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PETITIONER: COMMISSIONER OF INCOME-TAX, BIHAR & ORISSA,PATNA

       Vs.

RESPONDENT: M/S.  KIRKEND COAL COMPANY

DATE OF JUDGMENT: 12/03/1969

BENCH: SHAH, J.C. BENCH: SHAH, J.C. GROVER, A.N.

CITATION:  1969 AIR 1352            1969 SCR  (3) 983  1969 SCC  (1) 776

ACT: Indian  Income-tax,  1922, ss. 26, 28,  44  and  66--Penalty leviable   on   firm  for   assessment   year   1948-49-Firm reconstituted in later years but business not  discontinued- Penalty   in   respect  of  1948-49  whether   leviable   on reconstituted  firm-Section 44 not applicable to such  cases Applicability  of ss. 26 and 28-Question not  raised  before Tribunal cannot be raised in reference under s. 66.

HEADNOTE: The respondent was a firm on which penalty under s. 28(1)(c) of  the  Indian  Income-tax Act, 1922  was  imposed  by  the Income-tax  Officer in respect of the assessment year  1948- 49.    At  the  time  when  the  penalty  was  imposed   the constitution  of  the  firm  had  changed  though  the  same business  was  continued  by the  reconstituted  firm.   The appeals  filed  by  the  respondent  before  the   Appellate Assistant  Commissioner and the Tribunal were rejected.   In reference the High Court held that penalty could be  legally imposed  upon the original firm constituted in  the  account year  relevant to the assessment year 1948-49 and  not  upon the  new  firm  constituted in 1952.   In  coming  to  their conclusions the Tribunal as well as the High Court proceeded on  the assumption that the source and power of the  Income- tax  Officer to impose a penalty was in s. 44 of the  Indian Income-tax  Act,  1922.  In appeal by the  Revenue  to  this Court, HELD  : (i) Section 44 only applies to those cases in  which there  has  been discontinuance of the business and  not  to cases   in   which   the  business   continues   after   the reconstitution  of the firm, or there is succession  to  the business.  Cases of reconstitution of the firm or succession to  the  business  are covered by ss. 26(1)  and  (2).   The Tribunal  and  the  High Court were therefore  in  error  in relying on s. 44 of the Act. [988 A; 985 D-E] (ii) Assessment  in  Ch.   IV of  the  Income-tax  Act  1922 includes  a  proceeding for imposition of  penalty  and  the expression ’person’ includes for the purpose of s. 28 a firm registered  or unregistered.  If there is reconstitution  of the firm by virtue of s. 26, the Income-tax Officer will  in imposing the penalty proceed against the firm.  If there  is

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discontinuance  of  the  business penalty  will  be  imposed against the partners of the firm. [988 B-D] In  the present case, however, this Court could not go  into the  question  whether penalty on the  respondent  firm  was leviable  under the terms of ss. 26 and 28 even  though  the question  raised by the Tribunal was in  terms  sufficiently comprehensive to embrace the enquiry.  In a reference  under s. 66 of the Indian Income-tax Act, 1922, only the  question which was either raised or argued before the Tribunal may be answered, even if the language of the question framed by the Tribunal  may  apparently  include  an  enquiry  into  other matters  which  could  have been but  were  not,  raised  or argued. [988 D-F] Shivram  Poddar  v. Income-tax Officer, Central  Circle  II, Calcutta & Anr., 51 I.T.R, 823, C. A. Abraham v.  Income-tax Officer, Kottayam and 984 Anr., 41 I.T.R. 425 and Commissioner of Income-tax, Madras & Anr.  V. S.    V. Angidi Chettiar, 44 I.T.R, 739, applied. S.   M.  S. Karuppiah Pillai v. Commissioner  of  Income-tax Madras, 9 I.T.R. 1, approved.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2456 of 1966. Appeal  from the judgment and order dated January 27,  1964 of the    Patna  High Court in Misc.  Judicial Case No.  299 of 1958. D.   Narsaraju,  S.  K.  Aiyar, R. N.  Sachthey  and  B.  D. Sharma, for the     appellant. C.   K.   Daphtary,  Narain  Rao,  V.  D.  Narayan  and   D. Goburdhun, for the respondent. The Judgment of the Court was delivered by Shah, J. Indetermining the taxable income of the  respondent firm for the assessment year 1948-49 the Income-tax  Officer added  to  the  income returned a sum  of  Rs.  1,60,000  as ’undisclosed receipts’.  The order was confirmed in’  appeal by   the  Appellate  Assistant  Commissioner,  and  by   the Tribunal.   The  Income-tax  Officer  had  in  the  meantime commenced  a  proceeding  for the levy  of  penalty  and  in exercise  of  the power under s. 28 (1) (c)  of  the  Indian Income-tax Act, 1922 he directed the respondent firm to  pay Rs. 60,000 as penalty.  The Appellate Assistant Commissioner in  appeal  confirmed the order.  The  Income-tax  Appellate Tribunal rejected the contention of the respondent that  the order imposing penalty upon the firm after the original firm was dissolved was without jurisdiction. The Tribunal referred at the instance of the respondent firm the  following  question  to the High  Court  of  Patna  for opinion;               "Whether on the facts and in the circumstances               of the case the imposition of penalty under s.               28 (1) (c) of the Indian Income-tax Act,  upon               the    petitioner   firm    (respondent)    as               constituted at the time of levy of penalty was               legal and valid?" The  High Court called for a supplementary statement of  the case and pursuant thereto the Tribunal submitted a statement on  the  specified points raised by the order  of  the  High Court that               (1)The  firm  which carried  on  the  business               during the calendar year 1947 was dissolved on               July 7, 1951 when Butto Kristo Roy, one of the               partners, died.

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             (2)During the previous year 1947 there was  no               instrument  of partnership in  existence,  but               the  terms  of the oral partnership  were  the               same as set out in the partnership deed  dated               October 17, 1949.               985               (3)   The  business of the firm was  continued               with effect from July 8, 1951 by the new  firm               as successor to the business of the old  firm.               The terms of the partnership were the same  as               set out in the deed dated October 17, 1949 and               the  partners and their shares were  also  the               same except that Baidyanath Roy took the place               of Butto Kristo Roy.               (4)   With  effect  from April 28,  1952,  the               business  was  carried  on  by  a  partnership               constituted by Baidyanath Roy and Bijali Kanti               Roy under an instrument dated August 27, 1952.               There  was no dissolution of the  firm,  which               was carrying on the business; there was only a               change  in  the constitution of the  old  firm               from April 28, 1952. The  High  Court held that penalty could be  legally  levied only upon the original firm constituted in the account  year relevant to the assessment year 1948-49 and not upon the new firm constituted under the deed dated April 27, 1952.       The Tribunal and the High Court approached the problem before  them on the assumption that the source of the  power of the Income-tax Officer to impose a penalty was in section 44  of the Indian Income-tax Act, 1922.  In so assuming,  in our judgment, they were in error.  Section 44 of the  Indian Income-tax  Act, 1922, as it stood at the relevant date,  in so far as it is material provided :               "Where  any business, profession  or  vocation               carried  on  by a firm has  been  discontinued               every  person  who  was at the  time  of  such               discontinuance   a partner of such firm shall,               in respect of the income, profits and gains of               the firm   be 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". The  section  is  fairly  plain : it  applies  to  cases  of discontinuance of the business of a firm and not where there is  dissolution  of the firm but not discontinuance  of  its business. In S. M. S. Karuppiah Pillai v. Commissioner of  Income-tax, Madras(1), in dealing with the effect of s. 44 of the Indian Income-tax  Act,  1922, before it was amended by  Act  7  of 1939, a Full Bench of the Madras High Court observed               "This  section (s.44) only applies when  there               has  been  discontinuance  of  the,  business,               The section               (1)   911.T.R. I.               986               says  that if a business is  discontinued  the               partners  shall  nevertheless be  jointly  and               severally  liable  for the profits  which  had               been earned". In Shivram Poddar v. Income-tax Officer, Central Circle  II, Calcutta and Anr.(1) this Court examined the scheme of s. 44 (before  it was amended by the Finance Act of 1958) and  its inter-relation with the provisions of ss. 25(1), (2), 26(1), (2)  and 28 (1) (c) in some detail.  The Court observed :

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             "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               dissolution  of a firm without  discontinuance               of   the   business  will  not   attract   the               application of s.44 of the Act........               The  reason for this distinction appears  from               the  scheme  of  the  Income-tax  Act  in  its               relation  to  assessment of the  income  of  a               firm.    A   firm   whether   registered    or               unregistered is recognised under the Act as  a               unit of assessment (sections 3 and 2(2)),  and               its  income is computed under clauses (3)  and               (4) of section 23. as the income of any  other               unit.  Section 25(1) relates to assessment  in               cases  of a discontinued business-whether  the               business  is  carried on by a firm or  by  any               other  person...........  Then  there  is  the               special provision relating to assessment  when               at  the  time of making an  assessment  it  is               found  that  a  change  has  occurred  in  the               constitution  of  a firm, or a firm  has  been               newly  constituted : section 26(1).  The  date               on   which   the  change   has   occurred   is               immaterial; it may be in the year of  account,               in  the year of assessment or even  after  the               close  of the year of assessment, The  Income-               fax Officer has under section 26(1) to  assess               the firm as constituted at the time of  making               the  assessment, but the income,  profits  and               gains  of  the  previous year  have,  for  the               purpose  of inclusion in the total  income  of               the  partners, to be apportioned  between  the               partners  who  were entitled  to  receive  the               same.  Subsection (2) of section 26 relates to               assessment  in  the case of  succession  to  a               person  (which  expression  includes  a  firm)               carrying  on a business by another person  in               such  capacity...........  Discontinuance   of               business  has the same connotation in  section               44 as if has in section 25 of the Act; it does               not               (1)   51 T.T.R. 823.               987               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  busi-               ness  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 in the personality  of  the               firm,  and succession to the business and  not               discontinuance      of      the       business               results.........   But  the   Income-tax   Act               recognises  a firm for purposes of  assessment               as   a  unit  independent  of   the   partners               constituting  it; it invests the firm  with  a               personality which survives reconstitution.   A               firm   discontinuing  its  business   may   be               assessed  in  the manner provided  by  section               25(1)  in  the  year of account  in  which  it

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             discontinues  its  business; it  may  also  be               assessed in the year of assessment.  In either               case it is the assessment of the income of the               firm.   Where the firm is dissolved,  but  the               business  is  not  discontinued,  there  being               change  in  the  constitution  of  the   firm,               assessment  has  to be made under  section  26               (1),  and  if  there  be  succession  to   the               business  assessment  has  to  be  made  under               section  26(2).   The provisions  relating  to                             assessment    on   reconstituted   or newly               constituted  firms, and on succession  to  the               business are obligatory.  Therefore, even when               there  is  change  in  the  ownership  of  the               business    carried   on   by   a   firm    on               reconstitution    or   because   of   a    new               constitution,  assessment must still  be  made               upon the firm.  When there is succession,  the               successor and the person succeeded have to  be               assessed each in respect of his actual  share.               This scheme of assessment fumishes the  reason               for  omitting  reference to dissolution  of  a               firm from section 44 when such dissolution  is               not  accompanied  by  discontinuance  of   the               business". Two  other  cases  decided  by this  Court  may  be  briefly noticed.   In C. A. Abraham v. Income-tax Officer,  Kottayam and  Another(1) there was discontinuance of the business  of the firm consequent upon dissolution of the firm, s. 44  was held applicable, and it was held that imposition or  penalty being  a process of assessment the.  Income-tax Officer  was not incompetent to levy penalty after discontinuance of  the business.  In Commissioner of Income-tax, Madras and Another v.  S.  V.  Angidi Chettiar (2) this  Court  held  that  the Income-tax  Officer could exercise under s. 44 read with  s. 28 power to impose penalty upon the firm which  discontinued its  business on dissolution caused by the death of  one  of the partners (1) 41 I.T.R. 425. (2) 44 I. T. R 739.  988 Section  44 therefore only applied to those cases  in  which there  had  been discontinuance of the business and  not  to case,  in which the business continued after  reconstitution of the firm or there was succession to the business.   Cases of reconstitution of the firm or succession to the  business of the firm are covered by ss. 26(1) and (2). "Assessment"  in  Chapter IV of the  Income-tax  Act,  1922, includes a proceeding for imposition of penalty.  Section 28 of the Act authorises the Income-tax Officer, if  satisfied, in  the  course  of any proceeding under the  Act  that  any person  has,  inter alia, concealed the particulars  of  his income  or deliberately furnished inaccurate particulars  of such income, to direct that such person shall pay by way  of penalty,  a sum of money not exceeding the amount  specified therein  in addition to the incometax and super-tax  payable by  such person.  The expression " person" includes for  the purpose  of  s. 28, a firm registered or  unregistered.   If there is reconstitution of the firm, by virtue of s. 26, the Income-tax  Officer  will in imposing  the  penalty  proceed against  the  firm.   If  there  is  discontinuance  of  the business penalty will be imposed against the partners of the firm. Before  the Tribunal and the High Court the case was  argued

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on  the  footing that s. 44 alone was  applicable.   Whether under  the  terms of s. 26 read with s. 28, penalty  may  be imposed  upon  the  new  partners for  the  failure  of  the partners  of  the firm constituted in the  year  of  account relating  to the assessment 1948-49 was never  investigated. The question raised by the Tribunal is in terms sufficiently comprehensive to embrace an enquiry whether partners of  the firm  in  existence  on July 30, 1954,  were  liable  to  be assessed  to  penalty  as  successors  in  interest  of  the partners  of the original firm in existence in the  year  of account  relating to the assessment year 1948-49.  But in  a reference  under s. 66 of the Indian Income-tax  Act,  1922, only  the question which was either raised or argued  before the  Tribunal may be answered, even if the language  of  the question  framed by the Tribunal may apparently  include  an enquiry  into other matters which could have been, but  were not, raised or argued.    The appeal fails and is dismissed.  In the  circumstances of  the  case  there will be no order as to  costs  in  this Court. G.C.                                   Appeal dismissed.