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Nagarmal Baijnath v. Commissioner Of Income Tax .
Factual and Procedural Background
M/s. Nagarmal Baijnath, a partnership firm, carried on business during the previous years ending 4 November 1945 and 31 March 1946, relevant to assessment years 1946-47 and 1947-48. By a deed dated 2 December 1946 the firm was dissolved and its business discontinued.
Notices under Section 22 and other ancillary provisions of the Indian Income-tax Act, 1922, as well as under the Excess Profits Tax Act, 1940, were nonetheless issued in the name of the firm. Returns were filed in the firm’s name and assessments were completed on 23 March 1951 (A.Y. 1946-47) and 10 March 1952 (A.Y. 1947-48).
No objection to the validity of these proceedings was taken before the Income Tax Officer, the Appellate Assistant Commissioner, or in the initial grounds before the Income-tax Appellate Tribunal (ITAT). Permission to raise an additional ground regarding the validity of the assessments was later granted by the ITAT, but the appeals were dismissed on merits.
On a reference under Section 66(1) of the 1922 Act and Section 21 of the Excess Profits Tax Act, the Bombay High Court answered the following question in favour of the Revenue:
“Whether, on the facts and in the circumstances of the case, the income-tax assessments for the years 1946-47 and 1947-48 and excess profits tax assessments for the chargeable accounting periods ending November 4, 1945 and March 31, 1946 made on M/s Nagarmal Baijnath, a firm which was dissolved and whose business was discontinued at the time of the assessments, were validly made?”
The assessee appealed to the Supreme Court from that decision.
Legal Issues Presented
- Whether, under unamended Section 44 of the Indian Income-tax Act, 1922, the Income Tax Officer could validly assess a firm that had been dissolved and whose business had been discontinued prior to the date of assessment.
Arguments of the Parties
Appellant’s Arguments
- Section 44, prior to its 1958 amendment, did not authorise assessment upon a dissolved firm; the provision referred to dissolution only in relation to an “association of persons”, not to a “firm”.
- The statute did not expressly permit assessment of a non-existent entity, and a legal fiction cannot be implied.
- The subsequent amendment of Section 44 in 1958 rectified this omission, demonstrating that the earlier provision was inadequate to sustain the impugned assessments.
Revenue’s Arguments
- The matter is concluded by binding Supreme Court precedent, in particular C.A. Abraham v. ITO and Shivram Poddar v. ITO, which uphold assessments made after dissolution when the business has been discontinued.
- It is therefore not open to the assessee to re-agitate the validity of the assessments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| C.A. Abraham v. ITO (1961) 41 ITR 425 (SC) | Section 44 creates a legal fiction allowing assessment of a firm after discontinuance of business; partners are jointly and severally liable. | Treated as conclusive authority that assessments on a dissolved firm whose business is discontinued are valid under unamended Section 44. |
| Shivram Poddar v. ITO (1964) 51 ITR 823 (SC) | Section 44 applies where dissolution results in discontinuance of business; it does not apply to mere dissolution without discontinuance. | Relied on to reaffirm that the present case falls within Section 44 because dissolution and discontinuance occurred together. |
| CIT v. S.V. Angidi Chettiar (1962) 44 ITR 739 (SC) | Confirms that, upon discontinuance, the Revenue may assess the firm as if no dissolution had taken place. | Cited (through Gujarat decision) as supportive of the Abraham principle. |
| CIT v. Raja Reddy Mallaram (1964) 51 ITR 285 (SC) | Same line of authority affirming applicability of Section 44 on discontinuance. | Referenced to reinforce the settled position. |
| CIT v. Devidayal & Sons (1968) 68 ITR 425 (Bom) | Bombay High Court decision following Abraham. | Mentioned to show consistent Bombay view that assessments after dissolution are valid. |
| Laxmidas & Co. v. CIT (1969) 72 ITR 88 (Bom) | Reiterates Bombay High Court’s adherence to Abraham. | Cited for the same purpose as above. |
| Nagarmal Baijnath v. CIT (1978) 114 ITR 133 (Bom) | Another Bombay decision in line with Abraham. | Noted but not separately analysed. |
Court’s Reasoning and Analysis
The Supreme Court analysed unamended Section 44, noting that it expressly covered two situations: (i) discontinuance of business by a firm or association of persons, and (ii) dissolution of an association of persons. In the present case, dissolution had led to discontinuance; therefore, the first limb (“discontinued”) was satisfied.
Citing Abraham, the Court reiterated that Section 44 “sets up machinery for assessing the tax liability of firms which have discontinued their business” and that, by statutory fiction, “the firm is deemed to continue after discontinuance for the purpose of assessment under Chapter IV.”
Shivram Poddar was invoked to clarify that Section 44 is engaged only when there is discontinuance; mere dissolution without cessation would not suffice. Because the appellant conceded that dissolution resulted in complete cessation of business, the case fell squarely within the scope of Section 44.
The Court distinguished the unreported Gujarat decision relied upon by the assessee, observing that even that judgment accepted the authority of Section 44 where dissolution is accompanied by discontinuance.
Finding the earlier Supreme Court authorities “conclusive,” the Court rejected the appellant’s textual arguments and held that the assessments were valid.
Holding and Implications
Appeal Dismissed.
The Supreme Court affirmed that, under unamended Section 44 of the Indian Income-tax Act, 1922, the Revenue may validly assess a partnership firm even after its dissolution when the dissolution is accompanied by discontinuance of business. The decision upholds long-standing precedent and leaves intact the machinery enabling recovery of tax from partners jointly and severally; it sets no new precedent but reinforces the existing interpretation of Section 44.
B.P Jeevan Reddy, J.— These appeals are preferred against the judgment of the Bombay High Court in Income Tax Reference No. 44 of 1968. The question referred under Section 66(1) of the Indian Income Tax Act, 1922 and Section 21 of the Excess Profits Tax Act, 1948 for the opinion of the High Court reads thus:
“Whether, on the facts and in the circumstances of the case, the income tax assessments for the years 1946-47 and 1947-48 and excess profits tax assessments for the chargeable accounting period ending November 4, 1945 and March 31, 1946 made on M/s Nagarmal Baijnath, a firm which was dissolved and whose business was discontinued at the time of the assessments, were validly made?”
2. The appellant-assessee, M/s Nagarmal Baijnath was a firm which did business during the accounting years relevant to assessment years 1946-47 and 1947-48, the previous years being the years ending November 4, 1945 and March 31, 1946 respectively. By a deed of dissolution dated December 2, 1946, the firm was dissolved and its business discontinued.
3. Notice under Section 22(2) of the Act relating to the assessment years 1946-47 was issued in the name of the partnership firm and served on one Satyanarayan who accepted it on behalf of the firm, on August 19, 1946. Subsequent notices under Sections 22(4) and 23(2) were also issued in the name of the firm and assessment completed on March 23, 1951 on the firm. The same procedure was adopted with respect to the assessment year 1947-48 and assessment completed on the firm on March 10, 1952. So far as the assessments under the Excess Profits Tax Act are concerned, notices were issued again in the name of the firm and assessments completed in the name of the firm. Indeed, the returns were filed in the name of the firm signed by Baijnath Gajanand for and on behalf of the firm.
4. During the course of the assessment proceedings under both the enactments, no objection was taken by anyone on behalf of the assessee to the validity of the proceedings. Against the orders of assessment, appeals were preferred to the Appellate Assistant Commissioner. Even in these appeals the validity of the assessment orders was not challenged. On the appeals being dismissed, further appeals were filed before the Income Tax Appellate Tribunal. In the grounds of appeal before the Tribunal too, no objection was taken to the validity of the assessments. Subsequently, however, permission was sought for raising additional grounds in appeal questioning the validity of the assessment proceedings. Though, the Revenue opposed the same, the Tribunal permitted the said new ground to be raised, observing that even from the assessment order relating to the assessment year 1946-47, it appears that “the Income Tax Officer was aware that the business of the firm was closed”. Ultimately, however, the Tribunal dismissed the appeals. It is thereupon that the appellant obtained the reference under Section 66(1).
5. The only question urged by the appellant before the High Court was: inasmuch as the firm stood dissolved prior to the date the orders of assessment relating to the said two assessment years were made, the orders of assessment are void. It was urged that Section 44 of the Act did not authorise the Revenue to make an assessment on the firm after it was dissolved. The High Court first noticed the factual finding recorded by the Tribunal viz., when the assessments were made on the firm, the firm was not in existence, having been dissolved prior to that date and its business discontinued. The High Court also noticed the contention of the assessee that inasmuch as “prior to the dates of the respective assessments, the firm had been dissolved and its business discontinued” the assessments made were contrary to law, in support of which contention the appellant-assessee relied upon a judgment of the Gujarat High Court in Special Civil Application No. 429 of 1960, disposed of on November 12, 1985. The High Court refused to follow the said judgment in view of the consistent view taken by the Bombay High Court that even under the unamended Section 44, it was permissible for the Revenue to make an assessment upon a dissolved firm after its dissolution and discontinuation of business. Accordingly, it answered the question referred to it in the affirmative i.e, against the assessee and in favour of the Revenue.
6. In this appeal, it is contended by Shri V. Rajagopal, learned counsel for the appellant that under the unamended Section 44, no assessment could have been made upon a firm which was dissolved by the date of the assessment. Learned counsel laid emphasis on the language of the section. He pointed out that so far as the discontinuance is concerned, it referred both to association of persons as well as the firm, but when it referred to dissolution, it only referred to association of persons but not to the firm. This was a clear pointer, says the counsel, to the fact that the section did not apply to dissolution of a firm though it may have applied to its discontinuation. He further submitted that the mere application of the provisions of Chapter IV for the purpose of assessment did not mean that an assessment could be made upon a non-existent entity. He contrasted the language of unamended Section 44 with the language employed in amended Section 44 and submitted that the very defect pointed out by him in the unamended provision was rectified by the amendment, and the omission supplied. He emphasised the proposition that an assessment cannot be made upon a non-existent entity and that such an assessment is void in law — unless, of course, the law provides for such a course in express terms. No such provision was there in Section 44 before it was amended in 1958, says the counsel.
7. On the other hand, it is contended by Shri A. Raghuvir, learned counsel for the Revenue that the contention urged by the appellant is concluded against him by the decisions of this Court and that it is too late in the day to re-agitate the said question.
8. Section 44 of the Indian Income Tax Act, 1922 prior to its amendment by the Finance Act, 1958, read as follows:
“Liability in case of discontinued firm or association.— Where any business, profession or vocation carried on by a firm or association of persons has been discontinued or where an association of persons is dissolved, every person who was at the time of such discontinuance or dissolution a partner of such firm or a member of such association shall, in respect of the income, profits and gains of the firm or association, be jointly and severally liable to assessment under Chapter IV and for the amount of tax payable and all the provisions of Chapter IV shall, so far as may be, apply to any such assessment.”
9. After it was amended, the section read thus:
“44. Liability in case of firm or association discontinued or dissolved.— (1) Where any business, profession or vocation carried on by a firm or other association of persons has been discontinued, or where a firm or other association of persons is dissolved, the Income Tax Officer shall make an assessment of the total income of the firm or other association of persons as such as if no such discontinuance or dissolution had taken place.
(3) Every person who was at the time of such discontinuance or dissolution a partner of the firm or a member of the association, as the case may be, shall be jointly and severally liable for the amount of tax or penalty payable, and all the provisions of Chapter IV so far as may be, shall apply to any such assessment or imposition or penalty.”
10. Unamended Section 44, it is evident, covered two situations: (1) where any business, profession or vocation carried on by a firm or association of persons was discontinued and (2) where an association of persons was dissolved. In either of these situations, every person who at the time of such discontinuance or dissolution was a partner of such firm or member of such association was made jointly and severally liable to assessment under Chapter IV in respect of the income, profits and gains of the firm or association, as the case may be. The joint and several liability extended to the payment of the tax held payable. All the provisions of Chapter IV, so far as the case may be, were made applicable for such assessment.
11. In this case, we are dealing with the situation where the dissolution of the firm resulted in discontinuation of its business. We are not concerned herein with the situation where the firm was dissolved but its business was not discontinued. It is necessary to bear this factual premise in mind. Indeed, on a pointed query from us, the counsel for the appellant stated that this was a case where the dissolution resulted in discontinuance of business. The question is whether in such a case, does not Section 44 enable the Income Tax Officer to make an assessment on the dissolved firm? We are of the opinion that it does. Indeed this aspect is no longer res integra in view of the decisions of this Court in C.A Abraham v. ITO (1961) 41 ITR 425, (1961) 2 SCR 765, AIR 1961 SC 609 and Shivram Poddar v. ITO (1964) 51 ITR 823, AIR 1964 SC 1095. In Abraham (1961) 41 ITR 425, (1961) 2 SCR 765, AIR 1961 SC 609 the firm stood dissolved on the death of a partner and the penalty under Section 28 of the Act was imposed after its dissolution. It was contended by the assessee that such imposition was illegal, which contention was negatived with reference to unamended Section 44. That was also a case where the business of the firm was discontinued because of the dissolution. The purport of Section 44 was stated by Shah, J., speaking for the Bench, in the following words:
“… Section 44 sets up machinery for assessing the tax liability of firms which have discontinued their business and provides for three consequences, (1) that on the discontinuance of the business of a firm, every person who was at the time of its discontinuance a partner is liable in respect of income, profits and gains of the firm to be assessed jointly and severally, (2) each partner is liable to pay the amount of tax payable by the firm, and (3) that the provision of Chapter IV, so far as may be, apply to such assessment….
In effect, the Legislature has enacted by Section 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 application of the machinery provided for assessment and imposition of tax liability notwithstanding discontinuance of the business of firms. By a fiction, the firm is deemed to continue after discontinuance for the purpose of assessment under Chapter IV.”
12. In our opinion, the above observations squarely apply to the present case which is also a case where the dissolution of the partnership firm led to discontinuance of its business.
13. To the same effect is the decision in Shivram Poddar (1964) 51 ITR 823, AIR 1964 SC 1095. The firm consisted of four partners including Shivram Poddar. It was dissolved in February 1950 and thereupon its business was discontinued. For the assessment year 1949-50, one of the partners of the firm submitted a return of its income and the assessment was made on October 28, 1952 in the status of an unregistered firm. Subsequently, in March 1955 notice was issued under Section 44 of the Act proposing to reopen the assessment for the said assessment year whereupon Shivram Poddar approached the Calcutta High Court for issuance of a writ of mandamus commanding the Income Tax Officer to forbear from giving effect to the said notice. The High Court dismissed the writ petition, whereupon the matter was brought to this Court. The question arising for consideration was stated by Shah, J., speaking for the Bench in the following words:
“The question which falls to be determined in this appeal is whether the income earned by the firm in the year ending March 1950, could be assessed to tax under Section 44 of the Indian Income Tax Act, 1922, after the firm was dissolved.”
14. The learned Judge set out the unamended Section 44 and its object as adumberated in Abraham (1961) 41 ITR 425, (1961) 2 SCR 765, AIR 1961 SC 609 and observed thus:
“Section 44 operates in two classes of cases: where there is discontinuance of business, profession or vocation carried on by a firm or association, and where there is dissolution of an association. It follows that mere dissolution of a firm without discontinuance of the business will not attract the application of Section 44 of the Act. It is only where there is discontinuance of business, whether as a result of dissolution or other cause, that the liability to assessment in respect of the income of the firm under Section 44 arises. In the case of an association, discontinuance of business for whatever cause, and dissolution with or without discontinuance of business, will both attract Section 44. The reason for this distinction appears from the scheme of the Income Tax Act in its relation to assessment of the income of a firm.”
15. After explaining the scheme of the 1922 Act and after referring to the relevant provisions in that behalf, the learned Judge proceeded to state:
“… Section 44, is therefore, attracted only when the business of a firm is discontinued, i.e, when there is complete cessation of the business and not when there is a change in the ownership of the firm, or in its constitution, because by reconstitution of the firm, no change is brought in the personality of the firm and succession to the business and not discontinuance of the business results.”
16. The learned Judge concluded, on a examination of the scheme of the Act, that:
“… Absence of reference to dissolution of firm (not resulting in discontinuance) in Section 44 was therefore a logical sequel to the provisions relating to assessment of firms contained in Chapter IV, especially Sections 23(5), 25(1), 26(1) and (2).”
17. In our opinion, these two decisions are conclusive on the question arising herein. The appeals are accordingly liable to fail.
18. So far as the unreported decision of the Gujarat High Court is concerned, the facts of that case appear to be different. It is sufficient to mention that even the said decision recognised that where the dissolution of the firm resulted in discontinuance of its business, assessment could be made on the dissolved firm having regard to the provisions contained in unamended Section 44. This is what the Division Bench observed, i.e:
“Now if there was discontinuance of the business of the first petitioner firm on its dissolution, it is clear that the unamended Section 44 would have governed the question of assessment of the first petitioner firm and having regard to the decisions of the Supreme Court just referred to, the Revenue would have been entitled to assess the first petitioner firm as a firm despite its dissolution.”
19. The very same idea was repeated at a later stage in the following words:
“If there is discontinuance of the business, Section 44 would apply and the Revenue would be entitled to proceed to assess the firm as if no dissolution had taken place. (Vide C.A Abraham v. ITO (1961) 41 ITR 425, (1961) 2 SCR 765, AIR 1961 SC 609, CIT v. S.V Angidi Chettiar (1962) 44 ITR 739, AIR 1962 SC 970, 1962 Supp 2 SCR 640 and CIT v. Raja Reddy Mallaram (1964) 51 ITR 285, AIR 1964 SC 825, (1964) 5 SCR 508.) But if there is no discontinuance of the business and there is succession, the case would fall within Section 26(2). That section, however, does not enact a provision enabling the Revenue to assess a dissolved firm on its pre-dissolution income in case of succession.”
20. We are, therefore, of the opinion that the said decision does not lay down any principle contrary to the one enunciated in Abraham (1961) 41 ITR 425, (1961) 2 SCR 765, AIR 1961 SC 609 or Shivram Poddar (1964) 51 ITR 823, AIR 1964 SC 1095.
21. In this view of the matter, we do not think it necessary to deal with the facts and principles enunciated in the decisions of the Bombay High Court referred to in the order under appeal. Suffice it to say that the decisions in CIT v. Devidayal and Sons (1968) 68 ITR 425, Laxmidas & Co. v. CIT (1969) 72 ITR 88 and the one in Nagarmal Baijnath v. CIT (1978) 114 ITR 133 affirm and follow the principle in Abraham (1961) 41 ITR 425, (1961) 2 SCR 765, AIR 1961 SC 609.
22. For the above reasons, the appeal fails and is accordingly dismissed. No costs.
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