The real question which arises in this reference is whether it can be said that a firm which has been dissolved 'cannot be found' within the meaning of the proviso to sub-section (2) of Section 26 of the Indian Income-tax Act, 1922, notwithstanding that all the members of the firm are alive and can be found.
The assessee is the proprietor of a business carried on under the style of the National Cycle Importing Company. Up to the end of the Samvat year 1994, that is, up to October 23, 1938, this business was owned by the assessee in partnership with two others, Vanamali Premchand Shah, and Fulchand Bhaichand Shaw. On October 24, 1938, the first day of the Samvat year 1995, the assessee took over the entire business and the partnership was dissolved as from that date. In the Samvat year 1995 the Income-tax Officer assessed the total income of the business for the year 1994 at Rs. 16,500. The assessees share of this amount was Rs. 7,427 and Fulchand Bhaichand Shaws share Rs. 4,950, and they were assessed to income-tax on these amounts respectively. The third partner was not assessed on his share (Rs. 4,125) as the Income-tax Officer was informed that he had ceased to be a partner before the month of October 1938.
The Commissioner of Income-tax considered that the Income-tax Officer had not adopted the right method of assessment. In his opinion the case falls within the second sub-section of Section 26 of the Act and by virtue of the proviso contained in that sub-section the assessee can be assessed to tax on the full amount of the profits earned during the year 1994. Accordingly he revised the assessment and caused notice to be served on the assessee under Section 33 to show cause why he should not be assessed in respect of the sum of Rs. 16,500, which represented to total profits. The assessee objected to the proposal, and in consequence the Commissioner has referred to the Court for decision the following question :
'Whether in the circumstances of the case the Commissioner of Income-tax was right in setting aside the order of the Income-tax Officer and directing that Amritlal Bhaichand Shah should be assessed on the entire profits as successor under Section 26(2) of the Indian Income-tax Act.'
We are concerned in this case only with the provisions of Section 26(2) as it stands as the result of the amendment made in the year 1939. The sub-section now reads as follows :-
'Where a person carrying on any business, profession or vocation has been succeeded in such capacity by another person, such person and such other person shall, subject to the provisions of sub-section (4) of Section 25, each be assessed in respect of his actual share, if any, of the income, profits and gains of the previous year :
Provided that, when the person succeeded in the business, profession or vocation cannot found, the assessment of the profits of the year in which the succession took place up to the date of succession, and for the year preceding that year shall be made on the person succeeding him, in like manner and to be same amount as it would have been made on the person succeeded or when the tax in respect of the assessment made for either of such years assessed on the person succeeded cannot be recovered from him, it shall be payable by and recoverable from the person succeeding, and such person shall be entitled to recover from the person succeeded the amount of any tax so paid.'
Looking merely at the words used in the first paragraph of the sub-section it would appear that they are only intended to apply to a succession which has taken place during the year of account and not to a succession which has become effective during the year of assessment. Mr. Sesha Ayyangar on behalf of the Commissioner, however, contends that the first paragraph of the sub-section must be read in conjunction with the second paragraph and says that when this is done the sub-section is wide enough to cover also a succession during the year of assessment. For the purpose of answering the present reference it is not necessary to decide whether the contention is well founded. The Commissioner himself has relied on the wording of the proviso, but it s clear that before the proviso can be brought into operation it must be established that the person succeeded, 'cannot be found' that is he must be dead or has disappeared. The proviso cannot be applied where the person succeeded is alive and his whereabouts are known or can be ascertained. Here, all the three persons who formed the firm whose business was taken over by the assessee are alive and their addresses ar known. In Karuppiah Pillai v. Commissioner of Income-tax, Madras (1) : 9ITR1(Mad) this Court held that a partner who takes over the partnership business after the dissolution of the partnership business within the meaning of Section 26(2).
What the Court has to decided is whether the Commissioner is right in the opinion which he has formed that a firm 'cannot be found' when it has been dissolved. The Commissioner dissociates the partners in the firm from the firm itself. This appears to us to be going too far. It is quite true that a firm for purposes of assessment to income-tax in some cases is regarded as a unit, but that does not mean that in all cases a firm must be looked upon as a juridical person. Section 2(6B) says that the words 'firm' 'partner' and 'partnership' have the same meanings respectively as in the Indian Partnership Act 1932, and Section 4 of that enactment states that persons who have entered into partnership with one another are called individually 'partners' and collectively 'a firm.' This being the position, we are unable to say that the firm 'cannot be found', when all the partners are her and two of them have paid their proportionate share of the tax.
The Court is not concerned with any further provisions of the Act which may help the Income-tax authorities in this case. It is only concerned with the question under reference and the decision of the question merely involves the construction of the expression 'cannot be found.' We have indicated that the firm can be found for the purposes of the proviso to Section 26(2), and the answer to the question formulated by the Commissioner must be in the negative.
The assessee has succeeded and he is entitled to his costs, Rs. 250. He is also entitled to the refund of his deposit of Rs. 100.
Reference answer in the negative.