SRINIVASAN J. - In this reference the question of relief under section 25(4) of the Indian Income-tax Act arises in the following circumstances.
G. A. Chambers was carrying on a business in the export of hides and skins and mica, in insurance and as a share broker. This proprietary business which was carried on under the name of Chambers and Co. was, it is common ground, subject to assessments under the 1918 Act. In 1932 G. A. Chambers ceased to do that business and handed it over to his son, K. H. Chambers. It is the case of the assessee, K. H. Chambers, that there was a succession by him to this business attracting section 25(4) of the Act, a contention which the department declined to accept. This question of the succession to the business in 1932 arose for the first time in 1948-49 when the business conducted by K. H. Chambers up to that date was taken over by a limited company from the 1st of January, 1948. The Income-tax Officer accepted the position that G. A. Chambers was assessed under the Act of 1918. He further came to the conclusion that what took place in 1932 was that G. A. Chambers closed down his though it dealt in the same lines as the former business, was yet not a continuation of the business of Chambers and Co. He supported this conclusion by a reference to the division of assets and liabilities effected in 1932, which showed that a considerable portion of the liabilities and assets were retained by G. A. Chambers and that the trade name of Chambers and Co. was not also taken over by the business conducted by K. H. Chambers. The conclusion reached by him was that the business started by K. H. Chambers in 1932 was not the same business carried on previously by G. A. Chambers, his father. That resulted in the in the finding that there was no identity between the two businesses and that it could not, therefore, be claimed that the assessees business was the one that had suffered tax under the 1918 Act.
Successive appeals carried to the Appellate Assistant Commissioner and the Appellate Tribunal failed. The Tribunal also held that :
'The identity of the sons business with that of the father was clearly lost on the 30th November, 1932, as the business as such on the foregoing facts cannot be said to have been transferred intact to the son, a large part of the assets and liabilities including some stock-in-trade having been retained by the father himself for eventual liquidation in pursuance of his intention to close down. In these circumstances, we have to hold that there has been no succession to the business by the son as claimed on the 30th November, 1932.'
As directed by this court, the following question is referred :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in refusing relief under section 25(4) of the Indian Income-tax Act to the assessee ?'
The correspondence that passed between G. A. Chambers and his son, K. H. Chambers, in 1932 and the further steps taken by them in relation to Chambers and Co. have been marked as annexures to the statement of the case. On 7th July, 1932, G. A. Chambers wrote to his son thus :
'As far as I can see at present, a general liquidation of C and Co.s affairs up to the end of August is very necessary; in the meantime and, if possible, before you leave on Monday, I think it would be advisable as a precautionary measure to give general notice to the staff of C and Co., so that by the end of August we shall know the exact position and be free to stop or re-engage them... but as far as I can see at present, by the end of August, there is not likely to be mush left of your Rs. 40,000 and it will need about Rs. 60,000 from me before C and Co. has a clear state and I simply cannot afford to risk any further sum under the same conditions, but I want you please to understand that, in my opinion, even under present conditions the goodwill of C and Co. is a decided asset. It is yours and I leave it to you, and I do not want to take it back again.'
Thereafter, G. A. Chambers suggested that K. H. Chambers should 'obtain some advantage from the goodwill and connections of Chambers and Co. either by interesting financially one or other of the firms connections, or by offering to work on a commission basis, but it must be a clear commission basis, free of all risks and expenses'. To this letter, the son replied that he was trying to raise the necessary finance but wanted G. A. Chambers 'to pay to me or to my financier, when recovered, the proceeds of the debts now due, less the cost of recovery, less any losses on contracts in course of execution or in transit...... If I get this finance, I would prefer to start right afresh in my own name or in the name of C and Co. if you do not wish to trade under this name in future. I can get a place for less rent and use a smaller staff. I hope you will allow me to make use of the existing private codes....'
In December, 1932, G. A. Chambers addressed the auditors, Messrs. Fraser and Ross, and informed them that from the 1st of December, 1932, K. H. Chambers was running the export business separately in his own name, that the accounts of Messrs. Chambers and Co. were to be closed up to the end of November, and that those accounts relating to G. A. Chambers were to be transferred to the account of Messrs. Chambers and Co., in the books of the Chrome Leather Co. It may be mentioned here that G. A. Chambers was also the proprietor of the Chrome Leather Co. and that part of the accounts relating to G. A. Chambers in Chambers and Co., which was sought to be transferred to the books of the Chrome Leather Co., covered those assets and liabilities of Chambers and Co., which had been taken over by G. A. Chambers.
There was a division of the assets and liabilities between G. A. Chambers and K. H. Chambers on the 30th November, 1932. Broadly stated, a large volume of liabilities amounting to Rs. 5,95,433 was taken over by G. A. Chambers with an equally large volume of assets to the value of Rs. 5,67,485. Of this, well over a sum of Rs. 5,00,000 was payable to the National Bank of India as against which the land and buildings of Chambers and Co., valued at a little over Rs. 4,00,000, were taken by G. A. Chambers. Annexure 'D-2' establishes, however, that liabilities to the extent of Rs. 27,266 were taken over by K. H. Chambers. K. H. Chambers also took over the available stock-in-trade as part of the assets and over Rs. 40,000 worth of outstanding.
It is on these facts that the department has taken the view that there was initially a discontinuance or closing down of the business of Chambers and Co., as run by G. A. Chambers and the commencement of an entirely new business of K. H. Chambers, and that the only reasonable conclusion to reach on these facts was to hold that K. H. Chambers did not succeed to the business in the same capacity as G. A. Chambers who carried on the business previously. The identity of the business was, in the opinion of the department, destroyed, notably for the reason that the trade name of Chambers and Co. was retained by the transferor, G. A. Chambers.
It is certainly true that in the letter dated 7th July, 1932, written by the father, G. A. Chambers, to his son, his father strongly advised the son that the business should be closed down. He pointed out that in view of the financial position then obtaining, it was not likely that very mush would be left to them of Rs. 40,000 which had been invested in the company by the son, and that unless the father put in a further sum of Rs. 60,000, the business could hardly be said to have any financial stability. He proceeded, however, to suggest that if the son, K. H. Chambers, was insistent upon carrying on the business, he could yet obtain some advantage from the goodwill and the connections of Chambers and Co., but that it would be desirable to work on a purely commission basis free of all risks and expenses. Relevant portions of the sons reply have been extracted earlier which indicate very clearly that K. H. Chambers wanted to continue the business even if the name of Chambers and Co. was not to be associated with the trade in future. No doubt he mentioned that he would prefer 'to start right afresh in my own name,' and admittedly, the business as conducted by K. H. Chambers was not conducted in the name of Chambers and Co. Nevertheless it is conceded by the department that K. H. Chambers continued to operate the same lines of business as were carried on by Chambers and Co., taking over all the constituents of the business, using the same premises with the same telephone number, post box number, codes and trade marks and important sections of the staff that belonged to Chambers and Co. G. A. Chambers also utilised his good offices in getting the Liverpool and London and Globe Insurance Company to transfer the agency of that company with Chambers and Co. to the business thereafter to be conducted by K. H. Chambers. It is on these features that the assessee relies in seeking to establish that there was a real succession to the business within the meaning of section 25(4) of the Indian Income-tax Act.
What is succession to a business is no doubt primarily a question of fact, but the inference to be drawn from the facts and circumstances relating to an individual case do raise a question of law. If any one thing is clearer than another, it is that the decisions clearly point to the conclusion that no test of general nature can be laid down in order to determine what is succession. In Simons Income Tax, 2nd edition, at page 137, it has been pointed out that no definition of 'succession' has ever been attempted and that 'as a result it has been necessary for the courts to decide the matter in individual cases, and while some guidance can be obtained from the reported cases, the decisions of the courts have frequently taken the form of holding that the question at issue was primarily one of fact and that there were no grounds for disturbing the decisions of the Commissioners on a point of law. In particular, argument from decided cases has resulted in the acquisition by the word succession of a somewhat artificial meaning.' Broadly speaking, however, in order to constitute succession, there must be a taking over of the whole of the business concern, and notwithstanding that minor assets of the business are omitted from the transfer, that will not prevent there being a succession. In Jitanram Nirmalram v. Commissioner of Income-tax, the Patna High Court pointed out that it is not necessary that the successor business should have mathematically the same extent of business as the predecessor, but that it would suffice to constitute succession if there is substantial identity or similarly in the nature and extent of the activities carried on by the two firms. In that case, a firm which consisted of four partners stood dissolved as a result of a notice given by a partner. The remaining partners continued to do the same old business under the old firm name, the share in the profits and assets of the fourth partner being paid off partly in cash and partly by allotting to him a shop owned by the firm. The learned judges referred to the decision of the Privy Council in Commissioner of Income-tax v. P. E. Polson, where Lord Simonds has stated that the word 'discontinued' in section 25(3) of the Act meant only a complete cessation of the business and did not include the case of discontinuance of the business by the person formerly carrying it on as the result of the transfer or assignment of that business to another person who thereafter carried it on. It would be seen from this decision that though a part of the business was left with the retiring partner and the successor took over only the remaining part of the business, it was nevertheless held to constitute a succession within the meaning of the Act.
The facts in Commissioner of Income-tax v. Mansookhlal Zaveri are to some extent similar to the facts of this case. There a firm consisted of two partners; it got into financial difficulties and was dissolved. More than three months after such dissolution, one of the partners executed a deed of release by which he surrendered his right to the stock-in-trade and furniture, and to the use and occupation of the business premises. He also gave up all claims to the outstanding and assigned to the other partner the right to the trade marks of the firm. But before dissolution, certain major creditors were paid off. But apart from this, the assessee took over the assets and liabilities of the firm, carried on the same kind of business in the same premises, though on a smaller scale. The name of the business was also slightly altered. On these facts, the Commissioner held that there was a succession within the meaning of the Act.
The learned counsel for the department seeks to emphasise that G. A. Chambers had discontinued the business and that the assessee had commenced a fresh business, the identity between the two businesses having been destroyed in 1932. In putting forward this argument, reliance has been placed upon the correspondence between the father and the son to the effect, that the entire assets and liabilities were not taken over by K. H. Chambers and that the giving up of the firm name of Chambers and Co. of for the succeeding business is a clear indication that the goodwill of the old concern was not transferred to K. H. Chambers. We have already indicated our view on the correspondence between the father and son as strongly as he could that it would be better if the business were completely discontinued amounted to nothing more than paternal advice, the father himself conceding that the son had invested a fair amount of capital in the concern, and clearly left it to him to decide whether to continue the business. He, however, chose to retain the name of Chambers and Co. but otherwise gave the son the full benefit of the goodwill of that concern by arranging for all the constituents of the old firm to be taken over by K. H. Chambers and by passing on all the advantages which the connections of the old firm had given it. It is also clear that the name, Chambers and Co., was retained by the father for the purpose of enabling him to take steps for discharging some of the heavier liabilities as against which he took over assets of about an equal value. The giving up of the name by itself is to our minds of no real significance, and if the fact that the successor firm did not carry on the business under the same name is sought to be construed as a non-transfer of the goodwill of the old firm, though legally it may amount to that, factually however all the goodwill attendant upon the old business was transferred to the successor firm. We have pointed out how in the Rangoon case also there does not appear to have been a transfer of the goodwill in the sense that the same firms name was continued at the successor firm. All the features that were found to obtain in the Rangoon case are also found in the present case, such as that K. H. Chambers continued to carry on the identical line of business in the same premises with the same telephone number, post box number, codes and trade marks and important sections of the staff that belongs to Chambers and Co. That was as a matter of fact by the Tribunal in the statement of the case.
Learned counsel for the department relies upon Hari Ram Gopi Nath v. Commissioner of Income-tax. That was a case where as a result of a dispute among certain partners who were running four business under particular name, one partner looked after two of the shops. The other partners started two new firms in separate premised with new sets of account books. Subsequently, as a result of arbitration the disputing partner was outstanding and discharge the liabilities of the old firm. But the significant feature in that case was that the right to carry on business under the trading name of the old firm was barred to all the partners. On reference, the learned judges of the Lahore High court took the view, that the new firm was entirely different from the old firm which was in fact discontinued and that there was no succession. It seems to us that on facts this case is clearly distinguish able from the facts of the present case.
Reference has been made by the learned counsel for the department to two cases in Wilson and Barlow v. Chibbett and Ogston (H. M. Inspector of Taxes) v. Reynolds Sons and Co. Ltd. In the first of this case a business had gone into voluntary liquidation and was advertised for sale. The assessee firm purchased the property the stock-in trade and the premises. Apparently, no book debts or liability to trade creditors or anything of the kind was taken over. The creditors were left to look to the liquidation of the company for realising what was due to them from the old company. The commissioner held that there was no succession, view that was upheld by Rowlatt J. on the short ground that he could not discern any error in law. In the second of the above cases also, it was found as a question of fact that the assessee company did not purchase a business formerly carried on but only certain of its assets. In that case also, the old firm had been overtaken by bankruptcy and trustee had been appointed. The trustee could only carry on the business with a view to winding up. Though Rowlatt J. held that the mere circumstance that the assets and the book debts and the liabilities were left to be worked off by the trustee in liquidating the concerns of the partners, did not conclude the matter, the Commissioner were justified in holding that the transfer firm purchased only the assets of the old firm and started afresh. These cases to our minds deal with facts not comparable to those that obtain in the present case.
In Industrial Development and Investments Co. Ltd. v. Commissioner of Excess Profit Tax, the learned judges observed that the sale of goodwill would be a very important and material fact, because if goodwill was sold, it would support the contention that what was sold was a going business. Reliance has been placed upon this authority. That was also a case, however, where the business was sold by a receiver appointed by court. The question really arose under section 8(3) of the Excess Profits Tax Act (Act XV of 1940), the assessee in that case contending that there was no succession attracting tax liability under the Act. The learned judges pointed out that what section 8(3) of the Act, does is to take away the fiction introduced by section 8(1) of the Act, one of the purposes of that sub-section being a question of computation of depreciation. It would not this decision except in the context of the very limited scope of the matter which the learned judges had to consider in that case.
There are only two circumstances upon which the department is enabled to rely in opposing the conclusion that there was a succession. They are, firstly, that the major part of the assets and liabilities were retained by the transferor and that the firms name was not transferred suggesting thereby that there was no transfer of the goodwill. It is not denied that there is other wise a complete identity in the lines of business that were carried on by K. H. Chambers, that the same constituents were taken over and that the trade marks, codes, premises, etc., of the old firm were also enjoyed by the firm conducted by K. H. Chambers. If before the actual taking over by K. H. Chambers, those liabilities which were retained by G. A. Chambers had actually been discharged by using the assets that were reserved, there would certainly be no point in the objection. It seems to us that it makes very little difference in principle in the peculiar circumstances of this case, where the father and the son were jointly interested in the old firm even before November, 1932. It became exclusively his after November, 1932. The business was continued without a break. The non-user of the name of Chambers and Co. has also to our minds not the effect of indicating that there was no transfer of the goodwill, because all the advantages that would spring from the use of that name were in fact made available to K. H. Chambers. The suggestion that the business should be closed down that was earlier made by the father was most definitely not given effect to, the father, as it clearly appears from the subsequent conduct of the parties, agreeing that the same business should be carried on by the son, the son being relieved of the burden of discharging the liabilities by the good offices of the father, who separated an adequate portion of the assets for that purpose. In the light of all these circumstances, the power view to take is in our opinion that there was a succession to the business within the meaning of section 25(4) of the Act.
In the result, we answer the question in the negative and in favour of the assessee. The assessee will be entitled to costs. Counsels fee Rs. 250.
Question answered in the negative.