NATIONAL LAW INSTITUTE

UNIVERSITY
BHOPAL,M.P.

A Project On LBA-1 Involving Critical

Submitted to, Submitted by,

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Associate Professor,NLIU 2012 BA LLB 101
Acknowledgement
With my highest gratitude I would take this opportunity to thank all those people who helped
me in making this project.Firstly I would thank my parents who always supported me in all
my endeavours .Then I would thank Sanjay Yadav Sir who guided me with the strategy to
make this project successfully.Without the direction of all the above mentioned people ,this
project would have been incomplete.

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 Table Of Contents

Topic Page No:

2.Sections of IPA ,1932 and Indian Income tax Act,1922

involved

3.Arguements of parties

4.Judgement

5.Critical analysis

6.Bibliography

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 Material Facts
1. M/s. Pigot Champan & Co. is a firm of foreign exchange brokers which had been
operating in Calcutta for a very long time. There is no dispute that the firm had been
taxed on its business income under the Indian Income-Tax Act, 1918 and that the
other conditions laid down in Section 25(4) of the 1922 Act for entitling an assessee
to the relief under the provision are satisfied. 
2. The Constitution of the firm Had undergone several changes in the past; the firm was
re-constituted for short periods and whenever any partner retired he gave up his claim
to the partnership assets which vested in the continuing partners. 
3. A deed of partnership was executed by and between Rogers Haywood, Leonard Mark
Blomenstok, H.G. Ablitt and S.C. Roy on 18th May, 1953 which, after reciting the
various deeds executed in the earlier years, which had the following provisions:
a. That the partnership should be continued for a term of 6-years from 1.4.1953 and shall
expire on the 31-3-1959.
b. That Rogers Haywood would retire from the firm on 31-3-1957 but the partnership
should be continued by the remaining partners until 31-3-1959.
c. What would be the shares of the partners as varied from year to year including the
shares of the remaining partners after Haywood's retirement.
d. That goodwill of the firm was to belong to Hay wood until his retirement; thereafter it
was to devolve on the three continuing partners in equal shares and on the retirement
of Blomenstok it was to devolve on Ablitt and Roy in equal shares.
4. By a deed of variation dated 7-4-1955 one Leonard William Mclean was admitted as a
partner of the firm for one year; by another deed of variation dated 30th April,
195Mclean was admitted as the partner for the rest of the term and the retirement of
Haywood was postponed from 31-3-1957 to 31-3-1958 but it was provided that on
such retirement the partnership was to be continued by the remaining 4 partners till
31-3-1959.
5. the deed also provided that Blomenstok would retire from the firm on 31-3-1959 and
on such retirement the goodwill and the capital of the firm shall devolve absolutely on
Ablitt and Roy and Mclean in certain shares set out.
6. Haywood retired on 31-3-1958 and Blomenstok on 31-3-1959. On 30th March, 1959 a
Deed was executed by Mclean, describing himself as the retiring partner, and Ablitt
and Roy jointly describing themselves as continuing partners, it was provided that
the partnership business of M/s. Pigot Champan & Co. subsisting between them shall
be deemed to have been dissolved by mutual consent as from 1st April, 1959 and
thereafter the said business with its assets and goodwill shall belong to and be carried
on by the continuing partners whose shares were defined.
7. The retiring partner released all his claims to his share of goodwill and assets of the
firm in favour of the continuing, partners while the continuing partners in their turn
absolved and indemnified the retiring partner from any liability of the firm.

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 8. The business was then carried on by Ablitt and Roy., on terms and conditions
recorded in a Deed of Partnership executed by them on 29th June, 1959.
9. This new deed of partnership of 29th June, 1959 recited the following facts: (a) that
by a deed dated 30th March, 1959 made between Mclean, Ablitt and Roy their
partnership was mutually dissolved as from 1.4.1959, (b) that Ablitt and Roy shall
remain partners under terms and conditions mentioned to the exclusion of any other
document, (c) that the business shall be that of exchange brokers and (d) that the
same shall be carried on under the name and style of M/s. Pigot Champan & Co.
10. For the Assessment Year 1959-60, for which the accounting year ended on 31-3-1959,
the respondent-assessee filed a Return of Income declaring its total income of Rs.
1,80,300.
11. It was claimed that by the deed dated 30th March, 1959 the firm of M/s. Pigot
Champan & Co. had been dissolved as from 1st April, 1959 and was succeeded by
another firm of two partners Ablitt and Roy and as such relief under Section 25(4) in
respect of the Assessment Year 1959-60 was due to the respondent assessee.

Sections Of The Indian Partnership Act ,1932 and Income Tax Act ,1922

Involved

1.Section-44 of IPA ,1932:

(a) that a partner has become of unsound mind, in which case the suit may be brought as well
by the next friend of the partner who has become of unsound mind as by any other partner;
(b) that a partner, other than the partner suing, has become in any way permanently incapable
of performing his duties as partner;
(c) that a partner, other than the partner suing, is guilty of conduct which is likely to affect
prejudicially the carrying on of the business, regard being had to the nature of the business;
(d) that a partner, other than the partner suing, wilfully or persistently commits breach of
agreements relating to the management of the affairs of the firm or the conduct of its
business, or otherwise so conducts himself in matters relating to the business that it is not
reasonably practicable for the other partners to carry on the business in partnership with him;
(e) that a partner, other than the partner suing, has in any way transferred the whole of his
interest in the firm to a third party, or has allowed his share to be charged under the
provisions of rule 49 of Order XXI of the First Schedule to the Code of Civil Procedure, 1908
(5 of 1908) or has allowed it to be sold in the recovery of arrears of land revenue or of any
dues recoverable as arrears of land revenue due by the partner;
(f) that the business of the firm cannot be carried on save at a loss; or
(g) on any other ground which renders it just and equitable that the firm should be dissolved.

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2.Section 25(4) of the Income tax act 1922 :

Under it relief has been granted by the Tribunal and by the High Court to the respondent,it
runs thus:

Where the person who was at the commencement of the Indian Income-Tax (Amendment)
Act, 1939 (VII of 1939), carrying on any business, profession or vocation on which tax was
at any time charged under the provisions of the Indian Income-lax Act, 1918, is succeeded in
such capacity by another person, the change not being merely a change in the Constitution of
a partnership, no tax shall be payable by the first mentioned person in respect of the income,
profits and gains of the periods between the end of the previous year and the date of such
succession, and such person may further claim that the income, profits and gains of the
previous year shall be deemed to have been the income, profits and gains of the said period.
Where any such claim is made, an assessment shall be made on the basis of the income,
profits and gains of the said period, and, if an amount of tax has already been paid in respect
of the income, profits and gains of the previous year exceeding the amount payable on the
basis of such assessment a refund shall be given of the difference.

Arguements of Parties
1. Counsel for the Appellant pointed out that Section 25(4) makes a distinction between a
case of succession by another person upon a dissolution of the firm and a case where
there is merely a change in the Constitution of a partnership and according to him in
order to get relief it is necessary to show that there has been a succession by another
person and not just a change in the Constitution of the partnership.
2. The firm had been undergoing several changes in the past; the firm was re-constituted
for shorter periods, whenever any partner retired he gave up his claims to the assets and
goodwill which vested in the continuing partners and what happened as of 1st April,
1959 as evidenced by the deed dated 30th March, 1959 was a similar reconstitution of
the same firm.
3. If on the earlier occasions there was no succession then the change in the firm as of 1st
April, 1959 was also not a succession.
4. Recitals as also the operative part of the deed dated 30th March, 1959 which clearly
states that Ablitt and Roy were to carry on the firm's business from 1st April, 1959 as
continuing partners, the goodwill and assets having devolved on them by the outgoing
partner named Mclean releasing his claims in their favour.
5. It was pointed out that a retiring partner releasing all his claims in the goodwill and
assets of the firm in favour of the continuing partners and in turn getting himself
indemnified by the continuing partners with regard to the liabilities of the firm were the
normal things usually provided for whenever there was a reconstitution of the firm and
would have no bearing on the aspect whether there was a dissolution of the firm.

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 6. According to counsel when a partnership is dissolved and only one of the erstwhile
partner takes over the business and carries it on as the proprietor or upon dissolution
some of the erstwhile partners take some outsiders as partners and carry on the
business, those would be the cases where another person could be said to have
succeeded to the business within the meaning of the Section 25(4).

7. But in the instant case after retirement of Mclean, the two erstwhile remaining partners,
namely, Ablitt and Roy jointly described as continuing partners by the deed dated 30th
March, 1959, took over the business and carried it on as from 1-4-1959 under the style
of M/s. Pigot Champan & Co. at the same place and therefore it could not be said that it
was a case of a dissolution of the erstwhile firm and succession to the old business by a
new firm and as such both the Tribunal and the High Court were in error in granting
relief under Section 25(4) to the respondent-assessee.

8. Case relied on by the counsel of appellant:

A firm consisting of three partners, A, B and C, carried on the business of tea brokers and
paid income-tax under the Income-tax Act of 1918. There were several changes in the
personnel of the partners and in 1939 the firm consisted of C, D and E. C retired and in 1945
a new partnership deed was written up between D, E and F and they carried on the business.
In 1947 the partnership was converted into a limited company. The Income-tax authorities
refused to give relief under s. 25(4) of the Income-tax Act as the partners of the firm in 1939
were different from the partners of the firm in 1947:

Held, that in spite of the changes in the constitution of the firm, the business of the firm as
originally constituted continued right from its inception to the time it was succeeded by the
limited company and the firm was the same unit all through; the reconstitution of the firm in
1945 did not make it a different unit, and the firm was therefore entitled to relief under s.
25(4) of the Act.

Judgement
A. Judgement of the Income tax officers:
1. According to the Income Tax Officer the entire assets and liabilities of the old
partnership were taken over by the new firm as on 1-4-1959 and there was no cessation
of the business within the meaning of Section 25(4) of the 1922 Act.He therefore
dismissed the claim for seeking relief by the assesse.

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 2. On appeal, the Appellate Assistant Commissioner agreed with the view taken by the
Income-Tax Officer and dismissed the appeal. On further appeal the Tribunal on a
consideration of the various deeds of the partnership, deeds of variation and the Deed
dated 30th of March, 1959 held that the assessee firm must be regarded as having been
dissolved under Section 40 of the Indian Partnership Act in terms of the Deed dated
30-3-1959, as the retiring partner had given up all claims to his share in the goodwill
and assets of the firm and in turn had been indemnified with regard to the liabilities.
3. The assessee was entitled to relief under Section 25(4) in respect of its income for the
assessment year 1959-60 .So the appeal was allowed.

B.High Court:
1. The High Court called for a supplementary statement of the case from the Tribunal
directing the Tribunal to forward to the High Court a true copy of the new deed of
partnership that was subsequently executed by Ablitt and Roy on 29th June, 1959 and
on a consideration of the said deed together with the earlier documents that were on
record the High Court upheld the view of the Tribunal and answered the question in
favour of the respondent assessee. 
2. The Commissioner of Income-tax has come up in appeal challenging the view taken by
the High Court.

C.Supreme Court:
1. The principle is well settled that it is an examination of relevant documents and
relevant facts and circumstances that the Court has to be satisfied in each case as to
whether there has been a succession or a mere change in the Constitution of the
partnership. 
2. It is not possible to accept the contention of Counsel for the appellant that upon a
dissolution of a firm succession to the old business by another person would only arise
if a solitary partner takes over assets and liabilities and carries on the business as a sole
proprietor thereof or if some of the erstwhile partners alongwith some strangers take
over the assets and liabilities of the old firm and carry on the business.
3. The two instances mentioned by Counsel for the appellant are undoubtedly clear cases
of succession to the old business by another person or entity but succession to the old
business contemplated under Section 25(4) need not be and cannot be confined to the
instances mentioned by Counsel for the appellant. 
4. The question whether there has been a dissolution of the firm and upon such
dissolution a new firm has succeeded to the business of the old firm is a question
which depends upon the intention of the parties to be gathered from the document or
documents, if any, executed by and between the partners and other facts and
surrounding circumstances of the case.

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 5. Having regard to these facts and circumstances which emerge clearly , it seems to that
both the Tribunal as well as the High Court were right in coming to the conclusion that
the old firm was dissolved on 1st April, 1959 and it was the case of a new firm
succeeding to the old business and therefore, the respondent assessee was entitled to
the relief claimed under Section 25(4) of the 1922 Act in respect of its income for the
Assessment Year, 1959-60.
6. In the result the appeal fails and is dismissed. There will be no order to costs.

Critical Analysis
1. The question is whether there has been dissolution of the old firm followed by the
creation of a new firm which could be said to have succeeded to the business of the
old firm. 
2. The effect of the earlier documents commencing from the initial deed of partnership
dated 18th May, 1953 right up to the Deed dated 30th of March, 1959 with which we
are principally concerned.

3. the initial partnership between Haywood, Blomenstok, Ablitt and Roy under the
deed dated 18th May, 1953 was for a fixed term of six years from 1-4-1953 and as
such the same would automatically stand dissolved under Section 42(a) of the
Partnership Act on 31-3-1959.

4. under the deed dated 30th of March, 1959 the partnership between Mclean, Ablitt and
Roy Was in terms “dissolved by mutual consent as from 1st April, 1959.

5. the document expressly states both in the recital portion and in the operative part that
the firm has been dissolved by mutual consent.

6. the continuing partners were given the sole right to collect all the assets of the
dissolved firm and to issue, recover and give full receipts for all debts of that firm.

7. each of the parties to the deed released the other from all proceedings, accounts,
costs, claims and demands in respect of the dissolved firm.

8. the Tribunal found as a fact that the relevant account books clearly indicated that the
old firm stood dissolved and its assets and liabilities were taken over by the new firm
of the two continuing partners.
9. within three months another document was executed on 29th June, 1959 by and
between the continuing partners recording the terms and conditions on which the
continuing partners, to the exclusion of the retiring partner, were to carry on the
business of the old firm with effect from 1-4-1959. Having regard to these facts and
circumstances which emerge clearly on record it seems to us that both the Tribunal as

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 well as the High Court were right in coming to the conclusion that the old firm was
dissolved on 1st April, 1959 and it was the case of a new firm succeeding to the old
business and therefore, the respondent assessee was entitled to the relief claimed
under Section 25(4) of the 1922 Act in respect of its income for the Assessment Year,
1959-60.

Bibliography

1.www.indiankanoon.org
2.www.lawnotes.in
3.www.jurisonline.in

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