Reconstituted firm profits: income-tax assessable, but amounts belonging to the old concern escape excess profits tax.

A sum received by a reconstituted firm was assessable as part of the firm's income-tax profits under Section 26 of the Indian Income-tax Act, 1922, because the Tribunal treated the old undertaking's profits as profits of the firm for that assessment. However, for excess profits tax, the decisive question was whether the amount represented profits of the assessee-firm's own business during the accounting year. As the Tribunal found that the amount belonged to the old concern and was distributable to persons entitled under the prior arrangement, it was not the reconstituted firm's business profit and was not chargeable to excess profits tax.

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Issues: (i) Whether the sum of Rs. 56,260 formed part of the assessee-firm's profits for income-tax assessment under Section 26 of the Indian Income-tax Act, 1922. (ii) Whether the same sum was the profits of the assessee-firm's business and therefore liable to excess profits tax under the Excess Profits Tax Act.

Issue (i): Whether the sum of Rs. 56,260 formed part of the assessee-firm's profits for income-tax assessment under Section 26 of the Indian Income-tax Act, 1922.

Analysis: Section 26 proceeds on the basis that where a change has occurred in the constitution of a firm, assessment is to be made on the firm as constituted at the time of assessment, with the previous year's income apportioned among the partners entitled to receive it. On the Tribunal's finding, the profits of the old undertakings were treated as profits of the firm for the purposes of that assessment. That finding was conclusive for the income-tax reference.

Conclusion: The sum of Rs. 56,260 was rightly treated as part of the assessee's profits for income-tax assessment. This issue was decided against the assessee.

Issue (ii): Whether the same sum was the profits of the assessee-firm's business and therefore liable to excess profits tax under the Excess Profits Tax Act.

Analysis: For excess profits tax, the material question was whether the amount represented the profits of the assessee's own business during the accounting year. The Tribunal's recorded finding showed that the profits of the old undertakings were divided between the original partners and the administratrix of the deceased partner. If the amount belonged to the old concern and was merely received or recovered by the reconstituted firm for distribution, it was not the resultant profit of the assessee-firm's own business. The statutory scheme of the Excess Profits Tax Act applies only to profits of the assessee's business, and not to sums belonging to another business or another beneficial owner.

Conclusion: The sum of Rs. 56,260 was not liable to excess profits tax in the hands of the assessee-firm. This issue was decided in favour of the assessee.

Final Conclusion: The reference succeeded only in part: the amount was assessable under the income-tax provisions, but it was not chargeable to excess profits tax as the profits of the assessee-firm's business.

Ratio Decidendi: A sum received by a reconstituted firm but found to belong to the old undertaking and to be distributable to persons entitled under the old arrangement is not the profits of the reconstituted firm's business for excess profits tax purposes, even if it can be brought to assessment under the firm-assessment provisions of the income-tax law.

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