Successor business test and mandatory partnership deed shares under income tax registration rules

For succession under Section 26(2) of the Indian Income Tax Act, 1922, the same business must continue with a change in the person carrying it on; a later joint venture formed after expiry of earlier labour-supply contracts, without transfer of assets, liabilities, or a going concern, was only a similar business and not a succession. For registration under Section 26-A, the partnership instrument had to specify the individual inter se shares of the partners; external knowledge of those shares was insufficient because the requirement in the deed was treated as mandatory. The succession issue was decided for the assessee, while refusal of registration was upheld for the Revenue.

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Issues: (i) Whether the assessee firm had succeeded to the business of the earlier partnerships within the meaning of Section 26(2) of the Indian Income Tax Act, 1922. (ii) Whether registration could be refused under Section 26-A because the instrument of partnership did not specify the inter se shares of the partners of a constituent partner-firm.

Issue (i): Whether the assessee firm had succeeded to the business of the earlier partnerships within the meaning of Section 26(2) of the Indian Income Tax Act, 1922.

Analysis: The prior businesses were carried on under fixed-term labour-supply contracts and ended with the expiry of those contracts. The later joint venture was formed after the contracts expired and was only a business of a similar nature, not the same continuing business. No assets, liabilities, or transferable going concern were taken over. The statutory condition for succession requires identity of business with change in the person carrying it on, and that requirement was not satisfied.

Conclusion: The answer to this issue was in the negative and was in favour of the assessee.

Issue (ii): Whether registration could be refused under Section 26-A because the instrument of partnership did not specify the inter se shares of the partners of a constituent partner-firm.

Analysis: The section required the instrument itself to specify the individual shares of the partners. Although the Revenue was aware of the internal shares from other materials, the statutory requirement had to be complied with in the partnership deed. The provision was treated as mandatory and not as permitting equitable relaxation.

Conclusion: Registration was rightly refused and this issue was decided against the assessee.

Final Conclusion: The reference was answered partly in favour of the assessee and partly in favour of the Revenue, with the assessee succeeding on the succession question but failing on registration.

Ratio Decidendi: For succession under Section 26(2), the same business must continue with a different person carrying it on; a new venture of a similar nature after expiry of earlier contracts is not succession. For registration under Section 26-A, the instrument of partnership must itself specify the individual shares of the partners.

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