Dhannalal Gulabchand Sethi vs ITO

In these two writ petitions question posed for consideration is whether the order passed by assessing officer and directions issued u/s 144A of the Income Tax Act, 1961 by Additional Commissioner treating the partnership firm as association of persons; liable to assessment u/s 185 of the Income Tax Act, 1961 (hereinafter referred to as the Act) are proper.

The fact which is not in dispute that there existed a partnership firm. One of the partners namely Shri Gulabchand Sethi died on 16-8-1997 owing to which the partnership firm stood dissolved. Fresh partnership deed was drawn on 20-8-1997 in which it was mentioned that the old firm was dissolved due to the death of Shri Gulabchand and that there was no business from 17-8-1997 to 19-8-1997. New firm started the business from 20-8-1997 to 31-3-1998.

According to Income Tax Officer the accounts were not closed of dissolved firm on the death of Shri Gulabchand Sethi and the actual profit has not been distributed amongst the partners for the period 1-4-1997 to 16-8-1997. Petitioner filed two returns, i.e., one for the period 1-4-1997 to 16-8-1997 and the other for the period 20-8-1997 to 31-3-1998. Owing to the death of Shri Gulabchand Sethi on 16-8-1997 the firm was legally dissolved for the reason that in the deed of partnership executed on 1-4-1995 which was effective at that time, there was no provision to continue the partnership. A new partnership deed was executed on 20-8-1997 in which it was mentioned that the old firm was dissolved due to the death of Shri Gulabchand and that there was no business transaction from 17-8-1997 to 19-8-1997.

The directions of Additional Commissioner were sought. The learned Additional Commissioner has agreed with findings of assessing officer as the accounts were made for the period 1-4-1997 to 31-3-1998 and although two Income Tax Returns were filed for two periods, copy of common trading account, profit and loss account and balance sheet has been filed which ought to have been separately maintained. However, in profit and loss account, profits have been distributed amongst the partners for the two periods taking the proportionate income counting the days involved in the accounting period. The books of account have not been closed on the dissolution of the firm and the profits distributed amongst the partners are not the actual profits because there was no business transaction from 17-8-1997 to 19-8-1997. This is clear from the partnership deed drawn on 20-8-1997. Under the circumstances, it was essential that two separate accounts should have been maintained for the two periods. It has been decided to treat the partnership firm as association of persons and to assess in that capacity.

Thus, assessing officer has taken a decision to assess, the petitioners firm as association of persons as per order (P. 6) dated 2-8-1999. Aggrieved by the decision of the assessing officer petitioner filed an application u/s 144A of the Act before the Additional Commissioner of Income Tax, Gwalior Bench, Gwalior in which Additional Commissioner has agreed with the order passed by the assessing officer. Hence present writ petition has been filed before this Court.

Petitioner submits that the action is bad in law. Once the fact is not in dispute that the firm which was dissolved on 16-8-1997, was registered partnership firm and the newly constituted firm as per partnership deed (P. 4) dated 20-8-1997 is also a registered firm. Thus, assessment has to be made u/s 144A of the Act and invoking provision u/s 185 of the Act to make assessment as association of persons, is bad in law.

The stand of the respondents in the return is that on dissolution; the petitioner firm was required to value closing stock at market rate. The firm was also required to value all assets at market rate. The petitioner was required to offer the appreciation for capital gain as provided u/s 45(4) of the Act. Petitioner was also required to disclose that tax was deducted at source and as on the date of dissolution and there was no violation. Petitioner was also required to file balance-sheet as on the date of dissolution to verify that there was no violation of section 43B, 269SS or 269T. The other transactions as on the date of dissolution also required cross-verification. To avoid proper payment of tax, the petitioner closed its books of account as at 31-3-1998. The conduct of the petitioner shows that old firm was not treated as dissolved but continued with the same old firm by substituting the name of his widow in place of deceased. Thus, computation of profit by estimate is not the proper method of computation of income. Firm is not validly constituted as condition of section 184 is not satisfied. The assessing officer rightly invoked the provision of section 185 and treated the firm as association of persons. It is also contended that the directions issued u/s 144A will be incorporated by the assessing officer in his assessment order to be passed u/s 143(3) and the ultimate order is appealable u/s 246 before the CIT(A) and further appeal lies u/s 253 before the Income Tax Appellate Tribunal. Thus, the writ petition is devoid of substance and deserves to be dismissed.

Shri Sumit Nema, learned counsel appearing for the petitioner, has submitted that the directions issued by Additional Commissioner u/s 144A of the Act and the order (P.6) of assessing officer are bad in law and it is not a case where out rightly the order to treat the status of petitioner, firm as an association of persons could be passed. Shri Sumit Nema further submitted that the two returns were filed. Profits were shown separately. There was only a failure to maintain the separate account. There was failure to close the accounts of the previous firm on the date of dissolution. This defect could be allowed to be rectified under sub-section (9) of section 139 of the Income Tax Act. Thus, the decision and the direction to make assessment u/s 185 of the Act in the capacity of association of persons is uncalled for and not warranted in the facts & circumstances of the case.

Shri Rohit Arya, learned counsel appearing for the respondents, raised preliminary objections and submitted that petitioner has remedy of raising the question against the final assessment before the CIT(A); since there was no closure of the accounts of the dissolved firm which was necessary, profit has not been indicated. Thus, the opinion expressed by the assessing officer as well as by Additional Commissioner to make assessment as association of persons is proper and calls for no interference.

It is apparent that section 184 of the Act provides that a firm shall be assessed as a firm for the purpose of the Act if the partnership is evidenced by an instrument; and the individual shares of the partners are specified in that instrument. It has not been disputed by the learned counsel for the respondents that these two eventualities exist. Sub-section (5) of section 184 of the Act contains non obstinate clause where in respect of any assessment year, there is on the part of a firm any such failure as is mentioned in section 144, the firm shall not be assessed as such for the said assessment year and thereupon the firm shall be assessed in the same manner as an association of persons, and all the provisions of the Act shall apply accordingly.

Section 144 of the Act deals with the best judgment assessment. It provides that if any person fails to make the return required under sub-section (1) of section 139 and has not made a return or a revised return under sub-section (4) or sub-section (5) of that section or fails to comply with all the terms of a notice issued under sub-section (1) of section 142 or fails to comply with a direction issued under sub-section (2) of section 143.

It is contended by the learned counsel for the respondents that exigencies for applicability of section 144 are available, thus, the provision of section 185 of the Act is attracted as provided in sub-section (5) of section 184 of the Act. True it is that if there is failure to file the return as mandated under sub-section (1) of section 139 or revised return has not been filed under sub-sections (4) & (5) of section 139 of the Act and notice issued under sub-section (2) of section 143 of the Act has not been complied with or a notice under sub-section (1) of section 142 has not been complied with, the firm can be assessed as an association of persons. However, the provisions of section 139 of the Act is not attracted which is the provisions for filing of the return. In my opinion, it was incumbent upon the assessing officer as well as the Addl. Commissioner of Income Tax to ponder on the issue whether the defect of failure to maintain the account and to close the account on the date of dissolution is such which cannot be allowed to be rectified within the purview of sub-section (9) of section 139 of the Act. Sub-section (9) of section 139 of the Act provides that where the assessing officer considers that the return of income furnished by the assessee is defective, he may intimate the defect to the assessee and give him an opportunity to rectify the defect within a period of fifteen days from the date of such intimation or within such further period which, on an application made in this behalf, the assessing officer may, in his discretion, allow; and if the defect is not rectified within the said period of fifteen days or as the case may be, the further period so allowed, return filed shall be treated as invalid return. There is power to condone the delay also. Explanation to sub-section (9) of section 139 of the Act provides that a return of income shall be regarded as defective unless the conditions enumerated in the Explanation are fulfilled. As this question has not been examined by the Addl. Commissioner and the assessing officer, I deem it appropriate to direct the Addl. Commissioner from whom directions u/s 144A had been sought to consider whether petitioner can be allowed to remove the defect in terms of sub-section (9) of section 139.

It is also submitted by the learned counsel appearing for the petitioner that it is possible to ascertain the profit. He has placed reliance on a decision of the Allahabad High Court in Motor Sales v. CIT (1998) 230 ITR 441 to contend that still there is possibility to ascertain the profit in case a firm is converted into a company then the business of the firm is succeeded by the company within the meaning of section 170(1) and the firm will be assessed upto the date of succession. Though the facts in Motor Sales case (supra) are different; the decision may be of some assistance to the plea of petitioner to allow to rectification of the defect if permissible; that has to be considered by the Addl. Commissioner at the first instance not directly by this court in exercise of writ jurisdiction under article 226 of Constitution of India.

Resultantly, the impugned order P. 9 in both the writ petitions passed by the Addl. Commissioner is quashed. Writ petitions are partly allowed. The Additionall Commissioner is directed to reconsider the matter u/s 144 of the Act and decide the same within two months from today. No order as to cost.

Petition partly allowed.