Rajasthan H.C : Whether the learned Tribunal was right in law in holding that the notice under s. 148 dt. 8th June, 1988, is valid and with jurisdiction ?

High Court Of Rajasthan

Kundanlal Pyarelal & Co. vs. ITO

Section 256(2)

N.N. Mathur & O.P. Bishnoi, JJ.

IT Ref. Appln. No. 66 of 1998

5th November, 2001

Counsel Appeared

Vinit Kothari, for the Petitioner : L.M. Lodha, for the Respondent

JUDGMENT

N.N. MATHUR, J. :

This reference application under s. 256(2) of the IT Act, 1961, has been filed at the instance of the assessee seeking reference on the following questions of law for the opinion of this Court :

“(1) Whether the learned Tribunal was right in law in holding that the notice under s. 148 dt. 8th June, 1988, is valid and with jurisdiction ?

(2) Whether, on correct interpretation of s. 42 of the Indian Partnership Act r/w s. 187(2) of the IT Act, 1961, the learned Tribunal was right in law in holding that it is a case of dissolution and not of change in constitution?

(3) Whether the learned Tribunal was right in law in holding that the Revenue was justified in rejecting the claim of the assessee for adopting the same value for the second period as had been adopted in valuing the closing stock for the first period ?”

2. Briefly stated the facts of the case are that a firm was constituted of four partners, namely, Shri Pyarelal, Shri Nathmal, Smt. Rani Devi and Shri Tarsemlal w.e.f. 27th March, 1969 on the terms and conditions of the partnership deed executed on 15th June, 1969. One of the partners namely, Pyarelal died on 22nd Aug., 1986. On 25th Aug., 1986, Smt. Rajrani Devi, widow of deceased Pyare Lal joined hands with the other three surviving partners on the terms and conditions of the partnership deed executed on 5th Sept., 1986. The assessee filed two returns of the income, one for the period from 18th April, 1986 to 21st Aug., 1986, another for the period 25th Aug., 1986, to the end of March, 1987. A specific note was made to the effect that the firm is to be dissolved on 21st Aug., 1986, on account of the death of Shri Pyarelal, one of the partners of the firm. The returns were accepted under s. 143(1) of the IT Act. Subsequently, it transpired that the assessee had overvalued the closing stock in the first return so as to take benefit of the same in the second return. In the first return, the assessee had declared an income of Rs. 8,350 after inflating the value of stock, by a sum of Rs. 9,05,184, but for this overvaluation of closing stock, there would have been a loss of Rs. 8,96,834. Thus, according to the Revenue, by overvaluation of the closing stock for the first period, assessee suppressed the profits of the firm in the second period so as to get a dual benefit. Accordingly, the proceedings were reopened by issuing a notice under s. 148 of the IT Act to the assessee for the period 25th Aug., 1986 to 31st March, 1987. On 16th Aug., 1988, the AO issued a letter to the assessee to explain the basis for adopting the value of closing stock for the first period, which has been shown as opening stock in the second period. After receipt of the said letter, assessee filed a consolidated return which was termed as a revised return. The assessee claimed that only one assessment should be made in respect of the entire period as there has been no dissolution of the partnership firm on the death of one of the partners but only a change in the constitution of the firm. By letter dt. 28th June, 1990, the assessee claimed that after the execution of the first partnership deed, a supplementary partnership deed had been executed by the firm on 24th July, 1969, which contained cl. 10 to the effect that the firm would not be dissolved on the death of any partner. The cl. 10 reads as under : “The firm shall not stand dissolved on the death of any partner.” A certificate of the Punjab National Bank was also filed certifying the availability of the supplementary partnership deed with the bankers. On consideration of the entire material, the AO disbelieved the existence of supplementary partnership deed. The AO arrived at the conclusion that assessee has produced distorted fact and has manipulated the closing stock for the purpose of saving tax burden. This finding has been confirmed by the CIT(A) as well as by the Tribunal.

It is contended by Mr. Kothari, learned counsel for the assessee, that upon the death of partner, there was only change in the constitution of the partnership firm and not dissolution. He has pointed out certain circumstances to show that a supplementary deed was executed which provide that on the death of the partner, the firm shall not be dissolved. It is pointed out that Smt. Rajrani, widow of late Shri Pyarelal, was substituted as a partner and the partnership firm was continued to exist thereafter. It is submitted that two returns were filed under a bona fide mistake. However, when partners came to know about the correct interpretation of the provisions of law, they immediately filed a revised return before the assessing authority and submitted that it was only a case of change in constitution of firm. It is, thus, submitted that question relates to the interpretation of law contained in s. 42 of the Indian Partnership Act r/w s. 187(2) of the IT Act. The learned counsel has also relied upon the decision of this Court in CIT vs. B.D. Dal & Oil Industries (1989) 175 ITR 372 (Raj) : TC 34R.754 wherein it is held that s. 42(c) of the Indian Partnership Act, 1932, envisages that a partnership would not stand dissolved on the death of a partner but shall continue with the remaining partners together with the heir of the deceased partner, there results only a change in the constitution of the firm and a single assessment is to be made on the firm for the periods before and after the death of a partner.

On careful consideration of the entire material, we are of the view that no referable question of law arises from the order of the Tribunal. There is a concurrent finding of fact that the supplementary partnership deed is a manipulated document. The plea taken at a later stage is an afterthought. Thus, the question is not of harmonious consideration of s. 42 of the Indian Partnership Act and s. 187 of the IT Act, but the question is to the effect that as to the existence of the supplementary partnership deed. It is a purely a question of fact which has been answered against the assessee. Thus, in our opinion, no referable question of law arises from the order of the Tribunal.

Accordingly, the reference application filed by the assessee-petitioner is rejected.

[Citation : 265 ITR 654]

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