Kerala High Court
Paulson Constructions vs Commissioner Of Income-Tax on 25 August, 1989
Equivalent citations: [1990]181ITR476(KER)
Author: K.S. Paripoornan
Bench: K.S. Paripoornan
JUDGMENT K.A. Nayar, J.
1. At the instance of the assessee, the Income-tax Appellate Tribunal, Cochin Bench, referred, as directed by this court, the following question of law arising out of the order of the Tribunal dated January 28, 1983, in I.TA. No. 268(Coch) of 1981 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in deciding that the assessee-firm was in existence during the year 1974 notwithstanding the fact that the partners of the firm have executed a dissolution agreement on April 1, 1972, that the assets and liabilities then existing were realised and paid off and that the accounts between the partners as they stood then were fully settled on April 1, 1972 ?"
2. The assessee was a firm constituted by a deed of partnership dated August 10, 1971. This firm took up the work of completion of a tunnel from Messrs. Paily Piliai and Co., another partnership firm. The said firm took the original contract for the tunnel work and upon its dissolution in September, 1971, the partner of the said firm, Sri P. M. Paily Pillai, was authorised to complete the unfinished portion of the work. He gave a subcontract to the assessee-firm to complete the tunnel work. At the time when Messrs. Paily Pillai and Co. executed the work, they had taken on hire from the Government a compressor for completing the work. The compressor was continued to be used for completing the work by the assessee-firm as well. The privity of the main contract was between Sri P. M. Paily Pillai and the Government. The payment for work done by the assessee was used to be obtained by Sri P. M. Paily Pillai who, thereafter, passed on the proceeds to the assessee-firm after deducting his share of the payments received. For the period the compressor was used by the assessee-firm, a sum of Rs. 36,000 was deducted by the Government from the amount payable to the contractor towards hire charges of the compressor during the previous year relevant to 1972-73 assessment. As the work was done by the assessee-firm, the said hire charges were borne by the assessee-firm. The assessee-firm, in turn, claimed it as an item of expenditure from its income for its income-tax assessment for 1972-73 which was allowed as a deduction. Since the work was over during the previous year ended on March 31, 1972, relevant to 1972-73 assessment, the assessee-firm was dissolved by an agreement of dissolution dated April 1, 1972. When the said compressor was in use for the contract work taken by Messrs. Paily Pillai and Co., the said firm applied to the Government in 1969 for selling the compressor to them. The Government took a final decision in January, 1974. The Government decided to sell the compressor to Messrs. Paily Pillai and Co. with effect from 1966. The Government also decided, inter alia, to adjust the hire charges recovered in respect of the compressor against the sale price. This resulted in the accrual of an income of Rs. 36,000 to the partners of the assessee-firm also for the assessment year 1974-75 on account of the refund of the hire charges sanctioned by the Government relating to the period during which the compressor was used by the assessee-firm. The Income-tax Officer, thereafter, initiated proceedings for assessing the assessee-firm for 1974-75 in respect of the said income of Rs. 36,000. The partners of the assessee-firm objected to the assessment on the ground that the firm was dissolved with effect from April 1, 1972, and that, therefore, the assessment cannot be made on a dissolved firm for the year 1974-75. But the Income-tax Officer, overruling the objection, assessed the firm under Section 189(1) read with Section 41(1) of the Income-tax Act, 1961.
3. On appeal, the Appellate Assistant Commissioner took the view that neither Section 41(1) nor Section 189(1) is applicable as the firm was not in existence during the relevant year. The Department went in second appeal before the Tribunal and the Tribunal took the view that the Income-tax Officer was justified in assessing the sum of Rs. 36,000 in the hands of the assessee-firm. It is thereafter that the aforesaid question of law was got referred to this court.
4. We heard counsel. There is no dispute that a sum of Rs. 36,000 relating to the hire charges of the compressor paid by the assessee and allowed as an expenditure in the hands of the assessee-firm, for the assessment year 1972-73, was received by the partners of the assessee-firm in the accounting year relevant to assessment year 1974-75. The only contention of the assessee is that the firm was dissolved with effect from April 1, 1972, and, on dissolution, the assessee-firm ceased to exist. The receipt that has been considered for assessment in the hands of the assessee is a refund of the hire charges paid by the assessee when it was executing the sub-contract. The refund will certainly be assessed as the income of the assessee-firm, if the firm had continued to exist at the time when the refund arose and such an assessment will have to be made under Section 41(1). If the business of the assessee is discontinued either by dissolution or otherwise, the firm can be treated as continuing for the purpose of obtaining the refund as well as for assessment by virtue of Sections 41 and 189 of the Income-tax Act read with Section 47 of the Indian Partnership Act, 1932.
5. Section 47 of the Partnership Act says that on the dissolution of a firm, the authority of each partner to bind the firm and the other mutual rights and obligation of the partners continue notwithstanding the dissolution so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of the dissolution. Therefore, for realisation of the assets, discharging the liability of the firm and settling the accounts of the partners, etc., the firm will continue to exist despite the dissolution. The firm, namely, the assessee herein, paid the hire charges when it carried on the sub-contract business which was allowed as a deduction in its assessment. The order passed by the Government in 1974 vested in the assessee-firm a right to get the refund and the refund was also realised on that basis. The said amount of refund will form an asset in the hands of the firm which has to be distributed among the partners and, therefore, by virtue of Section 47 of the Partnership Act, the assessee-firm continued to exist for distributing the assets.
6. Under Section 189 of the Income-tax Act, 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 discontinunace or dissolution had taken place and by Section 2(24)(v), income will include any sum chargeable to income-tax under Section 41 also. Section 41 provides that where a deduction has been made in the assessment for any year in respect of expenditure incurred by the assessee, and subsequently during any previous year, the assessee has obtained any amount in respect of such expenditure, the amount obtained by the assessee shall be deemed to be profits and gains of business and accordingly chargeable to income-tax as the income of the previous year, whether the business in respect of which the deduction has been made is in existence in that year or not. Since the refund in question was received during the accounting year relevant to the assessment year 1974-75, the amount is taxable in the hands of the assessee despite the dissolution.
7. In C. A. Abraham v. ITO [1961] 41 ITR 426, the question which came up for consideration before the Supreme Court was whether penalty can be imposed on a firm after its dissolution. Indirectly, in that case, the question whether the assessment can be made on a firm after its dissolution also came up for consideration. The Supreme Court referred to Section 44 of the old Act, corresponding to Section 189 of the present Act, and held that (at p. 430 ):
"In effect, the Legislature has enacted by Section 44 that the assessment proceedings may be commenced and continued against a firm of which business is discontinued as if discontinuance has not taken place. It is enacted 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."
8. It was held in the above case that the firm is deemed to continue by a fiction for the purpose of the assessment. In CIT v. Raja Reddy Malla-ram [1964] 51 ITR 285, the Supreme Court was considering the method of assessment of the assessee, an association of persons, after its dissolution of its pre-dissolution income. The Supreme Court held that (at p. 290) :
"By virtue of Section 44 the personality of the association is continued for the purpose of assessment and Chapter IV applies thereto. What can be assessed is the income of the association received prior to its dissolution and the members of the association would be jointly and severally assessed thereto in their capacity as members of the association. For the purpose of such assessment, the procedure is that applicable for assessment of the income of the association as if it had continued. A notice to the appropriate person under Section 63(2) would, therefore, be sufficient to enable the authority to assess to tax the association."
9. In CIT v. Devidayal and Sons [1968] 68 ITR 425, the question raised before the Bombay High Court related to the validity of the assessment made on a firm which was dissolved and its business discontinued in respect of its pre-dissolution income. The Bombay High Court, after referring to the Supreme Court decisions in C. A. Abraham v. ITO [1961] 41 ITR 425 and CIT v. Raja Reddy Mallaram [1964] 51 ITR 285, held that (at p. 434) :
"The result of the Supreme Court decision referred to above is that even after the discontinuance of the business of the firm either by dissolution or otherwise, the firm can be treated as continuing so far as the assessment of its pre-dissolution income is concerned and the assessment or reassessment of such a firm after dissolution under Section 44 of the Act could be made in the same manner under Chapter IV as if it had not discontinued its business. In the present case, therefore, the assessment made on the firm could not be treated as invalid as held by the Tribunal."
10. To the same effect are the decisions reported in Laxmidas and Co. v. CIT [1969] 72 ITR 88 (Bom) and Nagarmal Baijnath v. CIT [1978] 114 ITR 133 (Bom). In the latter case, the Bombay High Court once again held that (headnote) :
"Even after the discontinuance of the business of a firm by dissolution or otherwise, the firm can be treated as continuing so far as the assessment of its pre-dissolution income is concerned and the assessment or reassessment of such a firm after dissolution can, under Section 44 of the Indian Income-tax Act, 1922, be made in the same manner under the Income-tax Act or the Excess Profits Tax Act as if it had not discontinued its business."
11. Reference was made on behalf of the Revenue to the decision in CIT v. Tulsi Ram Karam Chand [1981] 130 ITR 968 (P & H). Though the facts are similar in that case, the case was decided on admitted facts. In that case, the assessee-firm got deduction by way of business loss of a certain amount during the year 1949-50. The assessee-firm was dissolved in 1950 and thereafter it got refund of a certain amount which was originally allowed as business loss in its assessment for the year 1949-50. The question was whether the amount got by way of refund could be taxed in the hands of the assessee-firm. It was held in that case that the act of receiving the refund itself is a business activity during the accounting year relevant to the assessment year 1952-53 and, therefore, the amount is taxable. But, in that case, the finding that the assessee should be assessed as a firm has not been challenged. The assessee had accepted its status as an unregistered firm and hence the amount in dispute was held to be the income of the assessee-firm and not the individual income of the partners. The other decision referred to on behalf of the Revenue is in Raghunathdas Kakani v. Addl. CIT [1980] 122 ITR 952 (MP). In that case, the brokerage received by the deceased up to the date of his death and by his legal representatives thereafter were directed to be clubbed together and assessed in the hands of the legal representatives so that one assessment could be made in the hands of the legal representatives. It was held therein that the arrears of brokerage received by the legal representatives is not income from the estate of the deceased and, therefore, the income received by the deceased up to the death and realised thereafter by the legal representatives up to the end of the previous year have to be clubbed together and taxed under the provisions of Section 159. This decision also, has no direct bearing on the point in issue.
12. Counsel for the assessee referred to the decision in CIT v. V. T, Kuttappu and Sons [1974] 96 ITR 327, a Division Bench ruling of this court. In that case, the question was whether the debts due by the firm to the creditors on becoming barred by limitation, when credited to the partners' accounts could be taxed as income under Section 41(1). It was held that a portion of the amount has not been allowed as a deduction in the hands of the assessee during the previous year and, therefore, it will not be income coming within the meaning of Section 41. The remaining portion also cannot be considered as income under Section 41 for there was no cessation of liability with respect to those amounts. On being barred by limitation, the assessee treated these debts as irrecoverable due to the bar of limitation and decided that it was unnecessary to show the amounts as due to creditors but proceeded to divide the amounts and included them in the capital asset of the partners of the firm. When the assessee proceeded to divide the amounts and include them, what is meant is that the amount is not recoverable from the assessee and it did not intend to pay the amount, if an action is taken by the creditor against him. Therefore, it was held that Section 41 was not attracted in that case. Counsel also referred to the decision in CIT v. Hukumchand Mohanlal [1971] 82 ITR 624 (SC) where the wife succeeded to a business. After the death of her husband, the wife got refund of the sales tax paid by her husband. The question was whether the wife is liable to pay income-tax in respect of the refund of sales tax obtained by her. The wife has to pay income-tax only if Section 41 is attracted. If the husband was alive and got refund, he would have been liable for assessment for then it will be a refund of an amount which was claimed as deduction earlier in this assessment. It cannot be taxed in the hands of his widow for she is not an assessee as contemplated under Section 41. This decision also will not in any way advance the contention of the assessee. The other case referred to is the decision in Saligram Ruplal Khanna v. Kanwar Rajnath, AIR 1974 SC 1094, which only refers to the liability of the partners.
13. In this case, the amount which was allowed as deduction in the previous year was refunded to the firm after dissolution and, therefore, it would form an asset in the hands of the firm which will have to be distributed among its partners and for this limited purpose, the firm would continue under Section 47 of the Partnership Act. If the firm continues for this purpose, it will have to be assessed also under Section 189 of the Income-tax Act read with Section 41.
14. In the light of the above, our answer to the question referred to us is in the affirmative, that is, in favour of the Revenue and against the assessee.
15. A copy of the judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.