2015 (7) TMI 43 - AT - Income Tax

Income received after dissolution of firm - Whether Sec. 189(1) empowers the Assessing Officer to bring to tax any income arising out of any transaction when the firm was not in existence and no business was carried out? - Legality and validity of the proceedings initiated u/s. 147 - Held that - The only objection to its chargeability to tax in the hands of the firm is on the ground that at the time of receipt, the firm had discontinued its business. This objection, however, is no more valid after incorporation of sub-s. (3A) in s. 176 of the Act which is intended specifically to meet such objections. Sub-s. (3A) clearly provides that any sum received after the discontinuance of the business shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if the same would have been chargeable as income had it been received before such discontinuance. This sub-section constitutes an exception to the rule that business receipts are chargeable only if the business or profession is carried on in the year of receipt. - the amount of ₹ 9,80,000 was assessable in the hands of the assessee-firm in the year of receipt despite dissolution and discontinuance of its business by virtue of sub- s. (3A) of s. 176 r/w s. 189 of the Act. Nowhere it is the case of Assessing Officer that the said sum belong to the period during which the assessee firm was in existence and carried out its business. We are of the opinion that as there is no evidence to suggest that the transaction allegedly noted on loose paper with name analogous to the name of the assessee firm pertains to the year, in which the assessee firm was in existence. Admittedly the assessee firm has been dissolved on 31-03-2002 and alleged transaction is found in December, 2003, no income can be brought to tax treating unexplained income of the assessee in the A.Y. 2004-05. We, accordingly, allow the contention of the assessee on this specific plea and quash the proceedings initiated u/s. 147 and cancel the assessment framed by the Assessing Officer and upheld by the CIT(A). - Decided in favour of assessee.

Issues Involved:
1. Legality and validity of proceedings initiated under Section 147.
2. Assessment of income for a dissolved firm.
3. Application of Section 189.
4. Reliance on statements and materials seized from third parties.
5. Procedural fairness in not providing the opportunity for cross-examination.

Detailed Analysis:

1. Legality and Validity of Proceedings Initiated under Section 147:
The assessee challenged the notice issued under Section 148 for the A.Y. 2004-05, arguing that the firm was dissolved on 31-03-2002, and thus, no proceedings could be initiated against a non-existent entity. The Assessing Officer received information from a search and seizure action against a third party, which indicated that the assessee had received Rs. 1,50,00,000 in December 2003. Despite the assessee's objections and evidence of dissolution, the Assessing Officer proceeded with the assessment.

2. Assessment of Income for a Dissolved Firm:
The assessee contended that no assessment could be made on a dissolved firm for any period post-dissolution. The CIT(A) upheld the assessment, relying on Section 189, which allows for the assessment of a dissolved firm as if it had not been dissolved. The CIT(A) cited several precedents to support this view, including the Supreme Court's decision in Shivram Poddar and other High Court decisions.

3. Application of Section 189:
Section 189(1) stipulates that the assessment of a dissolved firm should be made as if no dissolution had taken place. The CIT(A) interpreted this to mean that the firm could be assessed for income received post-dissolution. However, the Tribunal found this interpretation incorrect, noting that Section 189 applies to income earned while the firm was in existence, not to transactions occurring after dissolution. The Tribunal cited cases like CIT vs. United Trading Co. and Banyan & Berry vs. CIT to support this view, emphasizing that Section 189 does not extend to income arising after the firm's dissolution.

4. Reliance on Statements and Materials Seized from Third Parties:
The assessee argued that the assessment was based on documents seized from a third party, Shri Sohanraj Mehta, without any direct evidence linking the assessee to the transaction. The Tribunal noted that the Assessing Officer relied on these documents without providing the assessee an opportunity to cross-examine Shri Mehta, which was procedurally unfair.

5. Procedural Fairness in Not Providing the Opportunity for Cross-Examination:
The Tribunal highlighted the procedural lapse in not allowing the assessee to cross-examine Shri Mehta, whose statements were crucial to the assessment. This failure to provide a fair opportunity to the assessee was a significant procedural defect.

Conclusion:
The Tribunal quashed the proceedings initiated under Section 147 and canceled the assessment framed by the Assessing Officer. It held that no income could be brought to tax for a period after the firm's dissolution, and the reliance on third-party documents without cross-examination was procedurally unfair. The assessee's appeal was allowed, and the assessment for A.Y. 2004-05 was annulled.

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