PETITIONER: NAGARMAL BAIJNATH Vs. RESPONDENT: COMMISSIONER OF INCOME TAX DATE OF JUDGMENT26/03/1993 BENCH: JEEVAN REDDY, B.P. (J) BENCH: JEEVAN REDDY, B.P. (J) VENKATACHALA N. (J) CITATION: 1993 AIR 1888 1993 SCR (2) 645 1993 SCC Supl. (2) 520 JT 1993 (3) 579 1993 SCALE (2)233 ACT: Income tax Act, 1922: Section 44 (prior to amendment by Finance Act, 1958)-Scope of-Dissolution of firm and discontinuance of business-Assessment on dissolved firm- Correctness of. HEADNOTE: The appellant assessee, a firm which did business during the accounting years relevant to assessment years 1946-47 and 1947-48, was dissolved by a deed of dissolution dated December 2,1946, and Its business discontinued. Notices were issued in the name of the partnership firm and assessments were completed under the Income-tax Act 1922 and Excess Profits Tax Act, 1948. Indeed, the returns were flied in the name of the firm. During the course of the assessment proceedings under both the enactments viz. Income-tax and Excess Profit Tax Act, no objection was taken as to the validity of the proceedings. Against the orders of assessment, appeals were preferred to the Appellate Assistant Commissioner. In these appeals also the validity of the assessment order was not challenged. Even In the further appeals before the Tribunal, no objection was taken to the validity of the assessments. Subsequently, however, permission was sought for raising additional grounds questioning the validity of the assessment proceedings. Though, Revenue opposed the same, the Tribunal permitted the said new ground to be raised on the ground that the Income-tax Officer was aware that the business of the firm was closed. Ultimately, the Tribunal dismissed the appeals. Thereupon the assessee obtained the reference and since it could not succeed even before the High Court the assessee filed the present appeals. It was contended on behalf of the appellant see that under the unamended Section 44, no assessment could have been made upon a firm which was dissolved by the time the assessment was made. 646 Dismissing the appeals, this Court, HELD:1.1. Section 44 of the Income-tax Act, 1922 (before Its Amendment by Finance Act, 1958) covered two situations: (1) where any business, profession or vocation carried on by a firm or association of persons was discontinued and (2) where an association of persons was dissolved. In either of these situations, every person who at the time of such discontinuance or dissolution was a partner of such firm or member of such association was made jointly and severally liable to assessment under Chapter IV in respect of the Income, profits and pins of the firm or association as the case may be. The joint and several liability extended to the payment of the tax. [650 C-D] 1.2.The instant case Is one where the dissolution of the firm resulted in discontinuance of its business. This Court is not concerned with the situation where the firm was dissolved but its business was not discontinued, a distinction which has to be borne in mind. In the case of dissolution resulting in discontinuance of business S.44 of the Income-tax Act, 1922 enabled the Income-tax Officer to make an assessment on the dissolved firm. Indeed this aspect is no longer res integra in view of the settled law. [650 E-H] C.A. Abrahani v. Income Tax Officer, Kottayam & Anr., 41 I.T.R. 425 and Shivram Poddar v. Incomne Tax Officer, Central Circle II, Calcutta & Anr., 51 I.T.R. 823, relied on. C.LT., Bombay v. Devidayal, 68 I.T.R. 425, Larmidas v. C.LT Bombay, 72 I.T.R. 88 and Nagarmal Baijnath v. C.I.T., 114 I.T.R. 133, referred to. JUDGMENT:
CIVIL APPELLATE JURISDICTION Civil Appeal Nos. 15657/1979.
From the Judgment and Order dated 5.11.1977 of the Bombay
High Court in Income Tax Reference No. 44 of 1968.
U. Rajagopal and Ashok Mathur for the Appellant.
A. Raghubir and Ms. A. Subhashini for the Respondent.
The Judgment of the Court was delivered by
647
B.P. JEEVAN REDDY, J. These appeals are preferred against
the judgment of the Bombay High Court in Income Tax
Reference No.44/68. The question referred under Section
66(1) of the Indian Income Tax Act, 1922 and Section 21 of
the Excess Profits Tax Act, 1948 for the opinion of the High
Court reads thus:
“Whether, on the facts and in the
circumstances of the case, the Income-Tax
assessments for the years 1946-47 and 1947-48
and excess profits tax assessments for the
chargeable accounting period ending 4.11.1945
and 31.3.1946 made on M/s. Nagarmal Baijnath,
a firm which was dissolved and whose business
was discontinued at the time of the
assessments, were validly made?’
The appellant assessee, M/s. Nagarmal Baijnath was a firm
which did business during the accounting years relevant to
assessment years 1946-47 and 1947-48, the previous years
being the years ending November 4, 1945 and March 31, 1946
respectively. By a deed of dissolution dated December 2,
1946, the firm was dissolved and its business discontinued.Notice under Section 22(2) of the Act relating to the
assessment years 1946-47 was issued in the name of the
partnership firm and served on one Satyanarayan who accepted
it on behalf of the firm, on August 19, 1946. Subsequent
notices under Sections 22(4) and 23(2) were also issued in
the name of the firm and assessment completed on March 23,
1951 on the firm. The same procedure was adopted with
respect to the assessment year 1947-48 and assessment
completed on the firm on March 10, 1. So far as the
assessments under the Excess Profits Tax Act are concerned,
notices were issued again in the name of the firm and
assessments completed in the name of the firm. Indeed, the
returns were filed in the name of the firm signed by
Baijnath Gajanand for and on behalf of the firm.
During the course of the assessment proceedings under both
the enactments, no objection was taken by anyone on behalf
of the assessee to the validity of the proceedings. Against
the orders of assessment, appeals were preferred to the
Appellate Assistant Commissioner. Even in these appeals the
validity of the assessment orders was not challenged. On
the appeals being dismissed, further appeals were filed
before the Income Tax Appellate Tribunal. In the grounds of
appeal before the Tribunal too, no objection was taken to
the validity of the assessments. Subsequently, how-648
ever, permission was sought for raising additional grounds
in appeal questioning the validity of the assessment
proceedings. Though, the Revenue opposed the same.’ the
Tribunal permitted the said new ground to be raised,
observing that even from the assessment order relating to
the assessment year 1946-47, it appears that “the Income-Tax
Officer was aware that the business of the firm was closed.”
Ultimately,-however, the Tribunal dismissed the appeals. It
is thereupon that the appellant obtained the reference under
Section 66(1).The only question urged by the appellant before the High
Court was: inasmuch as the firm stood dissolved prior to the
date the orders of assessment relating to the said two
assessment years were made, the orders of assessment are
void. It was urged that Section 44 of the Act did not
authorise the Revenue to make an assessment on the firm
after it was dissolved. The High Court first noticed the
factual finding recorded by the Tribunal viz., when the
assessments were made on the firm, the firm was not in
existence, having been dissolved prior to that date and its
business discontinued. The High Court also noticed the
contention of the assessee that inasmuch as “prior to the
dates of the respective assessments, the firm had been
dissolved and its business discontinued’ the assessments
made were contrary to law, in support of which contention
the appellant assessee relied upon a judgment of the Gujarat
High Court in Special Civil Application No.429/60, disposed
of on November 12, 1985. The High Court refused to follow
the said judgment in view of the consistent view taken by
the Bombay High Court that even under the unamended Section
44, it was permissible for the Revenue to make an assessment
upon a dissolved firm after its dissolution and
discontinuation of business. Accordingly, it answered the
question referred to it in the affirmative i.e., against the
assessee and in favour of the Revenue.In this appeal, it is contended by Sri V. Rajagopal, learned
counsel for the appellant that under the unamended Section
44, no assessment could have been made upon a firm which was
dissolved by the date of the assessment. Learned counsel
laid emphasis on the language of the Section. He pointed
out that so far as the discontinuance is concerned, it
referred both to association of persons as well as the
firms, but when it referred to dissolution, it only referred
to association of persons but not to the firm. This was a
clear pointer, says the counsel, to the fact that the
section did not apply to dissolution of a firm though it may
have applied to its
649
discontinuation. He further submitted that the mere
application of the provisions of Chapter IV for the purpose
of assessment did not mean that an assessment could be made
upon a non-existent entity. He contrasted the language of
unamended Section 44 with the language employed in amended
Section 44 and submitted that the very defect pointed out by
him in the unamended provision was rectified by the
amendment, and the omission supplied. He emphasised the
proposition that an assessment cannot be made upon a non-
existent entity and that such an assessment is void in law
unless, of course, the law provides for such a course in
express terms. No such provision was there in Section 44
before it was amended in 1958, says the counsel.
On the other hand, it is contended by Sri A. Raghuvir,
learned counsel for the Revenue that the contention urged by
the appellant is concluded against him by the decisions of
this Court and that it is too late in the day to re-agitate
the said question.Section 44 of the Indian Income Tax Act, 1922 prior to its
amendment by the Finance Act, 1958, read as follows:“Liability in case of discontinued firm or
association:Where any business, profession or vocation
carried on by a firm or association or persons
has been discontinued or where an association
of persons is dissolved, every person who was
at the time of such discontinuance or
dissolution a partner of such firm or a member
of such association shall, in respect of the
income, profits and gains of the firm or
association, jointly and severally liable to
assessment under Chapter IV and for the amount
of tax payable and all the provisions of
Chapter IV shall, so far as may be, apply to
any such assessment.”After it was amended, the Section read thus:
“44. Liability in case of firm discontinued
or dissolved.(1)Where any business profession or
vocation carried on by a firm on other
association or persons has been discontinued,
or where a firm of other association of
persons is dissolved, the Income Tax Officer
shall make an assess-650
ment 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)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 I
V
so far as may be, shall apply to any such
assessment or imposition or penalty.’
Unamended Section 44, it is evident, covered two situations:
(1) where any business, profession or vocation carried on by
a firm or association of persons was discontinued and (2)
When as association of persons was dissolved. In either of
these situations, every person who at the time of such
discontinuance or dissolution was a partner of such firm or
member of such association was made jointly and severally
liable to assessment under Chapter IV in respect of the
income, profits and gains of the firm or association, as the
case may be. The joint and several liability extended to
the payment of the tax held payable. All the provisions of
Chapter IV, so far as the case may be, were made applicable
for such assessment.In this case, we are dealing with the situation where the
dissolution of the firm resulted in discontinuation of its
business. We are not concerned herein with the situation
where the firm was dissolved but its business was not
discontinued. It is necessary to bear this factual premise
in mind. Indeed, on a pointed query from us, the counsel
for the appellant stated that this was a case where the
dissolution resulted in discontinuance of business. The
question is whether in such a case, does not Section 44
enable the Income Tax Officer to make an assessment on the
dissolved firm? We are of the opinion that it does. Indeed
this aspect is no longer res integra in view of the
decisions of this Court in C.A. Abraham v. Income Tar
Officer, Kottayam & Anr., 41 I.T.R. 425 and Shivram Poddar
v. Income Tar Officer, Central Circle II, Calcutta & Anr.,
51 I.T.R. 823. In Abraham, the firm stood dissolved on the
death of a partner and the penalty under Section 28 of the
Act was imposed after its dissolution. It was contended by
the assessee that such imposition was illegal, which
contention was negatived with reference to unamended Section44. That was also a case where the business of the firm was
discontinued because of the dissolution.651
The purport of Section 44 was stated by Shah, J., speaking
for the Ben in the following words:“Section 44 sets up machinery for assessing
the tax liability of firms which had
discontinued their business and provides for
three consequences,
(1)that on the discontinuance of the
business of a firm, every person who was at
the time of its discontinuance a partner is
liable in respect of income, profits and gains
of the firm to be assessed jointly and
severally (2) each partner is liable to pay
the amount of tax payable by the firm, and (3)
that the provision of Chapter IV, so far as
may be, apply to such assessment…..In effect, the Legislature had enacted by
Section 44 that the assessment proceedings may
be commenced and continued against a firm o
f
which business is discontinued as if
discontinuance has not taken place. It is
enacted manifestly with a view to ensure
continuity in the application of the machinery
provided for assessment and imposition of tax
liability notwithstanding discontinuance of
the .business of firms. By a fiction, firm is
deemed to continue after discontinuance for
the purpose of assessment under Chapter IV.”
In our opinion, the above observations squarely apply to the
present case which is also a case where the dissolution of
the partnership firm led to discontinuance of its business.
To the same effect is the decision in Shivram Poddar. The
firm consisted of four partners including Shivram Poddar.
It was dissolved in February, 1950 and thereupon its
business was discontinued. For the assessment year, 1949-
50, one of the partners of the firm submitted a return of
its income and the assessment was made on October 28, 1952
in the status of an unregistered firm. Subsequently, in
March, 1955 notice was issued under Section 44 of the Act
proposing to reopen the assessment ‘for the said assessment
year whereupon Shivram Poddar approached the Calcutta High
Court for issuance of a writ of mandamus commending the
Income Tax Officer to forbear from giving effect to the said
notice. The
652
High Court dismissed the Writ Petition, whereupon the matter
was brought to this Court. The question arising for
consideration was stated by Shah, J., speaking for the Bench
in the following words:“The question which falls to be determined in
this appeal is whether the income earned by
the firm in the year ending March, 1950 could
be assessed to tax under Section 44 of the
Indian Income-Tax Act, 1922, after the firm
was dissolved.The learned Judge set out the unamended Section 44 and its
object as adumberated in Abraham and observed thus:“Section 44 operates in two classes of cases:
where there is discontinuance of business,
profession or vocation carried on by a firm or
association, and where there is dissolution of
an association. It follows that mere dissolu-
tion of a firm without discontinuance of the
business will not attract the application of
section 44 of the Art. It is only where there
is discontinuance of business, whether as a
result of dissolution or other cause, that the
liability to assessment in respect of the
income of the firm under Section 44 arises.In the case of an association, discontinuance
of business for whatever cause, and
dissolution with or without discontinuance of
business, will both attract section 44. The
reason for this distinction appears from the
scheme of the Income-Tax Act in its relation
of assessment of the income of a firm.’
After explaining the scheme of the 1922 Act and after
referring to the relevant provisions in that behalf, the
learned Judge proceeded to state:“Section 44, is therefore, attracted only when
the business of a firm is discontinued, i.e.,
when there is complete cessation of the
business and not when there is a change in the
ownership of the firm, or in its re-
constitution, because by reconstitution of the
firm, no change is brought in the personality
of the firm and succession to the business and
not discontinuance of the business
results ………653
The learned Judge concluded, on a examination of the scheme
of the Act, that:“absence of reference to dissolution of firm
(not resulting in discontinuance in Section44) in section 44 was therefore a logical
sequel to the provisions relating to assess-
ment of firms contained in Chapter IV,
especially sections 23(5), 25(1), 26(1) and
(2).”In our opinion, these two decisions are conclusive on the
question arising herein. The appeals are accordingly liable
to fail.So far as the unreported decision of the Gujarat High Court
is concerned, the facts of that case appear to be different.
It is sufficient to mention that even the said decision
recognised that where the dissolution of the firm resulted
in discontinuance of its business, assessment could be made
on the dissolved firm having regard to the provisions
contained in unamended Section 44. This is what the
Division Bench observed, i.e.:“Now if there was discontinuance of the
business of the first petitioner firm on its
dissolution, it is clear that the unamended
Section 44 would have governed the question of
assessment of the first petitioner firm and
having regard to the decisions of the Supreme
Court just referred to, the Revenue would have
been entitled to assess the first petitioner
firm as a firm despite its dissolution.’
The very same idea was repeated at a later stage in the
following words:“If there is discontinuance of the business,
Section 44 would apply and the Revenue would
be entitled to proceed to assess the firm as
if no dissolution had taken place. (Vide C-A.
Abraham v. Income Tax Officer, Commissioner of
Income Tax_ v. Angadi Chettiar & Commissioner
of Income tax v. Rais Reddy Mallaram (supra).
But if there is no discontinuance of the
business and there is succession, the case
would fall within Section 26(2). That
section, however, does not enact a provision
enabling the Revenue to assess a dissolved
firm on its pre-dissolution
654
income in case of succession.’
We are, therefore, of the opinion that the said decision
does not lay down any principle contrary to the one
enunciated in Abraham or Shivram Poddar.
In this view of the matter, we do not think it necessary to
deal with the facts and principles enunciated in the
decisions of the Bombay High Court referred to in the order
under appeal. Suffice it to say that the decisions in CLT,
Bombay v. Devidayal, 68 I.T.R. 425, Laxmidas v. CLT. Bombay.
72 I.T.R. 88 and the one in Nagarinal Baijnath v. C.I. T,
114 I.T.R. 133 affirm and follow the principle in Abraham.
For the above reasons, the appeal fails and is accordingly
dismissed. No costs.
G.N.
Appeal dismissed.
655