This Supreme Court decision in Commissioner of Income-Tax, West Bengal v. A. W. Figgies & Co. and Others [1954 SCR 173] establishes a critical precedent concerning the interpretation of Section 25(4) of the Indian Income-tax Act, 1922. The primary legal issue centered around whether a firm that underwent several reconstitutions over decades, and was eventually succeeded by a private limited company, remained the same taxable entity throughout its existence, thus being entitled to relief under the said provision. The Court upheld the view that for the purposes of Section 25(4), a firm can be treated as the same entity despite changes in partnership, provided the business continuity remains unbroken and is not disrupted by dissolution or external succession. This judgment emphasized substance over form, protecting firms from being denied statutory tax benefits due to routine internal changes in constitution. It clarified the scope of succession and established jurisprudence supporting business continuity and interpretative pragmatism in taxation matters.

Keywords: Income-tax Act 1922, Section 25(4), partnership firm, tax relief, firm succession, business continuity, reconstitution, legal entity, income-tax jurisprudence, corporate conversion

B) CASE DETAILS

i) Judgement Cause Title: Commissioner of Income-Tax, West Bengal v. A. W. Figgies & Co., and Others

ii) Case Number: Civil Appeal No. 77 of 1952

iii) Judgement Date: 24th September 1953

iv) Court: Supreme Court of India

v) Quorum: Mehr Chand Mahajan, S.R. Das, and B.K. Mukherjea JJ.

vi) Author: Justice Mehr Chand Mahajan

vii) Citation: (1954) SCR 173

viii) Legal Provisions Involved: Section 25(4) of the Indian Income-tax Act, 1922

ix) Judgments Overruled by the Case (if any): None explicitly overruled

x) Case is Related to Which Law Subjects: Taxation Law, Corporate Law, Business Law

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The central contention in this case revolved around the interpretation of Section 25(4) of the Indian Income-tax Act, 1922, which provides tax relief where a business, originally taxed under the 1918 Act, is succeeded by another person or entity. The dispute was whether the firm, which underwent multiple changes in partnership over the years and was later converted into a limited company, constituted the same taxable entity for the purpose of Section 25(4) relief. The Income-tax authorities contested the relief, asserting that a change in partners constituted a new entity. The Tribunal and the High Court rejected this view, holding that the firm remained the same in substance despite partner reconstitution. The Revenue appealed to the Supreme Court, which examined the evolution of the firm and the statutory language of Section 25(4) to settle the issue.

D) FACTS OF THE CASE

The assessee was originally a partnership firm known as A. W. Figgies & Co., engaged in tea brokerage. The firm paid tax under the Income-tax Act of 1918. It had three founding partners: Mathews, Figgies, and Notley. Over the years, the constitution of the firm changed several times. In 1924, Mathews retired and his share passed to the remaining two. Squire joined in 1926, and Figgies exited in 1932. The firm from 1932 to 1939 comprised Notley and Squire. Hillman joined in 1939, and after further retirements and the joining of Gilbert in 1945, the firm operated with Gilbert, Squire, and Hillman until its conversion into a private limited company in 1947. There was continuity of the business throughout these years, with no actual dissolution or break in business identity. The firm applied for relief under Section 25(4) on the ground that it had paid tax under the 1918 Act and was succeeded by a company. However, the Income-tax Officer denied the relief, claiming a different firm existed in 1947 compared to the one taxed under the 1918 Act due to partner changes.

E) LEGAL ISSUES RAISED

i) Whether a firm that undergoes changes in its partners but continues the same business can be considered the same entity for the purposes of Section 25(4) of the Indian Income-tax Act, 1922?

ii) Whether such a firm, when converted into a private limited company, can claim exemption from tax on the transitional year income as per the relief provided under Section 25(4)?

F) PETITIONER/ APPELLANT’S ARGUMENTS

i) The counsels for the Petitioner / Appellant submitted that Section 25(4) relief was only available if the same partnership that was taxed under the 1918 Act existed at the time of succession. They argued that since the firm had undergone several changes in partners, the identity of the firm had changed, thereby disqualifying it from the relief.

They contended that under partnership law, a firm is not a legal entity but a collective of its partners. Consequently, any change in the partnership alters the identity of the firm itself. The firm in 1947 could not be the same as that in 1939, and hence, relief under Section 25(4) was inapplicable. They further submitted that if such relief were permitted, it would enable tax evasion through internal changes in firm structure while maintaining outward continuity, thus defeating the objective of the statute.

The appellant placed reliance on the literal interpretation of the term “person” in Section 25(4), arguing that only the same legal person originally taxed should be entitled to relief.

G) RESPONDENT’S ARGUMENTS

i) The counsels for the Respondent submitted that Section 25(4) provided relief to a “business” rather than to individual partners. Therefore, even if the partners changed, the business identity remained intact, entitling the firm to relief.

They asserted that there was no dissolution at any stage—only changes in constitution occurred. The partnership deeds specifically stated that retirement or admission of partners would not dissolve the firm. The same business—tea brokerage—was carried on under the same firm name, at the same location, and in the same capacity. The firm was converted into a private limited company, not taken over by an external entity. As per judicial principles, the substance of the business must be considered over form.

The counsel emphasized that income-tax law treats a firm as a distinct assessable entity, separate from its partners, under Section 3 and Section 55 of the Income-tax Act. The firm continued to be assessed as a unit even when its constitution changed.

H) RELATED LEGAL PROVISIONS

i) Section 25(4) of the Indian Income-tax Act, 1922 – Relates to tax exemption during succession of a business taxed under the 1918 Act.

ii) Section 3 – Charging section that recognizes firms as distinct entities.

iii) Section 26, Section 48, and Section 55 – Deal with assessments and treatment of firms under the Act.

iv) Indian Partnership Act, 1932, Sections 31 to 33 – Provide rules on admission, retirement, and reconstitution of firms without dissolution.

I) JUDGEMENT

a. RATIO DECIDENDI

i) The Supreme Court held that a mere change in the constitution of a firm does not constitute a new entity for the purpose of income-tax assessment. The continuity of the business from 1918 to 1947, despite changes in partners, was unbroken. Therefore, the firm was the same entity entitled to relief under Section 25(4). The Court emphasized that “the firm, not the partners, was the unit to whom the relief was due”.

The Court recognized that while partnership law sees the firm as a collection of partners, income-tax law recognizes the firm as a separate entity. Under tax jurisprudence, it is the business unit that matters, not the personnel changes. There was no dissolution, no division of assets, and no external succession. The firm remained intact until its conversion into a company.

b. OBITER DICTA 

i) The Court noted that a firm under income-tax law has a separate juristic identity distinct from its partners and can continue despite changes in personnel. This perspective differs from the narrow legalistic interpretation under partnership law, showcasing the divergence between general law and tax-specific doctrines.

c. GUIDELINES 

• Relief under Section 25(4) must be granted based on business continuity.

• Change in constitution of firm does not amount to succession.

• Income-tax Act recognizes firms as separate taxable entities.

• Reconstitution clauses in partnership deeds are significant in determining business continuity.

• Courts must distinguish between legal formality and economic substance.

J) CONCLUSION & COMMENTS

The judgment established a landmark precedent in Indian tax law by recognizing the continuity of business as a key determinant in succession cases under Section 25(4). The Supreme Court’s interpretation harmonized the taxation framework with practical business realities, preventing denial of legitimate reliefs due to procedural technicalities. It further distinguished the taxable identity of a firm from its internal composition, emphasizing the principle that taxation law demands its own rules of interpretation, distinct from general partnership doctrines.

This case continues to be a foundational precedent in resolving disputes on business succession, partnership reconstitution, and tax exemptions. It ensures tax relief provisions are interpreted purposively and not thwarted by formalistic objections regarding changes in partner identities.

K) REFERENCES

a. Important Cases Referred

[1] Punjab Co-operative Bank Ltd. v. Commissioner of Income-tax, Lahore, 67 I.A. 464 (1940)

[2] Lalta Prashad v. Gajadhar, I.L.R. 55 All. 28

[3] Chhoteylal v. Ganpat, I.L.R. 57 All. 176

[4] Virayya v. Parthasarathi, I.L.R. 57 Mad. 190

b. Important Statutes Referred

[5] Indian Income-tax Act, 1922, Sections 3, 25(4), 26, 48, 55

[6] Indian Partnership Act, 1932, Sections 31, 32, 33