JUDGMENT
Arijit Pasayat, C.J.
1. At the instance of the Revenue, the following question has been referred by the Income-tax Appellate Tribunal, Delhi Bench-D (in short “the Tribunal”), under Section 256(1) of the Income-tax Act, 1961 (in short “the Act”), for the opinion of this court :
“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in annulling the assessment framed by the Inspecting Assistant Commissioner (Assessment) ?”
2. The dispute relates to the assessment year 1973-74.
3. The background facts sans unnecessary details are as follows :
The assessed had filed return of income disclosing nil income for the assessment year in question. In Part III of the return, a sum of Rs. 7,12,460 was claimed as exempt under Section 176(4) of the Act. It was stated that the partnership had been dissolved on January 24, 1968. The amount in question had been received by Charanjit Lal, proprietor of the concern, C. Lyall and Co. It was the assessed’s stand that the amount was in lieu of the claim filed by the sub-partnership which had been brought into existence by Charanjit Lal to execute the contract allotted to him for construction of the airfield at Lucknow in the name of his concern, C. Lyall and Co. during 1964-65. The deed of sub-partnership is dated December 24, 1962. The sub-partnership which had executed the contract had filed claims and the amount was received as a result of the award of an arbitrator who decided the claim of the sub-partnership. It was, therefore, claimed that the receipt was of capital nature and not taxable. The Inspecting Assistant Commissioner (“the IAC” in short) referred to Clause I of the deed of dissolution and noticed that one of the partners was authorised to pursue the claim for which expenses were to be paid by the partners and expenses were to be settled inter se. It was, therefore, observed that distribution of
the assets is a part of the transaction of dissolution of partnership and it
constitutes a business transaction. It was observed that what applies to dissolution also applies to discontinuance of business. He was of the view that in either case the final account must show the actual or the book value of the distributed assets as agreed upon by the partners. Accordingly, he held that what was furnished was a non-existent dissolution and sham arrangement. The receipts were relatable to the business done by the firm and were revenue in nature. As there was no business activity during the year, the Inspecting Assistant Commissioner held that the amount in question was to be assessed in the hands of an association of persons. The assessed preferred an appeal before the Commissioner of Income-tax (Appeals) (in short “the CIT (A)”). The stand of the assessed before the Commissioner of Income-tax (Appeals) was that the firm had already been dissolved on April 13, 1964, and on that date the balance-sheet had been drawn up. The agreement to dissolve the firm was oral and later on it was considered expedient to reduce the terms to writing and a written deed of dissolution was drawn up on August 24, 1968. The preamble of the said deed of dissolution indicated that the work for which the partnership had been brought into existence was completed and, therefore, the partnership has to be dissolved on April 13, 1964. The Commissioner of Income-tax (Appeals) noticed that the indication regarding dissolution of the firm had already been sent to the Department on September 13, 1966. The assessed had not filed any return for the assessment years 1968-69 to 1970-71. On the basis of intimation of discontinuance of the business, assessment proceedings for these three years in question had been dropped. Referring to various clauses of the Indian Partnership Act, 1932, the Commissioner of Income-tax (Appeals) observed that the amount in question could not be brought to tax though notice of dissolution was not given to the Department within 15 days of the dissolution as required under Section 176(3) of the Act. The same was not of much consequence when the firm had been already dissolved. Whatever happened after April 13, 1964, was merely realisation of assets and settlement of accounts thereto. That being the position, the assessed’s stand was accepted. The matter was carried further in appeal before the Tribunal. On consideration of the rival submissions, the Tribunal came to the conclusion that the assessed had informed the Department about discontinuation of the firm on September 30, 1966, and at least from that date the Department knew that the firm was no longer in existence. It was also observed that the Inspecting Assistant Commissioner had no material for coming to the conclusion that the dissolution was sham. The conclusion was not based on any material on record and the facts clearly indicated that there was in fact dissolution of the firm and the partners felt that nothing can be gained by keeping in existence the firm which ceased to do any business except that it was to pursue arbitration which could be easily done by
providing for the same in the dissolution deed. It was not necessary for the agency to continue the partnership. The Tribunal recorded a finding that dissolution of the firm was normal and a bona fide act. It was also observed that the provisions of Section 176(3) which had been brought into operation with effect from April 1, 1976, would have no application to the facts of the case. Accordingly, the assessed’s stand was upheld and the Revenue’s appeal was dismissed. On being moved for reference, the question as set out above has been referred for the opinion of this court.
4. We have heard learned counsel for the Revenue. There is no appearance on behalf of the assessed in spite of service of notice. Learned counsel for the Revenue submitted that the Tribunal was not correct in holding that there was no material to show that the arrangement was sham.
5. We find that the Tribunal on consideration of the relevant materials has come to the conclusion that the dissolution was a normal and a bona fide one and there was no material to show that any sham arrangement had been entered into. That being the factual finding recorded by the Tribunal, we are of the view that no question of law arises. We, therefore, decline to answer the question referred.