1964 (5) TMI 54 - HC - Income Tax

Summary

Issues Involved:
1. Validity of assessment proceedings against a dissolved partnership firm.
2. Applicability of Section 26(1) of the Indian Income-tax Act.
3. Applicability of Section 44 of the Indian Income-tax Act.
4. Applicability of Section 26(2) of the Indian Income-tax Act.

Issue-wise Detailed Analysis:

1. Validity of assessment proceedings against a dissolved partnership firm:
The primary issue was whether assessment proceedings could be initiated against a firm after its dissolution. The assessee contended that a firm, being a distinct assessable entity, ceases to exist upon dissolution, and hence, no assessment could be made against it post-dissolution. The court considered the applicability of Sections 26(1), 26(2), and 44 of the Indian Income-tax Act to resolve this issue.

2. Applicability of Section 26(1) of the Indian Income-tax Act:
Section 26(1) applies when there is a change in the constitution of a firm or a newly constituted firm at the time of making an assessment under Section 23. The court found that the partnership was dissolved on December 31, 1947, and the business was taken over by Pt. Deo Sharma as a sole proprietor from January 1, 1948. The subsequent partnership agreement between Pt. Deo Sharma and Sheo Nath Sharma, which retrospectively deemed the partnership to have commenced on January 1, 1948, did not affect third parties and could not alter the fact that the business was taken over by a sole proprietor. Therefore, Section 26(1) was deemed inapplicable as there was no mere change in the constitution of the assessee or a newly constituted firm.

3. Applicability of Section 44 of the Indian Income-tax Act:
Section 44 permits assessment proceedings against a firm even after its dissolution if the business is discontinued. The court referred to the Supreme Court's decision in C.A. Abraham v. Income-tax Officer, which held that Section 44 contemplates assessment and penalty proceedings against a firm even after dissolution by deeming the firm to continue for assessment purposes. However, the court noted that in the present case, the business was not discontinued but succeeded by Pt. Deo Sharma. Therefore, Section 44 could not be invoked.

4. Applicability of Section 26(2) of the Indian Income-tax Act:
Section 26(2) deals with the apportionment of tax liability between the original owner of the business and the successor when there is a succession to the business. The court found that the case involved succession to the business, not discontinuance. Hence, Section 26(2) was applicable. However, the court pointed out that Section 26(2) does not provide a procedural framework for assessing a dissolved firm, unlike Section 44. The absence of such procedural provisions rendered the assessment orders invalid. The court also noted that the amendment to Section 44 by the Finance Act of 1958, which extended its applicability to dissolved firms regardless of business discontinuance, could not retroactively validate the assessment orders made before April 1, 1958.

Conclusion:
The court concluded that the assessment orders were invalid, whether considered under Section 26(1) or Section 26(2). The question referred in each case was answered in the negative. The court directed that a copy of the judgment be sent to the Appellate Tribunal and awarded costs to the assessee, assessed at Rs. 100 in each case, with counsel's fee also assessed at Rs. 100 in each case.