COMMISSIONER OF Income Tax, PUNJAB. vs CHHEHARTA BUTTON FACTORY.

H. R. KHANNA J. - This is a reference u/s 66(1) of the Indian Income Tax Act, 1922 (hereinafter referred to as the Act), by the Income Tax Appellate Tribunal for decision of the following question of law :

"Having regard to the fact that notice u/s 22(2) was served and the return was filed when the firm was in existence, was the assessment for 1953-54 on the firm Messrs. Chheharta Button Factory, Chheharta, validly made on January 20, 1958, when the firm was dissolved on April 30, 1957 ?"

The brief facts of the case are that the assessee-firm, Chheharta Button Factory, is an unregistered firm. A notice u/s 22(2) of the Act was issued and served on the assessee on the 28th May, 1963, in respect of the assessment year 1953-54. During the course of assessment proceedings, the assessee sent two letters dated the 27th December, 1957, and 16th January, 1958, informing the Income Tax Officer that the business of the assessee had been closed. The Income Tax Officer, vide his order dated the 20th January, 1958, assessed the income of the firm to be Rs. 40,939. In appeal by the assessee it was contended before the Appellate Assistant Commissioner that the assessment had not been validly made as the firm had been dissolved on 30th April, 1957, long before the order of the Income Tax Officer. The Appellate Assistant Commissioner accepted the appeal and set aside the assessment on the ground that the assessment could not be made in the name of the firm which had been dissolved on the 30th April, 1957. Against the finding of the Appellate Assistant Commissioner, the Income Tax Officer went up in appeal before the Appellate Tribunal. The Tribunal upheld the decision of the Appellate Assistant Commissioner about the dissolution of the firm on the 30th April, 1957, and held that in view of the dissolution the assessment should be annulled. On application filed by the Commissioner of Income Tax, the Tribunal referred the question of law reproduced above to this court.

We have heard Mr. Awasthy on behalf of the Commissioner of Income Tax. No one has, however, appeared on behalf of the assessee. Section 44, as it stood before the amendment made by the Finance Act, 1958, was as under :

"44. Liability in case of discontinued firm or association. - Where any business, profession or vocation carried on by a firm or association of 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, 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."

Dealing with the object of the above provision of law their Lordships of the Supreme Court observed in Shivram Poddar v. Income Tax Officer, Central Circle II, Calcutta :

"The object of the enactment is clear : it is to authorise assessment of tax on income, profits or gains earned in a business, profession or vocation carried on by a firm or association before the discontinuance of the business, profession or vocation, or before dissolution of the association, and to impose joint and several liability upon every person who was at the time of discontinuance a partner of the firm or a member of the association or at the time of dissolution a member of the association."

It was further observed as under :

"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 section 44 of the Act. 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 u/s 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."

After referring to sections 23, 25 and 26 of the Act, their Lordships observed :

"These provisions have to be read with section 44, for that section provides that in the case of discontinuance of business of a firm or of an association or dissolution of an association, liability to assessment is under Chapter IV and all the provisions of Chapter IV, so far as may be, apply to such assessment."

Their Lordships accordingly concluded :

"Balmukand Radheshyam was an unregistered firm and by the discontinuance of the business it neither ceased to be liable to pay tax on the income earned by it, nor could a procedure different from the one prescribed under Chapter IV apply for the assessment of the income of that firm."

C. A. Abraham v. Income Tax Officer, Kottayam is another case decided by the Supreme Court in which the effect of section 44 of the Act was considered and it was observed :

"Section 44 sets up machinery for assessing the tax liability of firms which have discontinued their business and provides for three consequences, (1) that on the discontinuance of the business of the 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 provisions of Chapter IV, so far as may be, apply to such assessment."

It was further observed :

"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."

In view of the dictum laid down in the above two Supreme Court authorities, no room for doubt is left in the matter and I would, accordingly, hold that dissolution of the assessee-firm in the present case and discontinuance of its business would not affect the validity of the assessment order made against the firm.

The Income Tax Appellate Tribunal in arriving at the conclusion, that no assessment order could be made against the firm after its dissolution, relied upon a Division Bench decision of the Calcutta High Court in R. N. Bose v. Manindra Lal Goswami In that case the court found that the notice u/s 34 of the Act, which was served on a partner of the firm, was not valid and no proper assessment could be made on the basis of the aforesaid notice. It was also observed that no assessment order could be made against a dissolved firm with regard to its pre-dissolution income. It would thus appear that the observations about the assessment order being made against a dissolved firm were in the nature of obiter dicta. The above-mentioned Calcutta authority was also cited before the Supreme Court in Shivram Poddars case and the observation made in the Calcutta authority was held to be obiter. In any case the matter should be deemed to have been set at rest by the two Supreme Court authorities referred to above. In the present case there is also the additional fact that the assessee-firm was in existence at the time notice u/s 22(2) of the Act was served and the dissolution of the firm took place after the service of the aforesaid notice. Be that as it may, it is not necessary to dilate on this aspect of the matter in view of the fact that the case is otherwise covered by the pronouncements of their Lordships of the Supreme Court.

I would, accordingly, answer the question referred for decision in the affirmative. Looking to the circumstances of the case, I would leave the parties to bear their own costs of this reference.

A. N. Grover J. - I agree.

Question answered in the affirmative.