keep the said workshop and carry on the business as before, they should carry on the business accordingly; if on the other hand the aforesaid two individuals should consider that it is beneficial to sell the property settled to be sold to the limited company in the manner aforesaid, to any outsiders as warrant by the prevailing times and circumstances, they shall sell the same accordingly. If may wife shall in my stead co- operate with the said Veera Sarabhaiah Garu, cause the share to be done accordingly, keep the property and carry on the business my wife shall from out of the joint profits derived therefrom and also from out of the sale consideration in case sale is effected carry out the said acts enumerated in above items 2, 3, and 4 and my wife is hereby empowered to do accordingly.
(13) My wife my partner, Veera Sarabhaiah Garu, and the aforesaid clerk, Lakshminarayana, all the three shall hold consultations and according to the majority opinion, they shall give effect to all the above mentioned provisions made by me. The said three individual shall be the trustees in the Devasthanam trust deed also and manage the affairs; they shall manage the choultry and cows also and maintain proper accounts. If any of them should die or vacate the office, the other two individuals shall choose in his stead another person who is virtuous and who has an orthodox view and spiritualistic bent of mind and the right to appoint by election shall in the aforesaid manner continue for ever.'
After the death of Kotaiah, the business was continued by the surviving partner, Veera Sarabhaiah, and Durgamba till July 5, 1946, when the sale of the business mentioned above was completed in favour of 'The Shanker Foundry and Machinery .'
In the course of the assessment proceedings for the year 1947-48, the firm claimed that it was entitled to the benefit of exemption from tax conferred by section 25(4) of the Act in respect of the business profits of the period commencing from April 1, 1946, and termination with July 5, 1946, when the sale of the partnership assets took place.
As the accounts were not made up from April 1, 1946, to May 13, 1946 the Income-tax Officer computed the profits arising from the business for the period, April 1, 1946, to July 5, 1946 at Rs. 26,518 and apportioned the said profits to two periods, namely, April 1, 1946, to May 13, 1946, and May 14, 1946, to July 5, 1946, the profits of the first apportionment being Rs. 11,878. There was no dispute as regards these figures. It is seen that the Revenue gave the benefit of section 25(4) to the assessee only in respect of the proportionate profits of Rs. 11,878.
The assessee carried the matter in appeal to the Appellate Assistant Commissioner contending that the duration of the broken period for which the firm was entitled to the benefit of section 25(4) was from April 1, 1946, to July 5, 1946, the date of sale of the business of the company to the newly floated company and not from April 1, 1946, to May 13, 1946, the date of the death of Kotaiah. The Appellate Assistant Commissioner confirmed the order of the Income-tax Officer rejecting the plea of the assessee that the succession to the business of the firm of Kotaiah and Veera Sarabhaiah occurred only on July 5, 1946.
The assessee carried a further appeal to the Income-tax Appellate Tribunal without any success. However, the Tribunal at the request of the firm referred the aforementioned question for the opinion of this court under section 66(1) of the Act.
The same contention is urged before us in this reference on behalf of the assessee. Before we examine the soundness of the submission made by the learned counsel for the assessee, it is convenient to read section 25(4) of the Act which is as under :
'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 :
It is clear from this section that if the partnership carrying on a business on which tax was at any time charged under the provisions of the Indian Income-tax Act, 1918, is succeeded by a limited concern, the former entity is eligible for relief if it treated as one of continuing partnership in which there was not a mere change in the composition of the partnership. That being the legal position, the firm of Kotaiah and Veera Sarabhaiah could claim the advantage of section 25(4) from April 1, 1946, to the time when it was succeeded by another assessable unit in such capacity i.e., as the owner thereof.
A perusal of that section establishes the following three essential ingredients, namely (i) change of ownership, (ii) continuity in the integrity of the business and (iii) identity and continuity of the business in the hands of the person succeeded and the person succeeding. The word 'succession' connotes transfer of ownership and the person succeeding another must have by such succession become the owner of the business which his predecessor was carrying and which his successor thereafter carries on in the capacity of owner : (vide Jupudi Kesava Rao v. Commissioner of Income-tax). Succession may take place not only when there is a transfer inter vivos but also when there is a devolution of the business of a person either as a heir or as a legatee. Whenever there is a change of ownership either by reason of devolution in either of the modes mentioned above or by reason of transfer to a purchaser, succession occurs within the purview of section 25(4).
In Maharajadhiraj of Darbhanga v. Commissioner of Income-tax it was laid down by the Privy Council that for the purposes of section 26(2) of the Act the son must be regarded as having succeeded to the business of the father. A bench of the Allahabad High Court in Pt. Lachhman Pandey In re held that when a joint family acquired a business from an individual member of the family under an award, succession in the capacity of the owner occurred on the date of the award when the property ceased to be the self acquired property of the individual member and became the joint family property and thereafter was allotted to the members of the family.
Bearing these principles in mind we have to consider as to when the succession occurred in this case whether on the date of the death of Kotaiah or on the date when the sale was effected in favour of the limited company. The contention presented on behalf of the assessee both before the Revenue and the Appellate Tribunal and before us is that the death of Kotaiah does not determine here the date of succession for the reason that Durgamba, the legatee under Kotaiahs will, carried on the business pursuant to the directions of the will.
As substantiating this proposition, learned counsel for the assessee called in aid the decision of the Supreme Court in Executors of the Estate of J.K. Dubash v. Commissioner of Income-tax. In that case the assessees were the executors of the will of a person who died in April, 1942. They were directed to carry on the testators business as a going concern as if they are absolute owners but without being responsible for loss for a particular period. The testator further directed them to sell the business to a relation of his or to any other person as a going concern. In such circumstances the executors claimed the benefit of section 25(4) for the period between the date of the death of the testator and the date of sale of the concern which was effected by them as per the directions in the will. The department took the stand that the assessee could get the benefit of section 25(4) only for the period between the end of the previous year and the date of the death of the testator when the executors succeeded to the business. The Supreme Court, in an appeal from the judgment of the High Court of Bombay which answered the question against the assessee, ruled that succession took place when the testator dies, since his whole estate including the business vested in the executors and they carried on the business within the meaning of section 3 read with section 10. One of the learned judges (Patanjali Sastri J. as he then was) ruled that the expression 'succeeded by another person' in section 26(2) and section 25(4) covered not only succession inter vivos but also the case of succession on death.
We fail to see how this ruling renders any assistance to the assessee. On the other hand, the dicta in that case furnishes an answer to the contention presented on behalf of the assessee. An argument similar to the one advanced in this case, namely, that as the business was continued under the directions of the testator as a going concern to be sold as a going concern there was no succession by the executors 'in such capacity till the sale was made', was repelled by their Lordship observing that that consideration was not relevant for the enquiry. It follows that the only test for the decision of the question as to when succession occurred was whether there was a change of ownership of the business and whether the successor continued the business as owner. We may also point out here that Patanjali Sastri J. (as he then was) remarked that although the transfer of ownership was ordinarily involved in cases of succession falling within section 26(2) or section 25(4) of the Act, it could not be regarded as an essential element of succession within the meaning of those proceedings, having regard to the fact that the Income-tax Act directed its attention primarily to the person who got the income profits or gains rather than to the ownership or enjoyment thereof. This is an a fortiori case since indisputable Durgamba succeeded to the estate of Kotaiah vested in her and the income accruing from the business could be enjoyed by beer unlike the case of an executor.
The next point raised by the learned counsel for the assessee was that the death of Kotaiah did not bring about dissolution of the partnership but the partnership continued as before with a mere change in the constitution of the concern, there being only a change of the personnel of the partners, and so succession could be regarded as having taken place only when the business was transferred to the newly floated company. This is sought to be established by the following contention. The general rule laid does in section 42 of the Indian Partnership Act that the death of one of the partners results in dissolution of partnership in inapplicable to the present case as there was a contract to the contrary within the meaning of that very section. By reason of section 47 of the Partnership Act the partnership must be deemed to have continued despite the death of Kotaiah.
So far as the first limb of the argument is concerned we do not think that it is permissible for the assessee to urge it now before us for the first time. This case was not put forward either before the department or the Tribunal. The rival contentions urged before the Tribunal are those set out hereunder :
'The income-tax authorities took the view that by reason of the death of Kotaiah on 13th May, 1946 and in the absence of any provision in the partnership deed made on 30th November, 1938 (annexure A), the partnership between the two, Kotaiah and Sarabhaiah, became dissolved by operation of law on 13th May, 1946, that thereafter and until the business assets were sold to the limited concern on July 5, 1946, the erstwhile business of the said partners was being carried on by Sarabhaiah and Duragambe, that, in the absence of any material to support that they formed a partnership, they were to be assessed in the status of association of persons on the profits of the period May 14, 1946, to July 5, 1946, that the first succession to the partnership business of Kotaiah and Sarabhaiah after April 1, 1939, tool place on May 13, 1946, when Kotaiah died and the firm became dissolved and as such it was the second succession that took place on July 5, 1946, when the entity consisting of Sarabhaiah and Duragambe sold the asset to the Shankar Foundry and Machinery . Having taken this view, the Income-tax Officer held that the firm of Kotaiah and Sarabhaiah was entitled to the benefit of section 25(4) in respect of the profits of its business for the broken period April 1, 1946, to May 13, 1946.
On the other hand, the contentions raised by the assessee were as follows : Firstly, that the firm of Kotaiah and Sarabhaiah did not become dissolved by reason of the death of the former on May 13, 1946, that from that date right up to July 5, 1946, his wife continued to represent him in the said partnership business by reason of the directions given in the will and the provisions of sections 47 and 50 of the Indian Partnership Act, 1932, and, secondly, assuming, however that the firm Kotaiah Sarabhaiah became dissolved on May 13, 1946, and that change of ownership to the business took place from that entity to another entity, Duragamba Sarabhaiah, the correct status of the latter entity was 'firm' and not an association of persons as held by the department, that, as such, the change that took place on May 13, 1946, was 'merely a change in the constitution of a partnership' within the meaning of section 25(4), that, therefore, the first succession to the business of Kotaiah Sarabhaiah, after April 1, 1939, took place only on July 5, 1946, and hence the profits of the entire period ending with July 5, 1946, are entitled to the benefit of section 25(4).
It is seen that the case of the assessee was not that the partnership was continued under an agreement of the parties which would constitute a contract contrary to section 42 of the Indian Partnership Act but that the partnership was continued under the directions of the testator. This position is apparent from the statement of the case to which both parties agreed. Such being the position, it is not open to the assessee to urge for the first time before us a point not raised either before the assessing authority or the Appellate Assistant Commissioner or even before the Tribunal. It was pointer out by their Lordships of the Supreme Court in Commissioner of Income-tax v. Calcutta Agency Ltd., that as the statement of the case preferred by the Appellate Tribunal under the rules framed under the Indian Income-tax Act was prepared with the knowledge of the parties concerned and they had a full opportunity to apply for addition or deletion from that statement, the High Court has to base its judgment on the facts as stated in the Statement of the case.
That apart, there is no foundation for the argument that there was an agreement which would take the instant case out of the ambit of section 42. The argument of Sri Rajashwara Row, learned counsel for the assessee, is that the conduct of Durgamba and Veera Sarabhaiah would establish a contract to the contrary contemplated by section 42. The learned counsel invites us to draw such an inference from the fact that both of them carried on the business till the date of sale of the assets of the partnership to the limited concern. Assuming that such an agreement could be imputed to Durgamba and Veera Sarabhaiah, that does not advance the case of the assessee for the agreement should be between the original partners of the firm at the time of the formation of the partnership. Nowhere was it suggested that the continuation of the business was traceable to a contract entered into between the parties that the partnership was to continue in spite of the death of one of the partners. We do not think that Ram Kumar v. Kishori Lal relied on by the counsel is of any help to the assessee. What was held there was that the words 'subject to the contract between the partners' in section 42 of the Indian Partnership Act do not convey that the idea that the contract must be express and not convey such a contract to continue the partnership after the death of the partner could be inferred from the conduct of the parties. It was not laid down there that the agreement between the surviving partner and the legal representatives of a deceased partner was relevant for the purpose of deciding whether there was a contract to the contrary. Of course, they observed that the conduct of the surviving partner and the heirs of the deceased could throw light on the existence of such a contract between the original partners. There is nothing in that case which would advance the case of the assessee here.
Similarly, the judgment of Subba Rao C.J. in Sudarsanam v. Viswanadham Bros. does not advance the case of the assessee any further. The rule stated there was that the contract to the contrary need not be in writing. It could be culled out from the conduct of the parties and the surrounding circumstances. We asset to the proposition contained in these two rulings that to constitute an agreement to the contrary it need not be express or reduced to writing and that it could be made out from the conduct either of the original partners or of the surviving partner and the heirs of the deceased as throwing light on the agreement of the original partners. But the conduct of the parties must be such as would inevitably lead to the conclusion that such a contract existed.
Sri Rajeswara Row then fell back on the argument that the partnership deed itself contains a specific provision that the partnership was to continue till the business was discontinued. Here again, such a case was not put forward before any of the Tribunals.
Therefore, it is not competent for him to raise this point for the first time before us. Even otherwise this argument is untenable. All that the partnership deed recites was that the profits and losses would be divided between the partners in certain shares until the business was discontinued and not that the partnership would not stand dissolved on the death of one of the partners but it would be deemed to continue so long as the business was not discontinued. There is, therefore, no substance in this argument either.
We shall now turn to the second branch of the argument, namely, that there was no change in the assessable unit inasmuch as the partnership consisting of Veera Sarabhaiah and Durgamba was a continuation of the old one, therefore, both the assessable units must be treated as one and the same by reason of the applicability of section 47. We do not think that section 47 of the Indian Partnership Act contains any principle which is helpful to the assessee here. For one thing, section 47 contemplates the dissolution of the partnership and it is only on the footing of dissolution that the surviving partner is empowered to do certain things for the purpose of winding up the concern. The language of that section does not warrant the assumption that, notwithstanding the death of a partner, the partnership should be deemed to continue. The section merely empowers the surviving partner to do certain things which are absolutely essential to wind up the affairs of the firm and to complete all transactions begun but left unfinished at the time of the dissolution.
An alternative contention was urged that between the date of the death of Kotaiah and the transfer of the assets of the business to the limited concern, there was no discontinuance of the business and all that the surviving partner and Durgamba did was to wind up the affairs of the company. In other words, there was cessation of business between the date of the death of Kotaiah and the sale of the assets to the newly floated company. This argument also is opposed to the statement of the case. It would appear from the statement of the case that the erstwhile business of the said two partners was being carried on by Veera Sarabhaiah and Durgamba. It was nowhere suggested that the business was discontinued except for the purpose of winding up the affairs of the company. On the other hand, the parties proceeded on the assumption that there was continuity in the integrity of the business. Therefore, the assessee should not be permitted to raise this point before us. Even otherwise, section 47 of the Indian Partnership Act would not govern to present case for the reason for the reason that that section has in contemplation the winding up of the affairs of the partnership by the surviving partner. That does not envisage the association of the heirs of the deceased partner. In this case, admittedly, Durgamba joined Veera Sarabhaiah to carry on the business till the asset of the old partnership along with the goodwill of the business were transferred to the Shankar Foundry and machinery .
The following passage in The Law of Partnership be Desai (1940 edition, at page 243) under section 47 of the Indian Partnership Act does not support the view which the learned counsel for the assessee pressed upon us, namely, that the association of the heirs of a deceased partner would not make any difference to the applicability of section 47. The passage is as under :
'The authority of a partner to bind that firm ordinarily comes to an end on the dissolution of partnership; but notwithstanding the dissolution the rights and obligations of partners continue in all things necessary for the winding up of the business. It becomes the duty of the partners or the surviving partners to wind up the affairs of the firm and as between the partners doing so and the other partners of their representatives the former have by virtue of their overriding duty the power to complete all transactions bean but unfinished at the time of the dissolution.'
This statement of law does not indicate that the representatives of the deceased partner could also join the surviving partner for winding up the affairs of the firm. All that is stated there is that the surviving partners have a duty and power to complete all transactions having regard to the relationship between the surviving partners and the heirs of the deceased partner. For these reasons, our conclusion is that section 47 of the Indian Partnership Act does not enable the assessee to claim that the partnership continues notwithstanding the death of one of the partners. It follows that the old partnership was succeeded by Veera Sarabhaiah Durgamba in the capacity of owners and as such succession took place for purposes of section 25(4) on the death of Kotaiah and the assessee is entitled to the benefit of that section only for the period from 1st April, 1946, to 13th May, 1946.
For the reasons mentioned above, we answer the question referred to us in favour of the department and against the assessee. The assessee will pay a sum of Rs. 100 to the department by way of costs.
Writ Petition No. 933 of 1959.
This writ petition, in addition to raising the point as to the date of succession within the ambit of section 25(4) of the Indian Income-tax Act, poses the question whether a certificate issued under section 46(2) of the Indian Income-tax Act is invalid because of the failure of the department to issue a notice of demand to the petitioner, who is the adopted son of Veera Sarabhaiah. It may be mentioned here that after the assessment was made for the relevant year notice of demand was served both on Veera Sarabhaiah and Durgamba and when there was no compliance with this demand, a certificate under section 46(2) was issued. After this Veera Sarabhaiah died. Notwithstanding the death of Veera Sarabhaiah the proceedings pursuant to the certificate under section 46 were continued and the properties of Veera Sarabhaiah in the hands of the petitioner were attached. It is to quash this attachment that the present petitioner is taken out. The contention of the learned counsel for the petitioner is that as the petitioner was not served with notice it would be ineffective as against him, since there was violation of section 29 of the Indian Income-tax Act. We do not think that we can give effect to this argument. Section 29 contemplates only an issue of notice either to the assessee or other persons liable to pay such tax. In this case, the requirements of section 29 are satisfied as the assessee was served with the notice of demand. We, therefore, reject the contention based on section 29.
In the result, the writ petition is dismissed without costs.