Commissioner of Income-Tax, Bangalore versus M/S. R. Hanumanthappa and Son

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COMMISSIONER OF INCOME-TAX, BANGALORE v.

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M/s. R. HANUMANTHAPPA AND SON

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August IO, 1971

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[K. S. HEGDE AND A. N. GROVER, JJ.]

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Mysore Income-tax Act, 1923, s. 25(3)-Hindu undivided/amity carrying on family business-After partition, the same coparceners with another formed partnership and was carrying on the same business-Whether discontinuance of the family business within the meaning of s. 25(3)-Mysore Income-tax Act, 1922-Finance Act, 1950-Whether appeal lay from a judgment of Mysore High Court arising out of pre-constitution matterInterpretation of Art. 136(i) of the Constitution.

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After the partition of a Hindu undivided family the coparceners formed into a partnership and carried on the same business which was being done by the Hindu undivided family.

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A clause in the deed of partnership was that "the partnership shall carry on as a successor to the business originally carried on by the Hindu undivided family". The assessment of the Hindu undivided family for the year I 949-50 was completed on December 29, 1949. The previous assessment year was November 30, 1947 to November I, 1948. This assessment was sought to be reopened under s. 34 of the Mysore Incometax Act, 1923 and an additional demand was raised by the order of the Income-tax Officer. On behalf of the disrupted Hindu undivided family, an exemption was claimed under s. 25(3) of the Mysore Act of 1923 which provided that where any business etc. was discontinued 'no tax shall be payable in respect of the income, profits and gains of the period between the end date of the previous year and the date of such dis- continuance.'

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The assessee claimed the benefit under s. 25(3) of the Mysore Act on the ground that after partition there was a discontinuance of the business and so no tax was payable. The Income-tax Officer relied on the succession clause which showed that the business which was being carried on by the Hindu undivided family continued to be carried on by the partnership firm and also the cash balance, book account and the stocks of the family business had been transferred from the books of the family to that of the firm. The Appellate Assistant Commissioner and the Tribunal upheld the view of the Income-tax Officer. On reference, the High Court answered the question in favour of the assessee. In appeal to this Court it was contended by the Revenue, that there was discontinuance of the business within the meaning of s. 25(3) of the Mysore Act. The respondent raised a preliminary objection that since the matter related to pre-constitution period and the Mysore High Court being the final authority .under the Mysore Act, no appeal lay to any higher Court.

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C.I.T., V, HANUMANTHAPPA (Grover. J.)

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95

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HELD: (i) 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 discontinuity must be real and factual and it has to be of the business and not of its owner or owners of the business. There was no factual cessation of business or its discontinuance in the present case. All that happened was that previously B the owner of the business was the Hindu undivided family and subsequently the partnership became the owner. There was merely a change of ownership and the business as such continued. Therefore, there was no discontinuance of the business within the meaning of s. 25(3) of the Act. [102B-C, IOJB]

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(ii) Since the Indian Income-tax Act, 1922 was introduced in the

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erstwhile State of Mysore and since this Act was amended by s. 3 of the

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C Finance Act, 1950 (by which it was made applicable to whole of India except Jammu & Kashmir), the Mysore Act therefore has ceased to have any effect except for the purposes of levy, assessment etc. mentioned in the section. Further the judgment of Mysore High Court was delivered on January 4, 1967 and the appeal was brought by special leave under Art. 136 of the Constitution. The language of Art. 136 (i) is very wide to cover any judgment, including the impugned judgment of

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D the Mysore High Court, dealing with a pre-constitution matter. [103B]

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C.l.T. Bombay v. P.E. Polson, 13 l.T.R. 384, Income-tax Appellate Tribunal v. Bachraj Nathani of Raipur, 1946 I.T.R. 191 and S.N.A.S.A. Annamalai Chettiar v. C.J.T. Madras, 20 I.T.R. 238, referred to.

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CIVIL APPELLATE JURISDICTION : Civil appeal No. 704

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E of 1968.

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Appeal by special leave from the judgment and order dated January 4, 1967 of the Mysore High Court in J.T.R.C. No. 43 of 1965.

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Jagdish Swarup, Solicitor General A. N. Kirpal and F B. D. Sharma for the appellant.

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M.C. Chagla, K. R. Ramani and T.A. Ramachandran for the respondent.

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The Judgment of the Court was delivered by

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G . Grover, ~- This is an appeal by special leave and is directed agamst the judgment of the Mysore High Court rendered in its advisory jurisdiction on a case stated by the Commissioner of Income tax Mysore under s. 66 (2) of the Mysore Income tax Act, 1923, hereinafter called the 'Mysore Act'.

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H The facts are not in dispute. The family of R. Hanumanthappa and son was being assessed in the status of Hindu undivided family with late R. Hanumanthappa as

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(1972] ! S.C.R

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96

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3UPREME COURT REPORTS

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its karta till there was a partition and all the family assets including the cotton business were divided after the disruption of the joint family which took place on November 2, 1948. The division took place among the following three coparceners, (1) R. Hanumanthappa, Karta, (2) R. Rama Setty his son and (3) R. R. Sreenivasa Murthy his grandson. After the disruption of the family the partnership firm was formed on November 22, 1948, the partners being the aforesaid erstwhile three coparceners of the Hindu Undivided family, hereinafter referred to as 'H. U. F.' and R. Gopamma a widowed daughter of R. Hanumanthappa. The partnership worked under the name and style of R. Hanumanthappa & Son, Cotton Merchants. It is common ground that it did the same business which was being done by the H. U. F. The business assets and liabilities falling to each coparcener's share were entered in their personal accounts and then retransferred to the partnership firm as contribution of capital with the exception of a few trade debts. In the deed of partnership it was stated in paras 2. and 3 as follows :-

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(2) "WHEREAS the aforesaid R. Hanumanthappa, R. Rama Setty and R. R. Srinivasamurthy were carrying on, as members of a Hindu undivided family, a family business as cotton merchants, till they became divided on 2-11-1948 and the said three parties desire to continue the family business constituting themselves into a partnership.

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(3) WHEREAS it is agreed that the aforesaid Sreemathi Gopamma shall also be admitted into the partnership constituted for the purpose of the ~rrying on the family business after the partition of the family as aforesaid.

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NOW IT IS AGREED BETWEEN THE FOUR PARTIES HERETO :-

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(1) That the partnership shall carry on, as successor to the business, originally carried on by the Hindu Undivided Family of Cotton Merchants Ginners and Pressers.''

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c.1.r., V, HANUMANTHAPPA (Grover, J.)

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A The assessment for the assessment year 1949-50 was completed on December 29, 1949 on the H. U. F. The previous year was the Deepavali year i.e. November 30,. 1947 to November 1, 1948. This assessment was sought to be reopened under the provisions of s. 34 of the Mysore B Act and an additional demand of Rs. 2,25,942/- was raised by the order of the Income tax Officer dated September 23, 1959. Before the Income tax Officer an exemption had been claimed on behalf of 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) of the Indian Income tax c Act, hereinafter called the 'Indian Act', as it stood before: the amendment of 1939 was as follows :-

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"Where any business, profession or vocation ... on which tax was at any time charged under the provisions of the Mysore Income tax Act 1920, is D discontinued, no tax shall be payable in respect of the income, profits and gains of the period between the end date of the previous year and the date of such discontinuance, and the assessee may further claim that the income, profits and gains of the previous year shall be deemed to have been the E income profits and gains of the said period. Where any such claim is made, an assessment shall be made on the basis of the income profits and gains of the said period, and if an amount of tax has already been paid in respect of the income, profits and gains the previous year, exceeding the F amount payable on the basis of such assessment, a refund shall be given of the difference."

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The Mysore Income tax Act 1920 referred to in the above: provision was in pari materia with a similar provision in the earlier Indian Income Tax Act of 1918. Under those: G Acts the income tax was paid for each income tax year in respect of the income of that year. As pointed out by theHigh Court the position was changed with the introduction of the Indian Income tax Act 1922 in British India and theMysore Act 1923 in the erstwhile State of Mysore according to which during each assessment year tax was H paid in respect of the income earned during the previous year. A situation, therefore, arose that upon the introduction of the new Act the assessee had to pay tax ir.

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(1972] 1 S.C.R.

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SUPREME COURT REPORTS,

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respect of the income of the same year both under the earlier Statute and under the later enactment. It was with a view to removing this hardship and saving the assessees from double taxation that provision was made in sub-s. (3) of s. 25 of the new Act to give relief to the assessees to the extent possible. The assessee, in the present case, was being assessed under the Mysore Income tax Act 1922 and it could certainly claim the benefit of s. 25 (3) of the Mysore Act provided it could prove di<· continuance of the business within s. 25 (3).

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In support of the contention that there had been discontinuance of the assessee's business as contemplated by s. 25 (3) of the Mysore Act it was urged, inter a/ia, before the Income tax authorities that on partition the business had disintegrated into several parts which had been allotted individually to each coparcener thereby connoting discontinuance of the business. The assets which had been acquired by the firm were of the divided members and did not belong to the H. U. F. and a fourth partner had joined the partnership. This showed that the partnership had not succeeded to the business of the H. U. F. The Income tax Officer rejected these contentions. Apart from other matters he relied on the clause in the partnership deed which showed that the business which was being carried E on by the H. U. F. continued to be carried on by the partnership firm and that the cash balance, book account and the stocks of the family business had been transferred from the books of the family to that of the firm.

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In appeal the Appellate Assistant Commissioner upheld the view of the Income tax officer. It may be mentioned that ~he appellate authority under the Mysore Act was designated as Deputy Commissioner but since that Act .was no longer in force the appeal was heard by the Appellate Assistant Commissioner. He took the view that the case was one of succession and not of discontinuance' and affirmed the order of the Income tax Officer. The Commissioner agreed with the reasons of the Appellate Assistant Commissioner. On application being made under s. 66 (2) of the Mysore Act the following question was :referred for the opinion of the High Court :-

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"Whether on the facts and in the circumstances of the case, the assessee is entitled to exemption

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c.r.r., v. HANUMANTHAPPA (Grover, I.)

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under Section 25 (3) of the Mysore Income-tax Act?"

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The High Court answered the question in favour of the assessee and against the Revenue.

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B There are, numerous decisions relating to the question as to what is meant by business being discontinued as also of there having been a succession with reference to s. 25 (3) of the Indian Act. The language of s. 25 (3) of the Mysore Act was different and was the same as of the Indian Act before its amendment in 1939. We have to ascertain the c correct scope and ambit of the words "business is discontinued" which w , uld mean discontinuance of business for the purpose of s. 25 (3) of the Mysore Act

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In Commissioner of Income tax Bombay v. P.E. Polson it· was observed as follows:-

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"Before the amending Act came into force the words "discontinued" and "discontinuance" in Section 25 of the 1922 Act had been the subject of numerous decisions in the Courts of India, among them Commissioner of Income tax, Bombay E v. Sanjana & Co. Ltd. (1925) 50 Born. 87, Kalumal Shorimal v. Commissioner of Income tax, Punjab (1929) 3 I. T. C. 341 and Hanutram Bhuramal v. Commissioner of Income Tax, Bihar (1938) 6 I.T.R. 290 and it had been uniformally decided that these words did not cover mere change F of ownership but referred only to a complete cessation of the business. Their lordships entertain no doubt ofthe correctness of these decisions, which appeal to be in accord with the plain meaning of the section and to be in line with similar decisions upon the English Income Tax Acts. Nor G has their correctness been challenged in the judgment under appeal or in the argument before their Lordships."

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It was pointed out that under the Indian ·Act before it was amended in 1939, s. 25 (3) gave relief in the event of H discontinuance. The amendment only introduced a qualification that if there was a succession in respect of which

(1) 13 l.T.R. 384.

[1972] 1 S.C.R.

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1lUPREME COURT REPORTS

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relief was given there should not be any relief upon discontinuance. 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 busiB ness was not discc;mtinued within the meaning of s. 25 (3) of the Indian A.ct. (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 c 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 as its share. The other coparceners relinquished their rights therein and started separate business of their own. The assessee carried on the business D 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 E 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 therei i. Grille C.J., and Niyogi J., discussed elaborately the c1se law relating to sub-s. (3) and ( 4) of s. 25 of the Indian Act in Income tax Appellate Tribunal F Bombay v. Bachraj Nathani of Raipur¹ • The observations made there are pertinent for the purpose of the present case. This is what was said :-

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"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

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(I) (1946) l.T.R. 191.

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C.I.T., v. HANUMANTHAPPA (Grover, .T.) 101

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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."

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All the above decisions proceed on the footing that the B 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 discontinuity as pointed out in Bachrai 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.

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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 D 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 E 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, F 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 G 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 H the present case. Here apart from the circumstances and facts which have been found and established the partner

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(1) (1946) I.T.R. 191.

(2) 20 l.T.R. 23~. .

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[ 1972] 1 S.C.R,

SUPREME COURT REPORTS

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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. Nothing could be clearer than the language used -in sub-clause (I) of clause (3) of the Partnership deed that the partnership shall carry on as successor to the business originally carried on by the H.U.F. of cotton ginners and presseri;. 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 attn~ct 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 "lS answered in favour of the Revenue.

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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:

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

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

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(2) ·n extends to the whole of India, except the State of Jammu & Kashmir ... "

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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.

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C.I.T., V. HANUMANTHAPPA (Grover,!.)

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In the present case the judgment of the Mysore High

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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

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·see how under Art. 136 special leave to appeal could not

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8 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.

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Jn the result the appeal is allowed and the question is

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answered as mentioned above. Owing to the previous

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C order of this court dated February 2, 1968 the appellant shall pay the costs of the respondent in this Court.

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s.c.

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Appeal a/lowed.

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8-MJ245Sup.Cl/71.

Commissioner of Income-Tax, Bangalore v. M/S. R. Hanumanthappa and Son

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Commissioner of Income-Tax, Bangalore v. M/S. R. Hanumanthappa and Son

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