1971 (5) TMI 15 - HC - Income Tax

Issues Involved:
1. Validity of notices issued under Section 148 of the Income-tax Act, 1961.
2. Applicability of Section 149 and Section 150 of the Income-tax Act, 1961.
3. Liability of the successor for the income of the dissolved firm.
4. Interpretation of Section 26 and Section 44 of the Income-tax Act, 1922.
5. Implications of the High Court's findings in previous references on the current case.

Detailed Analysis:

Issue 1: Validity of Notices Issued under Section 148
The petitioner challenged the notices issued by the Income-tax Officer on December 3, 1968, under Section 148 for the assessment years 1948-49 and 1949-50, claiming they were barred by time as per Section 149 of the Income-tax Act, 1961. Section 149 prescribes a maximum period of 16 years for cases falling under Section 147(a) and 4 years for cases under Section 147(b). The notices were issued well beyond these periods, making them prima facie barred by time.

Issue 2: Applicability of Section 149 and Section 150
The revenue argued that under Section 150, a notice under Section 148 could be issued at any time if it was for making an assessment or reassessment in consequence of or to give effect to any finding or direction by any authority in any proceeding under the Act. The High Court's order dated May 20, 1964, in I.T.R. Nos. 738 and 739 of 1962, stated that the petitioner succeeded to the business of the old Sharma & Co. on January 1, 1948. The revenue contended that this finding implied the petitioner was liable to be assessed as the successor, thus justifying the issuance of the notices under Section 150.

Issue 3: Liability of the Successor for the Income of the Dissolved Firm
The court examined whether the petitioner could be taxed for the income earned by the old Sharma & Co. before its dissolution on December 31, 1947. It was noted that Section 44 of the Income-tax Act, 1922, as amended in 1958, makes the partners of a dissolved firm liable for tax, not the successor. Section 26 of the Act also requires separate assessments for the person succeeded and the successor, with no liability on the successor for the income earned by the predecessor before the succession.

Issue 4: Interpretation of Section 26 and Section 44
The court held that Section 26 and Section 44 do not authorize the Income-tax Officer to take proceedings against the successor for the income earned by the dissolved firm. The liability for such income remains with the partners of the dissolved firm. There was no allegation that the partners of the old Sharma & Co. were unavailable for assessment or tax recovery, thus negating any liability on the petitioner for the firm's income up to its dissolution.

Issue 5: Implications of the High Court's Findings in Previous References
The High Court's previous finding that the petitioner succeeded to the business did not imply that he was liable for the income earned by the old Sharma & Co. up to its dissolution. The court noted that neither Section 26 nor Section 44 authorized such proceedings against the petitioner. Furthermore, Explanation III to Section 153, which deals with the reassessment of income excluded from one person and held to be the income of another, did not apply as the petitioner was not given an opportunity to be heard in the previous references.

Conclusion:
The court concluded that the notices issued to the petitioner were beyond the time limit prescribed by Section 149 and were not justified under Section 150. The notices were not issued in consequence of or to give effect to any finding or direction by the High Court. Therefore, the notices dated December 3, 1968, were quashed, and the writ petitions were allowed with costs. The court did not find it necessary to address the validity of Section 150 in this context.

Judgment:
Petitions allowed.

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