Bombay High Court
Dhanamall Silk Mills vs Commissioner Of Income-Tax on 11 June, 1998
Equivalent citations: [1998]234ITR682(BOM)
Author: A.Y. Sakhare
Bench: A.Y. Sakhare
JUDGMENT Dr. B.P. Saraf, J.
1. By this reference under Section 256(1) of the Income-tax Act, 1961, at the instance of the assessee, the Income-tax Appellate Tribunal has referred the following question of law to this court for opinion :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in refusing the continuance of registration to the assessee under Section 184(7) of the Income-tax Act, 1961 ?"
2. The controversy pertains to the assessment year 1973-74. The material facts of the case are as follows : The assessee, Dhanamall Silk Mills, was a partnership firm formed by five partners, P.D. Aswani, C.T. Sherwani, C.D. Aswani, D.N. Aswani and B.C. Sherwani. It had carried on the business of manufacture of rayon textiles with the aid of machinery, land and buildings which belonged to one of its partners, P.D. Aswani. On August 31, 1971, all the partners assigned the entire running business of the firm with all its assets and liabilities at book value to a limited company, namely, Dhanalakshmi Silk Mills Private Limited, and put the latter in possession. Thereafter, the business till then carried on by the firm was carried on by the company. The partnership firm stood dissolved with effect from August 31, 1971. In the previous year relevant to the assessment year 1973-74, the Income-tax Officer refunded a sum of Rs. 60,921 as interest under Section 214 of the Income-tax Act, 1961 ("the Act"), on the excess payment made by the firm. The said amount was received by the erstwhile partners of the said firm. The return was filed by one of the erstwhile partners of the said firm in the name of the erstwhile firm in the status of a registered firm. A declaration under Section 184(7) of the Act in Form No. 12 for continuance of the registration was also filed along with the return showing taxable income of Rs. 60,921 of the assessee.
3. The Income-tax Officer did not assess the assessee in the status of a firm. He was of the opinion that as the assessee had not carried on any business after the transfer of its business to the limited company on August 31, 1971, the interest under Section 214 of the Act received by it in the year under consideration was taxable under the head "Income from other sources". He also held that in the absence of any business, there was no question of granting the assessee registration under Section 184(7) of the Act. He, therefore, took the assessee's status as an "association of persons" and rejected the application made by the assessee under Section 184(7) of the Act. The assessee appealed against the above order to the Appellate Assistant Commissioner of Income-tax. The Appellate Assistant Commissioner agreed with the opinion of the Income-tax Officer that the assessee was no more a firm which was entitled to registration under Section 184(7) of the Act. He, however, held that the proper status of the assessee would be "body of individuals" and not "association of persons". In view of the above, he confirmed the order of the Income-tax Officer under Section 184(7) of the Act. The assessee went in further appeal to the Income-tax Appellate Tribunal ("the Tribunal"). The Tribunal, on perusal of Section 184(7) of the Act and the proviso thereto, was of the opinion that for continuation of the registration under Section 184(7) of the Act for a particular year, it was incumbent that the firm existed as such during the previous year relevant to the said assessment year and without existence of the firm during such previous year, the question of allowing registration or continuance of registration under Section 184(7) of the Act did not arise. The Tribunal held that in the instant case, the business having been totally closed and there being no intention to carry on business and to share profits thereof, there can be no partnership or firm. The Tribunal observed that on transfer of the entire business of the firm to the limited company, the firm stood dissolved. No partnership firm existed thereafter. The Tribunal, therefore, held that the application of the assessee for continuance of registration was not tenable and was rightly rejected by the Income-tax Officer and upheld by the Appellate Assistant Commissioner. Hence, this reference at the instance of the assessee.
4. We have heard learned counsel for the assessee. The question referred to us in this case is whether the Tribunal was right in refusing the continuance of the registration to the assessee under Section 184(7) of the Act. So far as the facts of this case are concerned, there is no dispute that the business for which the partnership was constituted came to an end on August 31, 1971, when the entire business was transferred to a limited company. There is also no dispute about the fact that thereafter neither any business was carried on by the partners nor it was intended to be carried on. The firm stood dissolved on transfer of the business to the limited company on August 31, 1971. Section 184 of the Act deals with registration of firms and continuance of registration. In the instant case, the firm was registered as a partnership firm for the period up to August 31, 1971. Under Sub-section (7) of Section 184 of the Act, the registration granted to the firm for any assessment year may have effect for subsequent assessment years provided there is no change in the constitution of the firm as evidenced by the instrument of partnership on the basis of which the registration is granted. In the instant case, the firm was constituted for carrying on a particular business. The business came to an end on August 31, 1971, and the firm got dissolved. The registration granted under Section 184 no more existed. That being so, neither the dissolved firm could have applied for continuance of registration under Section 184(7) of the Act nor the Income-tax Officer could have passed any order under that section for continuance of the registration of the firm. The continuance of registration under Sub-section (7) of Section 184 of the Act contemplates existence of the firm during the period for which the continuance is sought for. In the instant case, the admitted position is that the firm was no more in existence after August 31, 1971. In that view of the matter, the Tribunal was right in holding that the assessee was not entitled to continuance of registration under Section 184(7) of the Act as the firm for which the registration was sought for was no more in existence during the material period. We do not find any infirmity in that conclusion of the Tribunal.
5. We are, however, of the opinion that the question referred to us does not bring out the real controversy in this case. Both the assessee and the Revenue have failed to approach the real issue in the proper perspective. This is a case of assessment of income of a dissolved firm. The partners of the dissolved firm received some refund and interest on delayed refund from the Income-tax Department on account of the dissolved firm after its dissolution. The partner of the dissolved firm submitted a return of income of the firm in the status of registered firm showing the interest income. Along with the return a declaration as required under Section 184(7) of the Act for continuance of registration was also filed. The Income-tax Officer assessed the income as per the return not in the status of registered firm but as an association of persons. He refused continuance of registration under Section 184(7) of the Act. The Appellate Assistant Commissioner changed the status to "body of individuals". The question that arises for consideration is whether the income of a dissolved firm received after dissolution can be assessed as income of an association of persons or body of individuals. The answer obviously would be in the negative. Section 189 of the Act specifically provides the mode of assessment of a firm which has been discontinued. Sub-section (1) of Section 189 provides that :
"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 discontinuance or dissolution had taken place, and all the provisions of this Act, including the provisions relating to the levy of a penalty or any other sum chargeable under any provision of this Act, shall apply, so far as may be, to such assessment."
6. Sub-section (3A) of Section 176 of the Act, which was inserted by the Taxation Laws (Amendment) Act, 1975, is also material. It provides:
"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."
7. The legal position in regard to the assessment of the income of a dissolved firm was summed up by this court in CIT v. Star Andheri Estate, [1994] 208 ITR 573 in the following words (page 580) :
"A careful reading of Section 189 and Section 176(3A) and 176(4) makes it abundantly clear that the Income-tax Act contemplates that where a firm is dissolved, the assessment of the total income of such firm shall he made by the Income-tax Officer as if no such dissolution had taken place. The same is the position in the case of discontinuance of the business of the firm. Section 189 keeps the firm alive for the purposes of assessment under the Act despite its dissolution. It does not provide for the assessment of the partners of the dissolved firm which was the position, under Section 44 of the Indian Income-tax Act, 1922, prior to its amendment in the year 1958 and which is the position even today under Section 159 of the 1961 Act in respect of the assessment of the legal representative of a deceased assessee. This section, on the other hand, clearly provides that the dissolved firm shall be assessed on its total income as if no such dissolution has taken place. The position is thus clear that despite its dissolution, for the purposes of levy of tax under this Act, the dissolved firm is deemed to be in existence. Sub-section (3A) of Section 176 specifically provides that where any business is discontinued in a particular year, any sum received after the discontinuance shall be deemed to be the income of the recipient and shall be 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. This Sub-section thus creates a legal fiction. It is intended to resolve all doubts in regard to taxability of such income on account of discontinuance of business in the year of receipt. Or to put it differently, it makes an exception to the general rule that in order to hold the receipts chargeable to tax in the year of its receipt the business must be in existence in that year."
8. In view of the above legal position, the question of filing a declaration for continuance of registration or order for continuance of registration under Section 184(7) of the Act would not arise in case of assessment of the income of a dissolved firm for assessment of the income received after dissolution. Section 189 of the Act keeps the firm alive for the purpose of assessment despite its dissolution. The Tribunal, in our opinion, did not examine the real issue in the proper perspective.
9. We, therefore, remit the matter to the Tribunal to examine the controversy afresh in proper perspective in the light of the provisions of Sections 189 and 176 of the Act.
10. This reference is disposed of accordingly with no order as to costs.