Commissioner of Income-Tax, Bihar
& Orissa, Patna V. M/S. Kirkend Coal Company  INSC 76 (12 March 1969)
12/03/1969 SHAH, J.C.
CITATION: 1969 AIR 1352 1969 SCR (3) 983 1969
SCC (1) 776
Indian Income-tax, 1922, ss. 26, 28, 44 and
66--Penalty leviable on firm for assessment year 1948-49-Firm reconstituted in
later years but business not discontinuedPenalty in respect of 1948-49 whether
leviable on reconstituted firm-Section 44 not applicable to such cases
Applicability of ss. 26 and 28-Question not raised before Tribunal cannot be
raised in reference under s. 66.
The respondent was a firm on which penalty
under s. 28(1)(c) of the Indian Income-tax Act, 1922 was imposed by the
Income-tax Officer in respect of the assessment year 1948
49. At the time when the penalty was imposed
the constitution of the firm had changed though the same business was continued
by the reconstituted firm. The appeals filed by the respondent before the
Appellate Assistant Commissioner and the Tribunal were rejected. In reference
the High Court held that penalty could be legally imposed upon the original
firm constituted in the account year relevant to the assessment year 1948-49
and not upon the new firm constituted in 1952. In coming to their conclusions
the Tribunal as well as the High Court proceeded on the assumption that the
source and power of the Incometax Officer to impose a penalty was in s. 44 of
the Indian Income-tax Act, 1922. In appeal by the Revenue to this Court,
HELD : (i) Section 44 only applies to those
cases in which there has been discontinuance of the business and not to cases
in which the business continues after the reconstitution of the firm, or there
is succession to the business. Cases of reconstitution of the firm or
succession to the business are covered by ss. 26(1) and (2). The Tribunal and
the High Court were therefore in error in relying on s. 44 of the Act. [988 A;
985 D-E] (ii) Assessment in Ch. IV of the Income-tax Act 1922 includes a
proceeding for imposition of penalty and the expression 'person' includes for
the purpose of s. 28 a firm registered or unregistered. If there is
reconstitution of the firm by virtue of s. 26, the Income-tax Officer will in
imposing the penalty proceed against the firm. If there is discontinuance of
the business penalty will be imposed against the partners of the firm. [988
B-D] In the present case, however, this Court could not go into the question
whether penalty on the respondent firm was leviable under the terms of ss. 26
and 28 even though the question raised by the Tribunal was in terms
sufficiently comprehensive to embrace the enquiry. In a reference under s. 66
of the Indian Income-tax Act, 1922, only the question which was either raised
or argued before the Tribunal may be answered, even if the language of the
question framed by the Tribunal may apparently include an enquiry into other
matters which could have been but were not, raised or argued. [988 D-F] Shivram
Poddar v. Income-tax Officer, Central Circle II, Calcutta & Anr., 51 I.T.R,
823, C. A. Abraham v. Income-tax Officer, Kottayam and 984 Anr., 41 I.T.R. 425
and Commissioner of Income-tax, Madras & Anr. V. S. V. Angidi Chettiar, 44
I.T.R, 739, applied.
S. M. S. Karuppiah Pillai v. Commissioner of
Income-tax Madras, 9 I.T.R. 1, approved.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 2456 of 1966.
Appeal from the judgment and order dated
January 27, 1964 of the Patna High Court in Misc. Judicial Case No. 299 of
D. Narsaraju, S. K. Aiyar, R. N. Sachthey and
B. D. Sharma, for the appellant.
C. K. Daphtary, Narain Rao, V. D. Narayan and
D. Goburdhun, for the respondent.
The Judgment of the Court was delivered by
Shah, J. Indetermining the taxable income of the respondent firm for the
assessment year 1948-49 the Income-tax Officer added to the income returned a
sum of Rs. 1,60,000 as 'undisclosed receipts'. The order was confirmed in'
appeal by the Appellate Assistant Commissioner, and by the Tribunal. The
Income-tax Officer had in the meantime commenced a proceeding for the levy of
penalty and in exercise of the power under s. 28 (1) (c) of the Indian
Income-tax Act, 1922 he directed the respondent firm to pay Rs. 60,000 as
penalty. The Appellate Assistant Commissioner in appeal confirmed the order. The
Income-tax Appellate Tribunal rejected the contention of the respondent that
the order imposing penalty upon the firm after the original firm was dissolved
was without jurisdiction.
The Tribunal referred at the instance of the
respondent firm the following question to the High Court of Patna for opinion;
"Whether on the facts and in the
circumstances of the case the imposition of penalty under s.
28 (1) (c) of the Indian Income-tax Act, upon
the petitioner firm (respondent) as constituted at the time of levy of penalty
was legal and valid?" The High Court called for a supplementary statement
of the case and pursuant thereto the Tribunal submitted a statement on the
specified points raised by the order of the High Court that (1)The firm which
carried on the business during the calendar year 1947 was dissolved on July 7,
1951 when Butto Kristo Roy, one of the partners, died.
(2)During the previous year 1947 there was no
instrument of partnership in existence, but the terms of the oral partnership
were the same as set out in the partnership deed dated October 17, 1949.
985 (3) The business of the firm was
continued with effect from July 8, 1951 by the new firm as successor to the
business of the old firm.
The terms of the partnership were the same as
set out in the deed dated October 17, 1949 and the partners and their shares
were also the same except that Baidyanath Roy took the place of Butto Kristo
(4) With effect from April 28, 1952, the
business was carried on by a partnership constituted by Baidyanath Roy and
Bijali Kanti Roy under an instrument dated August 27, 1952.
There was no dissolution of the firm, which
was carrying on the business; there was only a change in the constitution of
the old firm from April 28, 1952.
The High Court held that penalty could be
legally levied only upon the original firm constituted in the account year
relevant to the assessment year 1948-49 and not upon the new firm constituted
under the deed dated April 27, 1952.
The Tribunal and the High Court approached the
problem before them on the assumption that the source of the power of the
Income-tax Officer to impose a penalty was in section 44 of the Indian
Income-tax Act, 1922. In so assuming, in our judgment, they were in error.
Section 44 of the Indian Income-tax Act, 1922, as it stood at the relevant
date, in so far as it is material provided :
"Where any business, profession or
vocation carried on by a firm has been discontinued every person who was at the
time of such discontinuance a partner of such firm shall, in respect of the
income, profits and gains of the firm 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
The section is fairly plain : it applies to
cases of discontinuance of the business of a firm and not where there is
dissolution of the firm but not discontinuance of its business.
In S. M. S. Karuppiah Pillai v. Commissioner
of Income-tax, Madras(1), in dealing with the effect of s. 44 of the Indian
Income-tax Act, 1922, before it was amended by Act 7 of 1939, a Full Bench of
the Madras High Court observed "This section (s.44) only applies when
there has been discontinuance of the, business, The section (1) 911.T.R. I.
986 says that if a business is discontinued
the partners shall nevertheless be jointly and severally liable for the profits
which had been earned".
In Shivram Poddar v. Income-tax Officer,
Central Circle II, Calcutta and Anr.(1) this Court examined the scheme of s. 44
(before it was amended by the Finance Act of 1958) and its inter-relation with
the provisions of ss. 25(1), (2), 26(1), (2) and 28 (1) (c) in some detail. The
Court observed :
"Section 44 operates in two classes of
where 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 dissolution of a firm
without discontinuance of the business will not attract the application of s.44
of the Act........
The reason for this distinction appears from
the scheme of the Income-tax Act in its relation to assessment of the income of
a firm. A firm whether registered or unregistered is recognised under the Act
as a unit of assessment (sections 3 and 2(2)), and its income is computed under
clauses (3) and (4) of section 23. as the income of any other unit. Section
25(1) relates to assessment in cases of a discontinued business-whether the
business is carried on by a firm or by any other person........... Then there
is the special provision relating to assessment when at the time of making an
assessment it is found that a change has occurred in the constitution of a
firm, or a firm has been newly constituted : section 26(1). The date on which
the change has occurred is immaterial; it may be in the year of account, in the
year of assessment or even after the close of the year of assessment, The
Incomefax Officer has under section 26(1) to assess the firm as constituted at
the time of making the assessment, but the income, profits and gains of the
previous year have, for the purpose of inclusion in the total income of the
partners, to be apportioned between the partners who were entitled to receive
the same. Subsection (2) of section 26 relates to assessment in the case of
succession to a person (which expression includes a firm) carrying on a
business by another person in such capacity........... Discontinuance of
business has the same connotation in section 44 as if has in section 25 of the
Act; it does not (1) 51 T.T.R. 823.
987 cover mere change in ownership or in the
constitution of the unit of assessment.
Section 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 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......... But the Income-tax Act
recognises a firm for purposes of assessment as a unit independent of the
partners constituting it; it invests the firm with a personality which survives
reconstitution. A firm discontinuing its business may be assessed in the manner
provided by section 25(1) in the year of account in which it discontinues its
business; it may also be assessed in the year of assessment. In either case it
is the assessment of the income of the firm. Where the firm is dissolved, but
the business is not discontinued, there being change in the constitution of the
firm, assessment has to be made under section 26 (1), and if there be
succession to the business assessment has to be made under section 26(2). The
provisions relating to assessment on reconstituted or newly constituted firms,
and on succession to the business are obligatory. Therefore, even when there is
change in the ownership of the business carried on by a firm on reconstitution
or because of a new constitution, assessment must still be made upon the firm.
When there is succession, the successor and the person succeeded have to be
assessed each in respect of his actual share.
This scheme of assessment fumishes the reason
for omitting reference to dissolution of a firm from section 44 when such
dissolution is not accompanied by discontinuance of the business".
Two other cases decided by this Court may be
briefly noticed. In C. A. Abraham v. Income-tax Officer, Kottayam and
Another(1) there was discontinuance of the business of the firm consequent upon
dissolution of the firm, s. 44 was held applicable, and it was held that
imposition or penalty being a process of assessment the. Income-tax Officer was
not incompetent to levy penalty after discontinuance of the business. In
Commissioner of Income-tax, Madras and Another v. S. V. Angidi Chettiar (2)
this Court held that the Income-tax Officer could exercise under s. 44 read
with s. 28 power to impose penalty upon the firm which discontinued its
business on dissolution caused by the death of one of the partners (1) 41
(2) 44 I. T. R 739.
988 Section 44 therefore only applied to
those cases in which there had been discontinuance of the business and not to
case, in which the business continued after reconstitution of the firm or there
was succession to the business. Cases of reconstitution of the firm or
succession to the business of the firm are covered by ss. 26(1) and (2).
"Assessment" in Chapter IV of the
Income-tax Act, 1922, includes a proceeding for imposition of penalty. Section
28 of the Act authorises the Income-tax Officer, if satisfied, in the course of
any proceeding under the Act that any person has, inter alia, concealed the
particulars of his income or deliberately furnished inaccurate particulars of
such income, to direct that such person shall pay by way of penalty, a sum of
money not exceeding the amount specified therein in addition to the income tax
and super-tax payable by such person. The expression " person"
includes for the purpose of s. 28, a firm registered or unregistered. If there
is reconstitution of the firm, by virtue of s. 26, the Income-tax Officer will
in imposing the penalty proceed against the firm. If there is discontinuance of
the business penalty will be imposed against the partners of the firm.
Before the Tribunal and the High Court the
case was argued on the footing that s. 44 alone was applicable. Whether under
the terms of s. 26 read with s. 28, penalty may be imposed upon the new
partners for the failure of the partners of the firm constituted in the year of
account relating to the assessment 1948-49 was never investigated.
The question raised by the Tribunal is in
terms sufficiently comprehensive to embrace an enquiry whether partners of the
firm in existence on July 30, 1954, were liable to be assessed to penalty as
successors in interest of the partners of the original firm in existence in the
year of account relating to the assessment year 1948-49. But in a reference
under s. 66 of the Indian Income-tax Act, 1922, only the question which was
either raised or argued before the Tribunal may be answered, even if the
language of the question framed by the Tribunal may apparently include an
enquiry into other matters which could have been, but were not, raised or
The appeal fails and is dismissed. In the
circumstances of the case there will be no order as to costs in this Court.
G.C. Appeal dismissed.