# COMMISSIONER OF INCOME·TAX, MADRAS v. K. H. CHAMBERS, MADRAS

- **Citation:** [1965] 2 S.C.R. 43
- **Court:** Supreme Court of India
- **Decided:** 1964-11-09
- **Bench:** K. SUBBA RAo, J. C. Shah, S. M. Sikri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-madras-v-k-h-chambers-madras-3422
- **Pages:** 10

## Headnote

The Income-tax Act, (XI of 1922), s. 25(4)-.Succession-What isFinding regarding succession-High Court-Jurisdiction to review.
Succession contemplated by s. 25 ( 4) of the Indian Income-tax Act (XI
of 1922) involv.S change of ownership, that is, the transferor goei out
and the transferee comes in. It connotes that the whole business is transferred. It also implies that substantially the identity and the continuity
of the business are preserved. If there is a transfer of a business, any
arrangement between the transferor and the transferee in respect of some
of the assets and liabilities, not with a view to enable the transferor to
run a part of the business transferred but to enable the transferee to run
the business unhampered by any load of debts, or, for any other app1 opriate collateral purpose, cannot detract from the totality of succession.
[49 F-H]
Reynolds, Sons & Co. Ltd. v. Ogston H. M. Inspector of Taxes, (1929)
IS T.C. 501, Commissioner of Income-tax, Burma v. N. N. Firm, (1934) 2
I.T.R. 85, Commissioner of Income-tax, Burma v. AL.V.R.P. Firm, (1940)
8 I.T.R. 531, Jittanram Nirmalram v. Commissioner of Income-tax, Bihar cl
Orissa, (1953) 23 I.T.R. 288, Malayalam Plantations, Ltd. v. Clark (H.M.
Inspector of Taxes) (1935) 19 T.C. 314, referred to.
The tests crystallised by decisions have given a legal content to the
E
expression "succession" in s. 25 ( 4) of the Act and whether facts proved
aatisfy those tests would be a mixed question of law and fact. The High
Court would therefore have jurisdiction under s. 66 (!) of the Act, to
ascertain the correctness of a finding given by the Tribunal on the question
of succession.
[52 DJ
Meenakshi Mills, Madurai v. The Commissioner of Income-tax, Madras,
(1956] S.C.R. 691, referred to.
F

## Text

I
•
43
A
COMMISSIONER OF INCOME·TAX, MADRAS
B
c
D
v.
K. H. CHAMBERS, MADRAS
November 9, 1964
[K. SUBBA RAo, J. C. SHAH AND S. M. SIKRI, JJ.]
The Income-tax Act, (XI of 1922), s. 25(4)-.Succession-What isFinding regarding succession-High Court-Jurisdiction to review.
Succession contemplated by s. 25 ( 4) of the Indian Income-tax Act (XI
of 1922) involv.S change of ownership, that is, the transferor goei out
and the transferee comes in. It connotes that the whole business is transferred. It also implies that substantially the identity and the continuity
of the business are preserved. If there is a transfer of a business, any
arrangement between the transferor and the transferee in respect of some
of the assets and liabilities, not with a view to enable the transferor to
run a part of the business transferred but to enable the transferee to run
the business unhampered by any load of debts, or, for any other app1 opriate collateral purpose, cannot detract from the totality of succession.
[49 F-H]
Reynolds, Sons & Co. Ltd. v. Ogston H. M. Inspector of Taxes, (1929)
IS T.C. 501, Commissioner of Income-tax, Burma v. N. N. Firm, (1934) 2
I.T.R. 85, Commissioner of Income-tax, Burma v. AL.V.R.P. Firm, (1940)
8 I.T.R. 531, Jittanram Nirmalram v. Commissioner of Income-tax, Bihar cl
Orissa, (1953) 23 I.T.R. 288, Malayalam Plantations, Ltd. v. Clark (H.M.
Inspector of Taxes) (1935) 19 T.C. 314, referred to.
The tests crystallised by decisions have given a legal content to the
E
expression "succession" in s. 25 ( 4) of the Act and whether facts proved
aatisfy those tests would be a mixed question of law and fact. The High
Court would therefore have jurisdiction under s. 66 (!) of the Act, to
ascertain the correctness of a finding given by the Tribunal on the question
of succession.
[52 DJ
Meenakshi Mills, Madurai v. The Commissioner of Income-tax, Madras,
(1956] S.C.R. 691, referred to.
F
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1106 of
G
H
1963.
Appeal by special leave from the judgment, dated December
21, 1960 of the Madras High Court in Case Referred No. 136 of
1956.
N. D. Kharkhanis and R. N. Sachthey, for the appellant.
R. Ganapathy Iyer, for the respondent.
The Judgment of the Court was delivered by
Subba Rao, J.
This appeal by· special leave raises the question
of the applicability of s. 25 ( 4) of the Indian Income-tax Act,
hereinafter called the Act, to the assessment in question.
One G. A. Chambers was carrying on two businesses, one i11
the name and style of "Chambers & Co." and the other in tho
44
SUPREME COURT REPORTS
[1965] 2 S.C.R.
name and style of "Chrome Leather Company". The first business
A
was concerned with export of hides, skins and mica, insurauce
and shippmg brokerage.
The said Chambers & Co.
was
an
assessee under the Indian Income-tax Act, 1918. As the business
was in a bad way, in or about 1931 G. A. Chan1bers handed over
the management of the said business to his son, K. H. Chambers.
The change of management did not bring about any favourabie
turn in the affairs of the business. The appellant's case is that
towards the end of 1932 G. A. Chambers transferred the business
B
to his son, K. H. Chambers, and that after the said transfer, K. H.
Chambers carried on the business in his own name till January 1,
1948, when the business was taken over by a limited company.
For the assessment year 1948-49 K. H. Chambers claimed relief C
under s. 25 ( 4) of the Act on the ground that the business had
been assessed under the old Act of 1918 when it was carried on
by his father, G. A. Chambers, and that the said Chambers transferred the business to him towards the end of 1932. The Incometax Officer, by his order, dated March 18, 1949, held that K. H.
Chambers did not take over the business of his father carried D
ori in the name of "Chambers & Co." "as a whole running concern"
and, therefore, the assessee was not entitled to relief under s. 25 ( 4)
of the Act: On appeal, the Appellate Assistant Commissioner
agreed with the Income-tax Officer and held that the business
carried on by K.H. Chambers was not the same business which was
originally assessed under the old Act of 1918 in the hands of his
father. On a further appeal, the Income-tax Appellate Tribunal
came to the same conclusion and found that the identity of the
business carriec;I on by the father was lost in the hands of the son,
E
as the entire business was not transferred to him. Ultimately the
Tribunal referred the following question to the High/Court of F
· Madras for its opinion under s. 66(1) of the Act :
/
"Whether on the facts and in the circumstances of the
case the Tribunal was right in law in refusing relief
under Section 25 ( 4) Of the Indian Income-tax Act to
the assessee."
The High Court answered the aforesaid question in the negative
in favour of the assessee; it held that the son succeeded to the
business of his father after November 1932 and, thereore, there
was succession within the meaning of s. 25 ( 4) of the Act. Hence
the appeal.
G
H
Mr. Karkhanis, learned counsel for the Revenue, raised before
us two contentions, namely, (i) the question referred by the
Tribunal to the High Court was only a pure question of fact and,
I
r
c. I. T. v. K. H. CHAMBERS (Subba Rao, J.)
45
A therefore, the High Court has no jurisdiction to give its opinion
thereon; and (ii) where the transferor retains the goodwill and
most of the assets and the transferee carries on the same business
with a part of the assets of the principal business, it cannot be
said that there is succession to the whole of the business within
the meaning of s. 25 ( 4) of the Act.
B
We shall take the second question first. G. A. Chambers, the
father, was carrying on two indep\mdent businesses, one in the
export of hides, skins and mica, in insurance and shipping brokerage
under the name and style of "Chambers & Co." and the other
under the name and style of "Chrome Leather Company''. In
c 1932, G. A. Chambers handed over the sole management of the
former business to his son, K. H. Chambers.
The son was
managing the business, but not with any success. In July 1932,
the son was going to foreign countries, presumably in connection
with his business.
On July 7, 1932, before the son left India,
G. A. Chambers wrote a letter to him informing him that by the
D
end of August 1932 the sμm of Rs. 40,000 invested by him in the
business would run out, and that unless Rs. 60,000 was invested
by him (the father), which he could not afford to risk, the business
could not be conducted. He, therefore, suggested to his son that
the Chambers & Co. could be wound up and that if he chose
he could have the goodwill of the said Company so that he might
E obtain some advantage from the goodwill and connections of
Chambers & Co., either by interesting financially one or other of
the firm's connections or by offering to work on a commission basis.
On July 8, 1932, the son renlied to the father to the effect that
he would prefer to start right afresh in his own name or in the
name of Chambers & Co.; he also suggested that he could get a
F place for less rent and use a smaller staff; and requested his father
to allow him to use the existing private codes. On December 5,
1932, G.A. Chambers asked his auditors, Mis. Fraser & Ross, to
close the accounts of Chambers & Co. and send the balance-sheet,
venture and profit and loss accounts for 8 months ending November
30, 1932, together with the schedule of accounts taken over by K. H.
G Chambers showing the amount due to him from K. H. Chambers.
In that letter G. A. Chambers informed the auditors that from
December l, 1932, K. H. Chambers would be running the export
business separately in his own name; that he had asked Chambers
& Co. "to close their accounts upto the end of November and
transfer all such accounts to Messrs. Chambers and Company
H
relating to G. A. Chambers to us so that we may run Messrs.
Chambers and Company's account at Chromepet." This letter
was signed by G. A. Chamebrs on behalf of the Chrome Leather
46
SUPREME COURT REPORTS
[1965) 2 S.C.R.
Company. This letter shows that from December 1, 1932, K. H.
o\
Chambers would run the export business and that the accounts
of G. A. Chambers in the Chambers & Co. would be transferred
to the accounts of Chrome Leather Co. From that date the export
business which K. H. Chambers was running earlier as manager
would be continued by him in his own name; that is, instead of
as manager, as its own proprietor. Pursuant to the instructions
B
given by G. A. Chambers, M/s. Fraser & Ross,
the auditors,
prepared a balance-sheet of the Chambers & Co. and also the
individual accounts of G. A. Chambers and K. H. Chambers.
The balance-sheet shows that G. A. Chambers was giv,en assets
valued
at
Rs.
5,67,485-10-2
and
liabilities
valued
at
Rs. 5,95,433-12-3; K. H. Chambers was given assets valued at C
Rs. 55,214-2-3 and liabilities valued at Rs. 27,266-0-2.
The
liabilities given to K. H. Chambers includes the amount representing the difference between the value of the assets and liabilities
given to G. A. Chambers. Broadly stated, the father had taken
over the liabilities of the Company and assets, including buildings
0
and machinery sufficient to discharge the liabilities, while the son
was given the stock in trade and a small amount of debts. After
this allotment, it is conceded that K. H. Chambers continued to
operate the same lines of business as was carried on by Chambers
& Co. taking over all the constituents of that business, using the
same premises,· the same telephone number, Post Box No., private E
codes and trade marks and the important sections of the staff that.
belonged to Chamber & Co. On May 23, 1933. G. A. Chambers
wrote to the Liverpool and London and Globe Insurance Company, Calcutta, wherein he stated :
"We confirm our conversation with your representative that inasmuch as we have transferred all our export
business to Mr. K. H. Chambers, who is now running
the business in his own name and at his own risk and
responsibility, we shall be pleased if you will transfer
the agency of your firm to him."
·
F
It is also conceded by the Department that G. A. Chambers utilized
G
his good offices in getting the Liverpool and London and Globe
Insurance Company to transfer the agency of that company to
Chambers & Co. run by K. H. Chambers. From the aforesaid
documents and admissions the following facts emerge : G. A.
Chambers was conducting two businesses, one under the name and
style of Chambers & Co. and the other under the name and style of H
Chrome Leather Company.
The Chambers & Co. was doing
export business.
Some months prior to July 7, 1932, K. H.
c. I. T. v. It. H. CHAMBERS (Subba Rao, J.)
4 7
A Chambers invested a sum of Rs. 40,000 in the business conducted
by Chambers & Co. and was actually managing the same. The
business was running at a loss and the father was not anxious to
continue the business and, therefore, he made some alternative
suggestions to his son. But the son was anxious to continue the
business independently.
The changeover was effected after the
B
accounts were audited and the balance-sheet was prepared by the
Company's auditors; and the father took over the old liabilities
and assets sufficient to discharge them and the business
was
handed over to the son. Thereafter, the son was carrying on the
business of Chambers & Co. in his own name, in the same premises, taking over all the constituents of Chambers & Co., using
C
the same codes and trade marks and the important members of
the staff of the Company. It is true that the name of Chambers &
Co. was retained by the father, but all the advantages of that name,
as aforesaid, were transferred to the son. It is also true that some
substantial assets of Chambers & Co. were not transferred to the
son, but they were retained by the father only for discharging the
D
debts in order to help the son to carry on the transferred business
without being burdened with heavy debts. The taking over of the
assets and liabilities by the father was not for the purpose of
continuing to do a business of his own in the same lines, but to
facilitate the carrying on of the transferred business by the son
effectively and profitably. On these facts, can it be held that there
was no succession to the business within the meaning of s. 25 ( 4)
of the Act ? Though there is no clear and exhaustive definition
of the expression "succession", decided cases and text-books throw
some light on the subject.
In Simon's Income Tax. Vol. 2, 2nd
Edn., it is stated at pp. 137-138 :
F
"In particular, argument from decided cases has
resulted in the acquisition by the word "succession" of a
somewhat artificial meaning ......... .
'In order to constitute a succession there must be,
G
broadly speaking, a taking over of the whole of the business concerned; .. .. .. .. .. .. .. .. .. .. .. . But if a
business is taken over as a whole, the fact that minor
assets of the business are omitted from the transfer will
not prevent there being a succession. The fact that the
purchaser already has a similar business is not a material
H
fact in establishing succession. The purchase of a business with a view to closing it down would not appear to
constitute succession.
48
. SUPREME COURT REPORTS
/ (1965) 2 S.C.R.
Other questions which have been used as tests are :
( 1) whether a similar trade has been carried on after
the transfer; (2) whether goodwill or other intangible
assets are included in the transfer; ( 3) whether staff is
taken over; ( 4) the treatment on transfer of the stock
and debts of the transferor; ( 5) whether there was an
interval in the carrying on of the trade as a result of
the transfer'." (Briton Ferry Steel Co., Ltd. v. Barry,
(1940] 1 K. B. 463, 476).
A
B
In Reynolds, Sons & Co., Ltd. v. Ogston (H. M. Inspector of
Taxes)( 1 ) , Lord Han worth, M. R., accepted the following tests
laid down by Rowlatt, J., to ascertain whether there was a succes·
C
sion, namely :
"You want to measure the income of the successor
by the past history of the business, it is therefore essential
that there should be a very close identity between the
business of the former proprietorship and the business
D
in the present proprietorship."
The Rangoon High Court in Commissioner of Income-tax, Burma
v. N. N. Firm(') had to consider the meaning of the word
"succeeded" ins. 26(2) of the Income-tax Act. Page, C.J., giving
the opinion of the Court, observed :
"In order that a person should be held to have
"succeeded" another person in carrying on a business,
profession or vocation, it is necessary that the person
succeeding should have succeeded his predecessor in
carrying on the business as a whole."
E
The Rangoon High Court again in The Commissioner of IncomeF
tax. Burma v. A. L. V. R. P. Firm(') reiterated the same principle.
What is the meaning of the expression "whole business" has been
the subject of other decisions. A Division Bench of the Patna High
Court in Jittanram Nirmalram v. Commissioner of Income-tax,
Bihar & Orissa, (') after considering the relevant decisions, both G
English and Indian, said that it was sufficient if there was substantial identity or similarity in the nature and extent of the
activities carried on between the two firms i.e., the transferor and
the transferee firms. The Court observed therein :
"For the application of Section 26(2) or Section
25 ( 4) it is not essential in every case that the successor
H
(I) (1929) IS T.C. SOI, S21.
(2) (1934) 2 I.T.R. BS, 87, 88.
(3) (1940) 8 LT.R. S31.
(4) (19S3) 231.T.R. 288, 296.
A
B
c
D
E
C. I. T. v. K. B. CHAMBERS (Subba Rao, J.)
49
firm should have mathematically the same extent of business as the predecessor firm or that it should have taken
over the same extent of trade or the same line or set of
customers as belonging to the predecessor firm nor does
it mean that the successor firm should have taken over all
the different businesses which the predecessor firm had
carried on."
In Malayalam Plantations, Ltd. v. Clark (H. M. Inspector of
Taxes) (1) the appellant-company therein, by an agreement dated
March 28, 1928, acquired from another company, as from April
l, 1928, a rubber estate in India together with plantations.
nurseries, factories, plant etc., and the benefit of contracts and
engagements whether with coolies or others, but did not take over
any book debts or the vendor's selling organisation. It was contended that there had been no succession to a trade. In rejecting
that contention, Finlay, J., observed :
"The substance of what was done, I think, clearly
was this. The thing was taken over as a going concern,
taken over with the things growing on it, and with the
coolies employed to work the estate. l am not going
into it any further because it is essentially a question of
fact. but I cannot avoid the view that there was material
upon which the Commissioners might arrive at the conclusion that there was a succession."
This is an authority for the position that if a business was taken
over as a going concern the mere fact that some assets, which
were not required by the successor for carrying on of the business,
were not transferred to him would not make it anylheless a
F
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 arracyement betw~en the transferor
G and the transferee in respect of some of the assets a!1d liabilities
not with a view to enable the tramferor to run a part of the
business transferred but to enable the twansferee to run the business
unhampt!red by the load of debts or for any other appropriate
collateral purpose cannot detract from the totality of succession.
H
In the present case, the export business of the father was
carried on by the son. The whole of the business was transferred,
(1) (1935) 19 T.C. 314, 323.
50
SUPREME COURT REPORTS
(1965) 2 S.C.R.
.the identity was preserved and the same business was continued.
A
The father reserved for himself some assets for the purpose of discharging the debts.
He did so not for the purpose of running
the same business by himself but only to help the son to carry on
the same business more effectively. If so, it follows that on the
facts found or admitted there is a clear case of succession in the
present case.
Learned counsel for the Revenue argued that whether there
was succession or not was a pure question of fact and the High
Court had no jurisdiction to question the correctness of the finding
given by the Tribunal to the effect that there was no succession
to the business.
C
This Court in Meenakshi Mills, Madurai v. The Commissioner
of lncome-tax, Madras(') laid down the following propositions
which are relevant to the question now raised before us :
(a) Where an ultimate finding on an issue is an
inference to be drawn from the· facts found, on the
D
application of any principle of law, there is a
mixed question of law and fact, and the inference
from the facts found is, in such a case, a question
of Jaw and is open to review by the Court.
(b) Where the final determination of the issue does not
involve an application of any principle of law, an
inference from the facts is a pure inference of fact
although it is drawn from other basic facts.
( c) The proposition that an inference from proved
facts is one of law is therefore correct in its application to mixed questions of law and fact, but
F
not to pure questions of fact.
In the case of pure questions of fact, the inference from proved facts being itself a question
of fact can be attacked as being erroneous in law
only if there is no evidence to support it or' if it is
perverse."
This distinction between a question of law and a question of fact
was also brought out by some of the English decisions cited at
the Bar. In Bell (Surveyor of Taxes) v. The National Provincial
Bank of England, Ltd. (2) the Master of the Rolls observed :
G
"The finding of the Commissioners upon that part
H
.of the case is this : 'The Commissioners were of opinion
(t) [t9S6) S.C.R. 691.
(2) (1903) S T.C. 1, 10, 11
A
B
c. I. T. v. K. H. CHAMBERS (Subba Rao, J.)
51
that there was no succession within the meaning of
the said 4th Rule.' That is, as my brother Mathew has
pointed out, not a finding in fact that there was no succession, but that the particular kind of succession which
took place in this case was not a succession within
the meaning of the 4th Rule. That is not a finding of
fact, but a finding of law and construction based upon
the fact that one existing Bank did acquire and take
over, not for the purpose of extinction, but for the purpose of development, the existing business of another
· Bank existing in another place."
C
So too, Mathew; L.J ., stated :
'"No succession' say the Commissioners within the
meaning of the said 4th Rule. That is the proposition
of law we have to decide as distinguished from fact, and
we are entitled to differ from that view.'-'
D Io Wilson and Barlow v. Chibbett (H. M. Inspector of Taxes) (1 )'
Rowlatt, J., observed : I>
"The question was whether here there was a succession, which is a primary question of fact upon which,
of course, it is possible the Commissioners might take
E
a wrong view of the law and apply false law."
The learned Ju4ge concluded thus :
"All I can say is that I do not see my way to say
that I can discern any sort of error in law here in the
way in which the' Commissioners have dealt with the
F
case .............. "
G
These observations imply that if correct tests are not applied in
coming to a conclusion whether there is succession or not in a
particular case, it can be re-opened by the
High Court. Io
Malayalam Plantations, Ltd. v. Clark (H. M. Inspector of
taxes) (2), Finlay, J., after considering at some length the facts
placed before him, refused to go further into the matter because
the finding of succession was essentially a question of fact. But
the facts in that case disclosed that the correct tests were applied
and, therefore, no illegality was committed by the Commissioners.
The said decisions did not lay down that in every case the
H
finding of succession is one of fact. Indeed, the first two decisions.
(1) (1929) 14 T.C. 407, 412, 413.
(2) (1935) 19 T.C. 314, 323.
52
SUPREME COURT REPORTS
[ 1965] 2 S.C.R.
clearly maintained that a finding on a question whether a succesA
sion is one within the meaning of a particular provision or whether
it is vitiated by any error of law is not final. The English view
is also in accord with that expressed by this Court.
The question, therefore, is whether a finding that a person
succeeded another in his business within the meaning of s. 25 ( 4)
of the Act is a finding of fact. The expression "succession'', as
stated by Simon· in his book on Income-tax, has acquired a somewhat artificial meaning.
The cases we have considered supra
and similar others have laid down some tests, though not exhaustive, to ascertain whether there is succession in a given case or
not.
The tests of change of ownership, integrity, identity and
continuity of a business have to be satisfied before it can be said
that a person "succeeded" to the business of another. Unless the
facts found by the Tribunal satisfy the said tests, the finding
cannot be conclusive.
The tests crystallized by decisions have
given a legal content to the expression "succession" within the
meaning of s. 25 ( 4) of the Act and whether facts proved satisfy
those tests is a mixed question_ of law and fact. If so, it follows
that a question of law arose out of the Tribunal's order and the
High Court has jurisdiction to ascertain the correctness of the
finding given by the Tribunal on the question of succession.
In the result, the appeal fails and is dismissed with costs.
Appeal dismissed.
B
c
D,
E