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R.B. Jessa Ram Fateh Chand Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 256 of 1964
Judge
Reported in[1971]81ITR409(All)
ActsIncome Tax Act, 1922 - Sections 26(1) and 26(2)
AppellantR.B. Jessa Ram Fateh Chand
RespondentCommissioner of Income-tax
Appellant AdvocateP.N. Pachauri, Adv.
Respondent AdvocateB.L. Gupta and ;R.R. Misra, Advs.
Excerpt:
- .....is dissolved, but the business is not discontinued, there being change in the constitution of the firm, assessment has to be made under section 26(1), and if there be succession to the business, assessment has to be made under section 26(2).'13. this passage contains a clear exposition of the true scope of sub-sections (1) and (2) of section 26 of the act. it is true that the supreme court was directly concerned with a proceeding under section 44 of the act. but for investigating the propriety of the proceeding, it became necessary to analyse the true scope of section 26 of the act. consequently, the observations on pages 827 and 828 cannot be dismissed as obiter dicta. the decision of the supreme court as regards the true interpretation of section 26 of the act is binding upon this.....
Judgment:

V.G. Oak, C.J.

1. The question raised in this incline-tax reference is with respect to the procedure applicable to the assessment of a firm. The question has arisen thus.

2. The assessee is a firm, Messrs. Rai Bahadur Jessa Ram Fatehchand. The assessment year is 1959-60. The relevant accounting period was from October 24, 1957, to November 11, 1958. The assessee-firm was constituted under a deed of partnership executed in the year 1954. During the relevant accounting year one of the partners, Thakurdas, died on or about August 1, 1958. The assessee filed two separate returns for the assessment year. One return was for the period from October 24, 1957, to August 1, 1958, while the other return was for the period from August 2, 1958, to November 11, 1958. According to both the returns, there, was a loss for both the periods. The Income-tax Officer proceeded to make separate assessments for the two periods. He did not accept the position that there was loss for the first period. He made an addition of a sum of Rs. 9,305 with respect to the first period. Assessment for the first period was made on that basis.

3. In appeal the assessee urged before the Appellate Assistant Commissioner that the Income-tax Officer was in error in making two separate assessments for the two periods in the same accounting period. This contention was rejected by the Appellate Assistant Commissioner and also by the Appellate Tribunal. At the request of the assessee, the Appellate Tribunal has referred the following question of law to this court:

'Whether, on the facts and in the circumstances of the case, the assessee-firm was newly constituted after the death of the partner on August 1, 1958, within the meaning of Section 26(1) of the Act and whether the assessment should have been made on the firm as constituted at the time of making the assessment '

4. This case involves the interpretation of Section 26 of the Indian Income-tax Act, 1922 (hereafter referred to as 'the Act'). Section 26 dealt with change in the constitution of a firm. Sub-section (1) of Section 26 stated :

'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 or that a firm has been newly constituted, the assessment shall be made on the firm as constituted at the time of making the assessment. ...'

5. Sub-section (2) of Section 26 ran thus :

'Where a person carrying on any business, profession or vocation has been succeeded in such capacity by another person, such person and such other person shall, subject to the provisions of Sub-section (4) of Section 25,each be assessed in respect of his actual share, if any, of the income, profits and gains of the previous year. ...'

6. According to the assesses, the present case is governed by Sub-section (1) of Section 26 ; consequently, a single assessment for the entire accounting period ought to have been made. According to the department, this is a case of succession governed by Sub-section (2) of Section 26 ; consequently, two separate assessments for the two periods were properly made by the Income-tax Officer.

7. It is common ground that the death of Thakurdas about the 1st of August, 1958, did not put an end to the business. Business continued even after August 1, 1958. There were originally 12 partners. After the death of Thakurdas the business was continued by the remaining 11 partners. A fresh deed of partnership was drawn up on August 20, 1958. Clause (1) of the partnership deed dated August 20, 1958, provided that the new firm 'has taken over the entire business of the firm styled as R. B. Jessaram Fateh Chand, Merchants, Commission Agents & Bankers, Kanpur, as a going concern together with all the assets and liabilities'. The question, therefore, arises whether, on these facts, the present case is governed by Sub-section (1) or by Sub-section (2) of Section 26 of the Act.

8. In Sharma & Co. v. Commissioner of Income-tax, [1965] 57 I.T.R. 372 (All.), the assessee was aregistered partnership firm consisting of two persons, A and B. The partnership was dissolved on December 31, 1947, when the entire business was transferred to B. Thereafter B carried it on as sole proprietor. Subsequently, B entered into a partnership with his brother, C, it being agreed that the partnership would be deemed to have come into existence on the 1st of January, 1948. It was held by this court that Section 26(1) of the Act was not applicable. Facts of that case were peculiar. After the dissolution of the partnership on December 31, 1947, business was carried on by the sole proprietor, B, for some time. Facts of the present case are different.

9. In the case of In re G.I.M. Gregory & Co., [1937] 5 I.T.R. 12 (Cal.) it was held by Panckridge J. that Section 26(1) only applies when a change occurs in the Constitution of a firm or a firm is newly constituted during the currency of the partnership. It has no application where the new or succeeding firm comes into existence after the term of the former partnership due to effluxion of time.

10. In Jittanram Nirmalram v. Commissioner of Income-tax, [1953] 23 I.T.R. 288 (Pat.), it was held by the Patna High Court that for the application of Section 26(2) of the Act it is sufficient if there is substantial identity or similarity in the nature and extent of the activities carried on between the two firms.

11. In Bhausa Ganusa Pawar & Co. v. Commissioner of Income-tax, [1966] 62 I.T.R. 75 (Bom.), it was held that the mere circumstance that the business has continued without interruption and a new firm has come into existence from the moment of the death of the deceased partner of the old firm is not sufficient to hold that there has been a mere change in the constitution of the old firm. In that case the question before the court was about registration of a firm. The question about the scope of Section 26 of the Act did not directly arise for consideration.

12. In Shivram Poddar v. Income-tax Officer, Calcutta, [1964] 51 I.T.R. 823 (S.C.), the Supreme Court had occasion to discuss the true scope of the two sub-sections of Section 26 of the Act. Their Lordships observed on pages 827 and 828 thus :

'Under the ordinary law governing partnerships, modification in the constitution of the firm in the absence of a special agreement to the contrary amounts to dissolution of the firm and reconstitution thereof, a firm at common law being a group of individuals who have agreed to share the profits of a business carried on by all or any of them acting for all, and supersession of the agreement brings about an end of the relation. But the Income-tax Act recognises a firm for purposes of assessment as a unit independent of the partners constituting it; it invests the firm with a personality which suivives reconstitution. . . . Where the firm is dissolved, but the business is not discontinued, there being change in the constitution of the firm, assessment has to be made under Section 26(1), and if there be succession to the business, assessment has to be made under Section 26(2).'

13. This passage contains a clear exposition of the true scope of Sub-sections (1) and (2) of Section 26 of the Act. It is true that the Supreme Court was directly concerned with a proceeding under Section 44 of the Act. But for investigating the propriety of the proceeding, it became necessary to analyse the true scope of Section 26 of the Act. Consequently, the observations on pages 827 and 828 cannot be dismissed as obiter dicta. The decision of the Supreme Court as regards the true interpretation of Section 26 of the Act is binding upon this court under Article 141 of the Constitution.

14. Mr. Brijlal Gupta appearing for the department pointed out that the assessee itself filed separate returns for the two parts of a single accounting period. The assessee applied for registration for the first period only. The assessment for the second period proceeded as against an unregistered firm. It was, therefore, urged by Mr. Gupta that it is not open to the assessee to urge now that a single assessment under Section 26(1) ought to have been made. Now, there cannot be an estoppel against statute. If in fact the procedure adopted by the Income-tax Officer was incorrect, the defect is not cured by the attitude taken up by the assessee.

15. Mr. Brijlal Gupta further pointed out that the appeal before the Appellate Tribunal was confined to the first period. Assessment for the second period has become final. It was, therefore, suggested that no useful purpose would be served by the court's answering the question referredto it.

16. It is true that some complication may arise due to the fact that assessment for the second part of the accounting period has become final. But we are not sure that the assessee will not get any relief by our answering the question before the court. If the question is answered in favour of the assessee, there would be three alternatives before the Tribunal. The assessment may be reopened for the entire accounting period. Or the assessment may be reopened for the first part only. Or the assessment for the first period may be merely set aside. We do not decide at this stage which is the correct alternative to be adopted by the Tribunal. It will be for the Tribunal to decide its course on receipt of the court's answer to the question referred by the Tribunal. In view of the decision of the Supreme Court in Shivram Poddar v. Income-tax Officer, Calcutta, the question has to be answered in favour of the assessee.

17. Our answer to the question referred to the court is as follows. On the facts and in the circumstances of the case, change occurred in the constitution of the firm within the meaning of Section 26(1) of the Indian Income-tax Act, 1922, and assessment should have been made on the firm as constituted at the time of making the assessment. The question is answered in favour of the assessee. We make no order as to costs in this reference.


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