9911796707
TMI Blog2002 (6) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... ued to the firm and that as it passed on to the assessee Shri J.H. Tarapore, in terms of settlement deed it can be only in application of income?" In T.C. No. 588, the questions referred are at the instance of the assessee. They being: "1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that a sum of Rs. 28,99,484 represents the income of the assessee? 2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the above receipts are revenue in nature and cannot be characterised as a windfall or casual receipt falling under section 10(3) of the Income-tax Act, 1961?" In this judgment, we shall consider the two sets of questions referred at the instance of the Revenue and the assessee separately. T.C. No. 587 of 1984: The assessee was assessed as an "individual" and the relevant year of assessment was 1974-75. The assessee was carrying on the business of executing the contract/engineering works along with one Loganatha Mudaliar as a partner and the firm was named as "Tarapore and Co." since 1935. The firm bagged a contract from the Government of India and entered into an agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee on the ground that this was in pursuance of a contract carried out by the firm, Tarapore and Co., in respect of which the matter was referred to arbitration out of which this amount came into the hands of the assessee after the dissolution of the firm. The assessee pleaded that thus the claim of the firm was prosecuted by the assessee as successor to the partnership firm and since the said firm stood dissolved and there was distribution of assets of the firm, this claim came to him only by way of "capital receipt" and not as "revenue receipt". In short, the contention of the assessee was that on the dissolution of the firm, all the claims which fell to the share of the assessee were converted into capital and, therefore, it came in his hands as the capital and thereby the same was exempt from the tax. The Income-tax Officer rejected the claim of the assessee on the ground that after the death of Loganatha Mudaliar, the same contract was continued by the assessee as the proprietor and the amount covered by the arbitration award was only in respect of the piece of work which was continued and executed by the assessee subsequent to the dissolution of the firm on the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of a profit of the firm could not overnight change its character merely because there was an intervening event of the death of one of the partners and, therefore, the resultant dissolution of the firm. Learned counsel very strenuously argues that even from the clauses in the dissolution deed, it could be seen that the assessee was to continue the business of the firm, which included the execution of the present contract also. What he got by way of award was merely in the nature of the profit earned by the firm because of its business activity during the period from January, 1967 to September, 1969, and, therefore, this profit which came in pursuance of the award passed in the arbitration proceedings could not overnight change its character and become capital asset at the hands of the assessee. Learned counsel very heavily relied on the decisions reported in CIT v. P.R.A.L. Muthu Karuppan Chettiyar [1935] 3 ITR 208 (PC) and CIT v. M. Uttama Reddy [1984] 148 ITR 580 (Mad)--the latter being a Division Bench decision of this court. As against this, learned senior counsel, Mr. V. Ramachandran, appearing for the assessee pointed out that in the first place it was not the firm which wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, such a receipt in the hands of the assessee would constitute "capital asset". The Tribunal held that the source for this income was the work executed by the firm and as such that income which passed on to the assessee in terms of the settlement deed was only an application of income. The Tribunal also heavily relied upon the judgment of this court in AR.N. Ramaswami Chettiar v. CIT [1963] 48 ITR 771. In short, the Tribunal presumed that after the dissolution of the firm the assets which came to the erstwhile partner are only in the nature of capital assets and more particularly in this case since the amount received was for the work done when the firm was in existence, the said amount was in the nature of "capital asset" and, therefore, exempted. It will be, therefore, proper firstly to see and consider the ruling which the Tribunal has relied upon. Ramaswami Chettiar's case [1963] 48 ITR 771 (Mad) was a case of partition which took place in the Hindu undivided family whereby the joint family business came to be divided along with the stock-in-trade. Subsequently, some amounts were received as compensation for war damage in respect of the said stock-in-trade for which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the net residue of the estate after payment of family debts...There is no justification for this artificial attribution of profit to the assessee either in law or under the terms of the partition deed now in question." The learned judges also took stock of the another decision in Mettur Sandalwood Oil Co. v. CIT [1963] 47 ITR 781 (Mad) which was relied upon by the Revenue Department and recorded a finding as under: "In the present case, indisputably there was a partition and the effect of the partition was that the share allotted to the members of the family even in respect of the business asset became a capital of the allottee. At that point of time, the stock-in-trade of the business or any claim in respect of such stock-in-trade assumed the character of capital in the hands of the divided members. No doubt it is open to them to treat such capital as a stock-in-trade by employing it in the business and dealing with it as a stock-in-trade. But such treatment must be borne out by evidence of overt acts or by a systematic course of conduct." In our opinion, the Tribunal has erred in relying upon this decision. In the first place, this was a case of a partition of the joint fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad). It will be worthwhile to quote it here: "It is well established that where a partnership is dissolved and one partner takes over and continues the business of the partnership it is a case of succession to the business. And in this case the assessee continued the firm's business with the same stock-in-trade and with all its assets and liabilities. It must, therefore, be held that the assessee was entitled to write off the debts which had become barred during the year of account, albeit such debts originally belonged to the firm to which the assessee succeeded." In our opinion, this paragraph clinches the issue against the assessee in this case. This question as to what happens after the dissolution of the firm had fallen for consideration in CIT v. P.R.A.L. Muthu Karuppan Chettyar [1935] 3 ITR 208 before the Privy Council. The Privy Council observed that the only question as to whether the effect of the dissolution was to make payment of all sums on dissolution payments by way of capital and not payments of income or profits. This case was relied upon by our High Court in CIT v. M. Uttama Reddy [1984] 148 ITR 580. The Division Bench of this court quoted a passage from Muthu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the firm. The clauses of the dissolution deed bear testimony to that. It is also found by some authorities below that the business of construction and more particularly the con tract under the Farakka Project continued as if nothing had happened. It also cannot be forgotten that the profits were directly relatable to the work done by the firm in pursuance of the contract much earlier to its dissolution. They only accrued later on as having been crystallised because of the arbitration award. Therefore, the earnings from the contract, which was the business of the firm, can certainly be termed as the profits of the firm. The said business continued in the hands of the assessee and in the dissolution deed all the claims of the partnership firm came into the hands of the assessee who on the basis of that lodged a claim by way of reference to arbitration and it was in pursuance of that that this awarded amount came into the hands of the assessee. Therefore, there can be no escape from the proposition that what came to the hands of the assessee was the profit earned by the erstwhile firm to which the assessee had become entitled on account of the dissolution of the firm. A sum wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave to be necessarily in relation to the assessment year 1974-75. Learned counsel pointed out that because of the amendment made to section 176 by adding sub-section (3A) had the income come after the amendment it could certainly have been assessed in the hands of the firm. However, prior to the advent of section 176(3A), there cannot be an assessment of such income more particularly in the hands of the present assessee. Learned counsel very heavily relied on the decision of the Delhi High Court in CIT v. Bhagat and Co. [1990] 182 ITR 212 and pointed out that there also the assessment year was 1971-72 and a partnership firm which was formed in the year 1963 was dissolved in the year 1967. The assets and liabilities of the firm were taken over by the private limited company. There being certain outstanding bills and claims of the erstwhile firm, they were received by the receiver of the dissolved firm in November, 1969 and December, 1971, in two instalments. This income was disclosed by the receiver as the income for the year 1971-72. However, the partner of the firm filed "nil" return. The Tribunal had held that this sum was not taxable as the income of the firm under section 28(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm because of the death of Loganatha Mudaliar in the year 1971 and the whole business of the firm coming into the hands of the assessee as a result of the dissolution deed dated October 19, 1972. Those facts have been elaborately stated in paragraphs 4 and 5 (pages 309) of the earlier part of this judgment. The assessee, who continued the business of the firm after the death of the sole partner Loganatha Mudaliar and also continued to perform the contract which was awarded to the firm and carried out the further works in the year 1972-73 for which he was paid the total sum of Rs. 1,43,77,973. Out of this amount, the assessee calculated the amount of Rs. 28,99,484 to be a sum emanating by way of ex gratia payment, perhaps, because that is how the amount was referred to. When the details were called as to how this amount was arrived at the assessee gave the details of the work done by him in respect of reaches at RD 10 to RD 68. The work details are as follows: -------------------------------------------------------------------- &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; 28,99,484 ------------- -------------------------------------------------------------------------- The sum thus arrived at was because of the difference of rates awarded by the Government of India for the work done. The assessee, therefore, claimed the same as exempt from income-tax. The Assessing Officer did not accept the contention and assessed the same at the hands of the assessee. In the appeal also, the Appellate Assistant Commissioner found that the work done by the assessee was in respect of reaches RD 10 to RD 68 which was the unfinished portion of the work. In addition to this unfinished work which the assessee completed, he also undertook the work of RD 97 to RD 103 and he alone completed it and it was because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e paid from time to time. It is not as if a consolidated amount of Rs. 28,99,484 came to be paid to him separately by way of a reward. In our opinion, even if such a reward had been paid to him, it would have been still integrally connected with the business and could have been viewed as a business income. The claim made by the assessee that this amount was given to the assessee by the Government of India is not wholly correct in the sense that the amount was only calculated from time to time and was on the basis of the increased rates. The contention raised by the assessee was that this was not a claim made in the usual course of the business. In our opinion, the Tribunal as well as the other authorities are absolutely correct in holding that this amount emanated from the usual business alone. This amount has been tried to be claimed as an income of a casual and non-recurring nature. We fail to understand such a claim because obviously the amount was calculated from time to time and the payments were calculated at the increased rates. Learned counsel specifically relied on the reported decisions in CIT v. M. Balamuralikrishna [1988] 171 ITR 447 (Mad) and Mehboob Productions P. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the judgment of the Privy Council in CIT v. Shaw Wallace and Co. [1932] 2 Comp Cas 276 (PC); AIR 1932 PC 138 and came to the conclusion that as per this decision, the term "income" in the Act connotes a periodical monetary return, coming in with some sort of regularity or expected regularity from a definite source. The said source need not be one which was expected to be continuously productive, but it must be one whose object is the production of a definite return and anything in the nature of a windfall must be excluded from what may be properly regarded as income. The learned judge did take note of the subsequent decision in Raghuvanshi Mills Ltd. v. CIT [1952] 22 ITR 484 (SC) and observed as follows: "It is true that subsequent decision s of the Privy Council and of the Supreme Court have, to a certain extent, restricted the applicability of the discussion to be found in the above case; but, in my opinion, it must remain the starting point of all discussions on the question and it will be found referred to in all subsequent decisions both of the Supreme Court and other High Courts on this aspect of the matter." What was meant by the learned judge was probably that the receip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. What we are considering as 'windfall' is some unexpected receipt not in the contemplation of the assessee and not directly attributable to or occurring by way of its business profits." The learned judge then went on to hold that the concerned income earned by the producers of "Mother India" could never have been contemplated by them and as such it amounted to "windfall". This is how the learned judge again explained: "Where the obtaining of a particular advantage or receipt could not be said to be within the ordinary contemplation of the party obtaining or receiving it, then only would it be proper to characterise the advantage or receipt as a windfall." Ultimately, the learned judge held that this receipt was in the nature of a windfall as to mere quantum and hence proceeded to answer the question against the Revenue. We have deliberately quoted the judgment in Mehboob Productions P. Ltd.'s case [1977] 106 ITR 758 (Bom) in extenso because even if we choose to accept this judgment and agree with the propositions laid down therein, it will be not helpful to the assessee in the present case. Learned senior counsel argues on unduly broad outlines and suggests that though in Mo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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