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R. Hanumanthappa and Son Vs. Commissioner of Income-tax - Court Judgment

SooperKanoon Citation
SubjectDirect Taxation
CourtKarnataka High Court
Decided On
Case NumberIncome-tax Referred Case No. 43 of 1965
Judge
Reported in[1968]68ITR35(KAR); [1968]68ITR35(Karn)
ActsMysore Income Tax Act - Sections 25(3)
AppellantR. Hanumanthappa and Son
RespondentCommissioner of Income-tax
Appellant AdvocateK.R. Ramamani, Adv.
Respondent AdvocateS.R. Rajasekhara Murthy, Adv.
Excerpt:
.....as by the then highest appellate authority, the privy council. in the case of undivided hindu families carrying on business, the undoubted legal position is that the business itself is regarded as one of the assets of the family and that the same is available for partition like any other asset or property of the joint family......the act. at that stage, the assessee claimed exemption under sub-section (3) of section 25 of the mysore income-tax act, 1923. the facts on the basis of which the claim was made briefly the following : 3. on 2nd november, 1948, the family entered into a regular partition of all its properties and assets. one of the assets was a flourishing business which was till then being carried on by the family. the manner in which the partition was put through was first to list separately different categories of assets belonging to the family, like cash, land, buildings, machinery, book balances, etc., and divide the assets in each of those categories into shares for allotment and to allot to each coparcener specific items. thereafter, the three male members of the family mention above together.....
Judgment:

Narayana Pai, J.

1. This is a reference under section 66(2) of the Mysore Income-tax Act, 1923, and relates to the assessment for the income-tax year 1949-50 of a Hindu undivided family, of which one R. Hanumanthappa was the karta and his son, Ramasetty, and grandson, Sreenivasa Murthy, were the other members. The account year of the assessee was Deepavali to Deepavali and the period relevant for assessment was November 30, 1947, to November 1, 1948.

2. The assessment in the normal course was completed on December 29, 1949. But some years later, the assessment was sought to be reopened under section 34 of the Act. At that stage, the assessee claimed exemption under sub-section (3) of section 25 of the Mysore Income-tax Act, 1923. The facts on the basis of which the claim was made briefly the following :

3. On 2nd November, 1948, the family entered into a regular partition of all its properties and assets. One of the assets was a flourishing business which was till then being carried on by the family. The manner in which the partition was put through was first to list separately different categories of assets belonging to the family, like cash, land, buildings, machinery, book balances, etc., and divide the assets in each of those categories into shares for allotment and to allot to each coparcener specific items. Thereafter, the three male members of the family mention above together with one Gopamma, the widowed daughter of the karta, entered into an ordinary partnership to carry on the same business as the family had been carrying on before the partition. The capital contribution to the new partnership by each of the three male members was by way of transfer entries in the books carried out in the following manner :

-----------------------------------------------------------------Assets Sri R. Hanumanthappa Sri Rama Sri R. R. Srini-Setty. vasa Murthy-----------------------------------------------------------------Rs. Rs. Rs.Cash 3,229 3,229 3,229Land 25,000 15,000 15,000Buildings 75,000 1,00,000 1,10,000Machinery 3,50,000 3,50,000 2,25,000Stock 47,526 47,526 47,526Book balance(Debtors) 10,068 6,178 64,231---------- --------- ---------Total 5,10,824 5,06,934 4,64,987Liabilitiestransferred(Creditors) 59,876 1,06,105 81,382---------- ---------- ----------Net valuecontributedas capital 4,50,948 4,00,829 3,83,604-----------------------------------------------------------------

4. Gopamma's contribution was out of some property and money gifted to her by the other male relatives in her parental family.

5. Both the partition deed and the partnership deed were executed on the same date. Outwardly, the business did not appear to suffer any change; it continued under the old name of 'Hanumanthappa & Son' in the old premises dealing with the stock-in-trade of the old business and continuing to deal with its previous customers in the same way as the family had been doing.

6. The partition was reported to the income-tax authorities under section 25A and an order recording the partition by metes and bounds resulting in allocation of specified shares to the members of the family was also made.

7. On the basis of the facts stated above, the assessee (undivided family) claimed exemption under section 25(3) of the Act contending that the process summarised above resulted in a discontinuance of the business originally carried on by the undivided family. Both the original assessing authority as well as the appellate authority, the Assistant Commissioner, rejected this claim. The Commissioner, under sub-section (2) of section 66, however, referred to this court the following question for opinion :

'Whether, on the facts and in the circumstances of the case, the assessee is entitled to exemption under section 25(3) of the Mysore Income-tax Act ?'

8. Section 25(3) of the Mysore Act is the same as the section and sub-section of the same number of the Indian Income-tax Act, 1922, as it stood before the amendment of 1939, and read as follows :

'25. (3) 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 discontinued, no tax shall be payable in respect of the income, profits, and gains of the period between the end 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 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 profits, and if an amount of tax has already been paid in respect of the income, profits and gains of the previous year, exceeding the amount payable on the basis of such assessment, a refund shall be given of the difference.'

9. The Mysore Income-tax Act, 1920, referred to therein is in pari materia with the earlier Indian Income-tax Act of 1918. Under those Acts, income-tax was paid for each income-tax year in respect of the income of that year. The position was changed with the introduction of the Indian Act of 1922, in British India and the Mysore Act of 1923, in the erstwhile State of Mysore, under which during each assessment year tax is paid in respect of the income earned during the previous year. The assessees, who were paying tax under the earlier Act, necessarily, therefore, had to face a situation upon the introduction of the new Act in which in respect of the income of the same year they were made to pay tax under both the statutes. It is with a view to obviate such hardship that provision was made in sub-section (3) of section 25 of the new Act so as to relieve the assessees to the extent possible of the inevitable double taxation.

10. That the present assessee was an assessee under the Mysore Act of 1920 is undoubted. It is also undoubted that in respect of the business carried on by it, it could claim exemption under the said provision only if it makes out that the business had been discontinued.

11. The meaning of the expression 'discontinuance' was the subjects of consideration by the High Courts in India and the consensus of opinion was that the said expression meant complete cessation of business. That view was ultimately accepted as correct by the Privy Council in the case Commissioner of Income-tax V. P. E. Polson.

12. As a result of the said view taken by the several High Courts, the benefit of exemption from double taxation was lost or could not be availed of by an assessee, who had started paying tax under the 1918 Act in the case where he did not discontinue the business in the sense of totally putting an end to it but transferred it or assigned it to some other person, himself ceasing to carry on the business. To prevent such a result, the Indian Act was amended in 1939 by adding another sub-section (4) extending to cases of assignment of business or succession to business the same benefit as was available to cases of discontinuance to business covered by sub-section (3) of section 25, but, in Mysore, the old Act continued unamended.

13. Although the rulings of the Indian High Courts or even the opinion of the Privy Council may not be binding or be authoritative in the old Mysore area, it may not be possible for the assessee to argue successfully against the acceptance of that view as correct. After all, it is an interpretation unanimously placed upon an identical statutory provision by the highest courts in the lands as well as by the then highest appellate authority, the Privy Council.

14. Even on the footing that discontinuance of business for the purpose to section 25(3) can only be a total cessation of that business, the question is whether, in the case of this assessee and on the facts summarised above, it is not possible for the assessee to contend that the situation was nothing but a discontinuance of business in that sense.

15. It will be noticed that the the assessee was an undivided Hindu family and that the business it was carrying on was a family business. In the case of undivided Hindu families carrying on business, the undoubted legal position is that the business itself is regarded as one of the assets of the family and that the same is available for partition like any other asset or property of the joint family. While entering into a partition, it is open to a family either to allot the business as an entire unit to one or more of its members without affecting its integrity or to divide separately assets which may be exclusively identified as business assets and allot those assets separately to different members of the family. In the former event, it may be possible to say that the business of the family as a unit and a separate asset available for partition which was originally owned by the family as a whole has, in consequence of the partition, come of be owned by one or more individual members of the family as their separate asset. Where, however, the business itself as a unit is not so allotted but several subsidiary assets going to make up that business are divided, then the several coparceners taking different subsidiary assets cannot be said to have acquired the original business as a unit. The question is whether such coparceners, who have thus obtained different subsidiary assets of the business, can put together those assets to run the business in the same way as the family had been doing and whether, upon such reintegration of the business, it could be said that the reintegrated business is the same as the original business carried on by the family.

16. The identical question was considered by the Rangoon High Court in Commissioner of Income-tax v. N. N. Firm and by the Madras High Court in S. N. A. S. A. Annamalai Chettiar v. Commissioner of Income-tax.

17. In the Rangoon case, a joint family had two business assets - a money-lending business and a rice mill. So far as the rice mill is concerned, the family considered it undesirable to split it up and therefore the said entire business as a unit was taken over by some members paying off the other members a value placed upon his share therein. The money-lending business, however, was divided between the members, each member getting a share therein appropriate to his position in the family. Thereafter, some of the members, who had acquired shares in the money-lending business, joined together to form themselves into a partnership firm and continued the money-lending business in the same way as the undivided family had been doing prior of partition. Page C.J., dealing with the case, pointed out that in the case of the rice mill, the position was that of a change of ownership of the identical business and therefore one of succession but that the integrity of the money-lending business had got split up as a direct result of partition and the subsequent carrying on of the same business by the divided members as partners under the Contract Act cannot be regarded as identical with the business originally carried on by the family. Referring to the money-lending business, his Lordship expressed himself as follows :

'In my opinion, it is manifest that there was not a 'succession' within section 26(2) of the Act. In order that a person should he held to have 'succeeded' another person in carrying on a business, profession or vocation, it is necessary that the person succeeding should have succeeded his predecessor in carrying on the business as a whole. Where a business is split up and thereafter another person carried on part of the business I am of opinion that he does not 'succeed' his predecessor in carrying on the business with section 26(2). Further, where there is no continuity in carrying on the business and when one business has come to an end and after a time another business is started, it may be with the same assets and under the same conditions and in the same premises as the old business, the persons carrying on the new business do not 'succeed' those who had carried on the old business within section 26(2) of the Act.'

18. This principle was accepted and applied by the Madras High Court in the case of Annamalai Chettiar v. Commissioner of Income-tax, referred to above. Satyanarayana Rao J. observed :

'When a unit is divided into parts it is difficult to see how the part is identical with the whole. All the parts taken together no doubt constitute the whole but when the unifying principle of that whole no longer exists, the parts gain their individuality and become separate and distinct.'

Raghava Rao J.

19. 'The endeavour if Mr. Rama Rao Sahib in this case was to extend the operation of the Privy Council decision in Polson's case to cases of business in respect of which there has been not merely a change of ownership but also a destruction of the integrity of the business. Notwithstanding the latter feature, urges learned counsel, the old business must be deemed to continue in the several parts in the hands of the several members of the quondam coparcenary into which it has become split up and the discontinuance contemplated by section 25(3) of the Indian Income-tax Act cannot consequently be postulated. The argument overlooks that the conception of 'continuance' as excluding and the conception of 'discontinuance' as warranting the operation of sub-section (3) are alike juridical and not physical. Lord Simonds in Polson's case did not, in ruling that 'discontinuance' connotes cessation and not a mere change of hands or transfer of ownership, mean to suggest that even where the legal integrity of the business becomes affected by the later transaction of partition of between members of the joint family which originally owened it, there no cessation of the business in the eye of law.

20. That a change of ownership and the idea of succession is possible only when the identity and integrity of business continues was also the view taken by the Supreme Court in Commissioner of Income-tax v. K. H. Chambers. Subba Rao J. adopted the statement of principle made by Page C.J. in the case of Commissioner of Income-tax v. N. N. Firm already cited.

21. That the position is the same even in cases where different assets of an individual's business are purchased by another as separate assets in the view taken by Rowlatt J. in Ogston v. Reynolds Sons & Co. Ltd. In the case discussed on that page, upon insolvency of a particular person, another purchased separately his goodwill, the premises and some of the merchandise or chattels and put them together for the purpose of carrying on the business in the same way as the original business of the insolvent had been doing. His Lordship observed that in such a case the business carried on by the purchaser on putting together the subsidiary assets of the insolvent's business was quite a new business and not the original business of the insolvent himself, succeeded to by the purchaser.

22. We have little doubt that the principles stated above are applicable directly to the facts of this case. The only difference or distinguishing feature relied upon on behalf of the department before us was that, in the preamble or the opening paragraphs of the deed of partnership, the parties have permitted themselves to state that the idea of their entering into a partnership was to continue the old family business. That statement may be correct as a statement of fact to this extent, viz., that in spite of the change in legal status and legal title brought about by the partition, there was no apparent change in the outward appearance of the business and the manner in which it was to be carried on. But such is also the position in the case, for example, of a family house allotted to a single persons or several coparceners in distinct shares after partition. It is only those that are aware of the partition and the change in nature of the title that will be able to realise that the house has ceased to be a joint family house. The real question is the legal consequence of the manner in which the business assets or several assets used for the purpose of the family business have been dealt with in the course of the partition. The actual effect of the partition, as already pointed out, is to allot separate items to different coparceners, and the starting of the business by the new partners, which included a female member who was not a coparcener, was not a continuance of the old family business but the commencement of the starting of a new business with the assets of the old business separately acquired by different persons and subsequently put together for the purpose of carrying on the business.

23. For these reasons, our answer to the question referred is the following :

'On the facts and in the circumstances of the case, the assessee is entitled to exemption under section 25(3) of the Mysore Income-tax Act.'

24. The assessee will have costs of this reference. Advocate's fee Rs. 250.


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