Income Tax Appellate Tribunal - Cochin
Joint Receivers In The Case Of United ... vs Income-Tax Officer on 29 May, 1986
Equivalent citations: [1986]18ITD556(COCH)
ORDER
T.V. Rajagopala Rao, Judicial Member
1. The appeal as well as cross-objection arise out of common order passed by the Commissioner (Appeals), Calicut dated 19-2-1983 relating to the assessment year 1979-80. The appeal is preferred by the assessee, whereas the cross-objection is preferred by the revenue. The only grounds raised in the appeal are (i) whether the income earned by the joint receivers is assessable at all for the assessment year 1979-80, (II) whether proper machinery was provided in the Income-tax Act, 1961 ('the Act') to bring to tax the income earned on the post-dissolution period of a firm, more particularly between the date of dissolution and the date of winding up of the firm. In any view of the matter and (iii) whether the income earned by the receivers is correctly assessed in the status of an AOP.
2. The facts are few and they may be stated as under. The relevant assessment year is 1979-80 for which the accounting year is from 23-5-1978 to 31-3-1979. The assessees in this case are the joint receivers appointed by the Court to manage United Film Exhibitors, Palghat till the winding up of the firm was complete. 'Priya' and 'Priyadarshini' are the two theatres constructed as well as owned by the firm 'United Film Exhibitors' which was carrying on the business of exhibition of cinematographic films and the firm used to be governed by the terms and conditions of partnership deed dated 19-7-1971. Smt. Bhavani Kaimal, wife of P.K. Kaimal, Smt. Fathima Ismail, wife of M.A. Ismail and Smt. P.K. Rahmathunnissa wife of M.B. Abdul Rahiman Mooppan used to be three partners of the firm. M.A. Mayankutti Mooppan and M.A. Muhammed Babu son of M.A. Ahmed Kutti Mooppan were minors and they were admitted to the benefits of partnership. The construction of 'Priyadarshini' was completed in 1973 and it was inaugurated on 31-5-1973 whereas 'Priya' theatre was inaugurated on 20-8-1975. In 1975 Master M.A. Mayankutty Mooppan became a major and expressed his desire to join as a full-fledged partner of the firm. A new deed of partnership was executed on 4-6-1975. Master M.A. Muhammed Babu was admitted to the benefits of that partnership also. The first of three parties used to have 25 per cent share, whereas Shri M.A. Mayankutty Mooppan and his minor brother Master M.A. Muhammed Babu had only 12 1/2 per cent each in the profits and in case losses being incurred, except the minor, the other four partners agreed to bear the losses, in equal proportions. Differences arose between the partners; Shri M.A.¦'Mayankutty Mooppan was making preparations to start a rival business on the adjoining compound of 'Priya' and 'Priya-darshini' theatres, constructing and making ready for opening 'Aroma Movie House'. Smt. Rahmathunnissa caused a notice issued to the other partners of the firm dated 19-5-1978 intimating that the partnership in question stands dissolved on 22-5-1978. Smt. Bhavani Kaimal and Smt. Fathima Ismail filed a suit O.S. No. 167 of 1978 in the Court of Subordinate Judge, for a declaration that the firm, United Film Exhibitors, stands dissolved as on 22-5-1978 that the accounts, of the said partnership should be taken under the provisions of the Indian Partnership Act, 1932 and for that purpose an enquiry is to be made into the assets, properties, movable and immovable including books of accounts, documents belonging to the entire business of the firm and for allied reliefs. While the suit was pending on the file of that Court, the plaintiffs filed seeking appointment of a receiver to manage the affairs of 'Priya' and 'Priyadarshini' cinema theatres till the disposal of suit. The learned Sub-Judge disposed of the said application along with a petition for grant of injunction in LA. No. 1293 of 1978. The question posed by the subordinate Judge was found in the last sentence of paragraph 7 of his orders which is as follows :
Therefore, in view of the aforesaid principles stated, we have to see, how best the interest of the partners of the dissolved firm can be protected till the accounting of the assets and liabilities of the dissolved firm and distribution of the assets among the partners is done.
In paragraph 9, the learned Sub-Judge stated that 'under the circumstances existing in this case, it appears to me that the apprehension of the plaintiffs is well founded and cannot be characterised as fanciful or imaginary'. In the opening sentence of paragraph 10 of his order, he stated that the learned counsel for the parties have conceded that a receiver has to be appointed for the management of the assets of the dissolved firm among the partners of the dissolved firm. He further stated that after taking stock of the situation and circumstances of the case plantiffs can be appointed as receivers for the management of the two theatres for the purpose of protecting the interests of the partners of the dissolved firm. He directed the plaintiffs to deposit security for Rs. 10,000 in the Court for their receivership within two weeks. He also directed defendants 2 and 4 to hand over possession of the theatres to the plaintiffs and he further directed to produce the account books of the dissolved firm immediately and to hand over money deposited in the bank to the plaintiffs. The plaintiffs were directed to file statement of accounts regarding daily collections and expenses into the Court, once in every week regarding the running of the theatres. All amounts to be paid to the employees of the theatres and payment of other investible amounts have to be done by cheques by the plaintiffs as receivers. Therefore, by giving such and similar directions, the sub-Judge allowed the receiver's petition whereas he dismissed the injunction petition by his common order dated 17-6-1978. Smt. Rahma-thunnissa, Shri M.A. Mayankutty Mooppan and Master M.A. Mohammed Babu (minor) went in appeal to the Kerala High Court against the appointment of the receivers. The Hon'ble High Court in CM. A. No. 113 of 1978 by its order dated 13-7-1978 except making some modifications, confirmed the order of the learned sub-Judge appointing the plaintiffs as receivers. At pages 2 and 3 of its orders, it was pleased to hold as follows :
It would appear from the discussion of the matter by the Court below that there was no objection by any party to the appointment of receiver as such. In the Court below the question was as to who among the parties should be appointed receiver. The Court below on a consideration of all aspects of the question thought fit to appoint the plaintiffs as receivers. In a suit for dissolution of partnership and rendition of accounts the appointment of receiver is usually claimed and it is desirable and even necessary in most cases to preserve the property in dispute during the pendency of the suit and also for properly effectuating division of the assets among the partners.
We are of the view that in a case like this where in the matter of dissolution of partnership as such so as to get the best value for the firm's assets it would be necessary to sell the theatres as running concern. In the circumstances pointed out by the Court below it will not be in the interests of the members of the dissolved firm to entrust the business now to the defendants who are interested in the neighbouring theatre.
3. From the records, it would appear that the matter was settled outside the Court. The counsels for the parties made an endorsement on the back of the plaint to the effect that the matter has been settled out of the Court. Therefore, the suit is dismissed without costs as can be seen from the judgment dated 29-2-1980. A regular deed of dissolution of partnership was executed by all the partners of the firm on 22-2-1980. In the recitals of the said dissolution deed also, it was stated that the partnership stood dissolved with effect from 22-5-1978. Inter alia, it is also recited that O.S. No. 167 of 1978 on the file of sub-Judge was filed for obtaining a decree, for distribution of surplus in the money value of the assets after paying debts and liabilities of the firm and for the purpose of adjustment of rights of the parties hereto, in the assets of the firm. It is categorically stated that such adjustment of the parties hereto in the assets of the firm is made as on today that is on 7-2-1980. There is the balance sheet attached to the deed of dissolution. According to the balance sheet as on 7-2-1980, the amount remained to be distributed among the partners comes to Rs. 58,99,106.16. The assets of the firm shown in the schedule were stated to be incapable of division and it was agreed that all those assets including goodwill, money deposits, etc., be taken over by Smt. K. Bhavani Kaimal at the aforesaid valuation and other parties be paid the money equivalent of their respective shares, in the distributed assets of the firm. The books of account as well as balance sheet duly signed by all the parties are handed over to Smt. Bhavani Kaimal. The following amounts are allotted towards shares of each of the partners :
Rs.
(2) Smt. Fathima 15,19,991.41
Ismail
(3) Smt. P.K. Rah- 9,28,058.88
mathunnissa
(4) Shri M.A. May- 2,02,812.46
ankutty Mooppan
(5) Master M.A. 7,00,757.46
Mohammed Babu
being the money of their shares in the distributed assets of the firm after adjusting initial payment of Rs. 5 lakhs on 24-1-1980. Thus, virtually, the cinema halls, the sites on which they stand, the machinery, furniture, etc., mentioned in the schedule attached to the deed of dissolution were all given to the first party, Mrs. Bhavani Kaimal and the money equivalent of their share in the assets after meeting all the liabilities of the firm were distributed among the other partners of the firm according to their profit-sharing ratio. Paragraph '14' of the deed of dissolution dated 7-2-1980 is important and it is as follows :
It is further agreed that the parties of the second and third parts shall not have any right, title, claim or interest in any of the properties of the dissolved firm including those that may arise or accrue in future which are not ascertained and accounted for in the balance sheet attached hereto. Similarly, they shall also not be liable for any of the liabilities in relation to the properties and the business of the firm carried on up to this date whether existing or arising in future. The party of the first part hereby undertakes to indemnify the parties of the second and third parts in case the latter have to meet any of the aforesaid liabilities.
While arriving at the distributable assets of the firm or their value under the dissolution deed dated 7-2-1980, adequate provision was already made to meet the pending income-tax liabilities as on 7-2-1980. As far as the assessment year 1979-80 is concerned, the following amounts were set apart :
Assessment : Rs. Rs. year : 1979-80 Estimated dues 1,83,000 Advance tax 1,83,000 Nil paid Interest under 12,800 Section 139(8) estimated
We shall consider what is the significance of this provision made by the firm towards income-tax for the assessment year 1979-80 a little later.
4. Income-tax return was submitted for the assessment year 1979-80 disclosing nil income on 3-12-1980. As the difference between the returned income and the income sought to be assessed by the ITO is more than Rs. 1 lakh the matter was referred to the IAC under Section 144B of the Act. The status of the assessee was shown as 'representative-assessee'. In the letter dated 24-2-1982, it was claimed that since the receiver was appointed by the Court, this is the representative-assessee under Sections 160 and 161 of the Act, the liability of such a representative-assessee was specified. According to that provision, the assessment is to be made as if the income was earned by the beneficiaries and the tax shall be levied and recovered in the same manner from a person represented by him. This follows that the assessment has to be made as those amounts were realised for and on behalf of the partners. In the present case, as the receivers represented the individual partners, the status to be adopted is that of those partners.
5. The ITO held that the joint receivers are managing the affairs of the business and they acted jointly for common purpose of producing income. As the beneficiaries have common purpose of running business and earning income through their representatives, namely, the receivers, the status of the assessee undoubtedly is an AOP and the ITO under his assessment order dated 27-2-1982 determined the status as an AOP and determined the total income of the assessee at Rs, 3,82,130 and observed that advance tax paid of Rs. 1,83,000 has to be given credit to.
6. Aggrieved against the said decision of the ITO, the assessee carried the matter before the Commissioner (Appeals). On the basis of the decision in CIT v. Indramohan Sharma [1982] 138 ITR 696 (Bom.), it is contended that the joint receivers should be construed as the representative-assessee representing an AOP consisting of all the partners of the erstwhile firm only, the partners of the erstwhile firm having given their specific consent for exploiting the assets of the firm and carrying on its business in a concerted manner by the receivers. The next argument advanced was that assuming that the receivers were representing their erstwhile partners, their shares were definite and ascertained and only the proportionate income should be brought to tax in the hands of the receivers as representing each partner distinctly and separately. One of the stands taken before the Commissioner (Appeals) was that after dissolution no income can be brought to tax as arising from business carried on with the assets of the dissolved firm, as there is no assessable entity which can be brought to tax within the Act. The learned Commissioner (Appeals) after considering the arguments advanced before him held that the receivers were rightly assessed as an AOP in view of the Supreme Court decision in N.V. Shanmugham & Co. v. CIT [1971] 81 ITR 310. The learned Commissioner (Appeals) sought to justify the finding that carrying on business by joint receivers amounts to joint enterprise and on that ground they can be held to constitute an AOP. He called in aid the decision of the Kerala High Court in the case of CIT v. T.V. Suresh Chandran [1980] 121 ITR 985 in order to explain the meaning of the words 'association of persons'. He held that when there is a combination of persons formed for the promotion of joint enterprise, those persons joined in a common purpose constitute an association. He further held that wherever an AOP is formed such an association can be brought to tax as a distinct assessable entity under the Act. In what manner they happened to come together is not of material consequence. The contention that after dissolution of the firm, there is no taxable entity and the income, if any, cannot be taxed anywhere is dismissed as not tenable. He held that if income, profits and gains arose in the hands of person it has to be subjected to tax if there is no express prohibition against such taxation. He further held that the income had arisen to the erstwhile partners as a group acting through the joint receivers and, hence, it has to be taxed in that form and capacity only. The dissolution of the firm, the learned Commissioner (Appeals) held, does not affect taxation of the income earned by the erstwhile members of the dissolved firm. He also held that after dissolution there is no ban, express or implied, in taxing such income. Therefore, he held that the income was brought to tax properly in the hands of joint receivers as they have derived the said income as a representative-assessees, representing the erstwhile partners.
7. We have heard Shri P.A. Francis and Shri T.G.N. Nair, the learned advocates for the assessee and Shri M.M. Cheriyan, the learned senior departmental representative for the department. Besides, filing a paper book running into 56 pages the assessee's learned advocate on our request filed the receiver order passed by the sub-Judge, order passed by the Hon'ble Kerala High Court besides submitting written arguments. So also, the learned departmental representative also filed written arguments running into 8 pages. Shri P.A. Francis argued at the first instance that there is no provision in the Act to assess a dissolved firm in respect of the income realised after the dissolution and during the winding up of the affairs of the firm. He wanted to impress upon us that this is not a fresh plea taken but was advanced even in the original stage which we verified and found it correct. Shri P.A. Francis asserted that the only provision in the Act which enables the assessment of dissolved firm is Section 189 of the Act. The scope of this Section was explained by the Hon'ble Supreme Court in Shivram Poddar v. ITO [1964] 51 ITR 823 at page 825 wherein it is held that the object of the Section is only to authorise the assessment of income derived by the firm before the discontinuance of the business or before the dissolution of the firm. Shri Francis, the learned advocate for the assessee contended that the Act is a self-contained code and provided a complete machinery for assessment-See 1975 KLT 253 (Ker.) approved by 1976 KLT 333 (Ker.) (FB). In support of his arguments, he brought to our notice the oft quoted dictum of Justice Rowlat in 12 Tax Cases 358 at p. 366 approved by the House of Lords in 27 Tax Cases 205 at page 248 in which it is stated while interpreting a taxing statute one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used. Keeping in view these general principles if we read the provision of Section 189, it clearly indicates that the assessment provided for is only in respect of the income from 'business or profession carried on by a firm' as a full-fledged firm before the discontinuance of the business or profession or before the dissolution of the firm. He also contended that the expression 'total income of the firm' in Section 189(1) is also indicative of the total income derived by the firm while it was a full-fledged firm. He argued that the provision in Section 189(1) that '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' clearly shows that the income to be assessed is the total income derived by a firm as a full-fledged firm and that the fiction is only for the purpose of assessment of that income and that firm after it is, dissolved. Continuing his arguments he submitted that Section 189(1) is, thus, merely a machinery Section for the purpose of assessment of the pre-dissolution income of a dissolved firm and not a charging Section for any post-dissolution income of the dissolved firm. His argument continued that the portion of the provision containing the words in Section 189(1) that 'all the provisions of this Act, including the provisions relating to the levy of penalty or any other sum chargeable under any provisions of this Act, shall apply, so far as may be, to such assessment' makes it clear that the applicability of all the provisions of the Act including those for penalty is only in respect of 'such assessment', that is to say, an assessment of a dissolved firm in respect of its pre-dissolution income. In order to strengthen his argument he brings to our notice the words 'in the course of any proceeding under this Act in respect of any such firm' in Section 189(2) mean only those proceedings that could be taken in normal circumstances against a regular firm and not a dissolved firm. The words 'that the firm was guilty of any of the acts' in Section 189(2) also indicate an act of the firm prior to its dissolution. According to the learned advocate the express mention of Chapter XXI in Section 189(2), in order to describe the nature of the acts, makes it all the more clear that the acts attracting penalty could be only those acts that could be done by a full-fledged firm and not by a dissolved firm. He further argued that the words 'every person who was at the time of such discontinuance or dissolution a partner of the firm' in Section 189(3) also indicate that the sphere of responsibility under Section 189 is only for acts done up to the time of discontinuance or dissolution and never beyond that. He further submitted that the words 'the share of each partner in the income of the firm before its discontinuance or dissolution' in the Explanation to Section 189(3) also clearly show that the income of the firm to be taken into account is only that up to the time of discontinuance or dissolution. He further contended that the provision in Section 189(4) that 'where such discontinuance or dissolution takes place after any proceedings in respect of an assessment year have commenced, the proceedings may be continued against the persons referred to in Sub-section (3)' also indicates that the applicability of Section 189 is only in respect of the transactions of the firm up to the time of discontinuance or dissolution. Therefore, by all the above, he wanted to strengthen his primary argument that the region of Section 189 is only income up to the discontinuance or dissolution and its assessment after the discontinuance or dissolution. Applying the maxim of expressio unius-est exciusio ulterius the irresistible conclusion is that the express provision of Section 189 for the assessment of a dissolved firm in respect of its income up to the time of discontinuance or dissolution implies the exclusion of an assessment of the dissolved firm in respect of its income, if any, derived after the discontinuance or dissolution. In other words there is no machinery for the assessment of a dissolved firm in respect of its post-dissolution income, if any, in the course of its winding up. If a dissolved firm cannot be assessed in respect of its post-dissolution income, can the dissolved firm be assessed as an AOP in respect of the income that arises during the winding up of the firm ? In answer to these several contentions, the learned departmental representative contended the income assessed in this case is the income from business, namely, the running of two theatres, during the period from 23-5-1978 to 31-3-1979. The assessment is made in the status of an AOP and not in the status of a dissolved firm. Once the firm is dissolved, the legal tie that binds the partners is broken and so there is no firm in existence from 22-5-1978. However, that does not mean that income from business carried on during the impugned accounting period would escape assessment. In CIT v. Indira Balkrishna [1960] 39 ITR 546 wherein the Supreme Court held that 'association of persons' as used in Section 3 of the Indian Income-tax Act, 1922 ('the 1922 Act') means an association in which two or more persons join in a common purpose or common action and as the words occur in a Section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains. In the present case, after the dissolution of the firm, the business was carried on by the receivers. The income earned by the receivers also went to the partners only and, therefore, argues the learned departmental representative that the assessment in the status of an AOP is perfectly justified. He also argued that the decision of the Supreme Court in N.V. Shanmugham & Co.'s case (supra) fully comes to support the assessment in this case. The learned departmental representative invited our attention to an earlier decision of the Hon'ble Supreme Court in Mohamed Noorullah v. CIT [1961] 42 ITR 115 which according to him further supports his stand. The arguments sought to be advanced against the concept of an AOP, on behalf of the assessees, are (1) there was no common purpose or jo int action by the partners as they were fighting among themselves, (2) there was no business carried on by them and (3) the assessment should be in the hands of the individual partners. As regards second objection raised by the assessee, it can be seen that an amount of Rs. 3,82,130 was acquired from running of two theatres, the income earned by the receivers on behalf of the partners ultimately went to the partners only, the receivers filed the accounts before the Court once in every week and the partners were entitled to look into the accounts and state their objections. Thus, when the receivers ran the theatres on behalf of the partners as per directions of the Court, the assessee cannot turn round and say that no business is carried on by them. As regards their objection that they were not consulted and the business does not represent joint action by the partners as their consent was lacking, the learned departmental representative submitted that the erstwhile partners never objected to the carrying on of the business by the receivers. Their objection was against the appointment of two ladies (plaintiffs in the suit) as receivers. As can be seen from the order of sub-Judge as well as the High Court, the dispute was not about carrying on of the business or about the appointment of receiver as such, but, it was concerned with the question who should act as receiver. The business continued in pursuance of the orders of the Court. The erstwhile members of the firm were shown the accounts every week. Nobody raised any objection for the way in which the business was carried on. That means all of them acquiesced in the continuance of business. In identical circumstances, the Supreme Court held in the cases mentioned supra that there was joint action by the erstwhile partners to justify the assessment as an AOP. In N.V. Shanmugham & Co.'s case (supra) also lack of consent, between partners was raised as against taking the status as an AOP. However, this was held to be untenable by the Hon'ble Supreme Court. The receivers appointed did not and could not have represented the individual interest of the erstwhile partners and, therefore, the question of taxing post-dissolution income in the hands of the individual partners does not arise. The existence of specific and defined interest in the profits did not make the earning, anytheless by an AOP. The business of running the theatres is an indivisible business, the control and management of which was in the hands of the receivers. Such a control was a unified one. The receivers had joined for common purpose and had acted jointly. Had the receivers represented the individual interest of the erstwhile partners there would have been chaos in the business. The profits were earned on behalf of persons who had common interest created by the order of the Court and on that account they constitute an AOP. The decision of the Supreme Court in N.V. Shanmugham's & Co. case (supra) as well as the decision in Mohamed Noorullah's case (supra) may be referred in this context. In Mohamed Noorullah's case (supra), a Mohammedan was carrying on the business of manufacture and sale of beedies of a particular brand. He died on 17-12-1942 leaving certain lakh rupees. The heirs of the deceased wanted to continue the business and in partition, a receiver was appointed with a direction to continue the business. The question was in which capacity the receivers were assessed. Ultimately, the Supreme Court decided that the High Court had rightly come to the conclusion that the business was a business carried on by an AOP. Giving reasons for its decision the following is that is stated as per headnote of the decision of the Supreme Court :
...None of the partners wanted to break the unity of control of the business or its continuity and the business was of such a nature that it could not be carried on without such consensus. The income was the income of a business which was carried on as a single business by the consent of all the parties. The mere fact that a suit was pending at the time for the administration of the estate of the deceased or for the separation of the shares of the co-heirs did not affect the incidence of taxation. (p. 116)
8. We wish to take up for consideration the plea of the assessee that the post-dissolution income is not assessable to income-tax under the existing provisions of the said Act. Shri Francis, the learned counsel for the assessee, argued that the Supreme Court in Shivram Poddar's case (supra) at page 825 held that but for Section 189 dissolved firm should not be assessed. He also argued that a dissolved firm is foreign to the scheme of the Income-tax Act. Section 4 of the Income-tax Act speaks of 'person'. A 'person' is defined under Section 2(31) of the Income-tax Act and among the list of the persons 'dissolved firm' is not mentioned. A 'firm' is defined in Section 2(23) of the Income-tax Act. He argued that we cannot say that a firm and an association of pesons are one and the same within the meaning of the Indian Partnership Act. Therefore, ultimately his argument is that the Legislature either by innocent or deliberate omission has left out the post-dissolution income of the firm from the incidence of income-tax. He referred us to two more Supreme Court decisions-one in Indira Balkrishna's case (supra) at pages 551 and 552, in the said case what is meant by an AOP is defined by the Supreme Court. It is held therein that an AOP must be one in which two or more persons join in a common purpose or common action and as the words occur in a Section which imposes a tax on income, the association must be one the object of which is to produce income, profits or gains. In that case the co-widows of a Hindu governed by the Mitakshara law inherited his estate which consisted of immovable properties, shares money lying in deposit and a share in a registered firm. Except for receiving the dividends from the shares and the interest from the deposits jointly, they had done no act which had helped to produce the income. Ultimately, the Supreme Court held that since there is no finding that the three widows combined in a joint enterprise to produce income they did not constitute an AOP. In Champaran Cane Concern v. State of Bihar [1963] 49 ITR 152 (SC) the question which fell for determination was whether the assessee was a partnership or a co-ownership concern belonging to two persons. The Supreme Court ultimately held that question is to be decided having regard to the facts and the circumstances of the case and they ultimately found that the facts and the circumstances of the case were consistent with the claim of the assessee that it is a co-ownership concern in which case the common manager was liable to assessment under Section 13 of the Bihar Agricultural Income-tax Act, 1948. Therefore, the abovesaid two cases do not help us in any way except knowing the general principles of the essentials of an AOP and the distinction between a firm and co-ownership concern. We shall take up the case of the Supreme Court in Shivram Poddar's case (supra) a little later in an appropriate place. For the present, we defer discussion on the said decision. The learned counsel for the assessee strongly urged that since the date of dissolution, there is no partnership in existence. In this case, the partnership is at will. Due to difference between the partners one of the partners issued notice of dissolution on 19-5-1978 and it came into effect from the receipt of said notice by the partners, i.e., on 22-5-1978. Therefore, for the accounting period from 23-5-1978 to 31-3-1979 which is relevant for the assessment year 1979-80, there is no partnership in existence. There is no question of mutual agreement between the partners and so there is no question of partnership being assessed any longer for the post-dissolution income. According to the learned counsel there is only one Section 189 in the Act to govern the situation of taxing the income of a dissolved firm. Section 189(1) contemplated income earned in business or profession carried on by a firm till it is discontinued or till it is dissolved. For taxing the income earned till dissolution or discontinuance only, it should be deemed that no dissolution of the firm took place. But it does not speak of taxability of the post-dissolution income of the firm. He specifically argued that though there is likelihood of a firm doing business in between the period from dissolution of the firm and winding up of the affairs of the firm. Section 189 does not specifically provide the necessary machinery to assess such income. Now we have to see whether each of the concepts pressed before us by the learned counsel for the assessee are correct under law. Section 47 of the Indian Partnership Act is as follows :
After the dissolution of a firm the authority of each partner to bind the firm and the other mutual rights and obligations 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, but not otherwise :
Provided that the firm is in no case bound by the acts of a partner who has been adjudicated insolvent ; but this proviso does not affect the liability of any person who has after the adjudication represented himself or knowingly permitted himself to be represented as a partner of the insolvent.
It is very clear from the above provisions that so far as it is necessary to wind up the affairs of the firm, a partner of a dissolved firm has got authority to bind the firm. So the concept that the firm came to an end even on 22-5-1978 which is admittedly the date of dissolution of the firm in this case and that no firm existed subsequent to that date is not correct. In our opinion, for purpose of winding up of the affairs of the firm, the firm existed and the mutual rights and liabilities of the partnership continued. In Saligram Ruplal Khanna v. Kanwar Rajnath AIR 1974 SC 1094, the Supreme Court held that after dissolution the partnership subsists merely for the purpose of completing pending transactions, winding up the business and adjusting the rights of the partners and for these purposes and these only, the authority, rights and obligations of the partners continued. Section 25 of the Indian Partnership Act speaks about the continued liability of the partner for the acts of the firm as follows :
Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner.
In our opinion, even when the rights and liabilities of the partner continued for limited purposes of winding up the affairs of the firm or for completing the transactions previously undertaken by the firm, they continue up to the completion of the winding up process of the firm. That means in this case as the suit was ultimately compromised out of Court and a regular dissolution deed was executed on 22-2-1980, the rights and liabilities of the partners continued up to that date. Dissolution of the firm is the process by which legal existence of firm comes to an end. The firm continues to exist until its affairs are finally and completely wound up-Narendra Bahadur Singh v. Chief Inspector of Stamps AIR 1972 All. 1. Therefore, simply because there is dissolution of the firm, it automatically does not bring to an end the existence of the firm. The firm continues until its affairs are, thus, completely wound up, the firm can be said to be in existence and the liability of the partners under Section 25 for the acts of the firm also continues up to the winding up of the affairs of the firm. Now, in this case admittedly the said winding up took place only on 7-2-1980. Therefore, the firm continued to be in existence till 7-2-1980. The Allahabad High Court held as follows :
From the provisions of the Partnership Act noted above, it will be clear that a mere dissolution of a firm does not bring about a complete extinction of the firm itself. The firm, even though for the limited purposes mentioned in the relevant Sections, continues to exist until its affairs are finally and completely wound up. It is only after the dissolution of the firm that its affairs can be wound up at the instance of any of the partners. Till the debts and liabilities of the firm have been fully paid off no partner can claim any particular property as his own nor can he claim that he has any specific share or interest in any property of the firm.... (p. 5) Therefore, we are sufficiently fortified in the view we have taken that for purposes of winding up of the affairs of the firm, the firm continued even though it was dissolved on 22-5-1978. The precursor of Section 189 of the 1961 Act is Section 44 of the 1922 Act and it used to be as follows :
Liability in case of firm or association discontinued or dissolved-(1) Where any business, profession or vocation carried on by a firm or other association of persons has been discontinued or where a firm or other association of persons is dissolved, the Income-tax Officer shall make an assessment of the total income of the firm or other association of persons as such as if no such discontinuance or dissolution had taken place.
(2) If the Income-tax Officer, the Appellate Assistant Commissioner or the Appellate Tribunal in the course of any proceedings under this Act in respect of any such firm or other association of persons as is referred to in Sub-section (1) is satisfied that the firm or other association is guilty of any of the acts specified in Clause (a) or Clause (b) or Clause (c) of Sub-section (1) of Section 28, he or it may impose or direct the imposition of a penalty in accordance with the provisions of that Section.
(3) Every person who was at the time of such discontinuance or dissolution a partner of the firm or a member of the association, as the case may be, shall be jointly and severally liable for the amount of tax or penalty payable and all the provisions of Chapter IV so far as may be, shall apply to any such assessment or imposition of penalty.
In Kanga and Palkhivala's Law and Practice of Income-tax, Seventh edn., Vol. 1, the difference between Section 44 of the 1922 Act and Section 189(3) of the 1961 Act is explained as under :
However, the tax payable referred to in Sub-section (3) means the tax payable by the firm and not the tax assessed on the partners personally. If the dissolved firm is assessed as a registered firm, although all the partners would be jointly and severally liable under this Section to pay the registered firm's tax, one partner would not be liable to pay the tax assessed on another partner individually. On this point there is no difference between the position under this Section and the position under Section 44 of the 1922 Act either before or after its amendment in 1958. But there is an exception to this rule. To the extent specified in Section 182(4), a registered firm is liable to pay a partner's tax which cannot be recovered from him. The effect of Section 182(4) is to convert a partner's liability into the firm's liability to the limited extent specified therein and upon dissolution it becomes the liability of all the partners jointly and severally under Section 189(3). This is now made explicit by the Explanation to Sub-section (3).
The Section applies where the business of the firm is discontinued or the firm is dissolved. If the business is not discontinued but there is a succession to the business and the firm is not dissolved but continues to exist, this Section would have no application. However, even if there is succession to the firm's business but the firm is dissolved, this Section would apply. (p. 1028) From the wording of Section 189 it is sought to be argued that it only deals with the income derived by the firm prior to the dissolution but it never intended to tax post-dissolution income of the firm or to tax the income earned by the firm after the dissolution and before the affairs of the firm are wound up. In support of its contention, the decision of the Hon'ble Supreme Court is in Shivram Poddar's case (supra). In the said decision, the Supreme Court held as follows :
The object of the enactment is clear : it is to authorise assessment of tax on income, profits or gains earned in a business, profession or vocation carried on by a firm or association before discontinuance of the business, profession or vocation, or before dissolution of the association and to impose joint and several liability upon every person who was at the time of discontinuance a partner of the firm or a member of the association or at the time of dissolution a member of the association. (p. 825) Shri P.A. Francis argued that from the above, it is very clear that Section 44 was never intended to govern the income derived for the post-dissolution period up to the winding of the affairs of the firm. However, having regard to the facts of the case and ultimate decision rendered by the Hon'ble Supreme Court on those facts, we are not prepared to agree with the learned counsel for the assessee that Section 44 does not concern itself to tax the post-dissolution income up to the winding up of the firm. In the facts before the Hon'ble Supreme Court, the firm was dissolved in February 1950. On 28-3-1955 notice was issued under Section 34, read with Section 22(2) of the 1922 Act which was addressed to the assessee as a partner of the firm at the time of its dissolution calling upon him to submit a return of the income of the firm for the year ending on 31-3-1950. Therefore, obviously the notice is intended to tax income derived by the firm even after its dissolution. Whereas the dissolution took place in February 1950, the return of income was called for up to 31-3-1950 which is much beyond the date of dissolution. A writ petition was filed commanding the ITO to forbear from giving effect to the notice. The question which fell for determination was whether the income earned by the firm in the year ending March 1950 would be assessed to tax under Section 44 after the firm was dissolved. The following is what is held by the Hon'ble Supreme Court:
...Under the ordinary law governing partnerships, modification in the constitution of the firm in the absence of a special agreement to the contrary amounts to dissolution of the firm and reconstitution thereof, a firm at common law being a group of individuals who have agreed to share the profits of a business carried on by all or any of them acting for all and supersession of the agreement brings about an end of the relation. But the Income-tax Act recognises a firm for purposes of assessment as a unit independent of the partners constituting it; it invests the firm with a personality which survives reconstitution. A firm discontinuing its business may be assessed in the manner provided by Section 25(1) in the year of account in which it discontinues its business ; it may also be assessed in the year of assessment. In either case it is the assessment of the income of the firm. Where the firm is dissolved, but the business is not discontinued, there being change in the constitution of the firm, assessment has to be made under Section 26(1) and if there be succession to the business, assessment has to be made under Section 26(2). The provisions relating to assessment on reconstituted or newly constituted firms and on succession to the business are obligatory. Therefore, even when there is change in the ownership of the business carried on by a firm on reconstitution or because of a new constitution, assessment must still be made upon the firm. When there is succession, the successor and the person succeeded have to be assessed each in respect of his actual share.... (p. 827) Ultimately, the writ petition was dismissed by the Hon'ble Supreme Court. Therefore, the ratio of the Supreme Court should be taken to have contained not only in the prior paragraphs but also in the pages extracted from 827 and 828 of the reported decision. The reason why no provision is made to bring to tax the post-dissolution income up to the winding up of the firm is clearly given by the Hon'ble Supreme Court in the extracted portion of the judgment from pp. 827 and 828 given above. In the facts before us also what took place on 22-5-1978 was only dissolution of the firm but not discontinuance of business. The discontinuance of business can be said to have taken place on 22-2-1980 or on 7-2-1980 which fall very much after the close of the accounting period. To our understanding in Shivram Poddar's case (supra) is a clear authority for the proposition that the firm only would be liable to the income earned up to discontinuance of business of the firm and the provisions of Section 44 do not lay down anything contrary to the said proposition. Therefore, in view of the said decision, it is highly difficult for us to appreciate either that Section 189 did not concern itself with the assessment of the post-dissolution period or the Legislature by oversight did not provide adequate mechinery to tax such an income. Therefore, the primary argument that the impugned income in this case is not liable to tax as there is no machinery Section provided for it cannot be accepted to be sound.
9. Now let us see whether N.V. Shanmugham & Co.'s case (supra) completely justifies taxing of the impugned income as income of the AOP. Shri Francis wanted to distinguish this decision. Firstly, on the ground that the real point in controversy as pointed out by the Supreme Court itself is to decide between the revenue and the assessee whether the profits earned in the business should be considered as profits earned by an AOP or whether they should be considered as having been earned by individuals. The decision reached by the Hon'ble Supreme Court was that the profits were earned on behalf of the persons who had common interest created by the order of the Court and were on that account, an AOP. On the facts of that case, their Lordships held that in law the erstwhile partners of the firm carried on business through their representatives. So, the question whether the erstwhile partnership can be considered to be the proper person to be assessed to income-tax for the impugned income earned was not one of the questions which was posed before the Hon'ble Supreme Court or considered by it. It is further submitted that the provisions of Section 47 which say that though the firm was dissolved it continued for the purpose of winding up of the firm and also for completing the transactions began by the erstwhile firm were not considered at all nor any decision given thereon and, therefore, for the above two reasons in N.V. Shanmugham & Co.'s case (supra) does not lay down ratio to govern all cases of taxing the post-dissolution income up to the winding up of the firm. We agree with this contention. We are of the view that the scope of the enquiry before the Hon'ble Supreme Court was limited to the question whether the profits earned in the business should be considered as profits earned by an AOP or should be considered by having been earned by individuals. In this case, the orders delivered by the learned sub-Judge clearly revealed that there is no dispute among the parties for appointment of a receiver but only dispute among them was whom to appoint as receivers. Ultimately, the receivers were appointed by the Court. The appointment of the receivers is not permanent feature but it was only a step to wind up the affairs of the firm. In fact, the Hon'ble Kerala High Court expressed its wish that the sale of the theatres should be conducted within three months of their orders dated 13-7-1978. However, ultimately, the matter was settled between the parties themselves and all the partners had chosen 7-2-1980 as the date on which the affairs of the firm should be wound up. They made adequate provision to meet the income-tax liability for the assessment year 1979-80 also. From the facts and circumstances of the case, we have no hesitation to hold that all the affairs of the firm were settled up to 7-2-1980 and the firm was in existence for purpose of winding up and completing the transactions earlier undertaken by it up to 7-2-1980 and the ultimate deed of dissolution was drafted on 22-2-1980. Therefore, having regard to the facts and circumstances of the case, the dissolution of the firm took place on 7-2-1980 if not on 22-2-1980 and up to that date the firm continued. Section 47 is clear and it has stated that "after the dissolution of a firm the authority of each partner to bind the firm and the other mutual rights and obligations 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 dissolution, but not otherwise". Therefore, the firm continued up to 7-2-1980 at least for purpose of winding up of the firm. The appointment of the receivers and carrying on the business of the firm by the receivers is towards winding up of the affairs of the firm only. The appointment of the receivers is a step to which all the partners agreed. Under the orders of the sub-Judge any amount to be disbursed by the plantiffs for running the theatres is to be done after getting sanction of the Court only. The receivers though parties in the suit, they are officers of the Court and they are bound to obey the directions of the Court, even when those directions were given with regard to the method of management. Therefore, under the circumstances, it would be difficult to postulate that the joint receivers had any scope to earn income by reason of their association and the scope of their functions would stop at mere receipt of income and, therefore, they cannot be called an AOP and in our opinion by virtue of Section 47 of the Partnership Act, read with Section 189(3) of the Income-tax Act the firm 'United Film Exhibitors' should have been assessed for the impugned income for the assessment year 1979-80 in the capacity of a firm. Therefore, we set aside the status as an AOP and we direct that the assessment be completed in the status of a firm. We also hold that it is open to the partners of the erstwhile firm to make use of Clause 14 of the deed of dissolution dated 22-2-1980 for purposes of reimbursement or otherwise which is available to them under law. In view of our finding in the main appeal that the firm only should be assessed for the assessment year 1979-80, it is also entitled to depreciation as admittedly the assets were not only owned but also used by the receivers for and on behalf of the firm.
10. Hence, the appeal is allowed and cross-objection is dismissed.
A. Satyanarayana, Accountant Member -
1. I agree with the conclusions of my learned brother that the firm only should be assessed to tax for the assessment year 1979-80. But I wish to add a few lines. In the case of Mangat Ram Hazari Mal v. CIT [1968] 67 ITR 788 (Punj. & Har.) three individuals and a firm consisting of four partners, formed themselves into a partnership and applied for registration as firm under Section 26A of the Act. Registration was refused on the ground that one of the partners was a firm and the partnership was assessed as an unregistered firm by the ITO and this assessment was upheld by the AAC. On further appeal, the Tribunal took the view that the partnership was not a 'firm' at all and assessed it in the status of an 'association of persons'. It was contended that the Tribunal had no power to uphold the assessment changing the status of the assessee but could only annul the assessment or remand the case to the ITO to make a fresh assessment on the assessee in the status of an 'association of persons'. It was held by the Punjab and Haryana High Court that :
(i) that the assessee was 'an association of persons' and not a 'firm' ;
(ii) the Tribunal had power to uphold the assessment changing the status of the assessee into that of an association of persons as the question whether the assessee should be assessed as an unregistered 'firm' or as 'an association of persons' was raised before the Income-tax Officer and the Appellate Assistant Commissioner and before the Tribunal also. (p. 789)
2. The Andhra Pradesh High Court in the recent decision in the case of Pannabai v. CIT [1985] 153 ITR 608 (FB) considered the competence of the Tribunal to change the status. In that case K was a partner in a firm. He died intestate leaving behind him his wife P and six minor children. P entered into an agreement with the other partners and was allotted the share in the firm held by K. P claimed that she was assessable only on one-seventh of the share from the firm because all the seven heirs of K were entitled to the income from the firm. The ITO negatived the claim and assessed the entire share income in her hands. The AAC upheld this order. On further appeal, the Tribunal held that the correct status of the assessee was a 'body of individuals'. On a reference, it was held that-
...neither before the AAC nor before the Tribunal was it claimed by the revenue that there could be an assessment in the status of 'body of individuals'. The Tribunal having held that P could not be assessed as an individual on the income derived from the firm was incompetent to modify or alter the status to that of 'body of individuals' without notice to that body of individuals mandatorily required under Section 139(2). The Tribunal should have annulled the assessment with liberty to the ITO to assess the income in the status of body of individuals, if permitted by law, after issuing notice to that body of individuals to submit a return as required by Section 139(2). (p. 608)
3. In the instant case, the departmental representative in the course of the arguments specifically urged that if the Tribunal finds that the assessment should have been made in the status of a firm finding may be given accordingly. So, in the instant case, the Tribunal is perfectly competent to alter the status to that of a firm.