1963 (12) TMI 6 - SC - Income Tax

Whether the income earned by the firm in the year ending March 1950 could be assessed to tax under section 44 of the Indian Income-tax Act 1922 after the firm was dissolved? Held that - It is for the revenue authorities to ascertain the facts applicable to a particular situation and to grant appropriate relief in the matter of assessment of tax. Resort to the High Court in exercise of its extraordinary jurisdiction conferred or recognised by the Constitution in matters relating to assessment levy and collection of incometax may be permitted only when questions of infringement of fundamental rights arise or where on undisputed facts the taxing authorities are shown to have assumed jurisdiction which they do not possess in attempting to bypass the provisions of the Income-tax Act by inviting the High Court to decide questions which are primarily within the jurisdiction of the revenue authorities the party approaching the court has often to ask the court to make assumptions of facts which remain to be investigated by the revenue authorities. Appeal dismissed.

Issues Involved:

1. Whether the income earned by a dissolved firm can be assessed to tax under section 44 of the Indian Income-tax Act, 1922.
2. The interpretation and application of section 44 of the Indian Income-tax Act, 1922, in cases of business discontinuance and firm dissolution.
3. The scope of the High Court's jurisdiction in tax assessment matters.

Detailed Analysis:

1. Assessment of Income Earned by a Dissolved Firm:

The primary issue in this appeal was whether the income earned by the firm in the year ending March 1950 could be assessed to tax under section 44 of the Indian Income-tax Act, 1922, after the firm was dissolved. The court noted that section 44, before its amendment in 1958, stated: "Where any business, profession or vocation carried on by a firm or association of persons has been discontinued, or where an association of persons is dissolved, every person who was at the time of such discontinuance or dissolution a partner of such firm or a member of such association shall, in respect of the income, profits and gains of the firm or association, be jointly and severally liable to assessment under Chapter IV and for the amount of tax payable and all the provisions of Chapter IV shall, so far as may be, apply to any such assessment."

The court explained that the object of this enactment was to authorize the assessment of tax on income earned by a firm before its discontinuance or dissolution and to impose joint and several liability upon every partner at the time of discontinuance or dissolution. The court referred to the precedent set in C. A. Abraham v. Income-tax Officer, Kottayam, which held that assessment proceedings could be commenced and continued against a firm as if the discontinuance had not taken place, ensuring continuity in the application of the tax assessment machinery.

2. Interpretation and Application of Section 44:

The appellant argued that section 44 applies only when a firm's business is discontinued and not when the firm is dissolved. The court, however, clarified that section 44 operates in two classes of cases: where there is discontinuance of business carried on by a firm or association, and where there is dissolution of an association. It follows that mere dissolution of a firm without discontinuance of the business does not attract the application of section 44. The court explained that a firm, whether registered or unregistered, is recognized under the Act as a unit of assessment. The provisions of sections 25(1) and 26(1) and (2) of the Act were discussed to highlight that the assessment must be made upon the firm even if there is a change in ownership or constitution.

The court concluded that section 44 is attracted only when the business of a firm is discontinued, i.e., when there is complete cessation of the business and not merely a change in the ownership or constitution of the firm. The court emphasized that the Income-tax Act recognizes a firm for assessment purposes as a unit independent of the partners constituting it, and this personality survives reconstitution.

3. High Court's Jurisdiction in Tax Assessment Matters:

The court observed that the Income-tax Act provides a complete machinery for the assessment of tax and relief in respect of improper or erroneous orders made by the revenue authorities. It is for the revenue authorities to ascertain the facts applicable to a particular situation and to grant appropriate relief in the matter of tax assessment. The court noted that resort to the High Court in its extraordinary jurisdiction should be permitted only when questions of infringement of fundamental rights arise or where the taxing authorities are shown to have assumed jurisdiction they do not possess. The court emphasized that inviting the High Court to decide questions primarily within the jurisdiction of the revenue authorities often requires assumptions of facts that remain to be investigated by the revenue authorities.

Conclusion:

The court dismissed the appeal, concluding that the business of the firm was discontinued on its dissolution, and the firm remained liable to pay tax on the income earned by it. The court reiterated that the Income-tax Act provides a comprehensive mechanism for tax assessment and relief, and the High Court's extraordinary jurisdiction should be invoked only in specific circumstances. The appeal was dismissed with costs.

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