1965 (3) TMI 3 - HC - Income Tax

Pre-dissolution profits - assessment would, undoubtedly, be valid under the provisions of s. 26(2), even though it may not be valid under s. 44 - therefore, assessment made on the assessee-firm for the asst. yr. 1953-54 in respect of the pre-dissolution profits after its dissolution is valid in law

Issues Involved:
1. Validity of assessment on a dissolved firm.
2. Applicability of Section 44 of the Income-tax Act.
3. Applicability of Section 26(2) of the Income-tax Act.
4. Impact of dissolution and succession on tax assessment.
5. Distinction between discontinuance and succession of business.

Issue-wise Detailed Analysis:

1. Validity of assessment on a dissolved firm:
The primary question was whether the assessment made on the assessee-firm for the assessment year 1953-54 in respect of pre-dissolution profits after its dissolution is valid in law. The court held that an assessment can be made on a firm which is admittedly dissolved. This conclusion was supported by the Supreme Court's decision in C. A. Abraham v. Income-tax Officer, Kottayam, which established that an assessment can also be made on a firm after its dissolution.

2. Applicability of Section 44 of the Income-tax Act:
The court discussed whether Section 44, which deals with the assessment of dissolved firms, was applicable. It was concluded that Section 44 operates in cases where there is a discontinuance of business or dissolution of an association. However, in this case, there was a succession and not a discontinuance of the business, making Section 44 inapplicable. The court referenced the Supreme Court's decision in Shivram Poddar v. Income-tax Officer, which clarified that Section 44 is attracted only when the business of a firm is discontinued.

3. Applicability of Section 26(2) of the Income-tax Act:
The court reiterated that the case was governed by Section 26(2), which mandates that in cases of succession, the successor and the succeeded shall each be assessed in respect of their actual share. This section was deemed applicable because there was a succession of business rather than a discontinuance. The Tribunal and the Appellate Assistant Commissioner had previously held that Section 26(2) applied, and this view was upheld by the court.

4. Impact of dissolution and succession on tax assessment:
The court examined the impact of dissolution and succession on tax assessment. It was found that the business was succeeded by a private limited company, and the firm was dissolved. The assessment was made on the pre-dissolution profits of the firm, and the court held that such an assessment is valid under Section 26(2). The court emphasized that the mere mention of Section 44 in the assessment order does not invalidate the assessment if it is otherwise valid under Section 26(2).

5. Distinction between discontinuance and succession of business:
The court made a clear distinction between discontinuance and succession of business. Discontinuance implies a complete cessation of business, attracting Section 44, whereas succession involves a change in ownership or constitution, governed by Section 26(2). In this case, the business was succeeded by a company, and there was no discontinuance, making Section 26(2) applicable.

Conclusion:
The court concluded that the assessment made on the assessee-firm for the assessment year 1953-54 in respect of pre-dissolution profits after its dissolution is valid in law under Section 26(2) of the Income-tax Act. The reference was answered in the affirmative, and the assessee was ordered to pay the costs of the reference to the department.

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