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Commissioner of Income-tax, Punjab Vs. Ram Lall Nanak Chand. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtPunjab and Haryana High Court
Decided On
Case NumberIncome-tax Reference No. 51 of 1962
Reported in[1965]58ITR113(P& H)
AppellantCommissioner of Income-tax, Punjab
RespondentRam Lall Nanak Chand.
Cases ReferredR. B. Jodha Mal Kuthalia v. Commissioner of Income
Excerpt:
.....claimed the relief under section 25(4) was not in existence at the commencement of the amending act of 1939. at best he was of the opinion that the partnership came into existence at midnight between the 31st of march and the 1st of april and that, therefore, it could not be said to have been carrying on business at the commencement of the act......on the true interpretation of the partnership deed it could be held that succession to the family business in the present case took place on the 31st march, 194 ?'section 25 of the income-tax act of 1922 deals with assessment in the case of discontinued business and parts of sub-section (3) and the whole of sub-section (4) were introduced by the income-tax (amendment) act, 1939, (7 of 1939). they rea :'(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 (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.....
Judgment:

D. FALSHAW C.J. - This is a reference made by the Appellate Tribunal to this court under section 66(2) of the Income-tax Act in pursuance of the order of Dulat and Grover JJ. dated the 14th of February, 1962.

The case relates to the assessment of Messrs. Ram Lall Nanak Chand for the assessment year 1947-48 for which the accounting year ended on the 31st of March, 1947. The facts are that a Hindu undivided family was carrying on business at Jagadhri and it had paid income-tax under the Income-tax Act of 1918. On the 31st March, 1947, the undivided family disrupted and the business was taken over by four members of the undivided family who formed themselves into a partnership which was embodied in a deed executed on the 2nd of May, 1947. In August, 1949, the firm, Ram Lal Nanak Chand, applied for relief under section 25(3) and (4) of the Income-tax Act, 1922, on the ground that the business of the undivided family had stopped on the 31st of March, 1947, and on the same day the new partnership firm had succeeded to the business. The Income-tax Officer by his order dated the 27th of August, 1958, did not accept this contention relying on a decision of the Bombay High Court in the case of Ambaram Kalidas v. Commissioner of Income-tax. The assessees appeal was dismissed by the Appellate Assistant Commissioner, but the Appellate Tribunal accepted the assessees appeal and held that the partition and succession took place on the 31st of March, 1947, and that, therefore, the assessee was entitled to relief in respect of the tax paid for the year ending the 31st of March, 1947.

When the Commissioner applied under section 66(1) of the Act the application was dismissed by the Tribunal on the ground that this finding was a finding of fact. However, on the application of the Commissioner to this court under section 66(2) it was held that a question of law arose because the decision hinged on the interpretation of the partnership deed. The questions proposed by the Commissioner were, however, rejected and the point in issue was put in the following questio :

'Whether on the true interpretation of the partnership deed it could be held that succession to the family business in the present case took place on the 31st March, 194 ?'

Section 25 of the Income-tax Act of 1922 deals with assessment in the case of discontinued business and parts of sub-section (3) and the whole of sub-section (4) were introduced by the Income-tax (Amendment) Act, 1939, (7 of 1939). They rea :

'(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 (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 the 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.

(4) 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 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.'

There is no doubt that if, as was held by the Income-tax Officer and the Appellate Assistant Commissioner, the decision of the Bombay High Court in Ambaram Kalidass case was applicable, the assessee was not entitled to any relief. In that case there was no disagreement regarding the facts, which were that the Hindu undivided family came to an end on the 17th of October, 1944, which was the last day of the appropriate accounting year and that the partnership which succeeded it began from the 18th of October, 1944, the first day of the next accounting year. The disputed question here is, however, whether the partnership which succeeded the Hindu undivided family in the present case came into existence on the 31st of March or on the 1st of April, 1947. The relevant portion of the partnership instrument dated the 2nd of May, 1947, read :

'Whereas the entire assets of the family invested in the business known as Ram Lall Nanak Chand were partitioned amongst its four member (including minor) on 31st of March, 1947, and the joint family as such had ceased to have any interest in the business mentioned above with effect from the said date.

And whereas the parties hereto mentioned above have with effect from the said date, i.e., 31st of March, 1947, agreed to be associated in partnership in the business styled as Ram Lall Nanak Chand.

And whereas now all the parties agrees and desires that their rights and liabilities with effect from the said date in the partnership firm of Messrs. Ram Lall Nanak Chand be defined by means of a proper instrument.

Now this deed witnesseth as unde :

1. That the partnership shall be deemed to have commence with effect from April 1, 1947.'

There does not appear to be any decided case exactly on this point, but there is a decision of this court involving a some what similar point. This is the case of R. B. Jodha Mal Kuthalia v. Commissioner of Income-tax. In that case a Hindu undivided family was carrying on business and it had paid income-tax under the Income-tax Act of 1918. This family constituted itself into a partnership in 1934 and carried on business under that partnership until the 31st of March, 1939. That partnership was then dissolved on the 31st of March, 1939, and a new partnership was constituted which was embodied in a document on the 29th of June, 1939, the relevant portion of which read :

'All the partners of the firm, H, understood and settled their accounts up to 31st March, 1939, on 31st March, 1939, and all the partners have become separate from 1st April, 1939, and the business...in the name of firm, H, has fallen to our share to run which we have by means of an oral agreement constituted a separate partnership styled as R.B.J.'

This second partnership was dissolved in March, 1943, and the assessee claimed relief under section 25(3) or (4) as amended by the Amendment Act (7 of 1939), on the ground that the partnership had either been discontinued from March, 1943, or it had been succeeded by other persons. It must here be mentioned that section 25(4), under which the assessee in that case, as well as in this case, was claiming relief, was introduced into the section in its present form by an amending Act, which came into force on the 1st of April, 1939, and the question which arose in that reference was, whether the partnership which was dissolved in March, 1943, was within the meaning of the opening words of sub-section (4) 'carrying on any business at the commencement of the Indian Income-tax Amendment Act (7 of 1939)'. Thus the point which arose in that case, though in a different context, was somewhat similar to the point which arises in the present case, since the question, whether the assessee was entitled to relief in both the cases depended on whether a partnership came into existence on the 31st of March or on the 1st of April of a particular year. In the case decided by this court, Mehar Singh J. was of the opinion that the partnership which claimed the relief under section 25(4) was not in existence at the commencement of the amending Act of 1939. At best he was of the opinion that the partnership came into existence at midnight between the 31st of March and the 1st of April and that, therefore, it could not be said to have been carrying on business at the commencement of the Act. The other learned judge who constituted the Division Bench, Gosain J., was of a contrary opinion and, on reference to a third judge, Dulat J. agreed with Gosain J. Both thought that the document embodying the partnership should be interpreted so as to give expression to the intentions of the parties, and that even if the new partnership only came into existence at midnight between the 31st of March and 1st of April, it was carrying on business at the commencement of the Act which came into force at the same point of time.

It will be seen that in that case all the three learned judges virtually agreed that the effect of the instrument was that the old partnership came to an end at midnight on the 31st of March and the new partnership came into existence from that moment, i.e., on the 1st of April, and if the same interpretation were to be applied to the instrument in the present case it would make the decision of the Bombay High Court in Ambaram Kalidass case applicable. There are, however, differences in the language of the two instruments and it seems to me that the most important part of the decision of the majority in Jodha Mals case was their decision that the instrument should be interpreted so as to give expression to the intentions of the parties. I do not think there can be any doubt that in both these cases the parties had drafted their instruments with the provisions of the section in mind, and with the intention of claiming the benefit of section 25(4) when the occasion arose, which happened to be two or three years later in Jodha Mals case but was immediate in the present case. In fact it seems clear that the parties in the present case thought they had drafted an instrument whereby, because of the Hindu undivided family having been taxed under the Income-tax Act of 1918, they confidently hoped to be entitled to exemption in income-tax in the assessment year relating to the accounting year ending on the 31st of March, 1947. Thus in what might be described as the preamble to the instrument it was stated that the Hindu joint family was wound up on the 31st of March, 1947, and the partnership was to take over from that date. In other words the transfer was intended was to take place on the 31st of March and it was for this reason that clause (1) of the actual terms was worded as it was, namely, that the partnership should be 'deemed' to have commenced with effect from the 1st of April, 1947. If the partnership had in fact commenced from the 1st of April, 1947, and not on the 31st of March it would have been quite simple to state that the partnership would commence from the 1st of April, and the use of the word 'deemed' seems to have its usual connotation of creating a legal fiction. The terms of clause (1) have been explained by the learned counsel for the assessee, and have been held by the Appellate Tribunal to be due to the fact that, but for a deeming provision of this kind, accounting complications would have arisen.

In the circumstances I am in agreement with the view of Dulat and Gosain JJ. that the instrument of partnership should be so interpreted as to give expression to the intentions of the parties and there can be no doubt that the parties drafted the instrument wholly with the object of claiming relief under section 25(4) in respect of income of the Hindu undivided family for the accounting year ending on the 31st of March, 1947, and so in my opinion the correct view was taken by the Appellate Tribunal. On this finding our answer must be that on the true interpretation of the partnership deed it could be held that the succession to the family business in the present case took place on the 31st of March, 1947. The assessee will be entitled to his cost on the reference. Counsels fee Rs. 250.

H. R. KHANNA J. - I agree.


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