1986 (10) TMI 89 - AT - Income Tax

Summary

Issues Involved:
1. Interpretation of Section 176(3A) of the Income-tax Act, 1961.
2. Assessment of income received after the discontinuance of business.
3. Applicability of Section 189 versus Section 176(3A).
4. Determination of the recipient of the income for tax purposes.

Detailed Analysis:

1. Interpretation of Section 176(3A) of the Income-tax Act, 1961:
The primary issue in this appeal is the interpretation of Section 176(3A) of the Income-tax Act, 1961. The Income Tax Officer (ITO) contended that the receipt of Rs. 7,46,471 should be assessed under Section 176(3A) as it was received after the discontinuance of the business. The section deems any sum received after the discontinuance of a business to be the income of the recipient and chargeable to tax in the year of receipt.

2. Assessment of Income Received After the Discontinuance of Business:
The ITO reopened the assessment under Section 148, arguing that the sum of Rs. 7,46,471 should be taxed in the hands of the assessee, as the three firms had discontinued their business. The Commissioner (Appeals) disagreed, stating that the business had not been discontinued but merely suspended, and the firms continued to keep accounts open for collecting additional amounts awarded by the arbitrator.

3. Applicability of Section 189 versus Section 176(3A):
The Commissioner (Appeals) held that Section 189, which deals with the dissolution or discontinuance of a firm's business, should apply instead of Section 176(3A). The Commissioner pointed out that Section 189 is a special provision that applies to firms, whereas Section 176(3A) is a general provision. The Commissioner also noted that there was no discontinuance of business as the firms had not been dissolved under Section 40 of the Indian Partnership Act, 1932, and were partnerships at will.

4. Determination of the Recipient of the Income for Tax Purposes:
The department argued that the recipient of the income, as per Section 176(3A), was the assessee, as he had received the payment. However, the Commissioner (Appeals) and the Tribunal found that the actual recipients were the three firms that executed the work. The Tribunal noted that the term "recipient" in Section 176(3A) should be interpreted to mean the entity beneficially entitled to the income. Since the assessee received the amount on behalf of the three firms, he acted as a trustee or representative, and the income should be assessed in the hands of the firms or their partners.

Conclusion:
The Tribunal concluded that the provisions of Section 176(3A) were not applicable as the business of the three firms had not been discontinued. Instead, the firms continued to exist for the purpose of collecting outstanding amounts. The income should be assessed in the hands of the firms or their partners, not the individual assessee. The appeal was allowed, and the findings of the Commissioner (Appeals) were upheld, albeit for different reasons.