1998 (9) TMI 69 - HC - Income Tax

Court rules individual acting as trustee not ultimate recipient of arbitration sum; tax assessment should consider partnership firms.

YV. Subba Rao Versus Commissioner Of Income-Tax

The High Court held that the individual, acting as a trustee for three partnership firms, was not the ultimate recipient of the sum awarded by the ... Discontinued Business, Reference Issues:1. Applicability of section 189 in assessing partnership firms2. Applicability of section 176(3A) to the case3. Assessment of amount received by the assessee as a trustee for three firmsAnalysis:Issue 1:The Tribunal declined to answer questions regarding the applicability of section 189 as the assessee was not present.Issue 2:Regarding the applicability of section 176(3A), the case involved an individual who acted as a tenderer for construction work undertaken by three partnership firms. The firms completed the contract works, received profits, and were granted registration by the Department. Disputes led to an arbitrator awarding a sum to the individual, which was later confirmed by the civil court. The Income-tax Officer assessed this amount in the hands of the individual, but the Commissioner of Income-tax and the Tribunal considered the individual to be a trustee for the three firms. The Tribunal found that as the firms had discontinued their work after completing the contracts, section 176(3A) applied, deeming the amount received by the individual to be the income of the firms. The Tribunal's decision was based on the factual finding of business discontinuance by the firms and the individual's role as a trustee for them.Issue 3:The Tribunal's finding that the individual was a trustee for the firms, and the discontinuance of the firms' business leading to the individual receiving the amount, supported the conclusion that the actual recipients liable for taxation were the three firms. The High Court agreed with this view, emphasizing that the individual was merely a trustee and not the ultimate recipient of the sum awarded by the arbitrator. Therefore, the High Court answered question No. 3 in the affirmative, in favor of the assessee, confirming that the amount should be assessed in the hands of the three firms and not the individual.This judgment clarifies the application of tax laws in cases involving partnerships, business discontinuance, and trustee arrangements, providing a detailed analysis of the factual and legal considerations leading to the decision in favor of the assessee.