Judgment:
1. At the instance of the assessee, the Income-tax Appellate Tribunal, Allahabad, referred the following questions for the opinion of this court :
'Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that on October 15, 1972, the firm stopped doing its business and held the assets of the business thereafter for and on behalf of the company which was stipulated to be formed by the partners of the firm in terms of the deed of copartnery dated October 16, 1972 ?
If the answer to the above be in the affirmative-
Whether the Tribunal was justified, on the facts and in the circumstances of the case, in holding that the firm was liable to be assessed in respect of the profits which arose and accrued to it with regard to itstrading from January 1, 1972, to October 15, 1972, in terms of Section 170 of the Income-tax Act, 1961 ?'
2. The facts, as briefly stated, in the order of the Appellate Tribunal are that the asses see-firm comprised three partners during the accounting period which was the calendar year 1972. A new deed of partnership was constituted with effect from August 3, 1972, whereby four new partners were admitted into the partnership and thus the number of the partners swelled to 7 from 3.
3. The firm carried on the business of purchase and sale of Tata Mercedez Benz vehicles, tempos and mini bus, spare parts, tyres, oil and lubricants, etc.
4. On October 16, 1972, a deed of copartnery was entered into by the seven partners. Admittedly, the partnership firm was converted into a company, which was incorporated under the Companies Act with effect from November 25, 1972. Whereas the firm filed a return showing nil income for the entire accounting period relevant to the assessment year 1973-74 the company returned income for the period from January 1, 1972, to March 31, 1973. It has come in the statement of facts that the company applied for change in the accounting period and this is how the return was filed up to March 31, 1973.
5. The contention of the assessee before the assessing authority was that the entire income for the accounting period was liable to be taxed in the hands of the company. The assessing authority, while rejecting the contention of the assessee-firm, held that the business of the firm was succeeded by the company and, therefore, the income of the period from January 1, 1972, to November 25, 1972, was liable to be taxed in the hands of firm and for the subsequent period the income was liable to be taxed in the hands of the company.
6. So far as the question whether the business of the firm was succeeded by the company, is concerned, both the appellate authority and the Income-tax Appellate Tribunal affirmed the view, taken by the assessing authority that there was succession within the meaning of Section 170 of the Income-tax Act, 1961 (briefly, the Act). The Tribunal, however, held that income up to October 16, 1972, only was assessable in the hands of the firm.
7. It is in the backdrop of this factual position that the aforementioned question has to be considered.
8. The short question for consideration is whether the business of the firm was succeeded by the company and whether there was succession within the meaning of Section 170 of the Act. The authorities clearly held that the business of the firm was distinct from the business of the company. The Appellate Tribunal relied on the case of CIT v. A. W. Piggies and Co. : [1953]24ITR405(SC) . In this case also, the assessee, a partnership firm, carried on the business and that was converted in the year 1947 into a limited company. The Appellate Tribunal and the High Court both held that there was succession within the meaning of Section 25(4) of the Indian Income-tax Act, 1922, analogous to Section 170 of the Act. The Supreme Court concurred with the High Court saying (page 409) :
'We have no doubt that the Tribunal and the High Court were right in holding that in spite of the mere changes in the constitution of the firm, the business of the firm as originally constituted continued as tea brokers right from its inception till the time it was succeeded by the limited company and that it was the same unit all through, carrying on the same business, at the same place and there was no cesser of that business or any change in the unit.'
9. From the above reproduced finding, it is amply clear that when a firm is converted into a company then the business of the firm is succeeded by the company.
10. Section 170, Sub-section (1), Clauses (a) and (b), of the Act clearly provides that where a person carrying on any business or profession has been succeeded therein by any other person who continues to carry on that business or profession, the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession and the successor shall be assessed in respect of the income of the previous year after the date of succession.
11. From Section 170(1), it is clear that the Appellate Tribunal rightly held that the firm was assessable till it was succeeded by the company.
12. It is argued before us by counsel for the assessee that the profits of the business carried on by the firm do not accrue day-to-day and that in the instant case the account books were not closed when the company took over the assets and liabilities of the firm and, therefore, the profits of the firm could not be assessed in the hands of the company (?}. We do not agree with the submission of counsel for the assessee. When the books of account are regularly maintained by the firm, profits can be ascertained without any difficulty till the date of succession. Forascertaining the profit, it is not necessary that the books of account should have been actually closed, because the assessment of the predecessor firm is not dependent on the closing of the accounts.
13. For the reasons, both the parts of the question referred to this court are answered in the affirmative, that is, in favour of the Revenue and against the assessee.