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TMI Blog1973 (3) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... r renewal of the registration of the firm under section 26A of the Act and on October 25, 1960, filed a return showing a nil income. It had already filed on March 15, 1960, an estimate of income declaring the status as a firm and the income for year ending April 30, 1960, at Rs. 40,000. In response to the notice issued by the Income-tax Officer, the assessee produced its account books and other evidence in its possession to substantiate the correctness of the return and an advocate appeared representing the assessee. The documents, books of account, and other evidence produced, disclosed the following facts : On April 25, 1960, the partners of the assessee-firm executed an agreement which is styled as an agreement of dissolution of partnership. After reciting the business of the partnership firm and the rights and liabilities of the partners under the deed of partnership dated August 1, 1948, it proceeded to state that the parties felt that the object with which the parties formed the partnership had been fulfilled and consequently they have " decided to get the said Indian Institute of Engineering Technology registered as a society under the Indian Societies Act and entrust the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said Institute and shall not belong to the partnership or to the parties hereto. 4. The parties hereto hereby release one another and each of them and their respective estate and effects and from all the covenants and provisions of the partnership deed dated 1st August, 1948, and from all claims and demands whatsoever in relation to the affairs of the said firm. " On December 27, 1960, the assessee informed its bankers of the dissolution of the firm with a request to transfer the funds lying with it in a current account to be opened. The governing body of the society held its meeting on June 21, 1962, checked the accounts for the year ending April 30, 1960, and accepted the accounts with a remark that the liability of Rs. 90,000 (Rupees 30,000 for each of the founder members) did not find a place in the balance-sheet. It was contended before the Income-tax Officer that the partnership which was conducting the business had been retrospectively terminated from May 1, 1959, that the profits earned by the assessee up to April 25, 1960, and, thereafter, had been declared as not belonging to the partnership and vested in the contemplated society and that on account of the retrospe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh the income was derived by the assessee when it accrued, by reason of the dissolution of the partnership with effect from May 1, 1959, the income accrued right from May 1, 1959, shall be deemed to have been received by the partners not as a firm, but as trustees of the intended society and as such not assessable in their hands. In this connection he relied on the decision in Commissioner of Income-tax v. Bijli Cotton Mills Ltd. That related to the liability of a company to tax on its pre-incorporation profits. The facts in that case were these : A partnership firm acquired a cotton mill on behalf of a company which they were going to get incorporated. Possession of the mill was obtained on December 10, 1942, though no formal sale deed was executed by the vendor. On December 11, 1943, the company was duly incorporated and the formal conveyance in favour of the company was executed by the vendor on January 2, 1945. The question for consideration was in whose hands the income derived from the cotton mills for the period from December 11, 1942, to December 10, 1943, should be assessed. The findings in that case were that the partnership entered into an agreement to purchase the cott ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the society which they intended to bring into existence. The business was carried on by the partnership on its own account and deriving profits and gains. The partnership was carrying on business in the earlier years also and was deriving income. The partnership could not, therefore, be likened to or treated as promoters of a company. Even under the agreement dated April 25, 1960, there was no divestiture of the title of the partnership to the assets and other properties of the partnership. It only stated that the parties shall as soon as possible arrange to get the Indian Institute of Engineering Technology registered as a society and shall entrust the management of the affairs and properties of the said Institute to a governing body of the said society. It is not stated that as and from that date they have divested the title and they are holding the properties on behalf of and for the benefit of the society to be formed. Clause 3 of the agreement also did not say that the management and conduct of the affairs of the institute till the governing body takes over charge on its registration as a society shall be for and on behalf of the proposed society. The later portion of cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he funds should have been effected even on that date. If the transfer had been effected from the partnership accounts to the individual account on April 25, 1960, it might have been contended that there was a divestiture of the title to the funds by the partnership and the partners were holding the income for the benefit of a society that is to come into existence in future. It is seen from the finding of the Tribunal that in fact the three partners had been drawing substantial part of the income by way of salary and drawings right up to the date of transfer of funds and the minutes of the governing body showed that the three partners had been credited with a sum of Rs. 90,000. It is clear, therefore, that profits and gains did accrue and arise to the partnership right through the accounting year and the liability of being taxed on such income is fastened on the partnership. It is immaterial how these profits have been utilised or diverted by the partnership after it had earned it. By retrospective dissolution of the partnership, the operation of the provisions of the Income-tax Act could not be affected, whatever may be the rights of the parties thereto and whether such retrospect ..... X X X X Extracts X X X X X X X X Extracts X X X X
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