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Issues Involved:
1. Taxability of arbitration award in the hands of the firm. 2. Taxability of arbitration award in the hands of individual partners. 3. Applicability of Section 176(3A) of the Income-tax Act. 4. Existence and taxability of an Association of Persons (AOP) post-dissolution of the firm. Detailed Analysis: 1. Taxability of Arbitration Award in the Hands of the Firm The firm, M/s. Prabhat Construction Co., dissolved on 30-11-1988 and had outstanding claims against the Government of Gujarat, which were pursued by the partners. The Arbitrator awarded Rs. 43,42,025 on 20-4-1989, and each partner received their share. Initially, the Department sought to tax the firm under Section 176(3A) of the Act. However, the ITAT Rajkot Bench, following the Gujarat High Court decision in Banyan & Berry v. CIT [1996] 222 ITR 831, directed the Assessing Officer not to tax the arbitration award in the hands of the firm. 2. Taxability of Arbitration Award in the Hands of Individual Partners The Assessing Officer attempted to tax the individual partners by invoking Section 176(3A), issuing notices under Section 148, and passing ex parte assessment orders under Section 144. The Commissioner of Income-tax (Appeals) held that the receipt in the hands of the partners is capital in nature and exempt, aligning with the Gujarat High Court's decision in Banyan & Berry's case. 3. Applicability of Section 176(3A) of the Income-tax Act Section 176(3A) states that any sum received after the discontinuance of business shall be deemed income of the recipient if it would have been income of the person carrying on the business before discontinuance. The ITAT concluded that Section 176(3A) would apply only if the business was discontinued. Since the business was continued by M/s. Rupal Construction Pvt. Ltd., Section 176(3A) was not applicable. 4. Existence and Taxability of an Association of Persons (AOP) Post-Dissolution of the Firm The ITAT noted that the mere realization of assets or actionable claims by the partners does not amount to carrying on business. The Gujarat High Court in Banyan & Berry's case held that the realization of assets post-dissolution is not business activity. The ITAT found no evidence suggesting that the erstwhile partners intended to carry on the business as an AOP. Therefore, the sum received from the arbitration award could not be taxed in the hands of an AOP. Conclusion: The ITAT dismissed the revenue's appeals, confirming that the arbitration award could not be taxed in the hands of the dissolved firm, individual partners, or an AOP. The Cross Objections filed by the assessees were allowed, supporting the Commissioner of Income-tax (Appeals)'s order that treated the award money as a capital receipt, exempt from tax.
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