Kerala H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in law and in fact in finding that the firm continued to be in existence till February 7, 1980 ?

Counsel Appeared

P. Balachandran & Sudhir Gopi, for the Petitioner : P.K.R. Menon, for the Respondent

K.S.PARIPOORNAN, J. :

In the Original Petitions Nos. 413 and 571 of 1988, the Revenue is the petitioner. The same respondent in both these original petitions is an assessee to income-tax. The said assessee is the petitioner in Original Petition No. 231 of 1988. The questions of law that arise for consideration in the three original petitions are connected and arise out of the same appellate order dated May 29, 1986, passed by the Income-tax Tribunal for the year 1979-80.

We heard counsel for the Revenue as also counsel for the assessee. We are concerned with the asst. yr. 1979-80. The accounting period is May 23, 1978, to March 31, 1979. The assessees are joint receivers appointed by the Court to manage the firm, United Film Exhibitors, Palghat, till the winding up of the firm was complete. Though an array of facts are stated in the original petitions and also in the various annexures, the short question that arises for consideration is, whether the Tribunal was justified in holding that the assessment for the year 1979-80, relevant for the accounting period May 23, 1978, to March 31, 1979, should be made in the status of a “firm” and further whether depreciation allowance is allowable. There was an original partnership deed dated July 19, 1971. It was superseded by another deed dated June 4, 1975. Disputes arose among the partners. One of them issued notice to the other partners of the firm on May 19, 1978, informing them that the firm will stand dissolved on May 22, 1978. Two other partners filed Original Suit No. 167 of 1978 in the Sub-Court, Palghat, for a declaration that the firm stood dissolved on June 22, 1978, and for accounts. During the pendency of the suit, on motion by the plaintiffs, receivers were appointed. It was confirmed in appeal by the High Court in Civil Miscellaneous Application No. 113 of 1978. Finally, the matter was settled out of Court. The suit was dismissed on February 29, 1980. A regular deed of dissolution of partnership was executed by all the partners of the firm on February 22, 1980. It stated that the firm stood dissolved w.e.f. May 22, 1978. The history of the litigation was also referred to therein. The joint receivers appointed for the firm submitted the return for the asst. yr. 1979-80 on December 3, 1980, disclosing “nil” income. They were assessed as an AOP. The assessee took up the plea that the dissolved firm cannot be assessed at all. This was negatived. In the alternative, it was contended that the assessment made in the status of an “association of persons” is equally invalid. This plea was rejected by the ITO and also by the CIT.

In second appeal, the Tribunal held that in view of s. 189 of the IT Act, s. 47 of the Indian Partnership Act, 1932, and the decision of the Supreme Court in Saligram Ruplal Khanna vs. Kanwar Rajnath, AIR 1974 SC 1094, the rights and liabilities of the partners continued till the date of dissolution on February 22, 1980, and the firm continued to be in existence till then and in the light of the legal principles discernible from the provisions of the statute and the decision referred to, the status to be assigned to the assessees is that of the person whom they represented. In this case, the joint receivers represented the firm. So, the firm continued up to February 7, 1980, for the purpose of winding up. The joint receivers should be assessed in the status of a “firm” for the asst. yr. 1979-80. In this view, the Tribunal set aside the order of the lower authorities assigning the status as “AOP” and directed that the assessment should be made in the status of “firm”. As a sequel thereto, the Tribunal further held that the firm is entitled to depreciation since the assets were not only owned but also used by the, receivers for and on behalf of the firm.

The Revenue as well as the assessee filed applications before the Tribunal for referring certain questions of law for the decision of this Court. The applications filed by the Revenue and the assessee were dismissed. Thereafter, the Revenue has filed Original Petitions Nos. 413 and 571 of 1988 to refer the questions of law formulated in para 7 of the original petitions for the decision of this Court. The questions are as follows:

Original Petition No. 571 of 1988:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law and in fact in finding that the firm continued to be in existence till February 7, 1980 ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law and in fact in finding that the joint receivers had no scope to earn income by reason of their association and they cannot be called an “AOP” ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law and in fact in finding that United Film Exhibitors should have been assessed on the impugned income for the asst. yr. 1979-80 in the capacity of a registered firm ?

Original Petition No. 413 of 1988.

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law and in fact in holding that the firm is entitled to depreciation?”

4. The assessee has, in Original Petition No. 231 of 1988, prayed for referring the questions of law formulated in para 8 of the original petition, for the decision of this Court. The questions are as follows “1 Whether there is any provision in the IT Act, 1961, to assess a dissolved firm in respect of the income realised after the dissolution and during the winding up of the firm ? 2. If the answer to the above question is in the positive, should not the firm be assessed as a registered firm, the firm having been a registered firm till the dissolution of the firm?” As stated, in these three original petitions, the questions that fall for consideration are interlinked or interconnected. Broadly, three questions arise for consideration. They are :

(1) Whether a dissolved firm can be assessed ?

(2) What is the status to be assigned to the assessee ? and (3) Whether depreciation allowance is allowable ?

That a dissolved firm can be assessed to tax can be seen from s.189 of the IT Act. When posed with this statutory provision, the assessee’s counsel was not able to convince us that there was any error in the order of the Tribunal in holding that a dissolved firm can be assessed to income-tax. We hold that no referable question of law arises for consideration in Original Petition No. 231 of 1988, filed by the assessees. Original Petition No. 231 of 1988 is dismissed.

We now turn to the two original petitions filed by the Revenue. In the light of s. 189 of the IT Act, r/w s. 47 of the Indian Partnership Act and the decision of the Supreme Court in Saligram Ruplal Khanna’s case, AIR 1974 SC 1094, and on the facts of this case, is evident that the firm continued for the purpose of winding up till February 7, 1980. This is a finding recorded by the Tribunal. It is not open to any challenge ; nor was it challenged at the time of hearing. Till it was so wound up on February 7, 1980, the firm was in existence for the purpose of winding up and for completing the transactions undertaken earlier. The deed of dissolution was drafted on February 22, 1980. The firm continued up to February 7, 1980, and the receivers appointed by the Court carried on the business of the firm though it may be only for the purpose of winding up the affairs of the firm. In the light of s. 47 of the Partnership Act and s. 189 of the IT Act, understood in the context of the decision of the Supreme Court in Saligram Ruplal Khanna’s case, (supra) we have necessarily to hold that the status of the assessees is of the person whom they represented. Here, the joint receivers (assessees) represented the firm. The receivers were appointed by the Court. So, the joint receivers should be assessed in the status of a firm. This is what the Tribunal has held. We see no error in the said decision.

We should hasten to add that the Revenue has posed the question as if the Tribunal has held that the assessees should be assessed for the impugned income for the asst. yr. 1979-80 in the capacity of “registered firm”. It has not been so held by the Tribunal. All that the Tribunal has held is that the assessees should be assigned the status of a “firm”. We see no error in the said view.

The only further question is, whether the Tribunal was justified in allowing depreciation for the year 1979-80 ? As a consequence of holding that the status that should be assigned is that of a. “firm”, the Tribunal has held that the firm is entitled to depreciation as the assets were not only owned but also used by the receivers for and on behalf of the firm. Counsel for the Revenue submitted that the observations are very wide and it may even mean that the assessee will be entitled to double relief without reckoning the exact depreciation that the assessee is entitled to. All that we need to say is that the assessees will be entitled to depreciation which is in accordance with law.

In our view, the questions formulated by the Revenue in Original Petitions Nos. 413 and 571 of 1988 are not referable questions of law.

The above three original petitions are dismissed.

[Citation : 177 ITR 518]