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TaxTMI 
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2015 (7) TMI 43
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....ying the provisions of Sec. 189 for passing the impugned assessment order without giving a finding that conditions for doing so as laid down in Sec. 189 have been fulfilled. 5. The Ld CIT (A) erred on facts and in law in confirming the action of the AO in relying upon the statement of Shri Sohanraj Mehta recorded at the back of the appellant without confronting the appellant with the statement of Shri Mehta and without granting an opportunity of cross examination of Shri Mehta to the appellant. 6. The Ld CIT (A) erred on facts and in law in confirming the action of the AO in relying on the material seized from the place of an unrelated third party. 2. Ground Nos. 2, 3 and 4 in which the legality and validity of the proceedings initiated u/s. 147 is questioned by the assessee challenging the notice issued u/s. 148 for the A.Y. 2004-05. We preferred to narrate the facts from the order of the Ld. CIT(A) which are as under. The assessee is a firm. The Assessing Officer received information from the ACIT Central Circle-1(2), Pune vide letter dated 15-03-2011 that during the course of search and seizure action carried out on 21-01-2010 in the case of Shri Sohanraj Mehta C&F of RMD Gut....
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....fficer before the Ld. CIT(A). It was stated before the Ld. CIT(A) that the assessee firm has already been dissolved on 31-03- 2002. The assessee firm was registered in November, 1988 and was carrying on the successful business in real estate till the year 2002 and was also regularly filing the returns of income till it's dissolution. 4. The assessee contended before the Ld. CIT(A) that the notice was served on Shri Pandurang Jivraj Mantri, who was a partner in the dissolved firm and said Shri P.J. Mantri informed the Assessing Officer that the assessee firm has already been dissolved on 31-03-2002 and has not carried out any business after 31-03-2002. It was further contention of the assessee before the Ld. CIT(A) that the alleged date of transaction found during the course of search and seizure action against Shri Sohanraj Mehta stating that Rs. 1.5 Crores was found noted in the seized document has no relevance with any of the transactions of the assessee firm. The assessee contended before the Ld. CIT(A) that no proceedings can be initiated against the non-existing firm and hence, the notice issued u/s. 148 was totally bad in law. The assessee also contended that the alleged tra....
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.... To read the provisions otherwise, would be violating the very plain language of the section, it was so held in the case of CIT Vs Mangat Ram Hazarimal Kuthiala (1980) 125 ITR 91 (P & H). In Nagarmal Baijnath Vs CIT (1993) 201 ITR 538 (SC), the Hon'ble Apex Court affirming the decision of the Bombay High Court in Nagarmal Baijnath Vs CIT (1978) 114 ITR 133 (Bom) and approving decisions in CIT Vs Devidayal & Sons (1968) 271 ITR 88 (Bom) held that where the dissolution of the firm resulted in discontinuation of the business, section 189(1) is attracted where either of the two events - discontinuance of business or dissolution of the firm, takes place. The Bombay High Court in CIT Vs Star Andheri Estate (1994) 208 ITR 573 (Bom)? the Hon'ble Court observed thus: "A careful reading of s. 189 and s. 176(3A) and 176(4) makes it abundantly clear that the IT Act contemplates that where a firm is dissolved, the assessment of the total income of such firm shall be made by the ITO as if no such dissolution had taken place. The same is the position in the case of discontinuance of the business of the firm. Sec. 189 keeps the firm alive for the purposes of assessment under the Act despite its d....
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....sment proceedings initiated against the assessee firm u/s. 147 is a legal issue which goes to the root of matter hence, we proceed to decide the same. Ld. Counsel submits that the assessee firm was lastly assessed for the A.Y. 2002-03 and thereafter there is no assessment nor any return of income was filed by the assessee firm. He submits that after the dissolution of the firm on 31-03-2002, the necessary intimation was sent to the Registrar of the firm and Registrar of the firm, Pune made the required changes in it's record. He referred to Page No. 3 of the Compilation where the copy of the extract of the register of the firm is placed. He also referred to Page No. 6 where the copy of the acknowledgment of the return of the assessee firm for the A.Y. 2002-03 is placed. He submits that the assessee filed its last return for the A.Y. 2002-03 and thereafter no returns are filed as the assessee firm was dissolved. He submits that the provisions of Sec. 189(1) cannot be applied in situation where the firm has been dissolved and business is also discontinued and the said provision only can be applied in respect of the transaction or income during the existence of the firm. He submits th....
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....ts which disclosed the alleged payment of Rs. 1.5 Crores to one Shri Mantri Developers, Pune. The assessee has filed the Compilation in which the copies of reply given to the Assessing Officer from time to time are also placed. It is seen that after receipt of the notice from the Assessing Officer, the assessee informed that the assessee firm has been dissolved w.e.f. 31-03-2002 and all necessary formalities for closure are completed (Page No. 16 of the Compilation). The assessee informed to the Assessing Officer that since the assessee firm is not in existence in A.Y. 2004-05 there is no reason to initiate the action against the assessee. The assessee again filed the reply on 17-11- 2011 which was in respect of the notices issued u/s. 142(1) and 148 of the I.T. Act reiterating the stand that the assessee firm got dissolved w.e.f. 31-03-2002 and they have completed all necessary formalities including the copy of dissolution deed was sent to Assistant Registrar of the firms and due entry was also made in the register of the Assistant Registrar of the Firm, Pune. It appears that the return of income was filed on behalf of the assessee for the A.Y. 2004-05 on 12-04-2011 (Copy at Page ....
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.... shall apply, so far as may be, to such assessment." (2). ............................................ (3). ............................................ 10. In the opinion of the Ld. CIT(A) the bare reading of Sec. 189(1) would show that the said provisions are attracted where any business or profession carried on by a firm has been discontinued or where a firm is dissolved. The Ld. CIT(A) has relied on following precedents to support his above view: i. CIT Vs. Mangat Ram Hazarimal Kuthiala 125 ITR 91 (P & H). ii. Nagarmal Baijnath Vs. CIT 201 ITR 538 (SC). iii. CIT Vs. Raja Reddy Mallaram 51 ITR 285 (SC). iv. CIT Vs. Star Andheri Estate 208 ITR 573 (Bom.) v. CIT Vs. Paily Pillai & Co. 243 ITR 557 (Ker.) 11. In the case of CIT Vs. Mangat Ram Hazarimal Kuthiala (supra), the issue was in respect of penalty imposed u/s. 271(1)(a) of the Income-tax Act. In the said case, as per the facts on record, the assessee firm carried on the business of exploitation of forests and sale of timber. The accounts were closed on 30th June of each year. There were two partners in the said firm. On 30-05-1958, Shri Mangat Ram Kuthiala, passed away and hence, the firm was dissolved. By agreement....
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....of liquor contracts obtained from the former State of Hyderabad. The contracts came to an end and then the business was discontinued and the assessee group was dissolved. The assessee AOP did not file return pursuant to the notice u/s. 22(1) of the 1922 Act. In this background of the facts interpreting the provisions of Sec. 44, it was held that even if the business was discontinued, the income earned during existence of the AOP was liable to be taxed. It is categorically held by the Hon'ble Supreme Court that what could be assessed is the income of the association received prior to its dissolution and the members of the association would be jointly and severally assessed thereto in their capacity as members of the AOP. The said observation by their lordships on the interpretation of the provisions of Sec. 44 of 1922 Act as then it were. 14. In the case of Star Andheri Estate (supra) it held as under: The controversy in this case is in a narrow compass. The facts relevant for the determination of the controversy are also brief. So far as the amount of Rs. 12,90,000 is concerned, the material facts are that the assessee-firm was dissolved on 31st March, 1975, i.e., on the last day....
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....y profession is discontinued in any year on account of the cessation of the profession by, or the retirement or death of, the person carrying on the profession, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the aforesaid person had it been received before such discontinuance." A careful reading of s. 189 and s. 176(3A) and 176(4) makes it abundantly clear that the IT Act contemplates that where a firm is dissolved, the assessment of the total income of such firm shall be made by the ITO as if no such dissolution had taken place. The same is the position in the case of discontinuance of the business of the firm. Sec. 189 keeps the firm alive for the purposes of assessment under the Act despite its dissolution. It does not provide for assessment of the partners of the dissolved firm which was the position under s. 44 of the IT Act, 1922 prior to its amendment in the year 1958 and which is the position even today under s. 159 of the 1961 Act in respect of the assessment of the legal representative of a deceased assessee. This....
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.... before such discontinuance. This sub-section constitutes an exception to the rule that business receipts are chargeable only if the business or profession is carried on in the year of receipt. In that view of the matter, we are of the clear opinion that the amount of Rs. 9,80,000 was assessable in the hands of the assessee-firm in the year of receipt despite dissolution and discontinuance of its business by virtue of sub- s. (3A) of s. 176 r/w s. 189 of the Act. 9. We are fully supported in our above view by the recent decision of the Supreme Court in Nagarmal Baijnath vs. CIT (1993) 111 CTR (SC) 171 : (1993) 201 ITR 538 (SC), where the Supreme Court discussed at length the position of assessment of dissolved firm under the law as it stood prior to 1958 and the law as it stands now. The Supreme Court quoted with approval the following observations of Shah, J. in C.A. Abraham vs. ITO (1961) 41 ITR 425 (SC) (at 429) : "In effect, the legislature has enacted by s. 44 that the assessment proceedings may be commenced and continued against a firm of which business is discontinued as if discontinuance has not taken place. It is enacted manifestly with a view to ensure continuity in the....
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....essee is well supported by the following decisions: I. CIT Vs. United Trading Co. 212 ITR 532 (Raj.). II. Banyan & Berry Vs. CIT 222 ITR 831 (Guj.). 16. In the case of United Trading Co. (supra) the Hon'ble High Court of Rajasthan has explained the scope of Sec. 189 and it is held as under: "5. We have considered the matter. A deeming fiction is created by s. 189 in respect of a business or profession carried on by the firm which is discontinued or the firm is dissolved as if there is no such discontinuance or dissolution. The provisions contemplate that assessment could be made and all the provisions of the Act shall apply to such an assessment. This section refers to the business or profession carried on by a firm which has been discontinued or where the firm is dissolved. The power to make an assessment in such a case is in respect of that period for which the business or profession was carried on by the firm. Sec. 42 of the Partnership Act contemplates the contingency of dissolution of the firm and under s. 42(c), the firm stands dissolved by death of a partner. The provision of s. 189 has been made for the limited purpose that any firm which is dissolved may not escape the....
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....tinued or after it has ceased to exist as a result of dissolution. It would be a paradox to say that a firm has discontinued its business, yet, it is deriving profits from its discontinued business thereafter or to say that a firm, which has ceased to exist, but continues to earn profit even in the state of non-existence after its dissolution. As soon as a firm is dissolved, all its assets become the capital available for discharge of its liabilities incurred while in existence and to disburse the remainder amongst partners. As the firm is a separate entity for assessment under the Act which can be assessed as such, for the purpose of continuity in making assessment of all liabilities including tax or penalty of any other sum chargeable under the provisions of the Act which it had incurred upto its discontinuance of business or dissolution, in that status, a legal fiction has been created for deeming the dissolved firm to exist and it is deemed to exist under the IT Act only for the purpose of assessment and not for any other purpose. But for this provision, perhaps, it would not have been possible to continue or to initiate proceedings against the non-existing firm or in respect o....
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....ing before commencement of the assessment year. Secs. 170 and 176 both provide exceptions to the use and permit the income of the year during the same year, where business is discontinued. 46. This conclusion is further strengthened from the fact that s. 188 clearly deals with the situation where a firm carrying on business is succeeded by another firm and the case is not covered by s. 187, separate assessments are to be made on the predecessor firm and the successor firm in accordance with the provisions of s. 170, that is to say, where on account of dissolution there is a case of succession of business or profession which was being carried on by the firm, the assessment of the predecessor firm (dissolved firm) and the successor firm is to be done as in the case of succession of business under s. 170 and where it is not a case of succession of business but of discontinuance of business, the provisions of s. 176 in the matter of procedure of such assessment is attracted. Therefore, conclusion, in our opinion, is irresistible, that s. 189(1) by itself does not authorise assessment of the firm in respect of any income earned after it ceased to exist and the deeming provision of trea....
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....TR (Raj) 150 : (1988) 171 ITR 386 (Raj) : TC 34R.828, held : "It is clear from the above quoted provisions that despite the dissolution of the firm on account of its insolvency, it continued to be a subsisting firm under the IT Act for the purpose of assessment of the total income of the firm till the date of its dissolution. They contain deeming provisions for the continuance of the dissolved firm for this limited purpose. .... The deeming provisions of s. 189(1) of the Act are not applicable to the income arising long after the dissolution of the firm." The view was reiterated by that Court in CIT vs. United Trading Co. (1995) 129 CTR (Raj) 93 : (1995) 212 ITR 532 (Raj) : TC 34R.835 wherein the Court held as under : "A deeming fiction is created by s. 189 in respect of a business or profession carried on by the firm which is discontinued or the firm is dissolved as if there is no such discontinuance or dissolution. The provisions contemplate that assessment could be made and all the provisions of the Act shall apply to such an assessment. This section refers to the business or profession carried on by a firm which has been discontinued or where the firm is dissolved. The powe....
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....sh the proceedings initiated u/s. 147 and cancel the assessment framed by the Assessing Officer and upheld by the CIT(A). 19. The Ld. CIT (DR) has placed his reliance on the decision in the case of Hemendra Ranchhoddas Merchant, Mumbai (supra) for the plea that even after the dissolution of the firm the assessment can be framed u/s. 189(1). In the said case there was a search and seizure action u/s. 132 of the Act and warrant of authorization was issued to one of the partners of the dissolved firm who challenged the warrant of authorization by taking the stand that the firm was already dissolved. The Hon'ble High Court has held as under: "Section 189 of the Income Tax Act, 1961 stipulates that where any business or profession carried on by a firm has been discontinued or where a firm is dissolved, 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, and all the provisions of this Act, including the provisions relating to the levy of a penalty or any other sum chargeable under any provision of this Act, shall apply, so far as may be, to such assessment. By sub section (3) of section 189, every ....
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....t and other documents seized under sub section (1) shall not be retained by the authorized officer for a period exceeding thirty days from the date of the order of assessment under Section 153(a) or Section 158BC(c) unless reasons for retaining the same are recorded by the officer in writing and the approval of the Chief Commissioner, Commissioner, Director General or Director for such retention is obtained. Under the proviso, the Chief Commissioner, Commissioner, Director General or Director shall not authorize the retention of books of account and other documents for a period exceeding thirty days after all the proceedings under the Act in respect of the years for which books of account and other documents are relevant are completed. However, by sub section (3) the person from whose custody any books of account and other documents are seized under sub section (1) is permitted to make copies thereof or take extracts therefrom. Counsel for the Petitioner states on instructions that the Fixed Deposit Receipts have been returned to the Petitioner. Counsel appearing on behalf of the Revenue has placed on the record the last order dated 16 March 2012 passed by the Commissioner of Incom....