TaxTMI 
TaxTMI 
1986 (5) TMI 65
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....be stated as under The relevant assessment year is 1979-80 for which the accounting year is from 23-5-1978 to 31-3-1979. The assesses in this case are the joint receivers appointed by the Court to manage United Film Exhibitors, Palghat till the winding up of the firm was complete. 'Priya ' and 'Priyadarshini' are the two theatres constructed as well as owned by the firm 'United Film Exhibitors' which was carrying on the business of exhibition of cinematographic films and the firm used to be governed by the terms and condition of partnership deed dated 19-7-1971. Smt. Bhavani Kaimal, wife of P. K. Kaimal Smt. Fathima Ismail, wife of M. A. Ismail and Smt. P. K. Rahmathunnissa wife of M. B. Abdul Rahiman Mooppan and M. A. Muhammed Babu son of M. A. Ahmed Kutti Mooppan were minors and they were admitted to the benefits of partnership. The constriction of 'Priyadarshini' was completed in 1973 and it was inaugurated on 31-5-1973 whereas 'Priya' theatre was inaugurated on 20-8-1975 In 1975. Master M. A. Mayankutty Mooppan became a major and expressed his desire to join as a full-fledged partner of the firm. A new deed of partnership was executed on 4-6-1975. Master M. A. Muhammed Babu was....
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.... conceded that a receiver has to be appointed for the management of the asset of the dissolved firm among the partners of the dissolved firm. He further stated that after taking stock of the situation and circumstance of the case plaintiffs can be appointed as receivers for the management of the two theatres for the purpose of protecting the interests of the partners of the dissolved firm. He directed the plaintiffs to deposit security for Rs. 10,000 in the Court for their receivership within two weeks. He also directed defendants 2 and 4 to hand over possession of the theatres to the plaintiff and he further directed to produce the account books of the dissolved form immediately and hand over money deposited in the bank to the plaintiff. The plaintiff's were directed to file statement of account regarding daily collections and expenses into the Court, once in every week regarding the running of the theatres. All amounts to be paid to the employees of the theatres and payment of other investible amounts have to be done by cheques by the plaintiffs as receivers. Therefore, by giving such and similar directness the sub-Judge allowed the receiver's petition whereas he dismissed the in....
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....he firm. It is categorically stated that such adjustment of the parties hereto in the assets of the firm is made as on today that is on 7-2-1980. There is the balance sheet attached to deed of dissolution. According to the balance sheet as on 7-2-1980, the amount remained to be distributed among the partners comes to Rs. 58,99,106.16. The assets of the firm shown in the schedule were stated to be incapable of division andit was agreed that all those assets including goodwill, money deposits, etc., be taken over by Smt. K. Bhavani Kaimal at the aforesaid valuation and other parties be paid the money equivalent of their respective shares, in the distributed assets of the firm. The books of account as well as balance sheet duly signed by all the parties are handed over to Smt. Bhavani Kaimal. The following amounts are allotted towards shares of each of the partners : Rs. (2) Smt. Fathima Ismail  ....
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.... 1,83,000 Nil -------- Interest under section 139(8) estimated 12,800" We shall consider what is the significance of this provision made by the firm towards income-tax for the assessment year 1979-80 a little latter. 4. Income-tax return was submitted for the assessment year 1979-80 disclosing nil income on 3-12-1980. As the difference between the returned income and the income sought to be assessed by the ITO is more than Rs. 1 lakh the matter was referred to the IAC under section 144B of the Act. The status of the assessee was shown as 'representative-assessee'. In the latter dated 24-2-1982, it was claimed that since the receiver was appointed by the Court, this is the representative-ass....
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....ommissioner (Appeals) sought to justify the finding that carrying on business by joint receivers amounts to joints interpose and on that ground they can be held to constitute an AOP. He called in aid the decision of the in order to explain the Kerala High Court in the case of CIT v. T. V. Suresh Chandran [1980] 121 ITR 985 meaning of the words 'association of persons'. He held that when there is a combination of persons formed for the promotion of joint in a common purpose constitute an association. He further held that wherever an AOP is formed such an association can be brought to tax as a distinct assessable entity under the Act. In what manner they happened to come together is not of material consequence The contention that after dissolution of the firm there is no taxable entity and the income, if any, cannot be taxed anywhere is dismissed as not tenable. He held that if income, profits and gains arose in the hands of person it has to be subjected to tax if there is no express prohibition against such taxation. He further held that the income had arisen to the erstwhile partners as a group acting through the joint receivers and, hence, it has to be taxed in that form and capac....
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....e is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used. Keeping in view these general principles if we read the provision of section 189, it clearly indicates that the assessment provided for is only in respect of the income from 'business or professions carried on by a firm' as a full-fledged firm before the discontinuance of the business or profession or before the dissolution of the firm. He also contended that the expression 'total income of the firm' in section 189(1) is also indicative of the total income derived by the firm while it was a full-fledged firm. He argued that the provision in section 189(1) that 'the Income-tax Officer shall make an assessment of the total income of the firm as if no such discontinuance or dissolution had taken place' clearly shows that the income to be assessed is the total income derived by a firm as a full-fledged firm, and that the function is only for the purpose of assessment of that income and that firm after it is, dissolved. Continuing his arguments he submitted that section 189(1) is, thus, merely a machinery section for the purpose of assessment of the pre-dis....
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....Therefore, by all the above, he wanted to strengthen his primary argument that the region of section 189 is only income up to the discontinuance or dissolution and its assessment after the discontinuance or dissolution. Applying the maximum of expressio uniuest exclusion ulterius the irresistible conclusion is that the express provision of section 189 for the assessment of a dissolved firm in respect of its income up to the time of discontinuance or dissolution implies the exclusion of an assessment of the dissolved firm in respect of its income, if any, derived after the discontinuance or dissolution. In other words there is no machinery for the assessment of a dissolved firm in respect of its post dissolution income, if any, in the course of its winding up. If a dissolved firm cannot be assessed in respect of its post-dissolution income, can the dissolved firm be assessed as an AOP in respect of the income that arises during the winding up of the firm ? In answer to these several contentions, the learned departmental representative conceded the income assessed in this case is the income from business, namely, the running of two theatres, during the period from 23-5-1978 to 31-3-1....
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....t represent joint action by the partner as their consent was lacking, the learned departmental representative submitted that the erstwhile partners never objected to the carrying on of the business by the receivers. Their objections was against the appointment of two ladies (plaintiffs in the suit) as receivers. As can be seen from the order of sub Judge as well as the High Court, the dispute was not about carrying on of the business or about the appointment of receivers as such, but, it was concerned with the question who should act as receiver. The business continued in pursuance of the orders of the Court. The erstwhile members of the firm were shown the accounts every week. Nobody raised any objection for the way in which the business was carried on. That means all of them acquiesced in the continuance of business. In identical circumstances, the Supreme Court held in the cases mentioned supra that there was joint action by the erstwhile partners to justify the assessment as an AOP. In N. V. Shanmugham & Co.'s case also lack of consent between partners was raised as against taking the status as an AOP. However, this was held to be untenable by the Hon'ble Supreme Court. The rec....
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.... that the Supreme court in Shivram Poddar's case at page 825 held that but for section 189 dissolved firm should not be assessed. He also argued that a dissolved firm is foreign to the scheme of the Income-tax Act. Section 4 of the Income-tax Act speaks of 'person'. A 'Person' is defined under section 2(31) of the Income-tax Act and among the list of the persons 'dissolved firm' is not mentioned. A 'firm is defined in section 2(23) of the Income-tax Act. He argued that we cannot say that a firm and an association of persons are one and the same within the meaning of the Indian Partnership act. Therefore, ultimately his argument is that the Legislature either by innocent or deliberate omission has left out the post-dissolution income of the firm from the incidence of Income-tax. He referred us to two more Supreme Court decision-one in Indira Balkrishna's case at pages 551 and 552, in the said case what is meant by an AOP is defined by the Supreme Court. It is held therein that an AOP must be one in which two or more persons join in a common purpose or common action, and as the words occur in a section which imposes a tax on income, the association must be one the object of which is ....
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.... profession carried on by a firm till it is discontinued or till it is dissolved. For taxing the income earned till dissolution or discontinuance only, it should be deemed that no dissolution of the firm took place. But it does not speak of taxability of the post-dissolution income of the firm. He specifically argued that though there is likelihood of a firm doing business in between the period from dissolution of the firm and winding up of the affairs of the firm. Section 189 does not specifically provide the necessary machinery to assess such income. Now we have to see whether each of the concepts pressed before us by the learned counsel for the assessee are correct under law. Section 47 of the Indian Partnership Act is as follows : "After the dissolution of a firm the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners, continue notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the firm and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise : Provided that the firm is in no case bound by the acts of a partner who has been adjudicated insolven....
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....m also continues up to the winding up of the affairs of the firm. Now, in this case admittedly the said winding up took place only on 7-2-1980. Therefore, the firm continued to be in existence till 7-2-1980. The Allahabad High Court held as follows : "From the provisions of the Partnership Act noted above, it will be clear that a mere dissolution of a firm does not bring about a complete extinction of the firm itself. The firm, even though for the limited purposes mentioned in the relevant sections, continues to exist until its affairs are finally and completely would up. It is only after the dissolution of the firm that its affairs can be wound up at the instance of any of the partners. Till the debts and liabilities of the firm have been fully paid off no partner can claim any particular property as his own nor can he claim that he has any specific share or interest in any property of the firm." Therefore, we are sufficiently fortified in the view we have taken that for purposes of winding up of the affairs of the firm, the firm continued even though it was dissolved on 22-5-1978. The precursor of section 189 of the 1961 Act is section 44 of the 1922 Act and it used to be as f....
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....n dissolution it becomes the liability of all the partners jointly and severally under section 189(3). This is now made explicit by the Explanation to sub-section (3). The section applies where the business of the firm is discounted or the firm is dissolved. If the business is not discounted but there is a succession to the business, and the firm is not dissolved but continues to exist, this section would have no application. However, even if there is succession to the firm's business but the firm is dissolved, this section would apply." From the wording of section 189 it is sought to be argued that it only deals with the income derived by the firm prior to the dissolution but it never intended to tax post-dissolution income of the firm or to tax the income earned by the firm after the dissolution and before the affairs of the firm are would up. In support of its contention, the decision of the Hon'ble Supreme Court is in Shivram Poddar's case. In the said decision, the Supreme Court held as follows : "The object of the enactment is clear : it is to authorise assessment of tax on income, profits or gains earned in a business, profession or vocation carried on by a firm or ass....
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....constitution. 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 constitute 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 26(2). 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 be 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 ..." Ultimately, the writ petition was dismissed by the Hon'ble Supreme Court. Therefore, the ratio of the Supreme Court should be taken to have contained not only in the prior paragraphs but also in the pages extract....
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....tted that the provisions of section 47 which say that though the firm was dissolved it continued for the purpose of winding up of the firm and also for completing the transactions began by tea the erstwhile firm were not considered at all nor any decision given thereon and, therefore, for the above two reasons in N. V. Shanmugham & Co.'s case does not lay down ratio to govern all cases of taxing the post-dissolution income up to the winding up of the firm. We agree with this contention. We are of the view that the scope of the enquiry before the Hon'ble Supreme Court was limited to the question whether the profits earned in the business should be considered as profits earned by an AOP or should be considered by having been earned by individuals. In the case, the orders delivered by the learned sub Judge clearly revealed that there is no dispute among the parties for appointment of a receiver but only dispute among them was whom to appoint as receivers. Ultimately, the receivers were appointed by the Court. The appointment of the receivers is not permanent feature but it was only a step to wind up the affairs of the firm. In fact, the Hon'ble Kerala High Court expressed its wish tha....
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....d for the impugned income for the assessment year 1979-80 in the capacity of a firm. Therefore, we seat aside the status as an AOP and we direct that the assessment be completed in the status of a firm. We also hold that it is open to the partners of the erstwhile firm to make use of clause 14 of the deed of dissolution dated 22-2-1980 for purposes of reimbursement or otherwise which is available to them under law. In view of our finding in the main appeal that the firm only should be assessed for the assessment year 1979-80, it is also entitled to depreciation as admittedly the assets were not only owned but also used by the receivers for and on behalf of the firm. 10. Hence, the appeal is allowed and cross-objection is dismissed. Per Shri A. Satyanarayana, Accountant Member - I agree with the conclusions of my learned brother that the firm only should be assessed to tax for the assessment year 1979-80. But I wish to add a few lines. In the case of Mangat Ram Hazari Mal v. CIT [1968] 67 ITR 788 (Punj. & Har.) three individuals and a firm consisting of four partners, formed themselves into a partnership and applied for registration as firm under section 26A of the Act. Regist....