Metharam Lekhumal vs Commissioner of Income Tax

The Income Tax Appellate Tribunal, Jaipur, has referred the following two questions of law for the opinion of this court:

" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that what had taken place in the present case was merely a change in the constitution of the firm as defined in Sub-section (2) of Section 187 of the Income Tax Act, 1961, and that, therefore, the assessment had to be made in accordance with Sub-section (1) of Section 187 of the Income Tax Act?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the messing expenses were entertainment expenses and were, therefore, hit by the provisions of Section 37(2B) of the Income Tax Act, 1961 ? "

Brief facts of the case are that Smt. Ishwari Bai, one of the partners of the firm, M/s. Metharam Lekhumal, expired on August 5, 1971. The total income of the firm as per return filed on October 9, 1972, was Rs. 59,945. A mention was made in the return that the aforesaid income should be divided into two parts and should be assessed separately as under :

(i) For the first four months up to the date of death of Smt. Ishwari Bai--Rs. 19,300.

(ii) For the later duration of 8 months--Rs. 40,645.

For the later period of eight months of the accounting period, one Sundar Das (minor) was admitted to the benefits of the partnership in the place of Smt. Ishwari Bai. Sundar Das was allowed a share of 10% in profits. The Income Tax Officer did not accept the assessee''s contention to make two assessments on the basis of the above two returns. The Income Tax Officer gave the following reasons for not accepting the assessee''s contention:

(a) Same business was carried on and there was only a change in the constitution as per partnership deed which was executed on October 28, 1971, after the demise of one of the partners, Smt. Ishwari Bai.

(b) In the said partnership deed in Clause No. 2, it was specifically mentioned that the business is taken over as a running concern and that no separate accounts were to be kept. It was also mentioned that the same business premises shall continue to exist.

(c) The same business continued to exist as per account books and documentary evidence furnished and there was only a change in the constitution on account of the demise of the partner, Smt. Ishwari Bai."

The assessee appealed against the order of the Income Tax Officer but the Appellate Assistant Commissioner dismissed the appeal. The matter was then taken in appeal to the Tribunal. The Tribunal expressed the opinion that the change which came about by the aforesaid arrangement in the constitution of the firm was as defined in Sub-section (2) of Section 187 of the Income Tax Act, 1961. The Tribunal further held that in view of the above circumstances, the assessment had to be made in accordance with Sub-section (1) of Section 187 of the Act and they did not find any reason to take a different view and, as such, dismissed the appeal.

The assessee had also agitated before the Tribunal disallowance of Rs. 2,500 as messing expenses. According to the assessee, these expenses were incurred in providing food and refreshments, etc., to the customers of the assessee. In this regard, the Tribunal expressed the opinion that these expenses were in the nature of entertainment expenses and, as such, were hit by the provisions of Section 37(2B) of the Act. The Tribunal, as such, disallowed the contention of the assessee in this regard also.

On an application filed by the assessee, the Tribunal has referred the abovementioned questions of law for the opinion of this court.

As regards question No. 1, Mr. Ranka, learned counsel for the assessee, placed reliance on four decisions of this court reported in Addl. Commissioner of Income Tax Vs. M.K.M. Moosa Bhoy Amin, Commissioner of Income Tax Vs. Hind Agencies, Additional Commissioner of Income Tax Vs. Emery Stone Mfg. Co., and Surana and Co. Vs. Commissioner of Income Tax, Mr. Ranka also placed reliance on Ganesh Dal Mills Vs. Commissioner of Income Tax, and Addl. Commissioner of Income Tax, Gujarat Vs. Harjivandas Hathibhai, .

In view of the abovementioned decisions of this court as well as of the Madhya Pradesh and Gujarat High Courts, it was contended that the Tribunal was wrong in taking the view that in the facts and circumstances of the case, it was merely a change in the constitution of the firm as defined in Sub-section (2) of Section 187 of the Act. It was submitted that Smt. Ishwari Bai had expired on August 5, 1971, and, thereafter, one Sunder Das (minor) had been admitted to the benefits of the partnership with a share of 10 per cent. in the profits. It was not a case of a mere change in the constitution of the firm but it amounted to succession and constitution of a new firm. It was submitted that in these circumstances, two separate assessments had to be made, one on the erstwhile firm and the other on the new firm. It was also contended that it was immaterial whether the business was taken over by the new firm as a running concern and no separate accounts were kept by the new firm. It was also submitted that the Tribunal was wrong in holding that the share of the partners in the new firm had not changed.

As regards the second question of law mentioned above, Mr. Ranka placed reliance on Commissioner of Income Tax, Gujarat II Vs. Patel Brothers and Co. Ltd., , Commissioner of Income Tax, Vidarbha And Marathwada Vs. Shah Nanji Nagsi, , Commissioner of Income Tax Vs. Karuppuswamy Nadar and Sons, , CIT v. Lakhmi-chand Muchhal [1982] 134 ITR 234 , Commissioner of Income Tax Vs. Navalmal Punamchand, , Commissioner of Income Tax Vs. Raj Kumar Mills Ltd., and NAVA BHARAT ENTERPRISES (P.) LTD. Vs. COMMISSIONER OF Income Tax, A.P., . It was also submitted that the Bombay High Court had decided the same matter in Income Tax Appeal No. 30 of 1978 on June 13, 1978, in CIT v. Allied Publishers (P.) Ltd. A special leave to appeal against the judgment of the Bombay High Court was dismissed by their Lordships of the Supreme Court on October 13, 1979 in SLP (Civil) No. 3781 of 1978.

We have gone through the judgments referred to above by Mr. Ranka and we agree with the view taken in the aforesaid decisions. Mr. Surolia, learned counsel for the Revenue, was unable to cite any authority taking a view contrary to the authorities cited above.

In the result, both the above questions of law are answered in the negative and in favour of the assessee. In the facts and circumstances of the case, the parties shall bear their own costs.