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Commissioner of Income-tax, Andhra Pradesh Vs. Gunturu Kannabhai and Co. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 200 of 1979
Judge
Reported in[1986]158ITR353(AP)
ActsIncome Tax Act, 1961 - Sections 41, 41(1), 170, 170(1), 170(1), 256(2) and 260(1)
AppellantCommissioner of Income-tax, Andhra Pradesh
RespondentGunturu Kannabhai and Co.
Appellant AdvocateM. Suryanarayana Murthy, Adv.
Respondent AdvocateSriama Rao, Adv.
Excerpt:
.....- award given to assessee firm - whether compensation liable to be taxed in hands of assessee firm - assessee contended that right had already vested in favour of predecessor firm to release sum in question and arbitration was only for limited purpose of quantifying the amount payable - court opined that no new right stands created if matters were referred to arbitrator merely for purpose of quantification - after making above observation matter sent back to tribunal as there was absence of sufficient material. - motor vehicles act (59 of 1988)section 149 (2): [v. gopala gowda & jawad rahim, jj] insurers entitlement to defend the action joint appeal by insured and insurer - held, the language employed in enacting sub-section (2) of section 149 appears to be plain and simple and..........carried on by the predecessor firm on the basis that there was dissolution of the predecessor firm on january 14, 1970. even on merits, the tribunal held that the assessee firm should be held to be a successor within the meaning of section 188 of the act of the earlier firm. in that view, the revenue's plea that the was merely a change in the constitution of the firm was rejected. dealing with the merits, the tribunal held that the realisation by the assessee the sum of rs. 1,69,456 under the arbitrator's award dated january 24, 1970, was in the nature of realisation of an old asset belonging to the predecessor firm. the tribunal held that the receipt in the hands of the assessee was a capital receipt and as such cannot be included in its business income. the tribunal had also dealt.....
Judgment:

Y.V. Anjaneyulu, J.

1. Pursuant to the directions of this court under section 256(2) of the Income-tax Act, 1961 (the 'Act' for short), the Income-tax Appellate Tribunal referred the following three questions of law for the opinion of this court. This reference is at the instance of the Commissioner of Income-tax and relates to the income-tax assessment year 1971-72.

'1. Whether, on the facts and in the circumstances of the case, the receipt of the sum of Rs. 1,69,456 is a capital receipt

2. Whether the Appellate Tribunal is justified in holding that no action can be taken to assess the receipt in the hands of the predecessor firm under section 41(1), particularly in the absence of any appeal or cross-objections against the direction of the Appellate Assistant Commissioner

3. Whether, on the facts and in the circumstances of the case, there is a change in the constitution of the firm or succession by another firm ?'

2. The assessee is a partnership firm constituted under a deed of partnership dated January l5, 1970. The firm consisted initially of nine partners. Partner Sri P. Thatamma died on January 14, 1970. On January 15, 1970, the present assessee-firm came into existence. Apart from the eight surviving partners of the previous firm, another person, K. S. Venkateswar, was admitted as a partner. The assets and liabilities of the previous partnership were taken over as a going concern by the present assessee-firm. The assessee filed a return for the period January 15, 1970, to July 31, 1970, corresponding to the assessment year 1971-72 and claimed separate assessment of its income for the above period. It was claimed that there was dissolution of the previous firm on the death of the partner, Sri P. Thatamma, on January 14, 1970, and that the assessee-firm constituted under the deed of partnership dated January 15, 1970, should be held to be a separate firm succeeding to the business carried on by the previous firm. It appears, the previous firm also filed a return of its income for the period August 1, 1969, to January 14, 1970, and claimed assessment up to that date for the assessment year 1971-72. The Income-tax Officer accepted the above claim regarding the dissolution of the predecessor firm and the succession by the assessee-firm and made two separate assessments according to the returns filed.

3. In the return filed for the period January 15, 1970, to July 31, 1970, the assessee declared an income of Rs. 74,245. It may be mentioned that the assessee-firm carried on business as contractors under Balimela Dam Project, Chitrakonda, which was continuation of the business carried on by the predecessor firm. The income of Rs. 74,245 declared in the return was arrived at in the profit and loss account drawn up by the assessee-firm after taking into consideration on the credit side a sum of Rs.],69,456 received by way of compensation pursuant to an arbitrator's award dated January 24, 1970. It was claimed before the Income-tax Officer that the predecessor firm, which was dissolved on January 14, 1970, had incurred sum expenditure on certain works which never formed part of the original agreement with the Government and it preferred a claim for reimbursement of that expenditure before the State Government. Disputes seem to have arisen regarding the claim for reimbursement of the expenditure and consequently, matters were referred for arbitration as provided in the agreement between the predecessor firm and the State Government. The arbitrator gave the award on January 24, 1970, under which, it appears, compensation of Rs. 1,69,456 was awarded. This amount was payable to the predecessor firm, but as the predecessor firm ceased to exist on the day when the award was given, the amount was paid to the assessee-firm. During the course of the assessment enquiry, the Income-tax Officer held that the books of account maintained by the assessee were defective and, therefore, determined the income on estimate with reference to the works receipts. The income so determined was Rs. 2,11,149. To the income as determined above, the Income-tax Officer added the sum of Rs. 1,69,456 referred to above on the ground that the provisions of section 41 of the Act were attracted in view of the assessee's contention that the expenditure in respect of the compensation awarded by the arbitrator was incurred in the earlier years. The assessee filed an appeal to the Appellate Assistant Commissioner questioning the correctness of the inclusion of the sum of Rs. 1,69,456 in the assessee's total income. It was claimed that the expenditure was incurred by the dissolved firm and the compensation in question was referable to the business carried only the dissolved firm. It was further claimed that the provisions of section 41 of the Act are not applicable in the facts and circumstances of the assessee's case. The Appellate Assistant Commissioner held that the amount of compensation could be considered as income only in the hands of the dissolved firm. The Appellate Assistant Commissioner noticed the provisions of section 170(1) of the Act and held the view that the income accruing to the predecessor firm was liable to be taxed in the hands of the predecessor firm alone and the assessment of the same in the hands of the assessee-firm was not proper. In that view, the Appellate Assistant Commissioner deleted the sum of Rs. 1,69,456 from the assessment made in the hands of the assessee. He observed that the Income-tax Officer may consider the inclusion of the above said sum in the hands of the predecessor firm. The assessee's appeal was accordingly allowed.

4. The Income-tax Officer filed an appeal before the Income-tax Appellate Tribunal questioning the correctness of the order of the Appellate Assistant Commissioner deleting the sum of Rs. 1,69,456 from assessment. Curiously, the first contention urged by the Income-tax Officer before the Tribunal was that there was merely a change in the constitution of the firm on the death of one of the partners on January 14, 1970, and, therefore one single assessment was liable to be made under the provisions of section 187 of the Act. The Revenue urged before the Tribunal that the assessee firm constituted under the deed of partnership on January 15, 1970, could not be considered to be a separate firm and must be held to be a continuance of the old firm with only a change in the constitution. The Revenue also contended that, in any event, the Appellate Assistant Commissioner should have sustained the assessment of the sum of Rs. 1,69,456 in the assessee's hands. Resisting the Income-tax Officer's appeal, the assessee seems to have not only supported the order of the Appellate Assistant Commissioner in deleting the income in question, by raised a further plea that the sum of Rs. 1,69,456 was not assessable in the hands of the predecessor firm also either under section 41 of the Act or otherwise.

5. The Tribunal held that the Revenue could not be permitted to raise the plea that the assessee-firm was merely a continuance of the earlier firm and that there was merely a change in the constitution of the firm. The Tribunal pointed out that the Income-tax Officer himself had accepted the plea that the assessee-firm succeeded to the business carried on by the predecessor firm on the basis that there was dissolution of the predecessor firm on January 14, 1970. Even on merits, the Tribunal held that the assessee firm should be held to be a successor within the meaning of section 188 of the Act of the earlier firm. In that view, the Revenue's plea that the was merely a change in the constitution of the firm was rejected. Dealing with the merits, the Tribunal held that the realisation by the assessee the sum of Rs. 1,69,456 under the arbitrator's award dated January 24, 1970, was in the nature of realisation of an old asset belonging to the predecessor firm. The Tribunal held that the receipt in the hands of the assessee was a capital receipt and as such cannot be included in its business income. The Tribunal had also dealt at considerable length with the assessee's contention that the sum of Rs. 1,69,456 was not assessable as Income in the hands of the predecessor firm also. The Tribunal found fault with the direction given by the Appellate Assistant Commissioner to consider inclusion of the income in the hands of the predecessor firm. The Tribunal held that the predecessor firm cannot be taxed on the above mentioned sum either under section 41 of the Act or otherwise. The appeal filed by the Income-tax Officer was accordingly rejected by the Tribunal. The application filed by the Commissioner under section 256(1) of the Act for reference of certain questions of law to this court was rejected by the Tribunal. The Commissioner thereupon moved this court under section 256(2) of the Act and obtained a direction to the Tribunal to refer the question of law to this court for its opinion. It is pursuant to this direction that the Tribunal has now referred the above-mentioned questions of law to this Court.

6. It is convenient to dispose of the second question first. It is certain improper on the part of the Tribunal to go into the question whether the predecessor firm was liable to be taxed on the sum of Rs. l,69,456. The Tribunal was merely concerned with the question whether the above-mentioned sum was liable to be taxed in the hands of the assessee-firm. For arriving at a decision on this point, it was not necessary for the Tribunal to go into the question whether the predecessor firm was liable for tax in respect of the above-mentioned sum either under section 41 of the Act on otherwise. In fact, the Appellate Assistant Commissioner did not give an categorical direction for assessment of the income in the hands of the pre-decessor firm. All that the Appellate Assistant Commissioner did was to direct the Income-tax Officer to consider inclusion of the above-mentioned sum in the hands of the predecessor firm. If and when the Income-tax Officer took action for considering the assessment of the sum of Rs. 1,69,456 in the hands of the predecessor firm, it would be open to the predecessor firm to advance all contentions available to it to prevent the assessment. It is not for the assessee-firm to contend that the sum in question was not liable to be taxed in the hands of the predecessor firm. It is equally not open to the Tribunal to take upon itself a detailed examination of this question and record its findings on the assessability or otherwise of the said sum in the hands of the predecessor firm. In our opinion, the Tribunal committed an error in entertaining the assessee's plea in the above regard and in recording its findings on the question. We, therefore, answer the second question to the effect that the Tribunal should not have gone into the question regarding the assessability or otherwise of the sum of Rs. 1,69,456 in the hands of the predecessor firm. Whatever has been stated by the Tribunal in the above regard shall, therefore, be disregarded.

7. We shall now take up the third question whether, on the facts and in the circumstances of the case, there is a change in the constitution of the firm or succession by another firm. At the outset, we must state that we re somewhat surprised at the Revenue's attitude in pursuing this question. Before the Income-tax Officer, there was a claim that the predecessor firm was dissolved on January 14, 1970, and the present assessee firm came into existence on January 15, 1970, under a deed of partnership executed on that day. The firm as was in existence till January 14, 1970, filed one return for the assessment year 1971-72 declaring income up to the period January 14, 1970. The assessee firm filed a return for the same assessment year 1971-72 declaring income for the period January 15, 1970, to July 31, 1970. The claim that there was a dissolution of the predecessor firm and that the assessee-firm succeeded to the predecessor firm was accepted by the Income-tax Officer and two separate assessments were made-one on the predecessor firm on income up to the date of dissolution and another on the assessee firm from January 15, 1970, when it came into existence. The Income-tax Officer passed orders of assessment on that basis and also registered the present firm by his order dated October 20, 1973. These facts would clearly indicate that the Revenue accepted that the assessee-firm is a successor to the predecessor firm within the meaning of section 188 of the Act. The assessee filed an appeal before the Appellate Assistant Commissioner and it merely related to the assessability of the sum of Rs. 1,69,456 in the assessee's hands. The Income-tax Officer did not make any claim before the Appellate Assistant Commissioner that the assessee-firm is not a successor firm, but there is merely a change in the constitution within the meaning of section 187(2) of the Act. When the Appellate Assistant Commissioner deleted the sum of Rs. 1,69,456 from the assessment, the Income-tax Officer filed an appeal before the Tribunal and for the first time a contention was urged that the assessee-firm could not be considered to have succeeded to the predecessor firm and there was merely a change in the constitution following the death of P. Thatamma on January 14, 1970. The Revenue's contention before the Tribunal in this regard runs counter to its own acceptance of the assessee's claim that there was dissolution on January 14, 1970, and the present assessee-firm succeeded to the business carried on by the predecessor firm. The Tribunal was quite justified in declining to permit the Revenue to raise this plea before the Tribunal. The Tribunal referred to the fact that on the death of the partner, P. Thatamma, the account books were closed and profit ascertained and a new set of account books was opened on January 15, 1970, by the assessee-firm and they were closed on July 31, 1970. The Tribunal was justified in holding, based on these facts, that the Income-tax Officer gave a categorical finding that the old firm was dissolved on the death of the partner, P. Thatamma, and that the present assessee-firm came into existence under a fresh partnership deed with effect from January 15, 1970. The Tribunal was, therefore, quite right in observing that it is too late in the day for the Revenue to argue that there was only a change in the constitution of the firm on January 15, 1970, and the business continued without any interruption. We are constrained to observe that this contention has been taken by the Revenue light-heartedly in a desperate attempt to sustain the assessment of Rs. 1,69,456 without realising the consequences. The Revenue should have known that if there was no succession and there was merely a change in the constitution of the firm, altogether different considerations would prevail regarding the assessability of the sum in question. We feel that the Revenue should not take up contradictory stands to suit its convenience from time to time a charge which is often levelled by the Revenue against the tax-payer. For the aforesaid reasons. we are satisfied, on the facts and in the circumstances of the case, that there was dissolution of the firm on January 14, 1970, and the assessee-firm succeeded to the business carried on by the predecessor firm within the meaning of section 188 of the Act. Indeed, that was the assessee's claim and on a scrutiny, the Income-tax Officer accepted it. We accordingly, answer the third question to the effect that the assessee-firm succeeded to the business carried on by the predecessor firm and there was dissolution of the predecessor firm on January 14, 1970.

8. Having disposed of questions Nos. 2 and 3, we now address ourselves to the first question referred, namely, whether, on the facts and in the circumstances of the case, the receipt of the sum of Rs. 1,69,456 is a capital receipt. In our opinion, the real question that arises for consideration is whether the sum of Rs. 1,69,456 is liable to be taxed as income in the hands of the assessee. We have already set out the facts in detail and it is not necessary to restate them. Section 170 of the Act deals with cases of succession and the relevant principles governing the assessability of the income in the hands of the predecessor and in the hands of the successor. The Income-tax Officer was obviously unaware of the statutory provisions contained in section 170 and recorded a finding that the sum of Rs. 1,69,456 is an assessable income in the assessee's hands under section 41 of the Act. We are satisfied that the provisions of section 41 have no application in the assessee's case and the Appellate Assistant Commissioner was justified in deleting the sum from assessment on that ground. At the same time the Appellate Assistant Commissioner noticed the provisions of section 170 of the Act, but felt that the sum in question must be held to have accrued to the predecessor firm and, consequently, it was assessable in the hands of the predecessor firm under section 170(1)(a) of the Act. Although the Appellate Assistant Commissioner applied his mind rightly to the question, there is no indication in the order as to why the Appellate Assistant Commissioner held the view that the sum accrued as income to the predecessor firm. When the matter came up in appeal before the Tribunal, the Revenue failed to pursue the matter in the above direction. The Revenue did not urge any contention before the Tribunal, even as an alternative measure, that the sum in question should be held to have accrued as income to the assessee firm falling for assessment under section 170(1)(b) of the Act. The Tribunal did not, therefore, consider the question from that point of view. The Tribunal proceeded on the basis that the realisation of the above-mentioned sum is like realisation of any asset taken over on succession and, therefore, constituted a capital receipt. If what was realised by the assessee was an asset taken Over by the assessee-firm from the predecessor firm, the view held by the Tribunal is unexceptionable. The facts on record do not, however, indicate that when the assessee-firm took over the assets on January 15, 1970, there was any right vested in or asset created in favour of the predecessor firm to realise the sum of Rs. 1,69,456. Sri Ch. Sreerama Rao, learned counsel for the assessee, vehemently contended that a right had already accrued in favour of the predecessor firm to realise the sum in question and the arbitration was only for the limited purpose of quantifying the amount payable.

9. Learned counsel urges that the quantification of the award amount by the arbitrator under an award dated January 24, 1970, did not create any new asset. According to the learned counsel, there was merely a postponement of the quantification and the right already vested in the predecessor firm and that right, when it was taken over by the assessee firm during the course of succession, constituted an asset in the assessee's hands. Learned counsel further proceeded to state that indeed the right to receive reimbursement of the expenditure incurred by the predecessor firm vested in it in the years in which the expenditure was incurred. We are unable to accept the latter part of the submission of the learned counsel for the assessee. If the predecessor firm had incurred some expenditure on some works unconnected with the agreement, it was not automatically entitle to receive reimbursement. On the contrary, the facts would show that some disputes have arisen, although it is not clear from the record whether such disputes are in connection with the reimbursement or in the matte of quantification. The authorities below including the Tribunal had no referred to the nature of disputes, the matters which were referred to arbitration and the eventual decision of the arbitrator under the award dated January 24, 1970. The award is also not made part of the record and we have, therefore, not been able to look for ourselves to the nature of the arbitration proceedings. We are, therefore, unable to properly appreciate the contention of the learned counsel for the assessee that the arbitration proceedings were for the limited purpose of quantification of the sum payable and there was no dispute in principle that the predecessor firm was entitled to reimbursement. If the evidence would indicate that the right of the predecessor firm to receive reimbursement was accepted in principle and matters were referred to the arbitrator only to quantify the amount, there is force in the contention of the learned counsel for the assessee that when the quantification was made, no new right is created.

10. If, on the contrary, the evidence would show that the right of the predecessor firm to receive reimbursement was not accepted even in principle, but was disputed, and the matter was referred to the arbitrator not merely for the purpose of quantification but for the purpose of determining whether there was liability to pay the amount, it should then be said that there was no right vested in or an asset created in favour of the predecessor firm at the time when the assets were taken over by the assessee-firm.

11. Reference may be invited to the decision of the Supreme Court in E.D. Sassoon; Co. Ltd. v. CIT : [1954]26ITR27(SC) of the report, the Supreme Court observed :

'Income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody....... Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him.'

12. We may also refer to a decision of this court in Mahalakshmi Rice & Oil Mills v. CIT : [1965]55ITR462(AP) . This was a case in which the assessee's claim for payment of certain amount was accepted by the Government and pursuant to that acceptance, a sum of Rs. 44,000 was paid to the assessee in July, 1955. The assessee claimed that the sum paid was referable to the contract entered into with the Government on May 9, 1954, and, therefore, income had accrued to him in the year 1954 itself. The assessee accordingly urged that the sum of Rs. 44,000 paid in July, 1955, could not be included in the assessment for the year 1956-57. Rejecting the assessee's contention, this court held that income could be said to have accrued only on the date when the claim was accepted. In Lakshman Prakash v. CIT : [1973]92ITR492(All) , the Allahabad High Court, dealing with an identical situation, held that income could be said to have accrued only on the date when the claim for payment is accepted. We may also refer to the decision of the Allahabad High Court in CIT v. Kalicharan Jagannath : [1961]41ITR40(All) . (This was approved by the Supreme Court in CIT v. A. Gajapathy Naidu : [1964]53ITR114(SC) where it was held that 'income can be held to arise or accrue to an assessee only when the assessee obtains a right to receive that income. If an amount is to be taxable as income of the relevant previous year the right to receive it must come into existence in that year'.

13. Obviously realising the above basic principles regarding accrual of income, learned counsel for the assessee, Shri. Ch. Sreerama Rao, urged that the right to receive the income accrued in favour of the predecessor firm long prior to its dissolution and the arbitration was only for the limited purpose of quantification. Learned counsel submitted that under the award dated January 24, 1970, the amount payable was merely quantified and it could not, therefore, be said that the amount paid under the award accrued only on January 24, 1970, on its being ascertained. Learned counsel for the assessee made a grievance that the authorities below did not consider the assessability of the sum in question from the above point of view and did not, therefore, have an occasion to examine in detail the arbitration proceedings and arrive at a proper decision as to when the sum paid under the award dated January 24, 1970, had legally accrued. We find there is justification for this grievance because the authorities below including the Tribunal did not consider the assessability of the sum of Rs. 1,69,456 under section 170(1)(b) of the Act based on principles of accrual. In the absence of any material on record, we are unable to reach any firm conclusion in the matter as to when the sum paid under the award could be said to have accrued. In the circumstances, we decline to answer the first question referred to us and direct the Tribunal to go into the question in detail while passing an order conformably to this judgment under section 260(1) of the Act. The Tribunal shall give necessary opportunities to the assessee as well as the Revenue to place all the relevant materials regarding the nature of arbitration proceedings and arrive at a proper finding as to when the sum paid under the award accrued bearing the principles set out by us above. Section 170(1)(b) authorises the assessment in the hands of the assessee in respect of the income of the previous year after the date of succession. It is, therefore, necessary for the Tribunal to examine and determine whether the whole or any part of the sum of Rs. 1,69,456 represented income of the previous year after the date of succession. The extent of income, if any, determined as accruing in the previous year after the date of succession is liable to be assessed in the hands of the assessee for the assessment year under consideration under section 170(1)(b) of the Act.

14. Reference is answered accordingly. In the circumstances of the case, we direct the parties to bear their own costs. Advocate's fee Rs. 500.


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