TMI Blog2009 (10) TMI 635X X X X Extracts X X X X X X X X Extracts X X X X ..... 213 (in ITA No. 3401/Ahd./ 2002); Rs. 7, 56, 750 (in ITA No. 3402/Ahd./ 2002) and Rs. 43, 42, 030 (in ITA No. 3406/Ahd./ 2002). (2) On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income-tax(Appeals) ought to have upheld the order of the Assessing Officer." 3. The assessee in its Cross Objections has raised the following common grounds : "(1) On the facts and in the circumstances of the case as well as in the law, the Learned Commissioner of Income-tax (Appeals)-II, Baroda was right in rejecting the order of Assessing Officer and treating the award money as capital receipt and delete the same as income, in view of the principles laid down in the case of Banyan Berry 222 ITR 831 (Gujarat H.C.) (2) The respondent prays Hon ble Tribunal to confirm the order of Learned Commissioner of Income-tax (Appeals)-II, Baroda." 4. In all these appeals and Cross Objections, common issues are involved and hence they are taken up together for the sake of convenience. 5. The first four assessees being Shri Jamalsinh B. Barad, Shri Jibaba T. Barad, Shri Gambhirsinh B. Barad and Shri Ghanshyamsinh B. Barad were the partners of the firm, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial or quasi-judicial authorities reject the claims made and order any damages or sums payable by the partnership, such damages and sums shall forthwith be paid by the parties hereto in their respective profit-sharing proportions." 6. M/s. Rupal Construction (P.) Ltd. was incorporated on 21-11-1988. It continued to carry the said construction business after taking over it from the firm. After two years of the dissolution of the firm, the Arbitrator passed an award for a sum of Rs. 43 ,42 ,025. The date of order of the arbitrator is 20-4-1989 falling in the financial year 1989-90 relevant to the assessment year 1990-91. Each partner received the amount proportionate to his partnership share. To be specific, each partner received the following amounts : 1. Prabhatsinh Barad - Rs. 7 ,56 ,750 2. Gambhirsinh Barad - Rs. 7 ,75 ,213 3. Talamsinh Barad - Rs. 7 ,56 ,625 4. Ghanshyamsinh Barad - Rs. 7 ,56 ,750 5. Toravarsinh Barad - Rs. 7 ,56 ,625 6. Smt. Tiviben Tapubhai - Rs. 4 ,01 ,662 Initially the Department sough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ell supported by the decisions of Hon ble Madras High Court in case of P.V. Gajapathi Raju v. CIT [1989] 176 ITR 238, Kerala High Court in the case of S.P.V. Bank v. CIT [1980] 126 ITR 773 and in the case of CIT v. Kar Valves Ltd. [1987] 168 ITR 416 (Ker.). The Hon ble Gujarat High Court has also taken the same view in the case of Banyan Berry 222 ITR 831 which has been followed by the Hon ble ITAT vide order dated 6-8-2001 while deleting the addition made in case of M/s. Prabhat Construction Co. (Firm). It has already been held by the Hon ble IT AT Ahmedabad in the case of firm that provisions of section 176(3)( A) read with section 189(1) are not applicable. The Assessing Officer has not, brought on record any evidence that the appellant has run the business, the purpose of which was to earn profit. In the case of appellant, the only partners have done the act of realising the outstanding amount which can, not be termed as business as held in the above decisions. I fully agree with the contention of the appellant that in the absence of business activities, the amount of award cannot be taxed in the hands of appellant. There was not even a suggestion that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the partners in their profit sharing ratio, the authority of the partners to do all acts necessary and their status of agency of all for one and one for all continue to exist for the purpose of winding up of the affairs of the firm which remains outstanding as on the date existing, continue to exist until the winding up is complete. It cannot be said that something which is not otherwise envisaged in law was so plotted as a scheme or device by the partners for some purpose other than to bring about the legitimate consequence of a dissolution . 3.9 Hon ble High Court at page 861 has further observed as under : Section 47 envisaged that after dissolution of the firm, the authority of the partners continue. For application of section 47 , dissolution of the firm is an accepted premise. On the acceptance of that premise the necessary consequence is that the partners in their capacity as firm when they decided to dissolve the firm stop doing business in the firm. All the assets which belong to the firm on the date of dissolution cease to have a character of business or commercial assets. They assume the character of capital liable to be applied for payment of debts and distribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24-1-1968 and that amount received subsequently by way of arbitration award by sub-partnership was capital in nature and exempt under section 176(4). 3.13 Considering the facts and circumstances of the case and following the ratio laid down in the above decision of Hon ble Gujarat High Court in the case of Banyan Berry ( supra ) I hold that the Assessing Officer was not justified in taxing the amount of award in the hands of appellant considering the same as income . The addition made of Rs 7 ,56 ,750 , is therefore, directed to be deleted." 8. Before us, the ld. Departmental Representative submitted that provisions of section 176(3 A) are squarely applicable on the facts of the present case and the Hon ble Gujarat High Court in Banyan Berry s case ( supra ) observed that the sum is taxable in the hands of the recipient. He referred to various paras from that judgment, wherein the Hon ble Gujarat High Court had observed that such sum would be taxable in the hands of the recipient. Various paras of the order of Hon ble Gujarat High Court to which the ld. D.R. has drawn our attention are as under : " ( i )...For the purpose of section 176(3 A) discontinuance of bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been received only by the partners of the firm and has in fact been so received. (pp. 881 882) ( iii )Under section 189 of the Income-tax Act, 1961 , a legal fiction has been created for deeming the dissolved firm to exist and it is deemed to exist under the Income-tax Act only for the purpose of assessment and not for any other purpose. Section 189 cannot extend to income or profits which can be said to have accrued, arisen or been received after the discontinuance of such business or dissolution of the firm. Section 189 does not lay down procedure for assessment in such cases. Therefore, whether under section 47 of the Partnership Act, 1932 , or under section 189 of the Income-tax Act, the existence of the dissolved firm or continuing of the business by the firm has been assumed for a limited purpose and the fiction cannot be carried beyond the purpose for which it has been enacted. The provisions of section 189(1) read with section 176(3 A) make it clear that a firm cannot be deemed to be in existence in respect of assessment for any period after its dissolution or deemed to carry on business after it has parted with its business. Assuming that the dissolution of the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and as well as in the case of Hon ble Gujarat High Court. Once a Co-ordinate Bench has held that the facts in the present case are identical with the facts of Banyan Berry s case ( supra ) , then the decision rendered by the Hon ble Gujarat High Court in that case would automatically follow and would be binding on other Benches working in the jurisdiction of Hon ble Gujarat High Court. The ld. AR submitted that for invoking the provisions of section 176(3 A), following four conditions must be satisfied : ( i )There must be a discontinuance of a business, [the most important condition precedent for section 176(3 A) to apply to the recipient]. ( ii )Some amount must be received after the discontinuance of business by a person who was carrying on discontinued business or any other person. ( iii )Such recipient will be taxed if the person who carried on the discontinued business would have been taxed if the amount was received by such person before such discontinuance, and ( iv )The amount will be taxed in the hands of the recipient in the year of receipt. 11. Thus, if an amount is received but it is not a case of discontinuance of business then neither the firm, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not been discontinued or the firm has not been dissolved, that is to say, the fiction has been created only for the purpose of applying the machinery provisions in respect of the same assessee under the same status of the firm. Sub-section (3 A) of section 176 makes no such deeming provision treating the person who has carried on...." ( p. 877) 12. Another similar decision had, in fact, come from the Hon ble Gujarat High Court in the case of CIT v. Saurashtra Packaging (P.) Ltd. [2003] 259 ITR 520, where one of the ex-partner being a company had taken over the running business of partnership firm and had received refund of sales tax paid by the partnership before dissolution. On this aspect, the Hon ble Gujarat High Court held that provision of section 176(3 A) is not applicable on the facts of the present case as it can be applied only when there was discontinuance of business. The ld. AR further submitted that there is no AOP of ex-partners and relied on the following cases : ( i ) CIT v. M.H. Sanjana Co. Ltd. [1925] 2 ITC 110 ; ( ii ) Kaniram Ganpatrai v. CIT [1953] 23 ITR 314 (Pat.); ( iii ) Mettur Sandalwood Oil Co. v. CIT [1963] 47 ITR 781 (Mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch discontinuance." There are clear circumstances described in the above section as to when some receipt by the recipient would be charged to tax, in the year of receipt. It is "where any business is discontinued in any year". Thus for invoking section 176(3 A) the foremost finding required to be given by the authorities is that business is discontinued. In the present case, it is an undisputed fact that business has been taken over and continued by M/s. Rupal Construction Co. Therefore, the very first condition for invoking section 176(3A) did not satisfy. In this regard, following observations of the Hon ble Gujarat High Court in Banyan Berry s case ( supra ) are important and are reproduced as under : ( i )Ordinarily, under the Income-tax Act assessment is made for the assessment year in respect of the income earned by the assessee during the previous year ending before the commencement of the assessment year. Sections 170 and 176 both provide exceptions to the rule and permit assessment of the income of the year during the same year, where business is discontinued. ( ii )Therefore, the conclusion, in our opinion, is irresistible, that section 189(1) by itself does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he discussion whether the receipts in relation to the claims arising out of construction of the dam at Mazam Irrigation work was a receipt of a discontinued business or of a business which was the subject-matter of succession. 14. In addition, the ld. AR has rightly relied on the decision of the Hon ble Gujarat High Court in Saurashtra Packaging (P.) Ltd. s case ( supra ). The Head Notes from the decision are reproduced below for the sake of convenience : "The assessee-company was one of the partners of a firm. The firm stood dissolved with effect from 1-4-1983 , and the business of the firm was taken over as a going concern by the assessee-company with effect from 1-4-1983 , in the accounting year relevant to the assessment year 1984-85. The assessee received sales tax refund of Rs. 33 ,303 in the previous year relevant to the assessment year 1984-85 and Rs. 12 ,887 as sales tax refund in the previous year relevant to the assessment year 1985-86. The Assessing Officer included these two amounts in the total income of the assessee for these two years. The Tribunal took the view that the amount of sales tax refund received by the assessee-company in the assessment years 198 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm is dissolved, the assessment in the total income of such firm can be made by the ITO as if no such dissolution had taken place. Section 189 gives a firm a life for the purposes of assessment under the Act. It does not provide for assessment of the partners of the dissolved firm. For the sake of convenience, we reproduce head notes from the decision as under : "A careful reading of section 189 and sections 176(3 A) and 176(4) makes it abundantly clear that the Income-tax Act contemplates that where a firm is dissolved, the assessment of the total income of such firm shall be made by the Income-tax Officer as if no such dissolution had taken place. The same is the position in the case of discontinuance of the business of the firm. Section 189 keeps the firm alive for the purposes of assessment under the Act despite its dissolution. It does not provide for assessment of the partners of the dissolved firm which was the position under section 44 of the Indian Income-tax Act, 1922, prior to its amendment in the year 1958 and which is the position under section 159 of the 1961 Act in respect of the assessment of the legal representative of a deceased assessee. This section, on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed on its total income as if no such dissolution has taken place, in respect of the income earned prior to dissolution but received after dissolution. Further, in that case also, there was a discontinuance of business in the year of receipt. The Hon ble Kerala High Court in CIT v. Excel Productions [1996] 217 ITR 528 held that in a case, where there was only a change of situation of the firm, but business continued by newly constituted firm, then subsidy granted by the State Government would accrue to the firm as originally constituted and section 176(3 A) had no application. 16. ITAT, Third Member Bench in Asstt. CIT v. HYT Engg. Co. (P.) Ltd. [2005] 276 ITR (AT) 199 (Pune) held in a case where cash compensatory assistance was received by a company to which business was sold for a lump sum consideration that the sum so received cannot be taxed in the hands of the assessee-company by virtue of section 176(3 A) as business continued by the successor company. It is clearly held therein that provision of section 176(3 A) would be applicable when there was a discontinuance of business. 17. From a combined reading of all these authorities, we call out the following pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... / 342/13/K dated 7-9-1987 and its subsequent amendment dated 31-5-1988. The undersigned is appointed as Sole Arbitrator under the above quoted memoranda of Government of Gujarat for deciding disputes mentioned therein between the parties subject to certain conditions. One of the conditions is : All awards shall be in writing and in case of claims for which the amount of award is Rs. 1 lakh or above the awards shall be in writing with detailed reasons for the amount awarded as per clause No. 52 of the agreement". Later on parties also entered into arbitration agreement (in the form prescribed by the Govt. of Gujarat) on 17-9-87 and 24-2-89. The following in brief are the reasons for my award. 2. L.C. B, tender for the above work was accepted in favour of the claimants M/s. Prabhat Construction Co. under agreement No. LCB/1 of 1983-84 of the E.E. Sipu Project On, Desa. Accepted tender amount was Rs. 5 ,91 ,17 ,814.50 against estimated amount of Rs. 5, 06, 63, 000 put to tender. The accepted tender amount is about 16.688 per cent above the estimated amount put to tender. The estimate was based on SOR of 1982-83. Work order date was 24-2-1984 and with stipulated 48 months ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the award : ( i )It related to the work awarded to the firm M/s. Prabhat Construction Co. ( ii )Agreement to refer the dispute to arbitrator was between M/s. Prabhat Construction Co. (Claimants) and Government of Gujarat (Respondents). ( iii )This reference was on 7-9-1987 at the time when the firm was in existence. Subsequent event on 31-5-1988 was only an amendment to the original reference. ( iv )In respect of that work, the additional claims were pursued by the firm which are described on page 2 of the Appendix by the arbitrator in the award. ( v )The arbitrator has pointed out that 82 running accounting bills upto 31-3-1989 for cumulative total gross amount of Rs. 5 ,37 ,55 ,297 were paid to the firm. ( vi )The additional claims Interim award was also announced and published on 16-12-1988. ( vii )Quantification of award was finally decided by the arbitrator vide its order dated 28-2-1989. Since the time claims were filed, they pertained to the work carried on by the predecessor firm, namely M/s. Prabhat Construction Co. and continued to be pursued with arbitrator, then in our considered view award has accrued prior to dissolution but it is only th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m had been made part of the dissolution deed in question, the same result would have flown from the provisions of section 47 of the Act . In Banyan Berry case considering the effect of the agreement, the Tribunal held the firm to be in existence. The High Court observed at page 856 as under: Considering the legal effect of these terms in the agreement by the Tribunal for holding in favour of continuation of existence of firm were wholly irrelevant and unwarranted. In fact, the conclusion files in the face of the provisions of the Partnership Act . While dealing with section 189(1) read with section 176(3 A) the High Court observed that the firm cannot be deemed to be in existence in respect of the assessment for any period after the dissolution or deemed to carry on business after it has parted with its business. Hence, after considering the overall aspect of the case, we are of the opinion that the above judgment of the High Court is squarely applicable in the case in hand. The appeal of the assessee, i.e., ITA No. 387/97 is allowed. The ld. Assessing Officer is directed not to tax the amount of arbitration award, i.e., Rs. 42, 43, 025 in the hands of the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a ) held that mere distribution of asset on dissolution of the firm or efforts undertaken by the partners to realize the asset or actionable claim would not tanta- mount to carrying on of business for the purposes of applying the provisions of section 176(3 A). Some of the observations in this regard as made in the above referred judgment are as under : " ( i )There is ample authority for the proposition that the realisation of assets by a person in charge of the winding up of the business owned by a person or in charge of winding up of the entity is not an activity which can ordinarily be called business and cannot amount to carrying on business on that ground alone. (p. 857) In CIT v. National Mills Co. Ltd. (In liquidation) [1958] 34 ITR 155 (Bom.), Chief Justice Chagla stated the general principle (at page 160) : The assessee may stop doing business altogether, and these assets may cease to have the character of business or commercial assets. Then, they take on an entirely different character. They become capital assets, and qua those assets the assessee is not carrying on any business, but qua those assets the assessee has become their owner. As an owner the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1987] 168 ITR 416 (Ker.), when the revenue sought to tax the compensation received by and outstanding dues from customers on being realised by the company whose business was taken over by the Government and it held that after takeover of its business by the Government if the company is busy realising the compensation from Government and outstanding dues from customers, it cannot be held to be doing any business. (p. 861) ( v )If in that light the facts of the present case are viewed, the firm had parted with its business apparatus to the newly incorporated company, it has retained the actionable claim in respect of construction of the dam at Mazam Irrigation Project, which was already completed including the undisputed payment having been received by the assessee. Only the disputed claim regarding that completed project remained outstanding was retained by the firm. The partners of the firm manifested their intention not to carry on business except to the extent of realising the actionable claim outstanding against the Government in respect of the transaction completed before transfer of the business to the company and after dissolution of the firm they acted in unison in term ..... X X X X Extracts X X X X X X X X Extracts X X X X
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