1. This is an appeal by the assessee against an order of the CIT (Appeals), holding that the assessee was liable to tax on an award amount of Rs. 1,48,24,876 under Section 176(3A) read with Section 189 of the Income-tax Act, 1961.
2. The assessee has been assessed in the status of "Firm" for the year under consideration, Le.. assessment year 1988-89. A partnership deed was originally executed on16-ll-1982 with 16 partners and the business of the firm was that of engineers, contractors and builders. The firm was awarded a contract, inter alia, for construction of a dam for Mazam Irrigation Scheme in Sabarkantha district. The work of this contract was completed on 15-5-1984 and the firm submitted its final bill to the Irrigation Department of the Government of Gujarat. The firm also submitted a further claim in connection with the said work. This claim consisted primarily of price escalation and extra items as per condition Nos. 19 and 21 of the contract which are extracted below: 19. Condition regarding escalation clause is agreed to subject to clarification that if the limit is extended for reasons which are beyond the control of contractors the escalation in rates may be allowed for such extended period. However, if the work is delayed due to fault of contractor only, such escalation may not be granted beyond stipulated date of completion. 21. (Arbitration) : All claims and extra items shall be intimated to the deptt. within one month of their occurrence as provided under Clause 16 of B-2 form for settlement.
3. In the meantime a Private Limited Company under the name and style of "Banyan and Berry Construction Private Limited" was incorporated on 16-4-1983 and a transfer agreement took place between the firm M/s Banyan and Berry (hereinafter called 'the firm') and M/s Banyan & Berry Construction Pvt. Ltd. (hereinafter called 'the Company') by virtue of which it was agreed that subject to the provisions therein contained, the firm would transfer to the Company w.e.f. 1-7-1984 all the assets and liabilities of the firm together with the goodwill thereof with the intention that the firm's business may be taken over as a running concern by the Company w.e.f. 1-7-1984. However, there was a special provision in the agreement to the effect that the benefit of additional claims referred to above would not stand transferred to the company.
The relevant clause of the agreement is reproduced below: 5(d) The firm was awarded a contract for construction of Earthen Dam for Mazam Irrigation Scheme in the Sabarkantha District. The said work has been completed and handed over to the State Government and the firm has submitted its final bills to the Irrigation Department, Government of Gujarat. In addition to the final bills so submitted the firm has also submitted further claims to the Government of Gujarat in connection with the said work. Notwithstanding any thing herein contained the benefits of the said claims shall not, stand transferred to the Company and the Vendors shall be entitled to pursue the said claims and retain any amount that may be allowed by the Government or otherwise recovered in respect of the said claim or any part thereof and for the purpose of such recovered the Vendors shall be entitled to use the firm name and style and to be in the said name and style.
4. The present dispute before us relates to the additional claims made by the firm and we shall revert to it again. In the meantime the firm was dissolved by a dissolution deed dated 16-8-1984 w.e.f. the same day. Since an important claim was pending with the Irrigation Department in respect of the Mazam Dam, it was provided that the work would be allotted to and treated as a claim jointly enforceable by the partners of the dissolved firm, and each of them would be entitled to recover the same by any proceedings in respect of the claim in the proportion of shares provided in the dissolution deed. In fact the major part of the dissolution deed is concerned with the outstanding claims in respect of the Mazam Dam, how they will be pursued and how the amounts received would be distributed.
5. Thereafter the Government of Gujarat itself accepted some of the claims and paid two sums on 29-6-1984 and 23-11-1984 totalling Rs. 2,48,944. Since the firm was dissolved, it was claimed that the amounts belonged to the partners of the firm in their individual capacity in proportion to their share in the profit of the firm as per the provisions of the dissolution deed dated 16-8-1984. The amounts are stated to have been assessed in the hands of the partners for assessment year 1986-87 directly in the proportion of profit sharing ratio in the erstwhile firm by assessment orders dated 31-3-1989. Copy of the assessment order of one of the partners ShriK.B. Kunjadia has been given in the paper book at pages 197 to 202. A reference to the same shows that according to paragraph 4 of the assessment order, the income was brought to tax "without prejudice to any action that may be taken in the case of the firm M/s Banyan & Berry for any of the assessment proceedings". However, this amount of Rs. 2,48,944 has not been included in the total income of the assessee under consideration by us for assessment year 1988-89.
6. Those claims which could not be decided by the Government of Gujarat were referred to an arbitrator. The arbitrator made an award on 27-8-1986 directing the Government to pay a sum of Rs. 95,80,700, which was received on 26-11-1986.
7. In the meantime, the assessee had written a letter on 9-10-1986 to the Officer on Special Duty, Irrigation Department (page 73 of the paper book). It was requested that in view of the dissolution of the firm it was necessary to amend the name of the original claimant by including that the claimant firm was dissolved and the names of the 16 partners be added. The Government wrote to the Supdtg. Engineer, Irrigation Department on 21-11-1986 (page 76 of the paper book) that there was no objection to the proposal regarding making the payment of interim award to the respective partners of the dissolved firm M/s Banyan & Berry in accordance with their share in the said partnership.
In view of this each erstwhile partner received separate cheques for the interim award made by the arbitrator.
8. The final award was made by the arbitrator on 27-1-1987, the amount being Rs. 16,29,000 principal and interest Rs. 36,15,176, totalling to Rs. 52,44,176. The award was made to M/s Banyan & Berry as the claimants. A letter was written on 13-2-1987 by M/s Banyan & Berry to the OSD, Irrigation Deptt. to make the payment of the final award to the partners of the firm in accordance with their share. The partners were accordingly paid on 5-5-1987 and 28-5-1987.
9. The firm M/s Banyan and Berry did not file any return of income voluntarily Under Section 139(1) of the IT Act, 1961 ('the Act').
However a notice under Section 139(2) was issued by the Assessing Officer in response to which a return was filed showing Nil income. It was claimed by the assessee that the sum of Rs. 1,48,24,876 was a capital receipt. The Assessing Officer brought to tax the above mentioned sum for reasons which may be summarised as below: (1) The partners received benefit from the business carried on by the partnership firm. The claim arose from the business and there was a direct nexus between the business carried on by the firm and claim which resulted in receiving the sum by the partners. The amount was, therefore, taxable under Section 28(iv) of the Act being the value of any benefit or perquisite, whether convertible into any money or not, arising from the business; (2) The amount was taxable under the provisions of Sections 60 and 63 of the IT Act (However, neither the provisions of Sections 60 and 63 were set out in full nor was it explained how these sections can be invoked); (3) The provisions of Section 176(3A) provided for taxation of all those receipts which were related to the business activity before its discontinuance. The award amount received after dissolution of the firm was an integral part of the business receipts of the firm M/s Banyan & Berry. It was, therefore, taxable under Section 176(3A).
10. When the matter went to the CIT (Appeals) it was submitted before him that the provisions of Section 176(3A) of the Act were not applicable in the present case at all. Section 176(3A) was applicable in case the business had been discontinued whereas in the present case it was not a case of discontinuation of the business but a case of succession of the business by the company from the firm. Another objection to the. applicability of Section 176(3A) was that the income of the discontinued business was to be assessed in the hands of the recipients but in the present case it was submitted that the assessee-firm was not the recipient since it stood dissolved on 16-9-1984 and was not in existence when the amount of award was received. The amount of award was stated to have been received by the partners in their individual capacity in proportion to the share of profit they had in the erstwhile firm. Reliance was placed on the following cases: 4. New Cawnpore Flour Mills (P.) Ltd. v. ITO [1986] 19 ITD 360 (All.) 8. O.Rm. M.SP. S.V. Meyyappa Chettiar v. CIT [1943] 11 ITR 247 (Mad.) The learned counsel also relied on the commentary of Kanga & Palkhiwala pages 1300 to 1306 to emphasise that in case of succession the provisions of Section 176(3A) are not applicable and transfer of business from firm to company amounts to succession. He also pointed out that it is not necessary that the entire business of a going concern should be transferred to a new concern and even if substantial business is transferred it will amount to succession.
11. The CIT (Appeals) brought the facts of the case of CIT v. Bhagat and Co. [1990] 182 ITR 212 [1989] 47 Taxman 201 (Delhi) to the notice of the learned counsel for the assessee and made a query as to why the amount of award should not be taxed in the hands of the assessee-firm in terms of the provisions of Section 189 read with Section 176(3A) of the Act. According to the learned counsel the facts were distinguishable and it was not clear whether the assets and liabilities were taken over as a going concern by way of succession to the business of the firm. In that case the firm probably discontinued its business and thereafter a receiver was appointed. Subsequently the assets and liabilities of the firm were taken over by a private limited company by way of out-right purchase. He also submitted that the appeal of the revenue had been disallowed by the Hon'ble High Court on a preliminary issue of retrospective application of Section 176(3A). In the circumstances, It was submitted that the ratio of the decision was not applicable to the facts of the present case.
12. The CIT (Appeals) analysed Sections 189 and 176(3A) together. He observed that Under Section 189(1) what can be taxed is the income of the firm which accrued or arose when the firm was in existence. The fiction introduced by the section had a limited application and was only meant for completing the assessment. The section did not touch upon the question as to what happens if the income is received much after the firm had been dissolved. According to him this was a lacuna which had been rectified by Section 176(3A) introduced w.e.f. 1-4-1976.
It had made it possible to assess the income of a discontinued business in the year in which it is received in spite of the fact that the person carrying on such business had ceased to exist. The receipts of a discontinued business were put on the same footing as the receipts of a discontinued profession. According to him Section 176(3A) was only supplementary and complimentary to Section 189(1) of the Act. In the end he came to the conclusion that the word "discontinuance" is to be understood not only with reference to business but also with reference to a person being discontinued. A dissolved firm was treated as a discontinued person. He gave a finding that the award of Rs. 1,48,24,876 was liable to be taxed in the hands of the assessee-firm under Section 176(3A) read with Section 189 of the Act. The assessee is aggrieved by this finding and is now in appeal before us.
13. The learned counsel for the assessee made some preliminary objections before us in the first instance. A reference was invited to the observations of the CIT (Appeals) in para 19 of his order which are reproduced below: A perusal of various case laws cited by the learned counsel of the appellant primafacie indicate that the amount of award of Rs. 1,48,24,876 cannot be taxed in the hands of the appellant firm M/s Banyan and Berry because it is not a case of discontinuance of business and, therefore, provisions of Section 176(3A) are not applicable. With due respect to various High Courts and the ITAT, decisions which have been referred by the learned counsel of the appellant I would like to submit that if the position as enunciated by the various High Courts and the Tribunal is accepted then there will be a situation where income received after dissolution of a firm which has transferred its business to another firm or a company will escape assessment altogether.
The learned counsel for the assessee submitted that decisions of higher courts were binding on the CIT (Appeals) and it was against judicial discipline for the CIT (Appeals) to have knowingly departed from the decisions of higher courts. He invited attention to the following decisions in this regard: 1. K. Subramanian, ITO v. Siemens India Ltd. [1985] 156 ITR 11 (Bom.).Asstt. Collector of Centred Excise v. Dunlop India Ltd. AIR 1985 SC 330.Union of India v. Kamlakshi Financial Corporation Ltd. AIR 1992 SC 710.
13.1 The learned counsel thereafter reiterated the objection which was taken before the CIT (Appeals) to the effect that Section 176(3A) was not applicable in the present case for two reasons. Firstly, it was not a case of discontinuance of business but a case of succession of the business from the firm to the company. Secondly, the amount of award had not been received by the assessee firm at all because it had been dissolved before the award could be made and was not in existence.
Regarding the contention that it was not a case of discontinuance, the learned counsel relied on the case law cited before the CIT (Appeals) also. Thereafter, in particular he invited attention to the decision of the Tribunal in New Cawnpore Flour Mills (P.) Ltd. 's case (supra). The Tribunal had gone into several decisions of different High Courts and also a decision of the Supreme Court in paragraphs 9 & 10 and came to the conclusion that taking over of the business of a firm by a company was a case of succession and not of discontinuance of business. He also emphasised that the ITAT, Ahmedabad had also considered a similar question in the case of Bajoria Bros, (supra) for assessment year 1982-83. There also it was a case of a partnership firm carrying on business of executing engineering contracts. Subsequently a private limited company took over the running business of the partnership. But any amount that may be receivable but not shown in the books of account in respect of contracts already executed by the vendors prior to the agreement would belong to the vendors. Subsequently the partnership was dissolved and an outstanding claim of the firm was decided by an arbitrator who gave an award in favour of the firm. The Assessing Officer wanted to assess the amount of award as the income of the partnership firm. It was held by the Tribunal that Section 176 (3A) was not attracted.
13.2 The learned counsel also invited attention to the decision of the Gujarat High Court in Artex Mfg. Co. 's case (supra). Here also a firm was converted into a company as a going concern and it was held that the surplus was assessable as capital gains. However, it was also held that the assessment should be made in the status of "Body of Individuals". Relying on the ratio, the learned counsel submitted that it was clear that the firm was not in existence after the business was taken over and it was only a Body of Individuals which remained.
Therefore, there could be no assessment on the firm.
13.3 The learned counsel then referred to Section 28(iv), which had been invoked by the Assessing Officer. He submitted that the Gujarat High Court had held in CIT v. Alchemic (P.) Ltd. [1981] 130 ITR 168 5 Taxman 55. that it is only if the benefit or perquisite is not in cash or money that Section 28(iv) would apply. This section had no application to a cash receipt. It could, therefore, not be relied upon to tax the amount at all.
13.4 Thereafter the learned counsel referred to the observations of the Assessing Officer regarding a device to avoid tax. The matter had been argued before the CIT (Appeals) also as per para 11 of the order and it was submitted therein that there was no question of the firm adopting a colourable device to avoid tax. The Supreme Court had held in the case of CWT v. Arvind Narottam [1988] 173 ITR 479 39 Taxman 368 that if a legal and genuine transaction results in any reduction of tax incidence, it cannot be called a colourable device to reduce the tax.
It had been submitted before the CIT (Appeals) that the ratio of the decision of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 22 Taxman 11 was not applicable at all. The same arguments were reiterated. Attention was also invited to the decision of the Madras High Court in M. V. Valliappan v. JTO [ 1988] 170 ITR 238 37 Taxman 46. In that case it was held that partial partition of a HUF was real and had been given effect to. It could not be treated as a dubious device simply because the tax liability had been reduced. The learned counsel submitted before us that partition of HUF in that case was equivalent to dissolution of registered firm in the present case and, therefore, there could not be any question of a colourable device.
13.5 The learned counsel next submitted that the same amount had been taxed in different hands on earlier occasions. The amount of interim award consisting of Rs. 95,80,700 had been taxed in assessment year 1987-88. Attention was invited to the assessment order dated 30-3-1990 passed in the case of Shri K.B. Kanjodia for assessment year 1987-88 (pp. 203 to 210 of the paper book). It was held that the interim award would be treated as income of an AOP consisting of the erstwhile partners of the firm. Since the shares of the members of the AOP were determinate, the individual shares were added to the income of the members. Similarly, the balance amount of claim was taxed for assessment year 1988-89 by assessment order dated 25-3-1991 (pp. 211 to 217 of the paper book). In the light of these it was submitted that the department had exercised its option to tax the members of the AOP, and it was, therefore, not open to tax the firm again. Reliance was placed on the decision of the Gujarat High Court in Laxmichand Hirjibhai v.CIT [1981] 128 ITR 747 5 Taxman 302 and several earlier decisions.
13.6 The learned counsel thereafter referred to Sections 60 and 63 relied upon by the Assessing Officer and submitted that they dealt with transfer of Income where there is no transfer of assets. In the present case there was no such transfer and, therefore, these sections could not be relied upon by the Assessing Officer.
13.7 The learned counsel submitted in the end that it may happen that the tax may not be payable on a certain receipt by any one but, if that was the result of the true interpretation of law, then there should be no objection to it. As some examples he mentioned the case of Saraswati Industrial Syndicate v. CIT [1990] 186 ITR 278 (SC) where it was held that Section 41(1) was not applicable and the amount went untaxed.
Similarly in CIT v. Hukumchand Mohanlal [1971] 82 ITR 624 (SC) the assessee had paid some sales-tax and died thereafter. Subsequently a refund was received by his wife and it was held that it could not be taxed under Section 41(1). He invited attention to the amendment to Section 41(1) w.e.f. 1-4-1993 to plug some loopholes in law and submitted that these amendments were prospective and not retrospective with the result that for earlier years such amounts would remain untaxed.
13.8 For the above reasons, the learned counsel submitted that the order of the CIT (Appeals) should be reversed and the addition of Rs. 1,48,24,876 should be deleted.
14. The learned D.R. supported the order of the CIT (Appeals) strongly.
With regard to the preliminary objection of the learned counsel for the assessee regarding judicial discipline, he submitted that there was no judicial impropriety in the order of the CIT (Appeals). The case laws cited before him had referred at the most to Section 176(3A) alone but no where in those cases the applicability of Section 189(1) read with Section 176(3A) had been considered. The CIT (Appeals), on the other hand, had given a finding that Section 189(1) read with Section 176(3A) was applicable.
14.1 The learned D.R. thereafter referred to the case law cited before the CIT (Appeals) in support of the contention that Section 176(3A) was not applicable. In the case of BaJoriaBros. (supra), the ITAT, Ahmedabad had given certain observations which, according to him, were very relevant. It had been examined in paras 4 & 5 of the order that certain aspects of the Partnership Act were relevant and it was observed that in view of Section 47 of the Indian Partnership Act the partnership firm was entitled to pursue the claim, nothwithstanding the dissolution of the firm. It had also been observed that the covenant in the deed of dissolution could not change the nature or character of the receipt or the recipient of the amount Further the question related to contract executed by the partnership firm when it was in existence. It was stated in the end of para 5 that the amount in question was clearly the fruit of its business and ordinarily it should be assessable as such.
14.2 Attention was thereafter invited to the decision in the case of A.W. Piggies & Co. (supra). It was submitted that the decision was concerned with a totally different issue regarding Section 25(4) of the Indian Income-tax Act, 1922 for which there was no corresponding provision in the IT Act, 1961. According to the learned D.R., the decision of the Supreme Court that mere change in the constitution of the firm did not bring into existence a new entity does not help the assessee in the present case at all and the assessee's reliance on the decision was misplaced.
14.3 The learned D.R. next submitted that the case of justice R.M.Datta (supra) was not relevant at all since it concerned income from profession which was assessable Under Section 176(4) and not under Section 176(3A).
14.4 Thereafter it was submitted that the decision of the Tribunal in New Cawnpore Flour Mills (P.) Ltd. 's case (supra) was not relevant either, since it was, firstly, concerned with Section 41(1), which had not been invoked in the case before us, and, secondly, because it was concerned with Section 176(3A) alone whereas here the CIT (Appeals) had invoked Section 189(1) read with Section 176(3A).
14.5 The learned D.R. thereafter referred to the decision of the Gujarat High Court in Artex Mfg. Co. 's case (supra) and submitted that here also the issue was different. A firm had been converted into a limited company as a going concern and the issue was whether the surplus could be taxed in the hands of the firm as capital gains. He also stressed that the Hon'ble High Court was concerned in that case with the accounting period ended 31-3-1967 when Section 176(3A) was not on the statute book at all, having been introduced w.e.f. 1-4-1976.
14.6 The learned D.R. thereafter referred to the observation of the CIT (Appeals) and the arguments of the learned counsel for the assessee regarding the question whether the dissolution of the firm was a device for avoidance of tax. He invited attention to two relevant dates in this context. Agreement to take over the business of the firm by the company was dated 1-7-1984 w.e.f. the same date whereas the partnership was dissolved by a deed dated 16-8-1984. Thus the firm continued to be in existence as a firm for one month and 16 days. The learned D.R.submitted that the continued existence of the firm was perfectly in order so as to pursue the outstanding claims which were of huge amounts. He also invited attention to clause 15 of the partnership deed dated 16-11-1982, according to which there was a restriction on the retirement of the partners from the partnership business as under: (15) No partner shall retire from the partnership business before giving three calendar months' notice to other partners and till the works on hand are completed, and after adjusting and settling his account during that period such partner shall cease to be a partner at the end of the said three months. And that such partners shall not have any right in the goodwill of the above said partnership firm.
He emphasised that a partner could retire only after adjusting and settling his account after completion of the work on hand. If there was such restriction on retirement, then there could be no justification for dissolution of the firm without settling the claims. He, therefore, submitted that the dissolution was a mere device without a purpose and, therefore, the ratio of the judgment of the Supreme Court in the case of McDowell & Co. Ltd. (supra) was clearly applicable.
14.7The learned D.R. thereafter referred to the argument on behalf of the assessee that an option had been exercised to tax the members of the AOP and, therefore, tax could not be levied once more in the hands of the firm. He submitted that the reliance on the decision of the Gujarat High Court in the case of Laxmichand Hirjibhai (supra) was misplaced. In that case the partners of a firm were assessed separately on their share of profit and subsequently an assessment was also made in the status of unregistered firm which was held to be not permissible. It was submitted that in the present case no assessment had been made in the hands of individuals as partners of the firm and, therefore, the facts were distinguishable.
14.8 The learned D.R. also referred to the argument of the learned counsel for the assessee that tax may not be payable by any one if that was the true interpretation of law. He invited our attention to the facts in the case of Saraswati Industrial Syndicate (supra) and Hukumchand Mohanlal (supra) and submitted that the Supreme Court was concerned with the provisions of Section 41(1) of the Act whereas this section had not been invoked in the present case. The decisions were, therefore, distinguishable.
14.9 The learned D.R. in the end referred to the decision of the Delhi High Court in Bhagat & Co.'s case (supra) and submitted that Section 189(1) alone was considered in that case and decision given against the department. However, Section 176(3A) had not been introduced for the year under consideration and in the present case we should consider the effect of Section 189(1) and Section 176(3A) together.
14.10 For the above reasons, the learned D.R. submitted that the order of the CIT (A) should be confirmed, 15. We have considered the submissions of both sides carefully. Before coming to the main issues, we would like to deal with the preliminary objection that the CIT (A) committed judicial impropriety in not following the decisions of the High Court and the Tribunal cited before him. Our attention has been invited to the remarks contained in para 19 of the appellate order. There is no doubt that the decisions of higher courts have to be followed loyally. It was observed in Dunlop India Ltd.'s case (supra) that the "judicial system only works if someone is allowed to have the last word and that last word, once spoken is loyally accepted. The better wisdom of the court below must yield to the higher wisdom of the court above". The same principle was stressed in stronger language in the decision of the Supreme Court in Kamlakshi Financial Corpn. Ltd. 's case (supra). It was stated that the "principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not 'acceptable' to the department and is the subject matter of an appeal can furnish no ground for not following it unless its operation has been suspended by competent court". In the light of the above, we would not hesitate to give our strong disapproval if the CIT (A) has not followed the decisions of the Tribunal and High Court cited before him. However, on scrutiny of the appellate order it is seen that this is not the case. Referring to various case laws the CIT (A) observes that they 'prima facie indicate' that the amount of award cannot be brought to tax under Section 176(3A). He has then expressed an anxiety that a situation may arise when a sum may escape assessment altogether. However, nowhere has he said that Section 176(3A) alone is applicable. He has finally come to the conclusion that it is Section 189(1) read with Section 176 (3A) under which the amount of award should be brought to tax. In the facts and circumstances, we would infer that the CIT (A) has not crossed the lines of judicial propriety.
15.1 Connected with the above is another general issue regarding the argument of the learned counsel for the assessee that escaping tax altogether cannot be a consideration in deciding the question whether the award should be added to the assessee's income. The learned D.R.tried to distinguish the facts in the cases cited before us. However, the learned counsel for the assessee was only giving illustration, where, according to him, some amounts had escaped tax altogether but that was not a consideration in coming to the decision. We would agree with the learned counsel that escapement from tax altogether cannot be the sole criterion for making the addition but would say that it can be, in suitable cases, one of the circumstances to be considered.
15.2 We will now come to the applicability of Section 189(1) of the Act. This clause deals with a case of business carried on by a firm being discontinued or where the firm is dissolved and is a machinery section for making an assessment in such cases. The assessment has to be made as if no such discontinuance or dissolution had taken place and all the provisions of the Act applied to such assessment. The CIT (A) has himself said in para 20 of his appellate order that the fiction has limited application and is only meant for completing the assessment.
Thereafter in para 24 he says that for the income received after dissolution there is no help from Section 189(1) and the dissolved firm does not fall within the purview of Section 189. We agree with the reasoning that Section 189 does not come to the aid in bringing the amount of award to tax in the hands of the firm. If such be the case, adding Section 176(3A) to Section 189(1) will only result in holding Section 176(3A) being available and nothing more.
15.3 As far as Section 176(3A) is concerned, we agree with the learned counsel for the assessee that it cannot be invoked because it is not a case of discontinuance. We concur with paras 9 and 10 of the order of the Tribunal in the case of New Cawnpore Flow Mills (P.) Ltd. (supra) which is extracted below: 9. The above section applies only where the business has been discontinued. We have, therefore, to see whether the present case is of the discontinuance of the business. We have already stated above that earlier the business was carried on by the firm of New Cawnpore Flour Mills. It has been taken over as a going concern by the present company. In our view this does not amount to discontinuance of the business, but this is a case of succession of one assessee by another assessee. This principle is clear from the decision of the Supreme Court in CIT v. A.W. Piggies & Co. [1953] 24 ITR 405. In this case also a business formerly run by a firm had been taken over by a limited company. Taking over of the business of the firm by the company was throughout considered as the case of a succession and not of discontinuance of the business. A clear case on the point is of the Privy Council in CIT v. P.E. Poison [ 1945] 13 ITR 384. It was held in this case that the word 'discontinued' in Section 25(3) of the 1922 Act, means only a complete cessation of the business and does not include the case of discontinuance of the business by the person formerly carrying it on as a result of the transfer or assignment of that business to another person, who thereafter carries it on. Unless otherwise stated, the same word has to be given similar meaning in an Act. According to the principle, therefore, the discontinuance means a complete cessation of the business and not the transfer of the business by one person to another. The Madras High Court in O.RM.M.SP.S.V. Meyappa Chettiar v. CIT [1943] 11 ITR 247 gave a similar finding. The Court held that the word 'discontinuance' in Section 25(3) means 'cessation' and does not cover cases of succession. The direct cases on the point is of the Calcutta High Court in Krishna Hydraulic Press Ltd. v. CIT [1943] 11 ITR 504. Here the assessee-company had taken over the business of a firm. It was held that the assessee was the successor to the firm.
10. In view of the above authorities, there is no escape from the conclusion that the present is the case of a succession by the assessee to the business of the firm. It is not a case of discontinuance of the business. As such, the provisions of Section 176 (3A) cannot be applied in order to bring to tax the refund of the sales tax in the assessment of the assessee.
15.4 There is another reason why we would say that there is no discontinuance of the business. The facts of the present case are distinguishable from the facts in the case of New Cawnpore Flour Mills (P.) Ltd. (supra) in one respect. In the latter case the entire business of the firm was taken over by a private limited company and the question had arisen whether a refund of sales-tax subsequently received by the limited company was taxable under Section 176(3A) in the hands of the limited company. In the present case the entire business was not taken over. We have already noticed that the benefit of additional claims did not stand transferred to the company. The claims were nothing but claims primarily of escalation in costs due to delay in completion of the contract and also some additional items, etc. These claims were raised as part of the contract and we have also noticed releyant paras 19 and 21 of the contract. The quantum of these claims was huge, being Rs. 1,58,91,625 in one letter dated 25-5-1984 from the firm to the Executive Engineer, Irrigation Department (see page 133 of the paper book). Compared with this amount, it is seen that the private limited company M/s Banyan and Berry Construction Private Limited was assessed on the following income as per pages 219 to 222 of the paper book: 15.5 We also find that the assessment order of the registered firm M/s Banyan & Berry for assessment year 1985-86 under Section 147 read with Section 143(3) shows that the original assessment was completed under Section 143(1) on total income of Rs. 34,640 only. In the circumstances it is evident that a substantial part of the business consisting of the claim was not transferred to the limited company. In this connection realisation of outstanding claims is an integral part of the business cycle. It is further seen that the disptite before us relates to the amount of claim and the award and not to the other business which was transferred to the company. Thus we hold that for this reason also the business in question was not discontinued.
15.6 We will now take up the next contention of the learned counsel for the assessee that Section 28(iv) of the Act is not applicable to the facts of the present case, relying on the decision of the Gujarat High Court in Alchemic (P.) Ltd.'s case (supra). In that case the assessee had received a refund of excise duty and it was held that "benefit or perquisite arising from business" within the meaning of Section 28(iv) of the Act would not include cash receipt and, therefore, the refund of excise duty would not be taxed under that section. We agree with the contention and hold accordingly that Section 28(iv) cannot be invoked in the present case either.
15.7 Coming to the contention of the assessee that it was not open to the department to tax the firm, having once exercised its option to tax the members of the AOP on the same income, we find that the facts of the present case are distinguishable from the facts in the case of Laxmichand Hirjlbhai (supra). In that case the partners had been assessed separately on their share of profits from a firm and, thereafter, it was held that the firm could not be assessed subsequently in the status of URF. It is not the situation here that members of the AOP have been assessed in individual capacity and subsequently tax is being levied on an AOP. The situation here is quite different, inasmuch as the amount was taxed in the hands of an AOP earlier and, alternatively, it is being brought to tax in the hands of the firm. The following extracts from the assessment orders of Shri K.D. Kunjadia for assessment years 1987-88 and 1988-89 will show that what was taxed at that time was only a protective assessment: Share from AOP of the erstwhile partners of M/s. Banyan & Berry, taken provisionally subject to rectification and without prejudice to the treatment of the amount of award in the hands of the AOP that may be given at the time of finalisation of the assessment of the AOP and/or firm.
This income is brought to tax without prejudice to any action that may be taken in the case of M/s. Banyan & Berry for any of the assessment proceedings either on the basis of accrual or receipt of the income. The amount received by the partner is taken here subject to rectification both with reference to the status as well as to the quantum.
In the circumstances this contention of the assessee is not acceptable and is rejected.
15.8 We will now come to the question whether Sections 60 & 63 can be invoked in the present circumstances. We find that no case at all has been made out either at the assessment stage or at the first appellate stage in favour of invoking these sections. All that has been done in that these sections have been mentioned in the assessment order and the CIT (A) has made a reference to them to the effect that the Assessing Officer has invoked them. Section 60 comes into operation when there is transfer of income but no transfer of assets. No such case has been made out before us either by the learned D.R. beyond mentioning that the sections should be made applicable. The asset in question was an actionable claim. It was not transferred from the firm to the company but the income was also not transferred from the firm to the company.
If the firm is treated as dissolved on 16-8-1984 then both the actionable claim and the income therefrom were transferred to the erstwhile partners. We, therefore, hold that Sections 60 and 63 are not applicable to the facts of the present case.
15.9 We now come to the question whether the dissolution of the firm can be treated as a device for avoidance of tax and, therefore, covered by the decision of the Supreme Court in the case of McDowell & Co. Ltd. (supra). There are certain features of the case which require to be noted in this connection. It has been brought out that according to the partnership deed (para 15) no partner shall be permitted to retire from the partnership till the works on hand were completed and after adjusting and settling his account. It shows that there was a great amount of emphasis on all the partners remaining together for completing whatever work was taken up. In the circumstances it appears unusual that after the business of the firm was taken over by the company as a going concern on 1-7-1984, except for the outstanding claims which are under consideration, the firm should have been dissolved. The dissolution was not immediate and the firm continued till 16-8-1984 on which date it was dissolved. It has to be remembered that the outstanding claims were not some fringe matters which could be attended to without much effort. We have already noted that the claims were of huge amounts, the in the letter dated 25-5-1984 from the firm to the Executive Engineer, Irrigation Project alone being Rs. 1,58,91,625. The follow-up of the claim required representation before an arbitrator. Even then it was decided to dissolve the firm, which is a far more extreme step than mere retirement of some partner. Another unusual feature is that even after dissolution certain important elements of the partnership were continued. The claims were treated as an actionable claim, jointly enforceable as tenants-in-common by the parties thereto. Further, each of the erstwhile partners was entitled to share in the award in the same proportion as his share in the profits and loss of the firm. It is also seen that as per dissolution deed, three of the partners were appointed to do certain acts on behalf of all the erstwhile partners which included opening of bank account.
15.10 That question arises as to what was the purpose of dissolving the firm at all. The only clue available in the dissolution deed is contained in clause 7 thereof, which is reproduced below: The parties hereto are not undertaking any further business actively in the said firm and have no outstanding business save and except to the extent of pursuing the aforementioned claim against the Government of Gujarat in respect of the contract of construction of Earthern Dam for Mazam Irrigation Scheme in the Sabarkantha District.
It will be seen that pursuing of the claims was treated as an "outstanding business" and we have also come to the same conclusion earlier that the business of the firm was not discontinued on 1-7-1984 to the extent of the claims being outstanding. We have also noted the large magnitude of the claims. In the circumstances, the normal expectation would be that the firm should continue, not exactly the opposite took place by its dissolution.
15.11 It is also noticed that a strongly worded letter was sent by the assessee to the Assessing Officer on 30th June, 1989 where it was denied that the firm was being dissolved for taxation purposes but even then the purpose was not mentioned. Relevant extract of para 4 of the letter is given below: 4. It is highly improper for you to observe that 'on the name of planning you are evading the tax which in no circumstances will be allowed to prevail'. This shows that you have closed mind on the subject rather than a judicial approach which is necessary for an Income-tax Officer to adopt in the proceeding to assess the income under the Income-tax Act. It is not correct when you state that we ourselves have shown further claim as our income in the past. We have shown such claims in the past when they have been duly sanctioned and accepted by the PWD authorities and not otherwise. We also deny that our firm is dissolved for taxation purpose. Our firm has been legally and finally dissolved as per dissolution deed, copy of which is submitted to you and the person receiving the claim of dissolution have been given right to pursue the claim in the name of M/s Banyan & Berry but it cannot be said from this that the firm continued in face of overwhelming evidence produced by us before you from time to time.
15.12 We have also noted that in the return of income filed by the firm under Section 139(2) it was claimed to be a capital receipt. We enquired from the learned counsel for the assessee whether the amount had been disclosed as income under any status and in any year and we were informed that the interest income had been disclosed as income but not the principal contained in the award, though notes regarding receipt of the award had been made in the statements accompanying the returns.
15.13 We will now refer to the law relevant to the above facts. It was held by the Supreme Court in the case of McDowell and Co. Ltd. (supra) that colourable devices are not part of tax planning. Further it was the duty of court to expose and refuse approval of tax avoidance device in the course of interpretation of statutes. The following extract from the head note is relevant: Tax planning may be legitimate provided it is within the framework of the law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.
There is behind taxation laws as much moral sanction as is behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less a moral plane than honest payment of taxation. The proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax and whether the transaction is such that the judicial process may accord its approval to it. It is neither fair nor desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to expose the devices for what they really are and to refuse to give judicial benediction.
15.14 Subsequently it was held by the Supreme Court in Awind Narottam's case (supra) that where the true effect of the construction of the deeds is clear then the appeal to discourage tax avoidance is not a relevant consideration. However, the decision was given on the facts of that case and it was also observed, when referring to the case of McDowell & Co. Ltd. (supra) that it is true that tax avoidance in an under-developed or developing economy should not be encouraged on practical as well as ideological grounds. It, therefore, follows that the decision of the Full Bench of five judges in the case of McDowell & Co. Ltd. (supra) has to prevail.
15.15 In the case of M.V. Valliappan (supra), the Madras High Court was considering the case of a partial partition of a HUF. The Hon'ble High Court came to the conclusion, on the facts of that particular case, that it was a legitimate transaction which did not amount to a dubious device and was not hit by the new approach by the Supreme Court in McDowell and Co. Ltd. 's case (supra). Thus that decision also turned on its own facts.
15.16 In view of the above, there is no escape from the conclusion that the principles enunciated by the Supreme Court in the case of McDowell & Co. Ltd. (supra) still prevail very much. We have, therefore, to examine whether in the facts of the present case, there was a transaction which was a device to avoid tax. In the facts enumerated above, the unavoidable conclusion is that the dissolution of the firm was nothing but such a device to avoid tax. The firm may have been dissolved by a deed but in essence it continued. There was no purpose in dissolving the firm except to avoid tax. We, therefore, hold that the dissolution of the firm will be ignored for the purpose of assessment of income and it will be treated that the firm continued even after 16-8-1984 and received the awards of the arbitrator and the cheques in payment of the awards. In this view of the matter the sum of Rs. 1,48,24,876 becomes taxable in the hands of the firm.
15.17 There is, however, one consequential matter which remains to be decided. The amount of Rs. 1,48,24,876 was brought to tax in assessment year 1988-89 in the hands of the firm by the Assessing Officer for the reasons contained in para 13 of the assessment order, which is reproduced below : 13. As per the discussion above, the interim award and final award was received on 26-11-1986 Rs. 95,80,700, on 5-5-1987 Rs. 49,44,570 and on 28-5-1987 Rs. 2,99,606. Thus the total claims were received Rs. 1,48,24,876. Thus these all receipts fall in S.Y. 2043 corresponding to assessment year 1988-89. The assessee firm was adopting its accounting year as Samvat Year, hence the above receipts of the claim of Rs. 1,48,24,876 falls in Samvat Year 2043 and assessable in the assessment year 1988-89, i.e., the year under consideration. Hence the same will be taxable in the hands of the firm in assessment year 1988-89 accordingly.
It will be seen that the amounts had been treated as income on receipt basis and not on accrual basis. This has been done in view of the provisions of Section 176(3A) of the Act and in para 12 of the assessment order, the Assessing Officer observes that "the provisions of Section 176(3A) in very unambiguous language provides for taxation of those receipts which are directly related to the business activities before its discontinuance". However, we have held that Section 176(3A) of the Act is not applicable to the facts of the present case. The assessment order shows further that the assessee was following mercantile system of accounting. The incomeytherefore, should be assessed on the basis of accrual and not receipt. Sufficient facts are not available before us to show when the income accrued. We would, therefore, restore the matter to the file of the CIT(A) for the purpose of ascertaining the year or years in which the income in question accrued and retaining only that part of the income in this assessment which accrued in assessment year 1988-89. The order of the CIT(A) is set aside for this purpose. He should pass a fresh order after giving an opportunity of being heard to the assessee.
16. The assessee has also taken a ground regarding charging of interest under Sections 139(8) and 217 which is only consequential and does not need separate consideration.
17. In the result, the appeal is treated as allowed for statistical purposes.