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Empire Estate Vs. Third Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1992)41ITD23(Mum.)
AppellantEmpire Estate
RespondentThird Income-tax Officer
Excerpt:
.....2(31) lays down that a "person" includes a firm also. it follows that under the income-tax act, a firm is treated as a distinct and separate entity, different from the partners constituting it.13. where a firm is dissolved either by operation of law or by act of parties and is succeeded by another firm which has, as its partners, one or more partners of the former firm, the question arises whether in such a case there is change in the constitution of the firm as defined in section 187(2) or it is a case of succession covered by section 188? 14. on this question, we are of the opinion, that where the firm is dissolved either by operation of law or by act of parties and thereafter a new firm is formed or old firm is reconstituted so as to include one or more partners of the old firm,.....
Judgment:
1. These three appeals by the assessee are directed against the order of the CIT (Appeals)-II, Bombay and relate to the assessment years 1977-78,1978-79 and 1979-80. For the sake of convenience, these are consolidated together and disposed of by a common order.

2. The assessee is a partnership firm comprising of two partners, viz., Shri R.K. Mody and Miss M.K. Mody having equal shares (hereinafter called the "new firm").

3. Shri R.K. Mody and Miss M.K. Mody earlier constituted a partnership with Mrs. Ellen K.K. Mody (hereinafter this is to be referred as "old firm"). Mrs. Ellen died on 12-1-1974. The duration of the partnership was "at will". On the demise of Mrs. Ellen K.K. Mody, the firm was said to have been dissolved. The fresh deed of partnership was executed on 18-1-1974. It was mentioned in the said deed that the earlier firm was dissolved on 12-1-1974.

4. The business of the old firm was exhibition of cinema pictures at Bombay and Calcutta. The firm was owning theatre at Bombay by the name 'New Empire' and in Calcutta, one by the name 'Elite' and another by the name 'Minerva'. The new firm continued the same business.

5. Consequent upon the demise of Mrs. Ellen K. Mody, the question whether the old firm was dissolved or there was a change in the constitution of the firm was put before the Tribunal in I.T.A. No.2551/Bom/1980-81 for the assessment year 1975-76. The Tribunal, accepted the factum of dissolution of the firm and held that the old firm was dissolved by operation of law on the demise of Mrs. Ellen Mody, and consequently issued directions to the Assessing Officer to make two different assessments.

6. All these appeals rotate round the issue of jurisdiction. The old firm was assessed under the Permanent Account No. 34-046-PN-1911. The new firm came into existence on 18-2-1974. Its first assessment year was 1975-76, for which the return of income was filed with the 3rd ITO, Film Circle, Bombay. G.I.R. No. FC/E-345(3) was allotted to the new firm. For the relevant assessment years assessee filed its return, suo motu, with the ITO, Film Circle. Assessments were completed, ex parte, under Section 144. Assessee made application for re-opening the cases under Section 146. The cases were said to have been re-opened. But assessment consequent upon the reopening was not completed.

7. The Central Board of Direct Taxes (CBDT) assigned jurisdiction in respect of the old firm to the ITO, Central Circle-XV, Bombay, vide order dated 25-6-1977. Pursuant to the said order the file of old firm and new firm were sent to the Central Circle.

8. The department treated the new firm as a "reconstituted firm". In view of this, revenue's stand was that the CBDTs order covers the case of new firm also, as new firm cannot be construed to be a distinct entity.

9. The assessee challenged the jurisdiction on the ground that the old firm was dissolved and new firm was a "distinct entity". The case of the new firm is not covered by the order of the CBDT.10. Shri Mathur, ld. counsel for the assessee, contended that since the order of assessment was passed without jurisdiction, the same should be treated as void ab initio. According to ld. counsel, CBDT issued orders in relation to the old firm. New firm is different from the old firm.

It is assessed under a different G.I.R. No. The fact that Income-tax Officer reopened the assessments under Section 146 indicates that department treated it as a separate entity. The old firm was dissolved consequent upon the demise of Mrs. Ellen K. Mody. Tribunal also directed two separate assessments in respect of old firm and new firm.

The assessment proceedings in respect of old firm cannot be elongated so as to include within its sweep the case of the new firm also.

11. Shri Keshav Prasad, learned Departmental Representative, submitted before us that jurisdiction in the matter was assumed by the ITO in consonance with the order of the CBDT. The fact that the firm was reconstituted and not dissolved is yet to be finalised. The department has filed a reference application against the decision of the Tribunal.

There is no specific dissolution deed. Therefore, new firm cannot be treated as a distinct and separate entity. Further the provision of Section 124(5)(b) of the Income-tax Act, prohibits the challenge of jurisdiction. He also relied on some precedents to support the contention.

12. We have heard the rival submissions in the light of material placed before us and precedents relied upon. A name given to the partnership firm is nothing more than a compendious description of the partners carrying on the business. But for taxing purposes 'a partnership firm' is treated as an entirely distinct, from the persons who constitute the 'firm'. Section 2(23) gives the same meaning to the expressions "firm", "partner" and "partnership" as are respectively assigned to them in the Indian Partnership Act, 1932. Section 2(31) lays down that a "person" includes a firm also. It follows that under the Income-tax Act, a firm is treated as a distinct and separate entity, different from the partners constituting it.

13. Where a firm is dissolved either by operation of law or by act of parties and is succeeded by another firm which has, as its partners, one or more partners of the former firm, the question arises whether in such a case there is change in the constitution of the firm as defined in Section 187(2) or it is a case of succession covered by Section 188? 14. On this question, we are of the opinion, that where the firm is dissolved either by operation of law or by act of parties and thereafter a new firm is formed or old firm is reconstituted so as to include one or more partners of the old firm, there is a succession of one firm by another firm as contemplated by Section 188 and such a case could not be governed by Section 187. We have taken this view, after considering the effect of proviso inserted to Section 187(2) by the Taxation Laws (Amendment) Act, 1984 (67 of 1984), with retrospective effect from 18th April, 1975.

15. This proviso excludes from the ambit of Section 187(2)(a), a case, where the firm is dissolved on the death of any of its partners. In the instant case also the firm was said to have been dissolved on the demise of Mrs. Ellen Mody. The case of the assessee therefore comes within the ambit of the proviso. Accordingly old firm is to be treated distinct from the new firm.

16. Once this finding is reached the conclusion is irresistible, that the ITO had no jurisdiction over the new firm. The jurisdiction over the old firm cannot be elongated so as to include within its sweep the case of the new firm also.

17. Section 124(5)(6), as it stood, prior to amendment (by Direct Tax Laws (Amendment) Act, 1987 with effect from 1-4-1988) is reproduced hereunder : (5) No person shall be entitled to call in question the jurisdiction of an Income-tax Officer.

(b) Where he has made no such return after the expiry of the time allowed by the notice under sub section (2) of Section 139 or under Section 148 for the making of the return.

We find that in the instant case assessee (new firm) has duly filed its return of income. The assessments were completed under Section 144.

Subsequently these were re-opened under Section 146. In view of this fact, in our opinion, the case of assessee does not come within the ken of Section 124(5)(b).

18. Under the law, it is a fundamental principle that an order passed without jurisdiction is a nullity. A defect of jurisdiction, cannot be cured even by the consent of the parties. The assessee pointed out that defect of jurisdiction at the embryonic stage. But department proceeded on the basis that the new firm is the continuation of the old firm.

Legally this is not correct. New firm is distinct from the old firm.

The Assessing Officer had no jurisdiction over the assessee firm (new firm). Having regard to these facts, we are of the opinion that since there is want of jurisdiction, the whole proceedings arc, coram non judice.


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