1992 (7) TMI 96 - AT - Income Tax

Applied To, Benefit Or Perquisite Arising From Business, Business Income, Discontinued Business, Supreme Court

Summary

Issues Involved:

1. Taxability of award amount under Section 176(3A) read with Section 189 of the Income-tax Act, 1961.
2. Status of the firm and the transfer of business to a private limited company.
3. Applicability of Section 28(iv) of the Income-tax Act.
4. Consideration of the firm's dissolution as a tax avoidance device.
5. Assessment of income on receipt vs. accrual basis.

Issue-wise Detailed Analysis:

1. Taxability of Award Amount under Section 176(3A) read with Section 189:

The core issue was whether the award amount of Rs. 1,48,24,876 received post-dissolution of the firm was taxable under Section 176(3A) read with Section 189. The CIT (Appeals) held that the award amount was taxable in the hands of the dissolved firm. The CIT (Appeals) reasoned that Section 176(3A) was supplementary to Section 189(1) and allowed taxation of receipts related to the business activity before its discontinuance, even if received post-dissolution. The Tribunal, however, concluded that Section 176(3A) was not applicable as it was not a case of business discontinuance but succession. The Tribunal concurred with the assessee's argument that the business was succeeded by the company and not discontinued, thus Section 176(3A) could not be invoked.

2. Status of the Firm and Transfer of Business:

The firm executed a partnership deed on 16-11-1982 and was involved in construction work. A private limited company, Banyan & Berry Construction Pvt. Ltd., was incorporated on 16-4-1983, and the firm transferred its business to the company effective 1-7-1984, except for certain additional claims. The firm was dissolved on 16-8-1984. The Tribunal found that the firm's business was succeeded by the company and not discontinued, hence Section 176(3A) was not applicable. The Tribunal emphasized that the claims were a substantial part of the business, not transferred to the company, indicating that the business was not entirely taken over, and thus, the firm's business was not discontinued.

3. Applicability of Section 28(iv):

The Assessing Officer had invoked Section 28(iv), asserting that the award amount was taxable as a benefit arising from business. The Tribunal, however, held that Section 28(iv) was inapplicable as it pertained to non-cash benefits or perquisites. The Gujarat High Court in CIT v. Alchemic (P.) Ltd. had ruled that Section 28(iv) does not apply to cash receipts. Thus, the Tribunal concluded that Section 28(iv) could not be invoked to tax the award amount.

4. Consideration of the Firm's Dissolution as a Tax Avoidance Device:

The Tribunal examined whether the firm's dissolution was a device to avoid tax. The Tribunal noted that the firm continued to pursue significant claims post-dissolution, indicating that the dissolution was a mere formality. The Tribunal applied the Supreme Court's ruling in McDowell & Co. Ltd., which held that colourable devices are not part of legitimate tax planning. The Tribunal concluded that the dissolution was a device to avoid tax, and thus, the firm should be treated as continuing for tax purposes.

5. Assessment of Income on Receipt vs. Accrual Basis:

The Assessing Officer had taxed the award amount on a receipt basis under Section 176(3A). However, the Tribunal held that the income should be assessed on an accrual basis, as the firm followed the mercantile system of accounting. The Tribunal restored the matter to the CIT (Appeals) to ascertain the year(s) in which the income accrued and to adjust the assessment accordingly.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, directing the CIT (Appeals) to determine the accrual of income and reassess accordingly. The Tribunal held that Section 176(3A) was not applicable due to the succession of business, Section 28(iv) could not tax cash receipts, and the dissolution of the firm was a tax avoidance device. The assessment should be based on the accrual of income, not receipt.