ORDER
George Cheriyan, Senior Vice-President
1. These are two appeals preferred by the assessee. They relate to the assessment years 1983-84 and 1984-85.
2. For the assessment year 1983-84, the assessment was made on the assessee Shri Meghraj Jesraj in the status of an “Individual” under the provisions of Section 143(1)(a) on 25-3-1986 accepting the total income returned of Rs. 4,050. For the assessment year 1984-85, the assessment was made under the provisions of Section 143(1) according to a letter of intimation sent to the assessee dated 7-10-1986.
3. The Commissioner of Income-tax scrutinized the records and he found that certain amounts were received by the assessee. The assessee received Rs. 7,65,802 in the previous year relevant to the assessment year 1983-84 and Rs. 14,316 in the previous year relevant to the assessment year 1984-85. These two amounts represented refund of customs duty paid.
4. According to the Commissioner, these amounts should have been assessed to tax in the respective assessment years and since they were not brought to tax, the assessments as made were prejudicial to the Revenue and he, therefore, invoked his powers under Section 263 and issued a show-cause notice. In brief, according to the assessee, the provisions of the Act did not warrant taxing either of these amounts because the provisions of Section 41(1) of the Act were not attracted nor the provisions of Section 176(3 A) and the assessee as an individual was not liable to pay tax on these amounts.
5. As there was some confusion regarding the facts and since the case was very closely argued on behalf of the assessee as well as on behalf of the Revenue, it was considered necessary to ascertain certain facts and accordingly we passed a Remand Order dated 11th August, 1989. Subsequent to this, a Remand Report was received dated 2-1-1990. As the said Remand Report was not fully clarificatory, certain further information was sought and the final Remand Report received was dated 15-3-1990. Both these Remand Reports were made available to the assessee.
6. To appreciate the contentions, we would now set out certain facts as have been ‘ finally ascertained by us. Shri Meghraj Jesraj started business oh 15-1-1969. The business was in manufacture, purchase and sale of skinless steel vessels. The business was done in his individual capacity till 27-10-1973 when the closing stock of the business was taken over by a firm constituted under an instrument of partnership dated 27-10-1973 of which the partners were (1) Meghraj, (2) Bai Gheri, (3) Smt. Luxmi Vasanji, and (4) Ramanlal D. Vikam. It was mentioned in the partnership deed that Meghraj was carrying on his sole proprietary business in the name of Meghraj Metal Industries and in order to augment financial resources of business and to expand the business, the remaining three parties were taken in as partners.
7. The business constituted under the instrument of partnership dated 27-10-1973 was thus a continuation of the business started by Meghraj and run by him from 15-1-1969 onwards. The partnership carried on business under the name and style of Meghraj Metal Industries. Thereafter, Meghraj started the business of his own also in the manufacture, purchase and sale of stainless steel vessels on 28-1-1977 in the name of Madhu Industries.
8. Subsequent to the starting of the business in the name of Madhu Industries, Meghraj had purchased the following assets from the firm Meghraj Metal Industries:-
———————————————————————-
Date of purchase Name of assets Amount of
purchased consideration
----------------------------------------------------------------------
Rs.
4-2-77 Motor car APW 5880 7,500
" " TMZ 7605 15,000
30-3-77 Machinery 1,42,415
31-3-77 AC plant 1,725
" Factory building 55,175
" Furniture 4,250
" Machinery Dyes 10,650
" Tools 570
----------------------------------------------------------------------
The firm of Meghraj Metal Industries was dissolved according to a dissolution deed dated 30-4-1977. On this date, there was no closing stock with the firm. Clause 3 of the Dissolution Deed read as under:-
It is further agreed that all the rights pertaining to the partnership firm including use of trade name and right to licence, quota rights and prosecution of appeal shall belong to the party of the first part hereto and other partners shall not have any rights in the same and they shall not use trade name of the firm and shall not claim anything more than mentioned in para 9. The party of the first part herein shall be entitled to continue and carry on the said business in any manner he might choose.
The further facts to be stated are that the amount of Rs. 7,65,802 which had been received as customs duty refund represented refund of customs duty which had been paid by the firm when it was carrying on business.
9. The refund of customs duty of Rs. 14,316 was refund of customs duty paid by Meghraj as individual when he was carrying on business in his individual capacity in the period 15-1 -1969 to 27-10-1973. The issues before us are whether amount of Rs. 7,65,802 is assessable in the year 1983-84 in the hands of Meghraj Jesraj individual and whether Rs. 14,316 is assessable in the hands of Meghraj Jesraj individual in the assessment year 1984-85.
10. The Commissioner in his order Under Section 263, which is common for both the years, has made a reference to the provisions of Section 41(1) and the contention put forth on behalf of the assessee that the provisions of Section 41(1) are not attracted primarily because the refunds were not obtained by the same assessee who had made1:he payments in respect of which refunds were obtained. The Commissioner has also referred to the provisions of Section 176(3 A) and the stand of the assessee that the said provisions were not applicable, because the business was not discontinued. According to the Commissioner, the business of the firm was discontinued on 30-4-1977 and the deed of dissolution was drawn up and assets and liabilities were distributed and by virtue of that the assessee might have got a right to continue the business and to receive the customs duty refund. But once a dissolution deed had been drawn up, the business of the firm came to an end and at this point the business of the firm was terminated and hence the provisions of Section 176(3A) were clearly attracted.
11. The learned counsel for the assessee took us through the provisions of Section 41(1) of the I.T. Act which reads as under:-
41(1). Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be .profits and gains of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not.
As also the provisions of Section 176(3A) which read as under:-
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.
12. Taking the assessment year 1983-84, the learned counsel submitted that the provisions of Section 41 (1) were not applicable because an allowance should have been made in the hands of the same assessee earlier and it is only where a refund was received by the same assessee the amount could be brought to tax. Restated that it has now been definitely ascertained that the amount of Rs. 7,65,802 had been paid by the firm. The refund had been received by Meghraj individual. The firm and the individual were different assessees and the provisions of Section 41(1) were not attracted.
13. We have heard the learned Departmental Representative on this point. We agree with the learned counsel for the assessee that since it has been factually found that the amount of Rs. 7,65,802 had been paid by the firm and the refund had been received by the assessee as individual, the cardinal requirement of Section 41(1) is not satisfied and, therefore, the amount of Rs. 7,65,802 cannot be brought to tax in the assessment year 1983-84 under the provisions of Section 41(1).
14. Coming to the provisions of Section 176(3A), the learned counsel placed considerable stress on the decision of the Supreme Court in the case of CIT v. Kirkend Coal Co. [1960] 74ITR67. He submitted that the provisions applied only to cases of discontinuance of business of a firm and not where there was a dissolution of firm but not discontinuance of business. In particular, he referred us to the following observations of the Supreme Court at page 70:-
Discontinuance of business has the same connotation in Section 44 as it has in Section 25 of the Act; it does not cover mere change in ownership or in the constitution of the unit of assessment. 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 constitution, because by reconstitution of the firm, no change is brought about in the personality of the firm, and succession to the business and not discontinuance of the business results.
The submission of the learned counsel was that all the assets of the firm had been purchased by the assessee individual and this was tantamount to taking over the business of the firm. Therefore, business of the firm was not discontinued. The business continued to be carried on after dissolution of the firm by the assessee. Hence the provisions of Section 176(3 A) were not attracted because the business had never been discontinued. He also placed stress on the clause in the dissolution deed which we have already set out to submit that the assessee had been given the right to use the trade name as well as the right to licence, quota rights, etc., and also it had been specifically stated that he “shall be entitled to continue and carry on the said business in any manner he might choose”. His submission, therefore, was that the parties to the dissolution deed, namely, the ex-partners, had clearly and unequivocally stated that the assessee was to continue to carry on the erstwhile business. This was ample evidence that the business was not discontinued though the firm; may have been dissolved and hence the case fell outside the purview of the provisions of Section 176(3 A).
15. Another point emphasized by the learned counsel was that even if it was held that the assets had been purchased by the assessee, it only meant that by purchasing the assets the assessee had taken over the business and hence the business itself continued.
16. The learned Departmental Representative rested his case on two points. He firstly emphasized that the assessee had purchased all the assets of the firm on dates much prior to the dissolution of the firm, i.e., in February 1977 and in March 1977, whereas the firm dissolved only in April 1977. His argument was that when the plant with which the firm had carried on business, namely, manufacture and sale of stainless steel articles, had been purchased by the assessee, the firm could not have continued its business. Further he submitted that there was no closing stock whatsoever which the assessee took over when the firm dissolved on 30-4-1977. Therefore, if the entire infrastructure had been purchased earlier and there was no closing stock taken over on dissolution, he submitted, that this was a case where the firm had not only dissolved but the business of the firm had been discontinued and, therefore, the provisions of Section 176(3 A) were clearly attracted.
17. We have considered the rival submissions. We are in complete agreement with the learned counsel for the assessee that dissolution of a firm does not necessarily imply discontinuance of the business. Whether there has been discontinuance or not of the business has to be separately determined. Every change in ownership does not amount to discontinuance of business. In the present case, the assessee was a partner of the firm which carried on business in manufacture, purchase and sale of stainless steel articles. The firm dissolved only on 30-4-1977. The assessee had started his individual business of Madhu Industries. This business was also in the manufacture and sale of stainless steel articles. After starting the individual business on 28-1-1977,the assessee purchased the assets of the firm on 4th February, 1977, 30th March, 1977 and 31st March, 1977, of which we have given details earlier. These were all assets with which the firm was carrying on the business of manufacture and sale of stainless steel articles. Therefore, the assessee who had started the independent business of manufacture and sale of stainless steel articles, had augmented the manufacturing assets by purchase of further assets from the firm. Instead of purchasing such assets from the market, the assessee had purchased the same from the firm. Once the firm was divested of the assets with which it was manufacturing stainless steel articles, the business of manufacture of stainless steel articles as far as the firm was concerned, would perforce have come to an end. Apart from this, there was also no closing stock of any raw material left with the firm when the firm was dissolved. If there was neither raw material nor the assets were existing by which the raw material if available could have been converted into manufactured articles, it would, in our view, follow that the business which was of manufacture and sale of stainless steel’ utensils would have come to an end. In other words, on 31-3-1977, the business of the firm stood discontinued though the firm itself was dissolved only on 30-4-1977.
18. If we read the provisions of Section 176(3 A), it is clear that all the requirements are satisfied. The business which was carried on by the firm had been discontinued. The amount of Rs. 7,65,802 had been received after the discontinuance and where such were the circumstances, the amount had to be deemed to be the income 01 the recipient and the recipient was the assessee and the section enjoined that the amount has to be charged to tax in the year of receipt provided that such amount would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance. We have to examine whether this last provision is satisfied. We find it is satisfied because if the firm had not discontinued the business and the amount had been received, then because the amount of Rs. 7,65,802 had been paid by the firm earlier and remission had been obtained in respect the same, the amount would have been included in the total income of the firm under the provisions of Section 41 (1). Therefore in our view, the provisions of Section 176(3A) are satisfied and as far as the assessment-year 1983-84 is concerned, the amount of Rs. 7,65,802 has rightly to be subjected to tax.
19. The order of the Commissioner of Income-tax is that this amount should be subjected to tax in the fresh assessment which is to be done in accordance with law, he having set aside -the assessment. Our finding is confined only to the taxability of the amount of Rs. 7,65,802 in the fresh assessment which is to be made. As far as all other aspects are concerned, they do not arise for our consideration.
20. Coming to the assessment year 1984-85, the amount of Rs. 14,316 had been paid by the assessee in his individual capacity when he was carrying on the business between 15-1-1969 to 27-10-1973. The amount had been received back by the assessee again when he was doing business in his individual capacity. At the time of payment when the amount was allowed as a deduction and at the time when it was received back as refund, the assessee was assessable in the status of individual only. The assessee is, therefore, one and the same on both the occasions. We are unable to agree with the learned counsel that because in the intervening years the business was carried on by a firm, the position would be any different. We are also unable to agree with him that the refund has been received on behalf of the firm because the assessee is under no liability to make over any part of the payment to the firm. In the present case, the provisions of Section 41 (1) are fully satisfied and the amount of Rs. 14,316 is liable to tax under the provisions of Section 41(1).
21. The amount of Rs. 14,316 is not liable to tax under the provisions of Section 176(3A) because this amount if it had been received by the firm before it discontinued its business would not have been taxable in the hands of the firm under the provisions of Section 41(1) and as such, the provisions of Section 176(3A) will not be attracted in respect of this payment. Here again, our conclusion is that the Commissioner was right in directing that this amount of Rs. 14,316 be brought to tax in the fresh assessment to be made for the assessment year 1984-85 for which year also he has set aside the original assessment to be re-done in accordance with law. As/are as the other matters in the fresh assessment are concerned, they are not before us for decision.
22. The learned counsel has taken an argument that if according to us the business of the firm had been discontinued or in any event since the firm had dissolved, an assessment should have been made under the provisions of Section 189(1) and since this was mandatory, the learned counsel submitted that for the assessment year 1983-84, if at all the amounted Rs. 7,eo,802 was taxable, it would be taxable only in the hands of the firm were an assessment to be made in the hands of the firm. Hence he submitted that the question of including the amount in the hands of the assessee did not arise.
23. The provisions of sec, 176(3 A) and 189 are independent of each other. As long as an amount falls within the ambit of either of the provisions, it has to be taxed in the hands of the respective assessee. Of course, it goes without saying that assessment of the same amount twice though it be in the hands of different assessees, cannot arise. In the present case, taxation of the amount of Rs. 7,65,802 squarely falls under the provisions of Section 176(3A) which is applicable in the case of the assessee for the assessment year 1983-84 and since there is no material to show that such amount has been included already in the hands of the firm, the question of excluding the same from the present assessment does not arise on the ground put forth by the learned counsel that it was mandatory to make an assessment in the hands of the firm in the first instance.
24. In the result, both the appeals are dismissed.