Judgment:
S. Venkataraman, J.
1. The question involved in these petitions is as to whether a dissolved firm can be assessed to agricultural income-tax after the date of its dissolution in respect of the dividends received from the Coffee Board for the supply of coffee seeds made by the firm prior to its dissolution.
2. The facts of the cases may briefly be referred to before considering the above question.
In WP Nos. 2397 and 2398 of 1988 the firm, Shigode Plantations, was a registered firm and that firm was dissolved under a deed of dissolution dt. 31st March, 1978. Dividends in respect of supply of coffee made by the firm prior to its dissolution were received during the asst. yrs. 1979-80 to 1982-83. The Agrl. ITO made an assessment on the firm for the abovesaid four years. The assessment was made under s. 27 of the Agrl. IT Act ('the Act' for short). Those orders were challenged before the Karnataka Tribunal in AIT Nos. 51 to 55 of 1986. The Tribunal, by its order dt. 30th December, 1986, held that under s. 27 only the income received by the firm prior to its dissolution could be assessed even after its dissolution, that under that provision the firm could not have been assessed in respect of the dividends received subsequent to the dissolution. It, therefore, set aside the assessment orders. However, the Tribunal observed that the assessment of the firm could be reopened by the assessing authority to include the income derived subsequent to the dissolution and reassess the income of the firm.
After the passing of that order s. 26 of the Act came to be amended by the Karnataka Act No. 10 of 1987. Sec. 13 of the amendment Act contained a provision regarding validation of the orders made earlier. The first respondent wrote a letter, annexure-C, to the Manager, Syndicate Bank, demanding payment of tax which had earlier been assessed in respect of the firm on the ground that in view of the amendment Act the order of the Tribunal had become inoperative and that the original assessment order still held the field. The petitioners have challenged that annexure-C. During the pendency of the petitions, the first respondent has also purported to pass a rectification order under s. 37 rectifying the alleged mistake in the earlier assessment order. These rectification orders, annexure-F and G, have also been challenged.
In WP Nos. 2735 to 2740 of 1988, the firms involved are Doddangudda Estate and Kuttin Khan Estate. The first firm was dissolved by a deed of dissolution of 18th September, 1984, and the firm was reconstituted on 1st April, 1985. Even that reconstituted firm was dissolved on 28th May, 1986. Kuttin Khan Estate was dissolved on 18th September, 1984. With regard to supply of coffee made by the above firms before dissolution, dividends were received during 1984-85 to 1986-87. The first respondent has issued notices to the two firms to file agricultural income-tax returns for the years ending 31st March, 1985, 31st March, 1986 and 31st March, 1987. These notices have been challenged in those writ petitions.
In WP Nos. 13384 of 1988, the firm involved is Kalayan Koppal Estate. This firm was dissolved w.e.f. 2nd September, 1985. The first respondent has passed an assessment order dt. 13th June, 1988, assessing the dividends received in respect of the asst. yr. 1987-88 for the coffee supplied by the firm before its dissolution. That order is challenged in that writ petition.
3. Though in all the writ petitions the constitutional validity of the amendment of s. 26 is also challenged as this point has already been determined in E. M. V. Muthappan vs. Agrl. ITO : [1990]184ITR161(KAR) , that point was not urged.
4. It is now well-settled that the existence of an assessee at the time of making the assessment order is very necessary and that an order cannot be passed when the assessee is no longer in existence. In CWT vs. G. E. Narayana : [1992]193ITR41(KAR) , a Division Bench of this Court, relying on the earlier Supreme Court decisions, has held as hereunder :
'That the existence of the assessee at the time of the assessment order is an absolute necessity is a matter which has been recognised in all these decisions and if the assessee is not in existence, there should be a specific provision to assess the said income which was liable to be taxed under the provision of the IT Act'.
5. In these cases it is not disputed that at the time when the assessment orders were passed or the notices to file the returns were issued, the firms had ceased to exist. The question that requires consideration is whether s. 26(4) as amended by Act 10 of 1987 or s. 27 empowers the authority to pass an order of assessment against the dissolved firm in respect of certain income derived after the date of dissolution, though that income is relatable to the supply made by the firm when it was in existence.
The relevant provisions read as hereunder :
'26.(4) Where any business through which agricultural income is received is discontinued in any year, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance.
27.(1) Where the business of a firm or AOPs is discontinued or such firm or association is dissolved, the Agrl. ITO shall make the assessment of the agricultural income of the firm or AOPs as if no such discontinuance or dissolution has taken place and all the provisions relating to the levy of penalty or any other sum chargeable under any provisions of this Act shall apply, so far as may be, to such assessment.
27.(2) Every person who was at the time of such discontinuance or dissolution, a partner of such firm or a member of such association and the legal representative of any such person who is deceased, shall be jointly and severally liable to the assessment on such agricultural income and also to pay the amount of agricultural income-tax, penalty or other sum payable and all the provisions of this Act, so far as may be, shall apply to any such assessment or imposition of penalty or other sum'.
6. The learned Government advocate contended that orders could be passed under s. 27 as that provision creates a legal fiction of the firm continuing in existence. He also relied on the judgment of a learned single judge in WP Nos. 1091 and 1092 of 1987 (Seegekhan @ Rashinkhan Estate vs. Agrl. ITO - date of decision 13th August, 1987) in support of his contention. It is no doubt true that was also a case where assessment had been made in respect of the income received after the dissolution but in respect of supply made before the dissolution. The assessments were challenged on the ground that as the payments were received by the quondam partners subsequent to the date of dissolution, no assessment could be made on the firm by invoking s. 27 of the Act. The learned single judge has rejected that contention holding that the firm, though dissolved, continues by virtue of the fiction created by s. 27 of the Act.
7. While interpreting a provision in a taxation law, wherein a legal fiction is created, such provision will have to be strictly interpreted. In CWT vs. G. E. Narayana's case (supra), the Division Bench of this Court has pointed out that a lacuna in the taxing law cannot be filled up by any judicial exercise and the difficulty caused by the lacuna will have to be removed by the legislature. A reading of s. 27 shows that under that provision the Officer can make the assessment of the agricultural 'income of the firm' even after dissolution as if no dissolution had taken place. It is the 'income of the firm' that can be assessed even after its dissolution. Where certain income is received after the dissolution that income would not be the income of the firm as the firm would no longer be in existence. The object of s. 27(1) is to empower the officer to assess the income of the firm which accrued prior to its dissolution even though by the time of the assessment, the firm has stood dissolved. The fiction cannot be extended to a case where the income is received after the dissolution of the firm by the erstwhile partners.
8. In George Talkies Circuit vs. CIT (1988) 171 ITR 386 : TC 34R.828, a Division Bench of the Rajasthan High Court was dealing with s. 189(1) of the IT Act which is in pari materia with s. 27 of the Act. Interpreting that provision, the High Court has held as hereunder :
'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'.
Sec. 30(2) of the Act, which is on similar lines as that of s. 27, reads as hereunder :
'30.(2) When such an order has been passed, the Agrl. ITO shall make an assessment of the total agricultural income received by or on behalf of the family, branch, tarwad or tavazhi as such, as if no partition or maintenance division had taken place and each member or group of members shall, in addition to any agricultural income-tax for which he or it may be separately liable, and notwithstanding anything contained in cl. (a) of s. 12, be liable for a share of tax on the income so assessed according to the portion of the family, branch, tarwad or tavazhi property allotted to him or it and the Agrl. ITO shall make assessments accordingly on the various members and groups of members in accordance with the provisions of s. 19 :
Provided that all the members and groups of members whose family, branch, tarwad or tavazhi property has been partitioned or divided for maintenance shall be liable jointly and severally for the tax on the total agricultural income received by or on behalf of the family, branch, tarwad or tavazhi as such up to the date of the partition'.
9. In WP Nos. 16845 to 16847 of 1987 (V. R. Uddappa Gowda vs. Agrl. ITO - decision dated 20th August, 1991), a question arose as to whether an undivided Hindu family could be assessed after partition in respect of the income received after the date of partition. The assessing authority had held that by virtue of the Expln. to s. 30(2), the income was deemed to be received by the HUF and the HUF could be assessed accordingly for the years in which the income was received from the Coffee Board in respect of coffee crop harvested and delivered to the Coffee Board prior to the partition of the HUF. The payments were received subsequent to the partition. The Division Bench while referring to s. 30(2) has pointed out that that is a provision which enables the Revenue to assess the erstwhile HUF to the extent of the income received by the HUF till the date of partition.
10. We are, therefore, unable to hold that under s. 27 the dissolved firm could be deemed to be in existence for purpose of assessment in respect of the income derived after the date of dissolution of the firm. In fact, in WP No. 2397 and 2398 of 1988 that is the view taken by the Karnataka Tribunal and it is on that ground the assessment orders were set aside.
11. The next point to be considered is whether s. 26(4), as amended by Act 10 of 1987, could be of any help to the respondent.
12. Learned counsel for the petitioners contended that s. 26(4) applies only to a case of discontinuance of the business and not to a case of dissolution of the firm, that s. 27 makes a distinction between discontinuance of a business and dissolution of the firm, and that as such s. 26(4) does not apply to a case of dissolution of the firm. It is no doubt true that discontinuance of business need not necessarily imply dissolution of the firm. A firm may continue to exist but may discontinue carrying on a particular business. But where a firm is dissolved, it necessarily involves discontinuance of business. As such it cannot be said that s. 26(4) cannot be applied as it does not refer to dissolution of the firm, but what we are concerned with is as to whether this provision creates any legal fiction regarding the continuance of the firm notwithstanding its dissolution for purposes of assessing an income received after the dissolution. All that this provision lays down is that, any sum received after the discontinuance of business lays down is that, any sum received after the discontinuance of business shall be deemed to be the income of the 'recipient' and charged to tax in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance. Explaining this provision, the Division Bench of this Court in E. M. V. Muthappan's case (supra), has pointed out that since the sale proceeds received is income relating to agricultural activity carried on during the earlier years, it must be deemed to be the income of the recipient, as the original assessee is no longer continuing the business and, therefore, is liable to tax in the year of receipt in the hands of the recipient. It is, therefore, clear that this provision applies to a case where the person carrying on the business discontinues it and the income due to him, he being the original assessee, is received by another after the discontinuance of the business. In such a case, income received by the recipient could be charged to tax in the year of receipt. There is nothing in this provision to indicate that where the firm is dissolved and some income is received after the dissolution in respect of agricultural produce supplied by the firm before its dissolution, the firm itself could be assessed in the year of receipt of income notwithstanding its dissolution. Even in Uddappa Gowda's case referred to above, the Division Bench dealing with the Expln. to s. 30(2) which had been added by means of an amendment has held that nowhere the Explanation creates a fiction about the HUF being in existence for the purpose of the said income deemed to have been received by it and that in the absence of such a specific provision it was not possible for the Court to supply the omission, since the statute in question is a taxing provision. In the instant case also a legal fiction regarding the continuance of the firm even after its dissolution for the purpose of assessing it in respect of income received after the date of its dissolution cannot be spelt out from s. 26(4). The amendment effected by Act 10 of 1987 has not in any way changed the legal position with regard to the point at issue and the Agrl. ITO could not have relied on the amended s. 26 to assess the dissolved firm after its dissolution in respect of the income received from the Coffee Board though it related to the supply of agricultural produce before the date of dissolution. In the light of this conclusion s. 13 of Act 10 of 1987 dealing with validation cannot be of any help to the respondents.
13. For the above reasons these writ petitions are allowed in part and in WP Nos. 2397 and 2398 of 1988 recovery proceedings pursuant to annexure 'C' letter, annexure 'D' notice and the notices of demand annexures 'F' and 'G' are quashed. The respondents shall also refund the amount that might have been collected in pursuance of the proceedings which have now been quashed.
WP Nos. 2735 to 2740 of 1988 are allowed in part and the proceedings pursuant to the notices, annexures 'D' and 'E' are quashed.
WP No. 13384 of 1988 is allowed in part quashing the order dt. 13th June, 1988 - annexure 'A'.