Commissioner of Income Tax vs Madhukant M. Mehta

P.D. Desai, J.—The assessee, a registered partnership firm, carried on business in the name and style of Madhukant M. Mehta at the material time. The three partners who constituted the. firm were: (1) Mr. Mayur M. Mehta, (2) Mrs. Nirmalaben M. Mehta, and (3) Mrs. Bhavna D. Shah. The three partners were the legal heirs of one Mr. Madhukant M. Mehta, who died on 23-3-1964, being the son, widow and daughter, respectively, of the deceased. The deceased, in the capacity of a proprietor, was carrying on business of speculation in shares, cotton and other commodities. Within about one month of his death, the three legal heirs, executed a partnership deed on 22-4-1964 where under they agreed to carry on the business of speculation. We shall presently examine in detail the terms of the said partnership deed. Suffice it to say, for the present, that the partnership deed, in terms, contains recitals to the effect that the three legal heirs had succeeded to the speculation business carried on by the deceased and that they had decided to continue and carry on the said business on the terms and conditions agreed upon between them and recorded in the partnership deed. In the course of the assessee''s assessment to income tax for the assessment years 1965-66 to 1969-70, the relevant previous years being Samvat Years 2020 to 2024, a common contention was advanced before the ITO, namely, that the three partners had succeeded by inheritance to the business of speculation carried on by late Mr. Madhukant M. Mehta and that, therefore, the assessee was entitled to carry forward and set off the losses incurred by the deceased in his business against the income from speculation business of the partnership firm. The contention, which was based on the provisions of section 78(2) of the income tax Act, 1961 (hereinafter referred to as "the Act"), was rejected by the ITO on the ground that there was no succession to the business of the deceased as neither the assets nor the liabilities of the said business were taken over by the partnership firm and, in any case, the firm could not have succeeded by inheritance.

On appeals by the assessee, the AAC directed the ITO to find certain facts and make a report, on the basis of facts so found, on the question of succession of the business. The additional facts found by the ITO pursuant to the said direction were as follows:

None of the assets, including cash balance, and liabilities of late Mr. Madhukant M. Mehta as on the date of his death were taken over by the new firm.

The outstanding recoveries of the business of the deceased were recovered to the extent possible by his heirs and the amounts realised were paid to the creditors. The remaining assets of the business, namely, shares, unrealised book-debts, bank balance, insurance policies, etc., were surrendered to the TRO against the income tax demands outstanding against the deceased.

The outstanding transactions in speculation business of the deceased as on the date of his death were also not taken over by the new firm and they were allowed to be continued for settlement for a fortnight or so and cleared on the subsequent dates of settlement.

Even after the adjustment of all the assets of the deceased against the income tax demands, there was still outstanding income tax demand to the tune of Rs. 1,50,000 and there were no assets of the deceased left from which the same could be fully satisfied.

The legal heirs had also not inherited anything from the deceased.

On the strength of those findings, the ITO reported that the speculation business carried on by the deceased was not at all succeeded to by the new firm and that the speculation business carried on by the new firm was an altogether different business.

The AAC, having considered the matter on the basis of the entire material on record held that though the partnership deed contained recitals to the effect that the three legal heirs had succeeded to the speculation business carried on by the deceased, such recitals, which were in the nature of "self- serving statements", could not ipso facto conclude the issue. Such recitals were not only "strictly unnecessary for the purposes of partnership" but also appeared to have been inserted "with a view to achieve the result of carry forward and set off his loss in the hands of his successors". The AAC further held that since none of the outstanding assets or liabilities of the deceased were taken over by the assessee-firm and no link or nexus between the business carried on by the deceased and the assessee firm was established, there was no succession. Mere similarity of business was not sufficient to establish the link. The AAC also held that the succession by inheritance was also not established because when legal representatives become partners by virtue of a contract between them, there can be no question of inheritance. The appeals preferred by the assessee were, therefore, dismissed.

On further appeals preferred by the assessee before the Tribunal, the Tribunal held that in order to succeed in the claim that there was succession by inheritance, it was not necessary to establish that "the partners joining the firm was by inheritance and not by any other mode". In other words, the view of the Tribunal was that merely because the heirs entered into a partnership, their claim that they have succeeded to the business by inheritance cannot be negatived. The Tribunal further held that for succession what was required to be established is:

...that the same business must be carried on preserving substantial identity and continuity of the business, and it is not essential in every case that the successor should have mathematically the same extent of business as the predecessor firm, or that it should have taken over the same extent of trade 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.

On the facts of the case, the Tribunal found that (it was not in dispute that all the assets of the deceased, including the assets of business, if any, had been applied towards the arrears of tax demands and, therefore, no assets whatever were left to be taken over by the assessee. Under such circumstances the Tribunal found the department''s contention that no assets of the deceased had been taken over by the assessee and that, therefore, there was no succession to be without force. The Tribunal then referred to the following circumstances which, in its opinion, led to the conclusion that there was succession to the business:

The partnership deed which was drawn up on 22-4-1964, within a month of the death of the deceased, records the facts of the parties thereto as heirs and legal representatives of the deceased, and having succeeded to carried on the speculation business of the deceased. This claim of the assessee having carried on the speculation business even prior to the date of partnership deed had not been disputed. Even if the date of partnership deed is assumed to be the date from which the business had been carried on under the partnership deed, there was interval of less than one month between the death of the deceased and the date from which the assessee had carried on the business, and such interval even reckoning the partnership to have commenced from the date of deed of partner ship could not be regarded as long or unusual" in the case where succession is claimed to have taken place by inheritance on the death of the deceased.

The nature of the business was identical, namely, speculation business which was being carried on by the deceased.

The business name continued the same.

The business was carried on the same premises.

The same telephone which was being used by the deceased was also continued to be used by the assessee.

The constituents of the assessee''s business were the same as those of the business of the deceased.

The partnership deed clearly evidenced the intention of the legal heirs who constituted the assessee firm to continue and carry on the business which was carried on by the deceased.

As regards the AAC''s view that the recitals in the partnership deed were "self-serving statements", the Tribunal observed that there was nothing in law prohibiting an assessee from expressing his avowed intention and arranging his affairs in such a way as to give him the benefit under the law, provided the arrangement was real and acted upon and the advantage accruing to him was bona fide and genuine. The Tribunal held that, in the instant case, there was nothing to compel the legal heirs, particularly the widow and daughter, to carry on the speculation business, when it was not possible for them to know at the time of deciding to continue the business that it would definitely result in profit so that they would be in a position to take advantage of the loss incurred by the deceased. The Tribunal, therefore, concluded that there was, in the instant case, a succession by inheritance within the meaning of section 78(2). The Tribunal rejected the contention urged on behalf of the revenue that on account of the provisions of section 75(2), the assessee was not entitled to have its loss carried forward and set off on the ground that the loss claimed by the assessee in the instant case was not a loss incurred in the business carried on by it but the loss sustained by the deceased in his business. The Tribunal, therefore, allowed the appeals.

At the instance of the revenue, the Tribunal has referred the following two questions of law for the opinion of this Court:

Whether the Tribunal was right in law in holding that there was succession by inheritance in this case as contemplated by section 72(2) of the Act and, therefore, the assessee is entitled to carry forward and set off the deceased Shri Madhukant M. Mehta''s loss in business against the income for these years?

Whether the Tribunal was right in law in holding that section 75(2) of the Act does not prevent the assessee from claiming the set off of losses in question?

Chapter VI of the Act contains provisions, inter alia, in respect of set off, or carry forward and set off of loss. Sections 70 to 80 contained in the said Chapter deal with the said subject. Sections 70 and 71 deal with set off of loss against income under the same head and another head of income, respectively. Section 73 makes it clear, however, that a loss in a speculation business cannot be set off against any other income under the head "Profits and gains of business or profession" nor can it be set off against income under any other head. Such loss can be set off only against profits, if any, of another speculation business. If the loss cannot be accordingly set off, either wholly or partly, it can be carried forward to a subsequent year and set off only against the profits of any speculation business carried on by the assessee in such subsequent year. If the carried forward loss cannot still be set off, the loss or remainder part thereof can be carried forward to the subsequent year for which the loss was first computed. u/s 75, the loss incurred by a registered firm, if it cannot be set off against any other income of the firm, is to be apportioned among the partners, the firm itself having no right of carry forward. Section 75, sub-section (2), which is relevant in this behalf and material for the purposes of this case, reads as under:

(2) Nothing contained in sub-section (1) of section" 72, sub-section (2) of section. 73, sub-section (1) of section 74 or sub-section (3) of section 74A shall entitled any assessee, being a registered firm, to have its loss carried forward and set off under the provisions of the aforesaid sections.

The aforesaid provisions, read by themselves and in isolation, indicate that the right to carry forward and set off loss is available only to the person who has suffered the loss and, in the case of registered firms, to the partners of such firm to the extent that such loss is apportioned among them, and to none else. Section 78, sub-section (2), clarifies that even a successor in business cannot claim to carry forward and set off the loss of his predecessor, save in one and only one case, namely, where the succession is by inheritance. The said sub-section reads as under:

(2) Where any person carrying on any business or profession has been succeeded in such capacity by another person otherwise than by inheritance, nothing in this Chapter shall entitle any person other than the person incurring the loss to have it carried forward and set off against his income.

The bare reading of the aforesaid provision would show that in order to fall within the exception, the following conditions must be satisfied: (1) a person carrying on any business or profession has been succeeded in such capacity by another person; and (2) such succession has taken place by inheritance and not otherwise. It is against the background of the aforesaid statutory provisions that we must consider the questions posed for our opinion.

It would be convenient to refer at this stage to the partnership deed and to examine its contents. In its preambulary portion, the deed recites that Mr. Madhukant M. Mehta, who had carried on business of speculation in shares, cotton and other commodities down to his death, had died intestate leaving his widow, son and daughter as his heirs under the Hindu Succession Act, 1956 and that the said heirs had succeeded to the said speculation business and decided to continue and carry on the said business on the terms and conditions mentioned in the deed. The first and second clauses reiterate that the parties, as such heirs and legal representatives, had succeeded to the said speculation business of the deceased and they had continued and decided to carry on at will the same in the name of the deceased or such other name as the parties might agree upon from time to time. Clause 3 provides that the net profits of the speculation business should be divided between the parties equally and that all losses including loss of capital should be borne by them in like proportion. Clause 4 provides that the accounts of the business should be made up at the end of each Samvat Year and that the first of such accounts shall be made up at the end of Samvat Year 2020. Clause 5 declares that the parties having succeeded to the speculation business of the deceased as his heirs and legal representatives, they were entitled to set off the profits, if any, arising from the speculation business continued by them against unabsorbed speculation losses suffered by the deceased and that such losses shall belong to the parties in equal shares between them. Clause 6 provides that Mr. Mayur M. Mehta should devote necessary time and attention to the speculation business. Clauses 7 and 8 are not material and they need not be referred to. Clause 9 makes an express declaration that the parties had not taken over "personally" any of the debts of the deceased either in relation to the said speculation business or any of his other debts or liabilities and that as legal representatives they were liable to pay and discharge debts and liabilities of the deceased only out of and to the extent of any estate of the said deceased, which might come into their hands as such.

The first question, which requires consideration, is whether the finding of the Tribunal that there was, in the instant case, a succession to the business of the deceased has been arrived at on a balanced consideration of the evidence on record and on application of the correct legal tests. In Commissioner of Income Tax,Madras Vs. K.H. Chambers, Madras, , the question for consideration was whether, on the facts and in the circumstances of the case, the assessee was entitled to relief u/s 25(4) of the Indian income tax Act, 1922 (hereinafter referred to as "the 1922 Act") on the ground that the person carrying on business is succeeded in such capacity by another person, such another person being the assessee. The following observations were made in the course of the decision after reviewing several authorities:

...if a business was taken over as a going concern the mere fact that some assets, which were not required by the successor for the 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." (pp. 680-81)

On the facts, the finding in that case was that it was the export business of the father which was carried on by the son. The whole of the business was transferred, the identity was preserved and the same business was continued. The father had reserved for himself some of the assets. He did so, however, not for the purpose of running the said business by himself but for the purpose of discharging the debts and to help the son to carry on the same business more effectively. Therefore, there was a clear case of succession.

In the present case, we find that apart from the express declaration contained in the partnership deed with regard to the succession to the business of the deceased, there is ample other material on record to reach the same conclusion on application of the correct legal test. The business carried on by the deceased and by the assessee was the same, namely, speculation business. The business was continued in the same name and in the same premises and the same telephone which was used by the deceased was continued to be used by the assessee. The constituents of the assessee''s business were the same as those of the business of the deceased. It would thus appear that substantially the identity and the continuity of the business were preserved.

On behalf of the revenue, reliance was placed on the following circumstances in support of the plea that there was no succession: (7) no assets (including cash balance) or liabilities were taken over; (2) subsisting contracts, which alone really constituted the business, were not taken over; and (5) outstanding recoveries were not taken over.

While it is true that the above-mentioned factors are present in the instant case, in our opinion, they are not necessarily destructive of the integrity or identity of the business so as to negative the idea of succession. It is significant to note in this connection that the Tribunal has observed that there was no dispute on the point that the three heirs had carried on the speculation business of the deceased after his death and that the partner ship was formed within about one month of the death. The material on record shows that before the firm was brought into existence, the three heirs had effected the outstanding recoveries and that they had also cleared the outstanding transactions. The assets of the business were utilised in making payments to the creditors and in satisfying the income tax demands outstanding against the deceased to the extent possible. There was still outstanding a substantial income tax demand against the deceased but no asset was left to satisfy the same. Under such circumstances, as rightly found by the Tribunal, there were no assets whatever left to be taken over by the assessee. Similarly, there were no subsisting transactions or outstanding recoveries which could have been taken over by the assessee. Liabilities were apparently not taken over, not because they were to be met and discharged by any other person who was to carry on the business of the deceased, but so that the firm might carry on the same business without any impediment arising on account of the undischarged liabilities. If an integrated view of the matter is taken, and if it is appreciated that even after the partnership was formed, the same three heirs had continued to carry on the same business, the inference would be irresistible that the assessee succeeded to the business carried on by the deceased with the liability to be taxed on the future profits and gains arising out of such business. In our opinion, therefore, the Tribunal''s decision on the question of succession, which has been arrived at after taking into account all the relevant circumstances and on an application of the correct legal tests, is right in law.

The next question is whether the succession was by inheritance, as found by the Tribunal on a purview of the evidence. Here again, we find that the undisputed or indisputable facts point in the direction of the succession being by inheritance. The deceased died intestate. u/s 8 of the Hindu Succession Act, 1956, his property would devolve, firstly, upon the heirs being the relatives specified in class I of the Schedule. Son, daughter and widow are included in class I. That business is property and that there was no other relative specified in class I is not in dispute. There is a clear recital in the partnership deed that the partners as heirs succeeded to the business of the deceased. The business of the deceased, as earlier pointed out, had been carried on even prior to the execution of the partnership deed by the heirs. In any case, the partnership itself was brought into existence within a very short period after the death. Having regard to all the circum stances, in our opinion, the Tribunal was right in law in holding that the succession was by inheritance.

It was strenuously urged on behalf of the revenue, however, that there was no succession by inheritance within the meaning of section 78(2) because such succession was claimed by a partnership firm, which is a creature of contract, bearing, in the eye of law, a legal personality different from the heirs and which, for the purposes of the Act, is treated as a "person" and a distinct taxable entity. Such succession, according to the revenue, can be claimed only if the heirs, as such, continued to carry on the same business which the deceased carried on without having brought into existence between themselves the formal relationship. For the reasons which follow, we are unable to accept the submission.

At the risk of repetition, it might be stated that the Tribunal has found in the instant case that there was no dispute that even prior to the execution of the partnership deed, the three heirs had carried on the same speculation business and that the partnership was brought into existence within about a month of the death of the deceased. The Tribunal has further found that even after the partnership was brought into existence, the business was continued in the same name and in the same premises and the constituents of the assessee''s business were the same as those of the business of the deceased. It has been found earlier that during the interval of time between the death of the deceased and the formation of the partnership the outstanding recoveries were effected and the subsisting transactions were cleared and the assets of the business were utilized in clearing the liabilities by the three heirs in the process of carrying on the business as successors. The submission on behalf of the revenue set out above has to be examined against the aforesaid background.

Now the legal position is well settled that the business carried on by a firm is business carried on by the partners and that a firm is not a legal person even though it has some attributes of personality. A partnership is only a collective of separate persons and not a legal person. Although for the purposes of the income tax law a firm has certain attributes simulative of personality, a partnership is not a person but a plurality of persons.

In Commissioner of Income Tax, Bihar Vs. Ramniklal Kothari, , the assessee, who carried on business in diverse lines as a partner in four different firms, declared his share of profits from the four firms and claimed allowance in respect of payment of salary and bonus to staff, expenses for maintenance and depreciation of motor car, travelling expenses and interest. The ITO allowed the claim for interest as a permissible deduction and disallowed the rest. The AAC confirmed the order of the ITO. The Tribunal set aside the orders holding that the share of the profits received by the assessee from the various firms was taxable as business income and that appropriate deductions admissible u/s 10(2) of the 1922 Act were allowable in computing his taxable income. The Tribunal''s view was upheld by the Patna High Court. The Supreme Court held that the business carried on by a firm was business carried on by the partners, that the profits of the firm were profits earned by the partners in carrying on the business and that the expenditure incurred by the partners in earning their share of the profits was admissible for deduction u/s 10(2) in arriving at the taxable income of the individual partner u/s 10(1).

In Commissioner of Income Tax, Madras Vs. R.M. Chidambaram Pillai and Others, , the two assessee, along with others, were partners of two firms which owned two tea estates. The tea sold yielded income composite in character, being largely agricultural and partly non-agricultural. The two assessees, in addition to their share in profits, received salaries for services under the firms. The question which arose was whether the sums so drawn as salaries were wholly liable to income tax or only to the extent of 40 percent thereof which fell within the non-agricultural sector. The ITO treated the whole salary as subject to income tax. The AAC reversed the decision of the ITO. The Tribunal, however, reversed the said decision, following the decision in Mathew Abraham Vs. Commissioner of Income Tax, Madras, . A Full Bench of the Madras High Court which heard the reference upset its earlier view in Mathew Abraham''s case (supra) and upheld the case of the assessee that only 40 percent of the income by way of salary was liable to the charge of income tax as that portion of income alone fell within the non-agricultural sector. The Supreme Court affirmed the decision of the High Court after taking into consideration, inter alia, the provisions of sections 10(4)(b) and 16(1)(b) of the 1922 Act and rule 24 of the 1922 Rules and the relevant provisions of the Partnership Act and the decisions bearing on the legal status of partnership under the general and income tax law.

At page 295, it was observed:

...Here the first thing that we must grasp is that a firm is not a legal person even though it has some attributes of personality. Partnership is a certain relation between persons, the product of agreement to share the profits of a business. ''Firm'' is a collective noun, a compendious expression to designate an entity, not a person. In income tax law a firm is a unit of assessment, by special provisions, but is not a full person which leads to the next step that since a contract of employment requires two distinct persons, viz, the employer and the employee, there cannot be a contract of service, in strict law, between a firm and one of its partners. So that any agreement for remuneration of a partner for taking part In the conduct of the business must be regarded as portion of the profits being made over as a reward for the human capital brought in....

Examining the question in greater detail in the context of the relevant provisions of the 1922 Act, it was observed on the same and the following page:

...A firm, partner and partnership, according to section 2 (6B) of the Act, bear the same sense as in the Partnership Act. The taxable income of a firm has to be its business profits, as provided in sections 10(1), 10(2) and 10(4). What is the real nature of the salary paid to a partner vis-a-vis the income of the firm? On principle, payment of salary to a partner represents a special share of the profits and is, therefore, part of the profits and taxable as such. And section 10(4)(b) stipulates accordingly....

...The procedure for computation of the total income of a partner, found in section 16(1)(b), also fits into this understanding of the law behind the law....

...It is implicit that the share income of the partner takes in his salary.... Surely, therefore, salary is a different label for profits, in the context of a partner''s remuneration.

Against the aforesaid statutory background, the view of the Supreme Court is to be found in the following words at page 296:

Salaries are profits known by a different name and must be treated as such for taxation purposes. The portion of profits, from tea sales by a grower, which is agricultural, is insulated from incidence and exaction by the Constitution worked out through rule 24. Which means that by that modus operandi we set aside 60 percent of the total income as representing the agricultural sector, and the salary to partners paid out of it, being only profits, enjoys the same invulnerability to exigibility that rule 24 admittedly confers on the agrarian portion.

The revenue''s contention in that case substantially was that the Indian law recognises a firm as a person for many purposes and that sections 10(4)(b) and 16(1)(b) were special provisions enacted to provide against loss of revenue on account of the partners'' siphoning off substantial profits in the guise of salary and that such special provisions cannot alter the basic nature of salary and that, therefore, the salary received by the two assessees for services rendered to the two partnership firms was salary all the same, taxable as salary income u/s 10, there being no agricultural salary as such entitled to exemption. While rejecting the submission, it was observed that u/s 3 of the Partnership Act, a firm is not a legal person, but a relationship among persons.

Reference was then made in the decision to Dulichand Lakshminarayan Vs. The Commissioner of Income Tax, Nagpur, which pointed out that in some systems of law separate personality of firm apart from its members has received full and formal recognition as, for instance, in Scotland, but not in the English common law nor in our partnership law, which is based on English law, which does not recognise a firm as a entity distinct from the members composing it. The general concept of partnership, firmly established in both systems of law, still is that a firm is not an entity or "person" in law but is merely an association of individuals and a firm name is only a collective name of those individuals who constitute the firm. For the purposes of determining legal rights, there is no such thing as a firm known to the law.

Reference was next made to Addanki Narayanappa v. Bhaskara Krishnappa AIR 1966 SC 1300. It was observed that the view taken in that decision accorded with the legal position enunciated in Dulichand''s case (supra). Having next considered relevant authorities bearing on the question under the income tax law, including the decision in Ramniklal Kothari (supra), the law was declared in the following emphatic and clear terms at page 300:

Contrary views are not wanting in some rulings, but a catalogue of cases on the other side may be productive of confusion and not resolution of conflict. We abstain from that enterprise and confine ourselves to the statement of the law that although, for purposes of the income tax Act, a firm has certain attributes simulative of personality, we have to take it that a partnership is not a person but a plurality of persons."

(Emphasis supplied by us.)

In the light of the aforesaid legal position, it was held in that case that a partnership being only a collective of separate persons and not a legal person in itself, the salary stipulated to be paid to the partner from the firm was in reality a mode of division of the firm''s profits, since a contract of service postulates two different persons and no person can be his own servant in law. Inasmuch as by a statutory dichotomy, 60 percent of the tea income was agricultural in character, it was further held that the essential agricultural character and consequential legislative immunity cannot be lost on account of the flexible arrangement among partners regarding distribution of profits, which may take many forms or tags and labels. The ultimate conclusion, therefore, was that 60 percent of the salary income in the hands of the two partners could not be taxed u/s 10.

In Malabar Fisheries Co. Vs. Commissioner of Income Tax, Kerala, , a firm consisting of four partners carried on six different businesses. It installed various items of machinery in respect of which development rebate was allowed to it in the course of the previous assessments. The firm was then dissolved and one of its businesses was taken over by one partner, whereas the remaining five businesses were taken over by two of the other partners. The fourth partner received a certain sum in lieu of his share in the assets of the firm. The question which arose for consideration was whether the rebate allowed to the firm could be withdrawn on the ground that there was sale or transfer of the machinery within the meaning of section 34(3)(b) read with section 2(47) of the Act. The ITO and, on appeal, the AAC held that section 34(3)(b) applied and that the development rebate was liable to be withdrawn. The Tribunal, however, took the contrary view and held that there was no sale or transfer within the meaning of section 34(3)(b) in the transaction involving the adjustment of" the rights of the partners of a dissolved firm. On a reference, the High Court held that a dissolution of a firm amounted to extinguishment of the rights of the firm in the assets of the partnership and that, therefore, there was a transfer within the meaning of section 2 (47) and consequently the provisions of section 34(3)(b) applied to the case. On further appeal to the Supreme Court, the revenue sought to support the applicability of section 34(3)(b) read with section 2 (47) on the ground that during the continuance of the partnership the machinery belonged to the firm, that the firm as a taxable entity received the benefit of the development rebate in respect thereof u/s 33 and that upon dissolution the firm''s rights in the machinery got extinguished and became vested in the partner or partners to whom it was allotted in the distribution of assets and that, therefore, the transaction, so far as the firm was concerned, amounted to a transfer of assets. The question, which, therefore, arose for consideration, was whether in law a firm as such has rights in the partnership assets liable to extinguishment upon dissolution. The Supreme Court, in this context, observed that it was well known that commercial men and accountants on the one hand and lawyers on the other have different notions respecting the nature of the firm. Certain passages from Lindley on Partnership were then extracted to highlight the difference between the mercantile view and the legal view, which show: (7) that speaking generally, a firm as such has no legal recognition and that the law, ignoring the firm, looks to the partners composing it; (2) that what is called the property of the firm is partners'' property, and what are called the debts and liabilities of the firm are their debts and their liabilities; and (3) that a partner may be the debtor or creditor, of his co-partners, but he cannot be either debtor of creditor of the firm nor can he be employed by the firm, for a man cannot be his own employer. It was next pointed out that in English Jurisprudence a firm is only a compendious name for certain persons who carry on business, or have authorised one or more of their number to carry it on, in such a way that they are jointly entitled to the profits and jointly liable for the debts and losses of the business. Then the following pertinent observations were made:

The position as regards the nature of a firm and its property in Indian law under the Indian Partnership Act, 1932, is almost the same as in English law. Here also a partnership firm is not a distinct legal entity and the partnership property in law belongs to all the partners constituting the firm.

Having then referred to the decision of the Privy Council in AIR 1948 100 (Privy Council) and Addanki Narayanappa''s case (supra), the ultimate conclusion was recorded in the following words:

Having regard to the above discussion, it seems to us clear that a partnership firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm''s property or firm''s assets all that is meant is property or assets in which all partners have a joint or common interest. If that be the position, it is difficult to accept the contention that upon dissolution the firm''s rights in the partnership assets are extinguished.... In our view, therefore, there is no transfer of assets involved even in the sense of any extinguishment of the firm''s rights in the partnership assets when distribution take place upon dissolution.

In Commissioner of Income Tax, Bombay City Vs. Baimaniben, , two persons were carrying on business in partnership with equal shares. One of the partners died leaving him surviving only his widows the assessee. On the next day, a partnership deed was executed between the '' surviving partner and the assessee and under that partnership agreement the business was continued. While the assessee''s husband was alive, a loss was incurred in conducting the partnership business and in the first year, after the assessee joined the business, there was again a loss. In the year thereafter, the partnership earned some profit and the assessee claimed to set off against her share of profits her share of the loss of the previous year as well as the share of the loss incurred by the business when her husband was alive. The claim with regard to the latter set off was based on the ground that the assessee had, by inheritance, succeeded to her husband in the constitution of the firm and that, therefore, his share in the loss was liable to be set off against the income, profits and gains of the business during the current assessment year. The ITO negatived that contention and the AAC confirmed that order. The Tribunal, oil the facts, came to the conclusion that the share of her husband was given to the assessee and that it had devolved on her as she was the legal heir of the deceased and that by inheritance his share of the partnership had gone to the assessee. The Tribunal, therefore, gave the benefit of section 24(2) of the 1922 Act to the assessee and allowed the set off claimed by her. J.C. Shah, J., as he then was, speaking for the Court, observed that the sole question to be decided in the case was whether the assessee had by inheritance succeeded to her husband in the constitution of the firm as a partner and that on the facts found by the Tribunal, it was clear that the assessee had, in fact, succeeded to her husband in his capacity as a partner by inheritance. The Tribunal''s conclusion being one on a question of fact, there was no justification to interfere with its decision and the assessee was, therefore, entitled to set off against her share of the profits the loss suffered by her husband during the period that he was a partner of the firm.

In Sitaram Motiram Jain Vs. Commissioner of Income Tax, , the assessee, who carried on business as a sole proprietor, suffered a loss in his business and became entitled to carry forward a certain sum on account of such loss u/s 24(2) of the 1922 Act. During the next accounting period, the assessee took his brother as a partner in the said business which was taken over by the new firm. The partnership was registered under the provision of section 26A of the 1922 Act. The partnership earned profits in the very first year and certain sum of the profits came to the share of the assessee. The assessee claimed to set off against the said sum the loss incurred by him when the business was carried on by him as a sole proprietor. The claim was allowed by the ITO but the loss could not still be wholly set off. In the subsequent accounting period, the firm again made profits and the assessee received a certain portion thereof as his share. The claim to set off the carried forward loss as against such sum advanced by the assessee was rejected by the ITO. On appeal, the AAC upheld the decision. Meanwhile, the Commissioner revised the decision of the ITO allowing the set off a portion of the loss in the preceding year''s assessment and he directed the ITO to add back the sum so allowed to the relevant year''s income. The assessee challenged before the Tribunal the AAC''s order and also the Commissioner''s order, The Tribunal dismissed the appeals. On a reference, this Court observed that the question which, inter alia, arose was whether it could be said that the business that was carried on by the partnership during the relevant accounting periods could be regarded as a business carried on by the assessee because the language of section 24(2) required that the business should be continued to be carried on by the individual concerned. While dealing with the said question, this Court observed as follows:

...A ''partnership'' is defined by section 4 of the Indian Partnership Act as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. When a firm carries on business, it is a business carried on by the partners of that firm. One partner is the agent of the other in carrying on that business. When a partnership carries on a business, each partner thereof carried on that business...." (p. 412)

In this context, the provisions of proviso (e) to section 24(2) were examined and an analysis of the second part of the said proviso, which provided that'' ''where any person carrying on any business, profession or vocation has been succeeded in such capacity by another person, otherwise than by inheritance, nothing in this section shall be deemed to entitle any person other than the person incurring the loss to have it set off against his income, profits or gains" was found to yield the following result:

...The words ''another person'' are wide enough to include a firm. They are wide enough to include a firm in which the person who has been succeeded is also a partner. By that section the Legislature has provided that any person other than the person incurring the loss would not be entitled to claim a set off. The words of the section clearly imply that the person incurring the loss would be entitled to claim a set off provided the other conditions are fulfilled.... Reading the provisions of proviso (e) and the provisions of sub-section (2)(ii) of section 24, we are of the view that where a business carried on by a person on his sole account has been continued by that person in partnership with another, the provisions relating to set off would apply." (p. 413)

The ultimate conclusion was that the assessee was entitled to claim benefit of the loss which he had incurred while he carried on the business in proprietorship and that he was entitled to set off such loss as against the income earned by him as a partner in the firm in the subsequent accounting periods.

These decisions, in our opinion, leave no room for doubt that the submission made on behalf of the revenue is fallacious. In almost all those cases, a similar contention was advanced, considered and rejected. The decisions are an authority for the proposition that a firm has no distinct legal entity apart from the partners constituting it and that although, in the income tax law, a firm is a unit of assessment and it has certain attributes simulative of personality the business carried on by the firm is, in the eye of law, the business carried on by the partners collectively; the profits of the partnership firm are the profits earned by the partners, whichever may be the mode or form in which they reach them; the firm as such has no separate rights in the partnership assets but they are property in which all the partners have joint or common interest; and the claim to the benefit of the set off of loss incurred by a person, while he carried on business in proprietorship, would not be lost if he subsequently carries on the same business as a partner in a firm or when such person dies and his heir succeeds by inheritance in the capacity of a partner to the business. The very basis of the submission of the revenue in the present case, namely, that a firm has a legal personality different from its partners and that it is a distinct person in the eye of the general as well as the income tax law and that, therefore, the firm cannot succeed by inheritance to a business carried on by a sole proprietor is knocked out. The artificial distinction sought to be made between the firm and its partners for the purpose of the income tax law must be found to be lacking in legal existence in light of the clear and emphatic declaration of law in R.M. Chidambaram Pilla''s case (supra). Therefore, merely because the three heirs, who were the only legal heirs of the deceased under the law, and who having inherited the business had carried on the same since the death of the deceased, brought into existence a firm, which is a "commercially convenient but not legally recognised" entity, and decided to carry on the same business under the firm name, the succession by inheritance is not lost or destroyed. The link or nexus between the business carried on by the deceased and after his death, by his heirs, previously as a body of heir and subsequently as a collection of persons, joined with each other by the bond of partnership, is not lost either in substance or form and the business which the firm carried on still remained the same business which was succeeded to by inheritance by the heirs who were partners.

Considerable reliance was placed on behalf of the revenue, however, on certain observations in Commissioner of Income Tax, West Bengal Vs. A.W. Figgies and Co. and Others, in support of its contention that whatever may be the legal position of a firm under the law of partnership, under the income tax Act, the position is somewhat different. The assessee in that case was a partnership firm. Between 1924 and 1947 there were several changes in the constitution of the firm resulting in a change in the shares of the partners, but the firm did not appear to have been actually dissolved at any stage. In 1947, however, the partnership was converted into a limited company. In the course of its assessment for the assessment year 1947-48, the assessee claimed the benefit of relief u/s 25(4) of the 1922 Act on the ground that the firm had been succeeded by a private limited company. The claim was disallowed by the ITO and, on appeal, by the AAC on the ground that the partners of the firm in 1939 being different from the partners of the firm in 1947, no relief could be given. The Tribunal, however, held that the relief contemplated by section 25(4) was to be given to the business and not to the persons carrying on the business and that mere changes in the constitution of the firm had to be ignored. The firm, according to the Tribunal, was to be regarded for the purposes of the income tax law as having a separate juristic existence apart from the partners carrying on the business and that the firm could be carried on even if there was a change in its constitution. The High Court upheld the view taken by the Tribunal. In the appeal before the Supreme Court, the argument on behalf of the revenue was that by reason of the change in composition of the firm, the same firm did not continue throughout and that, therefore, there was no right to relief u/s 25(4) in the changed firm. This argument was rejected on the ground that on a proper construction of section 25(4), a mere change in the personnel of the partners could not be regarded as amounting to succession and that the section, in terms, disregarded such a change. It followed, therefore, that a mere change in the constitution of the partnership does not necessarily bring into existence a new assessable unit or a distinct assessable entity and that in such a case there was no devolution of the business as a whole. Therefore, in spite of mere changes in the constitution of the assessee-firm, the business of the firm as originally constituted continued right from the inception till the time it was succeeded by the limited company and it was the same unit all through, carrying on the same business, at the same place, and there was no cessor of that business or any change in the unit. To all intents and purposes, the firm as reconstituted was not a different unit but it remained the same unit in spite of the change in its constitution. The identity of the unit assessed under the Indian income tax Act, 1918, which paid double tax in the year 1939, with the unit to whose business the private limited company succeeded in the year 1947, was, therefore, established and the assessee-firm was consequently entitled to the relief u/s 25(4). In reaching this conclusion, the Supreme Court also took note of the fact that while under the law of partnership firm has no legal existence apart from its partners and it is merely a compendious name to describe its partners, it is equally true that under that law there is no dissolution of the firm by the mere incoming or outgoing of partners. A partner can retire with the consent of the other partners and a person can be introduced in the partnership by the consent of the other partners. The reconstituted firm can carry on its business in the same firm''s name till dissolution. It was observed that the law with respect to retiring partners as enacted in the Partnership Act is to a certain extent a compromise between the strict doctrine of English Common Law which refuses to see anything in the firm but a collective name for individuals carrying on business in partnership and the mercantile usage which recognises the firm as a distinct person or quasi corporation. Then followed the observation quoted below upon which great reliance has been placed on behalf of the revenue in the instant case:

But under the income tax Act the position is somewhat different. A firm can be charged as a distinct assessable entity as distinct from its partners who can also be assessed individually.... The partners of the firm are distinct assessable entities, while the firm as such is a separate and distinct unit for purposes of assessment.... These provisions of the Act go to show that the technical view of the nature of a partnership under English law or Indian law, cannot be taken in applying the law of income tax.

It is, no doubt, true that these observations appear to help the revenue in that they suggest that the firm being a distinct assessable entity from its partners, the same view as to the nature and status of a partnership under the partnership law cannot be taken in applying the law of "income tax. However, the observations do not advance the case of the revenue for several reasons.

In the first place-and we say so in all humility-the observations are in the nature of obiter dicta and they cannot prevail against the ratios of later decisions. On the construction of section 25(4) of the 1922 Act, the holding was that in terms it disregarded a mere change in the personnel of the partners. The material fact found was that in spite of several changes in the constitution of the firm, no dissolution of the firm appeared to have actually taken place at any state. In light of the above legal and factual position, it was held that several changes in the constitution of the firm between 1939 and 1947 did not bring into existence a new assessable unit or a distinct taxable entity and that the identity of the unit which paid double tax in 1939 and that to whose business the private limited company succeeded in 1947 was the same and that, therefore, relief u/s 25(4) was admissible to the firm. The decision on this point thus turned on statutory construction and that constituted the true basis of the decision. Even without the rule stated in the further observations, so heavily relied upon by the revenue, with regard to the applicability of the "technical view" of the nature of partnership under the partnership law to the law of income tax, the case could still have been decided just the same way and even if these observations were expressly dissented from by a Larger Bench of the highest Court in a later case, the ultimate decision in that case could not have been affected because there is no question but that a statute may repeal or vary a rule of law, as section 25(4) was found to have expressly done in that case by regarding the firm to have the same identity notwithstanding the change in the constitution of the firm. Those observations, therefore, with profound respect, were not necessary for the decision.

We are conscious of the fact that obiter dicta of the Supreme Court is binding on us. However, so far as the point under consideration is concerned, there are subsequent decisions of the Supreme Court referred to earlier where the rule that even for the purposes of the income tax Act, a partnership is not a distinct person but a plurality of persons, has been recognised and acted upon. In other words, the ratio of those decisions is that even for the purposes of the income tax Act, the firm has no distinct legal entity apart from the partners constituting it. Under such circumstances, we feel bound by the ratio decidendi of those later decisions and we must follow the law therein laid down and not the obiter dicta in A.W. Figgies & Co.''s case (supra).

In the next place, even assuming that we are wrong in this view and that the relevant observations are a part of the ratio decidendi of the decision, it appears to us, with respect, that having regard to the overall reasoning contained in the judgment and the later pronouncements of the Supreme Court, those observations, despite their apparent width and amplitude, must be read as having been made in the context of section 25(4) of the 1922 Act and as intended to be confined to a case governed by the said section. As earlier pointed out, on a proper construction of section 25(4), it was held that it, in terms, disregarded a mere change in the personnel of partners. The relevant observations only emphasise that under the law of partnership, a firm has no legal existence apart from its partners, the identity between the old and the reconstituted firm may not, stricto sensu, be said to have been maintained, although even under that law there is no dissolution of the firm by the mere incoming or outgoing of partners. However, such change in the personnel of the partners should not be regarded as affecting the identity of the firm for the purposes of section 25(4), having regard to the language employed therein, and notwithstanding the change in the constitution of the firm, it should still be held entitled to relief from double taxation under the provisions of the said section.

In the last place, even if we are wrong in this latter view, and assuming that the relevant observations constituting a part of the ratio decidendi are of general application and not relatable merely to section 25(4) of the 1922 Act then also, in our respectful opinion, since the relevant portions of the ratio decidendi of two decisions of the Supreme Court rendered by Benches of equal strength, namely, A.W. Figgies & Co. (supra) and Malabar Fisheries Co. (supra) conflict with one another, and the later decision does not allude to and or dissent from the earlier, it is open to us to choose which ratio decidendi to follow and in doing so we are free to act on our own opinion as to which is the more convincing [see Baker v. Queen [1975] 3 All. ER 55, 64 (PC)] and we prefer to follow the ratio decidendi in Malabar Fisheries Co. (supra) not only because the said decision is later in point of time and the view therein expressed is more convincing but also because similar is the ratio decidendi of two other decisions of Smaller Benches of the Supreme Court, namely, Ramniklal Kothari (supra) and R.M. Chidambaram Pillai (supra), and in the latter the declaration of law on the point has been made after taking into account "contrary views" and in words which leave no room for doubt that the Supreme Court was making a "statement of the law" on the subject. In the ultimate analysis, therefore, we hold that the decisions in A.W. Figgies & Co. (supra) cannot help the revenue in supporting its plea.

We might mention that besides the decision in A.W. Figgies & Co. (supra) reliance was also placed on behalf of the revenue on the decisions in Executors of The Estate of J.K. Dubash Vs. Commissioner of Income Tax, Bombay City, , Keshrichand Bhanabhai Vs. Commr. of I.T., , Sitaram Motiram Jain v, CIT (supra) and Commissioner of Income Tax Vs. Smt. Saroj Agarwal, . In view of the well settled legal position referred to earlier, those decisions are really of no assistance. We shall, however, briefly consider them.

In Executors of the Estate of Dubash v. CIT (supra) the question was whether the succession to business, within the meaning of section 25(4) of the 1922 Act, took place on the date of the death of the testator since from that date onwards the executors in whom the business got vested carried on the same as per the direction contained in the will, or whether such succession took place when the business was sold to one of the nephews of the testator within a period of one year of his death as directed in the will. It was held that the succession took place on the former date and not the latter. There is nothing in this decision which throws any light on the point under consideration.

In Keshrichand Bhanabhai''s case (supra), the question was whether the erstwhile coparceners of a HUF, which was carrying on business, were entitled to the benefit of carry forward and set off of loss incurred by the joint family business prior to partition u/s 24(2) of the 1922 Act in view of the fact that they had thereafter carried on the business as a firm which was registered under the relevant provisions of the said Act. It was held that the set off was not allowable inasmuch as the registered firm which sustained the loss was not the same assessee but different entity. It is one thing to say that a firm is not an entity distinct from the members composing it and quite another to say that the entity known as the HUF is the same as the firm constituted by its erstwhile coparceners after partition. The holding in this decision, therefore, does not help the revenue. True it is that there are certain further observations in that case to the effect that a registered firm is not the same as the individual partners constituting the firm and that in the case of a registered firm, the assessment is made on the firm, the firm is the assessee, but the liability for payment is imposed upon the members of that firm and they make the payment as the assessees in their individual capacity. In terms, it was observed that the Act makes a clear distinction between those two separate entities, namely, the registered firm and the partners of that firm. Those observations, however, have lost much of their force in view of the later decisions of the Supreme Court referred to earlier and they cannot any longer be pressed into service to buttress the revenue''s argument herein.

Sitaram Motiram Jain''s case (supra) is the same case upon which we have relief earlier. The revenue, however, relies upon that portion of the decision at page 413 which, while dealing with the argument of the revenue in that case to the effect that a firm was an entity under the income tax Act separate from the individuals who constituted that firm held that so far as unregistered firms (under the 1922 Act) were concerned, that, no doubt, was the true legal position, because unregistered firm was assessable to tax as a firm and constituted an entity under the income tax law. What was said there about unregistered firms would apply proprio vigore qua registered firms under the 1961 Act. if that statement had stood by itself. But now we have the authoritative pronouncement of the Supreme Court which makes no such distinction between partners and firm, although the firm might be registered under the 1961 Act and be in the same position as an unregistered firm under the 1922 Act. We do not think, therefore, that even those observations can help the revenue.

Smt. Saroj Agarwal''s case (supra) was a case in which the deceased husband of the assessee was partner in two partnership firms. Within three days on the death of her husband the assessee adopted a son and on the same day, she joined the two firms in place of her husband as a partner and the adopted son was admitted to the benefits of the partnership. The deceased had an unabsorbed loss from speculation business suffered by him as a partner in the two firms. The assessee claimed that the said loss should be set off against her speculation profits derived by her after joining the two firms. The holding was that the assessee was not entitled to the set off because under sections 72 and 74 the right to carry forward and set off losses is available only to the person who has suffered the loss and, u/s 78(2), to the person who succeeds him in such capacity by inheritance and not otherwise. Upon the death of the husband of the assessee the partnerships stood dissolved and upon such dissolution, the representative of the deceased partner gets no right to carry on the business which was being carried on by the deceased. Besides, the assessee had joined the two firms three days after her husband''s death and, therefore, she had no concern with the business of the firms, between the date of his death and her joining the firms, though, therefore, it could be said that the assessee had succeeded to the two businesses carried on by her husband in partnership, it could not be said that the succession was by inheritance and section 78(2), therefore, was not applicable. The situation there present and the one with which we are concerned herein are not identical. Succession by inheritance here is to a proprietary business from the moment of death and not to a share in a partnership business. The decision, therefore, is clearly distinguishable, even assuming, without deciding, that it correctly decided the issue arising for consideration therein. We cannot help observing at the same time that the decision in that case is not altogether reconcilable with the decision of the Bombay High Court in CIT v. Bai Maniben (supra) which is binding on us. Bai Maniben''s case was, of course, referred to and distinguished in that decision, but with respect we are not satisfied that the distinction makes any difference.

As argument of last resort, it was urged on behalf of the revenue that in the present case the business carried on prior to his death by Mr. Madhukant M. Mehta as a sole proprietor was inherited by the joint family consisting of his son and that in the hands of his son it was a joint family business and that when the assessee-firm took over the said business, there was a further succession, otherwise than by inheritance, neither the firm nor the three partners constituting the firm were entitled to carry forward and set off the losses incurred by the deceased. We are afraid, it is not open to the revenue to urge this point because it raises a totally new controversy, which was not there before the Tribunal. Whether there was in existence a joint family during the lifetime of Mr. Madhukant M. Mehta and whether such joint family continued as such till his death, or whether it was disrupted during his lifetime are all questions of fact which ought to have been urged before the Tribunal. If the joint family, if any, had disrupted during the lifetime of the deceased, the business carried on by him could not have been inherited by the remaining members of the joint family as contended on behalf of the revenue. Since the Tribunal was not called upon to find these material facts, such a contention cannot be allowed to be raised at this stage.

In view of the foregoing discussion, we hold that the Tribunal was right in law in holding that there was succession by inheritance in this case as contemplated by section 78(2) and that, therefore, the assessee is entitled to carry forward and set off the speculation losses of deceased Mr. Madhukant M. Mehta against the income from the speculation business earned during the relevant assessment years.

That take us to the second question, namely, whether section 75(2) prevents the assessee from claiming the set off of losses in question. The relevant provision has been quoted above. It provides, inter alia, that nothing contained in sub-section (2) of section 73 shall entitle any assessee, being a registered firm, to have its loss carried forward and set off under the provisions of the said sub-section. The Tribunal rightly held that the said sub-section was not attracted in the instant case. The benefit of sub-section (2) of section 73 is herein claimed in respect of the loss incurred in the business carried on by the deceased Mr. Madhukant M. Mehta as a sole proprietor. The benefit is not claimed in respect of the loss incurred by the assessee which is a registered firm. In our opinion, therefore, section 75(2), which disentitles any assessee, which is a registered firm, from having its loss carried forward and set off under the provisions, inter alia, of sub-section (2) of section 73, is not at all attracted in the present case. The Tribunal was, therefore, right in law in holding that section 75(2) does not prevent the assessee from claiming the set off of loss in question. In view of the foregoing discussion, we answer the questions referred to us as follows:

Question No. 1 : In the affirmative, that is to say, in favour of the assessee and against the revenue.

Question No. 2 : In the affirmative, that is to say, in favour of the assessee and against the revenue.

The Commissioner shall pay the costs of this reference to the assessee.