Skip to content


S.N.A.S. Annamalai Chettiar Vs. the Commissioner of Income-tax, Madras - Court Judgment

SooperKanoon Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberCase Referred No. 64 of 1947
Judge
Reported inAIR1952Mad271; [1951]20ITR238(Mad); (1951)2MLJ335
ActsIncome-tax Act, 1922 - Sections 25, 25(3) and 26; Income-tax (Amendment) Act, 1939
AppellantS.N.A.S. Annamalai Chettiar
RespondentThe Commissioner of Income-tax, Madras
Appellant AdvocateK. Rajah Aiyar and ;K. Srinivasan, Advs.
Respondent AdvocateC.S. Rama Rao Sahib, Adv.
Cases ReferredGeorge Humphreys and Co v. Cook
Excerpt:
.....allotted to the father and son, who constituted the family, in separate shares. thereafter, the father carried on a similar business in the same place with the assets allotted to his share. in the assessment of the son for the year 1939-1940, he claimed that the joint family business became discontinued by reason of the partition and that, under section 25(3) of the act, it was not liable to be taxed for the period in question.; held that there was a 'discontinuance' of the family business within the meaning of section 25(3). the conception of continuance as excluding, and the conception of discontinuance as warranting the operation of section 25(3) are alike juridical and not physical. this was not a case of mere transfer of ownership. the integrity of the business was broken and its..........for the assessment fear is from. 13-1-1938 to 13-4-1939.3. the assessee claimed that the joint family business became "discontinued" by reason of the partition in march 1939 and that therefore section 25 (3) applied. it was originally held by the appellate assistant commissioner that the business under different vilasams represented five distinct and separate businesses of the hindu undivided family which were divided between the two members the lather taking two businesses in their entirety and the son taking over the other three remaining businesses. it was therefore thought that there was no "discontinuance" within the meaning of section 25 (3). that this was an error was pointed out by the appellate tribunal by its order dated 13-9-1943 and it was held that it was. only one.....
Judgment:
1. The Income-tax Appellate Tribunal referred the following question of law for the opinion of this Court:

"Whether on the facts and circumstances of the case the Tribunal was right in holding that the Hindu undivided family was not entitled to the benefits of Section 25(3) of the Indian Income-tax Act, after partition on 28-3-1939."

2. The applicant was a member of a Hindu undivided family till the date of the partition on 28-3-1939. The family consisted of Chockalinga,. the father and Annamalai the son, the assessee The family was carrying on money-lending business at Penang under four different vilasams or styles (1) S. N. A. S. (Penang), (2) A. N. (Penang),. (3) S. N. A. S. A. (Penang) and (4) S. N. A. S. A. (Trust.) It had also a share in S. N. A. S. Bagan Datoh. In the partition of the family properties S. N. A. S. (Penang) and the family's share in Bagan Datoh was allotted to the father and the son took the remaining three assets or activities, i.e., S. N. A. S. A. (Penang), A. N. (Penang) and S. N. A. S. A. (Trust.) During the assessment year 1939-40, with which this reference is concerned, the assessee claimed that the joint family was not liable to be taxed for the period between 13-4-1938 and 28-3-1939, the date of the partition on the basis that it was entitled to the benefit of Section 25 (3), Income-tax Act. The accounting year for the assessment Fear is from. 13-1-1938 to 13-4-1939.

3. The assessee claimed that the Joint family business became "discontinued" by reason of the partition in March 1939 and that therefore Section 25 (3) applied. It was originally held by the Appellate Assistant Commissioner that the business under different vilasams represented five distinct and separate businesses of the Hindu undivided family which were divided between the two members the lather taking two businesses in their entirety and the son taking over the other three remaining businesses. It was therefore thought that there was no "discontinuance" within the meaning of Section 25 (3). That this was an error was pointed out by the Appellate Tribunal by its order dated 13-9-1943 and it was held that it was. only one single business of money lending carried on by the family the assets of which were divided amongst the two coparceners and as the assessment proceeded on an entirely wrong taste, the Appellate Tribunal remitted the matter to the Income-tax Officer for making a fresh assessment with a direction that the claim of the assesses under Section 25 (3) should be examined afresh in the right of the finding of the Tribunal. The Income-tax Officer purporting to follow the decision of this Court in 'Commissioner of Income-tax v. Annamalai Chettiar', 1944-12 I T R 226 held that there was no discontinuance within the meaning of Section 25 (3). On appeal, however, the Appellate Assistant Commissioner differed from this view on the ground that as a result of the partition the entire assets of the family belonging to one single business were divided and were allotted to the father and the son separately and that it was difficult to hold that the Joint family business continued after partition. The Appellate Tribunal reversed the decision of the Appellate Assistant Commissioner holding that there was no discontinuance of business as it was not established that the son continued to carry on the business with the assets allotted to him after partition though it was proved that the father was carrying on the business, the same old business in the same old vilasam though with the assets alloted to him at the time of the partition. We have to decide in this reference as between the two views which is correct.

4. The partition between the father and the son on 28-3-1939 was accented as genuine. The father, with the assets allotted to him. continued the business of money lending. The assets allotted to the son comprised mostly the properties acquired in the course of the money lending business which were acquired under different vilasams. The decision of the question turns on the interpretation of the words "discontinued" and '"discontinuance" occurring in Section 25 (3) of the Act. As the amending Act VII of 1939 which introduced Sub-section (4) to Section 25 came into force only on 1st April 1939 the assessee would not be entitled to the benefit of that provision on the ground that there was "succession" as the partition took place prior to the date of the coming into force of the Amending Act. It has now been authoritatively settled by the Privy Council in 'Commissioner of Income-tax, Bombay v. P. E. Poison', ILR (1945) Bom 938, which approves the decision of this Court in 'Meyyappa Chettiar v. Commr. of Income-tax, Madras, ILR (1944) Mad 168, that the word "discontinued" in the Sub-section means a complete cessation of the business and doss not include transfer of business. Mere change of ownership, therefore, without cessation of business does not amount to discontinuance of such business. In 'Meyyappa Chettiar v. commr. of income-tax, Madras, ILR (1944) Mad 165, there was no splitting of the business in the partition which occurred in the family but the business which was a long standing one and which was carried on till the date of the partition was continued after partition by the members of the family as partners. The continuity of the business was kept up by continuing it at the same place and perhaps in the same accounts. The case before the Privy Council, 'Commissioner of Income-tax, Bombay, v. P. E. poison', ILR (1945) Bom 933, was one of assignment of the business carried on by an individual to a company. The integrity and identity of the business in both the cases was not altered or affected in any manner by the change of ownership and therefore there was no complete cessation of the business at any point of time and no new business emerged by virtue of the alteration in the ownership of the business.

5. The business, the discontinuance of which is in question under the Sub-section is the business which was charged to income-tax under the Act of 1918 and which has been later discontinued. Which was the business that was assessed up to the date of discontinuance under the Income-tax Act? it was undoubtedly the joint family business which was a single business, as now finally decided by the Appellate Tribunal and which was carried on under the various vilasams and acquired assets during the course of such business under different names. Can it be said that after partition such business did not terminate but continued by reason of the fact that the father, with the assets allotted to his share after the disruption of the family, carried on a similar business with such assets. It cannot be gainsaid that the integrity of the business was broken and its identity was lost. The process of partition involves the restriction of what was a joint right of a member extending to the entirety of the properties to some of the assets of the family which were allotted at the partition. It is not quite correct to treat a partition as involving a change of ownership in the sense of a transfer of ownership from one to the other. The father, under the partition acquired an exclusive right to some of the assets as did the son to the other assets. The son, therefore, has no Interest in the business of the father and 'vice versa.' in other words, the business of the father is a totally different business in the eye of the law though of a similar or same nature as the business which was previously carried on by the joint family. In my view, the legal position of the assessee and his lather after partition in relation to the business was correctly stated by the Appellate Assitant Commissioner who held that, after splitting up of the assets of the business, the joint family Business no longer continued its existence but terminated. The mere fact that the father continued 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 are distinct and separate parts of a unified whole but the unity and the integrity between the parts are no longer possible unless there was a reunion or partnersnip. This is not a case of mere transfer of ownerhsip as in 'Commissioner of Income-tax, Bombay v. P. E. Polson', ILR (1945) Bom 938 or in 'Meyyappa Chettiar v. Commr. of Income-tax, Madras', ILR (1944) Mad 166. It is a case of disintegration of a unit into its component parts so as to annihilate the unity of the business.

6. Several decisions have been cited on both sides, particularly decisions in which the word "succession" had been Interpreted. Sections 25 and 20 of the Act form part of a single scheme and as observed by Lord Slmonds in Commr. of income-tax. Bombay v. P. E. Polson', ILR (1945) Bom 938 their inter action should not be ignored. Section 28 is primarily concerned with the apportionment of the tax where relief under Section 25 is not possible. But Section 26 (2) provides for the case of succession and apportionment of tax in cases not falling under Section 25 (4). That section also was amended in 1939, In Commr. of Income-tax Burma, v. N. N. Firm', 1934-2 I T R 85 the Rangoon High Court had to consider and interpret the word "succession" in Section 26 (2) of the Act before its amendment and the question was whether after a partition in the family where one member was cut off with a one-fifth share in the assets of the business and the other four carried on business with the remaining assets at the old premises in me manner in which it was carried on before partition, it can be said that by carrying on the business after partition there was a succession to the business of the joint family within the meaning of Section 26 (2). Page, C.J., pointed out that in order to constitute succession, it must be succession to the business as a Whole and when the business was split up and another person carries on part of the business it is impossible to hold that there was a succession. The learned Chief Justice treats the business carried on by the remaining coparceners as a new business not withstanding that it was carried on with the assets as before and with the same conditions and even in the same premises as the old business. The importance of this case is that the joint family business is treated as having been discontinued by reason of the partition. This was follow ed by the same High Court in 'Commr. of income- tax, Burma v. A. L. V. R. P. Firm', 1940-8 I T R 531 (SB.) In that case, before partition two brothers who were members of an undivided family carried on business under vilasam at different places and the business at each place functioned as one unit with separate capital and separate management but there was a central system of control of all the businesses at the said premises. After partition the brothers continued in partnership the business at the Rangoon shop, it was held that there was no succession to the joint family business by the partnership after the partition. A similar view was taken by this Court in 'Kannappa Naicker & Co. v. Commr. of Income-tax, Madras', 1937-5 ITR 49 (SB.) The Nagpur High Court supports the contention of Mr. Rama Rao Sahib, learned Advocate for the Commissioner. See In come-tax Appellate Tribunal, Bombay v. Bachraj Nathani', 1946-14 ITR

191. It was also a case of partition between the members of the family con sisting of two brothers who divided the business, and continued a moiety of the business that fell to the share of the respective brothers separately. Notwithstanding this splitting of the business, it was held that there was no discontinuance of the business. The learned Judges summarised their conclusions, after a review of the authorities 'at page 203' of the report. It is difficult to follow the reasoning of the learned Judges particularly their reasoning 'at page 204'. The second illustration given on that page is;

"A and 'B' Jointly carry on only one running business; e.g., a shop. They divide the shop with the result that each of them gets half of the shop as a going concern. Here it may be said that the business has lost its Integrity and per haps also its identity but can it be said that it has discontinued? This conceivably represents a case on the border line of continuity and discontinuity of business. Now supposing that 'A' and 'B' run a joint business with 9 branches. They divide the business in such a way that four branches go to each of them and one branch is divided into two moieties. In such a case, the business which falls to the share of each may well be regarded as whole and identical in spite of the fact that they include a fraction of an old branch as was done in 'Commr. of income- ax, Burma v. A L R P Firm', 1940-8 ITR 531. As so regarded, the conclusion would be a conclusion of fact."

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. It has been held in England that if two separate and distinct businesses are amalgamated, the business carried on thereafter will be a new business, i.e., the identity of the two separate and distinct businesses ceases to exist and a new business Springs up -- See 'George Humphreys and Co v. Cook', (1935) 19 Tax Cas 121. This is really a converse of the case now before us with great respect to the learned Judges of the Nagpur High Court, I am unable to accept the decision as laying down the law correctly and as applying to the facts before me.

7. It follows that the question referred to us must be answered in the negative and against the Income-tax Commissioner, AS the assessee has succeeded, he is entitled to his costs which we fix at Rs. 250.

Raghava Rao, J.

8. I agree. The endeavour of Mr. Rama Rao Sahib in this case was to extend the operation of the Privy Council decision in 'P. B. Poison's case, ILR (1945) Bom 938 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 quondom 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 Subsection (3) are alike judicial and not physical. Lord Simonds in 'P. E. Poison'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 between members of the joint family which originally owned it, there is no cessation of the business in the eye of law. In support of his argument Mr. Rama Rao Sahib stressed the following features: (1) that the businesses alter partition were carried on in the same premises as those of the head, office and its branches as of old, (ii) that the same set of account books continued, (iii) that the old good-will availed the several businesses after partition, and (iv) that the old customers continued connections with them. There are not, even if true, necessarily inconsistent with the sufficiently conclusive against the legal discontinuance of the old business which is the ordinary incident of partition.

9. The position taken up by the Commissioner is absolutely untenable and the question referred must be answered in favour of the assessee. I agree too in the order as to costs proposed by my learned brother.


Save Judgments// Add Notes // Store Search Result sets // Organize Client Files //