1986 (5) TMI 65 - AT - Income Tax

Summary

Issues Involved:

1. Assessability of income earned by joint receivers for the assessment year 1979-80.
2. Adequacy of the Income-tax Act, 1961 to tax income earned post-dissolution of a firm.
3. Correct status for assessing income earned by receivers: whether as an Association of Persons (AOP) or otherwise.

Issue-wise Detailed Analysis:

1. Assessability of Income Earned by Joint Receivers for the Assessment Year 1979-80:

The case revolves around the income earned by joint receivers appointed by the court to manage the affairs of a dissolved firm, United Film Exhibitors, during the period from 23-5-1978 to 31-3-1979. The firm was dissolved on 22-5-1978, and the receivers managed the business of two cinema theatres, 'Priya' and 'Priyadarshini,' until the winding up was completed. The Income-tax Officer (ITO) assessed the income earned during this period as that of an AOP, determining the total income at Rs. 3,82,130. The Commissioner (Appeals) upheld this assessment, citing the Supreme Court decision in N. V. Shanmugham & Co. v. CIT [1971] 81 ITR 310, which supported the concept of an AOP for joint receivers managing a business for a common purpose.

2. Adequacy of the Income-tax Act, 1961 to Tax Income Earned Post-Dissolution of a Firm:

The appellant contended that there is no provision in the Income-tax Act, 1961 to assess a dissolved firm for income earned post-dissolution. Section 189 of the Act, which deals with the assessment of dissolved firms, was argued to only cover income earned up to the date of dissolution. The appellant's counsel cited the Supreme Court decision in Shivram Poddar v. ITO [1964] 51 ITR 823, which interpreted section 44 of the 1922 Act (precursor to section 189) as authorizing assessment of income earned before the dissolution. The Tribunal, however, held that the firm continues to exist for the purpose of winding up its affairs and completing unfinished transactions, as per section 47 of the Indian Partnership Act. Consequently, the income earned during the winding-up period is assessable under the Act.

3. Correct Status for Assessing Income Earned by Receivers:

The ITO assessed the income in the status of an AOP, which was upheld by the Commissioner (Appeals). The Tribunal, however, found that the business was carried on by the receivers for the purpose of winding up the affairs of the dissolved firm, and the firm continued to exist for this purpose until the final winding up on 7-2-1980. The Tribunal held that the correct status for assessment should be that of the firm, not an AOP. The Tribunal relied on section 47 of the Indian Partnership Act, which states that the rights and obligations of partners continue for the purpose of winding up the firm's affairs. The Tribunal directed that the assessment be completed in the status of a firm and allowed the appeal, setting aside the status of an AOP.

Conclusion:

The Tribunal concluded that the income earned by the joint receivers during the winding-up period is assessable under the Income-tax Act, 1961, and the correct status for such assessment is that of the firm, not an AOP. The appeal was allowed, and the cross-objection by the revenue was dismissed.