TMI Blog1992 (7) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... im in connection with the said work. This claim consisted primarily of price escalation and extra items as per condition Nos. 19 and 21 of the contract which are extracted below : " 19. Condition regarding escalation clause is agreed to subject to clarification that if the limit is extended for reasons which are beyond the control of contractors the escalation in rates may be allowed for such extended period. However, if the work is delayed due to fault of contractor only, such escalation may not be granted beyond stipulated date of completion. 21. (Arbitration) : All claims and extra items shall be intimated to the deptt. within one month of their occurrence as provided under clause 16 of B-2 form for settlement. " 3. In the meantime a Private Limited Company under the name and style of " Banyan Berry Construction Private Limited " was incorporated on 16-4-1983 and a transfer agreement took place between the firm M/s Banyan Berry (hereinafter called 'the firm') and M/s Banyan Berry Construction Pvt. Ltd. (hereinafter called 'the Company') by virtue of which it was agreed that subject to the provisions therein contained, the firm would transfer to the Company w.e.f. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity in proportion to their share in the profit of the firm as per the provisions of the dissolution deed dated 16-8-1984. The amounts are stated to have been assessed in the hands of the partners for assessment year 1986-87 directly in the proportion of profit sharing ratio in the erstwhile firm by assessment orders dated 31-3-1989. Copy of the assessment order of one of the partners Shri K.B. Kunjadia has been given in the paper book at pages 197 to 202. A reference to the same shows that according to paragraph 4 of the assessment order, the income was brought to tax " without prejudice to any action that may be taken in the case of the firm M/s Banyan Berry for any of the assessment proceedings ". However, this amount of Rs. 2,48,944 has not been included in the total income of the assessee under consideration by us for assessment year 1988-89. 6. Those claims which could not be decided by the Government of Gujarat were referred to an arbitrator. The arbitrator made an award on 27-8-1986 directing the Government to pay a sum of Rs. 95,80,700, which was received on 26-11-1986. 7. In the meantime, the assessee had written a letter on 9-10-1986 to the Officer on Special Duty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the business activity before its discontinuance. The award amount received after dissolution of the firm was an integral part of the business receipts of the firm M/s Banyan Berry. It was, therefore, taxable under section 176(3A). 10. When the matter went to the CIT (Appeals) it was submitted before him that the provisions of section 176(3A) of the Act were not applicable in the present case at all. Section 176(3A) was applicable in case the business had been discontinued whereas in the present case it was not a case of discontinuation of the business but a case of succession of the business by the company from the firm. Another objection to the applicability of section 176(3A) was that the income of the discontinued business was to be assessed in the hands of the recipients but in the present case it was submitted that the assessee-firm was not the recipient since it stood dissolved on 16-9-1984 and was not in existence when the amount of award was received. The amount of award was stated to have been received by the partners in their individual capacity in proportion to the share of profit they had in the erstwhile firm. Reliance was placed on the following cases : 1. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leting the assessment. The section did not touch upon the question as to what happens if the income is received much after the firm had been dissolved. According to him this was a lacuna which had been rectified by section 176(3A) introduced w.e.f. 1-4-1976. It had made it possible to assess the income of a discontinued business in the year in which it is received in spite of the fact that the person carrying on such business had ceased to exist. The receipts of a discontinued business were put on the same footing as the receipts of a discontinued profession. According to him section 176(3A) was only supplementary and complimentary to section 189(1) of the Act. In the end he came to the conclusion that the word " discontinuance " is to be understood not only with reference to business but also with reference to a person being discontinued. A dissolved firm was treated as a discontinued person. He gave a finding that the award of Rs. 1,48,24,876 was liable to be taxed in the hands of the assessee-firm under section 176(3A) read with section 189 of the Act. The assessee is aggrieved by this finding and is now in appeal before us. 13. The learned counsel for the assessee made some p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver of the business of a firm by a company was a case of succession and not of discontinuance of business. He also emphasised that the ITAT, Ahmedabad had also considered a similar question in the case of Bajoria Bros. for assessment year 1982-83. There also it was a case of a partnership firm carrying on business of executing engineering contracts. Subsequently a private limited company took over the running business of the partnership. But any amount that may be receivable but not shown in the books of account in respect of contracts already executed by the vendors prior to the agreement would belong to the vendors. Subsequently the partnership was dissolved and an outstanding claim of the firm was decided by an arbitrator who gave an award in favour of the firm. The Assessing Officer wanted to assess the amount of award as the income of the partnership firm. It was held by the Tribunal that section 176(3A) was not attracted. 13.2 The learned counsel also invited attention to the decision of the Gujarat High Court in Artex Mfg. Co.'s case. Here also a firm was converted into a company as a going concern and it was held that the surplus was assessable as capital gains. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1987-88 (pp. 203 to 210 of the paper book). It was held that the interim award would be treated as income of an AOP consisting of the erstwhile partners of the firm. Since the shares of the members of the AOP were determinate, the individual shares were added to the income of the members. Similarly, the balance amount of claim was taxed for assessment year 1988-89 by assessment order dated 25-3-1991 (pp. 211 to 217 of the paper book). In the light of these it was submitted that the department had exercised its option to tax the members of the AOP, and it was, therefore, not open to tax the firm again. Reliance was placed on the decision of the Gujarat High Court in Laxmichand Hirjibhai v. CIT [1981] 128 ITR 747 and several earlier decisions. 13.6 The learned counsel thereafter referred to sections 60 63 relied upon by the Assessing Officer and submitted that they dealt with transfer of income where there is no transfer of assets. In the present case there was no such transfer and, therefore, these sections could not be relied upon by the Assessing Officer. 13.7 The learned counsel submitted in the end that it may happen that the tax may not be payable on a certain receipt by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a 5 that the amount in question was clearly the fruit of its business and ordinarily it should be assessable as such. 14.2 Attention was thereafter invited to the decision in the case of A.W. Figgies Co. It was submitted that the decision was concerned with a totally different issue regarding section 25(4) of the Indian Income-tax Act, 1922 for which there was no corresponding provision in the IT Act, 1961. According to the learned D.R, the decision of the Supreme Court that mere change in the constitution of the firm did not bring into existence a new entity does not help the assessee in the present case at all and the assessee's reliance on the decision was misplaced. 14.3 The learned D.R. next submitted that the case of Justice R.M. Datta was not relevant at all since it concerned income from profession which was assessable under section 176(4) and not under section 176(3A). 14.4 Thereafter it was submitted that the decision of the Tribunal in New Cawnpore Flour Mills (P.) Ltd.'s case was not relevant either, since it was, firstly, concerned with section 41(1), which had not been invoked in the case before us, and, secondly, because it was concerned with section 176(3A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... early applicable. 14.7 The learned D.R. thereafter referred to the argument on behalf of the assessee that an option had been exercised to tax the members of the AOP and, therefore, tax could not be levied once more in the hands of the firm. He submitted that the reliance on the decision of the Gujarat High Court in the case of Laxmichand Hirjibhai was misplaced. In that case the partners of a firm were assessed separately on their share of profit and subsequently an assessment was also made in the status of unregistered firm which was held to be not permissible. It was submitted that in the present case no assessment had been made in the hands of individuals as partners of the firm and, therefore, the facts were distinguishable. 14.8 The learned D.R. also referred to the argument of the learned counsel for the assessee that tax may not be payable by any one if that was the true interpretation of law. He invited our attention to the facts in the case of Saraswati Industrial Syndicate and Hukumchand Mohanlal and submitted that the Supreme Court was concerned with the provisions of section 41(1) of the Act whereas this section had not been invoked in the present case. The decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lone is applicable. He has finally come to the conclusion that it is section 189(1) read with section 176(3A) under which the amount of award should be brought to tax. In the facts and circumstances, we would infer that the CIT (A) has not crossed the lines of judicial propriety. 15.1 Connected with the above is another general issue regarding the argument of the learned counsel for the assessee that escaping tax altogether cannot be a consideration in deciding the question whether the award should be added to the assessee's income. The learned D.R. tried to distinguish the facts in the cases cited before us. However, the learned counsel for the assessee was only giving illustration, where, according to him, some amounts had escaped tax altogether but that was not a consideration in coming to the decision. We would agree with the learned counsel that escapement from tax altogether cannot be the sole criterion for making the addition but would say that it can be, in suitable cases, one of the circumstances to be considered. 15.2 We will now come to the applicability of section 189(1) of the Act. This clause deals with a case of business carried on by a firm being discontinued o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o another person, who thereafter carries it on. Unless otherwise stated, the same word has to be given similar meaning in an Act. According to the principle, therefore, the discontinuance means a complete cessation of the business and not the transfer of the business by one person to another. The Madras High Court in O.RM.M.SP.S. V. Meyappa Chettiar v. CIT [1943] 11 ITR 247 gave a similar finding. The Court held that the word 'discontinuance' in section 25(3) means 'cessation' and does not cover cases of succession. The direct cases on the point is of the Calcutta High Court in Krishna Hydraulic Press Ltd. v. CIT [1943] 11 ITR 504. Here the assessee-company had taken over the business of a firm. It was held that the assessee was the successor to the firm. 10. In view of the above authorities, there is no escape from the conclusion that the present is the case of a succession by the assessee to the business of the firm. It is not a case of discontinuance of the business. As such, the provisions of section 176(3A) cannot be applied in order to bring to tax the refund of the sales tax in the assessment of the assessee. " 15.4 There is another reason why we would say that there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee had received a refund of excise duty and it was held that " benefit or perquisite arising from business " within the meaning of section 28(iv) of the Act would not include cash receipt and, therefore, the refund of excise duty would not be taxed under that section. We agree with the contention and hold accordingly that section 28(iv) cannot be invoked in the present case either. 15.7 Coming to the contention of the assessee that it was not open to the department to tax the firm, having once exercised its option to tax the members of the AOP on the same income, we find that the facts of the present case are distinguishable from the facts in the case of Laxmichand Hirjibhai. In that case the partners had been assessed separately on their share of profits from a firm and, thereafter, it was held that the firm could not be assessed subsequently in the status of URF. It is not the situation here that members of the AOP have been assessed in individual capacity and subsequently tax is being levied on an AOP. The situation here is quite different, inasmuch as the amount was taxed in the hands of an AOP earlier and, alternatively, it is being brought to tax in the hands of the firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought out that according to the partnership deed (para 15) no partner shall be permitted to retire from the partnership till the works on hand were completed and after adjusting and settling his account. It shows that there was a great amount of emphasis on all the partners remaining together for completing whatever work was taken up. In the circumstances it appears unusual that after the business of the firm was taken over by the company as a going concern on 1-7-1984, except for the outstanding claims which are under consideration, the firm should have been dissolved. The dissolution was not immediate and the firm continued till 16-8-1984 on which date it was dissolved. It has to be remembered that the outstanding claims were not some fringe matters which could be attended to without much effort. We have already noted that the claims were of huge amounts, the amount in the letter dated 25-5-1984 from the firm to the Executive Engineer, Irrigation Project alone being Rs. 1,58,91,625. The follow-up of the claim required representation before an arbitrator. Even then it was decided to dissolve the firm, which is a far more extreme step than mere retirement of some partner. Another u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he PWD authorities and not otherwise, We also deny that our firm is dissolved for taxation purpose. Our firm has been legally and finally dissolved as per dissolution deed, copy of which is submitted to you and the person receiving the claim of dissolution have been given right to pursue the claim in the name of M/s Banyan Berry but it cannot be said from this that the firm continued in face of overwhelming evidence produced by us before you from time to time. " 15.12 We have also noted that in the return of income filed by the firm under section 139(2) it was claimed to be a capital receipt. We enquired from the learned counsel for the assessee whether the amount had been disclosed as income under any status and in any year and we were informed that the interest income had been disclosed as income but not the principal contained in the award, though notes regarding receipt of the award had been made in the statements accompanying the returns. 15.13 We will now refer to the law relevant to the above facts. It was held by the Supreme Court in the case of McDowell Co. Ltd. that colourable devices are not part of tax planning. Further it was the duty of court to expose and r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not hit by the new approach by the Supreme Court in McDowell Co. Ltd.'s case. Thus that decision also turned on its own facts. 15.16 In view of the above, there is no escape from the conclusion that the principles enunciated by the Supreme Court in the case of McDowell Co. Ltd. still prevail very much. We have, therefore, to examine whether in the facts of the present case, there was a transaction which was a device to avoid tax. In the facts enumerated above, the unavoidable conclusion is that the dissolution of the firm was nothing but such a device to avoid tax. The firm may have been dissolved by a deed but in essence it continued. There was no purpose in dissolving the firm except to avoid tax. We, therefore, hold that the dissolution of the firm will be ignored for the purpose of assessment of income and it will be treated that the firm continued even after 16-8-1984 and received the awards of the arbitrator and the cheques in payment of the awards. In this view of the matter the sum of Rs. 1,48,24,876 becomes taxable in the hands of the firm. 15. 17 There is, however, one consequential matter which remains to be decided. The amount of Rs. 1,48,24,876 was brought to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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