Income Tax Appellate Tribunal - Ahmedabad
Assistant Commissioner Of Income-Tax vs K. Kachradas Patel Spec. Family Trust on 28 February, 2003
Equivalent citations: [2004]88ITD228(AHD)
ORDER
R.P. Garg, Vice President
1. These appeals by the Revenue and cross objections by the assessees are against the orders of Commissioner of Income-tax (Appeals) both dated 27-9-1995 for the assessment year 1992-93. Since there is a common dispute, these appeals and cross objections are being disposed of by a common order for the sake of convenience.
2. Two assessments have been made in the hands of Kachradas Patel Specific Family Trust and Nirma Specific Family Trust. Two sums of Rs. 20,29,503 and Rs. 34,34,527 respectively were received by these two trusts as a refund of custom duty. Two proprietary concerns M/s. Noble Industries and M/s. Navbharat Industries purchased certain goods through Gujarat Detergent Manufacturing Association (GDMA for short) and paid certain customs duty on those purchases. The amounts were claimed and allowed as deduction in the earlier years in the assessments of erstwhile trusts K. Kachradas Patel Specific Trust and Nirma 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-lax, 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 HI-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 slated 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 the recipient beneficiaries and/or for earning income for their enjoyment.
(a) The liabilities to/for unpaid excise duty, receivable sales-tax, custom refund and custom liabilities are allotted and allocated subject to finalization of the claims. Any surplus or deficit arising thereon shall belong to or be borne by all the beneficiaries in proportion in which the liability/ies is/are allocated amongst the beneficiaries, on the date of dissolution.
(b) The above assets/properties are distributed subject to all the liabilities accounted or unaccounted, determined or undetermined ascertained or not and whether contingent or otherwise and as such if any liability which is not accounted for arises in the future the same is to be borne by all the beneficiaries in proportion to their respective shares in the corpus of the trust.
(c) Further recoveries, refunds, assets more particularly tax recoveries and refund if any, arises or are received, the same shall belong to and be allotted all the beneficiaries in proportion to their shares in the corpus of the Trust as on the date of dissolution.
(d) to (f) not reproduced as not being relevant to decide the issue.
2. FURTHER RESOLVED THAT the Bank Account No. 3277 with the Kalupur Com. Co-op. Bank Ltd. alongwith the credit Balance amount of Rs. 86,36,112.94 has been allotted to Karsanbhai Khodidas Patel HUF and the Beneficiary. The said HUF is liable for the said Balance amount. But to facilitate attending to the future transactions relating to the activities, objectives, and purposes of the dissolution of Trust the said Bank account shall remain in operation to be operated by (i) Shri Karsanbhai Khodidas Patel, (ii) Shri Kanjibhai Vandas Patel and (iii) Shri Jagdishchandra Nathalal Brahmbhatt for the aforesaid purpose and they have been authorized hereby by the Trustees and the beneficiaries of this Ninna Specific Family Trust to attend to all the matters for realization, distribution of the money/assets and/or to effect the required payments and to execute all such deeds, documents and papers as may be required for distribution of the Corpus/assets and meeting all the liabilities and administer the dissolution of the Mirma Specific Family Trust as specified herein. Notwithstanding such future administration/ration the Trust stands dissolved on and from the date 20-12-1987. That the same Bank Account shall be 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 accounts 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 that on and from the date of distribution i.e. 20-12-1987, the Ninna Specific Trust shall stand dissolved. Though Clause 2 provides for continued operation of the bank account No. 3277, it appears that the receipts of refund from GDMA were deposited in a newly opened separate account No. 2793 with Kalupur Comm. Co-op. Bank Ltd. in the names of the trusts operated by the constituted attorneys namely Shri Kanjibhai Vandas Patel, Shri Jagdishbhai Nathalal Brahmbhalt and Shri Karsandas Khodidas Patel.
5. In the case of K. Kachradas Patel Specific Trust as slated by the Assessing Officer that at page 6 of the dissolution deed, it is slated that to facilitate further affairs and activities relating to the dissolved trusts and beneficiaries...are hereby constituted as irrevocable attorneys. These constituted attorneys are authorized to perform on behalf of the trust a variety of acts which include :
(i) To recover and realise tax, refunds, etc. payable to the trust and the proprietary concern S.K. Patel (F.T.) and to give receipt to the same and discharge the same which amounts that the tax refunds have been received by the constituted attorneys on behalf of the trust and the proprietary concern of the trust, namely S.K. Patel (F.T.)
(ii) To appear, attend and represent the trust in variety of proceedings.
(iii) To initiate legal proceedings, if necessary, and to do all things and deeds necessary for the same.
6. Para 7 at page 8 of the dissolution deed slates that to facilitate the future affairs and activities relating to the dissolved trust (after the date of dissolution), new bank account shall be opened in the name of K. Kachradas Patel Specific Family Trust and S.K. Patel (F.T.) in any bank and shall be operated by the constituted attorneys. The concluding lines of the para 7 are, "the constituted attorneys are authorized to open and operate bank account in the name of the trust and S.K. Patel (F.T.) FOR AND ON BEHALF OF THIS DISSOLVED TRUST."
7. From the above, the Assessing Officer concluded that the dissolution deed of the trusts itself clearly states that for limited purposes, the trust continued through constituted attorneys. If it were not so, the constituted attorneys could not have received the customs duty refund issued in the name of proprietary concern of the trust. The amount was distributed amongst the beneficiaries in their beneficial 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 upto 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 taxable in the trust's hands under Section 176(3A) read with Section 41(1) of the Act.
9. He noted para 4 of the assessee's letter elated 21-2-1995 which reads as under:
It is true that the trust is dissolved. However, the trust, in any case would come into existence after the dissolution. On the dissolution of the trust, all the assets and liabilities were distributed amongst the beneficiaries.
From that he concluded that by saying in the second line of the para of the letter extracted above, the assessee has only agreed with the stand being taken by the department that the trust would come into existence.
10. He further observed that the Department has consistently been assessing the trust as AOP and, therefore, the provisions of Section 177 were also applicable and the trust is assessable in respect of the amount of credit note in assessment year 1992-93 after the date of dissolution also. In this connection, he also observed that the reliance by the assessee on the decision of Gujarat High Court in the case of CIT v. Deepak Family Trust (No. 7 j [1994] 72 Taxman 406 was of no help as in that case the court held that the status of the representative assessee cannot be different than that of the person represented and, therefore, the status of Deepak Family Trust was held to be individual whereas in the assessee trust, all the beneficiaries are not individuals and most of the beneficiaries are being assessed in the status of AOP and for this reason, the status of the assessee cannot be an individual. He, however, stated that finding that the provisions of Section 177 are applicable in the case of the assessee is given without prejudice to the fact that otherwise also, the amount of credit note is taxable in the hands of the assessee trust through the constituted attorneys in view of the clear provisions of Section 176(3A) of the Act which applies to receipts after the date of discontinuation of the business.
11. He then observed that though the assets and liabilities have been distributed, the dissolution deed provided only for distribution of the existing assets and liabilities for the purposes of future determination of assets and liabilities, the trust is to continue as per the dissolution deed. He ultimately concluded that as the constituted attorneys represented the trust and they have received this amount on behalf of the trust and proprietary 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)(iiv), 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 1TAT, Delhi in the case of Maman Chand Ramji Das v. ITO [1989] 28 IT D 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 non-taxable. Narrating the reference at pages 2 and 4 of the deed of dissolution wherein it was slated that the trust has been dissolved with effect from 20-12-1987 coupled with the fact that the assets have actually been distributed no doubt was left in regard to dissolution of the trust. Reference to the appointment of the constituted attorney to look after the income-tax matters and the operation of the bank accounts for depositing of refund was irrelevant consideration to decide the issue of dissolution of the trust. According to him, the functions carried on by the constituted attorneys were such as given to the amalgamated company for amalgamating company which has lost its identity in the case before the Supreme Court or to a new firm by the old firm as discussed in the case of the Tribunal decision. He, therefore, held that the appointment of constituted attorney did not lead to any inference that the trust has not been dissolved. In view of the above finding that the trust has been dissolved, he held that custom duty refund was not taxable under Section 41(1).
13. As regards the applicability of Section 176(3A), he observed that Section 176(3 A), referred to receipt which would have been taxable before the discontinuance of the business and, therefore, it would not operate in the realm of discontinuance of the assessee. According to him, the Supreme Court decision in the case of Saraswati Industrial Syndicate (supra) impliedly covers Section 176 (3A) also. He further referred to the decision of the Tribunal in the case of New Cawnpore Flour Mills P. Ltd. v. 77'O[1986] 19 1TD 360 (All.) wherein it was held that the assessee loses its identity the receipt after the event of loss of identity are not taxable under Section 176(3A) of the Act.
14. As regards the applicability of Section 177, he observed that it applies to an Association of Persons when the same is dissolved or business is discontinued. He held that the mere fact that the beneficiaries of the trust deeds, being representative of the assessee are more than one, cannot lead to the conclusion that they constitute an AOP and that the Gujarat High Court decision in the case of Dipak Family Trust (No.1) (supra) fully covers the issue which has followed the decision of Calcutta High Court in the case of Krishna Bhemdar Trust 201 ITR 589 (sic). He further held that in the case of the assessee trust itself it has been held to be taxable as 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 and, therefore, provisions of Section 41(1) are clearly applicable. Even if the two are different, the provisions of Section 176(3A) would be applicable and, therefore, the refunds were rightly assessed to lax. He further submitted the business of the trusts being carried on by the trustees who were more than one in number and that beneficiaries not restricted to individual alone, the cases of AOP and consequently the provisions of Section 177 would also be applicable.
17. The learned counsel for the assessee, on the other hand, supported the order of the CIT(A) and submitted that the trusts having been dissolved, were no more in existence and the cheques were received by the constituted attorney only for the purpose of collecting the money and disbursing the same to the beneficiaries. This has all happened post dissolution of the trusts. It is further submitted that the trusts and the beneficiaries were two separate entities and, accordingly, the amounts received after dissolution and ultimately distributed to the beneficiaries too cannot be held to be taxable under Section 41, the trusts and the beneficiaries being separate entities in the eye of law. Reliance is placed on the decisions of Saraswati Industrial Syndicate(supra) and CIT v. Hukumchand Mohanlal [1971] 82 ITR 624 (SC). For non-applicability of Section 176(3A) he relied upon the decision of Gujarat High Court in the case of Banyan and Berry v. CIT [1996] 222 ITR 831' and a recent decision in C/7'v. Saurashtra Packaging (P.) Lid. He further submitted that the Tribunal in earlier year has held that the trusts were assessable in the status of individual and not AOP and, therefore, Section 177 is also not applicable. According to the learned counsel for the assessee, neither the provisions of Section 41(1) nor Section 176(3A), nor Section 177 as applied by the Assessing Officer cover the cases for assessment of the refund and therefore, the CIT(A) was justified in holding that the receipt of custom duty was not assessable in the hands of these two assessees.
18. We have heard the parties and considered the rival submissions. The refund of amount of the excise duly paid and claimed as expenditure by a person is not an income in its ordinary parlance and consequently, such refund cannot be brought to tax. Seem this connection the decision of the Supreme Court in the case of Hukumchand Mohanlal (supra) 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 trading liability incurred by the assessee, and subsequently during any previous year 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.
20. On a plain reading of these provisions, it is clear that to bring to tax the amount received on the remission or cessation of liability, there must be an identity of the person claiming the deduction and the person receiving back the amount or obtaining the benefit on account of remission or cessation thereof the said liability.
21. In the case of Hukumchand Mohanlal(supra) the assessee widow, on the death of her husband succeeded to the business carried on by him and recovered towards sales-tax a sum of Rs. 24,341 consequent to the success in the appeal against the said sales lax assessment order. The receipt was brought to tax by the Revenue. Their Lordships of the Supreme Court held that the Act did not contain any provision making a successor-in-business or the legal representative of the assessee to whom an allowance had already been granted, liable to tax under Section 41 (1) in respect of the amount remitted and received by the successor or the legal representative. It was held that Section 41 did not apply to this case because the assessee sought to be taxed was not the assessee contemplated by that section. The assessee within Section 41(1) namely, the husband, having died, the revenue could not take advantage of its provisions.
22. In the case of Saraswati Industrial Syndicate Ltd. (supra), the assessee company and its holding company merged on amalgamation of the two companies as a result of which the amalgamated company stood dissolved and ceased to be in existence. Prior to amalgamation the holding company claimed in its earlier year the sum of Rs. 58,735 as a trading liability on the basis of accrual and was allowed as a deduction in computing its profit. After amalgamation, the assessee company derived benefit of the said sum of Rs. 58,735. It was brought to tax in the hands of assessees by Assessing Officer. The matter went upto 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 beneficiaries of the erstwhile trusts in the same ratio as they were having in the original trust deeds.
24. The learned DR submitted that the refund was actually allowed to the trusts themselves and received in their name, deposited in the trusts' accounts and then distributed to the beneficiaries and, therefore, it was a case of continuance of the same trust. At the first impression the argument seems to be impressive but it lacks merits for the following reasons: (1) the trusts were admittedly dissolved on 20-12-1987 and 30-11 -1991 respectively, much before the refund was received; (2) the refund was issued in the names of M/s. Noble Industries and M/s. Navbharat Industries, the proprietary concerns of the erstwhile name of the trusts, it was for ministerial/secretarial purposes and for collection thereof; (3) a fresh bank account was opened in the erstwhile names of the trusts by the constituted attorney as authorised by the dissolution deed. By these actions, a new obligation was created. They did not give life to the old obligation which ended by the dissolution of the trust deed. The new obligations by way of trusts were surfaced and acted under the erstwhile names of the trusts.
25. A further question came up for consideration and that was that the trust an assessee was nothing but a representative assessee for these very beneficiaries and there was a complete identity between the person claiming the deduction and the person obtaining the benefit of refund of custom duty. But that is the position in case of a firm and partners also, the firm being a comprehensive name of the partners constituting it. There also, the real beneficiaries of the income and profit of the firm are the partners like the beneficiaries in the case of a trust. There is practically no difference between the case of a firm and partners on the one hand and trust and beneficiaries on the other. In any case, reference can usefully be made to the decision of Gujarat High Court in the case of Tanvi Sajani Family Trust [1994] 209 ITR 497 wherein the Jurisdictional High Court held that the trust and beneficiaries are two different entities and interest paid by the trust to the beneficiaries is an allowable deduction. That view has recently been reiterated by Gujarat High Court in another decision in the case of CIT v. Saurabh Mehul Family Trust (IT Reference No. 103 of 1988 dated 25-7-2002). 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 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.
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 by the person who carried on the business and such sum was received by him before such discontinuance. Consequently, the receipt by the assessee would be assessable as if it was received by the erstwhile trusts before the discontinuance of the business. On a parity of a reasoning, if the receipt is deemed to have been received before discontinuance by the person who carried on the business, provisions of Section 41(1) would be applicable as if it were the receipt of the erstwhile trusts.
28. The provisions of Section 176(3A) came up for consideration before their Lordships of the Gujarat High Court in the case of Banyan and Berry (supra), the case relied upon by the assessee. Their Lordships observed at page 877 of the report that Section 176(3A) envisages two premises; one that any sum received after discontinuance must be taxable income of the person who carried on the business had such sum been received before such discontinuance; secondly, it renders such receipts taxable in the hands of the recipient. These two things in the opinion of Their Lordships clearly postulate that in the applicability of Sub-section (3A) of Section 176, the person carrying on the business whose income it would have been had it been received before its discontinuance and the recipient in whose hands the income is taxable need not be same. The recipient of such sum would be liable to tax as if it were the income of the recipient in the year of receipt. Referring to the provisions of Section 189 where a fiction has been created only for the purpose of applying the machinery provisions in respect of the same assessee, Their Lordships held that Sub-section (3A) of Section 176 makes no such deeming provision treating the person who had carried on the business before its discontinuance to be still in existence for the purpose of taxing when in fact it has ceased to exist. If a person receiving the income is the same who carried on the business, the sum so received may be taxed in that person's hands. If the person who receives the income is different from the person who had carried on the discontinued business, in that event, such different person had been made liable and the machinery provisions are applicable to the recipient of such income.
29. Banyan and Berry's case (supra) before the Jurisdictional High Court was a case of receipt in respect of an executed contract after the discontinuance 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 partners of the firm and had in fact been so received. Their Lordships also observed at page 882 that but for the provision of Sub-section (3 A) of sect ion 176 any receipt as a result of realising any asset of the firm by the partners would have been a capital receipt in their hands and not taxable; it is only by the dint of this provision that if it were income of the 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 the discontinuance of the business by dissolution of the firm. Under Section 176(3A) the sum is deemed to be income of the recipient when received and cannot be treated as income of the earlier year. The receipt of the sum is the basis of taxation under Section 176(3A) of the Act.
30. In the present case, it is true that the trusts were dissolved, it is also true that the trusts and the beneficiaries are different persons, but the fact remains that the refund was received by persons other than the original trusts though in the erstwhile names of the trusts and deposited in a bank account opened in the names of these trusts for and on behalf of the beneficiaries as authorised by the dissolution deeds of the trusts by the constituted attorneys. The said provision is an authority by the beneficiaries to collect the amount on their behalf and consequently it was a receipt for and on behalf of the beneficiaries of the erstwhile trusts by the trustees in an identically similar name of the trusts which were discontinued. Here, the constituted attorneys are receiving the money for and on behalf of the beneficiaries under a new obligation created by the dissolution of the trust deeds of the erstwhile trusts. It has the effect of emergence of a new obligation creating another trust for the receipt of the money' by the beneficiaries of the amount or the realisation of the assets of the erstwhile trusts which stood dissolved on 20-12-1987 and 30-12-1991. This is what was admitted by the assessees in their letter dated 21-2-1985, by stating that the trust in any case would come into existence after dissolution. The assessments are also completed through constituted attorneys of the new obligation and not on the trustees of the erstwhile trust. The provisions of Section 176(3A) read with Section 41(1) are therefore, correctly applied by the Assessing Officer.
31. Further, 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 (supra), 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 (supra) 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. (supra) 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 Saurashtra Packaging P. Ltd. (supra) 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 that context it was held that the provisions of Section 176(3A) were not applicable. Their Lordships held that Section 176(3A) can be applied only when there was discontinuance of the business and since the business was continued even after the same was taken over by the assessee, the provisions of Section 176(3A) of the Act were not applicable. We, therefore, hold that the amounts received by the recipients in the present case were taxable under Section 176(3A) of the Act.
32. In view of the aforesaid discussion, we are of the opinion that the CIT(A) was not justified in holding that the provisions of Section 176(3A) were not applicable and deleting the additions. The two sums were received by the different persons under different obligations with an identical names of the erstwhile trusts which stood dissolved. His orders to that extent are reversed and those of the Assessing Officer are restored.
33. Before parting with the case, we may observe that the Assessing Officer has also applied Section 177 to the assessees. This said section deals with a case of the discontinuance of the business carried on by an AOP and, therefore, would not be applicable in the present case, the erstwhile trusts having been assessed in the status of individual in the earlier year as per the order of the Tribunal in the assessees' own case elated 8-2-1997 in ITA No. 4704/Bom/1993.
34. In the cross objections of the assessees have challenged the validity of the reopening of proceedings under Section 148. The claim of the assessee is that the trusts were already dissolved prior to the issue of the notice and, therefore, the notice is illegal, unwarranted and void ab initio and consequently, the entire proceedings were invalid in view of the decision of CIT v. Kurban Hussain Ibrahimji Mithiborwala [1911] 82 ITR 821 (SC), Ehagwan Devi Samgi v. ITO [l979] 118 ITR 906 (Cal.), Gokul Chand v. ITO [1995] 211 ITR 738' (All.), P.N. Sasi Kumar v. CIT [1988] 170 ITR 80, Morghabhai Babarbhai Paid v. R.M. Parikh [1970] 78 ITR 418 (Guj.), Chooharmal Wadhuram v. CIT [1971] 80 ITR 360 (Guj.) and Amco Dyestuff Industries (P.) Lid. v. Dy. CIT [2000] 108 Taxman 252 (Ahd. - Trib.). We have no quarrel with the proposition that if the notice is invalid the entire proceedings would be invalid. As the CIT(A) has allowed the claim of the assessee on merits he did not deal with the validity of the reopening and since the issue goes to the root of the matter, we should not deal with the same for the first time and leave it to the CIT(A) to decide this issue raised by the assessee in the cross objections after giving opportunity to both the parties of being heard and defending their respective stands. We direct accordingly.
35. In the result, the appeals of the Revenue are allowed whereas the cross objections of the assessees are allowed for statistical purposes.