Appeal No 2456 of 1966
Appeal from the judgment and order dated January 27 1964 of the Patna High Court in Misc
Judicial Case No 299 of 1958
D Narsaraju section K Aiyar R N Sachthey and B D Sharma for the appellant
C K Daphtary Narain Rao V D Narayan and D Goburdhun for the respondent
The Judgment of the Court was delivered by Shah J
Indetermining the taxable income of the respondent firm for the assessment year 1948 49 the Income tax Officer added to the income returned a sum of Rs 160000 as undisclosed receipts 
The order was confirmed in  appeal by the Appellate Assistant Commissioner and by the Tribunal
The Income tax Officer had in the meantime commenced a proceeding for the levy of penalty and in exercise of the power under section 28 1 c of the Indian Income tax Act 1922 he directed the respondent firm to pay Rs 60000 as penalty
The Appellate Assistant Commissioner in appeal confirmed the order
The Income tax Appellate Tribunal rejected the contention of the respondent that the order imposing penalty upon the firm after the original firm was dissolved was without jurisdiction
The Tribunal referred at the instance of the respondent firm the following question to the High Court of Patna for opinion Whether on the facts and in the circumstances of the case the imposition of penalty under section 28 1 c of the Indian Income tax Act upon the petitioner firm respondent as constituted at the time of levy of penalty was legal and valid The High Court called for a supplementary statement of the case and pursuant thereto the Tribunal submitted a statement on the specified points raised by the order of the High Court that 1The firm which carried on the business during the calendar year 1947 was dissolved on July 7 1951 when Butto Kristo Roy one of the partners died
2During the previous year 1947 there was no instrument of partnership in existence but the terms of the oral partnership were the same as set out in the partnership deed dated October 17 1949
985 3 The business of the firm was continued with effect from July 8 1951 by the new firm as successor to the business of the old firm
The terms of the partnership were the same as set out in the deed dated October 17 1949 and the partners and their shares were also the same except that Baidyanath Roy took the place of Butto Kristo Roy
4 With effect from April 28 1952 the business was carried on by a partnership constituted by Baidyanath Roy and Bijali Kanti Roy under an instrument dated August 27 1952
There was no dissolution of the firm which was carrying on the business there was only a change in the constitution of the old firm from April 28 1952
The High Court held that penalty could be legally levied only upon the original firm constituted in the account year relevant to the assessment year 1948 49 and not upon the new firm constituted under the deed dated April 27 1952
The Tribunal and the High Court approached the problem before them on the assumption that the source of the power of the Income tax Officer to impose a penalty was in section 44 of the Indian Income tax Act 1922
In so assuming in our judgment they were in error
Section 44 of the Indian Income tax Act 1922 as it stood at the relevant date in so far as it is material provided  Where any business profession or vocation carried on by a firm has been discontinued every person who was at the time of such discontinuance a partner of such firm shall in respect of the income profits and gains of the firm be jointly and severally liable to assessment under Chapter IV and for the amount of tax payable and all the provisions of Chapter IV shall so far as may be apply to any such assessment
The section is fairly plain  it applies to cases of discontinuance of the business of a firm and not where there is dissolution of the firm but not discontinuance of its business
In section M section Karuppiah Pillai vs Commissioner of Income tax Madras1 in dealing with the effect of section 44 of the Indian Income tax Act 1922 before it was amended by Act 7 of 1939 a Full Bench of the Madras High Court observed This section s44 only applies when there has been discontinuance of the business The section 1 911TR I 986 says that if a business is discontinued the partners shall nevertheless be jointly and severally liable for the profits which had been earned
In Shivram Poddar vs Income tax Officer Central Circle II Calcutta and Anr1 this Court examined the scheme of section 44 before it was amended by the Finance Act of 1958 and its inter relation with the provisions of sections 251 2 261 2 and 28 1 c in some detail
The Court observed  Section 44 operates in two classes of cases where there is discontinuance of business profession or vocation carried on by a firm or association and where there is dissolution of an association
It follows that mere dissolution of a firm without discontinuance of the business will not attract the application of s44 of the Act 
The reason for this distinction appears from the scheme of the Income tax Act in its relation to assessment of the income of a firm
A firm whether registered or unregistered is recognised under the Act as a unit of assessment sections 3 and 22 and its income is computed under clauses 3 and 4 of section 23
as the income of any other unit
Section 251 relates to assessment in cases of a discontinued business whether the business is carried on by a firm or by any other person  
Then there is the special provision relating to assessment when at the time of making an assessment it is found that a change has occurred in the constitution of a firm or a firm has been newly constituted  section 261
The date on which the change has occurred is immaterial it may be in the year of account in the year of assessment or even after the close of the year of assessment The Income fax Officer has under section 261 to assess the firm as constituted at the time of making the assessment but the income profits and gains of the previous year have for the purpose of inclusion in the total income of the partners to be apportioned between the partners who were entitled to receive the same
Subsection 2 of section 26 relates to assessment in the case of succession to a person which expression includes a firm carrying on a business by another person in such capacity  
Discontinuance of business has the same connotation in section 44 as if has in section 25 of the Act it does not 1 987 cover mere change in ownership or in the constitution of the unit of assessment
Section 44 is therefore attracted only when the business of a firm is discontinued ie when there is complete cessation of the busi ness and not when there is a change in the ownership of the firm or in its constitution because by reconstitution of the firm no change is brought in the personality of the firm and succession to the business and not discontinuance of the business results 
But the Income tax Act recognises a firm for purposes of assessment as a unit independent of the partners constituting it it invests the firm with a personality which survives reconstitution
A firm discontinuing its business may be assessed in the manner provided by section 251 in the year of account in which it discontinues its business it may also be assessed in the year of assessment
In either case it is the assessment of the income of the firm
Where the firm is dissolved but the business is not discontinued there being change in the constitution of the firm assessment has to be made under section 26 1 and if there be succession to the business assessment has to be made under section 262
The provisions relating to assessment on reconstituted or newly constituted firms and on succession to the business are obligatory
Therefore even when there is change in the ownership of the business carried on by a firm on reconstitution or because of a new constitution assessment must still be made upon the firm
When there is succession the successor and the person succeeded have to be assessed each in respect of his actual share
This scheme of assessment fumishes the reason for omitting reference to dissolution of a firm from section 44 when such dissolution is not accompanied by discontinuance of the business
Two other cases decided by this Court may be briefly noticed
In C A Abraham vs Income tax Officer Kottayam and Another1 there was discontinuance of the business of the firm consequent upon dissolution of the firm section 44 was held applicable and it was held that imposition or penalty being a process of assessment the
Income tax Officer was not incompetent to levy penalty after discontinuance of the business
In Commissioner of Income tax Madras and Another vs section V Angidi Chettiar 2 this Court held that the Income tax Officer could exercise under section 44 read with section 28 power to impose penalty upon the firm which discontinued its business on dissolution caused by the death of one of the partners 1 2 988 Section 44 therefore only applied to those cases in which there had been discontinuance of the business and not to case in which the business continued after reconstitution of the firm or there was succession to the business
Cases of reconstitution of the firm or succession to the business of the firm are covered by sections 261 and 2
Assessment in Chapter IV of the Income tax Act 1922 includes a proceeding for imposition of penalty
Section 28 of the Act authorises the Income tax Officer if satisfied in the course of any proceeding under the Act that any person has inter alia concealed the particulars of his income or deliberately furnished inaccurate particulars of such income to direct that such person shall pay by way of penalty a sum of money not exceeding the amount specified therein in addition to the incometax and super tax payable by such person
The expression  person includes for the purpose of section 28 a firm registered or unregistered
If there is reconstitution of the firm by virtue of section 26 the Income tax Officer will in imposing the penalty proceed against the firm
If there is discontinuance of the business penalty will be imposed against the partners of the firm
Before the Tribunal and the High Court the case was argued on the footing that section 44 alone was applicable
Whether under the terms of section 26 read with section 28 penalty may be imposed upon the new partners for the failure of the partners of the firm constituted in the year of account relating to the assessment 1948 49 was never investigated
The question raised by the Tribunal is in terms sufficiently comprehensive to embrace an enquiry whether partners of the firm in existence on July 30 1954 were liable to be assessed to penalty as successors in interest of the partners of the original firm in existence in the year of account relating to the assessment year 1948 49
But in a reference under section 66 of the Indian Income tax Act 1922 only the question which was either raised or argued before the Tribunal may be answered even if the language of the question framed by the Tribunal may apparently include an enquiry into other matters which could have been but were not raised or argued
The appeal fails and is dismissed
In the circumstances of the case there will be no order as to costs in this Court
GC Appeal dismissed


Summary:
The respondent was a firm on which penalty under section 281c of the Indian Income tax Act 1922 was imposed by the Income tax Officer in respect of the assessment year 1948 49
At the time when the penalty was imposed the constitution of the firm had changed though the same business was continued by the reconstituted firm
The appeals filed by the respondent before the Appellate Assistant Commissioner and the Tribunal were rejected
In reference the High Court held that penalty could be legally imposed upon the original firm constituted in the account year relevant to the assessment year 1948 49 and not upon the new firm constituted in 1952
In coming to their conclusions the Tribunal as well as the High Court proceeded on the assumption that the source and power of the Income tax Officer to impose a penalty was in section 44 of the Indian Income tax Act 1922
In appeal by the Revenue to this Court HELD  i Section 44 only applies to those cases in which there has been discontinuance of the business and not to cases in which the business continues after the reconstitution of the firm or there is succession to the business
Cases of reconstitution of the firm or succession to the business are covered by sections 261 and 2
The Tribunal and the High Court were therefore in error in relying on section 44 of the Act
988 A 985 D E ii Assessment in Ch
IV of the Income tax Act 1922 includes a proceeding for imposition of penalty and the expression person  includes for the purpose of section 28 a firm registered or unregistered
If there is reconstitution of the firm by virtue of section 26 the Income tax Officer will in imposing the penalty proceed against the firm
If there is discontinuance of the business penalty will be imposed against the partners of the firm
988 B D In the present case however this Court could not go into the question whether penalty on the respondent firm was leviable under the terms of sections 26 and 28 even though the question raised by the Tribunal was in terms sufficiently comprehensive to embrace the enquiry
In a reference under section 66 of the Indian Income tax Act 1922 only the question which was either raised or argued before the Tribunal may be answered even if the language of the question framed by the Tribunal may apparently include an enquiry into other matters which could have been but were not raised or argued
988 D F Shivram Poddar vs Income tax Officer Central Circle II Calcutta  Anr  C A Abraham vs Income tax Officer Kottayam and ITR 425 and Commissioner of Income tax Madras  Anr
V section V Angidi Chettiar  applied
section M section Karuppiah Pillai vs Commissioner of Income tax Madras  approved