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Commissioner of Income-tax Vs. Tulsi Ram Karam Chand - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtPunjab and Haryana High Court
Decided On
Case NumberIncome-tax Reference No. 25 of 1973
Judge
Reported in(1979)10CTR(P& H)121; [1981]130ITR968(P& H)
ActsIncome Tax Act, 1961 - Sections 14, 44, 72 and 256(1); Income Tax Act, 1922 - Sections 10(2), 10(2A), 66(1) and 66(2); Finance Act, 1955 - Sections 8; Partnership Act - Sections 45
AppellantCommissioner of Income-tax
RespondentTulsi Ram Karam Chand
Appellant Advocate D.N. Awasthy and; B.K. Jhingan, Advs.
Respondent Advocate Bhagirath Dass,; S.K. Hirajee and; B.K. Gupta, Advs.
Excerpt:
.....during the assessment year 1949-50. this claim was disallowed by the ito, vide his order dated january 17, 1950. an appeal preferred to the aac was unsuccessful. receipt of the said amount by the assessee-firm is also a business activity and clearly falls under the head 'd 'in section 14 of the i......in law in holding that the amount of rs. 1,14,486 in question was not taxable in the hands of the assessee-firm in the assessment year 1952-53 ?' 2. the facts giving rise to this reference are as under : m/s. tulsi ram karam chand (hereinafter referred to as the 'assessee-firm') was a firm consisting of three partners, namely, (1) l. karam chand nayar, (2) l. lachhman dass nayar, and (3) l. chuni lal nayar. partners nos. 2 and 3 were real brothers. the assessee-firm carried on business with its head office at amritsar. there was another firm under the name and style of m/s. tulsi ram kanhaya lal carrying on business with its head office at ahmedabad. this firm will hereinafter be referred to as the 'ahmedabad firm'. the partners of the ahmedabad firm were, (1) l. lachhman dass nayar,.....
Judgment:

Ajit Singh Bains, J.

1. This is a reference by the Income-tax Appellate Tribunal, Chandigarh Bench, Chandigarh, under Section 256(1) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), made on the application of the Additional Commissioner of Income-tax, Punjab, J. & K. and Chandigarh, Patiala. The question of law that has been referred for the opinion of the High Court is as under :

'Whether, on the facts and in the circumstances' of the case, the Tribunal was justified in law in holding that the amount of Rs. 1,14,486 in question was not taxable in the hands of the assessee-firm in the assessment year 1952-53 ?'

2. The facts giving rise to this reference are as under :

M/s. Tulsi Ram Karam Chand (hereinafter referred to as the 'assessee-firm') was a firm consisting of three partners, namely, (1) L. Karam Chand Nayar, (2) L. Lachhman Dass Nayar, and (3) L. Chuni Lal Nayar. Partners Nos. 2 and 3 were real brothers. The assessee-firm carried on business with its head office at Amritsar. There was another firm under the name and style of M/s. Tulsi Ram Kanhaya Lal carrying on business with its head office at Ahmedabad. This firm will hereinafter be referred to as the 'Ahmedabad firm'. The partners of the Ahmedabad firm were, (1) L. Lachhman Dass Nayar, (2) L. Chuni Lal Nayar and (3) L. Ralia Ram Khanna. Thus, it emerges that L. Lachhman Dass and L. Chuni Lal Nayar were partners in both the firms.

3. In the year 1947, a permit was issued for supply of 250 bales of grey cotton cloth in favour of the Textile Commissioner, Jammu. The assessee-firm had undertaken to supply this cloth to the Textile Commissioner, Jammu, and for this purpose it placed an order with the Ahmedabad firm for the supply of 176 bales of cloth to be consigned by rail to the Textile Commissioner at Jammu Tawi Railway Station. The Ahmedabad firm complied with all the formalities of the order and consigned the required goods to 'self' and sent the railway receipt along with the invoice to the assessee-firm at Amritsar. The assessee-firm in its turn re-endorsed the railway receipt in favour of the Textile Commissioner, Jammu, and sent the same to its bank at Jammu for collection. All this happened in July, 1947. Due to partition of the country and the disturbances during the year 1947, the railway wagons carrying 176 bales of cloth, which were despatched by the railway authorities, could not be traced and the goods were, thus, lost in transit. The accounting year of the assessee-firm ended on July 7, 1948. Upon receipt of the invoice from the Ahmedabad firm, the assessee-firm had afforded a credit for Rs. 1,74,827 (price of 176 bales) by raising a debit to the account of the Textile Commissioner, Jammu. But on learning about the loss of the goods in transit, the assessee-firm, at the close of the year of account, credited the Textile Commissioner, Jammu, and debited the profit and loss account with a sum of Rs. 1,84,045.

4. On October 5, 1948, the Ahmedabad firm filed a suit against the Union of India in respect of the loss of the goods sent through the railway authorities. In the meantime, the assessee-firm was dissolved on March 18, 1950, and the Ahmedabad firm was also dissolved at about the same time. The suit filed by the Ahmedabad firm was ultimately compromised on June 18, 1951, and the erstwhile partners of the Ahmedabad firm, viz., Lala Lachhman Dass Nayar, Lala Chuni Lal Nayar and Lala Ralia Ram Khanna, received from the railway authorities a total sum of Rs. 1,24,586 according to their shares in the dissolved firm and the aforesaid amount was paid by them to the erstwhile partners of the assessee-firm.

5. The assessee-firm claimed deduction of the aforesaid loss Rs. 1,84,045 during the assessment year 1949-50. This claim was disallowed by the ITO, vide his order dated January 17, 1950. An appeal preferred to the AAC was unsuccessful. On further appeal to the Tribunal, there was a difference of opinion between the two members The Accountant Member took note of the recovery of Rs. 1,24,586 and the circumstances connected therewith and held that the aforesaid amount of Rs. 1,74,827 (i.e., cost of 176 bales of cloth) was allowable as a trading loss. The Judicial Member was of the view that the claim of the assessee was premature, In these circumstances, the case was referred to the President of the Income-tax Appellate Tribunal, who concurred with the Accountant Member and held that the sum of Rs. 1,74,827 represented loss of stock-in-trade in the year of account and that it should have been allowed as a deduction while computing the income of the previous year. While concurring with the view taken by the Accountant Member, the President in his order dated September 25, 1953, observed as under :

' I have no doubt in my mind that the assessee lost his stock-in-trade in the year of account. Merely because he may have a claim with the Government of India, it cannot be said that the loss was not ascertained or was not definite. In fact, I find that in the written statement filed on behalf of the Government, the Government's liability was not accepted. It was only when there was a compromise that the Government accepted liability to pay the compensation.'

6. Thus, the assessee-firm's appeal stood partly allowed and the ITO was directed to exclude the sum of Rs. 1,74,827 from the total income.

7. The revenue filed an application for reference under Section 66(1) of the Indian I.T. Act, 1922, but the same was dismissed by the Tribunal. The revenue then moved the High Court under Section 66(2) and the Tribunal was directed to refer the following question of law to the High Court :

'Whether, on the facts and circumstances of the case, any, and if so which portion of the sum of Rs. 1,74,827 could in law be treated as a loss in the previous year for the assessment year 1949-50 ?'

8. The question referred was ultimately answered in favour of the assessee-firm by the High Court, vide judgment dated October 14, 1963 (CIT v. Tulsi Ram Karam Chand ), copy of which is annexed with the statement of the case as annex. ' A-1 '.

9. With a view to tax the receipt of Rs. 1,24,586 which was received by the assessee-firm from the Ahmedabad firm as a result of a compromise in the civil suit filed by the Ahmedabad firm against the Union of India for the loss of goods sent through the railways, the ITO issued a notice for the assessment year 1952-53, which was served on L. Karam Chand Nayar on December 20, 1954, and on Chuni Lal Nayar on February 16, 1955. In compliance with the aforesaid notice, the assessee-firm filed three returns. In the first return filed on July 16, 1954, it was stated that the business styled as M/s. Tulsi Ram Karam Chand had been closed since March 18, 1950, and no business had been carried on after that date. In the second return filed by L. Chuni Lal Nayar on February 16, 1955, it was stated that the firm had been closed down and there was no business activity during the accounting period. In the last return which was filed by L Karam Chand Nayar on March 18, 1955, the following note was made :

'That the above firm had been discontinued since Chet v. 15, 2006 (18-3-1950) and thereafter did no business, hence there was no income forthe above assessment year. The agent of the firm received Rs. 1,24,586 from the Railway dept. against their old claim and which was not at all an assessable income of the firm under consideration as per the detailed letter attached for further submission.'

10. In the letter which was enclosed with the return and signed by Mr. D. V. Puri, counsel for the assessee-firm, it was also pointed out that the firm was discontinued on March 18, 1950, and the said sum of Rs. 1,24, 586 was never received by the assessee-firm in its capacity as a partnership firm. However, the contention of assessee-firm did not find favour with the ITO and vide order dated March 25, 1957, a sum of Rs. 1,14,487 (arrived at by excluding expenses of Rs. 10,100 incurred for recovering the amount) was taxed as the income of the assessee-firm and the status was adopted as 'association of persons' as the application for renewal of registration was refused. Copies of, (i) letter of Mr. D. V. Puri, (ii) assessment order, and (iii) order refusing renewal of registration are attached with the statement of the case as annexs. 'B', 'C' and 'D', respectively.

11. Two appeals were preferred by the assessee-firm before the AAC, who, vide his order dated November 13, 1958, accepted the claim of the assessee-firm for registration. He, however, confirmed the assessment made by the ITO. Copies of both the orders of the AAC are attached with the statement of the case as annexs. ' E' and ' F'.

12. Both the revenue and the assessee filed appeals before the Tribunal. The stand taken by the revenue before the Tribunal was that because of the dissolution of the assessee-firm on March 18, 1950, no firm existed during the previous year relevant to the assessment year 1952-53, and the AAC erred in granting renewal of registration to the assessee-firm. The stand taken by the assessee-firm was that the firm continued its business activity and, therefore, it required registration. The contention of the revenue was accepted by the Tribunal and the appeal allowed, vide its order dated August 9, 1960 (copy of which is annexed with the statement of the case as annex. 'G-8'). In this order, the Tribunal observed as under :

'Now if as Shri R. K. Khanna says the facts were truly known to Chuni Lal and if according to Chuni Lal the amount was not paid to the firm but was paid to the three individual partners, then obviously the firm did not exist even for making the recovery of Rs. 1,24,586.'

13. The assessee-firm's appeal against the assessment was allowed on September 14, 1960, and the revenue's appeal dismissed. While dismissing the revenue's appeal it was observed by the Tribunal as under :

'We have gone over the evidence on record and heard the parties at length. The Appellate Assistant Commissioner's finding that the proper Status was that of a firm is indeed eminently reasonable. However, afterrecording that finding what the Appellate Assistant Commissioner should have done was to annul the assessment made in the status of an association of persons and direct the Income-tax Officer to make a fresh assessment according to law in the status of a firm. This we will do now. The assessment for the year under consideration is accordingly annulled and the Income-tax Officer is directed to make a fresh assessment according to law on the proper person and in the proper status.'

14. Copy of the Tribunal's order dated September 14, 1960, is attached with the statement of the case as annex. ' H'.

15. The ITO made a fresh assessment, vide his order dated August 11, 1970, and brought to tax the amount of Rs. 1,14,486. The status was adopted as unregistered firm. Copy of the ITO's order dated August 11, 1970, is attached with the statement of the case as annex. ' I'.

16. Dissatisfied by the order of the ITO, the assessee-firm filed an appeal before the AAC, which was accepted and the order of the ITO was set aside. Against this order of the AAC, the revenue preferred an appeal before the Tribunal, which dismissed the revenue's appeal and upheld the order of the AAC. The copies of the AAC's order dated December 8, 1970, and the Tribunal's order dated July 17, 1972, are attached with the statement of the case as annexs. 'J' and 'K', respectively. Hence the aforesaid reference at the instance of the revenue.

17. We have gone through the paper-book and heard the arguments of the learned counsel for the parties at great length. The main contention put forward by Mr. Awasthy, learned counsel for the revenue, is that the assessee-firm having accepted the order of the Tribunal (annex. 'H') it accepted the fact that the receipt of Rs. 1,24,586 was the income of the unregistered firm and not the individual income of the partners. For this, he placed reliance on the Tribunal's finding in para. 9 of its judgment dated July 17, 1972 (annex. 'K'), in which it is categorically observed that the Tribunal's order dated September 14, 1960, whereby the assessment made in the status of an 'association of persons' was annulled and the ITO was directed to make a fresh assessment according to law in the status of a 'firm', has not been challenged in a reference by the assessee and has, therefore, become final. The main contention of Mr. Awasthy is that since this finding was not challenged by the assessee-firm, now it is not open to the Tribunal to say that the assessee-firm did not continue with -any business. On the other hand, Mr. Bhagirath Dass, learned counsel for the assessee-firm, contends that the aforesaid disputed amount could not be taxed under Section 10(2A) of the Indian I.T. Act, 1922, because the assessment pertained to the assessment year 1952-53, whereas this section was brought on the statute book by Section 8 of the Finance Act of 1955, with effect from April 1, 1955. His further argument is that the disputed amount couldalso not be brought to tax because there was no business activity in existence during any part of the accounting year relevant to the assessment year 1952-53, He placed reliance on the finding of the Tribunal that the assessee-firm stood dissolved on March 18, 1950, which, according to him, is a finding of fact. The only section then left is Section 44 and, according to him, this amount could not be brought to tax under this provision also. According to him, the object of Section 44 was to authorise the assessment of tax on incomes, profits or gains made from a business carried on by a firm before the discontinuance or dissolution of the business. The section is not confined to the profits only of the year of discontinuance or dissolution but extends also to the profits of the preceding years and not to the profits earned after its discontinuance or dissolution. The amended Section 44 provides for assessment up to the end of the accounting year in which the dissolution takes place and cannot be extended beyond that period. His main argument is that the Tribunal has given a firm finding that the assessee-firm was dissolved on March 18, 1950, that no business activity was done by the assessee-firm after that date and that if any business activity was continued it was by the Ahmedabad firm and that since these are the findings of fact, this court cannot go into those findings. After weighing the contentions of the learned, counsel for both the parties, I find merit in what Mr. Awasthy contends. The assessee-firm's stand at the time of making the application for renewal of registration was that it was not dissolved and it continued its business, whereas the revenue's stand at that time was that the assessee-firm did not continue its business activity as it stood dissolved on March 18, 1950. Both the revenue and the assessee-firm have taken dubious stands as had suited them at one stage or the other. Now the firm finding of the Tribunal, which the assessee-firm has not challenged, as given in para. 9 of its judgment dated July 17, 1972 (annex. 'K'), and which is based on an earlier judgment of the Tribunal dated September 14, 1960 (annex. 'H'). In para. 9, it is observed by the Tribunal as under :

'We have carefully considered the rival contentions. The Tribunal's order in I.T.A. No. 10192 of 1958-59, dated 14th September, 1960, whereby the assessment made in the status of an 'association of persons' was annulled and the Income-tax Officer was directed to make a fresh assessment according to law in the status of the firm, has not been challenged in a reference by the assessee and has, therefore, become final. The Tribunal had categorically stated that the status should be adopted as that of a firm and it is, therefore, not open to the assessee to challenge now that there was no firm in existence in this year. The fact that this firm is not entitled to registration for this year has also become final because after the assessee's reference in R.A. No. 863 of 1960-61 (arising out of I.T.A.No. 10207 of 1958-59) was dismissed on March 8, 1961, the assessee did not carry the matter further to the High Court. The status has, therefore, been correctly determined as that of an unregistered firm in this year.'

18. Once this status is accepted by the assessee-firm, then there is no difficulty in holding that the amount of Rs. 1,14,486 is the income of the assessee-firm in this, year, because the said sum was received by it during that accounting year. Receipt of the said amount by the assessee-firm is also a business activity and clearly falls under the head ' D ' in Section 14 of the I.T. Act, 1961. The authorities relied upon by the counsel for the assessee-firm do not apply to the facts of the present case. There is no quarrel about the principle of law as laid down in CIT v. South Indian Pictures Ltd. : [1951]20ITR605(Mad) , Parimisetti Seetharamamma v. CIT : [1965]57ITR532(SC) and Nalinikant Ambalal Mody v. 5. A. L. Narayan Row, CIT : [1966]61ITR428(SC) . The finding of the Tribunal that there was no activity by the assessee-firm in connection with the realisation of the disputed amount from the Government is erroneous. The fact that the amount in question was received by it from the Ahmedabad firm is a business activity. Hence, the amount in question is taxable as the assessee-firm continued its business activities during the accounting year relevant to the assessment year 1952-53. Since the finding of the Tribunal that the assessee should be assessed as a firm was not challenged, I am of the considered view that the firm continued with its business activity. Since the assessee-firm itself accepted the status of an unregistered firm by not challenging the order of the Tribunal dated September 14, 1960 (annex. 'H'), the amount in dispute was, thus, the income of an unregistered firm and not the individual income of the partners. Section 45 of the Partnership Act lays down that, notwithstanding the dissolution, the partners of a firm will be liable until a public notice of its dissolution is given under Section 72 of the Act. Admittedly, no public notice of the dissolution of the firm was given by the partners. In M. K. Mohammad Kunhi v. CIT : [1973]92ITR341(Ker) , it was held that the Tribunal had no jurisdiction to review or reverse its earlier order as it had lost seisin of the case when it remanded it. The only way to reverse its earlier order is by way of seeking a reference by the aggrieved party. In CIT v. Rai Bahadur Jairam Valji : [1959]35ITR148(SC) , it was held by their Lordships of the Supreme Court as under (headnote) :

'When once it is found that a contract was entered into in the ordinary course of business, any compensation received for its termination would be a revenue receipt, irrespective of whether its performance was to consist of a single act or a series of acts spread over a period.......

Generally, payments made in settlement of rights under a trading contract are trading receipts and are assessable to revenue. But where a person who is carrying on business is prevented from doing so by externalauthority in exercise of a paramount power and is awarded compensation therefor, whether the receipt is a capital receipt or a revenue receipt will depend upon whether it is compensation for injury inflicted on a capital asset or on a stock-in-trade.'

19. In CIT v. Siewart and Dholakia Private Ltd. : [1974]95ITR573(Cal) , it was held by their Lordships of the Calcutta High. Court that the true character of the money received by the assessee on the basis of the consent decree in a suit represented compensation for loss to the assessee in its trade and the said amount must, therefore, be considered to be a trading receipt of the assessee. The fallacy in the judgment of the Tribunal is obvious. In para. 9, it held that the assessee was an unregistered firm, whereas in para. 11 it stated that the assessee-firm stood dissolved. This is not the correct approach to decide the matter in dispute. In CIT v. P. R. A. L. Muthu Karuppan Chettiyar [1935] 3 ITR 208, their Lordships of the Privy Council held that any amount received by a partner on his retirement from a partnership was as a payment of profits and was thus assessable as a trading receipt.

20. Mr. Bhagirath Dass' contention that the finding of fact cannot be gone into by this court is also erroneous. In CIT v. Scindia Steam Navigation Co. Ltd. : [1961]42ITR589(SC) , their Lordships of the Supreme Court have held as under (headnote) :

'The High Court had jurisdiction to entertain the company's contention raised for the first time before it that the fourth proviso to Section 10(2)(vii) did not apply to the assessment as the contention was within the scope of the question as framed by the Appellate Tribunal and was really implicit therein, as the question whether the fourth proviso to Section 10(2)(vii) of the Act was applicable to the amount sought to be assessed as the company's income was a 'question arising out of the order' of the Tribunal and the High Court had jurisdiction to decide the question even if it was not raised and argued before the Tribunal.'

21. To the same effect are the observations in Seth Balkishan Das v. CIT , CIT v. Indian Molasses Co. P. Ltd. : [1970]78ITR474(SC) and Raghunath Prasad Poddar v. CIT : [1973]90ITR140(SC) . The ratio decidendi of all these authorities shows that each aspect of the question can be gone into by the High Court in such cases and it is not distinct from the main question. From whatever angle it may be viewed, I am of the considered opinion that the amount in question is a trading receipt of the assessee-firm in the relevant accounting year and, hence, is chargeable to tax.

22. I, accordingly, answer the question in the negative, in favour of the revenue and against the assessee-firm.

D. S. Tewatia, J.

23. I agree.


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