COMMISSIONER OF INCOME-TAX VS PAILY PILLAI & CO., 2002 PTD-KERALA-HIGH-COURT-INDIA 2061 (1999)

Income‑tax‑‑‑

‑‑‑‑Discontinuance of business‑‑‑Firm‑‑‑Effect of S.176(3A)‑‑ Dissolution of partnership‑‑‑Amount received under arbitration much after dissolution by erstwhile partners‑‑‑Amount assessable as income of firm under S.176(3A)‑‑‑Indian Income Tax Act, 1961, S.176.

Subsection (3A) of section 176 of the Income Tax Act, 1961 was introduced by the Taxation, Laws (Amendments) Act, 1975, with effect from April 1, 1976. This provision, inter alia, provides that any sum received after the discontinuance of a business is, for and from the assessment year 1976‑77, to be treated as income of the recipient in the year of receipt, if it would have been included in the total income of the person who carried on the business, had it been received before such discontinuance. It is to be noted that subsections (3A) and (4) constitute exceptions to the rule that business or professional receipts are chargeable only if the business or profession is carried on in the year of account. For the purpose of the assessment, there is a well‑marked distinction between "discontinuance" and "succession". While "discontinuance" refers to a complete cession of the business, "succession" is involved in a mere change of ownership. The conception of succession excludes the conception of discontinuance.

The assessee, a firm, was engaged in contract works with the Kerala State Electricity Board. It was dissolved by a deed of dissolution, dated October 1, 1970. Clause (4) of the deed of dissolution stated that the works done by the partnership till the close of the business on the 30th day of September, 1970, had been fully measured and values thereof duly accounted. Clause (5) provided that P who was one of the partners was authorised to do or to get done at his own expense, further work, if any, required to be done in respect of the business carried by the partnership and that the said P alone shall be entitled to or liable for the profits or losses, as the case may be, of the said further work if any. During the accounting period relevant to the assessment year 1976‑77, a sum of Rs.1,16,000 was received from the Board on the basis of an arbitration award in respect of work done earlier. The Assessing Officer issued a notice under section 148 of the Act to the assessee. The Assessing Officer brought the amount to tax in the hands of the firm under section 176(3A) of the Act. Being aggrieved, the matter was taken up by the assessee in appeal before the Commissioner of Income‑tax (Appeals) who upheld the action of the Assessing Officer. In second appeal, the Tribunal held that the claim which resulted in the arbitration award was made long after the dissolution of the firm, and it was not even in contemplation at any time prior to the dissolution, that the income accrued only on February 21, 1974, when the arbitrator gave his award and by that time, the firm had already been dissolved. The Tribunal was, therefore, of the view that it was a case of succession of a firm by an individual, i.e., one of the erstwhile partners. It set aside the assessment. On a reference:

Held, that clause (5) of the deed of dissolution related to further work, if any in respect of the business carried on by the partnership. The arbitration award was in respect of work already done prior to the dissolution of the firm. Only the claim was made subsequent to the dissolution. Though the plea of the assessee was that the award amount was not relatable to the work done earlier and was `further work" as referred to in clause (5) of the deed of dissolution, the amount was shared by the partners of the firm. The, very fact that the Income had been received by the partners nullified the stand taken by the assessee that the work done was independent. In other words, it was not relatable to any "further work". The amount received on arbitration was assessable in the hands of the firm.

P.K.R. Menon and George K. George for the Commissioner.

P.G.K. Warriyar and P. Balakrishnan for the Assessee.

JUDGMENT

ARIJI PASAYAT, C.J.‑‑‑Pursuant to a direction given by this Court, the Income‑tax Appellate Tribunal, Cochin Bench (in short, "the Tribunal"), has referred the following, question for the opinion of this Court under section 256(2) of the Income Tax Act, 1961 (in short, "the Act"):

"Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in deleting the inclusion of the arbitration award amount in the assessment of firm?"

The factual position; as set out in the statement of case, is as follows: The assessee, a firm, was engaged in contract works with the Kerala State Electricity Board (in short, "the Board"). It was dissolved by a deed of dissolution, dated October 1, 1970. During the accounting period relevant to the assessment year 1976‑77, a sum of Rs.1,16,000 was received from the Board on the basis of the arbitration award in respect of the work done earlier. The Assessing Officer issued a notice under section 148 of the Act to the assessee, as the amount was, according to him, assessable under section 41(1) of the Act. The assessee filed a "nil" return alongwith a covering letter stating that since the firm was already dissolved; there was no question of assessing the arbitration amount in its hands. Further, the respective shares of the arbitration award were already taxed in the hands of the partners individually. The Assessing Officer did not agree with the contention and brought the amount to tax in. the hands of the firm under section 176(3A) of the Act. Being aggrieved, the matter was taken up by the assessee in appeal before the Commissioner of Income‑tax (Appeals) (in short, the CIT(A)), who upheld the action of the Assessing Officer. In second appeal, the Tribunal held that the claim which resulted in the arbitration award was made long after the dissolution of the firm, and it was not even in contemplation at any time prior to the dissolution. Income accrued only on February 21, 1974, when the arbitrator gave his award and by that time, the firm, had already been dissolved. The Tribunal was, therefore, of the view that it was a case of succession of a firm by an individual, i.e., one of the erstwhile partners. Section 176, according to it, applied to the case of discontinued business and it cannot apply to a succession to the firm. Accordingly, the Tribunal nullified the assessment. An application under section 256(1) of the Act filed by the Revenue was rejected. Pursuant to the direction given by this Court, the question, as set out above, has been referred to this Court.

Learned counsel for the Revenue submitted that the approach of the Tribunal was erroneous as it failed to consider the materials on record in the proper perspective and misconstrued the terms of the deed of dissolution, dated‑ October 1, 1970. Learned counsel for the assessee, on the other hand, submitted that on a bare reading of the deed of dissolution, it is clear that the award cannot be brought to tax at the hands of the firm. The Tribunal seems to have proceeded on the footing that the award, dated February 21, 1973, cannot be treated to any dispute pending on the eve of dissolution and, therefore, the award passed had given rise to an income only on the date of the award.

Certain facts are to be noted as they have great relevance. The deed of dissolution has been quoted in its entirety by the Tribunal. Clauses (4) and (5), which are relevant, read as follows:

"4. It is hereby mutually agreed that the work done by the partnership between the parties hereto till the close of the business on the 30th day of September, 1970, have been fully measured and values thereof duly accounted.

5. It is hereby agreed that Sri P. M. Paily Pillai, the first party hereto, is authorised to do or to be got done at his own expense further work, if any, required to be done in respect of the business carried by or partnership and that the said Sri Paily Pillai alone shall be entitled to or liable for the profits or losses, as the case may be, of the said further work, if any." (underlined for emphasis)

According to the assessee, clause 5 had application to the facts of the case because the claim was lodged on October 15, 1973. Section 47 of the Indian Partnership Act, 1932 (in short, "the Partnership Act"), provides that on the dissolution of a firm, authority of each partner to bind the firm, and the other mutual rights and obligation of the partners, continue notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of dissolution. Clause 5 of the deed of dissolution relates to further work, if any, in respect of the business carried on by the partnership. It is evident that the arbitration award was in respect of the work already done prior to the dissolution of the firm. The only claim was made subsequent to the dissolution. Though the plea of the assessee is that the award amount was not relatable to the work done earlier and was "further work" as referred to in clause 5 of the deed of dissolution, the amount was shared by the partners of the firm. This falsifies the assessee's stand that the award was for "further work". Had that been so, in terms of clause (5), the entire amount of the award would have gone to Sri P.M. Paily Pillai and not to all the partners. The income from the date of award, which the Tribunal has considered to be a fortuitous circumstance, in reality, is the pivotal point for determination. Section 176(3A) of the Act reads as follows:

"(3A) 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 said provision was introduced by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1976. This provision, inter alia, provides that any sum received after the discontinuance of a business is, for and from the assessment year 1976‑77, to be treated as income of the recipient in the year of receipt, if it would have been included in the total income of the person who carried on the business, had it been received before such discontinuance. It is to be noted that subsections (3A) and (4) constitute exceptions to the rule that business or professional receipts are chargeable only if the business or profession is carried on in the year of account. For the purpose of the assessment, there is a well marked distinction between "discontinuance" and "succession". While "discontinuance" refers to complete cessation of the business, "succession" is involved in a mere change of ownership. The conception of succession excludes the conception of discontinuance. The very fact that the income has been received by the four partners is, as stated above, a factor which nullifies the stand taken by the assessee that the work done was independent. In other words, it was not relatable to any "further work". That being the position, the conclusions of the Tribunal are not sustainable.

The question referred, therefore, is answered in the negative, in favour of the Revenue and against the assessee.

M.B.A./801/FC Reference answered.