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Commissioner of Income-tax,madras Vs. K.H. Chambers, Madras - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtSupreme Court of India
Decided On
Reported inAIR1965SC970; [1965]55ITR674(SC); [1965]2SCR43
ActsIndian Income-tax Act, 1918 - Sections 25(4), 26(2) and 66(1)
AppellantCommissioner of Income-tax,madras
RespondentK.H. Chambers, Madras
Cases ReferredHigh Court. In Malayalam Plantations Ltd. v. Clark
.....challenged - high court had jurisdiction to ascertain correctness of finding given by tribunal on question of succession - upheld high court's decision. - motor vehicles act (59 of 1988)section 149: [dr.arijit pasayat & asok kumar ganguly,jj] liability of insurer - death of passenger in commercial vehicle - award passed against insurer on erroneous premises that premium was paid for goods and passengers - matter remitted to tribunal to fix liability after considering original documents relating to payment of premium. - was an assessee under the indian income-tax act, 1918. asthe business was in a bad way, in or about 1931 g. the son was managing the business,but not with any success. , eitherby interesting financially one or other of the firm's connections or byoffering to work on thefather to the effect that he would prefer to start right afresh in his own nameor in the name of chambers & co.; he also suggested that he could get aplace for less rent and use a smaller staff; and requested his father to allowhim to use the existing private codes. on december 5, 1932, g.a. chambers askedhis auditors, m/s. fraser & ross, to close the accounts of chambers &co.; and send the balance-sheet, venture and profit and loss accounts for 8months ending november 30, 1932, together with the schedule of accounts takenover by k.h. chambers showing the amount due to him from k. h. chambers. inthat letter g.a. chambers informed the auditors that from december 1, 1932,k.h. chambers would be running the export business separately in his own name;that he had asked chambers & co......

Subba Rao, J.

1. This appeal by special leave raises the question of the applicability ofsection. 25(4) of the Indian Income-tax Act, hereinafter called the Act, to theassessment in question.

2. One G. A. Chambers was carrying on two businesses, one in the name andstyle of 'Chambers & Co.' and the other in the name and style of'Chrome Leather Company'. The first business was concerned withexport of hides, skins and mica, insurance and shipping brokerage. The saidChambers & Co. was an assessee under the Indian Income-tax Act, 1918. Asthe business was in a bad way, in or about 1931 G. A. Chambers handed over themanagement of the said business to his son, K.H. Chambers. The change ofmanagement did not bring about any favourable turn in the affairs of thebusiness. The appellant's case is that towards the end of 1932 G. A. Chamberstransferred the business to his son, K.H. Chambers, and that after the saidtransfer, K.H. Chambers carried on the business in his own name till January 1,1948, when the business was taken over by a limited company. For the assessmentyear 1948-49 K.H. Chambers claimed relief under section 25(4) of the Act on theground that the business had been assessed under the old Act of 1918, when itwas carried on by his father, G. A. Chambers, and the said Chambers transferredthe business to him towards the end of 1932. The Income-tax Officer, by his order,dated March 18, 1949, held that K.H. Chambers did not take over the business ofhis father carried on in the name of 'Chambers & Co.' 'as awhole running concern' and, therefore, the assessee was not entitled torelief under section 25(4) of the Act. On appeal, the Appellate AssistantCommissioner agreed with the Income-tax Officer and held that the businesscarried on by K. H. Chambers was not the same business which was originallyassessed under the old Act of 1918 in the hands of his father. On a furtherappeal, the Income-tax Appellate Tribunal came to the same conclusion and foundthat the identity of the business carried on by the father was lost in thehands of the son, as the entire business was not transferred to him. Ultimatelythe Tribunal referred the following question to the High Court of Madras forits opinion under section 66(1) of the Act :

'Whether on the facts and in the circumstances ofthe case the Tribunal was right in law in refusing relief under section 25(4)of the Indian Income-tax Act to the assessee.'

3. The High Court answered the aforesaid question in the negative in favourof the assessee : it held that the son succeeded to the business of his fatherafter November 1932 and, therefore, there was succession within the meaning ofsection 25(4) of the Act. Hence the appeal.

4. Mr. Karkhanis, learned counsel for the Revenue, raised before us twocontentions, namely, (i) the question referred by the Tribunal to the HighCourt was only a pure question of fact and, therefore, the High Court has nojurisdiction to give its opinion thereon; and (ii) where the transferor retainsthe goodwill and most of the assets and the transferee carries on the samebusiness with a part of the assets of the principal business, it cannot be saidthat there is succession to the whole of the business within the meaning ofsection 25(4) of the Act.

5. We shall take the second question first. G.A. Chambers, the father, wascarrying on two independent businesses, one in the export of hides, skins and mica,in insurance and shipping brokerage under the name and style of 'Chambers& Co.' and the other under the name and style of 'Chrome LeatherCompany'. In 1932, G.A. Chambers handed over the sole management of theformer business to his son, K.H. Chambers. The son was managing the business,but not with any success. In July 1932, the son was going to foreign countries,presumably in connection with his business. On July 7, 1932, before the sonleft India, G.A. Chambers wrote a letter to him informing him that by the endof August 1932 the sum of Rs. 40,000 invested by him in the business would runout, and that unless Rs. 60,000 was invested by him (the father), which hecould not afford to risk, the business could not be conducted. He, therefore,suggested to his son that the Chambers & Co. could be wound up and that ifhe chose he could have the goodwill of the said company so that he might obtainsome advantage from the goodwill and connections of Chambers & Co., eitherby interesting financially one or other of the firm's connections or byoffering to work on a commission basis. On July 8, 1932, the son replied to thefather to the effect that he would prefer to start right afresh in his own nameor in the name of Chambers & Co.; he also suggested that he could get aplace for less rent and use a smaller staff; and requested his father to allowhim to use the existing private codes. On December 5, 1932, G.A. Chambers askedhis auditors, M/s. Fraser & Ross, to close the accounts of Chambers &Co.; and send the balance-sheet, venture and profit and loss accounts for 8months ending November 30, 1932, together with the schedule of accounts takenover by K.H. Chambers showing the amount due to him from K. H. Chambers. Inthat letter G.A. Chambers informed the auditors that from December 1, 1932,K.H. Chambers would be running the export business separately in his own name;that he had asked Chambers & Co. 'to close their accounts upto the endof November and transfer all such accounts to Messrs. Chambers and Companyrelating to G.A. Chambers to us so that we may run Messrs. Chambers andCompany's account at Chromepet.' This letter was signed by G.A. Chamberson behalf of the Chrome Leather Company. This letter shows that from December1, 1932, K.H. Chambers would run the export business and that the accounts ofG.A. Chambers in the Chambers & Co. would be transferred to the accounts ofChrome Leather Co. From that date the export business which K.H. Chambers wasrunning earlier as manager would be continued by him in his own name; that is,instead of as manager, as its own proprietor. Pursuant to the instructionsgiven by G.A. Chambers, M/s. Fraser & Ross, the auditors, prepared abalance-sheet of the Chambers & Co. and also the individual accounts of G.A.Chambers and K.H. Chambers. The balance-sheet shows that G.A. Chambers wasgiven assets valued at Rs. 5,67,485-10-2 and liabilities valued as Rs.5,95,433-12-3; K.H. Chambers was given assets valued at Rs. 55,214-2-3 andliabilities valued at Rs. 27,266-0-2. The liabilities given to K.H. Chambersincludes the amount representing the difference between the value of the assetsand liabilities given to G.A. Chambers. Broadly stated, the father had takenover the liabilities of the Company and assets, including buildings andmachinery sufficient to discharge the liabilities, while the son was given thestock in trade and a small amount of debts. After this allotment, it isconceded that K.H. Chambers continued to operate the same lines of business aswas carried on by Chambers & Co. taking over all the constituents of thatbusiness, using the same premises, the same telephone number, Post Box No.,private codes and trade marks and the important sections of the staff thatbelonged to Chambers & Co. On May 23, 1933, G.A. Chambers wrote to theLiverpool and London and Globe Insurance Company, Calcutta, wherein he stated :

'We confirm our conversation with yourrepresentative that inasmuch as we have transferred all our export business toMr. K.H. Chambers, who is now running the business in his own name and at hisown risk and responsibility, we shall be pleased if you will transfer theagency of your firm to him.'

6. It is also conceded by the Department that G.A. Chambers utilized hisgood offices in getting the Liverpool and London and Globe Insurance Company totransfer the agency of that company to Chambers & Co. run by K.H. Chambers.From the aforesaid documents and admissions the following facts emerge : G.A.Chambers was conducting two businesses, one under the name and style ofChambers & Co. and the other under the name and style of Chrome LeatherCompany. The Chambers & Co. was doing export business. Some months prior toJuly 7, 1932, K.H. Chambers invested a sum of Rs. 40,000 in the businessconducted by Chambers & Co. and was actually managing the same. Thebusiness was running at a loss and the father was not anxious to continue thebusiness and, therefore, he made some alternative suggestions to his son. Butthe son was anxious to continue the business independently. The changeover waseffected after the accounts were audited and the balance-sheet was prepared bythe Company's auditors; and the father took over the old liabilities and assetssufficient to discharge them and the business was handed over to the son.Thereafter, the son was carrying on the business of Chambers & Co. in hisown name, in the same premises, taking over all the constituents of Chambers& Co., using the same codes and trade marks and the important members ofthe staff of the Company. It is true that the name of Chambers & Co. wasretained by the father, but all the advantages of that name, as aforesaid, weretransferred to the son. It is also true that some substantial assets ofChambers & Co. were not transferred to the son, but they were retained bythe father only for discharging the debts in order to help the son to carry onthe transferred business without being burdened with heavy debts. The takingover of the assets and liabilities by the father was not for the purpose ofcontinuing to do a business of his own in the same lines, but to facilitate thecarrying on of the transferred business by the son effectively and profitably.On these facts, can it be held that there was no succession to the businesswithin the meaning of section 25(4) of the Act Though there is no clear andexhaustive definition of the expression 'succession', decided casesand text-books throw some light on the subject. In Simon's Income-tax, Volume2, 2nd Edn., it is stated at pp. 137-138 :

'In particular, argument from decided cases hasresulted in the acquisition by the word 'succession' of a somewhatartificial meaning .........

7. 'In order to constitute a succession there must be, broadly speaking, ataking over of the whole of the business concerned; ...... But if a business istaken over as a whole, the fact that minor assets of the business are omittedfrom the transfer will not prevent there being a succession. The fact that thepurchaser already has a similar business in not a material fact in establishingsuccession. The purchase of a business with a view to closing it down would notappear to constitute succession.

8. Other questions which have been used as tests are : (1) whether a similartrade has been carried on after the transfer; (2) whether goodwill or otherintangible assets are included in the transfer; (3) whether staff is takenover; (4) the treatment on transfer of the stock and debts of the transferor;(5) whether there was an interval in the carrying on of the trade as a resultof the transfer'.' (Briton Ferry Steel Co., Ltd. v. Barry, [1940] 1 K.B.463.

9. In Reynolds, Sons & Co., Ltd. v. Ogston (H.M. Inspector of Taxes)(1929) 15 T.C. 501, Lord Hanworth, M.R., accepted the following testslaid down by Rowlatt, J., to ascertain whether there was a succession, namely :

'You want to measure the income of the successor bythe past history of the business, it is therefore essential that there shouldbe a very close identity between the business of the former proprietorship andthe business in the present proprietorship.'

10. The Rangoon High Court in Commissioner of Income-tax, Burma v. N. N.Firm (1934) 2 I.T.R. 85 had to consider the meaning of the word'succeeded 'in section 26(2) of the Income-tax Act. Page C.J., givingthe opinion of the Court, observed :

'In order that a person should be held to have'succeeded' another person in carrying on a business, profession orvocation, it is necessary that the person succeeding should have succeeded hispredecessor in carrying on the business as a whole.'

11. The Rangoon High Court again in The Commissioner of Income-tax, Burma v.A.L.V.R.P. Firm (1940) 8 I.T.R. 531 reiterated the same principle. What isthe meaning of the expression 'whole business' has been the subjectof other decisions. A Division Bench of the Patna High Court in JittanramNirmalram v. Commissioner of Income-tax, Bihar & Orissa : [1953]23ITR288(Patna) after considering the relevant decisions, both English and Indian,said that it was sufficient if there was substantial identity or similarity inthe nature and extent of the activities carried on between the two firms, i.e.,the transferor and the transferee firms. The court observed therein :

'For the application of Section 26(2) or Section25(4) it is not essential in every case that the successor firm should havemathematically the same extent of business as the predecessor firm or that itshould have taken over the same extent of trade or the same line or set ofcustomers as belonging to the predecessor firm nor does it mean that thesuccessor firm should have taken over all the different businesses which thepredecessor firm had carried on.'

12. In Malayalam Plantations, Ltd. v. Clark (H.M. Inspector of Taxes)(1935) 19 T.C. 314 the appellant-company therein, by an agreement datedMarch 28, 1928, acquired from another company, as from April 1, 1928, a rubberestate in India together with plantations, nurseries, factories, plant, etc.,and the benefit of contracts and engagements whether with coolies or others,but did not take over any book debts or the vendor's selling organisation. Itwas contended that there had been no succession to a trade. In rejecting thatcontention, Finlay, J. observed :

'The substance of what was done, I think, clearlywas this. The thing was taken over as a going concern, taken over with thethings growing on it, and with the coolies employed to work the estate. I amnot going into it any further because it is essentially a question of fact, butI cannot avoid the view that there was material upon which the Commissionersmight arrive at the conclusion that there was a succession.'

13. This is an authority for the position that if a business was taken overas a going concern the mere fact that some assets, which were nor required bythe successor for carrying on of the business, were not transferred to himwould not make it anytheless a succession in law. It is not necessary tomultiply decisions. Succession involves change of ownership; that is, thetransferor goes out and the transferee comes in; it connotes that the wholebusiness is transferred; it also implies that substantially the identity andthe continuity of the business are preserved. If there is a transfer of abusiness, any arrangement between the transferor and the transferee in respectof some of the assets and liabilities not with a view to enable the transferorto run a part of the business transferred but to enable the transferee to runthe business unhampered by the load of debts or for any other appropriatecollateral purpose cannot detract from the totality of succession.

14. In the present case, the export business of the father was carried on bythe son. The whole of the business was transferred, the identity was preservedand the same business was continued. the father reserved for himself someassets for the purpose of discharging the debts. He did so not for the purposeof running the same business by himself but only to help the son to carry onthe same business more effectively. If so, it follows that on the facts foundor admitted there is a clear case of succession in the present case.

15. Learned counsel for the revenue argued that whether there was successionor not was a pure question of fact and the High Court had no jurisdiction toquestion the correctness of the finding given by the Tribunal to the effectthat there was no succession to the business.

16. This Court in Meenakshi Mills, Madurai v. Commissioner of Income-tax,Madras 0044/1956 : [1956]1SCR691 laid down the following propositions which arerelevant to the question now raised before us :

(a) Where an ultimate finding onan issue is an inference to be drawn from the facts found, on the applicationof any principal of law, there is a mixed question of law and fact, and theinference from the facts found is, in such a case, a question of law and isopen to review by the Court.

(b) Where the final determinationof the issue does not involve an application of any principle of law, aninference from the facts is a pure inference of fact although it is drawn fromother basic facts.

(c) The proposition that aninference from proved facts is one of law is therefore correct in itsapplication to mixed questions of law and fact, but not to pure questions offact.

17. In the case of pure questions of fact, the inference from proved factsbeing itself a question of fact can be attacked as being erroneous in law onlyif there is no evidence to support it or if it is perverse.'

18. This distinction between a question of law and a question of fact wasalso brought out by some of the English decisions cited at the Bar. In Bell(Surveyor of Taxes) v. The National Provincial Bank of England, Ltd. (1903) 5T.C. 1 the Master of the Rolls observed :

'The finding of the Commissioners upon that part ofthe case is this : 'The Commissioners were of opinion that there was nosuccession within the meaning of the said 4th Rule.' That is, as my brotherMathew has pointed out, not a finding in fact that there was no succession, butthat the particular kind of succession which took place in this case was not asuccession within the meaning of the 4th Rule. That is not a finding of fact,but a finding of law and construction based upon the fact that one existingBank did acquire and take over, not for the purpose of extinction, but for thepurpose of development, the existing business of another Bank existing inanother place.'

So too, Mathew, L.J., stated :

''No succession' say the Commissioners within themeaning of the said 4th Rule. That is the proposition of law we have to decideas distinguished from fact, and we are entitled to differ from that view.'

In Wilson & Barlow v. Chibbett (H.M. Inspector of Taxes) (1929) 14 T.C.407 Rowlatt, J., observed :

'The question was whether here there was asuccession, which is a primary question of fact upon which, of course, it ispossible the Commissioners might take a wrong view of the law and apply falselaw.'

The learned Judge concluded thus :

'All I can say is that I do not see my way to saythat I can discern any sort of error in law here in the way in which theCommissioners have dealt with the case...'

19. These observations imply that if correct tests are not applied in comingto a conclusion whether there is succession or not in a particular case, it canbe re-opened by the High Court. In Malayalam Plantations Ltd. v. Clark (H.M.Inspector of Taxes) (1935) 19 T.C. 314, 323, Finlay J., after considering atsome length the facts placed before him, refused to go further into the matterbecause the finding of succession was essentially a question of fact. But thefacts in that case disclosed that the correct tests were applied and,therefore, no illegality was committed by the Commissioners.

20. The said decisions did not lay down that in every case the finding ofsuccession is one of fact. Indeed, the first two decisions clearly maintainedthat a finding on a question whether a succession is one within the meaning ofa particular provision or whether it is vitiated by any error of law is notfinal. The English view is also in accord with that expressed by this Court.

21. The question, therefore, is whether a finding that a person succeededanother in his business within the meaning of section 25(4) of the Act is afinding of fact. The expression 'succession', as stated by Simon inhis book on Income-tax, has acquired a somewhat artificial meaning. The caseswe have considered supra and similar others have laid down some tests, thoughnot exhaustive, to ascertain whether there is succession in a given case ornot. The tests of change of ownership, integrity, identity and continuity ofbusiness have to be satisfied before it can be said that a person'succeeded' to the business of another. Unless the facts found by theTribunal satisfy the said tests, the finding cannot be conclusive. The testscrystallized by decisions have given a legal content to the expression'succession' within the meaning of section 25(4) of the Act andwhether facts proved satisfy those tests is a mixed question of law and fact.If so, it follows that a question of law arose out of the Tribunal's order andthe High Court has jurisdiction to ascertain the correctness of the findinggiven by the Tribunal on the question of succession.

22. In the result, the appeal fails and is dismissed with costs.

23. Appeal dismissed.

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