KANIA, C J - (1.) This is a reference made by the tribunal of Appeal under Section 66(1) of the Indian Income-tax Act, in respect of the assessment of Messrs. Motichand and Devidas, Solicitors, for the accounting year 1939. The relevant facts are these.
(2.) The firm of Messrs. Motichand and Devidas was carrying on business, as attorneys of this Court, since 26 January, 1909. The first partnership deed, referred to in this reference, was dated 29 October, 1926, and was executed between Mr. Motichand G. Kapadia and Mr. Devidas J. Desai, they sharing the profits and loss equally. A fresh partnership deed dated 15 July, 1936, was executed when Mr. Tanubhai, son of Mr. Devidas, was admitted as a partner. The shares of the partners were then readjusted, Mr. Motichand got seven annas, Mr. Devidas got seven annas and Mr. Tanubhai got two annas. The shares of the partners were subsequently changed to seven annas, five annas and four annas respectively, according to the writing dated 20 November, 1937. Mr. Devidas died on 8 July, 1940, with the result that on that day the firm was dissolved. A notice dated 11 September, 1940, was published in the government Gazette and other newspapers notifying the dissolution of the firm on 8th July, 1940. A fresh partnership agreement was entered into on 12 September, 1940, between Mr. Motichand and Mr. Tanubhai, sharing profits and loss equally with effect from 8 July, 1940.
(3.) The partnership carried on business at different places. On 8 July, 1940, it was carrying on business in a building in Nanabhay Lane. That was originally owned by the partnership but was sold to Mr. Devidas. On 8 July, 1940, the partnership was paying rent to Mr. Devidas for the premises occupied by it. The partnership maintained books of account and in the previous years the partners were assessed on the footing of the amounts withdrawn by them individually. That was taken as their income or profits from the business of the firm. For the assessment year 1940 a question arose about the liability of the firm for its income for the accounting year 1939. On behalf of the assessees it was contended that on the death of Mr. Devidas on 8 July, 1940, the firm was dissolved and its business was discontinued. As the firm of Messrs. Motichand and Devidas was assessed to tax under the Act of 1918, the firm which was in existence up to 8 July, 1940, claimed relief under Section 25(3) of the Act. On behalf of the Department it was urged that the firm had not discontinued its business of the old firm, and therefore no relief under Section 25(3) of the Act could be given to them. In that connection it was pointed out that when Mr. Tanubhai was admitted as a partner in 1936 there was change in the constitution of the firm, and if that firm is considered to be the firm which had discontinued its business, that firm had not been assessed to income-tax under the Act of 1918. It was contended that a mere change in the constitution of the firm did not amount to discontinuance of the business of the old firm and relief under Section 25(3) was not permissible under the circumstances. In respect of the amount for which the firm was liable to be assessed, it was urged by the Department that withdrawal is not a method of keeping accounts under Section 13 of the Act, and under that section withdrawal could not be considered a method of accounting regularly employed by the assessees. To put it at its highest it may be considered a rough and ready method of accounting. Under the Act only two methods are recognised as methods of accounting, viz., mercantile method and receipts and "cash basis. As the amounts withdrawn do not amount to a method for accounting, the Income-tax Officer was entitled to adopt the cash receipts method in assessing the income. On these facts the Tribunal has referred the following two questions for the Courts opinion : (1) Whether, in the circumstances of the case, there was discontinuance of the business or profession carried on by Messrs. Motichand and Devidas on 8 July, 1940, when Mr. Devidas died, so as to entitle the assessees to the relief provided by sub-section (3) of Section 25 of the Indian Income-tax Act, 1939 ? (2) Whether, in the circumstances of the case, the applicants were properly assessed on the receipts or "cash basis ?;