TMI Blog1986 (5) TMI 65X X X X Extracts X X X X X X X X Extracts X X X X ..... unting year is from 23-5-1978 to 31-3-1979. The assesses in this case are the joint receivers appointed by the Court to manage United Film Exhibitors, Palghat till the winding up of the firm was complete. 'Priya ' and 'Priyadarshini' are the two theatres constructed as well as owned by the firm 'United Film Exhibitors' which was carrying on the business of exhibition of cinematographic films and the firm used to be governed by the terms and condition of partnership deed dated 19-7-1971. Smt. Bhavani Kaimal, wife of P. K. Kaimal Smt. Fathima Ismail, wife of M. A. Ismail and Smt. P. K. Rahmathunnissa wife of M. B. Abdul Rahiman Mooppan and M. A. Muhammed Babu son of M. A. Ahmed Kutti Mooppan were minors and they were admitted to the benefits of partnership. The constriction of 'Priyadarshini' was completed in 1973 and it was inaugurated on 31-5-1973 whereas 'Priya' theatre was inaugurated on 20-8-1975 In 1975. Master M. A. Mayankutty Mooppan became a major and expressed his desire to join as a full-fledged partner of the firm. A new deed of partnership was executed on 4-6-1975. Master M. A. Muhammed Babu was admitted to the benefits of that partnership also. The first of three partie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the dissolved firm among the partners of the dissolved firm. He further stated that after taking stock of the situation and circumstance of the case plaintiffs can be appointed as receivers for the management of the two theatres for the purpose of protecting the interests of the partners of the dissolved firm. He directed the plaintiffs to deposit security for Rs. 10,000 in the Court for their receivership within two weeks. He also directed defendants 2 and 4 to hand over possession of the theatres to the plaintiff and he further directed to produce the account books of the dissolved form immediately and hand over money deposited in the bank to the plaintiff. The plaintiff's were directed to file statement of account regarding daily collections and expenses into the Court, once in every week regarding the running of the theatres. All amounts to be paid to the employees of the theatres and payment of other investible amounts have to be done by cheques by the plaintiffs as receivers. Therefore, by giving such and similar directness the sub-Judge allowed the receiver's petition whereas he dismissed the injunction petition by his common order dated 17-6-1978. Smt. Rahmathunnissa, Shr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assets of the firm is made as on today that is on 7-2-1980. There is the balance sheet attached to deed of dissolution. According to the balance sheet as on 7-2-1980, the amount remained to be distributed among the partners comes to Rs. 58,99,106.16. The assets of the firm shown in the schedule were stated to be incapable of division andit was agreed that all those assets including goodwill, money deposits, etc., be taken over by Smt. K. Bhavani Kaimal at the aforesaid valuation and other parties be paid the money equivalent of their respective shares, in the distributed assets of the firm. The books of account as well as balance sheet duly signed by all the parties are handed over to Smt. Bhavani Kaimal. The following amounts are allotted towards shares of each of the partners : Rs. (2) Smt. Fathima Ismail 15,19,991.41 (3) Smt. P. K. Rahmathunnissa 9,28,058.88 (4) Shri M. A. Mayankutty Mooppan 2,02,812.46 (5) Master M. A. Mohammed Babu 7,00,757.46 being the money of their shares in the distributed assets of the firm after adjusting initial payment of Rs. 5 lakhs on 24-1-1980. Thus, virtually, the cinema ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 160 and 161 of the Act, the liability of such a representative assessee was specified. According to the provision, the assessment is to be made as if the income was earned by the beneficiaries and the tax shall be levied and recovered in the same manner from a person represented by him. This follows that the assessment has to be made as those amounts were realised for and on behalf of the partners. In the present case, as the receivers represented the individual partners, the status to be adopted is that of those partners. 5. The ITO held that the joint receivers are managing the affairs of the business and they acted jointly for common purpose of producing income. As the beneficiaries have common purpose of running business and earning income through their representative, namely, the receivers, the status of the assessee undoubtedly is an AOP and the ITO under his assessment order dated 27-2-1982 determined the status as an AOP and determined the total income of the assessee at Rs. 3,82,130, and observed that advance tax paid of Rs. 1,83,000 has to be given credit to. 6. Aggrieved against the said decision of the ITO, the assessee carried the matter before the Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e dissolution of the firm, the learned Commissioner (Appeals) held, does not affect taxation of the income earned by the erstwhile members of the dissolved firm. He also held that after dissolution there is no ban, express of implied, in taxing such income. Therefore, he held that the income was brought to tax properly in the hands of joint receivers as they have derived the said income as a representative-assessees, representing the erstwhile partners. 7. We have heard Shri P. A. Francis and Shri T. G. N. Nair the learned advocates for the assessee and Shri M. M. Cheriyan, the learned senior departmental representative for the department. Besides, filing a paper book running into 56 pages the assessee's learned advocate on our request filed the receiver order passed by the sub-Judge, order passed by the Hon'ble Kerala High Court besides submitting written arguments. So also the learned departmental representative also filed written arguments running into 8 pages. Shri P. A. Francis argued at the first instance that there is no provision in the Act to assess a dissolved firm in respect of the income realised after the dissolution and during the winding up of the affairs of the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the dissolved firm, and not a charging section for any post-dissolution income of the dissolved firm. His argument continued that the portion of the provision containing the words in section 189(1) that 'all the provisions of this Act, including the provisions relating to the levy of penalty or any other sum chargeable under any provisions of this Act, shall apply, so far as may be, to such assessment' makes it clear that the applicability of all the provisions of the Act including those for penalty is only in respect of 'such assessment', that is to say, an assessment of a dissolved firm in respect of its pre-dissolution income. In order to strengthen his argument he brings to our notice the words 'in the course of any proceeding under this Act in respect of any such firm' in section 189(2) mean only those proceedings that could be taken in normal circumstances against a regular firm and not a dissolved firm. The words 'that the firm was guilty of any of the acts' in section 189(2) also indicate an act of the firm prior to its dissolution. According to the learned advocate the express mention of Chapter XXI in section 189(2), in order to describe the nature of the acts, make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment is made in the status of an AOP and not in the status of a dissolved firm. Once the firm is dissolved, the legal tie that binds the partners is broken and so there is no firm in existence from 22-5-1978. However, that does not mean that income from business carried on during the impugned accounting period would escape assessment. In CIT v. Indira Balkrishna [1960] 39 ITR 546 wherein the Supreme Court held that 'association of persons' as used in section 3 of the Indian Income-tax Act, 1922 ('the Act') means an association in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains. In the present case, after the dissolution of the firm, the business was carried on by the receivers. The income earned by the receivers also went to the partners only and, therefore, argues the learned departmental representative that the assessment in the status of an AOP is perfectly justified. He also argued that the decision of the Supreme Court in N. V. Shanmugham Co.'s case fully comes to support the assessment in this case. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted did not and could not have represented the individual interest of the erstwhile partners and, therefore, the question of taxing post-dissolution income in the hands of the individual partners does not arise. The existence of specific and defined interest in the profits did to make the earning, anytheless by an AOP. The business of running the theatres is an indivisible business, the control and management of which was in the hands of the receiver. Such a control was unified one. The receivers had joined for common purpose and had acted jointly. Had the receivers represented the individual interest of the erstwhile partners there would hedge been chaos in the business. The profits were earned on behalf of the persons who had common interest created by the order of the Court and on that account they constitute an AOP. The decision of the Supreme Court in N. V. Shanmugham's Co.'s case as well as the decision in Mohamed Noorullah's case may be referred in this context. In Mohamed Noorullah's case, a Mohammedan was carrying on the business of manufacture and sale of biddies of a particular brand. He died on 17-12-1942 leaving certain lakh rupees. The heirs of the deceased wanted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me, profits or gains. In that case the co-widows of a Hindu governed by the Mitakshara law inherited his estate which consisted of immovable properties, shares money lying in deposit and a share in a registered firm. Except for receiving the dividends from the shares and the interest form the deposits jointly, they had done no act which had helped to produce the income. Ultimately, the Supreme Court held the since there is no finding that the three widows combined in a joint enterprise to produce income they did not constitute an AOP. In Champaran Cane Concern v. State of Bihar [1963] 49 ITR 152 (SC) the question which fell for determination was whether the assessee was a partnership or a co-ownership concern belonging to two persons. The Supreme Court ultimately held that question is to be decided having regard to the facts and the circumstances of the case and they ultimately found that the facts and the circumstance of the case were consistent with the claim of the assessee that it is a co-ownership concern in which case the common manager was liable to assessment under section 13 of the Bihar Agricultural Income-tax Act, 1948. Therefore, the abovesaid two cases do not held us i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so does not affect the liability of any person who has after the adjudication represented himself or knowingly permitted himself to be represented as a partner of the insolvent." It is very clear from the above provisions that so far as it is necessary to wind up the affairs of the firm, a partner of a dissolved firm has got authority to bind the firm. So the concept that the firm came to an end even on 22-5-1978 which is admittedly the date of dissolution of the firm in this case and that no firm existed subsequent to that date is not correct. In our opinion, for purpose of winding up of the affairs of the firm, the firm existed and the mutual rights and liabilities of the partnership continued. In Saligram Ruplal Khanna v. Kanvar Rajnath AIR 1974 SC 1094, the Supreme Court held that after dissolution the partnership subsists merely for the purpose of completing pending transactions, winding up the business, and adjusting the rights of the partners and for these purposes, and these only, the authority, rights and obligations of the partners continued. Section 25 of the Indian Partnership Act speaks about the continued liability of the partner for the acts of the firm as follows ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in case of firm or association discontinued or dissolved. - (1) Where any business, profession or vocation carried on by a firm or other association of persons has been discontinued or where a firm or other association of persons is dissolved, the Income-tax Officer shall make an assessment of the total income of the firm or other association of persons as such as if no such discontinuance or dissolution had taken place. (2) If the Income-tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal in the course of any proceedings under this Act in respect of any such firm or other association of persons as is referred to in sub-section (1) is satisfied that the firm or other association is guilty of any of the acts specified in clause (a) or clause (b) or clause (c) of sub-section (1) of section 28, he or it may impose or direct the imposition of a penalty in accordance with the provisions of that section. (3) Every person who was at the time of such discontinuance or dissolution a partner of the firm or a member of the association, as the case may be, shall be jointly and severally liable for the amount of tax or penalty payable, and all the provisions of Chap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the business, profession or vocation, or before dissolution of the association, and to impose joint and several liability upon every person who was at the time of discontinuance of the firm or a member of the association or at the time of dissolution a member of the association." Shri P. A. Francis argued that from the above, it is very clear that section 44 was never intended to govern the income derived for post-dissolution period up to the winding of the affairs of the firm. However, having regard to the facts of the case and ultimate decision rendered by the Hon'ble Supreme Court those facts, we are not prepared to agree with the learned counsel for the assessee that section 44 does not concern itself to tax the post dissolution income up to the winding up of the firm. In the facts before the Hon'ble Supreme court, the firm was dissolved in February 1950. On 28-3-1955 notice was issued under the section 34, read with section 22(2) of the 1922 Act which was addressed to the assessee as a partner of the firm at the time of its dissolution calling upon him to submit a return of the income of the firm for the year ending on 31-3-1950. Therefore, obviously the notice is inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted decision. The reason why no provision is made to bring to tax the post-dissolution income up to the winding up of the firm is clearly given by the Hon'ble Supreme Court in the extracted portion of the judgment form pp. 827 and 828 given above. In the facts before us also what took place on 22-5-1978 was only dissolution of the firm but not discontinuance of business. The discontinuance of business can be said to have taken place on 22-2-1980 or on 7-2-1980 which fall very much after the close of the accounting period. To our understanding in Shivram Podar's case is a clear authority for the proposition that the firm only would be liable to the income earned up to discontinuance of business of the firm and the provisions of section 44 do not lay down anything contrary to the said proposition. Therefore, in view of the said decision, it is highly difficult for us to appreciate either that section 189 did not concern itself with the assessment of the post-dissolution period or the Legislature by oversight did not provide adequate machinery to tax such an income. Therefore, the primary argument that the impugned income in this case is not liable to tax as there is no machinery sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be conducted within three months of their orders dated 13-7-1978. However, ultimately, the matter was settled between the parties themselves and all the partners had chosen 7-2-1980 as the date on which the affairs of the firm should be wound up. They made adequate provision to meet the Income-tax liability for the assessment year 1979-80 also. From the facts and circumstances of the case, we have no hesitation to hold that all the affairs of the firm were settled up to 7-2-1980 and the firm was in existence for purpose of winding up and completing the transactions earlier undertaken by it up to 7-2-1980 and the ultimate deed of dissolution was dated 22-2-1980. Therefore, having regard to the facts and circumstances of the case, the dissolution of the firm took place on 7-2-1980 if not on 22-2-1980, and up to that date the firm continued. Section 47 is clear and it has stated that "after the dissolution of a firm the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners, continue not withstanding the dissolution, so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that one of the partners was a firm, and the partnership was assessed as an unregistered firm by ITO, and this assessment was upheld by the AAC. On further appeal, the Tribunal took the view that the partnership was not a 'firm' at all and assessed it in the status of an 'association of persons'. It was contended that the Tribunal had no power to uphold the assessment changing the status of the assessee but could only annul the assessment or remand the case to the ITO to make a fresh assessment on the assessee in the status of an 'association of persons'. It was held by the Punjab Haryanna High Court that : "(i) that the assessee was 'an association of persons' and not a 'firm'; (ii) the Tribunal had power to uphold the assessment changing the status of the assessee into that of an association of persons as the question whether the assessee should be assessed as an unregistered 'firm' or as 'an association of persons' was raised before the Income-tax Officer and the Appellate Assistant Commissioner and before the Tribunal also. 2. The Andhra Pradesh High Court in the recent decision in the case of Pannabai v. CIT [1985] 153 ITR 608 (FB) considered the competence of the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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