Rajasthan H.C : The status of the petitioner firm is that of an unregistered firm and not that of an AOPs as claimed ?

High Court Of Rajasthan

George Talkies Circuit vs. CIT

Sections 2(31), 189(1)

Asst. Year 1976-77

J.S. Verma, C.J. & Milap Chandra, J.

IT Ref. No. 25 of 1981

4th September, 1987

Counsel Appeared

S.K. Kakkar, for the Assessee : B.R. Arora, for the Revenue

MILAP CHANDRA, J.:

This is a reference under s. 256(i) of the IT Act, 1961 (hereinafter to be called ” the Act “), by the Tribunal, Rajasthan, Jaipur Bench, Jaipur, at the instance of the assessee, to answer the following question of law, namely:

” Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the status of the petitioner firm is that of an unregistered firm and not that of an AOPs as claimed ? “

2. The facts of the case giving rise to this reference may be summarised thus. The case relates to the asst. yr. 1976-77. The assessee was carrying on the business of film distribution and exploitation at Jodhpur. The firm and all its partners were declared insolvent on November 17, 1971, by the Addl. District judge No. 1, Jodhpur, and a receiver was appointed on May 18, 1971. He continued the said business in respect of the pictures whose term did not expire. He filed the return relating to the said period in the status of an AOP. The ITO, ” E ” Ward, Jodhpur, completed the assessment of the assessee in the status of an unregistered firm. On appeal by the receiver, the AAC confirmed the status of the assessee as that of an unregistered firm but set aside the assessment on the ground that the ITO should have issued fresh notice to the assessee to file a return in the status of an unregistered firm and directed him to proceed afresh after issuing necessary notice to the assessee. Both the parties preferred appeals against the order of the AAC. Both the appeals were dismissed by the Tribunal by its order dated September 11, 1980. Thereafter, the assessee moved an application under s. 256(1) of the Act for making this reference. It was allowed. Hence this reference.

It has been contended by learned counsel for the assessee that on the adjudication of the firm as insolvent, it stood dissolved and the business which was carried thereafter by the receiver was run on behalf of all the former partners as an AOP and not as partners.

In reply, it has been contended by learned standing counsel for the Department that on the declaration of the firm and its partners as insolvent, the firm stood dissolved under s. 41(a) of the Partnership Act but for the purpose of the assessment, it continued to be so as provided in s. 189 (1) of the IT Act.

6. It is the admitted case of the parties that the assessee and its partners were declared insolvent in the year 1971 and a receiver was appointed on May 18, 1971. It is not in dispute that on the adjudication of the firm as insolvent, it stood dissolved under s. 41 (a), Partnership Act. Sub-s. (1) of s. 189 of the Act runs as under : “189. (1) Where any business or profession carried on by a firm has been discontinued or where a firm is dissolved, the ITO shall make an assessment of the total income of the firm as if no such discontinuance or dissolution had taken place, and all the provisions of this Act, including the provisions relating to the levy of penalty or any other sum chargeable under any provision of this Act, shall apply, so far as may be, to such assessment. “

7. It is clear from the above-quoted provisions that despite the dissolution of the firm on account of its insolvency, it continued to be a subsisting firm under the IT Act for the purpose of assessment of the total income of the firm till the date of its dissolution. They contain deeming provisions for the continuance of the dissolved firm for this limited purpose.

8. Admittedly, the disputed assessment relates to the asst. yr. 1976-77. The firm, M/s George Talkies Circuit, Jodhpur, stood dissolved under s. 41(a) of the Partnership Act in the year 1971, and, thereafter, the business was carried on by the receiver. It cannot, therefore be said that the disputed income was of the said firm. It was of the erstwhile partners as an AOP. It has been observed in N. V. Shanmugham & Co. vs. CIT (1971) 81 ITR 310 (SC) at page 315, as follows: ” We are unable to accede to the contentions of the learned counsel for the assessee. It is not denied that the business was carried on by the receivers on behalf of the erstwhile partners of the firm and that considerable profits were earned from the business. The control and the management of the business was in the hands of the receivers. The control and management was a unified one. The receivers had joined in a common purpose and they acted jointly. When they did so, they acted on behalf of the persons who were the owners of the business. The receivers did not and could not have represented the individual interest of the various owners of the business. If they had done so, there would have been chaos in the business. The profits to which those owners lay claim and which they were not averse to pocketing, were earned on behalf of an ‘AOP’. The profits were earned on behalf of the persons who had a common interest created by the order of the Court and were on that account an ‘AOP’. The existence of specific or defined interest in the profits did not make the earning any the less by an ‘AOP’. Liability to tax depends upon the earning of profits by a unit and not upon the ultimate division of the profits. The expression ‘AOP’ is not defined in the Act. At one stage, there was conflict of judicial opinion about the true meaning of that expression. That conflict can now be said to have been settled by some of the decisions of this Court to which we shall refer presently. “

9. It has been observed in Munilal Shivnarain Kothari vs. CIT (1984) 42 CTR (Raj) 11 : (1984) 149 ITR 567 (Raj), at page 570, as under: ” Therefore, when the assessee in this case claims to be a firm, the individual members or partners of that firm cannot be assessed as individuals and if it is found that, as a matter of fact, there is no firm, then the only status in which they can be assessed is ” AOP “. Reference in this connection may be made to CIT vs. Murlidhar Jhawar and Purna Ginning & Pressing Factory (1966) 60 ITR 95 (SC), wherein it has been observed as under : ‘Apart from an association of individuals or a firm, the IT Act does not recognise a collection of individuals as an entity capable of being assessed to tax. The three parties were not a registered firm, and they could be assessed to tax collectively as an association of individuals or as an unregistered firm if the relation between them was of partners.’

10. Now, as already stated above, for the purpose of this reference, we have to assume that there is no genuine firm and, therefore, the relation between the persons, who are assessees in this case, cannot be said to be those of partners and, therefore, the only status in which they can be assessed is that of an AOP.”

11. The deeming provisions of s. 189(1) of the Act are not applicable to the income arising long after the dissolution of the firm.

12. As such, the Tribunal was not justified in holding the status of the assessee as of unregistered firm and not of AOP.

13. In the result, the question is answered in the negative, against the Revenue and in favour of the assessee.

[Citation : 171 ITR 386]

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