TMI Blog2015 (7) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... 80,000 was assessable in the hands of the assessee-firm in the year of receipt despite dissolution and discontinuance of its business by virtue of sub- s. (3A) of s. 176 r/w s. 189 of the Act. Nowhere it is the case of Assessing Officer that the said sum belong to the period during which the assessee firm was in existence and carried out its business. We are of the opinion that as there is no evidence to suggest that the transaction allegedly noted on loose paper with name analogous to the name of the assessee firm pertains to the year, in which the assessee firm was in existence. Admittedly the assessee firm has been dissolved on 31-03-2002 and alleged transaction is found in December, 2003, no income can be brought to tax treating unexplained income of the assessee in the A.Y. 2004-05. We, accordingly, allow the contention of the assessee on this specific plea and quash the proceedings initiated u/s. 147 and cancel the assessment framed by the Assessing Officer and upheld by the CIT(A). - Decided in favour of assessee. - ITA No. 1053/PN/2013 - - - Dated:- 19-12-2014 - SHRI R.S. PADVEKAR AND SHRI R.K. PANDA, JJ. For The Appellant : Shri Naresh Kumar For The Res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 148 of the Act and served on the assessee on 30-03-2011. In response to notice u/s. 148, the assessee filed a letter dated 12-04-2011 and also filed the return of income showing Nil income on 12-04-2011 itself. The Assessing Officer provided the assessee with the incriminating documents seized during the course of search and other related documents and also asked the assessee s explanation with respect to the notings made on the seized documents found and seized during the course of search action against Shri Sohanraj Mehta. The assessee submitted its reply vide letters dated 7/12, 15-12, 21-12 and 26-12 and also stated that the assessee firm was dissolved on 31.03.2002 and also filed copies of the profit and loss account and the last return filed for A.Y. 2002-03, however, the assessee denied to have received the aforesaid amount. The Assessing Officer, however did not accept the explanation furnished by way of various submissions by the assessee. The Assessing Officer noted that the seized documents found at the residence of Shri Sohanraj Mehta, C F of RMD Gutka Group had been written by him and also that the modalities of the method of transactions entered into by the RMD gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee also pleaded that the provisions of Sec. 189(1) cannot be interpreted to bring to tax any income when the assessee was not in existence nor the business was carried out. The contention of the assessee did not find any favour and same was rejected. Now, the assessee has challenged the finding of the Ld. CIT(A) questioning the legality and validity of the notice issued u/s. 148 of the Act. The reasons given by the Ld. CIT(A) for rejecting the contention of the assessee are as under: 3.5. The appellant has also raised the issue of initiating assessment proceedings against a non-existing person and has also placed reliance on this decision of the apex court that no assessment can be made on a dead person. In this regard sub-section (1) of section 189 stipulates that where any business or profession carried on by a firm has been discontinued or where there has been dissolution of firm, the assessment shall be made as if such discontinuance or dissolution has not taken place. While making such assessment all the provisions of the I.T. Act, 1961, including those relating to imposition of penalty or any other sum, shall so far as may be applicable to the assessment. The Alla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 Act in respect of the assessment of the legal representative of a deceased assessee. Sub-s. (3A) of s. 176 specifically provides that where any business is discontinued in a particular year, any sum received after the discontinuance shall be deemed to be the income of the recipient and shall be charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance. This sub-section thus creates a legal fiction. It is intended to resolve all doubts in regard to taxability of such income on account of discontinuance of business in the year of receipt Or to put it differently, it makes an exception to the general rule that in order to hold the receipts chargeable to tax, in the year of its receipt, the business must be in existence in that year. 3.7. The Kerala High Court has also held in CIT Vs Paily Pillai Co. (2000) 243 ITR 557 (Ker) that amount received by the firm after its dissolution on the basis of an arbitration award was assessable in the hands of dissolved firm u/s 176(3A). Thus, applying the rationale of the Supreme Court s decision i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se firms. He argues that Sec. 189(1) creates fiction but it has a limited application and the said provision cannot be interpreted to bring to tax even the transactions which are allegedly took place after the dissolution of the firms and discontinuance of the business. The Ld. Counsel relied on the following decisions in support of his plea. i. CIT Vs. Bhagat C0. 182 ITR 212 (del.). ii. George Talkies Circuit Vs. CIT 171 ITR 386 (Raj.). iii. Banyan Berry Vs. CIT 222 ITR 831(Raj.). 6. He submits that the proceedings initiated by the Assessing Officer and issuance notice u/s. 148 of the Act to the assessee for the A.Y. 2004-05 are totally bad in law and have to be cancelled. He pleaded for cancelling the notice issued by the Assessing Officer u/s. 148 to the assessee for the A.Y. 2004-05. Per contra, the Ld. DR for the Revenue submits that the Assessing Officer has taken right action as during the course of search and seizure action against Shri Sohanraj Mehta, C F of RMD Gutka Group the documents were seized from which it was revealed that the assessee firm was paid ₹ 1.5 Crores in December, 2003. He argues that there is no bar to take action against the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Compilation). 8. In this case the Assessing Officer has completed the assessment rejecting all the contentions of the assessee and completed the assessment u/s. 144 r.w.s. 147 of the I.T. Act, bringing to tax of ₹ 1.5 Crores as an unexplained income of the assessee for the A.Y. 2004-05. The contention of the assessee is that in December, 2003, when the alleged transaction was found recorded on the loose sheets from Shri Sohanraj Mehta during the course of search and seizure action u/s. 132(1) of the Act, at that time the assessee firm was not in existence at all and business was also discontinued. As per the documents filed by the assessee more particularly the extract from the register of the firm from the office of Assistant Registrar of the Firm, Pune (Page No. 3 of the Compilation), it is seen that the Assistant Registrar has made the changes in its record by passing the entry on 16-06-2003 by making the endorsement that the assessee firm has been dissolved on 31-03-2002. We also find that the assessee has taken a consistent stand before the Assessing Officer as well as before the Ld. CIT(A) that after the A.Y. 2002-03, no business was carried out nor any return of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22 was issued in the name of the assessee firm which was served on Shri Radhakishan, who had taken over the business of the assessee firm. There was a delay in filing the return of income of dissolved firm for the A.Y. 1959-60 and hence, the penalty was levied. It is clear from the facts on record that the issue of penalty was in respect of assessment year during which the assessee firm was in existence and return was not filed in time by the persons who had taken over the business of firm and continued the business. 12. In the case of Nagarmal Baijnath (supra) the following substantial question of law was before the Hon ble Supreme Court whether, on the facts and in the circumstances of the case, the income tax assessments for the years 1946-47 and 1947-48 and excess profits tax assessments for the chargeable accounting periods ending November 4, 1945, and March 31, 1946, made on Messrs. Nagarmal Baijnath, a firm, which was dissolved and whose business was discontinued at the time of the assessments, were validly made? The said assessee firm did business during the accounting years relevant to the A.Ys. 1946-47 and 1947-48. The said firm was dissolved by a deed of dissoluti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said firm prior to its dissolution and the balance amount of ₹ 9,80,000 was received after dissolution. The contention of the assessee is that on the date of receipt of the said amount, the assessee-firm being not in existence, the said amount cannot be held to be the receipt of the assessee-firm and cannot be assessed to tax. We have carefully considered this submission. The relevant provisions of the IT Act, having a bearing on determination of the point in issue, are ss. 189 and 176 of the IT Act. Sec. 189 provides for the assessment of a firm which has been dissolved or whose business has been discontinued. Sub-s. (1) of the said section, which is material for the present purpose, is in the following terms: 189. Firm dissolved or business discontinued.-(1) Where any business or profession carried on by a firm has been discontinued or where a firm is dissolved, the ITO shall make an assessment of the total income of the firm as if no such discontinuance or dissolution had taken place, and all the provisions of this Act, including the provisions relating to the levy of a penalty or any othersum chargeable under any provision of this Act, shall apply, so far as may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, for the purposes of levy of tax under this Act, the dissolved firm is deemed to be in existence. Sub-s. (3A) of s. 176 specifically provides that where any business is discontinued in a particular year, any sum received after the discontinuance shall be deemed to be the income of the recipient and shall be charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance. This sub-section thus creates a legal fiction. It is intended to resolve all doubts in regard to taxability of such income on account of discontinuance of business in the year of receipt. Or to put it differently, it makes an exception to the general rule that in order to hold the receipts chargeable to tax, in the year of its receipt, the business must be in existence in that year. 8. In the instant case, the business of the assessee-firm was discontinued from 31st March, 1975 when the firm was dissolved. A sum of ₹ 9,80,000 was received after the discontinuance of the business. The recipient was, however, the assessee-firm itself. That is so because by virtue of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter discontinuance for the purpose of assessment under Chapter IV. It was also observed that the above observations would squarely apply to a case where the dissolution of the partnership firm leads to discontinuance of its business. 10. The learned counsel for the assessee referred to a number of decisions in support of the contention that the analogy of s. 159 would apply to s. 189. We find it difficult to accept the above contention because, in our opinion, the scheme of these two sections is completely different. Sec. 159 is akin to s. 44 of the IT Act, 1922, as it stood before its amendment by the 1958 Act. The scheme of assessment of income of a dissolved firm originally was same as of a deceased assessee but that scheme is no more applicable for assessment of income of dissolved firms. Now, under s. 189 or under the amended s. 44 of the 1922 Act, the ITO has to make an assessment of the total income of the firm as such as if no such discontinuance or dissolution had taken place. The analogy of s. 159 is, therefore, not applicable to interpretation of s. 189. It may also be pertinent to mention that s. 176(3A) deals with all assessees whereas s. 189 deals with only bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of s. 189 when the firm had not carried on any business and was not in existence (because it was dissolved). Sec. 2(31) of the Act defines persons and a firm has been included in the definition of person. It has not been brought on record as to who are the persons on behalf of the deceased partners who have inherited the property of such deceased partners. If the firm is not in existence then assessment could be made of the persons who are the legal heirs. The fact that the firm was not in existence during the asst. yr. 1982-83 has not been stressed and the finding which has been recorded by the Tribunal is that the undisputed fact in the instant case is that the remaining two partners who comprised the firm from 1953 also died about 5-10 years back . Sec. 189, therefore, cannot be invoked in such a situation where the firm was not in existence and had not carried on any business. The finding which has been recorded by the Tribunal that no business was carried on by the firm in the asst. yr. 1982-83 and the provisions of s. 189 cannot be invoked is unassailable. For the purpose of capital gains also, the same position of law is applicable. The assessment in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm and partners in the individual capacity, it would not have been possible to proceed against the partners in their individual capacity in the absence of this provision to implement the provisions of the Act in respect of the liability which had already been incurred. In our opinion, s. 189 cannot extend to income or profits which can be said to have accrued, arisen or received after the discontinuance of such business or dissolution of the firm. 45. In this connection, we may also notice that s. 189 does not lay down procedure for the assessment in such cases. However, s. 176 which deals with discontinuance of business lays down the procedure that where any business or profession is discontinued in any assessment year, the income of the period from expiry of previous year for that assessment year upto the date of such discontinuance may be charged in the same assessment year. It also provides separate assessments to be made for the completed assessment year and part of the assessment year that is to say that the provision is made for making assessment upto the date of discontinuance of the business only. In the case of dissolution, s. 176 specifically does not talk of dissol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by it prior to its dissolution or discontinuance of business by it. Fiction created under s. 189 does not project into the future transactions. We are fortified in our conclusion by high authority. Sec. 189 of IT Act, 1961 is corresponding to s. 44 of the Indian IT Act, 1922 under Chapter IV. In Shivram Poddar vs. ITO (1964) 51 ITR 823 (SC) : TC 34R.800, Shah, J. as he then was speaking for the Court said : The object of enactment is clear. It is to authorise assessment of tax on income or gains earned in a business, profession or vocation carried on by a firm or association before discontinuance of business, profession or vocation or before dissolution of association...... In CIT vs. Raja Reddy Mallaram (1954) 51 ITR 285 (SC), the Supreme Court while dealing with the case of assessment of a dissolved AOP under s. 44 of the 1922 Act (now corresponding s. 177 in the Act of 1961) said, s. 44 ensures, by a fiction, the continuity of personality of the AOP even after its dissolution for the purpose of assessment and procedure for assessment after its dissolution of its pre-dissolution income of an AOP is the same as that of assessment while it continued to exist. By virtu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s connection it is also apposite to note that s. 189 is a machinery section and is not a charging section and it has been enacted for the purposes of continuing for the application of the machinery provision of the assessment and imposition of tax liability already incurred by the firm while in existence or during the course when business was carried on by the firm. By extending machinery provision, the substantive levy cannot be effected by charging an entity which is not in existence. It may be noticed that s. 189 assumes the continuance of the business or existence of the firm only for the purpose of assessment and not for the purpose of imposing charge which had not already come into existence before such discontinuance or its dissolution. There is always time lag between when the tax becomes due and when it crystallise into a realisable amount. Income-tax is a levy on the income earned during a specified period, viz., a year. Income of the year is known at the end of the year. Hence, on the completion of the previous year when total income of the assessee for the year becomes known, the levy under the Act comes into existence. However, its computation and assessment resulting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is deceased, shall be jointly and severally liable for the amount of tax, penalty or other sum payable, and all the provisions of this Act, so far as may be, shall apply to any such assessment or imposition of penalty or other sum. Sub section (1) of section 189 creates a legal fiction. The effect of the fiction created by law is that notwithstanding the discontinuance of the business of a firm or the dissolution of a firm, assessment has to be made by the Assessing Officer of the total income of the firm as if no such discontinuance or dissolution has taken place. Counsel appearing on behalf of the assessee submits that this would be subject to service of notice under section 283(2). Whether and to what extent the provisions of Section 283(2) were complied with is a matter which would fall for determination in the appeal which is pending against the orders of assessment and those passed by the CIT (A). We may, only record the submission of the Revenue that the Petitioner was aware all along of the assessment proceedings and participated in the assessment. In the present proceedings, the ambit and jurisdiction of this Court is limited to a determination of whether the Director of I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or until the proceedings are disposed of, whichever is earlier. Having regard to the provisions of Section 132 that direction is lawful and cannot be faulted. The Petitioner is entitled, however, to take copies of extracts as may be required. 9. Counsel appearing on behalf of the petitioner has relied upon a judgment of the Punjab and Haryana High Court in Commissioner of Income Tax Vs. Rakesh Kumar[(2009) 313 ITR 305 (P H)] where the Division Bench held that since the person in whose name the search authorization was issued, had died prior to the issuance of the authorization and since the search warrant and panchanama were prepared in the name of a dead person, the authorization for conducting a search was invalid and void ab initio. In the present case, however, as noted earlier, the warrant of authorization has also specifically been issued in the name of the petitioner and his spouse. 20. It is clear from the observations of their lordships that it was an issue in respect of warrant of authorisation and not in the contest of completing the assessment of the dissolved firm. In our humble understanding the said decision is not helpful to the Revenue even if the petitio ..... 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