98~

COMMISSIONER OF INCOME-TAX, BIHAR & ORISSA,

PATNA

MIS. KIRKEND COAJ, COMPANY

March 12, 1969

[J. C. SHAH A~D A. N. GROVER, JJ.)

Indian Jnrome-tax Act, 1922, ss. 26, 28, 44 and 66-Pena/ty leviah/e on firn: for assess1nent year 194849-Firin reconstituted in later years but business not discontinued-Penalt, v in respect of 1948-49 whether /eviable on reconstituted firm-Sect.ion 44 not apjJlicable to such Clllls- Applicahility of ss. 26 and 28-Question not rc.ised before Tribunal cannot he raised in reference under s. 66.

The respondent was a firm on which penalty under s. 28(1)(c) ot 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 cpnstitution 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 194849 and not upon the new firm constituted in 1952.

In coming to their conclusions the Tribunal as well a! the. High Court proceeded on the assumption that the source and power of the Income-tax Officer to impose a penalty was in s. 44 of the Indian Income-tax Act, 1922.

In appeal by the Revenue to this Court,

HELD : (i) Section 44 only applies to those <ases 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 df the firm or succeso; ion to the business are covered by ss. 26(1) and (2~. The Tribun•l and the High Court were therefore in ctr.or in relying on s. 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 'peron' includes for the purpose of s. 28 a firm registered or unregistered. If there is recbnstitution of the firm by virtue of s. 26, the Income-tax Officer will in imposing the penalty proceed against the firm. lf there is discontinuance of the business penalty will be imposed against the partners of the firm.

[988 B-0]

In the present case, however, this Court could not go into the question \vhether penalty on the respondent firm was leviahle under the terms of ss. 26 and 28 even though the question raised by the Tribunal was irt terms sufficiently comprehensive to embrace the enquiry.

In a refetence under s. 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-Fl

Shivr.m Poddar v. lncom•-tax Officer, Central Circle ll, Calcutta Anr., 51 I.T.R. 823, C. A. Abraham v, Jncom•-tax Officer, Kottav•m qnd

98.& Sl!PUM• OOUllT llPOlln

[1909] 3 S.C.L

Anr., 41 I.T.R. 425 and Comml1Sloner of lnco-.t=, Madr01 A Anr. v.

S. V. Angidl Chtttlar, 44. I.T.R. 739, applied,

S. M. S. Karuppl•h Pillai Y. Comml'11oner qf lncom<t= Madr01, 9 I.T.R. 1, approved.

CIVIL APPELLATE JURISDICTION: Civil 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, S. K. A.iyar, 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. In determining the taxable income of the respon dent firm for the assessment year ~948-49 the Income-tax Officer

added to the income returned a sum of Rs. 1,60,000 as 'undis closed rcc.ipts'. The order was confirmed in appeal by the D 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 s. 28 ( 1 )( c) of the Indian Income-tax Act, 1922 he directed the res pendent firm to pay Rs. 60,000 as penalty. The Appellate Assistant Commissioner in appeal confirmed the order. The Incomez tax AJ)pellate 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 F the case the imposition of penalty under s. 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 G the specified points raised by the order of the High Court that : ( 1) The firm which carried on the business during the calendar year 1947 was dissolved on July 7, 1951 when Butta Kristo Roy, one of the partners, died.

(2) During the previous year 1947 there was no ff 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.

........... A

( B

C, I.T. V. KIRKEND COAL CO. (Shah, J.)

( 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. l:he 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 th.em 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 th.e 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 ihe 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 wh.ere there is dissolution of the firm but not discontinuance of.its business.

In S. M. S. Karuppiah Pillai v. Commissioner of Income-tax, Madras( 1 ), in dealing with the effect of s. 44 ol' the Indian Income-tax Act, 1922, before if was amended by Act 7 of 1939, a Full Bench of the Madras High Court observed : ·

"This section (s.44) only applies when there has been discontinuance of the business, ... , The section

(I) 9,~.T.R, 1.

986 SUPREME COU..T RllPOJ.TS

(1969] 3 S.C.R.

mys that if a business is discontinued the partners shall nevertheless be jointly and severally liable for the proli cs which had been earned".

In Shivram Poddar v. Income-tax Officer, Central Circle II, Calcuca oni Anr. (1) this Court examined the scheme of s. 44 (bfore it was amended by the Finance Act of 1958) and B its inter-relation with the provisions of ss. 25 (I), (2), 26( 1),

(2) anJ 28(l)(c) in some detail.

The Court observed :

"Section 44 operates in two classes of cases; where there is discontinuance of business, profession or voca. ticin carried on by a firm or association, and where there is dissolution of an association. It follows that mere dissolution of a finn without discontinuance of the business will not attract the application of s.44 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 finn.

A finn whether registered or unregistered is recognised under the Act as a m.it of assessment (sections 3 and 2(2) ), and its income is computed under clauses (3) and

(4) of section 23 as the income of any other unit. Section 25 ( 1) 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 26 ( 1). 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-far.: Officer has under section 26(1) to assess the !inn 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 in- COIT'.e of the partners, to be apportioned between the nartners 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 fi•m) carrying on a business by another person in such capacity. . . . . . Discontinuance of business has the same connotation in section 44 as it has in section 2 5 of the Act; it does not

11) ~11.T.R. 823.

C.l.T. v. K!J.DND C.OA.L eo. (Shah, J.)

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, i.e. when there is complete cessation of the business 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 25 ( 1) 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

(I ) , and if there be succession to the business assessment has to be made under section 26(2). The provisions rehting to assessment on reconstituted or newly c0wtituted firms. and on succession to the business are obligatorv.

Therefore, even when there is change in the ownershio of the business carried on by a firm on reconstitution or because of a new constitution, assessment mmt still be made upon the firm.

When there is succession, the successor and the oerson succeeded have to be assessed each in respect of his actual share.

This scheme of assessment furnishes 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 mav be briefly noticed.

In C. A. Abrah'1m "Income-tax Officer, Kotrayam and Another(') there was discontinuance of the business of the firm consequent upon dis<olution of the firm. s. 44 was held applicable, and it wns Jield that imnosition or penaltv beimt a nrc>cess of assessment the Tncnme-tax Officer was not incnmnetent to levv penaltv after discontinuance of the business.

In Commis•ioner of Tnrnm~-tn~. M11dra• an-I Anmher v. S. V. AnviJ; Ch•t•iar(')

this Court held tht the Income-tax Officer coulcl exercise under s. 44 read with s. 28 power to impose penalty uoon the firm which discontinued its business on dissolution caused by the death of one of the partners.

Ill 41 T.T.lt 42~. :l) .. J.T.R. 739.

SUPREME COURT REPORTS

[!969] 3 S.C.R

Section 44 therefore only applied to those cases in which there had been discontinuance of the business and not to cases 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 ss. 26(1) and (2).

"Assessment'' in Chapter IV of the Income-ta-,: 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 a/ia, concealed the particulars of his income or deliberately furnished inaccurate particulars of such income, to direct that such person shall py by way of penalty, a sum of money not exceeding the amount specified therein in addition to the income tax and super-tax payable by such person. The expression "person" includes for the purpose of s. 28, a firm registered or unregistered. If there is reconstitution of the firm, by virtue of s. 26, the Income-tax Officer will in imposing the penalty proceed against the firm.

Tf there is discontinuance of the business penalty will be imposed against the partners of the firm.

Before the Tribunal and the Higi\ Court the case was argued on the footing that s. 44 alone was applicable. Whether under the terms of s. 26 read with s. 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 s. 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 aopeal fails and is dismissed.

In the circumstances of the case there will he no order as to costs in this Court.

CT.C.

Appeal di.nnissetl,