Income Tax Appellate Tribunal - Ahmedabad
Deputy Commissioner Of Income Tax vs Bajaria Bros. (Also Bajaria Bros. (Boi) ... on 24 August, 1995
Equivalent citations: (1996)54TTJ(AHD)151
ORDER
PHOOL SINGH, J. M. :
These two appeals - one by Revenue and the other by assessee - are inter-connected though relate to asst. yr. 1982-83 and thus were heard together and are being disposed of by this common order.
2. The facts under which these two appeals have come for disposal are interesting ones. To begin with, M/s Bajaria Bros., Ahmedabad, was a firm constituted prior to asst. yr. 1976-77 and the same was reconstituted on retirement of its partners and ultimately the latest partnership deed on record is dt. 9th March, 1979 (copy of partnership deed appearing at pp. 15 to 24 of the paper book of assessee). The firm carried on the business of executing contracts of civil engineering, mechanical engineering, electrical engineering, other contracts of various Govt. deptts. local bodies, public undertakings, private parties, etc. A private limited company under the name and style of Bajaria Bros. Pvt. Ltd. (hereinafter referred to as private limited company) was floated with a view to acquire and take over the business of M/s Bajaria Bros., partnership firm (hereinafter referred to as assessee-firm). An agreement dt. 23rd July, 1980 was executed in between the partners of the assessee-firm and that of private limited company of taking over the assessee-firm by private limited company as a going concern and copy of that agreement-deed does find place at pp. 25 to 33 of paper book. A perusal of that agreement deed reveals that the private limited company took over the business of the partnership firm including its assets and liabilities for which consideration was arrived at. However, clause No. 5 of that deed provides that any amount which may be received by assessee-firm after the date of said deed in respect of contracts already executed by it and not shown in the books of accounts, the said amount shall be of assessee-firm and in case of dissolution of the said firm, to the partners thereof in accordance with the terms and conditions of dissolution deed. It further transpires that on 2nd Aug., 1980 the assessee-firm was dissolved by dissolution deed dt. 2nd Aug., 1980 (copy appearing at pp. 34 to 40 of assessees paper book) and that dissolution deed, inter alia, provides that if any amount was awarded in respect of the pending claim relating to already executed contracts, then the said money would belong to the erstwhile partners in their individual capacity in the profits sharing ratio of partners in partnership firm. It is again to be pointed out that during the course of business the assessee-firm had entered into a contract for construction of buildings of polyster filament yarn project of M/s Petrofils Co-op. Ltd., Baroda by contract dt. 17th Feb., 1975 and work of the said contract was completed before the dissolution of the assessee-firm and even the assessee-firm made claim with M/s Petrofils Co-op. Ltd. for payment in respect of the work executed by it. From records, it appears that M/s Petrofils Co-op. Ltd. denied its liability to make payment of the claim made by the assessee-firm and even made counter-claim to the assessee-firm and that dispute had been referred to the arbitration of one Shri S. A. Desai and award was made by him on 7th Aug., 1980 by which the assessee-firm was to get Rs. 10,48,246 in respect of the work executed by it. Even M/s Petrofils Co-op. Ltd. paid the amount of award through a cheque dt. 3rd June, 1981 for Rs. 10,48,246.
3. In the year under consideration, i.e., asst. yr. 1982-83 of which previous year ended on 31st march, 1982, the assessee filed a return of income on 30th June, 1982 showing total income of Rs. 6,122. The Assessing Officer (AO) examined the cases of partners of assessee-firm and then came to know that each partner had mentioned in his/her individual computation of income to have received certain sum of amount in his/her profit sharing ratio out of Rs. 10,48,246 received from M/s Petrofils Co-op. Ltd. and claimed its exemption under s. 41(1) of the IT Act, 1961 (hereinafter referred to as the Act). The AO did not find anything regarding the amount of award received by the assessee-firm in its return of income and thus he issued notice to assessee under s. 143(2) and 142(1) of the Act. He called upon the assessee-firm to explain as to why the amount of award received by assessee-firm should not be taxed in its hands. Different pleas were raised by the assessee-firm and main plea was that assessee-firm was dissolved on 2nd Aug., 1980 while the amount of award was received on 3rd June, 1981 and the same was distributed among the partners in the profit sharing ratio of each partner in assessee-firm as per terms and conditions of dissolution deed. The assessee-firm pleaded that case of the assessee does not fall under the provisions of s. 41(1) of the Act nor provisions of s. 176(3A) of the Act. The AO examined each of the plea so raised by the assessee-firm and came to the conclusion that amount of Rs. 10,48,246 was to be taxed in the hands of the assessee-firm and accordingly assessment order was completed on 20th Feb., 1985. The assessee came in appeal and its appeal was dismissed by CIT(A) vide order dt. 17th Feb., 1985 against which the assessee came in second appeal before the Tribunal, Ahmedabad C Bench and different pleas were raised before the Tribunal. After considering all the facts the Tribunal Ahmedabad C Bench decided the matter vide order dt. 27th June, 1986 (copy of order appearing at pp. 44 to 48 of the paper book of assessee). The Tribunal observed that provisions of s. 176(3A) of the Act were not attracted in the case of the assessee-firm as its business was taken over by another company and that amounts to succession and not discontinuance which was required for applicability of provisions of that section. The Tribunal further discussed the provisions of s. 41(1) of the Act and observed that authorities below failed to examine the applicability of the provisions of s. 41(1) of the Act and thus the matter was restored back to CIT(A) to decide the matter after affording an opportunity of hearing to the parties. It was also made clear that observations of the Tribunal shall not be binding on the CIT(A) who will decide the point afresh. The plea of the assessee that after dissolution of the firm, partners of the assessee-firm were to be assessed in respect of the receipt in question in the status of BOI in pursuance of the decision of jurisdictional High Court in the case of Artex Mfg. Co. Ltd. vs. CIT (1981) 131 ITR 559 (Guj) was also restored back to CIT(A) for disposal along with the other controversy already restored to his file.
4. In the second inning the learned CIT(A) gave opportunity to assessee as well as to the AO concerned. He agreed with the plea of the AO that entire planning of forming the private company and dissolution of the firm has been made to avoid the tax liabilities in the hands of the firm but he was of the opinion that provisions of s. 41(1) of the Act are not going to help the Revenue in view of the decision of jurisdictional High Court in the case of Artex Mfg. Co. vs. CIT (supra) and further in view of the decision of Honble Supreme Court in the case of Saraswati Industrial Syndicate Ltd. vs. CIT (1990) 186 ITR 278 (SC). He held that the assessee-firm was not liable to pay tax under s. 41(1) of the Act in respect of the sum of Rs. 10,48,246 but he gave option to AO to proceed with the matter of assessing the partners of the firm in the status of BOIs, if he so liked. This order of CIT(A)-III, Ahmedabad, dt. 1st Dec., 1990 is subject-matter of appeal preferred by the Revenue.
5. As observed by CIT(A) that AO can proceed with the partners of assessee-firm, since dissolved, as BOIs the concerned AO initiated proceedings under s. 147 by issuing notice under s. 148 dt. 26th March, 1991 after recording detailed reasons to the effect that income chargeable to tax in the hands of BOI consisting of partners of assessee-firm had escaped assessment. The assessee put in appearance and questioned the very proceedings and denied its liability. The AO discussed the matter at length and ultimately the amount of Rs. 10,48,246 was assessed in the hands of BOIs consisting of partners of the assessee-firm provisionally as by that time the appeal of the Revenue against order of CIT(A) was pending before the Tribunal. The assessee even challenged this order of AO and CIT(A)-I, Ahmedabad, dismissed this appeal vide order dt. 13th Nov., 1993 and assessee has come in appeal vide ITA No. 1484/Ahd/94 against it. It is how these two appeals are interconnected and have come for disposal.
6. Before proceeding with the different submissions came from the learned senior Departmental Representative, Shri R. K. Chaudhary and that of Shri J. P. Shah, Advocate appearing for assessee, we are giving out the undisputed facts so that the submissions may be appreciated. The assessee-firm came into existence prior to asst. yr. 1976-77 and its main business was to undertake contracts of civil engineering, mechanical engineering, electrical engineering and other contracts of Central Government, PWD, MES, Semi-Govt. Deptt., local bodies, etc. as is given out in the partnership deed dt. 9th March, 1979. This has also come on record that assessee-firm undertook a contract for construction of buildings of polyster filament yarn project of M/s Petrofils Co-op. Ltd., Baroda, on 17th Feb., 1975. It is also the case of both the parties that said contract work was completed by the assessee-firm before its dissolution. The assessee-firm also raised its claim with M/s Petrofils Co-op. Ltd. for payment in respect of the work executed by it but M/s Petrofils Co-op. Ltd. denied its liability and even made counter claim. It is also an admitted fact that claim of assessee-firm and that of M/s Petrofils Co-op. Ltd. was referred to arbitration of one Mr. S. A. Desai. A company in the name of M/s Bajaria Bros. (P) Ltd. came into existence with a view to take over the business of the assessee-firm as a going concern and vide agreement dt. 28th Aug., 1980, the whole of the business of the assessee-firm was taken over by the said Private Limited Company except any amount which may be found receivable by assessee-firm in respect of contract executed by it. After the assessee-firm was takenover by the private limited company, the assessee-firm was dissolved on 28th Aug., 1980 and just after 5 days, the award was made by Shri S. A. Desai, arbitrator, by which the assessee was to receive Rs. 10,48,246 from M/s Petrofils Co-op. Ltd. Later on the matter of arbitration came to the Court and on 4th June, 1981 M/s Petrofils Co-op. moved an application in the Court of Civil Judge (Sr. Division), Baroda mentioning that the parties, viz., that the applicant M/s Petrofils Co-op. Ltd. and M/s Bajaria Bros., the assessee-firm, have amicably settled the dispute involved in the award given by the arbitrator, Shri S. A. Desai and that applicant has paid a sum of Rs. 10,48,246 to assessee-firm through cheque No. 054165 dt. 3rd June, 1981 and prayer was made by both the parties that matter may be treated as withdrawn unconditionally. It goes to show that assessee-firm received the cheque of Rs. 10,48,246 from M/s Petrofils Co-op. Ltd. After receipt of this amount by the assessee-firm, the same was distributed amongst its partners on the basis of their profit sharing ratio in the partnership firm.
7. Now on the basis of these facts, the only question for scrutiny before us and the authorities below was as to whether this amount is to be assessed in the hands of the assessee-firm or not as before the AO the contention of assessee-firm was that it was not taxable in the hands of assessee-firm as it stood dissolved before the receipt of that amount or that firm carried on any business at the relevant time. Contrary to it, the stand of Revenue is that it is the business income of the assessee relating to the work executed by the assessee-firm prior to its dissolution and for that said amount should be treated as that of business income of assessee. Before the Tribunal, the assessee took the alternative plea that the amount may be treated in the hands of partners of the assessee-firm in the status of BOIs. Accordingly we are taking up the first issue as to whether the amount is to be taxed in the hands of the assessee-firm or not.
8. On this point the stand of the Revenue is threefold. The first plea is that the said amount is taxable in the hands of assessee-firm in view of the provisions of s. 41(1) of the Act. The second plea is that it is also taxable under the provisions of s. 176(3A) r/w s. 189(1) of the Act. Lastly, the Department has placed reliance on the findings of Tribunal in the case of Baryan & Berry vs. Dy. CIT decided on 9th July, 1992 by the Tribunal Ahmedabad B Bench in ITA No. 5230/Ahd/91 relating to asst. yr. 1988-89 [reported at (1993) 45 TTJ (Ahd) 58] wherein the facts were identical and the Tribunal concluded that assessees case is covered by the reasonings of the decision in the case of McDowell Co. Ltd. vs. CTO (1985) 154 ITR 148 (SC) decided by Honble Supreme Court. The contention of the Revenue is that assessee in this case adopted a device to avoid tax by effecting the dissolution of the firm and the same business being taken over by the private limited company consisting of the same partners of the assessee-firm. We shall be taking up each of the pleas separately.
9. To begin with, we are taking up the first point relating to applicability of s. 41(1) of the Act as it stood at the relevant time to the facts of the case as undisputedly the Tribunal while deciding the appeal of assessee for this very assessment year restored the matter to the file of CIT(A) with a direction to examine whether the alleged amount of Rs. 10,48,246 can be treated as the income of partnership firm and assessable as such with the aid of s. 41(1) of the Act. It will be appropriate to give out the actual words of s. 41(1) of the Act which stood at the relevant time as that sub-s. (1) stood amended since 1st April, 1993 :
"Sec. 41(1). - Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading lability incurred by the assessee (hereinafter referred to as the first mentioned person) and subsequently during any previous year -
(a) The assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not."
10. From the wording of the above sub-s. (1) of s. 41 and relevant proviso of (a), the following conditions are to be fulfilled for its application :
(i) In the assessment of an assessee, an allowance or deduction has been made in respect of any loss, expenditure, or trading liability incurred by him;
(ii)(a) any amount is obtained in respect of such loss or expenditure, or
(b) any benefit is obtained in respect of such trading liability by way of remission or cessation thereof;
(iii) such amount or benefit is obtained by the assessee; and
(iv) such amount or benefit is obtained in a subsequent year.
If we apply the above provisions to the facts of the assessee firm then first requirement is to be seen whether assessee firm was allowed any deduction in respect of any expenditure or trading liability etc. In this connection it is noteworthy that after the case was remanded to CIT(A) by the Tribunal then the CIT(A) called for AO to argue about the applicability of s. 41(1) of the Act to the facts of assessee firm and AO vide written submission dt. 13th Sept., 1990 specifically mentioned that assessee firm had incurred expenditure in relation to the contract which had resulted into an award of Rs. 10,48,246 given by arbitrator and those expenses had been claimed as deduction from asst. yrs. 1976-77 to 1979-80. This fact had not been disputed from the side of assessee firm and only conclusion shall be that assessee had incurred expenses in execution of the contract of construction of buildings of Polyster Filament Yarn Project of M/s Petrofils Co-op. Ltd., Baroda during asst. yrs. 1976-77 to 1979-80 and those expenses were allowed to it as deduction. Further it is also a fact now that this award of Rs. 10,48,246 was obtained by the assessee firm in respect of those expenses incurred by it during asst. yrs. 1976-77 to 1979-80. It is also undisputed fact that claim for this amount of contract with M/s Petrofils Co-op. Ltd. was made by the assessee firm and ultimately as evident from copy of application dt. 4th June, 1981 moved by M/s Petrofils Co-op. Ltd. and assessee firm before Civil Judge (STD.), Baroda (copy appearing at p. 4 of Revenues paper book) that case relating to arbitration award between these two parties viz., M/s Petrofils and assessee firm was disposed of by payment of Rs. 10,48,246 by M/s Petrofils Co-op. Ltd. to assessee firm through cheque. It clearly proves that it is the assessee firm which received the amount and on the basis of all these facts, the requirements of s. 41(1) as referred to above, are clearly fulfilled.
11. The contention of the learned counsel, Shri J. P. Shah, Advocate is the same as was before the authorities below. According to him the amount is not to be treated, as received by the assessee firm as that firm was no more in existence at the time of its receipt nor it was carrying on any business. He has placed reliance on the case law to bring home the arguments that s. 41(1)(a) is not applicable in this case.
12. The first case relied by the learned counsel is that of CIT vs. Hukumchand Mohanlal (1971) 82 ITR 624 (SC). The brief facts are that the assessee carried on business of selling agent of M/s Mohanlal Hargovindas after succeeding her husband who died on 17th Feb., 1960. The assessee received a refund of Rs. 24,341 on 9th Nov., 1961. Question was whether that amount received by assessee is taxable in her hands or not under s. 41(1). Their Lordships of Honble Supreme Court observed that IT Act did not contain any provision making a successor in business or the legal representative of an assessee to whom allowance had already been granted, liable to tax under s. 41(1) in respect of the amount remitted and received by the successor or the legal representative. Sec. 41 did not apply to this case because the assessee sought to be taxed was not the assessee contemplated by that section as the assessee within s. 41(1) who was husband of the present assessee had already died.
13. The next case relied by the learned counsel for assessee is that of Saraswati Industrial Syndicate vs. CIT (supra). In that case Saraswati Industrial Syndicate (appellant company) and Indian Sugar Co. amalgamated under order of Honble High Court. Prior to the amalgamation Indian Sugar Co. was allowed expenditure to the extent of Rs. 58,735 on accrual basis in its earlier assessment. The said company had shown that amount as trading liability and the same was taken over by Saraswati Industrial Syndicate. After amalgamation the appellant company claimed exemption of the amount of Rs. 58,735 from income-tax on the ground that amalgamated company was liable to pay tax under s. 41(1) as the expenditure had been allowed to Indian Sugar Co. which was a different entity and that stood amalgamated and lost its entity. The Honble Supreme Court laid down that the Indian Sugar Co. ceased to exist in the eyes of law and Saraswati Industrial Syndicate was a separate entity of Indian Sugar Co. and not liable to tax under s. 41(1) of the Act.
14. The third case relied by the learned counsel as well as by learned CIT(A) is that of Artex Mfg. Co. Ltd. vs. CIT (supra). In that case provisions of ss. 41(2) and 45 of the Act were involved. A firm was carrying on business but the same was taken over as a going concern by a company. Their Lordships laid down that surplus arising out of sale of entire business undertaking together with its assets and liabilities for a slump price was not assessable under s. 41(2) nor principle of mutuality was attracted. The assets were assessable as capital gain.
15. Another case of CIT vs. P. K. Kaimal (1980) 123 ITR 735 (Mad) was also referred to in which their Lordships dealing with the provisions of s. 41(4) of the Act held that continued existence of the business was not a condition for applying both ss. 41(1) and 41(4) but the only basis for applying both ss. 41(1) and 41(4) was that identity of the assessee was the same. In that case partnership firm was dissolved and recovery was by assessee who took over and succeeded to the business. Their Lordships held that successor was not liable to be assessed under s. 41(4).
16. The learned counsel further referred to the decision of the Tribunal, Allahabad Bench A in the case of New Cawnpore Flour Mills (P) Ltd. vs. ITO (1986) 25 TTJ (All) 89 : (1986) 19 ITD 360 (All) and in that case the assessee company took over the business of the firm and then question came up regarding receipt of Rs 1,02,108 received as refund by the assessee company relating to the period of firm and the Tribunal relying upon the decision of Honble Supreme Court in the case of CIT vs. Hukumchand Mohanlal (supra) laid down that the amount was not taxable under s. 41(1) in the hands of assessee company who was successor in business or a legal representative of the assessee to whom the allowance was granted.
17. On the strength of these case laws, the contention of the learned counsel is that the reasoning is fully applicable to the facts of the case in hand as facts are identical and provisions of s. 41(1) were rightly held as inapplicable in the case of assessee firm by CIT(A) and his order requires no interference. As against it, the learned Sr. Departmental Representative has pointed out that the approach of the learned CIT(A) was not justified. According to him all the requirements of s. 41(1) were found fulfilled in the case of the assessee and the case laws relied upon by the assessee firm were not applicable as the facts were distinguishable. He placed reliance on the decision of Honble Kerala High Court in the case of Paulson Constructions vs. CIT (1990) 181 ITR 476 (Ker) in which the firm was dissolved and after dissolution a refund of Rs. 36,000 was received by the said firm for which deduction in respect of liabilities was allowed to that firm in asst. yr. 1972-73. The Honble High Court relying upon different case laws on the point and after considering the decision of Honble Supreme Court in the case of CIT vs. Hukumchand Mohanlal (supra) relied by the learned counsel for assessee which is basis for the other decision of the Tribunal and the High Court referred to above, concluded that the firm is to be treated as in existence even in asst. yr. 1974-75, the year in which the assessee firm received Rs. 36,000 under s. 47 of Indian Partnership Act, 1932 and the amount so refunded was assessable in the hands of the firm. On the basis of this case law which is said to be a direct decision on the point in hand, the learned Sr. Departmental Representative pointed out that the case law relied by him clinches the issue in favour of Revenue so far as the applicability of s. 41(1) is concerned.
18. After careful consideration of the rival submissions came before us, it is relevant to point out that we have already concluded that all the requirements of s. 41(1) of the Act stand fulfilled in the case of assessee as admittedly the assessee firm was allowed deduction in respect of expenses during asst. yr. 1976-77 to asst. yr. 1979-80 and the amount of award was obtained by the assessee in respect of that expenditure. It was obtained in subsequent year. Further the case laws referred to by the learned counsel for the assessee have a common feature that in those cases the Honble Supreme Court as well as the Honble High Court and the Tribunal were dealing with the successor concern who received the amount in relation to the expenses/trading liability incurred by its predecessor firm/concern. This was the only basis that different Courts held that provisions of s. 41(1) are not to be treated as applicable as the fundamental requirement is that receipient of the amount should be the same assessee. The facts in the present case are quite different to those cases. Admittedly we are not dealing with the successor company as amount in question has not been received by the successor company but by the assessee firm who has been the assessee before us. The dissolution of that firm will make no difference as under s. 47 of the Partnership Act the existence of firm is allowed to continue so far completion of any transaction began but remained unfinished at the time of dissolution. The word transaction used in s. 47 includes all matters relating to affairs of partnership and after dissolution, partnership subsists merely for completing those pending transactions. In the present case, the claim of the assessee firm with M/s Petrofils Co-op. Ltd. was not transferred to that company but that firm was allowed to pursue the same and admittedly that assessee firm has pursued it till the amount of arbitration award was received by it. The only inference out of these facts in view of all the provisions of s. 41(1) of the Act r/w s. 47 of the Partnership Act is that it is the assessee firm who was to be treated in existence till the completion of the pending transaction relating to the claim of that firm for construction work undertaken by it from M/s Petrofils Co-op. Ltd. and that firm alone dealt with that transaction till the realisation of its account which is not in dispute. As pointed above in the case in hand, assessee firm not only pursued the matter but received the cheque, deposited in bank account distributed to its partners. The reasoning of Honble Kerala High Court relied by the learned Sr. Departmental Representative in the case of Paulson Construction (supra) is a direct decision on this point and decides the matter in favour of Revenue after considering the provisions of s. 41(1) r/w s. 189 of the said Act and that of s. 47 of Indian Partnership Act. We accordingly follow the said decision that has also discussed for this very purpose the decision of Honble Supreme Court in the case of CIT vs. Hukumchand Mohanlal (supra) and thus conclude that the amount in question is to be taxed in the hands of assessee under s. 41(1) r/w s. 189 of IT Act and further r/w s. 47 of Indian Partnership Act.
19. The second alternative plea of the Revenue is that the amount in question is taxable in the hands of assessee firm in view of the provisions of s. 176(3A) of IT Act read with s. 189(1) and the view taken by the Tribunal in the first inning was not justified. The learned Departmental Representative has placed reliance on the decision of Bombay High Court in the case of CIT vs. Star Andheri Estate (1994) 208 ITR 573 (Bom) in which a firm was dissolved and the amount due to the firm prior to dissolution was received after the dissolution, was held assessable in the hands of the assessee firm in view of the provisions of s. 176(3A) r/w s. 189 of the Act. According to him this reasoning of Honble Bombay High Court is fully applicable to the facts of the present case as the amount in question is to be treated as assessable in these provisions. He further referred to the decision of Kerala High Court in the case of United Construction Contractors vs. CIT (1994) 208 ITR 914 (Ker) in which the business was discontinued and amount received after discontinuance of business was held assessable in the hands of that very concern under provisions of s. 176(3A). The contention of the learned Sr. Departmental Representative is that the matter is to be decided on the basis of those cases which are having direct impact on the facts of this case.
20. The learned counsel for the assessee at the very beginning pointed out that the learned Sr. Departmental Representative should have not agitated this issue as the matter stands decided by the Tribunal in favour of assessee firm. He referred to the decision of Tribunal Ahmedabad Bench C in ITA No. 2745/Ahd/95 asst. yr. 1982-83 decided on 27th June, 1986 by which the appeal of assessee for this assessment year was disposed of and the matter was restored to CIT(A) who decided the same and appeal of Revenue is against that order. According to the learned counsel, the Tribunal has specifically concluded that provisions of s. 176(3A) of the Act are not applicable as the business of assessee firm had been taken over by the company and that amounted to succession or transfer and not discontinuance. Once that was the conclusion and the Revenue has not challenged that decision through reference application to the Honble High Court, it does not lie in the mouth of Revenue to challenge that finding.
21. On merit the learned counsel pointed out that undisputedly the assessee firm had been taken over as a going concern by M/s Bajaria Bros. (P) Ltd. and that means succession and requirement for applicability of the provisions of s. 176(3A) is that a business should be discontinued. The Honble Privy Council in the case of CIT vs. P. E. Polson (1945) 13 ITR 384 (PC) has laid down that "discontinuance" used in s. 25(3) and (4), 26 of IT Act, 1922 does not include succession. The same view was taken in the case of CIT vs. A. W. Figgies & Co. & Ors. (1953) 24 ITR 405 (SC). The learned counsel pointed out that provisions of s. 176(3A) came up for discussion before the Tribunal, Allahabad Bench A in the case of New Gawnpore Flour Mills (P) Ltd. (supra) under similar circumstances and facts as in the case in hand and the Tribunal following the decision of Honble Supreme Court laid down that s. 176(3A) applies only where the business has been discontinued but in that case business of the firm was taken over as a going concern by assessee-company and thus the same was treated as case of succession and provisions of s. 176(3A) is not applicable. The contention of the learned counsel is that the matter stands decided in favour of assessee and it is on the basis of decision of Honble Supreme Court.
22. In rejoinder, the learned Sr. Departmental Representative pointed out that no doubt the Tribunal in the case of assessee while deciding the appeal in the first inning observed that the business of assessee was taken over by the company and that amounts to succession but while restoring the matter to CIT(A) the Tribunal in para 9 of its order left the matter completely open by observing that CIT(A) while deciding the matter afresh should not feel bound down by any of the observations of the Tribunal made above. It shows that the Tribunal was of the opinion, that the matter requires a fresh disposal even on all the points involved. The learned Sr. Departmental Representative also was of the opinion that in view of the decision of Honble Bombay High Court, the matter is to be decided as facts were quite identical to the facts of this case while in the case before the Honble Privy Council in the case of CIT vs. P. E. Polson (supra) and that of CIT vs. A. W. Figgies & Co. (supra) were different as in s. 25 of Old Act word succession was used and in that context word discontinuance was interpreted by Privy Council and Honble Supreme Court.
23. After going through the submissions of the learned representatives of the parties it is relevant to mention that no doubt the Tribunal observed in para 6 of its order dt. 27th June, 1986 that on going through the various High Courts decisions and dealing interpretation of the word "discontinuance" used in s. 25(2) of IT Act 1922 [it was s. 25(3) and not s. 25(2)] it is to be treated that s. 176(3A) of IT Act, 1961 was not attracted in the instant case but we have to go through the very intention of the Tribunal which is apparent from para 9 of the said order which is appearing on back of p. 46 of assessees paper book and by that the matter of assessee firm had been restored back to CIT(A) for rehearing and disposal of the appeal afresh. The relevant observations appearing in the end of this para read as under :
"It may be mentioned that none of our observations made above, would be binding on the CIT(A) while deciding the point afresh."
24. A plain reading of this goes to show that it was a case of open set aside by the Tribunal giving a clean slate to CIT(A) to decide the matter without any binding force of any observation of the Tribunal on him. If it was so, then the issue relating to applicability of provisions of s. 176(3A) were also open for fresh disposal.
25. Further it is also to be noted that the Tribunal observed that provisions of s. 25(3) of IT Act, 1922 are identical to the provisions of s. 176(3A) of the Act. This observation is patently wrong. The words used in s. 25(3) of IT Act, 1922 as reproduced by the Honble Privy council in the case of CIT vs. P. E. Polson at p. 387 of 13 ITR are as under :
Sec. 25(3) :
Where any business, profession or vocation on which tax was at any time charged under the provisions of Indian IT Act, 1918 is discontinued, no tax shall be payable in respect of the income, profits and gains of the period between the end of the previous year and the date of such discontinuance....."
This sub-s. 25(3) was amended by Amending Act VII of 1939 and words "then, unless there has been a succession by virtue of which the provisions of sub-s. (4) have been rendered applicable" were added after the word "discontinuance" used in s. 25(3). It is in this context of succession of discontinued business, the Honble Privy Council interpreted the word discontinuance. The same view was in the case of A. W. Figgies & Co. & Ors. (supra) by Honble Supreme Court. These are not the identical provisions to the words used in s. 176(3A) which have been added by the legislature since 1st April, 1976 and it relates to any sum received after discontinuance. The actual words are as under :
Sec. 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 recipient and charged to tax 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.
From perusal of above, it is clear that provisions of s. 25(3) of Old Act as stood amended in 1939 were quite different to the provisions of s. 176(3A) and the observation of the Tribunal was misconceived. Further the Tribunal itself has made it clear that no observation made by it shall be binding on CIT(A).
26. It is again relevant that provisions of s. 176(3A) which have been inserted since 1st April, 1976 have to be interpreted and made applicable in the manner in which different High Courts have interpreted the same and for that we are having before us the latest decision of Bombay High Court in the case of CIT vs. Star Andheri Estate (supra) and that of United Construction Contractors vs. CIT (supra) in which the facts were identical. Their Lordships of both the Honble High Courts have discussed the provisions of s. 176(3A) r/w s. 189(1) of the Act and concluded that even after dissolution of any firm, if the amount is received then such sum shall be deemed to be the income of that firm regardless of the fact of dissolution of that firm or discontinuance of that business.
27. This matter can be examined with another angle keeping in view the interpretation of word "discontinuance" made by the Privy Council and Honble Supreme Court in the case of P. E. Polson (supra), A. W. Figgies (supra) and that of other cases relied by the learned counsel for assessee. The word discontinuance used in s. 176(3A) can be interpreted in two ways. Firstly, so far as the business of assessee firm vis-a-vis its being taken over by the private limited company concern, it amounts to discontinuance of business in the case of firm but in the case of the company vis-a-vis firm its is a case of successor. In other words, if we take the meaning of the word "discontinuance" in relation to the assessee firm then admittedly its business had come to an end after the date of taking over by the private limited company and it fulfils the requirements of s. 176(3A) in which the word discontinuance has been used by the legislature. The very intention of the legislature for adding the provisions of ss. (3A) to s. 176 is that it was meant for those amounts received by particular concern after discontinuance of its business and it was made chargeable to tax accordingly in the year of receipt as if such amount would have been included in the total income of the persons who carried on the business had such amount been received before such discontinuance. In our considered opinion this sub-s. (3A) of s. 176 is meant for meeting such eventuality as has come in the case of assessee firm. Accordingly, we are of the opinion that provisions of s. 176(3A) r/w s. 189(1) are applicable to the case of the assessee firm in view of the decision of Bombay High Court and Kerala High Court referred to above and that business income of Rs. 10,48,246 is to be taxed in the hands of assessee firm irrespective of its dissolution.
28. The third plea of Revenue is about applicability of McDowell case (supra). Reliance has been placed by the learned Departmental Representative on the decision of Tribunal in the case of Banyan & Berry vs. Dy. CIT (supra) in which the facts were almost identical. In that case initially it was a partnership firm in the name of Banyan & Berry having 16 partners and nature of business was that of engineers, contractors and builders as in the present case. A contract was awarded to M/s Banyan & Berry for construction of dam and work was completed on 15th May, 1984. Ultimately, the claim of the assessee for that contract was referred to the arbitrator and in between the firm was dissolved and its business was taken over by Banyan & Berry (P) Ltd. The amount of the contract was received by the firm through its partners. The Tribunal after going through the facts concluded that dissolution of the firm was nothing but a device to avoid tax. No doubt the firm was dissolved by a deed but in essence it continued as there was no purpose in dissolving the firm except to avoid the tax. The Tribunal further laid down that dissolution of the firm will be ignored for the purpose of assessment of income which was received on the basis of awards of arbitrator and ultimately that amount of award was held as taxable in the hands of the firm after applying the decision of Honble Supreme Court in the case of McDowell & Co. (supra) and other decisions on the point. We are in full agreement with this conclusion of the Tribunal as even in this case facts are much stronger in favour of Revenue than that case and in case of assessee firm the amount of award has been received by the assessee firm after (sic) arbitration proceedings pending before the Court and assessee firm only later on distributed among the partners. There had not been any reason on record as to why the firms partners resorted to dissolution of the firm and why it was taken over by a company which had not carried out any work of construction etc. but had gone in losses in subsequent years. Another feature of the case is that this amount of Rs. 10,48,246 is not the only amount of that firm but in subsequent years different amounts have been received out of arbitration proceedings relating to those contracts which were taken up by the firm and executed by that firm before its dissolution and proceedings of arbitration were just going to be in favour of assessee firm in near future. These facts may be read coupled with the other facts that case of the assessee firm before the Tribunal was that firm was not liable to pay the tax on this amount of Rs. 10,48,246 but partners as BOI and when AO in pursuance of observation of CIT(A) made in second inning, charged income-tax on this amount on partners of assessee firm as BOI, the assessee has not accepted that position but challenged it before CIT(A) who dismissed its appeal and assessee has again come before us on the same point that partners of BOI are not liable to pay any tax. Mala fides of the assessee firm are evident from these facts that neither the assessee firm has come forward to pay the tax on the admittedly business income nor its partners are ready to pay tax as BOI nor successor came forward to pay the tax. If this is not to be treated as device to evade the tax in view of the decision of Honble Supreme Court in the case of McDowell (supra) we are afraid to observe that there cannot be any case of evasion of tax. In view of all these, we are of the definite conclusion that it was nothing but a device adopted by partners of assessee firm to evade the tax for which they dissolved the firm and floated a company which took over the said firm as a going concern but leaving a proviso that the unfinished contracts and receipts thereof shall be taken by partners of dissolved firm. Accordingly, we are in agreement with the findings of the Tribunal that alleged dissolution of the firm is to be ignored and amount in question of Rs. 10,48,246 was rightly treated as assessable in the hands of assessee, by AO.
29. The result of the above discussion is that the amount of Rs. 10,48,246 is assessable in the hands of assessee firm in view of s. 41(1) of the Act r/w s. 47 of Partnership Act and further under s. 176(3A) r/w s. 189 as well as by pressing into the service of reasoning of Honble Supreme Court in the case of McDowell & Co. (supra). The appeal of the Revenue stands allowed as we are confirming the order of AO and set aside the order of CIT(A) as we have concluded that amount is taxable in the hands of assessee firm, the appeal of assessee involving the question of taxability of that amount in the hands of BOI becomes infructuous and the same is dismissed.