SRINIVASAN J. - The assessee, Sri M. Subbaraya Iyer, has been a practitioner in matters connected with income-tax. He commenced practice in 1910 and was an assessee under the Indian Income-tax Act of 1918. By 1952, he had established a voluminous practice. On March 30, 1952, he entered into a partnership with four juniors of his, one of whom is his son. It was agreed that the five persons should carry on in partnership the business or profession of lawyers and advocates as from the March 30th, 1952, the profession heretofore carried on by the first partner, Sri Subbaraya Iyer, with the help of partners 2 to 5. On and after the formation of the above firm, all the; pending professional engagements of Subbaraya Iyer were handed over to the firm. It is common ground that there were no such professional engagements of the other partners which were so transferred to them. It is also common ground that on and after the formation of this partnership, all the fees recoverable in connection with the professional engagements subsequent to the date of the creation of the; partnership, were realised by the firm. On the basis of these facts, the assessee informed the Income-tax Officer that the firm referred to had succeeded to the business or profession which he had been carrying on, and applied for relief under section 25 (4). The Income-tax Officer denied the relief holding that though the profession carried on by the assessee had been transferred as a whole to the partnership, the assessee had 'not given up the profession altogether which is still being carried on by the firm of which he is the major partner with five annas share in the rupees. Nobody in common parlance will say that the assessee had discontinued his profession. Everybody will say that he still carried on his occupation as a partner in a firm instead of carrying it on individually.' In appeal, the Appellate Assistant Commissioner also held that there was no succession. The Tribunal, in its order dismissing the appeal of the assessee, while accepting the genuineness of the partnership, yet hold that since the practice depended purely on the skill and ability of the assessee, that could not be transmitted; that there was no cessation of the assessees professional activities; and consequently, no succession could be spelt out of the transaction.
It is on these facts that we have to decide the question referred to us under section 66 (1) of the Indian Income-tax Act, viz.;
'Whether the assessee is entitled to the first part of the relief contemplated in section 25 (4) in respect of the profits up to March 31, 1952 ?'
Before we proceed to deal with the question, we may refer briefly to certain changes that were introduced in the 1922, Act by the amending Act VII of 1939. Under the earlier Act, section 10 dealt with business and section 11 with professional earnings. By section 11 of the amending Act, for the word 'business' were substituted the words 'profits and gains of business, profession or vocation' and this change was carried out in the body of that section wherever the word 'business' occurred. Section 11 of the 1922 Act was also omitted. Clearly then, the concept of business was enlarged to include profession and vocation as well. At the same time, section 25 of the 1922 Act was also enlarged by the addition of section 25, sub-clause (4) as it appears at present. While section 25 of the earlier Act dealt only with discontinuance relief in the case of any business, profession or vocation, the newly introduced section 25 (4) provided for what may be called succession relief, a relief which was not available previously. It should be obvious therefore that it is implicit in the terms of the section that a profession or vocation could also be succeeded to in just the same way as a business could be succeeded to.
The conditions requisite for the application of section 25 (4) of the Act are that the person seeking the relief must, at the commencement of that amending Act VII of 1939, have been carrying on the profession. On the profits and gains earned by the exercise of such profession he must have been charged to tax under the provisions of the Indian Income-tax Act, 1918. He should have been succeeded in such capacity by another person. An exception is found in a case where a partnership had been originally carrying on the profession and complies with the first two conditions set out above and which partnership yields place to another partnership, the change in the partnership being nothing more than a change in the constitution of the first mentioned partnership. In such a case only is it laid down in the section that there would be no succession within the meaning of the provision. It is conceded that the person, the assessee in this case, was being charged to income-tax under the provisions of the 1918 Act on the earnings of his profession. It is also conceded by the department that he was carrying on that same business at the commencement of the amending Act VII of 1939. The first two conditions obtain in the present case and the only dispute is whether There has or has not been a succession to that business of that person by the partnership which came in to existence on the 30th of March, 1952.
We may at the outset deal with one aspect of the view taken by the Tribunal, which is expressed in its own words, as appearing in paragraph 13 of the statement of the case :
On the facts of the case, the Tribunal held that there was no element of goodwill traceable in the practice of the assessee as an indication of its identity. The practice depended purely upon the skill and ability of the assessee, which could not be transmitted; there was consequently no succession on March 31, 1952.'
If the Tribunal purported to hold that in all cases where the exercise of a profession or vocation depends on the skill or ability of the person who carries it on, and a profession of that kind could not be succeeded to, it seems to us that this approach is fundamentally opposed to the provisions of section 25 (4) itself. The section clearly contemplates that a person carrying on a profession or vocation could be succeeded to in such capacity by another person. The exercise of any profession or vocation virtually depends upon the personal characteristics of that individual carrying on that profession or vocation, and to say that there could be no succession in such a case, because the skill and ability of the person carrying on the profession cannot be transmitted it, as we said opposed to the underlying intention of the statute. It certainly is not the skill and the ability that is being transmitted or that is succeeded to. A person who engages himself in a particular field of activity, in this case the profession of a lawyers, builds up what is called a practice. He establishes contacts with the clientele which approaches him for professional advice or work. The case is not far different from that of a business where the business associations established by the person conducting the business virtually stand transferred to another person succeeding to that business. While no doubt the practice of the assessee in this case has been built on a foundation of his skill and ability, it is not that skill and ability that are transferred, but the established practice built up by those means. The reason advanced by the Tribunal for holding that there could be no succession because what was sought to be transferred was only the skill or ability fails to convince us a sound.
Even in the case of a business, in the final analysis, it is really the skill and ability of the person in management of that business that vitally contributes to its structure. The business on being succeeded to or being transferred may fail by reason of the person who contributed of its success having no further connection therewith. That, however, can be no reason for holding that there could not be a valid succession to the business. In Income-tax Commissioners for the City of London v. Gibbs the case of succession to a business of stock brokers arose. Viscount Simon L. C. said :
'Moreover, the very fact that there has been a change in the composition of the partnership during the year may, owing, for example, to the dropping out of a partner who has been chiefly instrumental in making the business a success, cause a fall in profits. Again, the same result might follow together the carrying on of a trade passes from a singly individual to another individual, and this remains true if a corporation, limited, or unlimited, is substituted for the individual in either or both cases.'
Later we shall deal with the question where the partnership claims to have succeeded to the business of an individual but the above passage makes it clear that through a business might have depended almost entirely upon the all land ability of the person carrying it on and the changed ownership of the business might to have the advantage of that skill and ability of that person, that would not be a reason for holding that there could not be a succession.
One feature that is almost fundamental under the law relating to Income-tax is that a firm is a distance assessable entity. For a variety of purposes, a firm is regarded as a unit of a assessment. It has been accorded under the income-tax law a status which it does not possess under the general law. Under the general law, a firm, that is a partnership, has no legal existence apart from the members. It is principally upon this basic that the department founds its argument. Mr. Rama Rao Sahib of the department concedes that no doubt under the Indian income-tax law an individual and a firm are distance entities. He is also willing to concede that if in the partnership which is claimed to have succeeded, the assessee had not been a partner, he cannot urge that succession had not taken place. But what he would contend is that because a partnership has no legal existence apart from the members, the association of the assessee in the partnership amounts to saying that the assessee is still carrying on the business. It that is so, so that argument runs, how an the assessee succeed to a business which the himself had carried on in the past This argument does not appear to us to be acceptable in view of the special position enjoyed by a partnership under the Income-tax Act. Cases have held that though not a legal entity under the general law, a partnership still possesses an individual character, apart for its members for purposes of the Income-tax Act. It is true that a firm is not a person for certain propose For example, a firm as such cannot be a member of another partnership. But that is an incident arising under the general law. Certain disabilities may attach to a firm under the general Law. Gut that is not the same thing as saying for any purpose for which the Income-tax Act specifically provides, this general principle can be applied.
We may in this contest refer to section 26 (2) of the 1922 Act. It provided that where a person carrying on any business, profession or vocation has been succeeded to in such capacity by another person, the assessment shall be made on such person succeeding as if he had been carrying on the business throughout the previous year and as if he had received the whole of the profits for that year. With the introduction of section 25 (4) by the amending Act of 1939, section 29 (2) was also recast to read thus :
'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.'
Section 26 (2) in its present form is made subject to section 25 (4), that is to stay, in cases where there has been a succession, a person who had been carrying on any business, profession or vocation prior to the succession, would not be liable to tax, if his case comes within the scope of section 25 (4) and only the successor would be made liable to tax. The expression 'person' has been used in a perfectly general manner in these provisions and under the income-tax law does certainly include a partnership. That being so, the liability to tax on the income of the business, profession or vocation has in this case been laid upon the person succeeding to the business. If the argument of the leaned counsel for the department is to be accepted, we have to construe 'succession' referred to in section 26 (2) of the Act somewhat differently from succession mentioned in section 25 (4) of the Act. That is to say, the department would rely on a succession in so far as it imposes a liability on the successor but not when a benefit is claimed. It seems to us that such a mode of interpretation is not permissible.
We may once again refer to the decision in Income-tax Commissioners for City of London v. Gibbs. That was a case where the business of an old partnership was succeeded by a new partnership. Under the English income-tax law, even a mere change in the constitution of a partnership is not denied the benefit resulting from succession. But the importance of this decision is only to emphasis the special position which a partnership enjoys under taxing enactments. Lord Wright said :
'Under rule 10 where there is a partnership the tax is to be computed jointly and in one sum and a joint assessment is to be made in the partnership name, which means that any partner can be called upon to pay the whole. This rule shows that while the Revenue Acts do not deal specifically with partnerships. They do in some respect treat them in a sense as special entities for taxation, though it is still true that the partner, not the firm as an entity, are taxed. The result is that where a new partner is admitted under rule 11, say at whatever period of the year, he is liable in solid to income-tax of the whole assessment, which is a single assessment on the profits of the entire year, before the new partner joined the firm, though no doubt the old and new partners may provide for some adjustment of the burden inter se.'
The observations of Viscount Simon are more pertinent to the present case :
'It cannot be disputed that the language of the rule would apply if an individual A ceases to trade and is succeeded in the business by an individual B, and the same result follows if a corporation, limited or unlimited, is substituted for A or B, or both. There would also be no difficulty in treating the rule as applying to the transfer of a business from a partnership consisting of A, B, C and D to another partnership consisting of W, X, Y and Z for person includes persons. The difficulty is to construe and apply the rule if the new partnership he contains a member, or members, of the old. In the present case none of the former partners had retired, and the new combination is the result of an addition. But it seems to me - and indeed this is admitted by counsel of the respondents - that no distinction, in principle, can be drawn between this case and the case in which all the previous partners, except one, have retired and a large number of new partners are added. The crucial case always is one in which there is one individual at least whom is a partner throughout.'
The argument that there could not be a succession in this case is mainly rested on the ground that Subbaraya Iyer, who was originally the sole proprietor, if we can so call him, became a partner in the firm of which is claimed to be the successor. The argument, as we have stated earlier, is that since Subbarya Iyer as a member of the firm continues to exercise the profession and a partnership has no legal existence apart from its members, it cannot be said that there has been such a change in the ownership so as to postulate a different entity taking the place of the previous entity. In substance, their argument once again reiterates the earlier argument that a firm cannot be regarded as a legal entity. As we have already held, though that proposition may be sound under the general law, it is modified in so far as the Income-tax Act is concerned. Whether Subbaraya Iyer is or is not a member of the partnership make no difference whatsoever to the conclusion that this firm certainly possesses a legal character which enables the department assess it as a unit different from the members who compose it. That being so, we are unable to accept the argument that the association of Subbaraya Iyer in the partnership is the factor that prevents there being a succession by this partnership to the profession of Subbaraya Iyer as an individual.
In Hassan Kassam v. Commissioner of Income-tax an assessee was carrying on a business as a sole proprietor from 1926. In 1940, he admitted his for sons and son-in-law as partners in business. For the assessment year 1940-41, the relief was claimed under section 25 (4). The Appellate Tribunal held that section 25 (4) applied to the assessment and that succession relief was available to the assessee. Though the decision of the High Court did not directly impinge upon the question. Whether the partnership could succeed to the business of the individual, on the facts found, viz., that it was a genuine partnership, that the business sought to the assessed was in fact charged under the 1918 Act and that the business was identical with the business what was carried on in 1926, the learned judges came to the conclusion that succession relief was available. It is implied in this decision that though in the succeeding partnership, the assessee who carried on the business previously was a partner, that circumstance would not disentitle succession being upheld.
Karuppiah Pillai v. Commissioner of Income-tax deals with a contrary case where the question of succession by an individual to a partnership, which had been carrying on the business previously, arose. The question principally turned upon the construction of section 26 (2) of the Act. But nevertheless, in so far as the interpretation of the expression 'succeeded in such capacity' is concerned, the principle of the decision is applicable to the present case. A full Bench of this court held that a firm for purposes of assessment of income-tax entity quite distinct from the members who compose it and that where a partner carries on the business of a partnership after dissolution, he succeeds to the business within the meaning of section 26 (2). The learned Chief Justice, in the course of his judgment, observed :
'For the assessee it is said that inasmuch as he was a partner in the business of exhibiting this film before he acquired the right to exhibit it for his sole benefit, there could be no succession because as part owner of the business he could not succeed to himself. This argument ignores the fact that a partner is not the partnership. A firm for the purposes of assessment to income-tax is an entity quiet distinct from the partners who compose it. In two cases which have come before this court it has been accepted that where a partner carries on the business or partnership after dissolution he does succeed within the meaning of section 26 (2).. If the partnership is an entity distinct from the partners there must be succession in circumstances such as we have here.'
They refer to other cases of the Rangoon High Court and in England which have taken the same view.
To our minds, these two decisions really clinch the matter. There is no dispute that the conditions per -requisite of the operation of section 25 (4) are complied with in this case. That being so, the partnership which came into existence on March 30, 1952, did in fact and in law succeed to the business that was carried on by the assessee prior to that date. We accordingly answer the question in the affirmative and in favour of the assessee. The assessee will be entitled to his costs.
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