RAJAGOPALAN, J. - Gnanadhikam and his brothers, Innasimuthu and Sandanaswami, carried on business under the trade name C. S. Y. Appavoo Pillai and Sons. After Gnanadhikams death, his son Lourdusami took his place. It should be convenient to refer to this group as 'the family' in the rest of this judgment. This family was all along assessed to income-tax in the status of an association of persons.
One of the lines of business of the family was timber, and it was common ground that on the profits of that business the family was assessed to income-tax under the 1918 Act. In 1920 Gnanadhikam, on behalf of the family, entered into a partnership with Arunachalam to carry on the business of contracts, mainly contracts with the South Indian Railway Company obtained in name of Arunachalam. The family was to finance the business, and, in addition to the interest on the sums advanced to the partnership, the family was entitled to a third share of the profits. On the share income of these profits also the family was assessed to tax as an association of persons under the 1918 Act. Arunachalam died on January 5, 1927. Gnanadhikam continued the business in contracts on behalf of the family. Arunachalams widow and his legal representatives relinquished all their rights in the business by a deed dated December 2, 1927, annexure 'D'. The family continued the business in contracts also in addition to its business in timber. As we said, the family was assessed all along in the status of an association of persons.
On December 31, 1942, there was a family arrangement between the three members of the family, Lourdusami, Innasimuthu and Sandanasami. Lourdusamis sister was also a party to that transaction. That does not affect any of the question at issue now. The family business in timber was closed down, and thereafter Innasimuthu and Sandanasami each carried on business in timber for himself. The family arrangement evidenced by annexure 'A' also provided for the continuance of the business in timber that Lourdusami had been conducting on his own. Thus the business in timber as a family business ceased on December 31, 1942. The contract business however was continued, and the provision in the document was that it should be conducted by the three members of the family Lourdusami, Innasimuthu and Sandanasami, as constituting a partnership. This partnership took over the contracts that had been obtained by the family in the name of Lourdusami. Paragraph 6 of annexure 'A' provided :
'Further, businesses are being carried on at present in the name of A. S. G. Lourdusami Pillai, in railway, Government and other contracts, gravel and jelly contracts, etc. In respect thereof, a deed of partnership has been drawn up between the parties of the first, third and fourth parts herein. The said parties shall share the net profits or losses arising therefrom in equal portions, in accordance with the terms or conditions of the said deed of partnership.'
Paragraph 8 of annexure 'A' provided that Sandanasami should be entitled to the benefits of the contracts that stood in his name. Apparently those contracts were not treated as coming within the scope of the business the family conducted, for which provision was already made in paragraph 6.
In the assessment year 1943-44 the assessee family claimed with reference to the period of accounting from April 13, 1942, to December 31, 1942, relief under sub-sections (3) and (4) of section 25 of the Income-tax Act with reference to both the lines of business, timber and contracts. Relief was granted under section 25 (3) with reference to the business in timber, and that is no longer in issue. The Department however held that the family, the assessee, was not entitled to relief either under section 25 (3) or under section 25 (4) with reference to the business in contracts.
The Tribunal agreed with that view. The question referred this court under section 66 (2) of the Income-tax Act was :
'Whether on the facts and circumstances of the case the assessee was entitled to relief under section 25 (4) of the Act in respect of his contract business.'
A fuller investigation than that undertaken by the Tribunal at the stage of the appeal was ordered by this court when it directed the reference under section 66 (2) of the Act. The statement of the case drawn up in compliance with those directions had therefore necessarily to travel to some extent beyond the Tribunals order on appeal, and some of the original findings were revised when the statement of the case was submitted.
The learned counsel for the Department urged that though the statement of the case complied with the directions given by this court, the court at this stage should only proceed on the basis of the findings recorded in the order on appeal out of which arose the question of law that has to be determined by this court. This contention of the learned counsel for the Department need not be discussed as an abstract proposition of law in the circumstances of this case. Whether the findings, either those recorded in the order on appeal or those recorded in the statement of the case, were supported by the material on record is still a matter for investigation by the court at this stage.
One of the grounds on which the Department and the Tribunal held that section 25 (4) could not apply was that contract could not constitute a business. The learned counsel for the Department did not seek to support the correctness of that finding. It should be needless to cite authorities for the position, that undertaking and executing contracts do constitute a well recognised business and that profits therefrom are assessable as income from business. It is a little starting to be told by the Tribunal at this stage that because contracts are necessarily sporadic, they cannot constitute a business. Certainly it is impossible to accept the position that while contracts constitute a business for purposes of taxing the profits therefrom, they cannot constitute a business for the application of section 25 of the Act. We shall therefore proceed on the basis that contracts constituted one of the lines of business of the family.
That there was a succession to that business in contracts at the end of 1942 could admit of no doubt. The business that had belonged to the family thereafter belonged to the partnership, though no doubt the identity of the persons that constituted the family and the partnership was the same. The Tribunal upheld the view taken by the Department, that though there was a succession, it was not a succession to the entire business. The Tribunal pointed out that some of the contracts were taken over by Sandanasami independent of the partnership. We have set out the terms of paragraph 6 of annexure 'A' and we have also referred to paragraph 8 thereof. On a proper construction of clauses 6 and 8 of annexure 'A', which evidences the family settlement, it seems clear to us that the reservation in clause 8 was with reference to contracts which never came within the scope of clause 6, and only contracts that came within the scope of clause 6, that is, contracts obtained in the name of Lourdusami, constituted the business of the family. Thus factually the partnership took over the entire business in contracts that the family had been conducting before that as constituting an association of persons. The learned counsel for the assessee referred to the decision in Kaniram Ganpatrai v. Commissioner of Income-tax in support of his contention that even if the partnership had only succeeded to the bulk of the business of the family, that would have satisfied the requirements of section 25 (4) of the Act. The contention is no doubt well founded, but it is needless to pursue that line of argument, because factually the contracts that stood in the name of Sandanasami did not form part of the business the family carried on. As far as the family was concerned succession was complete, and the family as such effected itself after the transaction of December 31, 1942. The business in contracts which the family had been conducting before that stood transferred to the partnership after December 31, 1942.
We have already pointed out that the family commenced its business in contracts in 1920. At that stage that business was conducted by the family in partnership with Arunachalam. Arunachalams death in 1927 dissolved that partnership. But it did not break the continuity of the business that the family carried on. Annexure 'D', under which the legal representatives of Arunachalam relinquished all their rights, made it clear that there was no break in the continuity of the business which commenced in 1920 under the deed of partnership executed by Gnanadhikam and Arunachalam. The Tribunal was of the view that the business commenced in partnership with Arunachalam in 1920 must have come to an end sometime before 1924, and that the business for the continuance of which the transaction of 1927 provided must have been a new one. It is true that the family was not assessed to tax on any share income from the business in contracts in the assessment year 1924-25. What the assessee had to establish was only continuity of business and not also continuity of assessment. Apart from that factor there was really no basis at all for the conclusion reached by the Tribunal, that there must have been a discontinuance of the partnership business sometime before 1924, and that a new partnership business must have come into existence sometime thereafter. There was only one deed of partnership, the one executed in 1920. Annexure 'D' specifically referred to the partnership constituted under that document, and it was the rights of Arunachalams heirs in that partnership that were given up by them. All the evidence points one way, that till Arunachalams death there was no break in the business in contracts, the business which the family conducted in partnership with Arunachalam. On Arunachalams death the family succeeded to the whole of that business by arrangement with the legal representatives of Arunachalam. That that business was continued by the family without any break after 1927 was never in issue. The finding of the Tribunal, that there was a break in the continuity of the business sometime before 1924, has thus to be left out of consideration. It was not supported by any material on record.
Though at the stage of the proceedings before the departmental officers they were not satisfied that the family had been assessed to tax on the income from the business in contracts under the 1918 Act, that is, in the assessment years that preceded 1922, that point was cleared up, and the finding now is that the records of the Department themselves proved that the family had been assessed to tax under the 1918 Act on its share income from the business in contracts. We have already pointed out that there was no break in the continuity of that business from 1920 to 1942. That there was a succession to the business commenced in 1920, in 1927, after Arunachalams death in no way affected the real question at issue, whether the family was entitled to relief under section 25 (4) of the Act on the basis of the succession in 1942. The view taken by the Tribunal that section 25 (4) contemplates only one succession and would not apply to cases where there had been an earlier succession before 1939 is erroneous and we did not understand the learned counsel for the Department to support that view.
The assessee satisfied all the requirements of section 25 (4) and was, therefore, entitled to the relief the assessee claimed under section 25 (4) of the Act. We answer the question in the affirmative and in favour of the assessee. The assessee will be entitled to the costs of this reference. Counsels fee Rs. 250.
Question answered in the affirmative.