2008 (3) TMI 246 - HC - Income Tax

Assessee is a company incorporated on March 31, 1994, with the main object of acquiring business of a firm with all its assets and liabilities - said firm was dissolved on April 5, 1995, w.e.f. March 31, 1994, and the partners were allotted equity shares in the company - assessment order for the A.Y 1990-91 to 1994-95 in respect of the partnership firm has been passed on the appellant-company assessment orders are not valid because company was not at all in existence during those years

Summary

Issues:
Assessment of a company incorporated to take over a partnership's business assets and liabilities for the years prior to its incorporation.

Analysis:
The case involved appeals against an order of the Income-tax Appellate Tribunal regarding the assessment years 1990-91 to 1994-95. The main question was whether the assessment could be made on a company incorporated to take over a partnership's business when the partnership was in existence. The assessee was a company formed to acquire the business of a partnership, and the assessment order was passed on the company based on the partnership's activities. The company argued that the assessment should have been on the partnership or its partners. The Assessing Officer considered the partners being directors of the company and converted partnership to a company as grounds for assessment on the company. The Commissioner of Income-tax (Appeals) held that notice should have been sent to the partners first, and only if unavailable, the assessment could be on the company. The Tribunal upheld this decision, leading to the appeals.

The relevant statutory provision, section 189 of the Income-tax Act, deals with assessment in cases of firm dissolution or business discontinuation. It states that in such cases, the Assessing Officer should assess the total income of the firm as if no dissolution had occurred, with joint liability of partners for tax payment. The provision also allows for penalties and continuation of proceedings post-dissolution. The court noted that the notice on the assessee-company, formed after the relevant assessment period, did not align with section 189(3) as the company was not in existence during the assessment years. The Assessing Officer's justification for assessing the company based on shared directors with the dissolved partnership was deemed legally unsustainable. The court affirmed the decision of the Commissioner of Income-tax (Appeals) and the Tribunal, dismissing the appeals and related motions.

In conclusion, the judgment emphasized the statutory provisions under section 189 of the Income-tax Act, highlighting the joint liability of partners in cases of firm dissolution or business takeover by a new entity. The court ruled that the assessment on the company formed post-partnership was not valid, as the company was a separate legal entity and the assessment should have been on the partnership or its partners. The decision upheld the principles of tax assessment and liability outlined in the relevant statutory provisions, leading to the dismissal of the appeals.