Commissioner of Income-Tax, Madras Vs.
K. H. Chambers, Madras  INSC 259 (9 November 1964)
09/11/1964 SUBBARAO, K.
CITATION: 1965 AIR 970 1965 SCR (2) 43
The Income-tax Act, (XI of 1922), s.
25(4)-Succession-What is Finding regarding succession-High Court-Jurisdiction
Succession contemplated by s. 25(4) of the
Indian Income-tax Act, (XI of 1922) involves change of ownership, that is, the
transferor goes out and the transferee comes in. It connotes that the whole
business is transferred. It also implies that substantially the identity and
the continuity of the business are preserved. If there is a transfer of a
business, any arrangement between the transferor and the transferee in respect
of some of the assets and liabilities, not with a view to enable the transferor
to run a part of the business transferred but to enable the transferee to run
the business unhampered by any load of debts, or, for any other appropriate
collateral purpose, cannot detract from the totality of succession. [49 F-H]
Reynolds, Sons & Co. Ltd. v. Ogston H. M. Inspector of Taxes, (1929) 15
T.C. 501, Commissioner of Income-tax, Burma v. N. N. Firm, (1934) 2 I.T.R. 85,
Commissioner of Incometax, Burma v. A.L.V.R.P. Firm, (1940) 8 I.T.R. 531,
Jittanram Nirmalram v. Commissioner of Income-tax, Bihar & Orissa, (1953)
23 I.T.R. 288, Malayalam Plantations, Ltd. v. Clark (H.M. Inspector of Taxes)
(1935) 19 T.C. 314, referred to.
The tests crystallised by decisions have
given a legal content to the expression "succession" in s. 25(4) of
the Act and whether facts proved satisfy those tests would be a mixed question
of law and fact. The High Court would therefore have jurisdiction under s.
66(1) of the Act, to ascertain the correctness of a finding given by the
Tribunal on the question of succession. [52 D] Meenakshi Mills, Madurai v. The
Commissioner of Income-tax, Madras,  S.C.R. 691, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 1106 of 1963.
Appeal by special leave from the judgment,
dated December 21, 1960 of the Madras High Court in Case Referred No. 136 of
N. D. Kharkhanis and R. N. Sachthey, for the
R. Ganapathy Iyer, for the respondent.
The Judgment of the Court was delivered by
Subba Rao, J. This appeal by special leave raises the question of the
applicability of s. 25(4) of the Indian Income-tax Act, hereinafter called the
Act, to the assessment in question.
One G. A. Chambers was carrying on two
businesses, one in the name and style of "Chambers & Co." and the
other in the 44 name and style of "Chrome Leather Company". The first
business was concerned with export of hides, skins and mica, insurance and
shipping brokerage. The said Chambers & Co. was an assessee under the
Indian Income-tax Act, 1918. As the business was in a bad way, in or about 1931
G. A. Chambers handed over the management of the said business to his son, K.
H. Chambers. The change of management did not bring about any favourable turn
in the affairs of the business. The appellant's case is that towards the end of
1932 G. A. Chambers transferred the business to his son, K. H. Chambers, and
that after the said transfer, K. H. Chambers carried on the business in his own
name till January 1, 1948, when the business was taken over by a limited
company. For the assessment year 1948-49 K. H. Chambers claimed relief under s.
25 (4) of the Act on the ground that the business had been assessed under the
old Act of 1918 when it was carried on by his father, G. A. Chambers, and that
the said Chambers transferred the business to him towards the end of 1932. The
Income-tax Officer, by his order, dated March 18, 1949, held that K. H. Chambers
did not take over the business of his father carried on in the name of "Chambers
& Co." "as a whole running concern" and, therefore, the
assessee was not entitled to relief under s. 25 (4) of the Act. On appeal, the
Appellate Assistant Commissioner agreed with the Incometax OfficeR and held
that the business carried on by K.H. Chambers was not the same business which
was originally assessed under the old Act of 1918 in the hands of his father.
On a further appeal, the Income-tax Appellate Tribunal came to the same
conclusion and found that the identity of the business carried on by the father
was lost in the hands of the son, as the entire business was not transferred to
him. Ultimately the Tribunal referred the following question to the High Court
of Madras for its opinion under s. 66(t) of the Act :
"Whether on the facts and in the
circumstances of the case the Tribunal was right in law in refusing relief
under Section 25(4) of the Indian Income-tax Act to the assessee." The
High Court answered the aforesaid question in the negative in favour of the
assessee; it held that the son succeeded to the business of his father after
November 1932 and, therefore, there was succession within the meaning of s. 2 5
(4) of the Act. Hence the appeal.
Mr. Karkhanis, learned counsel for the
Revenue, raised before us two contentions, namely, (i) the question referred by
the Tribunal to the High Court was only a pure question of fact and, 45
therefore, the High Court has no jurisdiction to give its opinion thereon; and
(ii) where the transferor retains the goodwill and most of the assets and the
transferee carries on the same business with a part of the assets of the
principal business, it cannot be said that there is succession to the whole of
the business within the meaning of s. 25 (4) of the Act.
We shall take the second question first. G.
A. Chambers, the father, was carrying on two independent businesses, one in the
export of hides, skins and mica, in insurance and shipping brokerage under the
name and style of "Chambers & Co." and the other under the name
and style of "Chrome Leather Company". In 1932, G. A. Chambers handed
over the sole management of the former 'business to his son, K. H. Chambers.
The son was managing the business, but not with any success. In July 1932, the
son was going to foreign countries, presumably in connection with his business.
On July 7, 1932, before the son left India, G. A. Chambers wrote a letter to
him informing him that by the end of August 1932 the sum of Rs. 40,000 invested
by him in the business would run out, and that unless Rs. 60,000 was invested by
him (the father), which he could not afford to risk, the business could not be
conducted. He, therefore, suggested to his son that the Chambers & Co.
could be wound up and that if he chose he could have the goodwill of the said
Company so that he might obtain some advantage from the goodwill and
connections of Chambers & Co., either by interesting financially one or
other of the firm' connections or by offering to work on a commission basis.
On July 8, 1932, the son replied to the
father to the effect that he would prefer to start right afresh in his own name
or in the name of Chambers & Co.; he also suggested that he could get a
place for less rent and use a smaller staff; and requested his father to allow
him to use the existing private codes. On December 5, 1932, G.A. Chambers asked
his auditors, M/s. Fraser & Ross, to close the accounts of Chambers &
Co. and send the balance-sheet, venture and profit and loss accounts for 8
months ending November 30, 1932, together with the schedule of accounts taken
over by K. H. Chambers showing the amount due to him from K. H. Chambers. in
that letter G. A. Chambers informed the auditors that from December 1, 1932, K.
H. Chambers would be running the export business separately in his own name;
that he had asked Chambers & Co. "to close their accounts upto the end
of November and transfer all such accounts to Messrs. Chambers and Company
relating to G. A. Chambers to us so that we may run Messrs. Chambers and
Company's account at Chromepet." This letter was signed by G. A. Chamebrs
on behalf of the Chrome Leather 46 Company. This letter shows that from
December 1, 1932, K. H. Chambers would run the export business and that the
accounts, of G. A. Chambers in the Chambers & Co. would be transferred to
the accounts of Chrome Leather Co. From that date the export business which K.
H. Chambers was running earlier as manager would be continued by him in his own
name; that is, instead of as manager, as its own proprietor.
Pursuant to the instructions given by G. A.
Chambers, M/s. Fraser & Ross, the auditors, prepared a balance-sheet of the
Chambers & Co. and also the individual accounts of G. A. Chambers and K. H.
Chambers. The balance-sheet shows that G. A. Chambers was given assets valued
at Rs. 5,67,48510-2 and liabilities valued at Rs. 5,95,433-12-3;K. H. Chambers
was given assets valued at Rs. 55,214-2-3 and liabilities valued at Rs.
27,266-0-2. The liabilities given toK. H. Chambers includes the amount
representing the difference between the value of the assets and liabilities
given to G. A. Chambers. Broadly stated, the father had taken over the
liabilities of the Company and assets, including buildings and machinery
sufficient to discharge the liabilities, while the son was given the stock in
trade and a small amount of debts. After this allotment, it is conceded that K.
H. Chambers continued to operate the same lines of business as was carried on
by Chambers & Co. taking over all the constituents of that business, using
the same premises, the same telephone number, Post Box No., private codes and
trademarks and the important sections of the staff that belonged to Chamber
& Co. On May 23, 1933. G. A. Chambers wrote to the Liverpool and London and
Globe Insurance Company, Calcutta, wherein he stated :
"We confirm our conversation with your
representative that inasmuch as we have transferred all our export business to
Mr. K. H. Chambers, who is now running the business in his own name and at his
own risk and responsibility, we shall be pleased if you will transfer the
agency of your firm to him." It is also conceded by the Department that G.
A. Chambers utilized his good offices in getting the Liverpool and London and
Globe Insurance Company to transfer the agency of that company to Chambers
& Co. run by K. H. Chambers. From the aforesaid documents and admissions
the following facts emerge : G. A. Chambers was conducting two businesses, one
under the name and style of Chambers & Co. and the other under the name and
style of Chrome Leather Company. The Chambers & Co. was doing ,export
business. Some months prior to July 7, 1932, K. H. 47 Chambers invested a sum
of Rs. 40,000 in the business conducted by Chambers & Co. and was actually
managing the same. The business was running at a loss and the father was not
anxious to continue the business and, therefore, he made some alternative
suggestions to his son. But the son was anxious to continue the business
independently. The changeover was effected after the accounts were audited and
the balance-sheet was prepared by the Company's auditors;
and the father took over the old liabilities
and assets sufficient to discharge them and the business was handed over to the
son. Thereafter the son was carrying on the business of Chambers & Co. in
his own name, in the same premises, taking over all the constituents of
Chambers & Co., using the same codes and trademarks and the important
members of the staff of the Company. It is true that the name of Chambers &
Co. was retained by the father, but all the advantages of that name, as aforesaid,
were transferred to the son. It is also true that some substantial assets of
Chambers & Co. were( not transferred to the son, but they were retained by
the father only for discharging the debts in order to help the son to carry on
the transferred business without being burdened with heavy debts. The taking
over of the assets and liabilities by the father was not for the purpose of
continuing to do a business of his own in the same lines, but to facilitate the
carrying on of the transferred business by the son effectively and profitably.
On these facts, can it be held that there was no succession to the business
within the meaning of S. 25(4) of the Act ? Though there is no clear and
exhaustive definition of the expression "succession", decided cases
and textbooks throw some light on the subject. In Simon's Income Tax, Vol. 2,
2nd Edn., it is stated at pp. 137-138 :
.lm15 " In particular, argument from
decided cases has resulted in the acquisition by the word
"succession" of a somewhat artificial meaning.
In order to constitute a succession there
must be, broadly speaking, a taking over of the whole of the business
concerned;........................ But if a business is taken over as a whole,
the fact that minor assets of the business are omitted from the transfer will
not prevent there being a succession. The fact that the purchaser already has a
similar business is not a material fact in establishing succession. The
purchase of a business with a view to closing it down would not appear to
48 Other questions which have been used as
tests are :
(1) whether a similar trade has been carried
on after the transfer; (2) whether goodwill or other intangible assets are
included in the transfer; (3) whether staff is taken over; (4) the treatment on
transfer of the stock and debts of the transferor; (5) whether there was an
interval in the carrying on of the trade as a result of the transfer'."
(Briton Ferry Steel Co., Ltd. v. Barry,  1 K. B. 463, 476).
In Reynolds, Sons & Co., Ltd. v. Ogston
(H. M. Inspector of Taxes) (1), Lord Hanworth, M. R., accepted the following
tests laid down by Rowlatt, J., to ascertain whether there was a succession,
"You want to measure the income of the
successor by the past history of the business, it is therefore essential that
there should be a very close identity between the business of the former
proprietorship and the business in the present proprietorship." The
Rangoon High Court in Commissioner of Income-tax, Burma v. N. N. Firm (2) had
to consider the meaning of the word " succeeded" in S. 26(2) of the
Income-tax Act. Page, C.J., giving the opinion of the Court, observed :
"In order that a person should be 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." The
Rangoon High Court again in The Commissioner of Income tax, Burma v. A. L. V.
R. P. Firm (3) reiterated the same principle. What is the meaning of the
expression "whole business" has been the subject of other decisions.
A Division Bench of the Patna High Court in Jittanram Nirmalram v. Commissioner
of Income-tax, Bihar & Orissa, (4 ) after considering the relevant decisions,
both English and Indian, said that it was sufficient if there was substantial
identity or similarity in the nature and extent of the activities carried on
between the two firms i.e., the transferor and the transferee firms. The Court
observed therein :
"For the application of Section 26(2) or
Section 25(4) it is not essential in every case that the successor (1) (1929)
15 T.C. 501, 527.
(2) (1934) 2 I.T.R. 85, 87, 88.
(3) (1940) 8 I.T.R. 531.
(4) (1953) 23 I.T.R. 288, 296.
49 firm should have mathematically the same
extent of business as the predecessor firm or that it should have taken over
the same extent of trade or the same line or set of customers as belonging to
the predecessor firm nor does it mean that the successor firm should have taken
over all the different businesses which the predecessor firm had carried
on." In Malayalam Plantations, Ltd. v. Clark (H.
M. Inspector of Taxes)(1) the appellant company
therein, by an agreement dated March 28, 1928, acquired from another company,
as from April 1, 1928, a rubber estate in India together with plantations.
nurseries, factories, plant etc., and the benefit of contracts and engagements
whether with coolies or others, but did not take over any book debts or the
vendor's selling Organisation.
It was contended that there had been no
succession to a trade. In rejecting that contention, Finlay, J., observed :
"The substance of what was done, I
think, clearly was this The thing was taken over as a going concern, taken over
with the things growing on it, and with the coolies employed to work the
estate. I am not going into it any further because it is essentially a question
of fact, but I cannot avoid the view that there was material upon which the
Commissioners might arrive at the conclusion that there was a succession."
This is an authority for the position that if a business was taken over as a
going concern the mere fact that some assets, which were not required by the
successor for carrying on of the business, were not transferred to him would not
make it any the less a succession in law. It is not necessary to multiply
decisions. Succession involves change of ownership; that is, the transferor
goes out and the transferee comes in; it connotes that the whole business is
transferred; it also implies that substantially the identity and the continuity
of the business are preserved. If there is a transfer of a business, any
arrangement between the transferor and the transferee in respect of some of the
assets and liabilities not with a view to enable the transferor to run a part
of the business transferred but to enable the transferee to run the business
unhampered by the load of debts or for any other appropriate collateral purpose
cannot detract from the totality of succession.
In the present case, the export business of
the father was carried on by the son. The whole of the business was
transferred, (1)(1935) 19 T.C. 314, 323.
50 the identity was preserved and the same
business was continued. The father reserved for himself some assets for the
purpose of discharging the debts. He did so not for the purpose of running the
same business by himself but only to help the son to carry on the same business
If so, it follows that on the facts found or
admitted there is a clear case of succession in the present case.
Learned counsel for the Revenue argued that
whether there was succession or not was a pure question of fact and the High
Court had no jurisdiction to question the correctness of the finding given by
the Tribunal to the effect that there was no succession to the business.
This Court in Meenakshi Mills, Madurai v. The
Commissioner of Income-tax, Madras(1) laid down the following propositions
which are relevant to the question now raised before us :
(a) Where an ultimate finding on an issue is
an inference to be drawn from the facts found, on the application of any
principle of law, there is a mixed question of law and fact, and the inference
from the facts found is, in such a case, a question of law and is open to
review by the Court.
(b) Where the final determination of the
issue does not involve an application of any principle of law, an inference
from the facts is a pure inference of fact although it is drawn from other
(c) The proposition that an inference from proved
facts is one of law is therefore correct in its application to mixed questions
of law and fact, but not to pure questions of fact.
In the case of pure questions of fact, the inference
from proved facts being itself a question of fact can be attacked as being
erroneous in law only if there is no evidence to support it or if it is
perverse." This distinction between a question of law and a question of
fact was also brought out by some of the English decisions cited at the Bar. In
Bell (Surveyor of Taxes) v. The National Provincial Bank of England, Ltd. (2)
the Master of the Rolls observed :
"The finding of the Commissioners upon
that part of the case is this : 'The Commissioners were of opinion (1) (1956]
(2) (1903) 5 T.C. 1, 10, 12.
51 that there was no succession within the
meaning of the said 4th Rule.' That is, as my brother Mathew has pointed out,
not a finding in fact that there was no succession, but that the particular
kind of succession which took place in this case was not a succession within
the meaning of the 4th Rule. That is not a finding of fact, but a finding of
law and construction based upon the fact that one existing Bank did acquire and
take over, not for the purpose of extinction, but for the purpose of
development, the existing business of another Bank existing in another
place." So too, Mathew, L.J., stated :
"'No succession' say the Commissioners
within the meaning of the said 4th Rule. That is the proposition of law we have
to decide as distinguished from fact, and we are entitled to differ from that
view." In Wilson and Barlow v. Chibbett (H. M. Inspector of Taxes) (1)
Rowlatt, J., observed "The question was whether here there was a
succession, which is a primary question of fact upon which, of course, it is
possible the Commissioners might take a wrong view of the law and apply false
law." The learned Judge concluded thus " All I can say is that I do
not see my way to say that can discern any sort of error in law here in the way
in which the Commissioners have dealt with the case.............. " These
observations imply that if correct tests are not applied in, coming to a
conclusion whether there is succession or not in a particular case, it can be
re-opened by the High Court. In Malayalam Plantations, Ltd. v. Clark (H. M.
Inspector of taxes) ( 2) , Finlay, J., after considering at some length the
facts placed before him, refused to go further into the matter because the
finding of succession was essentially a question of fact. But the facts in that
case disclosed that the correct tests were applied and, therefore, no
illegality was committed by the Commissioners.
The said decisions did not lay down that in
every case the finding of succession is one of fact. Indeed, the first two
decisions, (1) (1929) 14 T.C. 407, 412, 1 3.
(2) (1935) 19 T.C. 314,323.
52 clearly maintained that a finding on a
question whether a succession is one within the meaning of a particular
provision or whether it is vitiated by any error of law is not final. The
English view is also in accord with that expressed by this Court.
The question, therefore, is whether a finding
that a person succeeded another in his business within the meaning of s. 25(4)
,of the Act is a finding of fact. The expression ';succession", as stated
by Simon in his book on Income-tax, has acquired a somewhat artificial meaning.
The cases we have considered supra, and similar others have laid down some
tests, though not exhaustive, to ascertain whether there is succession in a
given case or not. The tests of change of ownership, integrity, identity and
continuity of a business have to be satisfied before it can be said that a
person "succeeded" to the business of another. Unless the facts found
by the Tribunal satisfy the said tests, the finding cannot be conclusive. The
tests crystallized by decisions have given a legal content to the expression
"succession" within the meaning of S. 25(4) of the Act and whether
facts proved satisfy those tests is a mixed question of law and fact. If so, it
follows that a question of law arose out of the Tribunal's order and the High
Court has jurisdiction to ascertain the correctness of the finding given by the
Tribunal on the question of succession.
In the result, the appeal fails and is
dismissed with costs.