Commissioner Of Income-Tax, Bangalore vs M/S. R. Hanumanthappa And Son

Supreme Court10 August 1971A.N. Grover · K.S. Hegde

SCC(1971) 3 SCC 592
Neutral1971 INSC 187
AIRAIR 1972 SC 175
SCR[1972] 2 SCR 94

Ratio decidendi

The rule this decision rests on

Where a business carried on by a Hindu undivided family continues to be carried on by a partnership formed after the disruption of the family, with the partners being the same coparceners (or their successors) and the partnership deed expressly stating that it shall carry on as successor to the original business, the business has not been discontinued within the meaning of section 25(3) of the Mysore Income-tax Act, 1923. The discontinuance contemplated by that section is a real and factual cessation of the business itself, not a mere change in the ownership or persons who carry it on; a change of ownership from a Hindu undivided family to a partnership firm does not constitute discontinuance of the business. Article 136(1) of the Constitution, by its wide language, permits the Supreme Court to grant special leave to appeal against any judgment delivered by a court or tribunal in the territory of India, including a judgment of a High Court on a matter relating to the pre-Constitution period and a pre-Constitution enactment, even where that High Court was constituted as the final court of appeal under the pre-Constitution law.

Written by Miss Lucy from the judgment below, not taken from a headnote.

Judgment

As delivered

CIVIL APPELLATE JURISDICTION : Civil appeal No. 704 of 1968.Appeal by special leave from the judgment and order datedJanuary 4, 1967 of the Mysore High Court in I.T.R.C. No. 43of 1965.Jagdish Swarup, Solicitor General A. N. Kirpal and B. D.Sharma for the appellant.M.C. Chagla, K. R. Ramani and T.A. Ramachandran for therespondent.The Judgment of the Court was delivered byGrover, J. This is an appeal by special leave and isdirected against the judgment of the Mysore High Courtrendered in its advisory jurisdiction on a case stated bythe Commissioner of Income tax Mysore under S. 66 (2) of theMysore Income tax Act, 1923, hereinafter called the 'MysoreAct'.The facts are not in dispute. The family of R. Hanu-manthappa and son was being assessed in the status of Hinduundivided family with late R. Hanumanthappa as96its karta till there was a partition and all the familyassets including the cotton business were divided after thedisruption of the joint family which took place on November2, 1948. The division took place among the following threecoparceners, (1) R. Hanumanthappa, Karta, (2) R. Rama Settyhis son and (3) R.R. Sreenivasa Murthy his grandson. Afterthe disruption of the family the partnership firm was formedon November 22, 1948, the partners being the aforesaiderstwhile three coparceners of the Hindu Undivided family,hereinafter referred to as 'H. U. F.' and R. Gopamma awidowed daughter of R. Hanumanthappa. The partnershipworked under the name and style of R. Hanumanthappa & Son,Cotton Merchants. It is common ground that it did the samebusiness which was- being done by the H. U. F. The businessassets and liabilities falling to each coparcener's sharewere entered in their personal accounts and thenretransferred to the partnership firm as contribution ofcapital with the exception of a few trade debts. In thedeed of partnership it was stated in paras 2 and 3follows:-(2) "WHEREAS the aforesaid R. Hanumanthappa,R. Rama Setty and R. R. Srinivasamurthy werecarrying on, as members of a Hindu undividedfamily, a family business as cotton merchants,till they became divided on 2-11-1948 and thesaid three parties desire to continue thefamily business constituting themselves into apartnership.(3) WHEREAS it is agreed that the aforesaidSreemathi Gopamma shall also be admitted intothe partnership constituted for the purpose ofthe carrying on the family business after thepartition of the family as aforesaid.NOW IT IS AGREED BETWEEN THE FOUR PARTIESHERETO :-(1)-That the partnership shalt carry on, assuccessor to the business, originally carriedon by the Hindu Undivided Family of CottonMerchants Ginners and Pressers."97The assessment for the assessment year 1949-50 was completedon December 29, 1949 on the H. U. F. The previous year wasthe Deepavali year ie. November 30, 1947 to November 1,1948 This-assessment was sought to be reopened under theprovisions of s. 34 of the Mysore Act and an additionaldemand of Rs. 2,25,942/- was raised by the order of theIncome tax Officer dated September 23, 1959. Before theIncome tax Officer an exemption had been claimed on behalfof the disrupted H. U. F. under s. 25 (3) of the Mysore Act.This provision which was in the same terms as s. 25 (3) ofthe Indian Income tax Act, hereinafter called the ' IndianAct', as it stood before the amendment of 1939 was asfollows :-"Where any business, profession orvocation ... on which tax was at any timecharged under the, provisions of the MysoreIncome tax Act 1920, is discontinued, no taxshall be payable in respect of the income,profits and gains of the period' between theend date of the previous year and the, date ofsuch discontinuance, and the assessee mayfurther claim that the income, profits andgains of the previous year shall be deemed tohave been the income profits and gains of thesaid period. Where any such claim is made, anassessment shall be made on the basis of theincome profits and gains of the said period,and if an amount of tax has already been paidin respect of the income profits and gains theprevious year, exceeding the amount payable onthe basis of such assessment, a refund shallbe given of the difference."The Mysore Income tax Act 1920 referred to in the above,provision was in pari materia with a similar provision in heearlier Indian Income Tax Act of 1918. Under those Acts theincome tax was paid for each income tax year in respect ofthe income of that year. As pointed out by the High Courtthe position was changed with the introduction of the IndianIncome tax Act 1922 in British India and the Mysore Act 1923in the erstwhile State of Mysore according to which duringeach assessment year tax was )aid in respect of the incomeearned during the previous ear. A situation, therefore,arose that upon the introduction of the new Act the assesseehad to pay tax in98respect of the income of the same year both under theearlier Statute and under the later enactment. It was witha view to removing this hardship and saving the assesseesfrom double taxation that provision was made in sub-s. (3)of S. 25 of the new Act to give relief to the assessees tothe extent possible. The assessee, in the present case, wasbeing assessed under the Mysore Income tax Act 1922 and itcould certainly claim the benefit of S. 25 (3) of the MysoreAct provided it could prove discontinuance of the businesswithin S. 25 (3).In support of the contention that there had been dis-continuance of the assessee's business as contemplated by S.25 (3) of the Mysore Act it was urged, inter alia, beforethe Income tax authorities that on partition the business,had disintegrated into several parts which had been allottedindividually to each coparcener thereby connotingdiscontinuance of the business. The assets which had beeracquired by the firm were of the divided members and did notbelong to the H. U. F. and a fourth partner had joined thepartnership. This showed that the partnership ha( notsucceeded to the business of the H. U. F. The Income taxOfficer rejected these contentions. Apart from othermatters he relied on the clause in the partnership deedwhich showed that the business which was being carried on bythe H. U. F. continued to be carried on by the partnershipfirm and that the cash balance, book account and the stocksof the family business had been transferrer from the booksof the family to that of the firm.In appeal the, Appellate Assistant Commissioner upheld theview of the Income tax officer. It may be mentioned thatthe appellate authority under the Mysore Act was designatedas Deputy Commissioner but since that A( was no longer inforce the appeal was heard by the Appellant' AssistantCommissioner. He took the view that the case was one ofsuccession and not of discontinuance an affirmed the orderof the Income tax Officer. The Con-, missioner agreed withthe reasons of the Appellate Assistant Commissioner. Onapplication being made under S. 66 (2) of the Mysore Act thefollowing question was ,referred for the opinion of the HighCourt :-"Whether on the facts and in the circumstancesof the case, the assessee is entitled toexemption99under Section 25 (3) of the Mysore Income-taxAct?"The High Court answered the question in favour of theassessee and against the Revenue.There are numerous decisions relating to the question as towhat is meant by business being discontinued as also ofthere having been a succession with reference to s. 25 (3),of the Indian Act. The language of s. 25 (3) of the MysoreAct was different and was the same as of the Indian Actbefore its amendment in 1939. We have to ascertain thecorrect scope and ambit of the words "business is disconti-nued" which Would mean discontinuance of business for: thepurpose of s. 25 (3) of the Mysore ActIn Commissioner of Income tax Bombay v. P.E. Polsonl' it wasobserved as follows:-"Before the amending Act came into force thewords "discontinued" and "discontinuance" inSection 25 of the 1922 Act had been thesubject of numerous decisions in the Courts ofIndia, among them Commissioner of Income tax,Bombay v. Sanjana & Co. Ltd. (1925) 50 Bom.87, Kalumal Shorimal v. Commissioner of Incometax, Punjab (1929) 3 1. T. C. 341 and HanutramBhuramal v. Commissioner of Income Tax, Bihar(1938) 6 I.T.R. 290 and it had beenuniformally decided that these words did notcover mere change of ownership but referredonly to a complete cessation of the business.Their lordships entertain no doubt of thecorrectness of these decisions,. which appealto be in accord with the plain meaning of thesection and to be in line with similardecisions upon the English Income Tax Acts.Nor has their correctness been challenged inthe judgment under appeal or in the argumentbefore their Lordships."It was pointed out that under the Indian Act before it wasamended in 1939, s. 25 (3) gave relief in the event of.'discontinuance. The amendment only introduced a quali-fication that if there was a succession in respect ofwhich.(1) 13 I.T.R. 384.

100 relief was given there should not be any relief upon dis- continuance. It did not enlarge or Alter the meaning of "'discontinuance". In the first case referred to by their Lordships, a company went into voluntary liquidation and the liquidator transferred the business to a new company which continued that business. It was held that the business was not discontinued within the meaning of S. 25 (3) of the Indian Act. (This was 'before the amendment made in 1939). Macleod C. J. analysed the scheme of the Indian Act and emphasised the fact that under its provisions tax was chargeable on the profits of a business and it made no difference if there was any change in the persons who carried on the business so long as the business was continued. In the next case i.e. Kalumal Shorimal there had been a partition of the H. U. F. The assessee got the family business a s its share. The other coparceners relinquished their rights therein and started separate busi- ness of their own. The assessee carried on the business under the old name and style. The assessee's contention was that the family firm had ceased to exist because the family had disrupted. This was rejected by the High 'Court on the ground that the business of the family could continue in spite of its disruption. The question really was whether the business was discontinued or not in consequence of the breaking up of the family. It is unnecessary to refer to the third case as a similar principle was laid down there Grille C.J., and Niyogi J., discussed elaborately the case law relating to sub-s. (3) and (4) of s. 25 of the Indian Act in Income tax Appellate Tribunal Bombay v. Bachraj Nathani of Raipurl. The observations made there are pertinent for the purpose of the present ,case. This is what was said :-

"It must be observed that sub-section (3) is ,concerned with business, profession or vocation and sub-s. (4) with person. When an owner of a business dies or transfers his business or when partners dissolve their partnership, there is discontinuance so far as the person dying or transferring or the separating partners are concerned but there may be no discontinuance of the business as such. Thus the word discontinuity is capable of double interpretation according as it is vis-a-vis the (1) (1946) I.T.R. 191.

101 owners of vis-a-vis the business. In the fromer case, the discontinuity is notional or jural and in the latter case, it is real or factual."

All the above decisions proceed on the footing that the requirement of sub-s. (3) of s. 25 is that the business should be discontinued and not that the person or persons who own the business should cease to be the same. The dis- continuity as pointed out in Bachraj Nathani(1) case must be real and factual and it has to be of the business and not of its owner or owners of the business.

A great deal of emphasis has been laid on behalf of the respondent assessee on the integrity of the business carried on by the H.U.F. having been broken by the disruption of the family and it is claimed that the business of the family must be deemed to have totally ceased or discontinued on such disruption. Reliance has been placed on a number of decisions out of which mention may be made only of S.N.A.S.A. Annamalai Chettiar v. Commissioner of Income tax, Madras(2) in which a H.U.F. consisting of a father and son carried on money lending business under different vilasams. There was a partition in 1939 under which some of the vilasams were allotted to the father and the rest were allotted to the assessee. The Madras High Court held that as the assets of the H.U.F. were split up on partition the family business no longer continued its existence but was terminated and there was, therefore, a discontinuance within the meaning of s. 25 (3) of the Indian Act. It was observed by the court that the mere fact that after continuing the same books of account and the customers of the money lending business were to some extent identical, would not make the business of the father a continuation of the old business when once what was a single unit was split up into various component parts. The parts separated were distinct and separate parts of a unified whole but the unity and integrity between parts were no longer possible unless there was a reunion or partnership. It is apparent that the facts of this case were different and clearly distinguishable from those of the present case. Here apart from the circumstances and facts which have been found and established the partner (1) (1946) LT.R. 191.

(2) 20 I.T.R. 238.

102 ship deemed itself made it clear that the three coparceners who had effected partnership desired to continue the family business as partner after the partition of the family. No- thing could be clearer than the language used in sub-clause (1) of clause (3) of the Partnership deed that the partner- ship shall carry on as successor to the business originally carried on by the H.U.F. of cotton ginners and pressers. Thus there was no factual cessation of business or its discontinuance. All that happened was that previously the owner of the business was the H.U.F. and subsequently the partnership became the owner. There was merely a change of ownership and the business as such continued. In other words the business was never discontinued so as to attract the provision of S. 25 (3) of the Mysore Act. The judgment of the High Court cannot thus be sustained. The answer given by it in favour of the assessee will have to be discharged and in its place the question referred is answered in favour of the Revenue.

We may mention a preliminary objection that was raised on behalf of the respondent. It was argued that the matter related to the pre-Constitution period under the Mysore Act by which the Mysore High Court had been constituted as the highest court and no appeal lay to any higher court. The decision of the Mysore High Court, therefore, was final and no appeal could be entertained by this Court. We find no force in this objection. By S. 3 of the Finance Act 1950, the Indian Act was amended. The following amendment is relevant for our purposes:

S. 3 "Amendment of Act XI of 1922-With effect from 1st day of April, 1950, the following amendments shall be made in the Income tax Act,-

(a) for sub-section (2) of section 1 of the following sub-section shall be substituted, namely :-

(2) It extends to the whole of India, except the 'State of Jammu & Kashmir The effect of S. 13 of the Finance Act dealing with repeals and savings was 'that the Mysore Act ceased to have any effect except to the extent mentioned in the section.

103 In the present case the judgment of the Mysore High Court was delivered on January 4, 1967 and the appeal which has been brought to this Court is by leave granted under Art. 136 of the Constitution. We are unable to see how under Art. 136 special leave to appeal could not be granted against the judgment of the Mysore High Court when the language of Art. 136 (1) is very wide and expressly covers any judgment etc. passed or made by any court or Tribunal in the territory of India.

In the result the appeal is allowed and the question is answered as mentioned above. Owing to the previous order of this court dated February 2, 1968 the appellant, shall pay the costs of the respondent in this Court.

S.C. Appeal allowed. 8-MI245Sup.CI/71. 104

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