JUDGMENT
Dr. B.P. Saraf, J.
1. By this reference under section 256(1) of the Income-tax Act, 1961, the Income-tax Appellate Tribunal has referred the following question of law to this court for opinion :
“Whether, on the facts and in the circumstances of the case, having particular regard to section 176(3A), the income-tax assessment could be filed for the assessment year 1976-77, even if the firm was dissolved on March 31, 1975 ?”
2. This reference pertains to the assessment year 1976-77. The assessee is a partnership firm. It was constituted as per deed of agreement dated October 26, 1963, for the purpose of acquiring a large area of land admeasuring about 25,000 square yards and disposing of the same. One of the partners of the said firm, Shri Manilal K. S. Vaidya, by an agreement for sale dated October 11, 1963, had agreed to purchase the said land from the Central Bank Executor and Trustee Co. Ltd., for a sum of Rs. 6,50,000. By another agreement dated November 22, 1968, entered into on behalf of the firm, he agreed to sell the said land to one Messrs. Mercury Corporation for a sum of Rs. 13,51,000. Messrs. Mercury Corporation, in turn, entered into another agreement for the sale of the said land to one Vaibhav Co-operative Housing Society Ltd. Shri Radia, a partner of the petitioner-firm, who had paid initially a sum of Rs. 65,000 to the Central Bank Executor and Trustee Co. Ltd., paid a further sum of Rs. 1,00,000 in 1964-65. Though the sale was not completed within six months of the date of the agreement with the vendor-bank, the assessee paid interest on the unpaid balance of sale price amounting to Rs. 1,95,676 on March 31, 1970. On the other hand, the assessee also received a sum of Rs. 1,90,000 from Messrs. Mercury Corporation in pursuance of the agreement for sale entered into with them.
3. The Central Bank Executor and Trustee Co. Ltd., vide its letter dated September 29, 1969, called upon the assessee to pay the full balance consideration within 10 days failing which it was stated that the agreement for sale would be terminated and the amount of advance received in pursuance thereof forfeited. As the assessee did not pay the amount, the bank, vide its letter dated May 22, 1970, terminated the agreement dated October 11, 1963, with the assessee. The assessee filed a suit in the High Court against the bank for specific performance, in the alternative, claiming damages, return of the earnest money and other reliefs. Vaibhav Co-operative Housing Society Ltd. also filed a suit against the assessee as well as Mercury Corporation and the Central Bank Executor and Trustee Co. Ltd., for damages and other reliefs. When all these suits were pending, one Shri Yogendra A. Desai entered into a tripartite agreement dated August 19, 1974, between the Central Bank Trustee and Co. Ltd. of the first part, Shri Yogendra A. Desai of the second part and promoters of the Co-operative Society of the Reserve Bank of India of the third part. As per the said agreement, the Central Bank Executor and Trustee Co. Ltd., agreed to sell the said property for a sum of Rs. 16,50,000 to Shri Yogendra A. Desai but subject to the claims of the assessee and other parties. Shri Yogendra A. Desai has also entered into an agreement on the said day, i.e., August 19, 1974, with the promoters of the Co-operative Housing Society of the Reserve Bank of India as per which, property admeasuring 9,548 square yards was agreed to be sold for a sum of Rs. 13 lakhs. Under this agreement, Shri Desai had agreed with the said promoters of the society that he would make out a marketable title to the said property free from all encumbrances and in particular, agreed to have all the pending suits between the parties withdrawn and/or dismissed. Shri Desai entered into a compromise with the assessee, Mercury Corporation and Vaibhav Co-operative Housing Society. He agreed to pay to the assessee-firm a sum of Rs. 12,90,000 for withdrawing its claim. A sum of Rs. 1,00,000 was deposited with the attorney of the assessee and the balance of Rs. 11,90,000 was to be paid on or before December 31, 1994, on the assessee withdrawing the suit. The assessee-firm was dissolved on March 31, 1975. It, however, submitted its return for the assessment years 1975-76 and 1976-77 showing “nil” income which was accepted by the Income-tax Officer.
4. However, later the Commissioner of Income-tax on perusal of the assessment records of the assessee being satisfied that the order of the Income-tax Officer was erroneous, initiated proceedings for suo motu revision of the orders of assessment for the assessment years 1975-76 and 1976-77 under section 263 of the Income-tax Act and on hearing the parties, held that the orders of the Income-tax Officer for the above assessment years were erroneous and prejudicial to the interests of the Revenue since the Income-tax Officer had failed to bring to assessment in either of the two years the income of Rs. 12,90,000 received by the assessee-firm from Shri Desai as per agreement dated August 19, 1974. It was submitted by the assessee that it received the above amount in full from Shri Yogendra Desai in the financial year 1974-75 and financial year 1975-76 as under :
Financial year 1974-75 :
Rs.
16-9-1974 1,00,000
16-9-1974 2,10,000
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3,10,000
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Financial year 1975-76 :
Rs.
11-4-1975 5,30,000
11-4-1975 1,00,000
17-7-1975 50,000
30-9-1975 1,00,000
10-11-1975 1,50,000
19-11-1975 50,000
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9,80,000
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5. It was contended by the assessee before the Commissioner that the above amounts came to be received after the firm was dissolved and that it could not be taxed in the year of receipt since no business was carried on by the assessee during that year. The Commissioner rejected the above contention of the assessee. It was observed that the receipts in question had intimate connection with the partnership business. The Commissioner also took note of the fact that the profits from the above receipts were distributed among all the partners of the dissolved partnership firm in their respective profit-sharing rations. The Commissioner also noted the expenditure incurred by the assessee in connection with the above venture and allocated the same in proportion to the receipts in the two years and determined the net receipts assessable for the two assessment years as under :
Assessment year 1975-76 :
Rs.
Receipts 3,10,000
Less : Expenses 80,330
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2,29,670
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Assessment year 1976-77 :
Rs.
Receipts 9,80,000
Less : Expenses 2,53,940
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7,26,060
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6. He, therefore, held that the Income-tax Officer has acted erroneously in not assessing the income comprised in the receipts from Shri Yogendra Desai in the assessment years 1975-76 and 1976-77 on the ground that the assessee-firm did not exist even for a day during the previous year relevant to the assessment year 1976-77. Accordingly, he set aside the orders of the Income-tax Officer for the assessment years 1975-76 and 1976-77 and directed the Income-tax Officer to make fresh assessment according to law.
7. Aggrieved by the order of the Commissioner under section 263 of the Act, the assessee appealed to the Income-tax Appellate Tribunal. The main contention of the assessee was that the assessee-firm having been dissolved on March 31, 1975, the amount of Rs. 12,90,000 received by it after its dissolution could not be assessed to tax. The Tribunal did not accept the contention of the assessee in regard to the assessment year 1975-76 because, on perusal of the dissolution deed, it found that the assessee-firm was in existence in the assessment year 1975-76. The Tribunal, therefore, refused to interfere with the action of the Commissioner in respect of that year. The Tribunal, however, did not approve the order of the Commissioner of Income-tax in regard to the assessment year 1976-77. Accordingly, the Tribunal allowed the appeal of the assessee for the assessment year 1976-77.
8. Being aggrieved by the order of the Tribunal for the assessment year 1976-77, the Revenue applied for reference of the question of law arising out of the order of the Tribunal for the said assessment year. The Tribunal, on being satisfied that it was a referable question of law, referred the question set out above to this court.
9. The controversy in this case is in a narrow compass. The facts relevant for the determination of the controversy are also brief. So far as the amount of Rs. 12,90,000 is concerned, the material facts are that the assessee-firm was dissolved on March 31, 1975, i.e., on the last day of the previous year relevant to the assessment year 1975-76. The amount of Rs. 12,90,000 was due to the assessee-firm in respect of a transaction entered into before its dissolution. A sum of Rs. 3,10,000 had been received by the said firm prior to its dissolution and the balance amount of Rs. 9,80,000 was received after dissolution. The contention of the assessee is that on the date of receipt of the said amount, the assessee-firm being not in existence, the said amount cannot be held to be the receipt of the assessee-firm and cannot be assessed to tax. We have carefully considered this submission. The relevant provisions of the Income-tax Act, having a bearing on the determination of the point in issue, are sections 189 and 176 of the Income-tax Act. Section 189 provides for the assessment of a firm which has been dissolved or whose business has been discontinued. Sub-section (1) of the said section, which is material for the present purpose, is in the following terms :
“189. Firm dissolved or business discontinued. – (1) Where any business or profession carried on by a firm has been discontinued or where a firm is dissolved, the Income-tax Officer shall make an assessment of the total income of the firm as if no such discontinuance or dissolution had taken place, and all the provisions of this Act, including the provisions relating to the levy of a penalty or any other sum chargeable under any provision of this Act, shall apply, so far as may be, to such assessment.”
10. Section 176 of the Act makes certain exceptions to the general rule that if the business or profession is discontinued before the commencement of the accounting year, the profits of the business or profession received in the accounting year cannot be taxed because the source of income did not exist in the accounting year. Sub-section (3A), which was inserted by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1976, reads :
“176. (3A) Where any business is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance.”
11. It may also be expedient to set out sub-section (4) of the said section which provides for taxation of income from profession received after the discontinuance of the profession. It reads :
“(4) Where any profession is discontinued in any year on account of the cessation of the profession by, or the retirement or death of, the person carrying on the profession, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the aforesaid person had it been received before such discontinuance.”
12. A careful reading of section 189 and section 176(3A) and 176(4) makes it abundantly clear that the Income-tax Act contemplates that where a firm is dissolved, the assessment of the total income of such firm shall be made by the Income-tax Officer as if no such dissolution had taken place. The same is the position in the case of discontinuance of the business of the firm. Section 189 keeps the firm alive for the purposes of assessment under the Act despite its dissolution. It does not provide for the assessment of the partners of the dissolved firm which was the position under section 44 of the Indian Income-tax Act, 1922, prior to its amendment in the year 1958 and which is the position even today under section 159 of the 1961 Act in respect of the assessment of the legal representative of a deceased assessee. This section, on the other hand, clearly provides that the dissolved firm shall be assessed on its total income as if no such dissolution has taken place. The position is thus clear that despite its dissolution, for the purposes of levy of tax under this Act, the dissolved firm is deemed to be in existence. Sub-section (3A) of section 176 specifically provides that where any business is discontinued in a particular year, any sum received after the discontinuance shall be deemed to be the income of the recipient and shall be charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance. This sub-section thus creates a legal fiction. It is intended to resolve all doubts in regard to taxability of such income on account of discontinuance of business in the year of receipt. Or to put it differently, it makes an exception to the general rule that in order to hold the receipts chargeable to tax in the year of its receipt the business must be in existence in that year.
13. In the instant case, the business of the assessee-firm was discontinued from March 31, 1975, when the firm was dissolved. A sum of Rs. 9,80,000 was received after the discontinuance of the business. The recipient was, however, the assessee-firm itself. That is so because by virtue of section 189, the firm continued for the purpose of assessment despite its dissolution. Factually also, it is the admitted position that despite dissolution, the receipt was distributed amongst the partners of the dissolved firm in their respective profit-sharing ratios. There is no dispute that the income from the above receipts would have been included in the income of the firm had the income been received before discontinuance. The only objection to its chargeability to tax in the hands of the firm is on the ground that at the time of receipt, the firm had discontinued its business. This objection, however, is no more valid after the incorporation of sub-section (3A) in section 176 of the Act which is intended specifically to meet such objections. Sub-section (3A) clearly provides that any sum received after the discontinuance of the business shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if the same would have been chargeable as income had it been received before such discontinuance. This sub-section constitutes an exception to the rule that business receipts are chargeable only if the business or profession is carried on in the year of receipt. In that view of the matter, we are of the clear opinion that the amount of Rs. 9,80,000 was assessable in the hands of the assessee-firm in the year of receipt despite dissolution and discontinuance of its business by virtue of sub-section (3A) of section 176 read with section 189 of the Act.
14. We are fully supported in our above view by the recent decision of the Supreme Court in Nagarmal Baijnath v. CIT [1993] 201 ITR 538, where the Supreme Court discussed at length the position of assessment of a dissolved firm under the law as it stood prior to 1958 and the law as it stands now. The Supreme Court quoted with approval the following observations of Shah J. in C. A. Abraham v. ITO [1961] 41 ITR 425 (at page 430), (at page 543 of 201 ITR) :
“In effect, the Legislature has enacted by section 44 that the assessment proceedings may be commenced and continued against a firm of 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, the firm is deemed to continue after discontinuance for the purpose of assessment under Chapter IV.”
15. It was also observed that the above observations would squarely apply to a case where the dissolution of the partnership firm leads to discontinuance of its business.
16. Learned counsel for the assessee referred to a number of decisions in support of the contention that the analogy of section 159 would apply to section 189. We find it difficult to accept the above contention because, in our opinion, the scheme of these two sections is completely different. Section 159 is akin to section 44 of the Indian Income-tax Act, 1922, as it stood before the amendment of 1958. The scheme of assessment of income of a dissolved firm originally was the same as in the case of a deceased assessee but that scheme is no more applicable for the assessment of the income of dissolved firms. Now, under section 189 or under the amended section 44 of the 1922 Act, the Income-tax Officer has to make an assessment of the total income of the firm as such as if no such discontinuance or dissolution had taken place. The analogy of section 159 is, therefore, not applicable to the interpretation of section 189. It may also be pertinent to mention that section 176(3A) deals with all assessees whereas section 189 deals only with business carried on by the firms. It may also be observed that section 176(3A) and section 189 deal with two different aspects – the former with chargeability of receipts to tax despite discontinuance of the business in the year of receipt, the latter with assessment of a firm despite its dissolution.
17. In view of the foregoing discussion, we are of the opinion that the Tribunal was justified in holding that the receipt of the amount by the assessee during the previous year relevant to the assessment year 1976-77 was assessable in its hands in the said assessment year despite dissolution of the firm and discontinuance of the business on March 31, 1975.
18. In that view of the matter, we answer the question referred to us in the affirmative and in favour of the Revenue.
19. No order as to costs.
20. In view of our answer to the question referred in Income-tax Reference No. 100 of 1982, the notice of motion becomes infructuous. It is, therefore, rejected.