Penalty on reconstituted firm upheld where business continued after dissolution under the Income-tax Act, 1922

Penalty under the Indian Income-tax Act, 1922 was held to extend to a firm as reconstituted where the business continued after dissolution of the original firm. Section 44 applies only when the business of a firm is discontinued; where there is dissolution but continuation of business, the assessment scheme in sections 26(1) and 26(2) governs, and the reconstituted firm remains the relevant unit of assessment. Because penalty proceedings form part of assessment under Chapter IV, section 28(1)(c) could be invoked against the firm in existence at the relevant time. The objection that penalty was confined to the dissolved firm failed.

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Issues: Whether penalty under the Indian Income-tax Act, 1922 could be levied on the firm as reconstituted or on the successor partners when the business had continued after the dissolution of the original firm.

Analysis: Section 44 applies only where the business of a firm is discontinued, and not where the firm is dissolved but the business continues. In cases of reconstitution or succession, the scheme of sections 26(1) and 26(2) governs assessment, and the firm as reconstituted remains the unit of assessment. Since assessment under Chapter IV includes penalty proceedings, section 28(1)(c) could be invoked against the firm in existence at the relevant time where the business continued after reconstitution. The reference could not be enlarged beyond the question actually raised or argued before the Tribunal.

Conclusion: The penalty was not confined to the original dissolved firm, and the levy on the firm as reconstituted was upheld; the objection to jurisdiction failed.

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