Decided on September 17,1980


Cited Judgements :-



Sohani, J. - (1.)THIS is a petition under arts. 226 and 227 of the Constitution.
(2.)THE material facts, as set out in the petition, briefly are as follows :
THE petitioner is a private limited company, incorporated under the Companies Act. THE petitioner and respondents Nos. 4 and 5 entered into a partnership on June 16, 1956, under the name and style of " Sir Hukum- chand and Mannalal" to carry on the business of sole selling agency of the Hukumchand Mills Ltd., Indore, which had been granted by the Hukum-chand Mills Ltd. to the said firm for a period of five years. Under the terms of the agreement granting the sole selling agency to the firm, the firm had deposited a sum of Rs. 26 lakhs with the mills-company at the interest of 41/2 per annum. This amount was contributed by the partners of the firm. THE mills-company, however, prematurely terminated the sole selling agency agreement on January 11, 1958, and as a consequence thereof the aforesaid partnership firm stood dissolved with effect from January 11, 1958, in accordance with the terms of the partnership agreement. THE firm was assessed to income-tax in the status of a registered firm for the assessment years 1957-58 and 1958-59. For the assessment year 1959-60, the firm was assessed for a period from January 1, 1958, to January 11, 1958, only as the firm stood dissolved on January 11, 1958.

Respondent No. 4 instituted a suit against the mills-company for the refund of deposits, for recovery of interest thereon and for damages for wrongful termination of the sole selling agency agreement, impleading the petitioner and respondent No. 5. Respondent No. 4 also instituted another suit against the petitioner and respondent No. 5 for a dissolution of the partnership and accounts. Both these suits were decreed by the Additional District Judge, Indore, on February 12, 1970. An appeal was preferred against the decree passed by the Additional District Judge, Indore, in the suit instituted by respondent No. 4 against the mills-company. The appeal was disposed of in terms of a compromise arrived at between the parties. By the decree passed in terms of the compromise, the mills-company was required to pay a sum of Rs. 46 lakhs on account of deposits and interest due, but it was not liable to pay any damages for the termination of the sole selling agency agreement. In pursuance of the compromise decree, the deposits made by the firm were allocated, with the consent of parties, by a break-up pro rata among the ex-partners, and in accordance with the terms of the compromise, a sum of Rs. 23 lakhs was payable to respondent No. 4 and a sum of Rs. 17,25,000 was payable to the petitioner and the remaining amount of Rs. 5,75,000 was payable to respondent No. 5.

During the pendency of the litigation, respondent No. 4 had offered the income from interest on deposits in their assessments to income-tax on the basis of accrual from year to year. The petitioner, on the other hand, appended a note to their returns filed in the relevant years, stating that the claims were in dispute and, as such, there was not even an accrued income.

(3.)FOR the assessment year 1973-74, relevant to the previous year in which the consent decree was passed as aforesaid, the petitioner filed its return on August 15, 1973, wherein it offered the entire income of its share. In the course of the assessment proceedings, enquiries were made by the ITO regarding the circumstances leading to the termination of the sole selling agency agreement, the dissolution of the firm, the litigation in the court, the consent decree passed and whether the income had accrued to the partners individually or to the dissolved firm. These queries were answered by the petitioner in the course of hearing and all necessary material and documents bearing on the said queries were placed before the ITO.
The ITO in the meanwhile issued a notice dated December 1, 1975, to the firm under Section 148 of the Act stating that the income in respect of which the firm was chargeable to tax for the assessment year 1973-74 had escaped assessment and that he proposed to assess the said income. The notice was served on the petitioner as a partner of the firm. In response to the notice, the petitioner's representative appeared and submitted before the ITO that he had no jurisdiction to assess the firm as the firm had already been dissolved with effect from January 11, 1958, and, thereafter, the firm had no income whatsoever in the assessment year 1973-74.

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