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Hoshiarpur Electric Supply Co. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtPunjab and Haryana High Court
Decided On
Case NumberIncome-tax Reference No. 9 of 1965
Judge
Reported in[1971]79ITR164(P& H)
ActsIndian Electricity Act, 1910 - Sections 7 and 7(1); Income Tax Act, 1922 - Sections 10(2)
AppellantHoshiarpur Electric Supply Co.
RespondentCommissioner of Income-tax
Appellant Advocate J.N. Kaushal,; G.C. Garg and; Ashok Bhan, Advs.
Respondent Advocate D.N. Awasthi,; B.S. Gupta and; Avinash Chander Jain,
Cases ReferredShivram Poddar v. Income
Excerpt:
- sections 100-a [as inserted by act 22 of 2002], 110 & 104 & letters patent, 1865, clause 10: [dr. b.s. chauhan, cj, l. mohapatra & a.s. naidu, jj] letters patent appeal order of single judge of high court passed while deciding matters filed under order 43, rule1 of c.p.c., - held, after introduction of section 110a in the c.p.c., by 2002 amendment act, no letters patent appeal is maintainable against judgment/order/decree passed by a single judge of a high court. a right of appeal, even though a vested one, can be taken away by law. it is pertinent to note that section 100-a introduced by 2002 amendment of the code starts with a non obstante clause. the purpose of such clause is to give the enacting part of an overriding effect in the case of a conflict with laws mentioned with the.....mehar singh, c.j.1. on july 12, 1928, firm mela ram-shiv dial, firm chamba mal-harkishan das, and balmokand entered into a partnership under a partnership deed of the date, registered on july 14, 1928, to carry on the business of. generation and distribution of electricity in the town of hoshiarpur and its suburbs. a copy of this partnership deed has not been produced. on the same date they made an application under section 3 of the indian electricity act, 1910 (act 9 of 1910), to the punjab state government for the grant of a licence for the purposes for which they entered into partnership and the then punjab government granted a licence to them described as ' the hoshiarpur electric licence, 1930 '. a copy of that licence is anriexure 'a'. according to clause 9 of the licence, the.....
Judgment:

Mehar Singh, C.J.

1. On July 12, 1928, firm Mela Ram-Shiv Dial, firm Chamba Mal-Harkishan Das, and Balmokand entered into a partnership under a partnership deed of the date, registered on July 14, 1928, to carry on the business of. generation and distribution of electricity in the town of Hoshiarpur and its suburbs. A copy of this partnership deed has not been produced. On the same date they made an application under Section 3 of the Indian Electricity Act, 1910 (Act 9 of 1910), to the Punjab State Government for the grant of a licence for the purposes for which they entered into partnership and the then Punjab Government granted a licence to them described as ' The Hoshiarpur Electric Licence, 1930 '. A copy of that licence is anriexure 'A'. According to Clause 9 of the licence, the option to purchase the undertaking under Section 7(i) of the Act was to be on the expiry of fifteen years from its date, and, thereafter, on the expiry of every subsequent period of twenty (sic) years. Of the three partners, Balmokand dropped out of the partnership by a document executed between the partners on April 29, 1930. The remaining two partners took with them two other partners, R.B. Mohan Lal and Mela Ram, and then, a new partnership deed was executed between those four partners on February 10, and registered on February 17, 1932. Copy of that partnership deed is annexure ' B '. This change was approved by the Punjab Government according to Section 9 of the Act by an endorsement of April 15, 1932, on the licence. On February 1, 1933, R.B. Mohan Lal having died, his minor son, Mohinder Lal, was admitted to the benefits of the partnership under the guardianship of his mother, Tara Wati. A new partnership deed was executed on June 6, 1933, but effective from February 1, 1933, the date of death of R.B. Mohan Lal. This change was also approved by the Punjab Government under Section 9 of the Act by an endorsement of September 30, 1933, on the licence. Copy of this partnership deed is also marked as annexure ' B '. In it the partners are described in this manner: firm Mela Ram-Shiv Dial through Shiv Dial, firm Chamba Mal-Harkishan Das through Chamba Mal, Mela Ram, and minor Mohinder Lal. It was for the first time provided in Clause 21 of this partnership deed that it will not be dissolved by the death of a partner or by his adjudication as an insolvent. This condition did not exist in the earlier partnership deeds. Some time about 1940, R.B. Jodha Mal Kuthiala acquired three annas share in the business of ' The Hoshiarpur Electric Licence, 1930 ' through an intermediary firm, Budh Ram-Karori Mal, having purchased that share from firm Chamba Mal-Harkishan Das. Mohinder Lal became major on August 14, 1942, and he elected to be the partner of the partnership. These changes were made known to the Punjab State Government some time about March 13, 1944, and were accepted by it under Section 9 of the Act by its endorsement of February 9, 1945, on the licence. On the disruption of the joint Hindu family firm Mela Ram-Shiv Dial, the former members or coparceners of that joint family in their own right became partners of the partnership. So, on April 10, 1946, a new partnership deed was-' executed in which the partners were Shiv Dial, Krishan Gopal, Balak Ram and Tek Chand, taking the place of the former partnership firm, Mela Ram-Shiv Dial, Mela Ram, Mohinder Lal and R.B. Jodha Mal Kuthiala. This change was also accepted by the Punjab Government by its endorsement of July 4, 1946, on the licence. So, from 1928, the joint Hindu family firm, Mela Ram-Shiv Dial, continuously remained in the partnership in spite of some of the intervening changes, already referred to, down to April 10, 1946, when its place in the partnership was taken by the members of the joint Hindu family, of which Mela Ram-Shiv Dial was previously the firm, the names of those members, as already given, being Shiv Dial, Krishan Gopal, Balak Ram and Tek Chand. Mela Ram has continuously remained in the partnership ever since the second partnership deed of February 10, 1932. R.B. Mohan Lal remained in the partnership also from the date of the second partnership deed of February 10, 1932, down to the date of his death on February 1, 1933, whereafter, his son, Mohinder Lal, replaced him, immediately from the very date of the death of his father, first as a minor having been admitted to the benefits of the partnership, and on attaining majority on August 14, 1942, as a full-fledged partner in his own right. The other original partner, firm Chamba Mal-Harkishan Das, remained in the partnership down to some time in June, 1940, when it transferred its three annas share to R.B. Jodha Mal Kuthiala through an intermediary firm, Budh Ram-Karori Mal, and from that time R.B. Jodha Mal Kuthiala continued to be a partner of the partnership. Only during one year of assessment for 1942-43, was this partnership assessed to income-tax as a registered firm, and for the remaining years it continued to be assessed in the status of an unregistered firm.

2. The last extension of the partnership licence carried on in the name of ' The Hoshiarpur Electric Licence, 1930 ' came to an end on February 24, 1955. A little more than two years earlier, on February 20, 1953, the Punjab State Government gave notice under Section 7 (2) and (4) of the Act exercising its option to purchase the undertaking on and from the date of the expiry of its licence, that is to say, on and from February 24, 1955. It is an accepted fact on both sides that on February 24, 1955, the Punjab State Government took over the whole of the business and undertaking of the firm ' The Hoshiarpui Electric Licence, 1930' and paid rupees five lakhs towards the price. It is further accepted that the balance of the price has already been paid by the Punjab State Government subsequently. In the appellate order of the Appellate Assistant Commissioner of Income-tax, dated September 21, 1962, annexure ' G ', is reproduced a letter, dated June 1, 1959, by the Chief Engineer of the Punjab Government in the electricity branch, addressed to the assessee in which it is stated :

' I have to inform you that while the enumeration of assets by actual counting and measurements was completed before the taking over of the concern on Februury 24, 1955, assessment of evaluation work could not be completed since it involved a lengthy procedure of calling quotations, etc. The price was, however, roughly assessed and a token payment of Rs. 5 lakhs was made to the company at the time of taking over. The balance payments were made later on as per details already supplied to you, vide this office letter No. 78529/WP-105, dated September 10, 1958. '

3. The partnership as described, subsisting on the date of the taking over of the undertaking by the Punjab State Government, that is to say, on February 25, 1955, has been the assessee, which was an unregistered partnership firm. The assessment year is 1955-56, and the accounting year ended on March 31, 1955. The partnership from the beginning having had the benefit of depreciation in the assessment year in question, a question having arisen whether the assessee had any profit coming within the scope of the second proviso to Clause (vii) of Sub-section (2) of Section 10 of the Income-tax Act, 1922 (II of 1922), the assessee even went to the extent of saying that there was no sale of the assessee's undertaking to the Punjab State Government and the statutory amount of 20 per cent, added to the fair market value did not form part of the sale consideration for the undertaking. The assessee denied liability to tax in the relevant assessment year on any profits under the second proviso to Section 10(2)(vii) of this Act. At this stage the assessee has not pressed its case on the question that the taking over of the undertaking was not a sale and the statutory excess payment of 20 per cent, over the fair market value does not form part of the sale consideration. The reason for this will be given presently.

4. There was an amendment of Act 9 of 1910 by the Electricity (Amendment) Act, 1959 (32 of 1959), and it is Section 7 of the principal Act, before that amendment, which applied to the facts and circumstances of this case. Under Sub-section (2) of the old Section 7, the State Government was given the power to acquire an undertaking as of type in the present case, and when that sub-section is considered with Sub-section (1) of that very section, then the licensee was under a duty to sell the undertaking to the Government on payment of the value of all lands, buildings, works, materials and plant of the licensee suitable to, and used by him for the purposes of the undertaking. There was a provision for arbitration in the case of difference or dispute in regard to the value of the undertaking. Sub-section (3) then provided that where a purchase had been effected under Sub-section (2) at the exercise of the option of the State Government, the undertaking shall vest in the purchasers, obviously the State Government, free frem any debts, mortgages or similar obligations of the licensee or attaching to the undertaking. There was nothing in Section 7 which clearly indicated, in the terms of that section, when a purchase of an undertaking was effected. The Punjab State amended Act 9 of 1910 by Punjab Act, 6 of 1939, and in the main body of Section 4 of that Act it has been provided that ' for the purposes of Sub-section (3) of Section 7 of the Act, a purchase shall be deemed to have been effected on such date as the Government may appoint within a period of six months after the specified date, whether the purchase money has been paid or not ', and in Section 2(c) of the same Act, ' the specified date ' is defined to mean the date on which an option of purchase arises under Sub-section (1) of Section 7 of Act 9 of 1910. The second proviso to Section 4 of the Punjab Act, 6 of 1939, reads:

' Provided also that the purchase money shall be paid to the licensee within a period not exceeding six months of the specified date or fixed date of the purchase, as the case may be, and if for any reason the purchase money is not paid within such period, the licensee shall be entitled to interest at 1 per cent. above the Reserve Bank of India rate from the expiry of such period. '

5. It is an accepted fact that the Punjab Government never fixed the date of purchase under Section 4 of the Punjab Act, 6 of 1939. Consequently, after the expiry of six months from February 24, 1955, and so on and from August 24, 1955, the Punjab Government started paying interest on the balance of the sale price remaining due to the assessee (licensee) in the terms of the second proviso to Section 4 of the Punjab Act, 6 of 1939. The contention of the assessee before the authorities under the Income-tax Act was that the Punjab Government not having given ' fixed date of the purchase ' accordin to Section 4 of the Punjab Act, 6 of 1939, the fixed date became the date on the expiry of six months from the specified date, that is to say, from February 24, 1955, from which date the Punjab Government started paying extra interest according to the second proviso to that section. Obviously, as pointed out, that date is August 24, 1955. If this argument was to prevail, the sale shall have been deemed to have been effected under Section 4 of the Punjab Act, 6 of 1939, on August 24, 1955, thus taking the matter out of the assessment year in question. The Income-tax Officer did not accept this contention and was of the opinion that any fictional date that the Punjab Government might have fixed or may be taken to havefixed under Section 4 of the Punjab Act, 6 of 1939, did not affect the actual fact of the sale having taken place on a particular date, that is to say, on February 24, 1955, so far as the other laws or the general law are or is concerned. He, therefore, negatived this contention on the side of the assesses. On appeal, the Appellate Assistant Commissioner was of the opinion that 'in this particular case, the fixed and the specified dates are one and the same, i.e., February 24/25, 1955'. It is, therefore, that the interest was allowed on the unpaid amount of purchase money from August 24, 1955. So he was of the opinion that the deemed date of thes ale under Section 4 of the Punjab Act, 6 of 1939, was February 24, 1955. On further appeal by the assessee before the Income-tax Appellate Tribunal, the argument again failed, the order of the Tribunal being of November 2, 1963, and that was mainly on the basis of the decision of this court by a Division Bench consisting of Bhandari C.J. and Bishan Narain J. in Fazilka Electric Supply Company Ltd. v. Commissioner of Income-tax, [1959] 36 I.T.R. 411, 417 (Punj.). In that case the company was the Fazilka Electric Supply Company Ltd. The State Government having duly and according to law exercised option to purchase the undertaking of that company on the expiry of its licence with effect from July 23, 1949, paid a certain sum as the value of the undertaking which sum was in excess of the written down value. The difference was sought to be brought under Section 10(2)(vii) of Act 11 of 1922. The main argument urged before the learned judges was that what happened on July 23, 1949, was not a sale but compulsory acquisition. This argument was negatived by Bishan Naiain J., Bhandari C.J. concurring with him, the learned judge pointing out that:

'In my view the licensee made an irrevocable offer to the local authority and the Government to sell the undertaking on the expiry of 15 years and on the expiry of every subsequent 10 years if the Government or the local authority chose to exercise the option. When the option is exercised then the contract of sale becomes complete.'

6. Following this case the learned members of the Tribunal negatived this argument on the side of the assessee and affirmed the orders of the income-tax authorities below that there was sale of the assessee's undertaking to the Punjab State Government on February 24, 1955, on which date the whole of the undertaking was taken over by the State Government and part of the price to the tune of Rs. 5 lakhs was paid by the latter to the assessee, though the balance of the price was paid subsequent to that date and though after August 24, 1955, the State Government paid interest to the assessee according to the second proviso to Section 4 of the Punjab Act, 6 of 1939. The assessee then obtained on February 5, 1965, under Section 66(1) of the Act, 11 of 1922, reference of these four questions to this court:

' 1. Whether, on the facts and in the circumstances of the case, the taking over by the Government of the assessee's electricity undertaking was a sale or not ?

2. If it was a sale, whether it took place within the previous year relevant to the present assessment year 1955-56 ?

3. Whether, on the facts and in the circumstances of the case, the amount of 20 per cent. added to the fair market value formed part of the sale consideration ?

4. Whether, on the facts and in the circumstances of the case, the assessee is liable to be assessed to tax in respect of depreciation allowed to it right from its inception in 1930 '

7. It appears that before the actual undertaking was purchased by the Punjab State Government, the partnership had turned into a limited company and it was agreed on both sides that question No. 4 be reframed in this manner:

' 4. Whether, on the facts and in the circumstances of the case, the assessee is liable to be assessed to tax in respect of the depreciation allowed to Hoshiarpur Electric Supply Company, since 1930 '

8. The Faziljta Electric Supply Company Ltd.'s case * was in appeal before their Lordships of the Supreme Court and is reported as Fazilka Electric Supply Company Ltd. v. Commissioner of Income-tax, [1962] 46 I.T.R. 127 (S.C.), and the decision of this court was upheld by their Lordships that the taking over of the electrical undertaking in that case on July 23, 1949, by the Punjab State Government on payment of the value or price on that date was a sale within the meaning of Section 10(2)(vii) of Act 11 of 1922. In the wake of that decision of their Lordships, the learned counsel for the assessee has stated clearly that questions Nos. 1 and 3 no longer arise in this reference and must be answered in the affirmative and against the claim of the assessee. Those two questions are accordingly answered in the affirmative.

9. The arguments on the side of the assessee have been confined to questions Nos. 2 and 4 only. On question No. 2 the learned counsel for theassessjet has contended that under Section 7 of Act, 9 of 1910, Sub-section (1),sale could only become effective or could only be effected on payment of thevalue of the whole property of the undertaking and, therefore, as in thiscase the payment made admittedly on February 24, 1955, was short of thefull payment, being only part payment to the tune of 5 lakhs, so under subsection (1) of Section 7 of that Act there was no sale effected of the assessee'sundertaking in favour of the Government on February 24, 1955. It isapparent that this argument cannot succeed in the face of the decision ofthe Division Bench of this court in Fazilka Electric Supply Company Ltd.'scase, in which the learned judges held in so many words that:.

' When the option is exercised then the contract of sale becomes complete. '

10. The learned counsel for the assessee has referred to the wording in the fifth part of Section 54 of the Transfer of Property Act, 1882 (4 of 1882), which reads :

' A contract for the sale of immovable property is a contract that a sale of such property shall' take place on terms settled between the parties, '

11. And contends.. that the observations of the learned judges as reproduced above had reference to this part of Section 54 of that Act, a contention which cannot obviously be accepted because the aforesaid part of Section 54 of that Act refers to ' contract for sale ' of immovable property, whereas the learned judges held, as already pointed out, that when the option is exercised then the contract of sale becomes complete, and there is thus an obvious difference between 'contract for sale' and ' contract of sale ', the first referring to an agreement to sell, and the second referring to a completed sale. When the Fazilka Electric Supply Company Ltd.'s case was in the Supreme Court, their Lordships, at page 130 of the report, observed:

' It is not disputed before us that if what took place on July 23, 1949, in exercise of the option given to the Government under Clause 9 of the licence read with Section 7 and other provisions of the Electricity Act, was a sale within the meaning of Clause (vii), then the amount which the Income-tax Officer determined to be Rs. 77,700 would be taxable in the hands of the appellant as profits within the meaning of the said clause, '

12. And their Lordships held that it was a sale within the meaning of Section 10(2)(vii) of Act, 11 of 1922. In the face of the decision in the Fazilka Electric Supply Company's case, this argument is not available to the assessee. The only difference between that case and the present case is that on the date on which the option to purchase was exercised by the State Government in the former case the full value was paid, and in the present case only a part of the value or price was paid, the balance having been paid later, out this will not detract from the nature of the transaction as ot or its completion on the exercise of the option by the State Government to purchase the assessee's electrical undertaking in the present case was on February 24, 1955. So on this consideration the argument on the side of the assessee does not prevail because full price was not paid on that particular date and, therefore, the sale was not effected and was thus not complete. In this respect another aspect of the argument of the learned counsel for the assessee has been that according to Section 54 of the Act, 4 of 1882, which Act admittedly applies to the municipal area of Hoshiarpur Municipality, there had to be a sale by a registered instrument because the value of what was purchased by the Punjab State Government was more than Rs. 100, and as there was no sale by a registered instrument in the present case, so there could be no sale in view of the said section, and, hence, no sale under Section 10(2)(vii) of Act, 11 of 1922. No doubt there was no argument either before the learned judges in this court or before, their Lordships of the Supreme Court in the Fazilka Electric Supply Company Ltd.'s case1, with reference to Section 54 of Act, 4 of 1882, and the argument there only was that what was said to be sale was in fact nothing more than compulsory acquisition, but their Lordships having held the purchase of the electrical undertaking in that case a sale for the purposes of Section 10(2)(vii) of Act 11 of 1922, it cannot now be held in this case that by reason of Section 54 of Act 4 of 1882 there has in fact been no sale of the assessee's electrical undertaking to the Punjab State Government. This matter is concluded by the decision of this court and of the Supreme Court in Fazilka Electric Supply Company Ltd.'s case'. As already pointed out, the Punjab Government did not fix or appoint any date under Section 7(3) of Act, 9 of 1910, read with Section 4 of Punjab Act, 6 of 1939, from which date the sale was deemed to have been effected and not having done so, it started paying interest according to the second proviso on the expiry of six months from February 24, 1955, which means from August 24, 1955. There is nothing in Section 4 of the Punjab Act, 6 of 1939, which can possibly support the contention on the side of the assessee that, in these circumstances, the fixed or the appointed date by the Punjab Government under Section 4 of the Punjab Act, 6 of 1939, shall be taken to be August 24, 1955, as the deemed date on which the sale was effected. In these circumstances, the only answer to this question is that the sale of the electrical undertaking of the assessee to the Punjab State Government took place and was effected on February 24, 1955. This is as far as has been the argument of the learned counsel for the assessee on the second question, and the answer to that question is thus in the affirmative.

13. In regard to the fourth question, the details of the changes in the partnership on various dates and the approval of the same by the Punjab State Government under Section 9 of Act, 9 of 1910, have already been given. The first change when one of the original partners, Balmokand, dropped out is not material because by that time no depreciation had been gained by the partnership. Then there are the remaining changes: (a) two new partners were taken in under the partnership deed of February 10, 1932, (b) on the death of R.B. Mohan Lal, his minor son, Mohinder Lal, was given benefit of the partnership according to the new partnership deed on June 6,1933, and on his attaining majority he became a full-fledged partner of the partnership on August 14, 1942, (c) in 1940 R.B. Jodha Ma) Kuthiala purchased three annas share of one of the former partners and became a partner, and (d) on April 10, 1946, on the disruption of the joint Hindu family firm, Mela Ram Shiv Dial, its four members became partners in place of the old firm and a new partnership deed was executed on that date. These are the four changes in reference to which the argument of the learned counsel for the assessee has been that every time there was a new and an independent partnership, and the last partnership, that is, the assessee, stands by itself, not being a continuation of any of the previous partnerships. The learned counsel has referred to the provisions of the Indian Partnership Act, 1932 (9 of 1932), in support of this part of his argument. Section 4 of this Act gives the definition of partnership as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all, and collectively the partners are called 'a firm' and the name under which they carry on their business is called the 'firm name '. Sections 31 to 38 deal with incoming and outgoing partners, and Sections 39 to 43, so far as relevant here, deal with the dissolution of a firm. In Section 42, Clauses (c) and (d) refer to dissolution of a firm by the death of a partner and by the adjudication of a partner as an insolvent, but Sections 34 and 35 provide that by contract the partners may agree that on the happening of such a contingency no dissolution may take place. Retirement and expulsion of a partner are dealt with in Sections 32' and 33, respectively, and do not lead to dissolution. By the consent of the partners most of the infirmities, which may otherwise lead to dissolution, may not have that result. The learned counsel has further pointed out that it is wrong to say that a partnership only comes to an end on dissolution, his position being that it comes to an end with every change as in each one of the four types in this case. He has drawn particular attention to the partnership deed of June 6, 1933, when in consequence of the death of R.B. Mohan Lal, his minor son, Mohinder Lal, was admitted to the benefits of the partnership and in Clause 21 of that deed it was specifically provided that the partnership will not be dissolved by the death of a partner or by his adjudication as an insolvent. The learned counsel has urged that at the time of the death of R.B. Mohan Lal, the operative partnership deed had no such clause and, therefore, on his death there was dissolution of the partnership, and by the deed of June 6, 1933, a new partnership came into existence. He then refers to Lindley on the Law of Partnership, 12th edition, page 44, where it is stated that:

' Another most important consequence of the principle, that on any change amongst the persons composing a partnership there is in fact a new partnership, and not a mere continuation of the old one, is that although, upon a change in a firm, it may be agreed between the members of the old and new firms that the rights and obligations of the old shall devolve uponthe new partners, this has no effect upon third parties unless they accede to it.'

14. He has pressed that with the four changes in the partnership, as already referred to, every time there was a new partnership and that the assessee has not been a continuation of any of the previous partnerships.. In regard to the Change in the partnership on account of the joint Hindu family going out and its partners coming in, he had referred to Kshetra Mohan-Sanwyasi Charan Sadhukhan v. Commissioner of Excess Profits Tax, [1953] 24 I.T.R. 488 ; [1954] 2 S.C.R. 268 (S.C.), in which their Lordships In the Supreme Court held that:

' A Hindu undivided family is included in the expression 'person' as defined in the Indian Income-tax Act, as well as in the Excess Profits Tax Act, but it is not a juristic person for all purposes. When two kartas of two Hindu undivided families enter into a partnership agreement, the partnership is popularly described as one between the two Hindu undivided families, but in the eye of the law it is a partnership between the two kartas and the other members of the families do not ipso facto become partners. There is, however, nothing to prevent the individual members of one Hindu undivided family from entering into a partnership with the individual members of another Hindu undivided family and in such a case it is a partnership between the individual members and it is wholly inappropriate to describe such a partnership as one between two Hindu undivided families.'

15. To the same effect is the decision 'of a Full Bench of this court in Khairati Ram v. Firm Balak Ram Mehr Chand, A.I.R. 1960 Punj. 192. So when on the disruption of the joint Hindu family firm, Mela Ram Shiv Dial, on April 10, 1946, four of its members in their own capacity became partners and a new partnership deed was executed, that, according to the learned counsel, was an entirely new partnership having nothing to do with the previous partnerships. Reliance is also placed on Commissioner of Income-tax v. Seth Govindram Sugar Mills, [1965] 57 I.T.R. 510 ; [1965] 3 S.C.R. 488 (S.C.), in which case their Lordships in the Supreme Court held that, on a minor attaining majority, a firm came into existence, when* fce joined as a partner in the firm, and the Tribunal misdirected itself in law in holding that the parties could not be regarded as partners. It is obvious that this case has no bearing on this argument on the part of assessee. Similarly, Firm Bhagat Ram Mohanlal v. Commissioner of Excess Profits Tax, [1956] 29 I.T.R. 521 ; [1956] S.C.R. 143, is also not relevant, because in that case the members of a Hindu undivided family coming in partnership in place of the karta were held to be a change in the persons who carried on business within the meaning of Section 8(1) of the Excess Profits Tax Act, 1940 (15 of 1940).

16. In regard to Mohinder Lal, minor, having been admitted to the benefits of partnership on the death of his father, R.B. Mohan Lal, and the effect of this change, the first case referred to by the learned counsel for the assessee is In re Seth Chimanlal Lalbhai, [1944] 12 I.T.R. 199 (Bom.), but all that was held in that case was during the minority of the son, who was admitted to the benefits of the partnership, the share of the son was assessable in the assessment of the father as an assessee under Section 16(3Xa) of Act, 11 of 1922. The next case referred to in this respect by the learned counsel is Commissioner of Income-tax v. Dwarkadas Khetan & Co., [1961] 41 I.T.R. 528 ; [1961] 2 S.C.R. 821 (S.C.), and in that case it was held by their Lordships of the Supreme Court that the admission of a minor as a full partner to a partnership was not valid and the partnership deed in that respect not being a valid document could not be registered under Section 26A of the last-mentioned Act, It is apparent that neither of these two cases is of any assistance so far as the argument on the side of the assessee is concerned. On the effect of the other changes in the partners of the partnership in the present case, of which the detail has already been given, apart from what has already been said, the learned counsel also referred to Ghella Dayal v. Commissioner of Income-tax, [1945] 13 I.T.R. 133 (Bom.), to urge that each one of these changes among the partners led to the coming into existence of a new partnership on a new partnership deed having been executed after the change. But that was a case again under Act 15 of 1940, and after the change in the firm by the addition of new partners, the change in the firm was taken to be a new firm for the purposes of excess profits tax on the net profits of the old firm and thus not liable to pay excess profits tax on the same. So this case again is not helpful to support this argument on the side of the assessee. The reply of the learned counsel for the Commissioner of Income-tax on this question is that, according to Section 3 of Act, 11 of 1922, a firm is a unit of assessment for the purposes of assessment to income-tax and any changes in its constitution do not make any difference so long as its main business continues to be the same and the firm is there. In such a case if depreciation has been had on the machinery and plant as in the case of the assessee by the partnership, changes in the partnership make no difference and on transfer the second proviso to Section 19(2)(vii) of Act, 11 of 1922, is attracted. In support of his contention the learned counsel has relied upon two cases. The first of those cases is Commissioner of Income-tax v. A.W. Piggies and Company, [1953] 24 I.T.R. 405, 408, 409 ; [1954] S.C.R. 171 (S.C.). In that case the firm originally consisted of three partners. One of the partners having gone out, the whole business was taken over by the remaining two partners. Some time later a new third partner was introduced. Some years after, one of the remaining two original partners went out, leaving one original partner and one who had subsequently joined. Some time after, those two partners brought in a third new partner. Some years later the only remaining original partner also went out. Thereafter, the business continued to be carried on by two partners who came in long after the formation of the partnership in the beginning and having acquired the shares of other or acquired the shares later. In the end the partnership having been converted into a limited company, the company claimed relief under Section 25(4) of Act, 11 of 1922, their Lordships held that they were entitled to the same, observing that:

' It is true that under the law of partnership a firm has no legalexistence apart from its partners and it is merely a compendious name todescribe its partners but it is also equally true that under that law there isno dissolution of the firm by the mere incoming or outgoing of partners. Apartner can retire with the consent of the other partners and a person canbe introduced in the partnership by the consent of the other partners. Thereconstituted firm can carry on its business in the same firm's name tilldissolution. The law with respect to retiring partners as enacted in thePartnership Act is to a certain extent a compromise between the strictdoctrine of English common law which refuses to see anything in the firmbut a collective name for individuals carrying on business in partnershipand the mercantile usage which recognises the firm as a distinct person orquasi-corporation. But under the Income-tax Act the position is somewhatdifferent. A firm can be charged as a distinct assessable entity as distinctfrom its partners who can also be assessed individually (after citing Section 3 of the Act). The partners of the firm are distinct assessable entities,while the firm as such is a separate and distinct unit for purposes of assessment. Sections 26, 48 and 55 of the Act fully bear out this position. Theseprovisions of the Act go to show that the technical view of the nature of apartnership, under English law or Indian law, cannot be taken in applyingthe law of income-tax. The true question to decide is one of identity of theunit assessed under the Income-tax Act, 1918, which paid double tax in theyear 1939, with the unit to whose business the private limited companysucceeded in the year 1947. We have no doubt that the Tribunal and theHigh Court were right in holding that in spite of the mere changes in theconstitution of the firm, the business of the firm as originally constitutedcontinued as tea brokers right from its inception till the time it was succeededby the limited company and that it was the same unit all through, carryingon the same business, at the same place and there was no cesser of thatbusiness or any change in the unit.'

17. These observations quite precisely apply to the present case, because their Lordships definitely decided that technically the law of partnership does not apply to a case like the present which is to be considered applying the law of income-tax. In the present case also the business of the firm originally constituted continued as the electrical undertaking at Hoshiarpur from the very beginning right down to its purchase by the Punjab Government, and it continued to be the same unit throughout, carrying on the same business of supply of electricity, at the same place and there was no cesser of that business or any change in the unit. The second case is Commissioner of Income-tax v. Kirkend Coal Co., [1969] 74 I.T.R. 67, 70, 71 (S.C.), in which, at page 70, their Lordships observed:

' Discontinuance of business has the same connotation in Section 44 as it has in Section 25 of the Act; it does not cover mere change in ownership or in the constitution of the unit of assessment. Section 44 is, therefore, attracted only when the business of a firm is discontinued, i.e., when there is complete cessation of the business and not when there is a change in the ownership of the firm, or in its constitution, because by reconstitution of the firm, no change is brought about in the personality of the firm, and succession to the business and not discontinuance of the business results.... 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 survives reconstitution. A firm discontinuing its business may be assessed in the manner provided by Section 25(1) in the year of account in which it discontinues its business ; it may also be assessed in the year of assessment. In either case it is the assessment of the income of the firm. 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). The provisions relating to assessment on reconstituted or newly constituted firms, and on succession to the business are obligatory. Therefore, even when there is change in the ownership of the business carried on by a firm on reconstitution or because of a new constitution, assessment must still be made upon the firm. '

18. This was cited by their Lordships from an earlier case decided in theSupreme Court and reported as Shivram Poddar v. Income-tax Officer, CentralCircle II, Calcutta, [1964] 51 I.T.R. 823 (S.C.). Now even this case makes it clear that where thebusiness of the firm continues, changes in its constitution still leave it as aunit of assessment for the purposes of the Income-tax Act. What thelearned counsel for the assessee has said in reply with regard to these twocases is that the same have not been cases under the second proviso to Section 10(2)(vii) of Act, 11 of 1922, which is correct, but their Lordshipshave laid down unmistakably that a firm is a unit of assessment as anindependent unit with a personality which survives reconstitution. In thewake of these decisions of their Lordships the argument advanced on the side of the assessee on the basis of the provisions of Act 9 of 1932 cannot be accepted, because the technical rules of the law of partnership are not attracted to a case like the present, for it is the firm which has to be considered as a unit of assessment and seen whether there has been a continuity of its personality throughout, in spite of changes in its constitution from time to time, in that it has continued the very same business right through in the same name and at the same place. This is exactly what has happened in the present case. So the answer to question No. 4 is also in the affirmative.

19. In consequence the answer to all the four questions is in the affirmative. The assessee will bear costs of the Commissioner of Income-tax, counsel's fee being Rs. 250.

R.S. Narula, J.

20. I agree.


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