Baijnath Vs. Commissioner of Income Tax  INSC 161 (26 March 1993)
Reddy, B.P. (J) Jeevan Reddy, B.P. (J) Venkatachala N. (J)
1993 AIR 1888 1993 SCR (2) 645 1993 SCC Supl. (2) 520 JT 1993 (3) 579 1993
tax Act, 1922: Section 44 (prior to amendment by Finance Act, 1958)-Scope
of-Dissolution of firm and discontinuance of business-Assessment on dissolved
firm- Correctness of.
appellant assessee, a firm which did business during the accounting years
relevant to assessment years 1946-47 and 1947-48, was dissolved by a deed of
dissolution dated December
2,1946, and Its
business discontinued. Notices were issued in the name of the partnership firm
and assessments were completed under the Income-tax Act 1922 and Excess Profits
Tax Act, 1948. Indeed, the returns were flied in the name of the firm.
the course of the assessment proceedings under both the enactments viz.
Income-tax and Excess Profit Tax Act, no objection was taken as to the validity
of the proceedings. Against the orders of assessment, appeals were preferred to
the Appellate Assistant Commissioner. In these appeals also the validity of the
assessment order was not challenged. Even In the further appeals before the
Tribunal, no objection was taken to the validity of the assessments.
Subsequently, however, permission was sought for raising additional grounds
questioning the validity of the assessment proceedings. Though, Revenue opposed
the same, the Tribunal permitted the said new ground to be raised on the ground
that the Income-tax Officer was aware that the business of the firm was closed.
Ultimately, the Tribunal dismissed the appeals. Thereupon the assessee obtained
the reference and since it could not succeed even before the High Court the assessee
filed the present appeals.
contended on behalf of the appellant see that under the unamended Section 44,
no assessment could have been made upon a firm which was dissolved by the time
the assessment was made.
Dismissing the appeals, this Court,
Section 44 of the Income-tax Act, 1922 (before Its Amendment by Finance Act,
1958) covered two situations:
any business, profession or vocation carried on by a firm or association of
persons was discontinued and
an association of persons was dissolved. In either of these situations, every
person who at the time of such discontinuance or dissolution was a partner of
such firm or member of such association was made jointly and severally liable to
assessment under Chapter IV in respect of the Income, profits and pins of the
firm or association as the case may be. The joint and several liability
extended to the payment of the tax. [650 C-D]
instant case Is one where the dissolution of the firm resulted in
discontinuance of its business. This Court is not concerned with the situation
where the firm was dissolved but its business was not discontinued, a
distinction which has to be borne in mind. In the case of dissolution resulting
in discontinuance of business S.44 of the Income-tax Act, 1922 enabled the
Income-tax Officer to make an assessment on the dissolved firm. Indeed this
aspect is no longer res integra in view of the settled law.
E-H] C.A. Abrahani v. Income Tax Officer, Kottayam & Anr., 41 I.T.R. 425
and Shivram Poddar v. Incomne Tax Officer, Central Circle II, Calcutta & Anr.,
51 I.T.R. 823, relied on.
Bombay v. Devidayal, 68 I.T.R. 425, Larmidas v. C.LT Bombay, 72 I.T.R. 88 and Nagarmal
Baijnath v. C.I.T., 114 I.T.R. 133, referred to.
APPELLATE JURISDICTION Civil Appeal Nos. 15657/1979.
the Judgment and Order dated 5.11.1977 of the Bombay High Court in Income Tax
Reference No. 44 of 1968.
and Ashok Mathur for the Appellant.
and Ms. A. Subhashini for the Respondent.
Judgment of the Court was delivered by 647 B.P. JEEVAN REDDY, J. These appeals
are preferred against the judgment of the Bombay High Court in Income Tax
Reference No.44/68. The question referred under Section 66(1) of the Indian
Income Tax Act, 1922 and Section 21 of the Excess Profits Tax Act, 1948 for the
opinion of the High Court reads thus:
on the facts and in the circumstances of the case, the Income-Tax assessments
for the years 1946-47 and 1947-48 and excess profits tax assessments for the
chargeable accounting period ending 4.11.1945 and 31.3.1946 made on M/s. Nagarmal
Baijnath, a firm which was dissolved and whose business was discontinued at the
time of the assessments, were validly made?' The appellant assessee, M/s. Nagarmal
Baijnath was a firm which did business during the accounting years relevant to
assessment years 1946-47 and 1947-48, the previous years being the years ending
November 4, 1945 and March 31, 1946 respectively. By a deed of dissolution dated December 2, 1946, the firm was dissolved and its
under Section 22(2) of the Act relating to the assessment years 1946-47 was
issued in the name of the partnership firm and served on one Satyanarayan who
accepted it on behalf of the firm, on August 19, 1946. Subsequent notices under Sections
22(4) and 23(2) were also issued in the name of the firm and assessment
completed on March 23,
1951 on the firm. The
same procedure was adopted with respect to the assessment year 1947-48 and
assessment completed on the firm on March 10, 1. So far as the assessments
under the Excess Profits Tax Act are concerned, notices were issued again in
the name of the firm and assessments completed in the name of the firm. Indeed,
the returns were filed in the name of the firm signed by Baijnath Gajanand for
and on behalf of the firm.
the course of the assessment proceedings under both the enactments, no
objection was taken by anyone on behalf of the assessee to the validity of the
proceedings. Against the orders of assessment, appeals were preferred to the
Appellate Assistant Commissioner. Even in these appeals the validity of the
assessment orders was not challenged. On the appeals being dismissed, further
appeals were filed before the Income Tax Appellate Tribunal. In the grounds of
appeal before the Tribunal too, no objection was taken to the validity of the
assessments. Subsequently, how- 648 ever, permission was sought for raising
additional grounds in appeal questioning the validity of the assessment
proceedings. Though, the Revenue opposed the same.' the Tribunal permitted the
said new ground to be raised, observing that even from the assessment order
relating to the assessment year 1946-47, it appears that "the Income-Tax Officer
was aware that the business of the firm was closed." Ultimately,-however,
the Tribunal dismissed the appeals. It is thereupon that the appellant obtained
the reference under Section 66(1).
only question urged by the appellant before the High Court was: inasmuch as the
firm stood dissolved prior to the date the orders of assessment relating to the
said two assessment years were made, the orders of assessment are void. It was
urged that Section 44 of the Act did not authorise the Revenue to make an
assessment on the firm after it was dissolved. The High Court first noticed the
factual finding recorded by the Tribunal viz., when the assessments were made
on the firm, the firm was not in existence, having been dissolved prior to that
date and its business discontinued. The High Court also noticed the contention
of the assessee that inasmuch as "prior to the dates of the respective
assessments, the firm had been dissolved and its business discontinued' the
assessments made were contrary to law, in support of which contention the
appellant assessee relied upon a judgment of the Gujarat High Court in Special
Civil Application No.429/60, disposed of on November 12, 1985. The High Court
refused to follow the said judgment in view of the consistent view taken by the
Bombay High Court that even under the unamended Section 44, it was permissible
for the Revenue to make an assessment upon a dissolved firm after its
dissolution and discontinuation of business. Accordingly, it answered the
question referred to it in the affirmative i.e., against the assessee and in favour
of the Revenue.
this appeal, it is contended by Sri V. Rajagopal, learned counsel for the
appellant that under the unamended Section 44, no assessment could have been
made upon a firm which was dissolved by the date of the assessment. Learned
counsel laid emphasis on the language of the Section. He pointed out that so
far as the discontinuance is concerned, it referred both to association of
persons as well as the firms, but when it referred to dissolution, it only
referred to association of persons but not to the firm. This was a clear
pointer, says the counsel, to the fact that the section did not apply to
dissolution of a firm though it may have applied to its 649 discontinuation. He
further submitted that the mere application of the provisions of Chapter IV for
the purpose of assessment did not mean that an assessment could be made upon a
non-existent entity. He contrasted the language of unamended Section 44 with
the language employed in amended Section 44 and submitted that the very defect
pointed out by him in the unamended provision was rectified by the amendment,
and the omission supplied. He emphasised the proposition that an assessment
cannot be made upon a non- existent entity and that such an assessment is void
in law unless, of course, the law provides for such a course in express terms.
No such provision was there in Section 44 before it was amended in 1958, says
other hand, it is contended by Sri A. Raghuvir, learned counsel for the Revenue
that the contention urged by the appellant is concluded against him by the
decisions of this Court and that it is too late in the day to re-agitate the
44 of the Indian Income Tax Act, 1922 prior to its amendment by the Finance
Act, 1958, read as follows:
in case of discontinued firm or association:
any business, profession or vocation carried on by a firm or association or
persons has been discontinued or where an 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 shall, in respect of the
income, profits and gains of the firm or association, 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." After it was amended, the Section read thus:
Liability in case of firm discontinued or dissolved.
any business profession or vocation carried on by a firm on other association
or persons has been discontinued, or where a firm of other association of
persons is dissolved, the Income Tax Officer shall make an assess- 650 ment of
the total income of the firm or other association of persons as such as if no
such discontinuance or dissolution had taken place.
person who was at the time of such discontinuance or dissolution a partner of
the firm or a member of the association, as the case may be, shall be jointly
and severally liable for the amount of tax or penalty payable, and all the
provisions of Chapter I V so far as may be, shall apply to any such assessment
or imposition or penalty.' Unamended Section 44, it is evident, covered two situations:
any business, profession or vocation carried on by a firm or association of
persons was discontinued and (2) When as association of persons was dissolved.
In either of these situations, every person who at the time of such discontinuance
or dissolution was a partner of such firm or member of such association was
made jointly and severally liable to assessment under Chapter IV in respect of
the income, profits and gains of the firm or association, as the case may be.
The joint and several liability extended to the payment of the tax held
payable. All the provisions of Chapter IV, so far as the case may be, were made
applicable for such assessment.
this case, we are dealing with the situation where the dissolution of the firm
resulted in discontinuation of its business. We are not concerned herein with
the situation where the firm was dissolved but its business was not
discontinued. It is necessary to bear this factual premise in mind. Indeed, on
a pointed query from us, the counsel for the appellant stated that this was a
case where the dissolution resulted in discontinuance of business. The question
is whether in such a case, does not Section 44 enable the Income Tax Officer to
make an assessment on the dissolved firm? We are of the opinion that it does.
Indeed this aspect is no longer res integra in view of the decisions of this
Court in C.A. Abraham v. Income Tar Officer, Kottayam & Anr., 41 I.T.R. 425
and Shivram Poddar v. Income Tar Officer, Central Circle II, Calcutta & Anr.,
51 I.T.R. 823. In Abraham, the firm stood dissolved on the death of a partner
and the penalty under Section 28 of the Act was imposed after its dissolution.
It was contended by the assessee that such imposition was illegal, which
contention was negatived with reference to unamended Section
That was also a case where the business of the firm was discontinued because of
The purport of Section 44 was stated by Shah, J., speaking for the Ben in the
44 sets up machinery for assessing the tax liability of firms which had
discontinued their business and provides for three consequences, (1)that on the
discontinuance of the business of a firm, every person who was at the time of
its discontinuance a partner is liable in respect of income, profits and gains
of the firm to be assessed jointly and severally (2) each partner is liable to
pay the amount of tax payable by the firm, and (3) that the provision of
Chapter IV, so far as may be, apply to such assessment.....
effect, the Legislature had enacted by Section 44 that the assessment
proceedings may be commenced and continued against a firm o f which business is
discontinued as if discontinuance has not taken place. It is enacted manifestly
with a view to ensure continuity in the application of the machinery provided
for assessment and imposition of tax liability notwithstanding discontinuance
of the .business of firms. By a fiction, firm is deemed to continue after
discontinuance for the purpose of assessment under Chapter IV." In our
opinion, the above observations squarely apply to the present case which is
also a case where the dissolution of the partnership firm led to discontinuance
of its business.
same effect is the decision in Shivram Poddar. The firm consisted of four
partners including Shivram Poddar.
dissolved in February, 1950 and thereupon its business was discontinued. For
the assessment year, 1949- 50, one of the partners of the firm submitted a
return of its income and the assessment was made on October 28, 1952 in the
status of an unregistered firm. Subsequently, in March, 1955 notice was issued
under Section 44 of the Act proposing to reopen the assessment 'for the said
assessment year whereupon Shivram Poddar approached the Calcutta High Court for
issuance of a writ of mandamus commending the Income Tax Officer to forbear
from giving effect to the said notice. The 652 High Court dismissed the Writ
Petition, whereupon the matter was brought to this Court. The question arising
for consideration was stated by Shah, J., speaking for the Bench in the
question which falls to be determined in this appeal is whether the income
earned by the firm in the year ending March, 1950 could be assessed to tax
under Section 44 of the Indian Income-Tax Act, 1922, after the firm was
learned Judge set out the unamended Section 44 and its object as adumberated in
Abraham and observed thus:
44 operates in two classes of cases:
there is discontinuance of business, profession or vocation carried on by a
firm or association, and where there is dissolution of an association. It
follows that mere dissolu- tion of a firm without discontinuance of the
business will not attract the application of section 44 of the Art. It is only
where there is discontinuance of business, whether as a result of dissolution
or other cause, that the liability to assessment in respect of the income of
the firm under Section 44 arises.
case of an association, discontinuance of business for whatever cause, and
dissolution with or without discontinuance of business, will both attract
section 44. The reason for this distinction appears from the scheme of the
Income-Tax Act in its relation of assessment of the income of a firm.' After
explaining the scheme of the 1922 Act and after referring to the relevant
provisions in that behalf, the learned Judge proceeded to state:
44, is therefore, attracted only when the business of a firm is discontinued,
i.e., when there is complete cessation of the business and not when there is a
change in the ownership of the firm, or in its re- constitution, because by
reconstitution of the firm, no change is brought in the personality of the firm
and succession to the business and not discontinuance of the business results
The learned Judge concluded, on a examination of the scheme of the Act, that:
of reference to dissolution of firm (not resulting in discontinuance in Section
44) in section 44 was therefore a logical sequel to the provisions relating to
assess- ment of firms contained in Chapter IV, especially sections 23(5),
25(1), 26(1) and (2)." In our opinion, these two decisions are conclusive
on the question arising herein. The appeals are accordingly liable to fail.
as the unreported decision of the Gujarat High Court is concerned, the facts of
that case appear to be different.
sufficient to mention that even the said decision recognised that where the
dissolution of the firm resulted in discontinuance of its business, assessment
could be made on the dissolved firm having regard to the provisions contained
in unamended Section 44. This is what the Division Bench observed, i.e.:
if there was discontinuance of the business of the first petitioner firm on its
dissolution, it is clear that the unamended Section 44 would have governed the
question of assessment of the first petitioner firm and having regard to the
decisions of the Supreme Court just referred to, the Revenue would have been
entitled to assess the first petitioner firm as a firm despite its
dissolution.' The very same idea was repeated at a later stage in the following
there is discontinuance of the business, Section 44 would apply and the Revenue
would be entitled to proceed to assess the firm as if no dissolution had taken
place. (Vide C-A. Abraham v. Income Tax Officer, Commissioner of Income Tax_ v.
Angadi Chettiar & Commissioner of Income tax v. Rais Reddy Mallaram
there is no discontinuance of the business and there is succession, the case
would fall within Section 26(2). That section, however, does not enact a
provision enabling the Revenue to assess a dissolved firm on its
pre-dissolution 654 income in case of succession.' We are, therefore, of the opinion
that the said decision does not lay down any principle contrary to the one
enunciated in Abraham or Shivram Poddar.
this view of the matter, we do not think it necessary to deal with the facts
and principles enunciated in the decisions of the Bombay High Court referred to
in the order under appeal. Suffice it to say that the decisions in CLT, Bombay
v. Devidayal, 68 I.T.R. 425, Laxmidas v. CLT. Bombay.
I.T.R. 88 and the one in Nagarinal Baijnath v. C.I. T, 114 I.T.R. 133 affirm
and follow the principle in Abraham.
the above reasons, the appeal fails and is accordingly dismissed. No costs.