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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

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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,

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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

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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

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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 Section 44.  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-

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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  Section               44)  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

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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