TMI Blog2003 (2) TMI 147X X X X Extracts X X X X X X X X Extracts X X X X ..... adas Patel Specific Trust and Nirrria Specific Family Trust. These trusts were dissolved on 20-12-1987 and 30-11-1991 respectively with almost identical clauses appearing in "Memorandum Recording of dissolution of Trust". 3. Clauses 1 and 2 in the case of Nirma Specific Family Trust dealing the liabilities, unpaid excise duty, receivable sales-tax, custom refund and custom liabilities, etc. and assets and properties and operation of such account are reproduced below: "1. The Trustees of the Nirma Specific Family Trust have passed the following resolution: RESOLVED that the Trustees of the Trust hereby affirm and declare that in pursuance of the discretionary powers vested in the Trustees under clause m-d of the Trust Deed the Trust be dissolved and it is further resolved that in consequence thereof the Trustees hereby resolve to distribute the Corpus/Trust Fund Wholly and handover the corpus, Trust Fund/Trust Properties of the Trust held so far by the Trustees of the Trust till as on 20-12-1987 as stated hereinbelow amongst the eligible corpus beneficiaries of the Trust, the said corpus/Trust Fund/Trust Properties to be owned, held, possessed, enjoyed, exploited, employed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operated for all transactions for and on behalf of this Trust and its Beneficiaries and the above shall at as Constituted Attorneys for the purpose. The above-mentioned persons to act as the Managers to open the appropriate account/s and maintain the same, realise the Fixed Deposits and utilise the funds." 4. Clauses (a), (b) and (c) passed on the refund receivable (in presenti or the futuro) of sales-tax, custom duty, etc. to the beneficiaries by way of distribution on dissolution of the trusts. They became the property of the beneficiaries. Clause 4 provides that properties allotted to the share of each of the beneficiaries shall belong to him absolutely and he shall be entitled to exploit or use the same in a mode, manner and style he thinks fit. Clause 5 provides that the corpus/trust funds/trust properties so distributed has/have on and from the date of distribution i.e. on and from 20-12-1987 cease to be the corpus/trust funds/trust properties. Clause 6 provides that trustees shall execute and/or handover deeds and documents necessary to effectively vest in the recipient beneficiaries the title to the corpus/trust funds/trust properties so distributed. Clause 7 provides t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al ratio. The aforesaid amounts of the custom duty refunds were issued in the erstwhile names of proprietary concerns Nobel Industries and M/s. Navbharat Industries by GDMA in March, 1992 which was received by the constituted attorney in a representative capacity of the beneficiaries. He further mentioned that the assessment proceedings for assessment year 1988-89 in the case of Nirma Specific Family Trust and for assessment year 1992-93 in the case of K. Kachradas Patel Specific Family Trust were not pending at the time of dissolution and they were initiated after the date of dissolution and the constituted attorneys have attended the same for the purpose of order under section 143(3). That was in respect of the income of the 2nd trust up to the date of dissolution i.e. from 1-4-1991 to 30-11-1991. 8. The Assessing Officer observed that the business of the proprietary concern was discontinued prior to the date of dissolution of the trust and the same was admittedly, not sold or transferred to some other person. He also observed that as the credit note was received by the constituted attorneys who represented the trust after the date of dissolution, the amount of credit note was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary concern, they are assessable to tax. Emphasizing the fact that the trust deed was in writing and the dissolution deed was also in writing and since the constituted attorneys represented the trust which is representative assessee as per the provisions of section 160(1)(iv), the provisions of section 161(1A) were attracted and the income was chargeable to tax at maximum marginal rate. 12. The CIT(A) held that section 41(1) covers the contingency when business is discontinued and not the contingency of discontinuance of the assessee. He held that the trusts were dissolved and, therefore, the issue was settled by the Supreme Court decision in the case of Saraswati Industrial Syndicate Ltd. v. CIT [1990] 186 ITR 278 wherein according to him, it was held that the benefit received by the amalgamated company is not taxable as amalgamating company is no more in existence and has lost its identity. He further noticed that ITAT, Delhi in the case of Maman Chand Ramji Das v. ITO [1989] 28 ITD 487 discussed a similar case where a new firm was formed and the benefit was derived by the new firm for the trading liability of the old firm and the same was held to be nontaxable. Narrating the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... individual by the ITAT, Bombay Bench in their order in ITA No. 4704/Bom/1993 dated 8-2-1997 and, therefore, the custom duty refund was not taxable under sections 41(1), 176(3A) and 177. 15. The Revenue is in appeal for deletion on merits and the assessee against the reopening of the assessments. The assessee also raised an additional ground challenging the levy of interest under section 234B. 16. The learned Departmental Representative submitted that the cheques were received in the name of the proprietary concerns of the trusts, the accounts were opened and operated in the names of the trusts, the amounts were deposited in the trusts' account and then distributed to the beneficiaries and, therefore, receipts were clearly taxable under section 176(3A) read with section 41(1). The decisions relied upon by the CIT(A) are distinguished by stating that there the cheques were received in the name of the partner directly and not in the names of the firm and, therefore, the assessments attempted to be made in the hands of the firm got cancelled. He further submitted that if the two persons claiming the deduction and receiving the refund are identical as held by the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ukumchand Mohanlal wherein it was pointed out at page 626 that "As observed by the High Court, under the General Law if a trading liability has been allowed as a business expenditure and if this liability is remitted in any subsequent year, the amount remitted cannot be taxed as income of the year of the remittance, nor can the amount, for the year in which the liability was allowed, to be reopened or adjusted. Therefore, there is no liability of the recipient for the receipt of the aforesaid amount and the two assessees cannot be assessed under the General Law for such refund." 19. The Apex Court further observed that section 41(1) was enacted to supercede this principle under general law. This section deems the receipt of the amount paid, remission or cessation of liability as income of the assessee and, therefore, unless the case of the assessee falls within the four corners of the provisions of section 41(1) he or it cannot be assessed to tax on such receipt. Let us, therefore, examine the provisions of section 41(1). At the relevant time, it read as under: "41(1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efit of the said sum of Rs. 58,735. It was brought to tax in the hands of assessees by Assessing Officer. The matter went up to the Supreme Court and their Lordships held that in order to attract the provisions of section 41(1) of the Income-tax Act, 1961, the identity of the assessee in the earlier year in which deduction was granted in relation to a trading liability and in the subsequent year in which the benefit is derived must be the same. If there is a change in the identity of the assessee, there would be no tax liability under section 41. If the assessee to whom the trading liability may have been allowed as a business expenditure in the earlier year ceases to be in existence or if the assessee has changed on account of death of the earlier assessee, the benefit received in the subsequent year cannot be treated as income received by the assessee. 23. Let us, therefore, examine whether there is an identity between the person who was granted deduction and the person who received the benefit of refund. Here in the present case, the custom duty was paid by the two trusts before they were dissolved and the refund was allowed after the dissolution and distributed to the benefic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We, therefore, do not find any merit in this submission of the Revenue as well. 26. The next submission of the Revenue is that if the recipients are treated as having different identity, then the provisions of section 176(3A) would be applicable and the refund would be liable to tax thereunder. Section 176(3A) reads as under: "176(3A) Where any business is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the receipt and charged to lax 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." 27. On a close reading of this section, it is evident that any sum received after the discontinuance of the business is deemed to be income of the recipient; it is to be charged to tax in the year of receipt; and it is to be included in income of the recipient as 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. In other words, the same treatment is to be given to the receipt as if it were received b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business of the firm and dissolution thereof and Their Lordships held that the firm having ceased to exist on its dissolution cannot be assessed under section 176(3A) read with section 189(1) of the Act. The only person who could be assessed in respect of the receipt were the partners who had actually received it. This view their Lordships observed, was strengthened from the fact that sub-sections (3A) and (4) form part of the substantive provisions while sub-sections (1), (2) and (3) are machinery provisions in the case of a business which has been discontinued. Both sub-sections (3A) and (4) provide for taxing receipt of the sums provided the same would be taxable income in the hands of the person who may be different from the person receiving it, had it been received before discontinuance of the business or profession. Therefore, even assuming that receipt of the amount pursuant to the award by the partners was a receipt of a discontinued business, it cannot be taxed in the hands of the firm under sub-section (3A) because the firm having stood dissolved when the amount was awarded, it could not have received the sum as a firm. It could have been received only by the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther, it is an admitted fact even by the assessee that the business was discontinued before dissolution and the said business was neither sold nor transferred to any other person. The business was not taken over by another person as the case of Banyan and Berry, it ceased to be in existence. In these circumstances, in our opinion, the decision of the Gujarat High Court in the case of Banyan and Berry instead of helping the assessees goes against them and decides the issue in favour of the Revenue. Similar would be position of the decision of the Tribunal in the case of New Cawnpore Flour Mills (P.) Ltd. referred to by the CIT(A) as in that case also, the business carried on by the firm New Cawnpore Flour Mills was taken over as a going concern by the assessee company and in that context it was held that the same did not amount to discontinuance of the business but a case of succession of one assessee by another assessee. In the later decision of the Gujarat High Court in the case of SaurashtraPackagil1g P. Ltd. also there was no discontinuance of business and the business of the assessee firm was taken over by one of the partners, the assessee company as a going concern and in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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