1998 (10) TMI 27 - HC - Income Tax

Summary

Issues Involved:
1. Legality and jurisdiction of the notice issued under Section 148 of the Income-tax Act, 1961.
2. Whether the firm was dissolved or merely underwent a change in its constitution.
3. Applicability of Section 187 of the Income-tax Act.
4. Grounds for initiating proceedings under Section 147 of the Income-tax Act.
5. Availability of alternative remedies under the Act.

Detailed Analysis:

1. Legality and Jurisdiction of the Notice Issued under Section 148:
The petition challenges the notice annexure F-2 issued under Section 148 of the Income-tax Act, 1961, and seeks an order declaring the proceedings under Sections 147/148 for the assessment year 1981-82 as illegal, void, and without jurisdiction. The petitioner contends that no conditions existed for initiating proceedings under Section 147, as there was no omission or failure to disclose material facts necessary for the assessment.

2. Dissolution or Change in Constitution of the Firm:
The petitioner-firm, originally consisting of three partners, saw one partner retire on November 7, 1980. The firm continued with the remaining two partners, who took over the business with all assets and liabilities. The petitioner argues that this scenario represents a change in the constitution of the firm rather than a dissolution. The firm was assessed under Section 143(3) of the Act, and the method of stock valuation was accepted by the Income-tax Officer.

3. Applicability of Section 187 of the Income-tax Act:
The petitioner relies on the Full Bench decision in Girdharilal Nannelal v. CIT [1984] 147 ITR 529, which held that if a firm is dissolved and succeeded by another firm with one or more partners of the original firm, it constitutes a change in the constitution under Section 187. The Division Bench decision in Vimal and Amar Talkies v. CIT [1982] 138 ITR 660 further supports this, stating that when a partner in the old firm is also a partner in the new firm, it is a change in the constitution, not a succession.

4. Grounds for Initiating Proceedings under Section 147:
The respondents argued that the firm was dissolved, necessitating the valuation of the closing stock at the market rate. However, the court found that the firm was not dissolved but merely underwent a change in its constitution, making Section 187 applicable. The court held that the conditions for initiating proceedings under Section 147 did not exist, as there was no failure to disclose material facts or any new information indicating that income had escaped assessment.

5. Availability of Alternative Remedies under the Act:
The respondents contended that the petitioner could raise objections before the Assessing Officer and pursue remedies provided under the Act. However, the court found that the notice was issued on a non-existent ground, making the jurisdictional basis for the notice invalid. The court referenced the decision in H. H. Maharaja Martand Singh Ju Deo v. WTO [2000] 242 ITR 229, where it was held that if no material existed to form an opinion that wealth chargeable to tax had escaped assessment, the notice could be quashed.

Conclusion:
The court concluded that the notice under Section 148 and the proceedings under Section 147 for the assessment year 1981-82 were based on a non-existent ground. The firm had merely undergone a change in its constitution, covered by Section 187, and not a dissolution. Therefore, the petition was allowed, and the notice and subsequent proceedings were quashed. Each party was left to bear its own costs.