1. The revenue has come up in appeal for the assessment year 1982-83.
On behalf of the revenue, Shri Ruhela, the learned departmental representative, submitted that the firm had large outstanding tax arrears. Certain properties of the firm were attached for collection of the tax and were sold by public auction. The assessee's immovable property, where its office and factory were located, were disposed of partly for Rs. 5,72,000 on 5-3-1982 by public auction. On behalf of the assessee, it was contended even before the ITO that the firm was dissolved long time back and there could be no assessments on the firm.
The ITO, however, mentions that provisions of Section 189 of the Income-tax Act, 1961 ('the Act') are very clear and, therefore, passes an order on the assessee-firm.
2. Shri Ruhela, submitted before the Commissioner (Appeals), that the assessments of the firm were done up to 1957-58 only. There was no material on the record to show that any business was carried on thereafter. No assessments were done thereafter, as the factory was closed all the time. It was also submitted that soon-after the discontinuance of the business, the firm also stood dissolved. It was also submitted that after the dissolution of the firm, the property of the firm should belong to the partner as co-owner and the capital gain, if any, arising therefrom on a property, should be treated as gain in the hands of the individual partners and not on the firm. It was also submitted that Section 189 has been mis-applied and that it is only for the purposes of keeping the firm alive for recovery of taxes that were due earlier to the dissolution. The various points raised by the assessee were given to the ITO for his comments and in respect of certain paragraphs, the ITO had submitted that- (1) the property was auctioned on 8-3-1982, and, therefore, this has to be treated as sold in the assessment year 1982-83 ; (2) Section 189 has been correctly applied to the facts of the case ; and (3) the authorised representative has argued without any legal sanctity.
It was also submitted by the assessee that there were four partners originally in the firm, two of whom died subsequently after they had retired from the firm. There were only two partners from 11-2-1953. The remaining two partners also died about 5-10 years from the date of the auction. It could, therefore, be construed that only the firm had discontinued its business, but that the partnership stood dissolved on the death of the partners.
The Commissioner (Appeals) on these facts came to the conclusion that provisions of Section 189 were not applicable and that since no partner existed on the date of auction, they having died much before the assessment of the firm was held to be invalid.
3. Before us, Shri Ruhela submitted a copy of the IAC's report dated 29-9-1983 wherein he had categorically stated that there was no dissolution of the firm. According to this report, only business seems to have been discontinued. Shri Ruhela relied on the provisions of Section 47 of the Indian Partnership Act, 1932, as also the ratio of judgment in Laxminarayan Sawalram v. Dwarkaprasad Rudmal AIR 1964 MP 55 that till the firm is fully dissolved and the assets are settled, the firm shall be deemed to be in existence.
4. On behalf of the assessee, Shri Choudhary, the learned representative for the assessee, submitted that the partnership was at will and the partners died. This fact has not been disputed. There were only four partners, two of whom retired and there were only two partners remaining from 1957, who also died in the 1970's. Shri Choudhary raised a question: Can there be any existence of a partner when the partners, who comprised the firm, do not exist He relied on Addl. Tahsildar v. Gendalal  21 STC 263 (SC). He again submitted that the provisions of Section 189 are for the limited purposes of recovery of taxes. Recovery of tax is one matter and assessing the income of certain assets as belonging to the firm after the partners having died is another matter. The words contain in Section 189, Sub-sections (3), (4) and (5) were important according to Shri Choudhary. Shri Choudhary also submitted that the provisions of Section 176(3A) of the Act were introduced for taxing the income of a professional, who ceased to be a professional in the year of receipt.
In the instant case, the property belonging to the firm was sold but the partners comprising of the firm died about 10 years back. Under these circumstances, he was of the view that the assessment made on the firm is totally invalid.
5. We have heard the parties. The undisputed fact in the instant case is that the remaining two partners, who comprised the firm from 1953 also died about 5-10 years back. The dissolution of the firm, which firm has been constituted by the partners as at will, is provided for in Section 43 of the Indian Partnership Act. According to this section, a partnership at will can be dissolved by a notice served by a partner or another partner. In the instant case, the partner, who can serve such a notice died in sequence (sic). Thus, there is no partner remaining, who could issue or the dead partner cannot issue any notice.
In such a situation, Section 42 of the Indian Partnership Act, Clause (c) would come into play, which provides for the dissolution of the firm by the death of a partner. Since the partners have died, the natural corollary is that the firm stood dissolved from the date of death of the partners. Therefore, as on March 1982, when the property of the firm was sold for recovery of taxes, there was no firm in existence by the name of United Trading Co.
The provisions of Section 189 are for the purpose of treatment under the Act up to the date of dissolution. Till the date of dissolution, the partners of the firm shall be deemed to be in existence and assessments could be made on them though such assessments are passed subsequent to the dissolution of the firm. Similarly, if there is any recovery to be made in respect of taxes, then the section provides that the liability of the partners jointly or severally and also provides the attachment of the properties of the firm. All these provisions are limited to and in relation to the various proceedings on the firm made for the various transactions up to the date of the dissolution of the firm. The order passed by the ITO would have been valid had the property been sold during the lifetime of the partners and the recoveries effected thereon. As far as recovery of the taxes from out of the assets of the firm are concerned, the department is well within its rights by means of previsions of Section 189, but as far as assets that are concerned in respect of capital gains on the sale of the property, the assessment is bad in law and could not have been effected at all on the firm as there was no firm in existence on the date of the sale of the property. The order passed by the Commissioner (Appeals) is, therefore, upheld.