TMI Blog1995 (12) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... rt decision in the case of McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 and not by the Supreme Court decision in CWT v. Arvind Narottam [1988] 173 ITR 479 and by the Madras High Court decision in the case of M. V. Valliappan v. ITO [1988] 170 ITR 238 ? (iii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that even after the income is taxed protectively or with remarks to that effect in the hands of the members of association of persons, the same income can be validly taxed again in the hands of the firm constituted by the same members as partners ? " The following two questions have been referred at the instance of the Commissioner of Income-tax in R. A. No. 872/Ahd. of 1992 : " (i) Whether, the Appellate Tribunal is right in law and on facts, in holding that the award amount of Rs. 1,48,24,876 is not taxable in the hands of the assessee-firm under the provisions of section 176(3A) read with section 189(1) of the Act ? (ii) Whether, the Appellate Tribunal is right in law and on facts in holding that the provisions of sections 28(iv), 60 and 63 of the Act were not applicable in the instant case ? " The facts as appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extent of pursuing aforementioned claims against the Government of Gujarat in respect of the contract of construction of earthen dam for Mazam Irrigation Scheme in the Sabarkantha District." Terms Nos. 1 and 2 of the said dissolution deed read as under : " (1) The partnership firm of Banyan and Berry shall stand dissolved with effect on and from the date of execution of these presents and each of the parties hereby released the rest of them from all proceedings, accounts, cost, claims and demand in respect of the partnership and the terms, conditions and covenants contained in the said deed of partnership dated November 16, 1982, made between the parties hereto, but without prejudice to any right of remedies arising under these presents. (2) The aforementioned claims against the State of Gujarat in respect of the contract for construction of an earthen dam for Mazam Irrigation Scheme in the Sabarkantha District have on this dissolution of partnership been allotted to and shall be treated as an actionable claim jointly enforceable as tenant in common by the parties hereto and each of the parties hereto shall be entitled to a share in the net amount realised or recovered by any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking the payment of interim award to the partners directly in accordance with their share in the partnership deed. Likewise the partners were directly paid the amount of final award as well. It may be noticed that the construction work at Mazam was completed before the transfer of business. The final bill was also submitted and payment thereof was received prior to the transfer of business. So also the claim for additional sums on account of escalation clause and price of the extra claim was lodged with the Government prior to said transfer. The firm did not file any return of income. A notice in respect of the aforesaid sums received by the partners under the award was issued under section 139(2) by the Assessing Officer in response to which the return was filed showing nil income. It was claimed by the assessee that the sum of Rs. 1,48,24,876 was a capital receipt and not taxable. The Assessing Officer brought to tax the above mentioned sum for the following reasons : " (1) The partners received benefit from the business carried on by the partnership firm. The claim arises from the business and there was a direct nexus between the business carried on by the firm and claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isting fact and invoked section 176(3A) to bring the receipts to tax in the hands of the firm. On appeal, the Commissioner of Income-tax (Appeals) found that discontinuation of business under section 176(3A) should not only be treated from the point of view of continuation or cessation of business but also from the point of view of the person carrying on the business. According to him, sub-section (3A) of section 176 is the logical extension of section 189(1) and reading the two provisions together, the firm was liable to be taxed. The Commissioner of Income-tax (Appeals) did not rest his conclusion on the edifice of treating the dissolution of firm as a device to avoid tax. The Commissioner of Income-tax (Appeals) affirmed the assessment though on a different ground. On further appeal, the Tribunal found that section 189 does not come to aid in bringing the amount of the award to tax in the hands of the firm. The Tribunal also found that as far as section 176(3A) is concerned, it cannot be invoked because it is not a case of discontinuance but continuation of business by the successor-company. However, the Tribunal further found that in the present case the entire business was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or. Even then it was decided to dissolve the firm, which is far more extreme step than mere retirement of some partner. (iv) Another unusual feature is that even after dissolution certain important elements of the partnership were continued. The claims were treated as an actionable claim, jointly enforceable as tenants-in-common by the parties thereto. Each of the erstwhile partners was entitled to share in the award in the same proportion as his share in the profits and losses of the firm. Three of the partners were appointed to do certain acts on behalf of all the erstwhile partners which included the opening of bank accounts. (v) The claim was treated as an outstanding business and we have also come to the same conclusion earlier that the business of the firm was not discontinued on July 1, 1984. (vi) The normal expectation would be that the firm should continue but exactly the opposite took place by its dissolution. On these precincts, the Tribunal concluded that the dissolution of the firm was nothing but a device to avoid tax. The firm was dissolved by a deed but in essence it was a device to avoid tax because there was no purpose in dissolving the firm. Consequen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business activity relating to the Mazam project was that which was regarded to be transferred to the company. The claim was disputed. It is also not the case that any other pending claim of any other such completed work was transferred to the company and the claim in respect of the Mazam dam was treated differently. In these circumstances, there could not be anything unusual for the partners, who intended to dissolve the firm on the transfer of business, not to transfer any pending/disputed claim of a completed work. Likewise the terms of dissolution were in consonance with section 47 of the Partnership Act. Even in the absence of the said terms, the same state would have existed under section 47 of the Partnership Act. The Tribunal's approach to treat the dissolution as a device to avoid tax because there was no purpose to dissolve it is apparently fallacious and is a result of misdirecting oneself in law. The question is whether in the undisputed facts of the case, it was essential to continue with the firm solely for the purpose of realisation of a disputed claim when all other business has been transferred to the company. No prudent man of commonsense would in f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laims about the construction of the earthen dam of the Mazam Irrigation Scheme which may be received some time in the future, and the terms of the dissolution deed which according to the Tribunal spelt out that certain important elements of the partnership were continued as unusual and those factors were stated to be--- (i) The claims were treated as actionable claims. (ii) The claims were treated as jointly enforceable as tenants-in-common by the parties ; (iii) The partners were entitled to share in the award in the same proportion as each one has a share in the profits and losses of the firm and ; (iv) Three of the partners were appointed to do certain acts on behalf of the erstwhile partners which included opening of bank accounts ; for holding that the said existing partnership after the transfer of business to the company still retained the continuing business and the Tribunal was also influenced by the magnitude of the claims when it repeatedly referred to the fact that the outstanding claims were not some fringe matters which could be attended to without much effort but the claims were of huge amounts, and the follow up of the claim required representation before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e excise department " and the court further came to the conclusion that the excise duty did not go into the hands of assessee and did not become part of the circulating capital. Therefore, the sales tax authorities were not competent to include in the turnover of the appellant the excise duty which was not charged by it but was paid directly to the excise authorities by the buyers. When the assessee had again agitated after the amendment and when the matter reached the Supreme Court, as aforesaid, the correctness of the decision in its earlier case referred to above was referred to a larger Bench. It was the stand of the manufacturer that it was a condition precedent for the buyer of its finished goods that the buyer pays the excise duty to the excise authorities directly, and on production of the receipts, liquor is issued from the distillery by way of sale under the supervision of the excise authorities and in view of such arrangement, the excise duty did not go into the common till of the assessee and it does not become a part of the circulating capital. R. N. Mishra J., delivering the leading judgment came to the conclusion on the merits that (at page 165 of 154 ITR) : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esorting to subterfuges." The court also quoted with approval the decision of this High Court in CIT v. Sakarlal Balabhai [1968]69 ITR 186, 200 (Guj) which decision was affirmed by the Supreme Court in appeal in CIT v. Sakarlal Balabhai [1972] 86 ITR 2 (at page 170 of 154 ITR) : " Tax avoidance postulates that the assessee is in receipt of an amount which is really and in truth his income liable to tax but on which he avoids payment of tax by some artifice or device. Such artifice or device may apparently show the income as accruing to another person, at the same time making it available for use and enjoyment to the assessee as in a case falling within section 44D or mask the true character of the income by disguising it as a capital receipt as in a case falling within section 44E or assume diverse other forms ... But there must be some artifice or device enabling the assessee to avoid payment of tax on what is really and in truth his income. If the assessee parts with his income producing asset, so that the right to receive income arising from the asset which, theretofore, belonged to the assessee is transferred to and vested in some other person, there is no avoidance of tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Oil Co. Ltd. [1982] STC 30 at page 32, which my noble and learned friend, Lord Brightman, quotes in his speech. These words leave space in the law for the principle enunciated by Lord Tomlin in IRC v. Duke of Westminster [1936] AC 1 at page 19 ; [1935] All ER rep 259 at page 267, that every man is entitled, if he can to order his affairs so as to diminish the burden of tax. The limits within which this principle is to operate remain to be probed and determined judicially. " The aforesaid opinions, amongst the decisions English and Indian, form the bedrock of the final conclusion about the scope of judicial probe into any transaction. In final conclusion after referring to number of decisions English as well as Indian, it was said (at page 160 of 154 ITR) : " In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. " From the afores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be, hence counterfeit, feigned, having the appearance of truth ". So also a device. The context in which the expression device has been used in its ordinary dictionary meaning as per the Shorter Oxford Dictionary means " ingenuity, something devised, arrangement, plan, contrivance, a plot or a trick. Black's Law Dictionary refers to device as contrivance, a scheme, trick. Subterfuge---According to the ordinary meaning as per the Shorter Oxford English Dictionary means that to which one refers for escape or concealment ". Subterfuge on historical principles means, an article or device to which a person refers in order to escape the force of an argument, an excuse with which conceals a clue. So also the expression dubious refers to a doubtful or of questionable character. That is to say what has been deprecated as tax planning for avoidance of tax are those acts which have doubtful or questionable character as to their bona fide and righteousness. Not all legitimate acts of a taxpayer which in the ordinary course of conducting his affairs a person does and are under law he is entitled to do, can be branded as being of questionable character on the anvil of McDowell's case [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC). That decision cannot advance the case of the Revenue because the language of the deeds of settlement is plain and admits of no ambiguity." Justice S. Mukherjee said, after noticing McDowell's case [1985] 154 ITR 148 (SC) : " Where the true effect on the construction of the deeds is clear, as in this case, the appeal to discourage tax avoidance is not a relevant consideration. But since it was made, it has to be noted and rejected. " The real question to be asked while examining is whether the act of an assessee falls in the category of a colourable device, a dubious method or subterfuge or an act of which the judicial process may not accord approval. Carrying on a trade is the fundamental right guaranteed under article 19 of the Constitution of India. The right to carry on trade includes the right not to carry on any trade. How and in what form business is to be carried on is also part of that freedom. Business is carried on individually, collectively, by constituting a partnership firm, or forming an association of persons or by a company. The formation and dissolution of partnerships are governed by statutory provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of dissolution, where the partnership is at will. The firm can be dissolved--by any of the partners by giving a notice in writing to all the partners of his intention to dissolve the firm and it stands dissolved from the date mentioned in the notice as to the date of dissolution and if no date in mentioned in the notice from the date of the communication of notice. Section 44 deals with a case where the court orders dissolution of a firm in a suit filed by the partner/s on the ground mentioned in it or on any other ground which renders it just and equitable that the firm should be dissolved. Sections 45 to 49 contain the scheme as what ensues dissolution of firm. Section 45 provides that notwithstanding the dissolution of a firm, the partners continue to be liable as such to third parties for any act done by any of them which would have been an act of the firm if done before the dissolution, until public notice is given of the dissolution. Section 46 provides that on the dissolution of the firm every partner or his representative is entitled, as against all the other partners or their representatives, to have the property of the firm applied in payment of the debts and liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of dissolution of the firm. It makes out clearly the distinction between dissolution of the firm resulting in cessation of its existence and the continuing authority of erstwhile partners, not as a firm but as persons in charge to wind up the affairs of firm, to bind each other by their act in the matter of pending actions, realisation of assets, etc. Merely because something has remained to be realised on account of the firm on the date when the firm is sought to be dissolved by consent of all the partners, it cannot be said that the only purpose for which the firm is dissolved is to get rid of the effect of such realisation which is outstanding on the date of dissolution. Such realisation by all the partners or one acting on behalf of the partners for the benefit of all the partners to be shared, or dealt with in accordance with the profit-sharing ratio of the partners during its existence is in fact the legal effect of a lawful, valid and bona fide dissolution. Even if no such agreement of treating a pending claim as an actionable claim and dividing it in the profit-sharing ratio on having a favourable award and authorising a few of the partners to pursue the claim had been mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ince the date of succession. This apart, other provisions make it clear that in the case of succession, there is a water tight compartment of period income up to which is assessable in the hands of the transferor, namely, up to the date the business is carried on by it. Section 170 also does not envisage that when a transfer of business takes place, the transferor or the predecessor must cease to exist. We may also notice here that though under the general law, a firm is not a person of separate juristic entity, according to the definition of " assessee " under section 2(7) read with section 2(31), a firm is a separate unit of assessment independent of the persons constituting it and has to be assessed as a separate entity. Likewise, in our opinion, the transfer of the business as a going concern excepting the retention of right to the pending claim, cannot be termed as colourable device to achieve the object of avoiding tax on a sum, the quantum of which was uncertain, and there was only likelihood of its receipt in future on dispute being decided in favour of the claimants. There was no basis for the Tribunal to hold that dissolution of the firm after the transfer of business w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew the aforesaid principle when a question arose before their Lordships of the Supreme Court in the case of Liquidators of Pursa Ltd. v. CIT [1954] 25 ITR 265 wherein a company, the appellant before the Supreme Court, negotiated to sell a business of growing sugarcane and manufacturing sugar intending to wind up the company, and concluded the agreement for sale of the factory during the previous year relevant to the assessment year in question. The income-tax authorities treated the surplus made by the company on the sale of buildings, plant and machinery as profits under the relevant provisions of the Indian Income-tax Act, 1922. The Tribunal as well as the High Court found that the company was carrying the business and treated the surplus arising out of such sale of buildings, plant and machinery as income of the business. Reversing the decision of the High Court, the court held : " Turning to the facts to be gathered from the records it is quite clear that the intention of the company was to discontinue its business and the sale of the machinery and plant was a step in the process of the winding up of its business. The sale of the machinery and plant was not an operation in f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se those interested in the shares of the company had agreed that the liquidation should take place and that the assets should be sold, appear to me to be no evidence whatever to justify the finding of the Commissioners. Most companies have in their memorandum a power to sell their assets, and it is a very common thing indeed for companies, when they are reconstructed and sell their assets in whole or in part, to have an arrangement or an agreement between the shareholders beforehand, deciding what is to be done, agreeing that certain resolutions shall be passed putting the company into liquidation and agreeing that the assets of the company in the liquidation shall be disposed of by the liquidator in a particular way. To accept the proposition which has been put before us would really come to this, that whenever a company acted in that way, the act of the liquidator in selling the assets would be an act of the company trading, instead of an act of realisation . . . . in my opinion they were nothing more or less than receipts by the liquidator on realisation by him in the ordinary course of his duty as liquidator to realise and get in the assets of the company. " In case of CIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a going concern to the company and it stopped undertaking any further business activity. The settlement of claims of completed work at Mazam with the Government remained the only outstanding affair of the firm. The claim was not an accepted claim. The entitlement under the agreement as well as the quantum both were the subject-matter of determination. It could probably be called only an activity relating to realisation of assets of the firm in the course of its winding up but could not in any sense be termed as carrying on business. Realisation of an asset after dissolution much less mere pursuit of a disputed claim cannot be termed as " business " for carrying on which the firm ought to continue to exist. Section 47 envisages that after dissolution of the firm, the authority of the partners continues. 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 identity of a firm and the assets which belong to the firm on the date of dissolution cease to have a character of business or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquired by the Government of the then Province of Punjab. The question arose about certain receipts by it whether they constituted an income from business carried on by the assessee. The factors relied on for the purpose of finding that the company was carrying on business or at least intended to carry on business were that (1) the company did not sell its undertaking as a going concern ; (2) it continued in possession of all assets of its undertakings other than those appertaining to the Lahore electric supply undertaking ; (3) it continued to hold deposits made by consumers of electricity supplied by the Lahore electric supply undertaking which had to be returned to them with interest ; (4) it had no intention of going into liquidation ; (5) the directors' report showed that the directors were " considering if they could possibly purchase some manufacturing concern which might become an additional source of profit to the shareholders " ; and lastly there was nothing to show that there was permanent discontinuance of the business of the company. It was on these factors that the Tribunal had come to the conclusion that the company had not ceased to carry on the business. The High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluding 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 terms of section 47 of the Indian Partnership Act for the purpose of realising the actionable claim and for distribution of the assets of the dissolved firm. Applying the test laid in the Lahore Electric Supply Co.'s case [1966] 60 ITR 1 (SC), it would be appropriate to say that it would be laying down strange law to hold that where a firm has ceased to exist, it must still be deemed to continue merely because realisation of assets and liquidation of liabilities of that business remains to be completed. In doing so, it carried on no business activity as discussed above. The effect and impact of the process of dissolution and distribution of assets and discharge of liabilities have aptly been stated by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceased or they ever intended to carry on business of the firm clandestinely or in any other manner. The Tribunal also misdirected itself in law in searching for a purpose to dissolve the firm beyond transfer of business as a going concern to the company. In fact after the firm transferred its running business as a going concern to the company, there was no purpose left to continue with the firm unless the partners desired to do some other business as a firm. In the absence of such eventuality, dissolution of the firm was the only logical act on their part. It would be strange to say that they should have continued to keep the firm in existence until the disputed claim was settled, only for the purpose of incurring tax liability in case an award is made in their favour. In other words, as per the Tribunal's reasoning the person must continue to carry on business, not in the ordinary course for earning profit by business activity, but to incur the tax liability, only or else it shall be deemed to be a mere device to avoid tax, as if person has no freedom to carry or not to carry on trade. We see no rationale to support this. Taking any other view would mean that a firm can never ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... phasis supplied). The court further went on to clarify that it is not deciding the issue of continuing or cessation of business, when it said " the proposition of law referred to by Mr. Desai that the dissolution does not necessarily follow because a partnership has ceased to do business " would not be of any material help to the appellants because we are not basing our conclusion of the dissolution of the firm of the parties upon the fact that the partnership had ceased to do business. Therefore, the operation of section 47 was confined to continuing the authority of partners for binding each other regarding the affairs of winding up and in that sense realisation of assets or carrying on with the pending proceedings was held to be part of that authority which the partners retain after the dissolution of the firm and applying that test it was held that the consent given by one of the partners in a pending proceeding after dissolution of the firm was binding on every partner. However, there is nothing to suggest that the court laid down any such proposition that a firm continues to exist to carry on business and is liable as a firm in respect of any realisation of assets made after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with any liability which had arisen after its dissolution. Secondly, it was relating to a statute where the levy was on the transaction and not on the person, as distinguished from the Income-tax Act where the levy is on the person and not on the transaction. The aforesaid view was taken in respect of transactions which had already become the subject-matter of levy and the question was only where the firm was in existence when the liability had arisen, whether under the provisions of section 47 read with section 49 that liability could be enforced against the firm as an affair of winding up so as to attract the applicability of section 47. Here, we are concerned with a case where liability to tax, if any, had arisen after the firm ceased to exist and for that purpose the provisions of section 47 cannot be extended by treating the firm as continuing to exist for such subsequent period by considering that discharge of such liability in respect of the asset of the firm on account of realisation of the assets of the dissolved firm is a liability to which the provisions of section 47 or section 44 can be attracted. This is apart from the fact that we are of the view as discussed above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se in the circumstances where certain income was assessed in the first instance in the status of the Hindu undivided family of husband. That was set aside. Assessment was then made against the husband which was challenged before the Appellate Assistant Commissioner. In the course of assessment of the husband, a finding was recorded that the wife was not engaged in any business. However, having doubts in his mind that on challenge the assessment in the case of the husband may be set aside, the Income-tax Officer thought it prudent to issue a notice under section 34(1)(a) to the wife also ex majorie cautela. It was urged before the High Court that the Income-tax Officer having made the assessment of the husband, section 34(1)(a) could not apply for issuing notice to the wife. The court held, though ultimately the wife's petition succeeded : " In our view this is not tantamount to a change of opinion but a more cautious approach of the Income-tax Officer by way of a protective assessment to avoid the recurrence of technical quashing as in the case of the Hindu undivided family ... The Income-tax Officer had to guard against the expiry of limitation in the peculiar predicament in whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a notice containing all or any of the requirements which may be included in a notice under sub-section (2) of section 139 and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under sub-section (2) of section 139. (6) The tax chargeable under this section shall be in addition to the tax, if any, chargeable under any other provision of this Act. (7) Where the provisions of sub-section (1) are applicable, any notice issued by the Income-tax Officer under sub-section (2) of section 139 or sub-section (1) of section 148 in respect of any tax chargeable under any other provisions of this Act may, notwithstanding anything contained in sub-section (2) of section 139 or sub-section (1) of section 148, as the case may be, require the furnishing of the return by the person to whom the aforesaid notices are issued within such period, not being less than seven days, as the Income-tax Officer may think proper. " " Section 189. (1) Where any business or profession carried on by a firm has been discontinued or where a firm is dissolved, the Income-tax Officer shall make an assessment of the total income of the firm as if no such dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he date of succession ; (b) the successor shall be assessed in respect of the income of the previous year after the date of succession. (2) Notwithstanding anything contained in sub-section (1), when the predecessor cannot be found, the assessment of the income of the previous year in which the succession took place up to the date of succession and of the previous year preceding that year shall be made on the successor in like manner and to the same extent as it would have been made on the predecessor, and all the provisions of this Act shall, so far as may be, apply accordingly. (3) When any sum payable under this section in respect of the income of such business or profession for the previous year in which the succession took place up to the date of succession or for the previous year preceding that year, assessed on the predecessor, cannot be recovered from him, the ' Income-tax Officer shall record a finding to that effect and the sum payable by the predecessor shall thereafter be payable by and recoverable from the successor, and the successor shall be entitled to recover from the predecessor any sum so paid. (4) Where any business or profession carried on by a Hindu u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilities including tax or penalty or any other sum chargeable under the provisions of the Act which it had incurred up to its discontinuance of business or dissolution, in that status, 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. But for this provision, perhaps, it would not have been possible to continue or to initiate proceedings against the non-existing firm or in respect of non-existing business in respect of income earned by the firm while in existence or of the business while it was continuing. There being two separate entities, namely, the 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, section 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. In this connection, we may also notice tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is a case of succession of business or profession which was being carried on by the firm, the assessment of the predecessor firm (dissolved firm) and the successor firm is to be done as in the case of succession of business under section 170 and where it is not a case of succession of business but of discontinuance of business, the provisions of section 176 in the matter of procedure of such assessment is attracted. Therefore, the conclusion, in our opinion, is irresistible, that section 189(1) by itself does not authorise assessment of the firm in respect of any income earned after it ceased to exist and the deeming provision of treating the income of the firm as if such dissolution or discontinuation of its business has not taken place is applicable only in respect of the income which has been earned by it prior to its dissolution or discontinuance of business by it. The fiction created under section 189 does not project into the future transactions. We are fortified in our conclusion by high authority. Section 189 of the Income-tax Act, 1961, is corresponding to section 44 of the Indian Income-tax Act, 1922, under Chapter V. In Shivram Poddar v. ITO [1964] 51 ITR 823 (SC), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the continuance of the dissolved firm for this limited purpose....The deeming provisions of section 189(1) of the Act are not applicable to the income arising long after the dissolution of the firm. " The view was reiterated by that court in CIT v. United Trading Co. [1995] 212 ITR 532 (Raj), wherein the court held as under : " A deeming fiction is created by section 189 in respect of a business or profession carried on by the firm which is discontinued or the firm is dissolved as if there is no such discontinuance or dissolution. The provisions contemplate that assessment could be made and all the provisions of the Act shall apply to such an assessment. This section refers to the business or profession carried on by a firm which has been discontinued or where the firm is dissolved. The power to make an assessment in such a case is in respect of that period for which the business or profession was carried on by the firm . . . . " In this connection, it is also apposite to note that section 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 impositi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manifestly with a view to ensure continuity in the application of the machinery provided for assessment and imposition of tax liability notwithstanding discontinuance of the business of firms. By a fiction, the firm is deemed to continue after discontinuance for the purpose of assessment under Chapter IV. " This is clearly indicative that only those machinery provisions which have been enacted to make the levy of tax effective, which include provision for imposing penalty has been made applicable by deeming the continuance of the business or the firm. For applying substantive provisions for levy of tax, the charge of which comes into existence after discontinuance of the business or dissolution of the firm, as the case may be, no such fiction has been created. Reliance in this connection was placed by learned counsel for the Revenue on a decision of the Bombay High Court in the case of CIT v. Star Andheri Estate [1994] 208 ITR 573. The decision is founded on construction of section 176(3A) and supposed distinction to be in the scheme of liability in respect of the assessment of a dissolved firm under the law as stood prior to 1958 and the law as it stands now. For this, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on-existing person and extend the machinery provisions to it. The Supreme Court in Nagarmal's case [1993] 201 ITR 538 had nowhere dwelt on the distinction which the new provision has brought into existence vis-a-vis the provision as it existed before amendment. It has merely noticed that prior to its amendment in 1958, the dissolution of the firm without discontinuance of the business was not included in the applicability of section 44. The court noticed this distinction by quoting both the provisions as they existed prior to 1958 and after 1958. While the provisions prior to 1958 did not refer to the eventuality " where a firm is dissolved " that was confined only to discontinuance of business carried on by the firm or association or dissolution of association of persons. Therefore, what was the ambit and scope of applicability of section 44 to dissolution of an association of persons was extended to the eventuality of firm dissolution also after its amendment. The court in fact was concerned with the assessment of firm which was dissolved. The assessment years were 1946-47 and 1947-48. The firm was dissolved shortly before the close of the accounting year related to the assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect, we notice that the state of law enunciated by the Supreme Court that section 44 is enacted in respect of pre-dissolution or pre-discontinuation income in Shivram Poddar's case [1964] 51 ITR 823 (SC) and Raja Reddy Mallaram's case [1964] 51 ITR 285 (SC) was not brought to the notice of the court. In this connection, it is also relevant to notice that so far as assessment under the Income-tax Act is concerned, the firm is a distinct entity from its partners and for the purpose of assessment, the two cannot be treated as one. In Shivram Poddar's case [1964] 51 ITR 823, 828, the Supreme Court noticed this distinction when it said "...the Income-tax Act recognises a firm for purposes of assessment as a unit independent of the partners constituting it ; it invests the firm with a personality . . . " Taking any other view would mean holding that a firm once having come into existence continues its existence for the purpose of taxation until it is completely wound up by discharging all its liabilities, realising all its assets and adjustment of its remainder amongst the partners and all proceedings pending for or against such firm have come to a close. That obviously will be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g discontinuance of the business and succession of the business as two different exigencies and ordinarily succession of business does not result in discontinuance of the business. However, the contention of learned counsel for the Revenue had been that sub-section (3A) of section 176 covers the same field of operation in respect of the discontinuance of business as is covered by sub-section (4) in respect of the discontinued profession. For the purpose of section 176(3A) discontinuance of business must be that discontinuance of business by the person carrying it on as has been stated in sub-section (4) of section 176 regarding discontinuation or cessation of profession. The case, therefore, must be governed by sub-section (3A) of section 176 for the purpose of treating the receipt of the sum under the award as an income of the assessee. Section 176(3A) clearly postulates that in the case of discontinuance of business if any sum is received thereafter and if it would have been considered as income of the person had it been received by the person carrying on the business before its discontinuance, such sum is to be taxed as income in the hands of the person who receives it. It is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e firm had it been received by the firm while it carried on the business, it can be taxed in the hands of the partners if the same is received after its discontinuation of business by dissolution of the firm. Under section 176(3A) the sum is deemed to be the income of recipient when received and cannot be treated as income of earlier year. Receipt of sum is the basis of taxation under section 176(3A). In view of this we are not inclined to further carry on the 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. Accordingly, we answer question No. 1 referred at the instance of the Revenue in the affirmative, that is to say, in favour of the assessee and against the Revenue. The second question referred to us at the instance of the Revenue relates to whether the receipt in question is covered by the provisions of sections 28(iv), 60 and 63 of the Act. It is apparent that the claim was arising out of terms relating to escalation of cost and extra work allegedly carried out by the assessee. In a way it was an a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering the corresponding legislations in England in A. G. Chamberlain v. CIR [1943] 25 TC 317 (HL), Lord Macmillan said : " This legislation forms part of a code of increasing complexity ... designed to overtake and circumvent a growing tendency on the part of taxpayers to endeavour to avoid or reduce tax liability by means of settlements. Stated quite generally, the method consisted in disposal by the taxpayer of part of his property in such a way that the income should no longer be receivable by him, while at the same time he retained certain powers, over, or interests in, the property or its income. " The above opinion of Lord Macmillan was quoted with approval by the Supreme Court in Tulsidas Kilachand v. CIT [1961] 42 ITR 1 while it was considering the provisions of section 16 under the 1922 Act, which corresponded to section 60 of the 1961 Act, and expressed its conclusion in the following terms after quoting the aforesaid observations (at page 4) : " These observations apply also to the section under consideration and the Indian provision is enacted with the same intent and for the same purpose.... Section 16(1)(c) provides that income from assets remaining the property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that even after the income is taxed protectively or with remarks to that effect in the hands of the members of association of persons the same income can be validly taxed again in the hands of the firm constituted by the same members as partners ? " The question is answered in the affirmative, in favour of the Revenue and against the assessee. Questions referred at the instance of the Revenue : " (i) Whether the Appellate Tribunal is right in law and on facts, in holding that the award amount of Rs. 1,48,24,876 is not taxable in the hands of the assessee-firm under the provisions of section 176(3A) read with section 189(1) of the Act ? We answer the aforesaid question in the affirmative, that is to say, in favour of the assessee and against the Revenue. (ii) Whether, the Appellate Tribunal is right in law and on facts in holding that the provisions of sections 28(iv), 60 and 63 of the Act were not applicable in the instance case ? " The question is answered in the affirmative, that is to say, in favour of the assessee and against the Revenue. No order as to costs. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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