Y.V. SUBBA RAO VS COMMISSIONER OF INCOME-TAX, 2000 PTD-ANDHRA-PRADESH-HIGH-COURT-INDIA 2830 (1998)

(a) Income-tax---

----Discontinuance of business---Construction work entrusted to three firms in all of which assessee was a partner---Amount received in respect of construction work after business was discontinued---Amount was assessable in hands of three firms---Indian Income Tax Act, 1961, S.176.

The assessee, an individual, submitted a tender for the construction of two aqueducts in Lower Sileru Project. In order to effectively carry out the construction, three different partnership firms were constituted which undertook the work in three separate sections. In all the three firms, the assessee was a partner. The construction work was completed by 1976. Thereafter, the firms had no contract works. Due to certain disputes that arose between the assessee and the electricity -department, the matter was referred to the arbitrator. The arbitrator awarded payment of Rs.7,46,471 by his award, dated December 19, 1976. The award was also confirmed by the Civil Court. The assessee received the amount on February 17, 1979. The Income-tax Officer assessed the amount in the hands of the assessee. The Tribunal held that the amount was assessable in the hands of the three firms. On a reference:

Held, that the finding of the Tribunal that there was discontinuance of the work by the three firms was a finding of fact which was based on the record before the Tribunal and it had become final. Once there was a discontinuance of the business by the three firms, the amount received after discontinuance would be deemed to be the income of the recipient and charged to tax in the year of receipt, as had he received the same before discontinuance, he would have been laible to pay tax. Prior to discontinuance the three firms were entitled to receive income. It was only on account of the discontinuance 'of the firms, that the assessee had received the amount. Therefore, the assessee was only a trustee and the actual recipients were the three firms. The provisions of section 176(3Aj of the Income Tax Act, 1961, were applicable and the amount of Rs.7,46,471 could not be assessed in the hands of the assessee-recipient but in the hands of the three firms which actually executed the contract:

Held also, that questions Nos. l and 2 could not be answered as, in spite of service of notice, the assessee was not present either in person or through any counsel.

(b) Income-tax---

----Reference---Reference at instance of assessee---Assessee absent in spite of service of notice---Reference could not. be answered---Indian Income Tax Act, 1961, S.256.

S. R. Ashok for the Commissioner.

JUDGMENT

MS. S. V. MARUTHI, J.---The Income-tax Appellate Tribunal, Hyderabad Bench, referred the following questions of law for the opinion of this Court. Questions Nos. l and 2 are referred at the instance of the assessee while question No.3 is referred at the instance of the Revenue.

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the provisions of section 189 are not applicable in assessing the amount of Rs.7,46,471 in the hands of the partnership firm?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal is correct in holding that the provisions of the section 176(3A) of the Income Tax Act, 1961, are applicable to the facts of the case?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal, while holding that the provisions of section 176(3A) are applicable, is correct in concluding that the amount of Rs.7,46,471 cannot be assessed in the hands of the assessee-recipient but in the hands of the three firms which actually executed the contract, on the ground that the assessee received the said amount only as a trustee?"

As regards questions Nos. 1 and 2, we decline to answer the same as, in spite of service of notice, the assessee is not present either in person or through any counsel.

As regards question No.3, the facts in brief tire as follows: The assessee is an individual. He was the tenderer for the construction of two aqueducts in Lower Sileru Project. In order to effectively carry out the construction, three different partnership firms were constituted which under?took the work in three separate sections. The three firms were (1) Y. V. Subba Rao Company, (2) Ramakrishna Constructions and (3) Srinivasa Constructions. In all the three firms. Sri Y. V. Subbarao was a partner. The three firms actually carried out the contract works and filed the income-tax returns in respect of the profits arising to them. The Department had accepted that the firms were genuine and had granted registration to them. The construction work was completed by 1976. Thereafter, the firms had no contract works. Due to certain disputes that arose between the assessee and the electricity department, the matter was referred to the arbitrator. The arbitrator awarded payment of Rs.7,46,471 by his award, dated December 19, 1976. The award was also confirmed by the civil Court. The assessee received the amount on February 17, 1979. The Income-tax Officer assessed the amount in the hands of the assessee on the ground that he is the recipient of the amount, while the assessee contended that he is a trustee and the actual recipients of the amount are the three firms which were constituted for the purpose of executing the contract works and which have executed the works. On appeal, the Commissioner of Income-tax held that the concerned firms have to be assessed separately for the assessment year under consideration and the entire additional contract amount awarded by the arbitrator cannot be treated as the income of the assessee. On further appeal, the Tribunal held that the assessee is only a trustee and he received the amount on behalf of the three firms which have executed the works and since the three firms have discontinued the contract work, section 176(3A) of the Act applies. However, at the instance of the Revenue, question No.3 as set out in the earlier paragraph was referred for the opinion of this Court.

To consider the question referred for the opinion of this Court, it is necessary to refer to section 176(3A) of the Income-tax Act which reads as follows:--

"Where, any business is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance. "

The finding of the Tribunal is that the assessee who was the tenderer entrusted the execution of the work of the three firms of which he was also one of the partners and the three firms actually executed the work and they stopped the work after completion of the contract works and, therefore, the three firms discontinued to exit. The Tribunal also held that the receipt of, money by the assessee, awarded by the arbitrator, was on behalf of the other three firms which have executed the work and he is only a trustee of the firms and, therefore, only the actual recipient are liable to be taxed and not the assessee who received the money on behalf of the other three firms.

The finding of the Tribunal that there is discontinuance of the work by the three firms is a finding of fact which is based on material placed on the record before the Tribunal and it has become final. Once there is a discontinuance of the business by the three firms, the amount received after discontinuance shall be deemed to be the income of the recipient and charged to tax in the year of receipt, as, had he received the same before discontinuance he would have been laible to pay tax.

Prior to discontinuance, the three firms are entitled to receive income. It is only on account of the discontinuance of the firms, the assessee has received the amount. Therefore, the assessee is only a trustee and the actual recipients are the three firms.

In view of the above, we agree with the view of the Tribunal. It follows, therefore, that question No.3 referred is to be answered in the affirmative and in favour of the assessee.

The reference is answered accordingly.

M.B.A./4180/FC???????????????????????????????????????????????????????????????????????????????? Reference answered.