Income Tax Appellate Tribunal - Delhi
Income-Tax Officer vs Mool Chand Parveen Kumar on 22 May, 1992
Equivalent citations: [1992]42ITD300(DELHI)
ORDER
J. Kathuria, Accountant Member
1. The Revenue's appeal and the assessee's cross objection for assessment year 1985-86 arising out of the order dated 28-6-1988 passed by the Commissioner of Income-tax (Appeals) -XI, New Delhi, are disposed of by a combined order, for the sake of convenience. We shall first take up the Revenue's appeal.
2. The only ground raised in the appeal, reads as follows :
On the facts and in the circumstances of the case, the learned CIT (Appeals) has erred in directing the Assessing Officer to frame two different assessment orders in this case by ignoring the provisions of Section 187(2)(a) of the IT Act, 1961.
3. Brief facts of the case are that the assessee firm had financial year as its previous year. The assessee firm consisted of the following 4 partners upto assessment year 1984-85:
1. Smt. Nisha Jain 30 per cent share.
2. Shri MoolChand 25 per cent share.
3. Smt. Renu Jain 25 per cent share.
4. Shri Suresh Kumar Jain 20 per cent share.
This position continued upto 30-9-1984 when a dissolution deed was executed in terms of which three partners, namely, Shri Mool Chand, Smt. Renu Jain and Shri Suresh Kumar Jain decided to retire from the firm. It was agreed that the firm M/s. Mool Chand Parveen Kumar was terminated and dissolved with effect from 30-9-1984. The account books of the firm were closed down and the trading account, profit and loss account and balance sheet for the period from 1-4-1984 to 30-9-1984 were prepared. It was also agreed that the stock-in-trade, furniture and fixtures and liabilities and assets of the firm had fallen to the share of Smt. Nisha Jain, the continuing partner, who was free to use the same in the manner she liked. The continuing partner was also free to run the business as a sole proprietor or in partnership under this very name or in any other name, in the same line or in any other line, from the same premises or from any other premises and the out going partners were to have no connection or lien, over the same.
4. Smt. Nisha Jain, the continuing partner along with three others executed a new deed of partnership on 1-10-1984, according to which the firm consisted of the following partners :
Name of the partners. Share. 1. Smt. Nisha Jain 30 per cent 2. Smt. Anita Jain 25 per cent 3. Shri Sushil Kumar Jain 25 per cent 4. Smt. Chandrawati Jain 20 per cent.
The said firm came into effect from 1-10-1984. As per Clause 10 of the partnership deed dated 1-10-1984 it was mentioned that the business as presently constituted would have no connection with or relation to any of the firms in which any of the party referred to in the partnership deed had been partner or was a partner or would be a partner.
5. For assessment year 1985-86 originally one composite Income-tax return declaring income of Rs. 1,46,820 was filed. The return, however, was accompanied by two trading and profit and loss accounts and balance sheets. One was for the period from 1-4-1984 to 30-9-1984 and the other for the period from 1-10-1984 to 31-3-1985. However, later on two separate returns were filed on 25-8-1986, one for the period from 1-4-1984 to 30-9-1984 declaring an income of Rs. 50,000 and the second return for the period from 1-10-1984 to 31-3-1985 declaring income at Rs. 96,680. The assessee claimed that two separate assessments for the aforesaid two periods should be made. The Assessing Officer, however, made one composite assessment for both the periods but allocated the shares to the partners period-wise. Aggrieved by the order of the Assessing Officer the assessee appealed to the Commissioner of Income-tax (Appeals) who held that it was the case of succession and not a mere change in the constitution of the partnership. He accordingly directed the Assessing Officer to make two separate assessments on the two returns filed by the two firms. The Revenue has come up in second appeal.
6. Smt. Sheba Bhattacharya, the learned Departmental Representative, submitted that the conduct of the assessee in filing one composite return originally clearly showed that even according to it there was no succession but a mere change in the constitution of the partnership. It was submitted that Smt. Nisha Jain, who was a partner in the original firm had continued to be a partner even after 30-9-1984 and that provisions of Section 187(2) were clearly attracted. Reliance was placed on a number of decisions like Nandlcd Sohanlal v. CIT[1977] 110 ITR 170 (Punj. &Har.)(FB); CIT v. G.N. Textiles [1987] 167 ITR 18P (Raj.); CIT v. Raj Bros. [1987] 165 ITR 7202 (Cal.) and other decisions.
7. Shri Bhagwan Garg, the learned counsel for the assessee, on the other hand, submitted that a composite return was filed on 25-9-1985 under a mistaken notion, that as soon as the mistake was discovered two separate returns were filed, that in the face of the revised returns the original return did not exist at all, that there was a dissolution of the old firm, that Smt. Nisha Jain had been authorised by the terms of the dissolution deed of 30-9-1984 to do the business of the sole proprietor or to enter into partnership with others, that the new partnership deed drawn on 1-10-1984 had clearly stated that the new firm had nothing to do with the old firm, that two account books had been maintained and consequently two profit and loss accounts, trading accounts and balance sheets had been drawn up and that the provisions of Section 188 and not of Section 187(2) were applicable to the facts of the instant case as this was the case of succession and not of a mere change in the partnership. Reliance was placed on the decision of the Delhi High Court in Addl. CIT v. BalKishan Doss Hari Kisan Doss [1984] 149 ITR 2023
8. We have carefully considered the rival submissions as also the facts on record. There is a conflict of judicial opinion on the issue at hand. On one end of the spectrum are some High Courts which have taken the view that in a situation like the present one there is a mere change in the constitution of the firm and not succession and that one assessment has to be made and not separate assessments. To give an example: the facts in the case of Vimal & Amar Talkies v. CIT[ 1982] 138 ITR 660 (MP) were akin to the facts of the present case. In that case the assessee firm initially consisted of 5 partners. On 30-4-1971, 4 partners had retired. The 5th partner was left alone in the firm and as the firm could not continue without there being at least two partners, it stood dissolved. The 5th partner inherited the assets of the firm as a result of the retirement of the other partners. On 1-5-1971 the 5th partner entered into another partnership in which one other partner was taken in and two minors were admitted to the benefits of the partnership. All the assets and liabilities of the dissolved partnership were taken over by the new partnership. The assessee filed two returns, one for the period from 30-10-1970 to 30-4-1971 and the other for the period from 1-5-1971 to 19-10-1971. The Assessing Officer held that there was merely a change in the constitution of the firm and he computed the income for both the periods by one assessment order.
Ultimately, the matter reached the High Court and the High Court held that the Tribunal was right in applying Section 187 and not Section 188 of the Income-tax Act for the reason that the 5th partner who was a partner in the old firm was also a partner in the new firm and it was, therefore, a case of change in the constitution of the firm and not a case of succession of one firm by another falling under Section 188 and that only a single assessment could be made on the firm for both the periods.
9. If one were to go by the above judgment then the order of the Assessing Officer in applying the provisions of Section 187(2), appears to be in order.
10. At the other end of the spectrum are decisions of some other High Courts, one of which is decision of the Andhra Pradesh High Court in Raj Bros.' case (supra) which is taken as an illustrative example. The facts of that case were like this. A partnership consisting of 4 partners came into existence under a deed of partnership dated 20-10-1969. The terms of the partnership indicated that it was a partnership "at will". The accounting period of the firm was financial year. On 31-12-1976 one of the partners retired from the partnership. Pursuant to the retirement of one of the partners the purpose mutually agreed was to dissolve the partnership and a deed of dissolution was executed on 4-1 -1977, evidencing the dissolution with effect from 31-12-1976. It is agreed that the balance standing to the credit of the retired partner at the time of retirement shall be paid to him. With effect from 1-1-1977 the remaining three partners constituted themselves into a partnership firm. A fresh deed of partnership was executed on March 19, 1977, according to which, the partnership came into existence with effect from 1-1-1977. The new partnership had taken over all the assets and liabilities of the partnership dissolved on 31-12-1976 and had been carrying on the same business. Two returns were filed for assessment year 1977-78 by the two firms. The Assessing Officer, however, made a single assessment on the firm as constituted at the time of making the assessment on the ground that there had only been a change in the constitution of the firm. Ultimately, the matter went to the High Court which held that there had been mutual agreement among the parties to dissolve the firm and, therefore, the dissolution was governed by Section 40 of the Indian Partnership Act. According to the High Court there was a dissolution of the partnership on 31-12-1976 and a new partnership came into existence on 1-1-1977 and the two partnerships were liable to be assessed separately under Section 188 of the Income-tax Act, on the income derived by them for the respective periods.
11. It would be immediately observed that the facts of the above case were also akin to those of the present case and if one were to go by the above decision of the Andhra Pradesh High Court then the order of the learned CIT (Appeals) in the present case directing the Assessing Officer to make two separate assessments would have to be upheld.
12. In a situation like this where judicial opinion is divided as illustrated above, we must seek guidance from the decision of the Delhi High Court which is the jurisdictional High Court in the present case. In the case of BalKishan Dass Hari Kisan Dass (supra) the facts were as follows. A firm reconstituted under a deed of partnership dated 26-6-1963 consisted of 4 partners: D, B, J and R. The partnership was at will and could be terminated by mutual consent of all the parties. J was no longer interested in continuing as a partner in the firm and the firm was dissolved by mutual consent of all the parties with effect from 12-12-1967. On 13-12-1967, another firm of the same name was constituted consisting of the original three partners, namely, D, B and Rand two ladies as new partners. A deed of dissolution was executed on 10-1-1968 which recorded dissolution of the partnership dated 26-6-1963 with effect from 12-12-1967. Separate books of account were maintained by the two firms. Two returns were filed, one for the period from 9-7-1967 to 12-12-1967 and the other for the period from 13-12-1967 to 26-6-1968. The Assessing Officer completed a single assessment. The matter ultimately reached the High Court which held that this was a case of succession, that there were two separate firms in existence and that incomes had to be assessed separately.
13. The Delhi High Court made copious references to the decision of the Supreme Court in CIT v. Pigot Chapman & Co. [1982] 135 ITR 620 in the aforesaid decision and observed that the Supreme Court did not accept the contention of the Revenue that upon dissolution of a firm, succession to the old business by another person would arise only if a solitary partner takes over the assets and liabilities and carries on the business as a sole proprietor thereof or if some of the erstwhile partners along with some strangers took over the assets and liabilities of the old firm and carried on the business. According to the Supreme Court the question depended upon the intention of the parties to be gathered from the document or documents, if any, executed by and between the partners and other facts and surrounding circumstances of the case. The Delhi High Court further noted that though the preponderance of the view of the various High Courts was the same as that of the Delhi High Court, it considered it unnecessary to refer to all these decisions one way or the other.
14. In our considered opinion if the ratio of the Delhi High Court decision in the case of Bal Kishan Dass Hari Kisan Dass (supra) were to be applied then the decision of the learned Commissioner of Income-tax (Appeals) in the present case has got to be upheld. The firm consisted of 4 partners when there was a dissolution on 30-9-1984 and three partners retired. In our opinion, even if no dissolution deed were there, since three partners had retired from the firm, the firm had ceased to exist because one remaining partner could not have constituted a partnership firm. There was, however, a written document in the form of a dissolution deed which clearly shows the intention of the erstwhile partners to dissolve the firm and to hand over all assets and liabilities of the firm to Smt. Nisha Jain. Smt. Nisha Jain, as per the terms of the dissolution deed, had the option to either continue as a proprietor or to constitute a partnership firm with others. With effect from 1-10-1984 a new partnership firm was constituted when three other partners came in. Though originally one return of income was filed for both the periods, before the completion of the assessment the mistake was discovered and rectified by filing two separate returns. The revised returns supplanted the original return. In the eye of law the original return had no existence and only the revised returns had to be considered by the Revenue authorities. The emphasis of the learned Departmental Representative on the filing of one return originally seems to be misplaced, because the subsequent conduct of the assessee by filing two revised returns clearly showed the intention which is supported by a written dissolution deed. It is also significant to note that two separate sets of account had been maintained for the two distinct periods and two separate profit and loss accounts, trading accounts and balance sheets had been prepared. Applying the ratio of the aforesaid decision of the Delhi High Court, we have no hesitation in holding that this was the case of succession and not of a mere change in the constitution of the partnership. We accordingly uphold the order of the learned Commissioner of Income-tax (Appeals) and dismiss the Revenue's appeal which stands rejected.
15. We now come to the assessee's cross objection. The first ground is against the upholding of the disallowance of Rs. 2,894 on account of House-tax. The Assessing Officer noted that the said expenditure was included in the general expenses account. No evidence was produced by the assessee before the Revenue authorities that the House-tax liability was to be borne by the assessee firm as a tenant. No such evidence has been produced before us either. The assessee was not the owner of the house property. There is no evidence that the assessee as a tenant had to pay the House-tax. We do not find any merit in this ground, which is hereby rejected.
16. The next ground is against a sum of Rs. 5,300 given as a donation being not considered as exempt under Section 80-G. In the first instance, the entire amount of Rs. 5.300 which was disallowed by the Assessing Officer was not the subject-matter of appeal before the first appellate authority. The learned CIT (Appeals) had considered only the donation of Rs. 5,000 made to Dr. Vidya Sagar Kaushalaya Devi Memorial Trust. On going through the records it was seen by the learned Commissioner of Income-tax (Appeals) that the receipt of donation was dated 1 -4-1985 whereas the accounts of the firm closed on 31-3-1985. It was accordingly held that the donation of Rs. 5,000 was not relevant to the year under consideration.
17. The learned counsel for the assessee, however, submitted that the donation was given by way of a cheque dated 16-3-1985, that it took some time before the cheque could be encashed and that the mere encashment of cheque which fell in the subsequent accounting year should not be the sole criterion for not accepting the assessee's claim of exemption under Section 80-G of the Act.
18. We have heard the rival submissions. The learned Commissioner of Income-tax (Appeals) has merely gone by the fact that the donation receipt was of 1-4-1985. Nobody has gone into the details as to when the donation was made, whether it was made in cash or by cheque, and if by cheque when was the cheque issued and whether the cheque had been sent by post or otherwise handed over to the trust. All these facts need to be brought on record. We, therefore, set aside this matter and restore it to the file of the Assessing Officer to bring all such relevant facts on record and if it is found that the cheque was issued genuinely and really on or before 31-3-1985 and did not bounce back and was honoured and encashed subsequently in the normal course then the payment shall relate back to the date of issue of the cheque and the exemption under Section 80-G would be admissible to the assessee provided all other conditions for the grant of such exemption were available. In case the cheque itself was issued after 31-3-1985 or it was dishonoured in the first instance then on exemption would be admissible to the assessee under Section 80-G in the year under consideration. With these observations, we send this issue back to the Assessing Officer for a fresh adjudication after bringing on record all the relevant and necessary facts of the case.
19. In the result, the cross objection is partly allowed.