2023 (1) TMI 1303 - HC - Income Tax

Reassessment proceedings against dissolved firm invalid after six years under section 149 time-bar provisions

HC held that reassessment proceedings against a dissolved firm were invalid as the firm ceased to exist on 31.03.2006. The court found that notices issued ... Reopening of assessment - notice in the name of the firm as it did not exist - Period of limitation - HELD THAT:- As the firm ceased to exist on 31.03.2006 and after the assessment of the year 2006-07, since there was no transfer of any surety in favour of any members, the proceedings u/s 149 have to be set aside on the ground that they are issued after a gap of six years. Further, the order imposing a penalty was set aside and the explanation given by the petitioner was accepted for the assessment year 2006-2007- Till date, no appeal has been filed against order dated 12.03.2013 and thus it attained finality. The department had thus accepted the dissolution of the firm. The department is now bound by the licence issued to the petitioner (P-3). It was Raja Ram HUF who became owner and HUF being separate identity had to file separate return. The word Management has been used in the partnership deed. After dissolution of the firm, there was no transfer of any asset to the partners of the firm. Present petition is allowed and notice issued are set aside. Issues Involved:1. Validity of notices issued under Section 147 and 148 of the Income Tax Act, 1961.2. Assessment of capital gains under Section 45(4) of the Income Tax Act, 1961.3. Limitation period for issuing notices under Section 149 of the Income Tax Act, 1961.4. Legal status and dissolution of the partnership firm and its implications on tax assessment.Detailed Analysis:1. Validity of Notices under Section 147 and 148:The petitioner challenged the notices dated 11.03.2014 and 17.11.2014, and the order dated 08.01.2015, which were issued under Section 147 and 148 of the Income Tax Act, 1961. The court noted that the petitioner had already submitted objections to the notice under Section 148, arguing that the partnership firm ceased to exist from 31.03.2006. The court held that since the firm had been dissolved and the explanation provided by the petitioner was accepted for the assessment year 2006-2007, the issuance of fresh notices under Section 147 for the assessment year 2007-2008 was unjustified.2. Assessment of Capital Gains under Section 45(4):The respondent argued that upon dissolution of the firm, the assets were transferred to the partners, making them liable for capital gains under Section 45(4) of the Act. The court, however, found that the theatre land was never transferred to the partnership firm but remained with Raja Ram HUF. The court emphasized that the property was never an asset of the firm and thus, no capital gains could be assessed in the hands of the firm for the assessment year 2007-2008.3. Limitation Period under Section 149:The petitioner argued that the notice under Section 148 was issued after the prescribed period of limitation under Section 149, which is six years. The court agreed, noting that the firm ceased to exist on 31.03.2006, and the notices were issued beyond the six-year limitation period. Consequently, the court held that the proceedings under Section 149 were time-barred and had to be set aside.4. Legal Status and Dissolution of the Partnership Firm:The court examined the legal status of the partnership firm and its dissolution. It was noted that the partnership firm M/s Sandeep Theatre was dissolved on 31.03.2006 due to continuous business losses. The court referred to the order dated 12.03.2013, which had accepted the dissolution and set aside the penalty imposed on the petitioner. Since no appeal was filed against this order, it attained finality. The court concluded that the firm ceased to exist from 31.03.2006, and there was no transfer of assets to the partners upon dissolution.Conclusion:The court allowed the petition and set aside the notices dated 11.03.2014, 17.11.2014, and the order dated 08.01.2015. The court held that the notices were issued beyond the limitation period, and there was no transfer of assets to the partners upon dissolution of the firm, making the assessment of capital gains under Section 45(4) inapplicable.