JUDGMENT BY THE COURT :
At the instance of the assessee, the Tribunal, Allahabad referred the following question for the opinion of this Court :
"Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that on 15th October, 1972 the firm stopped doing its business and held the assets of the business thereafter for and on behalf of the company which was stipulated to be formed by the partners of the firm in terms of the deed of copartnery dt. 16th October, 1972 ?
If the answer to the above be in the affirmative -
Whether, the Tribunal was justified on the facts and in the circumstances of the case, in holding that the firm was liable to be assessed in respect of the profits which arose and accrued to it with regard to its trading from 1st January, 1972 to 15th October, 1972 in terms of s. 170 of the IT Act, 1961 ?"
2. The facts, as briefly stated, in the order of the Tribunal are that the assessee-firm comprised three partners during the accounting period which was the calendar year 1972. A new deed of partnership was constituted w.e.f. 3rd August, 1972 whereby four new partners were admitted to the partnership and thus the number of the partners swelled to 7 from 3.
The firm carried on business of purchase and sale of Tata, Mercedez, Benz vehicles, tempos and mini bus, spare parts, tyres, oil and lubricants, etc. On 6th October, 1972, a deed of copartnery was entered into by the seven partners. Admittedly, the partnership firm was converted into a company, which was incorporated under the Companies Act w.e.f. 25th November, 1972. Whereas the firm filed return showing nil income for the entire accounting period, relevant to the asst. yr. 1973-74, the company returned income for the period from 1st January, 1972 to 31st March, 1973. It has come in the statement of facts that the company applied for change in the accounting period and this is how the return was filed upto 31st March, 1973.
The contention of the assessee before the assessing authority was that the entire income for the accounting period was liable to be taxed in the hands of the company. The assessing authority rejecting the contention of the assessee-firm held that the business of the firm was succeeded by the company and, therefore, the income of the period from 1st January, 1972 to 24th April, 1972 was liable to be taxed in the hands of firm and for the subsequent period, the income was liable to be taxed in the hands of the company.
So far as the question whether the business of the firm was succeeded by the company is concerned, both the appellate authority and the Tribunal affirmed the view taken by the assessing authority that there was succession within the meaning of s. 170 of the IT Act, 1961 (briefly, the Act). The Tribunal, however, held that income upto 6th October, 1972 only was assessable in the hands of the firm.
It is in the backdrop of this factual position, the aforementioned question has to be considered.
3. The short question for consideration is whether the business of the firm was succeeded by the company and whether there was succession within the meaning of s. 170 of the Act. The authorities clearly held that the business of the firm was distinct from the business of the company. The Tribunal relied on the case of CIT vs. A. W. Figgies & Co. & Ors. (1953) 24 ITR 405 (SC). In this case also, the assessee, a partnership firm, carried on business and that was converted in the year 1947 into a limited company. The Tribunal and the High Court both held that there was succession within the meaning of s. 25(4) of the Indian IT Act, 1922, analogous to s. 170 of the Act. The Supreme Court concurred with the High Court saying :
"We have no doubt that the Tribunal and the High Court were right in holding that in spite of the mere changes in the constitution of the firm, the business of the firm as originally constituted continued as tea brokers right from its inception till the time it was succeeded by the limited company and that it was the same unit all through, carrying on the same business, at the same place and there was no cesser of that business or any change in the unit".
From the above reproduced finding, it is amply clear that when a firm is converted into a company then the business of the firm is succeeded by the company.
Sec. 170 sub-s. (1) cls. (a) and (b) of the Act clearly provides that where a person carrying on any business or profession has been succeeded therein by any other person who continues to carry on that business or profession, the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession and the successor shall be assessed in respect of the income of the previous year after the date of succession.
From s. 170(1), it is clear that the Tribunal rightly held that the firm was assessable till it was succeeded by the company.
4. It is argued before us by the counsel for the assessee that the profits of the business carried on by the firm do not accrue day-to-day and that in the instant case the account books were not closed when the company took over the assets and liability of the firm and, therefore, the profits of the firm could not be assessed in the hands of the company. We do not agree with the submission of counsel for the assessee. When the books of account are regularly maintained by the firm, profits can be ascertained without any difficulty till the date of succession. For ascertaining the profit, it is not necessary that the books of account should have been actually closed because the assessment of the predecessor firm is not dependent on the closing of the accounts.
5. For the reasons, both the parts of the question referred to this Court are answered in the affirmative, that is, in favour of the Revenue and against the assessee.