Shivram Poddar vs Income-Tax Officer, Central Circle Ii

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Not extracted

Decision Date: 13 December, 1963

Coram: A.K. Sarkar, J.C. Shah, M. Hidayatullah

In this appeal the Court noted that the case involved Shivram Poddar, who was one of the partners of a Calcutta‑based commission agency and cotton piece‑goods business known as Balmokand Radheshyam. The firm, which had four partners including the appellant, was dissolved in February 1950 and its business ceased thereafter. For the assessment year 1949‑50 a return of income was filed by one of the partners and the assessment was made on 28 October 1952, treating the firm as an unregistered entity. On 28 March 1955 the Income‑Tax Officer issued a notice under section 34 read with section 22(2) of the Indian Income‑Tax Act, 1922, addressed to Shivram Poddar in his capacity as a former partner of the dissolved firm, requiring him to file a return of the firm’s income for the year ended 31 March 1950. The appellant challenged the notice by filing a petition for a writ of mandamus under article 226 of the Constitution, seeking an order directing the Income‑Tax Officer to refrain from acting on the notice. The petition was dismissed by Justice D. N. Sinha, and that dismissal was upheld on appeal under the Letters Patent by the High Court of Judicature at Calcutta.

The question that the Supreme Court was called upon to resolve was whether income earned by the firm for the year ending March 1950 could be subjected to tax assessment under section 44 of the Indian Income‑Tax Act, 1922, after the firm’s dissolution. Section 44, as it stood before being amended by the Income‑Tax (Amendment) Act, 1958, provided: “Where any business, profession or vocation carried on by a firm or association of persons has been discontinued, or where as 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, 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.” The Court observed that the purpose of this enactment was to permit the assessment of tax on income, profits or gains that were earned in a business, profession or vocation before its discontinuance or before the dissolution of the association, and to impose joint and several liability on every individual who was a partner or member at the time of such discontinuance or dissolution. Accordingly, the Court examined the effect of section 44 on the liability of a partner to be assessed for income of a firm whose business had terminated because of dissolution. The analysis focused on whether the statutory provision allowed the assessment to proceed despite the firm no longer existing as a going concern.

In addressing the liability of a partner to be assessed for the income of a firm that had discontinued its business because of dissolution, the Court referred to the observations made in C. A. Abraham v. Income‑tax Officer, Kottayam. The Court noted that section 44 of the Income‑tax Act expressly allowed assessment proceedings to be begun and continued against a firm whose business had been discontinued as though the discontinuance had not occurred. The provision was described as being enacted clearly to ensure that the mechanisms for assessment and imposition of tax liability would continue to operate even after a firm’s business had ceased. In the Abraham case, the discontinuance of the firm’s business arose from the dissolution of the firm upon the death of one partner. The principal issue in that case concerned whether the Income‑tax Officer had the competence to levy a penalty against a firm that had already discontinued its business after dissolution, on the grounds that the firm had concealed income details or had supplied inaccurate particulars in its return. The validity of the assessment order itself was not contested, although at the time of the assessment order the firm was already dissolved and its business had ceased. Nonetheless, the Court held that it could not decide on the legality of the penalty order without first determining whether a valid assessment existed, because any penalty order presupposes a valid assessment. The Court reiterated this view in Commissioner of Income‑tax v. Raja Reddy Mallaram, applying section 44 to the assessment of an association of persons that had been dissolved. Counsel for the appellant advanced a single argument, asserting that the notice issued by the Income‑tax Officer to the respondent was legally ineffective because section 44 applied to a firm only when there was a discontinuance of its business, not when the firm was dissolved. The counsel argued that while members of an association of persons could be assessed under section 44 upon either discontinuance of business or dissolution of the association, partners of a firm could be assessed only upon discontinuance of business, emphasizing that dissolution and discontinuance are distinct concepts. According to this reasoning, if discontinuance already included dissolution, then a specific provision concerning the dissolution of associations of persons would be unnecessary. To support this contention, the counsel relied on observations made by Chief Justice Chakravartti in R. N. Bose v. Manindra Lal Goswami, wherein the Chief Justice noted that section 44 of the 1922 Income‑tax Act refers to cases where a business, profession, or vocation carried on by a firm or an association has been discontinued, and also to cases where an association of persons is dissolved. The provision does not expressly address a situation where a firm has been dissolved. The Court observed that these remarks were obiter, because the parties had consistently proceeded on the assumption that section 44 applied to the case of a dissolved firm, and the Court itself would continue to operate on that same assumption. Finally, the Court explained that section 44 functions in two distinct categories: one where there is a discontinuance of business, profession, or vocation by a firm or an association, and another where an association of persons is dissolved.

In this case, the Court observed that section 44 of the Income‑Tax Act referred to the discontinuance of business, profession or vocation for both a firm and an association of persons, but when it spoke of dissolution it mentioned only an association and omitted the word “firm.” Counsel for the petitioner, identified as Mr. Meyer, argued that the concept of discontinuance subsumed dissolution. The Court could not accept that argument, explaining that although the dissolution of a firm inevitably involves the discontinuance of its business, the reverse is not necessarily true. A firm may decide to cease its business yet continue to exist for purposes such as collecting debts, and therefore dissolution and discontinuance are distinct concepts. The Court noted that the observations on this point were obiter because the parties had consistently proceeded on the assumption that section 44 applied to a dissolved firm, and the Court itself would also proceed on that assumption.

The Court clarified that section 44 operated in two separate categories: first, the discontinuance of business, profession or vocation carried on by either a firm or an association, and second, the dissolution of an association. Consequently, a mere dissolution of a firm without an accompanying discontinuance of business did not trigger the provisions of section 44. Liability to assess the income of a firm under section 44 arose only when there was a discontinuance of business, whether that discontinuance resulted from dissolution or from any other cause. In contrast, for an association of persons, both discontinuance of business for any reason and dissolution—whether or not accompanied by discontinuance—would bring the association within the scope of section 44.

The Court explained that this distinction stemmed from the overall scheme of the Income‑Tax Act concerning the assessment of a firm’s income. Under sections 3 and 2(2), a firm, whether registered or unregistered, was recognised as a unit of assessment, and its income was computed under clauses (3) and (4) of section 23 in the same manner as the income of any other unit. Section 25(1) dealt with assessment in cases of a discontinued business, regardless of whether the business was carried on by a firm or by any other person. This provision was essentially enabling, granting the Income‑Tax Officer the option to make a premature assessment on profits earned up to the date of discontinuance in the year of discontinuance, as illustrated in the case of Commissioner of Income‑Tax v. Srinivasau. Even if the officer chose not to make a premature assessment, the assessment for the whole year would be based on income computed up to the date of discontinuance.

Additionally, the Court referred to the special provision of section 26(1), which dealt with assessment when a change occurred in the constitution of a firm or when a new firm was constituted. The date on which the change occurred was immaterial; it could be in the year of account, the year of assessment, or even after the close of the year of assessment. The Court emphasized that these provisions had to be read together with section 44, which stipulated that in cases of discontinuance of business of a firm or an association, or dissolution of an association, liability to assess fell under Chapter IV, and all provisions of Chapter IV applied to such assessment. The Court further noted that the term “discontinuance of business” in section 44 carried the same meaning as in section 25 and did not extend to a mere change in ownership.

The Court explained that, under section 26(1) of the Income‑Tax Act, the Assessing Officer must evaluate the firm as it exists at the date the assessment is made. However, the income, profits and gains of the preceding year must be divided among the partners who were entitled to receive them so that each partner’s share is included in his total income. Section 26(2) deals with assessment where a business is succeeded by another person, the expression “person” including a firm, when that business is carried on by the successor in the same capacity. These provisions are to be read together with section 44, which provides that in cases of discontinuance of the business of a firm, an association, or dissolution of an association, the liability to assess falls under Chapter IV and all the provisions of Chapter IV that are applicable shall apply to such assessment.

According to the Court, “discontinuance of business” has the same meaning in section 44 as it has in section 25 of the Act; it does not merely refer to a change in ownership or in the constitution of the unit being assessed. Consequently, section 44 is triggered only when the firm’s business comes to a complete halt, not when there is merely a change in ownership or a reconstitution of the firm. Reconstitution does not alter the legal personality of the firm; instead it results in succession to the business, not in discontinuance. While common‑law partnership principles regard a modification in the constitution of a firm—absent a special agreement to the contrary—as a dissolution and subsequent reconstitution, the Income‑Tax Act treats a firm as an independent unit for assessment purposes, giving it a personality that survives reconstitution. A firm that discontinues its business may be assessed in the year of account in which the discontinuance occurs, as provided by section 25(1), or it may be assessed in the year of assessment; in either scenario the assessment is of the firm’s income. If the firm is dissolved but the business continues because of a change in its constitution, assessment must be made under section 26(1). Where there is succession to the business, assessment must be made under section 26(2). The provisions relating to assessment of reconstituted, newly constituted firms, and of succession to a business are mandatory, and therefore even a change in the ownership of a business carried on by a firm, whether by reconstitution or by new constitution, requires assessment of the firm itself.

In a situation where a firm is reconstituted or newly constituted, the law requires that the tax assessment continue to be made against the firm itself. When a succession takes place, the successor and the person succeeded are each assessed according to the actual share of income that belongs to them. This approach to assessment explains why section 44 does not refer to the dissolution of a firm when the dissolution is not accompanied by a discontinuance of the business. A firm that has discontinued its business, whether it has been dissolved or not, must therefore be assessed either prematurely under section 25(1) or in the regular year of assessment. In either event, the assessment procedure follows the provisions of section 23(3) and (4) as modified by subsection 5. Section 44 adds that all persons who were partners at the time of discontinuance are jointly and severally liable to pay the tax that the firm owes. Under section 23(5), by the second proviso to clause (a), a registered firm is liable to pay tax on a partner’s share of income only when that partner is a non‑resident. However, on discontinuance of the business, section 44 creates a joint and several liability for all partners to discharge the tax due by the firm. Apart from the general rules for premature assessment in section 25(1) and for assessment on succession in section 26(2), the Act contains no provision imposing joint and several liability on members of an association of persons upon dissolution or discontinuance of business. This omission is presumably why section 44 was originally enacted, before its amendment in 1958, without reference to dissolution that does not result in discontinuance. Consequently, the absence of a reference to dissolution of a firm not accompanied by discontinuance in section 44 is a logical continuation of the assessment provisions for firms found in Chapter II, especially sections 23(5), 25(1), 26(1) and 26(2). Balmokand Radheshyam was an unregistered firm, and by virtue of its discontinuance of business it remained liable to pay tax on its income, and no alternative procedure outside that prescribed in Chapter IV could be applied to assess the firm’s income. The Court noted that it had decided the case on the basis that the firm’s business was discontinued at the time of its dissolution. It reiterated, as in the earlier C A Abraham case, that the Income‑Tax Act provides a complete machinery for tax assessment and for granting relief where revenue orders are improper or erroneous. Determining the facts applicable to a particular situation and granting appropriate relief is the responsibility of the revenue authorities. The Court further observed that resort to the High Court, exercising its extraordinary jurisdiction under the Constitution, is permissible only when questions of fundamental rights arise or when the taxing authorities have assumed jurisdiction they do not possess.

In this case the Court observed that questions concerning the assessment, the levy and the collection of income‑tax may be taken up by the High Court only in narrowly limited circumstances. Such circumstances arise when there is a claim that a fundamental right guaranteed by the Constitution has been infringed, or when, based on facts that are not in dispute, it is demonstrably clear that the taxing authority has acted beyond the jurisdiction that the statute confers upon it. The Court further explained that if a party attempts to avoid the procedures laid down in the Income‑tax Act by asking the High Court to resolve issues that ordinarily belong to the domain of the Revenue Authorities, the party is in effect requesting the Court to accept factual assumptions that have not yet been examined by the tax officials. The Court noted that the proper determination of those facts is the responsibility of the Revenue Authorities, and that the High Court should not be called upon to substitute its own inquiry for that statutory process. Consequently, the appeal was found to have no merit. The Court accordingly ordered that the appeal be dismissed and that the costs of the proceedings be awarded against the appellant. The final order confirmed the dismissal of the appeal.